Le Saunda Holdings Limited - Proxy Solicitation & Information Statement 2021

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

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.

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**FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]**

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 374)

(1) MAJOR TRANSACTION – EXERCISE OF OPTION TO ACQUIRE A CONTROLLING STAKE IN MIYATA HOLDING CO., LTD.

AND

(2) NOTICE OF EGM

A letter from the Board of the Company is set out from pages 5 to 26 of this circular. A notice convening the EGM to be held at Garden Room, 2nd Floor, New World Millennium Hong Kong Hotel, 72 Mody Road, Tsim Sha Tsui East, Kowloon, Hong Kong on Tuesday, 9 February 2021 at 4:30 p.m. or any adjournment thereof is set out from pages EGM-1 to EGM-3 of this circular. A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the EGM in person, you are requested to complete and return the accompanying form of proxy to the Company’s Hong Kong branch share registrar and transfer office, Tricor Tengis Limited, Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM (i.e. not later than 4:30 p.m. on Sunday, 7 February 2021). Completion and return of the proxy form shall not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so desire.

This circular will remain on the “Latest Listed Company Information” page of the website of the Stock Exchange at http://www.hkexnews.hk and the Company’s website at http://www.fourseasgroup.com.hk/ for at least seven days from the date of its posting.

PRECAUTIONARY MEASURES FOR THE EGM

Please see page EGM-3 of this circular for measures to be taken with a view to addressing the risk to attendees of infection of COVID-19 at the EGM to be held on Tuesday, 9 February 2021.

For identification purposes only

20 January 2021

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Appendix I –	Financial Information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Appendix II –	Accountants’ Report of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1
Appendix III –	Management Discussion and Analysis on the Target Group . . . . . . . . . . . . . III-1
Appendix IV –	Unaudited Pro Forma Financial Information of the Enlarged Group . . . . . . . IV-1
Appendix V –	General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
Notice of EGM .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

DEFINITIONS

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

“Acquisition” the acquisition of the Option Shares;
“Agreements” together, the Share Sale Agreement (as supplemented by the Supplemental Agreement), the First Loan Agreement and the Second Loan Agreement;
“Announcement” the announcement of the Company dated 31 March 2020 in relation to, among others, the exercise of the Option;
“Board” the board of directors of the Company;
“Company” Four Seas Mercantile Holdings Limited, a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the Main Board of the Stock Exchange;
“Controlling Shareholders” comprising three Shareholders namely Careful Guide Limited, Special Access Limited and Capital Season Investments Limited, which were beneficially interested in approximately 18.22%, approximately 19.32% and approximately 29.98% of the issued share capital of the Company as at the date of the Announcement and the Latest Practicable Date;
“Director(s)” the director(s) of the Company;
“Dr. Tai” Dr. the Honourable Tai Tak Fung, Stephen, who is the founder, chairman of the Group and the spouse of Dr. Wu;
“Dr. Wu” Dr. Wu Mei Yung, Quinly, who is the co-founder, vice chairman of the Group and the spouse of Dr. Tai;
“EGM” the extraordinary general meeting of the Company to be convened to consider and, if thought fit, ratify the approval of the Acquisition;
“Enlarged Group” the enlarged Group immediately after completion of the Acquisition;
“First Loan” an interest-free loan in the amount of JPY800,000,000 (equivalent to approximately HK$57,685,000) provided by the Purchaser to MYC pursuant to the First Loan Agreement;

DEFINITIONS

“First Loan Agreement”	the loan agreement dated 15 November 2019 entered into between
	the Purchaser and MYC in connection with the provision of the
	First Loan by the Purchaser to MYC;
“Group”	the Company and its subsidiaries, including members of the
	Target Group after the Acquisition;
“HK$”	Hong Kong dollar, the lawful currency of Hong Kong;
“Hong Kong”	the Hong Kong Special Administrative Region of the People’s
	Republic of China;
“JPY”	Japanese Yen, the lawful currency of Japan;
“Latest Practicable Date”	15 January 2021, being the latest practicable date prior to the
	printing of this circular for ascertaining certain information
	contained herein;
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange;
“Merger”	the merger of the Target Company to MYC which took effect on
	24 November 2020 and is more particularly described in the
	section headed “5. INFORMATION ON THE TARGET GROUP”
	in the “Letter from the Board” in this circular;
“Mrs. Miyata”	Mrs. Yayoi Miyata, the spouse of the Vendor;
“MYC”	Miyata Co., Ltd. (宮田株式会社), a company incorporated in
	Japan, which was a wholly-owned subsidiary of the Target
	Company prior to the Merger and became the surviving company
	after the Merger;
“Option”	the option exercised by the Purchaser to require the Vendor to sell
	the Option Shares to the Purchaser at an aggregate consideration
	of JPY1,000;
“Option Shares Purchase Price”	JPY1,000, the price paid by the Purchaser to acquire the Option
	Shares under the Option;
“Option Shares”	a total of 990,054 ordinary shares in the Target Company
	transferred to the Purchaser upon the exercise of the Option,
	representing 55% of the then issued share capital of the Target
	Company which is more particularly described in the section
	headed “2. BACKGROUND INFORMATION ON THE
	EXERCISE OF THE OPTION” in the “Letter from the Board” in
	this circular;

DEFINITIONS

“PRC” the People’s Republic of China;
“Purchaser” Four Seas (Japan) Holdings Company Limited, a company incorporated in Hong Kong with limited liability and a wholly-owned subsidiary of the Company;
“Reporting Accountants” RSM Hong Kong, Certified Public Accountants, Hong Kong, which has been engaged by the Company as the reporting accountants on the Target Group in respect of the periods specified in the accountants’ report contained in Appendix II to this circular;
“Second Loan” an interest-free loan in the amount of JPY900,000,000 (equivalent to approximately HK$64,198,000) provided by the Purchaser to MYC pursuant to the Second Loan Agreement;
“Second Loan Agreement” the loan agreement dated 18 December 2019 entered into between the Purchaser and MYC in connection with the provision of the Second Loan by the Purchaser to MYC;
“Shareholder(s)” shareholder(s) of the Company;
“Share Sale Agreement” the share sale agreement dated 15 November 2019 between the Vendor and the Purchaser in relation to the acquisition of 15% of the issued share capital of the Target Company by the Purchaser and grant of the Option by the Vendor to the Purchaser, as supplemented by the Supplemental Agreement;
“Stock Exchange” The Stock Exchange of Hong Kong Limited;
“Supplemental Agreement” the supplemental agreement to the Share Sale Agreement dated 31 March 2020 entered into between the Purchaser, the Vendor and Mrs. Miyata;
“Target Company” Miyata Holding Co., Ltd., a company incorporated in Japan, which had become a 70% indirectly held subsidiary of the Company following completion of the Acquisition, and was subsequently merged to MYC and ceased to exist with effect from 24 November 2020;
“Target Group” the Target Company and its subsidiaries (including MYC) before the Merger, and MYC and its subsidiaries after the Merger;

DEFINITIONS

Miyata (Tianjin) International Trading Co., Ltd. (宮田世佳國際貿易(天津)有限公司), a company established in the PRC with limited liability, and a wholly-owned subsidiary of the Target Company prior to the Merger and a wholly-owned subsidiary of MYC after the Merger;

“Tianjin Miyata” MYC after the Merger; “Vendor” Mr. Osamu Miyata; and “%” per cent.

For illustration purpose only, JPY has been translated into HK$ in this circular at the exchange rate of JPY1.00 = HK$0.071223.

LETTER FROM THE BOARD

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**FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]**

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 374)

Executive Directors: TAI Tak Fung, Stephen (Chairman) WU Mei Yung, Quinly (Vice Chairman) TAI Chun Kit (Managing Director) MAN Wing Cheung, Ellis WU Wing Biu NAM Chi Ming, Gibson

Registered Office: Whitehall House 238 North Church Street P. O. Box 1043 George Town Grand Cayman KY1-1102 Cayman Islands

Independent Non-executive Directors: LEUNG Mei Han CHAN Yuk Sang, Peter Tsunao KIJIMA

Principal Place of Business in Hong Kong: 21/F., Manhattan Place No. 23 Wang Tai Road Kowloon Bay, Kowloon Hong Kong

20 January 2021

To the Shareholders

Dear Sir or Madam,

(1) MAJOR TRANSACTION – EXERCISE OF OPTION TO ACQUIRE A CONTROLLING STAKE IN MIYATA HOLDING CO., LTD.

AND

(2) NOTICE OF EGM

1. INTRODUCTION

Reference is made to the Announcement dated 31 March 2020 in relation to, among others, the exercise of the Option by the Purchaser, which is a wholly-owned subsidiary of the Company.

For identification purposes only

LETTER FROM THE BOARD

The applicable percentage ratios under Rule 14.07 of the Listing Rules in respect of the Acquisition were more than 25% but less than 100%, therefore the Acquisition constitutes a major transaction for the Company. Rules 14.40 and 14.44 of the Listing Rules stipulate that a major transaction by a listed issuer requires approval of the transaction by a majority vote at a general meeting of the shareholders. In the meantime, Rule 14.44 of the Listing Rules provides that written shareholders’ approval may, subject to Rule 14.86 of the Listing Rules, be accepted in lieu of holding a general meeting in the case that no shareholder is required to abstain from voting if the issuer were to convene a general meeting for the approval of the transaction.

For the reason that no Shareholder had a material interest in the Agreements and the transactions contemplated thereunder, including but not limited to the exercise of the Option and the Acquisition, no Shareholder would be required to abstain from voting at the general meeting that would need to be convened for the approval of the Acquisition upon the exercise of the Option. Under such circumstances, the Company had sought to obtain approval by way of written approvals of the Controlling Shareholders (which together held approximately 67.52% of the issued share capital of the Company as at the date of the Announcement) of the Acquisition upon the exercise of the Option pursuant to Rule 14.44 of the Listing Rules. The Controlling Shareholders are a closely allied group of corporate shareholders directly or indirectly controlled by Dr. Tai and Dr. Wu, both of whom are executive Directors.

As the Acquisition constitutes a major transaction of the Company, Rule 14.67(6)(a)(i) of the Listing Rules requires an accountants’ report of the Target Group to be published by the Company. For this purpose, the Reporting Accountants have been engaged to report on the historical financial information of the Target Group for each of the years ended 30 September 2017, 30 September 2018, 30 September 2019 and the ten months ended 31 July 2020. The text of the accountants’ report from the Reporting Accountants (the “ Accountants’ Report ”) is set out in Appendix II to this circular.

It is noted that while the Reporting Accountants express an unqualified opinion on the consolidated statements of financial position of the Target Group as at 30 September 2019 and 31 July 2020 respectively, and on the Target Group’s financial performance and cash flows for the ten months ended 31 July 2020, they do not express an opinion on the historical financial information of the Target Group for each of the years ended 30 September 2017 and 30 September 2018, or on the consolidated statement of profit or loss, the consolidated statement of comprehensive income and consolidated statement of cash flows for the year ended 30 September 2019 because of the significance of certain matters more particularly described in the sub-section headed “5. INFORMATION ON THE TARGET GROUP – Reporting Accountants’ opinion” in the “Letter from the Board” and in the Accountants’ Report. It is further noted that despite that written approvals of the Acquisition had been obtained from the Controlling Shareholders as described above, Rule 14.86 of the Listing Rules stipulates that the Stock Exchange will not accept a written shareholders’ approval for a transaction, where the reporting accountants can only give a modified opinion in the accountants’ report in respect of the relevant acquisition, and in which event the Exchange will require a general meeting to be held to consider the transaction. In light of this, the EGM will be convened and held by the Company to ratify the approval of the Acquisition upon the exercise of the Option pursuant to Rule 14.86 of the Listing Rules. The Controlling Shareholders holding in aggregate approximately 67.52% of the issued share capital of the Company as the Latest Practicable Date have undertaken to vote in favour of the ordinary resolution to be proposed at the EGM to ratify and approve the Acquisition upon the exercise of the Option.

LETTER FROM THE BOARD

The purpose of this circular is to provide you with, among others, (i) details of the Acquisition upon the exercise of the Option by the Purchaser; (ii) further information on the Target Group; (iii) financial information on the Group; (iv) the Accountants’ Report of the historical financial information of the Target Group including the basis for (a) disclaimer of opinion in respect of the historical financial information of the Target Group for the years ended 30 September 2017 and 30 September 2018 and the opening balances and the loss and cash flows for year ended 30 September 2019; and (b) unqualified opinion in respect of the statements of financial position as at 30 September 2019 and historical financial information for the ten months ended 31 July 2020, of the Reporting Accountants; (v) unaudited pro forma financial information of the Enlarged Group; (vi) other information as required under the Listing Rules; and (vii) the notice of the EGM.

2. BACKGROUND INFORMATION ON THE EXERCISE OF THE OPTION

The Company announced on 18 November 2019 that:

(i) the Purchaser entered into the Share Sale Agreement with the Vendor on 15 November 2019 whereby (a) the Purchaser agreed to acquire 15% interest in the issued share capital of the Target Company for a nominal consideration of JPY10,000 (equivalent to approximately HK$721); and (b) the Vendor granted the Option to the Purchaser, which entitled the Purchaser the right at its sole discretion to require the Vendor to sell to the Purchaser a further 55% interest in the issued share capital of the Target Company at the exercise price of JPY1,000 (equivalent to approximately HK$72). The latest day the Purchaser might exercise the Option was 27 March 2020; and
(ii) the Purchaser had also entered into the First Loan Agreement with MYC on 15 November 2019 whereby the Purchaser agreed to provide the First Loan of JPY800,000,000 (equivalent to approximately HK$57,685,000) to MYC to fund its general expenditures.

MYC was the principal operating wholly-owned subsidiary of the Target Company as at the date of the First Loan Agreement. As more particularly described in the section headed “5. INFORMATION ON THE TARGET GROUP – Business and background”, the Target Company was merged to MYC on 24 November 2020, as a result of which MYC was the surviving company after the Merger and the Target Company ceased to exist. The acquisition of the aforesaid 15% interest in the issued share capital of the Target Company was completed on 22 November 2019, whilst the First Loan was made to MYC upon the signing of the First Loan Agreement. Details of the Share Sale Agreement and the First Loan Agreement were set out in the announcement of the Company dated 18 November 2019.

LETTER FROM THE BOARD

The Company further announced on 18 December 2019 that the Purchaser entered into the Second Loan Agreement with MYC on the same date pursuant to which the Purchaser had provided the Second Loan of JPY900,000,000 (equivalent to approximately HK$64,198,000) to MYC, for the use by MYC as general working capital to meet its working capital needs during the festive season of the new year, which is traditionally the peak trading season in Japan’s confectionery industry. Please refer to the announcement of the Company dated 18 December 2019 for further details of the Second Loan Agreement.

The Company further announced on 31 March 2020 that the Purchaser, the Vendor and Mrs. Miyata, the spouse of the Vendor, entered into the Supplemental Agreement to the Share Sale Agreement under which the parties agreed to amend certain terms of the Share Sale Agreement. The major amendments under the Supplemental Agreement are summarised below:

(i) the exercise period of the Option under the Share Sale Agreement was extended to on or before 6 April 2020;
(ii) completion of the transfer of the Option Shares shall take place “within ten business days from” instead of “on the first business day after” the exercise of the Option;
(iii) the Vendor and his wife, Mrs. Miyata, agreed to capitalise JPY1,200 million of indebtedness owed by the Target Company to them in aggregate by way of the Target Company issuing new shares to the Vendor and Mrs. Miyata (the “ Converted Shares ”). Fifteen percent (15%) of the Converted Shares were agreed by the parties to be transferred to the Purchaser without consideration; and
(iv) the number of shares in the Target Company to be transferred to the Purchaser upon the exercise of the Option by the Purchaser was changed to (a) such number of shares equal to fifty-five percent (55%) of the Converted Shares, and (b) 55 ordinary shares in the Target Company such that upon completion of the transfer of the Option Shares, the Purchaser would hold shares representing seventy percent (70%) of the total issued outstanding shares of the Target Company.

3. INFORMATION ON THE PARTIES

The Purchaser

The Purchaser is an investment holding company and is a wholly-owned subsidiary of the Company.

The Vendor and Mrs. Miyata

The Vendor is the founder of the Target Group. Mrs. Miyata is the spouse of the Vendor. To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, the Vendor and Mrs. Miyata are third parties independent of the Company and its connected persons.

LETTER FROM THE BOARD

4. EXERCISE OF THE OPTION

Under the terms of the Share Sale Agreement (as supplemented by the Supplemental Agreement), in addition to the 15% interest in the Target Company sold by the Vendor to the Purchaser on 22 November 2019, the Purchaser was also granted the Option to require the Vendor to sell the Option Shares to it at the Option Shares Purchase Price. The Option was exercisable by the Purchaser at its discretion on or before 6 April 2020. On 31 March 2020, the Purchaser exercised the Option.

The Option Shares Purchase Price was JPY1,000 (equivalent to approximately HK$71) in aggregate, which had been agreed by the parties under the Share Sale Agreement after arm’s length negotiations between the parties with reference to, among other things, (i) the First Loan extended to MYC; and (ii) the synergies expected to be generated between businesses of the Group and the Target Group.

The Acquisition was completed on 16 April 2020. The Option Shares Purchase Price was satisfied by the internal resources of the Group.

Shareholding structure of the Target Company at time of the Acquisition

The following charts show the shareholding structure of the Target Company before and immediately after the Acquisition:

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

Before the Acquisition
Company
100%
Purchaser Vendor
15% 85%
Target Company
100% 100%
MYC Tianjin Miyata
Subsidiaries of MYC
----- End of picture text -----

LETTER FROM THE BOARD

Immediately after the Acquisition

==> picture [425 x 294] intentionally omitted <==

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

Company
100%
Purchaser Vendor
70% 30%
Target Company
100% 100%
MYC Tianjin Miyata
Subsidiaries of MYC
----- End of picture text -----

Upon completion of the Acquisition, the interest of the Purchaser in the Target Company increased from 15% to 70%, and the Target Company and its subsidiaries became indirect non wholly-owned subsidiaries of the Company. The results of the Target Group is consolidated into the financial results of the Group.

5. INFORMATION ON THE TARGET GROUP

Business and background

The Target Company was a company incorporated in Japan and was a special purpose vehicle established for the purpose of holding the investment in its principal subsidiary, Miyata Co., Ltd. (宮田株式会社) (i.e. MYC) and other subsidiaries. On 24 November 2020, the Target Company was merged to MYC by way of MYC alloting shares to the then shareholders of the Target Company (being the Purchaser (as to 70%) and the Vendor (as to 30%)) on the basis of one share of MYC for one existing share then held in the Target Company. In return for the allotment of the MYC shares, MYC, being the surviving company after the Merger, succeeded all the assets, liabilities, rights and obligations of the Target Company and the latter ceased to exist after the Merger has become effective. Save for the effect that MYC becomes the holding company of all the companies comprising the Target Group after the cease of the Target Company, and the Purchaser and the Vendor become direct shareholders of MYC, the Merger did not have any financial effect on the Target Group as a whole, nor did it result in any change in the overall management of the Target Group.

LETTER FROM THE BOARD

The following charts show the structure of the Target Group before and after the Merger:

Before the Merger

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

Target Company
100% 100%
MYC Tianjin Miyata
Subsidiaries of MYC
----- End of picture text -----

After the Merger

==> picture [157 x 85] intentionally omitted <==

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

MYC
Subsidiaries of MYC
(including Tianjin Miyata)
----- End of picture text -----

Established in 1955, MYC is a renowned snack food and confectionery distributor in Japan specialised in the wholesaling and distribution of confectionery. In about 2008, MYC expanded its business to nut products. MYC currently has seven sales offices and eight distribution centers in Japan. MYC also sells its own brand-named products produced by other OEM manufacturers. In 2014, Tianjin Miyata was established in Tianjin, the PRC, the principal activity of which is the procurement of OEM products in the PRC for related companies of MYC’s customers in the PRC market.

MYC has a strong sales and distribution network and broad customer base in Japan. Its customers span from established nationwide supermarket chains and convenience stores (including but not limited to AEON, Daiso 100-yen shop, Muji), regional retailers, wholesalers and exporters/ overseas customers. On the supply side, MYC has a stronghold of over 600 suppliers for a vast variety of confectionery and nuts products. To ensure prime quality of its products, MYC not only procures products locally in Japan, but also from overseas including United States and the PRC. Further, MYC also procures finished products from overseas suppliers including from Malaysia, South Korea, Turkey, France and Ukraine.

MYC’s corporate philosophy is to preserve and promote traditional Japanese culture via Japanese confectionery. With the “Quality First” strategy, MYC provides a full range of high quality confectionery products to consumers in Japan. MYC’s vast market and customers base is built on its strengths in planning and developing products, which is in turn backed by its market research, trends analysis, and development capabilities for new products, manufacturing know-how and stringent quality control and food safety measures. This, coupled with its products marketing and promotion strength, enables MYC to maintain a vast base of customers in Japan nationwide.

LETTER FROM THE BOARD

In around 2008, the Target Group started a new business segment (the “ Nut Business ”) to procure, sale, market and distribute bean and nuts products in Japan, under the leadership of a newly recruited personnel who was known to be well experienced in this business segment in Japan. The Nut Business had recorded strong business growth in last few years. However, in or around July 2019, the Vendor uncovered certain irregular transactions in the Nut Business (the “ Irregular Transactions ”).

Shortly after the discovery of the Irregular Transactions, the Target Group engaged an independent professional firm specialised in management and financial consulting business, namely, Yamada Consulting Group Co., Ltd. of Japan (“ YCG ”), to conduct financial investigation into the matter, which revealed that irregular sales, inventories and payment transactions had occurred with the Nut Business, but business transactions of the traditional core confectionery business of the Target Group remained intact and were not involved in or affected by the Irregular Transactions.

The Irregular Transactions

The Irregular Transactions involved certain fictitious transactions between MYC and eight independent business counterparties. These business counterparties were independent third parties not related to the Target Group and its connected persons, or to the Company and its connected persons.

It is believed that the Irregular Transactions started in around 2013. The individual instigated the Irregular Transactions (the “ Instigator ”) was employed by MYC in 2008 to develop and head the Nut Business. Before his joining, MYC was primarily involved in the confectionery business without much presence in the nuts and nut snacks sector. The Instigator was invited to join MYC for the development of the Nut Business and he was given full responsibility to develop the new sector and manage and operate the Nut Business. It was found that the Instigator had input into the system of MYC fictitious sale and purchase transactions which had the effects of inflating sales, purchases and inventory of the Nut Business of the Target Group.

To the best knowledge of the Company after having made reasonable enquires, the Irregular Transactions had ceased since they were uncovered in mid-2019, before the Purchaser acquired the 15% interest in the Target Company.

The Company had been informed by the Vendor of the occurrence of the Irregular Transactions and the then on-going investigation undertaken by YCG when the Vendor sought investment by the Company in the Target Group, which has led to the consummation of the entering into of the Share Sale Agreement. The Company was given to understand that the Vendor uncovered the Irregular Transactions around mid-2019 when he noted that MYC experienced tight cashflows and slow accounts receivable settlements for the Nut Business, despite increasing sales. The Vendor commenced examination and enquiry into the sales of the Nut Business and discovered that false transactions were booked by MYC as if they were real transactions, therefore overstating

LETTER FROM THE BOARD

the sales and net accounts receivable of MYC. In the ensuing investigation, the Vendor also found that the actual inventories held by MYC was not in line with the accounting records and was also overstated. The Nut Business had been scaled down since the discovery of the Irregular Transactions. On the other hand, the confectionery business remains intact and, basically, there was no material impact on the business pattern of the Target Group’s confectionery business.

Prior to the exercise of the Option by the Purchaser and as part of its due diligence exercise on the Target Group, the Company had reviewed the historical unaudited financial information of the Target Group, the findings of YCG on the Irregular Transactions and the effects of the reversal of the Irregular Transactions and was of the view that the Irregular Transactions and the financial effects thereof on the historical results of the Target Group for the three years ended 30 September 2019 had largely been identified.

At the request of the Purchaser, in addition to the engagement of YCG to conduct investigation into the Irregular Transactions, the Target Company has engaged one more independent professional firm of accountants, namely Accounting Advisory Co., Ltd. of Japan, to jointly review and investigate the Irregular Transactions together with YCG. The Company believes that thorough checks and investigation had been conducted as much as possible into the Irregular Transactions. It is noted that the amounts of Irregular Transactions related to eight independent business counterparties respectively, which had been identified by the management of the Target Group to the Company and its reporting accountants for each of the three years ended 30 September 2019 were as follows:

Fictitious sales Customer A Customer B Customer C Customer D Customer E Customer F Customer G Customer H	Year 2017 JPY’million 1,023 2,133 1,783 1,952 559 335 270 2,458 10,513	ended 30 September 2018 2019 JPY’million JPY’million 2,503 1,386 2,141 1,298 1,961 839 1,611 1,328 635 560 688 500 162 5 354 – 10,055 5,916	ended 30 September 2018 2019 JPY’million JPY’million 2,503 1,386 2,141 1,298 1,961 839 1,611 1,328 635 560 688 500 162 5 354 – 10,055 5,916
			5,916

LETTER FROM THE BOARD

Fictitious purchases Customer A Customer B Customer C Customer D Customer E Customer F Customer G Customer H	Year 2017 JPY’million 1,241 2,364 1,698 1,871 194 327 146 2,459 10,300	ended 30 September 2018 2019 JPY’million JPY’million 2,328 1,386 2,723 952 1,587 806 1,205 1,258 523 301 863 649 – 25 696 – 9,925 5,377	ended 30 September 2018 2019 JPY’million JPY’million 2,328 1,386 2,723 952 1,587 806 1,205 1,258 523 301 863 649 – 25 696 – 9,925 5,377
			5,377

Based on the findings of the Target Company, the amounts of sales, purchases and inventories related to the Irregular Transactions which had been reversed for each of the three years ended 30 September 2019 were as follows:

	Aggregate	Aggregate	Aggregate
	amount of	amount of	amount of
	reversal of	reversal of	reversal of	Total effect
	sales related	purchases	inventories	of reversal
	to the	related to	related to	of the
	Irregular	the Irregular	the Irregular	Irregular
	Transactions	Transactions	Transactions	Transactions
	JPY’million	JPY’million	JPY’million	JPY’million
For the year ended
30 September 2017
Revenue	(10,513)	–	–	(10,513)
Cost of sales	–	(10,300)	278	(10,022)
For the year ended
30 September 2018
Revenue	(10,055)	–	–	(10,055)
Cost of sales	–	(9,925)	635	(9,290)
For the year ended
30 September 2019
Revenue	(5,916)	–	–	(5,916)
Cost of sales	–	(5,377)	198	(5,179)

LETTER FROM THE BOARD

For ease of reference by the Shareholders, set out below is a summary of the revenue and cost of sales of the Target Group (together with a table of equivalent HK$ amount), on audited basis and as extracted from the consolidated statements of profit or loss of the Target Group as contained in the Accountants’ Report.

	For the	For the	For the	For the
	year ended	year ended	year ended	ten months
	30 September	30 September	30 September	ended
	2017	2018	2019	31 July 2020
	JPY’ million	JPY’ million	JPY’ million	JPY’ million
Revenue	33,967	37,009	38,508	29,405
Cost of sales	(30,064)	(32,951)	(34,614)	(26,146)
	For the	For the	For the	For the
	year ended	year ended	year ended	ten months
	30 September	30 September	30 September	ended
	2017	2018	2019	31 July 2020
	HK$’ million	HK$’ million	HK$’ million	HK$’ million
	equivalent	equivalent	equivalent	equivalent
Revenue	2,419	2,636	2,743	2,094
Cost of sales	(2,141)	(2,347)	(2,465)	(1,862)

The Irregular Transactions have been eliminated in the above audited historical financial data on the ground that they were fictitious transactions. Your attention is drawn to the further information set out in the following sub-sections headed “Financial information” and “Reporting Accountants’ opinion” below.

The Board is of the view that the occurrence of the Irregular Transactions was a historical incident which involved a dishonest individual. The Instigator left the Target Group in January 2020.

The Company seconded one personnel to the Target Group after completion of the acquisition of 15% equity interest in the Target Company in November 2019, who was subsequently appointed as a director of MYC in January 2020.

Subsequent to the Acquisition, the Company has appointed representatives to, representing a majority in number of, the board of directors of the Target Company (before the Merger) and MYC (after the Merger). As at the Latest Practicable Date, MYC has a total of seven members on its board, of whom five are nominated by the Purchaser. It is considered that the present board and management of the Target Group has the requisite qualification, experience and integrity to manage and monitor the affairs of the Target Group.

The Board considers that the current management team of the Target Group, which is mainly appointed by the Purchaser, is composed of personnel with integrity.

LETTER FROM THE BOARD

Internal control

The Board considers that the internal control system of the Target Group currently in place is effective and should be able to prevent the occurrence of similar incidents as the Irregular Transactions in future and safeguard the assets of the Target Group for the following reasons:

(i) the Instigator in the Irregular Transactions had left the Target Group;
(ii) a review of the internal control system of MYC to identify weakness and recommend strengthening measures has been carried out by YCG and the Target Group has adopted necessary measures to strengthen the internal control system of the Target Group; and
(iii) the following measures have been implemented by the Target Group to improve its internal control system:
strengthening segregation of duties on the approval and authorisation processes;
training of executives and employees on legal compliance, internal control procedures rules; and
strengthening of the monitoring of the day-to-day operation of accounts receivable, accounts payable and inventories by:
- conducting monthly check of inventories to ensure the accuracy of its quantity;
- conducting regular test checking of inventories movement with the underlying documents;

– implementing strict documents control system where inventories may only be transferred out of the warehouse with properly executed orders, processing payment only with the source documents and proper authorisation;

conducting sales and purchase transactions with executed and authorised documents;
conducting visits by the management to customers and suppliers of the Target Group on a more frequent basis such that the customers and suppliers have the opportunity to meet the management directly, so that suspicious transaction, if any, can be identified at an earlier stage during discussions with the customers and suppliers during such visits;

LETTER FROM THE BOARD

more attention will be paid by the Target Group to the creditworthiness of new customers by introducing more stringent know-your-customer procedures, including the use of credit reports to assess the financial position and creditworthiness of new customers before setting the credit limit; and

– tightening the financial, banking and cashflows reporting and management of the Target Group to the Company so that the Company will be alerted of any abnormalities of the financial and operation of the Target Group at an early stage.

Financial information

All companies comprising the Target Group were incorporated under the laws of Japan, except for Tianjin Miyata, which was incorporated under the laws of the PRC.

For the purpose of this circular, the Company has engaged the Reporting Accountants to report on the historical financial information of the Target Group for each of the years ended 30 September 2017, 30 September 2018, 30 September 2019 and the ten months ended 31 July 2020.

It is noted that as a result of the continuous travel ban and quarantine requirements imposed in Japan and the PRC where the principal business operations of the Target Group are located, the Reporting Accountants have required a lot more time in conducting and coordinating the audit work on the Target Group. Hence, a delay in the original schedule to prepare and complete the Accountants’ Report for inclusion in this circular has occurred, as a result of which the time for despatch of this circular had been delayed.

The text of the Accountants’ Report is set out in Appendix II to this circular. A summary of the results and financial position of the Target Group as extracted from the Accountants’ Report (together with a table of equivalent HK$ amount) is set out below:

	For the	For the	For the		For the
	year ended	year ended	year ended	ten months
	30 September	30 September	30 September		ended
	2017	2018	2019	31	July 2020
	JPY’ million	JPY’ million	JPY’ million	JPY’ million
Revenue	33,967	37,009	38,508		29,405
Gross profit	3,903	4,058	3,894		3,259
Profit/(Loss) before tax	855	(184)	(2,236)		116
Profit/(Loss) after tax	327	(497)	(2,032)		24

LETTER FROM THE BOARD

	For the	For the	For the	For the
	year ended	year ended	year ended	ten months
	30 September	30 September	30 September	ended
	2017	2018	2019	31 July 2020
	HK$’ million	HK$’ million	HK$’ million	HK$’ million
	equivalent	equivalent	equivalent	equivalent
Revenue	2,419	2,636	2,743	2,094
Gross profit	278	289	277	232
Profit/(Loss) before tax	61	(13)	(159)	8
Profit/(Loss) after tax	23	(35)	(145)	2
	As at	As at	As at	As at
	30 September	30 September	30 September	31 July
	2017	2018	2019	2020
	JPY’ million	JPY’ million	JPY’ million	JPY’ million
Total assets	10,502	12,207	12,432	11,778
Total liabilities	9,531	13,935	16,305	14,448
	As at	As at	As at
	30 September	30 September	30 September	As at
	2017	2018	2019	31 July 2020
	HK$’ million	HK$’ million	HK$’ million	HK$’ million
	equivalent	equivalent	equivalent	equivalent
Total assets	748	869	885	839
Total liabilities	679	992	1,161	1,029

Further information on the management discussion and analysis on the reported periods is set out in Appendix III to this circular.

Reporting Accountants’ opinion

Your attention is drawn to the Accountants’ Report set out in Appendix II to this circular. The Reporting Accountants have reported that:

(i) they do not express an opinion on the historical financial information of the Target Group for each of the years ended 30 September 2017 and 30 September 2018 (the “ FY2017 & 2018 Disclaimer ”);
(ii) they were appointed as the Reporting Accountants of the Target Group in July 2020, and thus they did not observe the counting of physical inventories as at 30 September 2017 and 30 September 2018. Had they not made the FY2017 & 2018 Disclaimer, they would have issued a qualified opinion due to scope limitation on their work on inventory related to the fictitious transactions as at 30 September 2017 and 30 September 2018 (the “ Scope Limitation on Inventory ”);

LETTER FROM THE BOARD

(iii) they do not express an opinion on the opening balances and the consolidated statement of profit or loss, the consolidated statement of comprehensive income and consolidated statement of cash flows of the Target Group for the year ended 30 September 2019 (the “ FY2019 Opening Balances/Loss/Cash Flows Disclaimer ”); and
(iv) in their opinion, the historical financial information of the Target Group gives a true and fair view of the Target Company and the Target Group’s financial position as at 30 September 2019 and 31 July 2020 and of the Target Group’s financial performance and cash flows for the ten months ended 31 July 2020 (the “ FY2019 Closing Balances/10mths 2020 Unqualified Opinion ”).

The following are the salient points of the basis of the opinions expressed by the Reporting Accountants in their report in respect of the FY2017 & 2018 Disclaimer, Scope Limitation on Inventory and FY2019 Opening Balances/Loss/Cash Flows Disclaimer:

(i) in respect of the basis for the FY2017 & 2018 Disclaimer

The Reporting Accountants state in their report that the extent of the Irregular Transactions and the restatements resulted in the reversal of the fictitious sales and the related trade and other receivables, cost of sales, trade and other payables, and inventories amounts were material and pervasive. The Reporting Accountants were unable to obtain sufficient appropriate evidence in respect of the completeness and accuracy of the restatements for the years ended 30 September 2017 and 30 September 2018 as the Target Group’s accounting records in respect of the fictitious transactions were incomplete and a key accounting personnel had left the Target Group;

(ii) in respect of the Scope Limitation on Inventory

The Reporting Accountants state in their report that because the Target Group was unable to provide sufficient information or documents in respect of certain sales and purchase transactions related to the fictitious transactions for the years ended 30 September 2017 and 30 September 2018, therefore they were unable to perform inventory roll-back procedures on the inventory related to the fictitious transactions or conduct alternative means to satisfy themselves of the quantities of inventories held by the Target Group as at 30 September 2017 and 30 September 2018, or as to whether the carrying amounts of the inventories as at 30 September 2017 and 30 September 2018 were fairly stated. Thus, they were unable to determine whether any adjustments to the consolidated statements of profit or loss, consolidated statements of comprehensive income and the consolidated statements of cash flows for the years ended 30 September 2017, 30 September 2018 and 30 September 2019 were necessary; and

LETTER FROM THE BOARD

(iii) in respect of the basis for the FY2019 Opening Balances/Loss/Cash Flows Disclaimer

The Reporting Accountants state in their report that given that they were unable to express an opinion on the Target Group’s historical financial information for the year ended 30 September 2018, any adjustments that might have been necessary to the Target Group’s consolidated statement of financial position as at 30 September 2018 and 1 October 2018 would have a consequential effect on the Target Group’s consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended 30 September 2019.

Shareholders may refer to the text of the opinions expressed by the Reporting Accountants and the basis thereof as contained on pages II-1 to II-4 in this circular.

The Board takes note of and accept the disclaimer opinions and scope limitation reported by the Reporting Accountants, as well as the FY2019 Closing Balances/10mths 2020 Unqualified Opinion, and consider that the FY2019 Closing Balances/10mths 2020 Unqualified Opinion underpins a good basis for the Company taking over the control and management of the Target Group. At the time of the exercise of the Option by the Purchaser to acquire the Option Shares, the Company had not expected that there would be any modifications in the audit opinion in respect of the accountants’ report of the Target Group to be prepared for the purpose of this circular, because the consolidated management accounts of the Target Group provided by the Vendor to the Company had been prepared by the Vendor with the assistance of YCG, taking into account YCG’s findings of their investigation on the false transactions. YCG had conducted an extensive due diligence review on the books and records of MYC to ascertain the extent of the irregularities and their effects on the books and records of MYC. In ascertaining the nature of the false transactions, the effects on the business pattern of the Nut Business and the impact that the false transactions might have on the on-going business of the Target Group, the Company has sought various explanations from the Target Group and YCG on the matters. The Vendor and the Target Group had been open and co-operative in disclosing information on the Irregular Transactions and the related restatements of the historical financial information of the Target Group for each of the years ended 30 September 2017, 30 September 2018 and 30 September 2019. In the circumstance, the Company believed at the time of the exercise of the Option that the Target Group could provide sufficient evidence and supporting information and documents to satisfy the reporting accountants to be appointed in respect of the audit of the relevant periods to enable the said reporting accountants to give an unqualified opinion on their audit work. Against this background, and having considered that:

(i) the cause for disclaimer of opinion under the Accountants’ Report was virtually due to the Irregular Transactions;

LETTER FROM THE BOARD

(ii) the occurrence of the Irregular Transactions was historical which was instigated by a dishonest person who has left the Target Group;
(iii) the internal control system of the Target Group currently in place is effective and should be able to prevent the occurrence of similar incidents in future and safeguard the assets of the Target Group for the reasons as set out under the sub-section headed “5. INFORMATION ON THE TARGET GROUP – Internal control” above;
(iv) with reference to the Accountants’ Report, the Reporting Accountants believe that the audit evidence they have obtained is sufficient and appropriate to provide a basis for their unmodified report on the statements of financial position as at 30 September 2019 and the historical financial information for the ten months ended 31 July 2020;
(v) with reference to the Accountants’ Report, in the Reporting Accountants’ opinion, the historical financial information gives, for the purposes of the Accountants’ Report, a true and fair view of the Target Company’s and the Target Group’s financial position as at 30 September 2019 and 31 July 2020 and of the Target Group’s financial performance and cash flows for the ten months ended 31 July 2020; and
(vi) the Company has taken control and management of the Target Group subsequent to the completion of the Acquisition as described above,

the Board is of the view that the Irregular Transactions and the FY2017 and 2018 Disclaimer and the FY2019 Opening Balances/Loss/Cash Flows Disclaimer will not pose any material impact on the Target Group’s future business operation and the Group’s consolidated financial statements subsequent to the completion of the Acquisition.

The Board is of further view that the Accountants’ Report provides the Shareholders with sufficient information on the Target Group during the Relevant Periods as the basis for the Reporting Accountants’ opinion in relation thereof have been fully set out in their report so that Shareholders could consider the Acquisition on a well informed basis.

6. REASONS FOR AND BENEFITS OF THE TRANSACTION

The principal activity of the Company is investment holding. The Group is principally engaged in manufacturing, trading, distributing and retailing of snacks foods, confectionery, beverages, ice-cream products, frozen food products, noodles, ham and ham-related products, the operation of catering and restaurants business, and investment holding, with PRC and Hong Kong as its two main geographical markets.

LETTER FROM THE BOARD

The Target Group is a renowned snacks and confectionery distributor in Japan. By having the Target Group becoming its subsidiaries, the Group could combine its strengths in (i) capital; (ii) management resources; (iii) market leadership in the confectionery retailing and distribution industry in Hong Kong; and (iv) manufacturing capabilities and distribution network in the PRC; with the strengths of the Target Group in the confectionery distribution and product development business in Japan.

It is envisaged that the Group will not only benefit from the synergies of cross-branding and sales between the Hong Kong/PRC subsidiaries on one hand and MYC in Japan on the other, but also the strengthening of sales capabilities and the broadening of combined customers base for the Group. The Group has a good competitive edge in the confectionery and food distribution market in Hong Kong and the PRC. It will leverage on its market distribution network and strengths to procure premier Japanese confectionery products of the Target Group into these two markets.

The Directors (including the independent non-executive Directors) are of the view that the exercise of the Option and the Acquisition are on terms which are arm’s length, fair and reasonable and in the interests of the Company and its shareholders as a whole for the following reasons:

(i) the Target Group is one of the top ten snack foods and confectionery distributors in Japan;
(ii) the Irregular Transactions have been thoroughly investigated and proper internal control measures have been implemented by the Target Group as is particularly described above;
(iii) the responsible person involved in the Irregular Transactions had already left the Target Group;
(iv) the Acquisition is strategically important to the Company, as it allows the Company to gain a controlling stake in the Target Group thereby providing the Group with an instant platform to access the snacks and confectionery market in Japan;
(v) the Group will be able to gain access to over 600 small to medium sized manufacturer suppliers of the Target Group which will complement and expand the brands already covered by the Group in Hong Kong and Mainland China markets;
(vi) the synergy effects of the Acquisition and the combined Hong Kong, Mainland China and Japan markets will catapult the Group to its next stage of development; and

LETTER FROM THE BOARD

(vii) the consideration for the Acquisition is nominal at the amount of JPY1,000. The Directors note that the Target Group recorded net current liabilities of approximately JPY2,709 million (equivalent to approximately HK$192.9 million) and net liabilities of approximately JPY2,670 million (equivalent to approximately HK$190.2 million) as at 31 July 2020 (of which JPY1,700 million (equivalent to approximately HK$121.1 million) were the aggregate sum of the First Loan and Second Loan), the goodwill on acquisition representing the difference between the consideration for the Acquisition and the net deficit of the Target Group is considered fair and reasonable given the market position of the Target Group and the synergy effects of the Acquisition.

7. FINANCIAL EFFECTS

Upon completion of the Acquisition, the interest of the Purchaser in the Target Company increased from 15% to 70%, and companies comprising the Target Group were accounted for as subsidiaries of the Company (after the Merger, the Purchaser holds 70% interest in MYC and MYC and its subsidiaries continue to be accounted for as subsidiaries of the Company). The results of the Target Group is consolidated into the financial results of the Group.

The unaudited pro forma financial information of the Enlarged Group is set out in Appendix IV to this circular (the “ Pro Forma FI ”). As shown in the annual report of the Company for the year ended 31 March 2020, the consolidated total assets and total liabilities of the Group were approximately HK$2,894 million and HK$1,549 million respectively as at 31 March 2020. The financial effects of the Acquisition on the Group’s net asset value, working capital and gearing, on a pro forma basis, are illustrated below:

Net asset value

Based on the unaudited pro forma consolidated statement of financial position of the Enlarged Group, as at 31 March 2020, the total assets of the Enlarged Group would increase from approximately HK$2,893.8 million to approximately HK$3,804.1 million, and the total liabilities of the Enlarged Group would increase from approximately HK$1,548.6 million to approximately HK$2,525.2 million. Thus, the net assets of the Enlarged Group would have decreased from approximately HK$1,345.2 million to approximately HK$1,278.9 million if the Acquisition had taken place on 31 March 2020.

The increase in total assets, on a pro forma basis, of the Enlarged Group of approximately HK$910.3 million is mainly attributable to increases in (i) property, plant and equipment of approximately HK$204.7 million; (ii) goodwill of approximately HK$85.7 million; (iii) trade and bills receivable of approximately HK$274.7 million; and (iv) cash and cash equivalents of approximately HK$226.8 million if the Acquisition had taken place on 31 March 2020, which increases would have been partly offset by a decrease in prepayments, deposit and other receivables (current assets portion) of approximately HK$88.3 million resulting from the elimination of the First Loan and the Second Loan from the balance of “prepayments, deposits and other receivables” from the Group’s current assets, and the same amount from the balance of “loan from a shareholder” from the Target Group’s current liabilities.

LETTER FROM THE BOARD

The increase in total liabilities, on a pro forma basis, of the Enlarged Group of approximately HK$976.6 million is mainly attributable to increases in (i) trade payables, other payables and accruals of approximately HK$283.6 million; and (ii) interest-bearing bank borrowings (both short term and long term) of approximately HK$624.5 million if the Acquisition had taken place on 31 March 2020.

Working capital and gearing

The Group had net current assets and cash and cash equivalents of approximately HK$498.3 million and approximately HK$507.0 million as at 31 March 2020, respectively. The Enlarged Group (as if the Acquisition had taken place on 31 March 2020) would have recorded net current assets and cash and cash equivalents of approximately HK$275.1 million and approximately HK$733.8 million as at 31 March 2020, respectively, on a pro forma basis. The decrease in pro forma net current asset of the Enlarged Group is mainly due to an increase in short term interest-bearing bank borrowings of approximately HK$420.8 million. The gearing ratio of the Group as at 31 March 2020 was 58%. The gearing ratio of the Enlarged Group, on a pro forma basis, would have increased from that to 108%.

Shareholders should note that the Pro Forma FI is prepared for illustrative purpose only. The Group has published its 2020/2021 interim report for the six months ended 30 September 2020 that includes the unaudited condensed consolidated financial statements of the Group for the six months ended 30 September 2020 which consolidated the results, assets and liabilities of the Target Group. The Group’s 2020/2021 interim report could be found in the following link:

http://www1.hkexnews.hk/listedco/listconews/sehk/2020/1218/2020121800404.pdf

For further details of the Pro Forma FI and related notes, and the report received from Ernst & Young, Certified Public Accountants, the auditors of the Company, on the Pro Forma FI, please refer to Appendix IV to this circular.

8. LISTING RULES IMPLICATIONS

As the applicable percentage ratios under Rule 14.07 of the Listing Rules in respect of the Acquisition were more than 25% but less than 100%, the Acquisition constitutes a major transaction for the Company and is subject to notification, announcement and Shareholders’ approval requirements under Chapter 14 of the Listing Rules. Rule 14.40 and 14.44 of the Listing Rules stipulate that a major transaction by a listed issuer requires approval of the transaction by a majority vote at a general meeting of the shareholders. In the meantime, Rule 14.44 of the Listing Rules provides that written shareholders’ approval may, subject to Rule 14.86 of the Listing Rules, be accepted in lieu of holding a general meeting in the case that no shareholder is required to abstain from voting if the issuer were to convene general meeting for the approval of the transaction.

LETTER FROM THE BOARD

As the Acquisition constitutes a major transaction of the Company, Rule 14.67(6)(a)(i) of the Listing Rules requires an accountants’ report of the Target Group for inclusion into this circular. The text of the Accountants’ Report from the Reporting Accountants is set out in Appendix II to this circular.

At the time of the exercise of the Option, the Company (i) believed that the Target Group could provide sufficient evidence and supporting information and documents to satisfy the reporting accountants to be appointed in respect of the audit of the relevant periods to enable the said reporting accountants to give an unqualified opinion on their audit work; and (ii) had not expected that there would be any modifications in the audit opinion in respect of the accountants’ report of the Target Company to be prepared for the purpose of this circular, on the basis more particularly described in the sub-section headed “5. INFORMATION ON THE TARGET GROUP – Reporting Accountants’ opinion” above.

As no Shareholder had a material interest in the Agreements and the transactions contemplated thereunder, including but not limited to the exercise of the Option and the Acquisition, no Shareholder would be required to abstain from voting at the general meeting that were to be convened for the approval of the Acquisition upon the exercise of the Option.

Under these circumstances, the Company had, on 31 March 2020, sought to obtain approval by way of written approvals of the Controlling Shareholders (which together held approximately 67.52% of the issued share capital of the Company as at the date of the Announcement) of the Acquisition under the exercise of the Option pursuant to Rule 14.44 of the Listing Rules. The Controlling Shareholders are a closely allied group of corporate shareholders directly or indirectly controlled by Dr. Tai and Dr. Wu, both of whom are executive Directors. The Acquisition was completed on 16 April 2020.

As more particularly described above, and in the Accountants’ Report, the Reporting Accountants have reported modified opinion on the FY2017 & 2018 Disclaimer, the Scope Limitation on Inventory and the FY2019 Opening Balances/Loss/Cash Flows Disclaimer. In this event, despite that written approvals of the Acquisition had been obtained from the Controlling Shareholders as described above, the EGM will be convened and held by the Company to ratify and approve the Acquisition upon the exercise of the Option pursuant to Rule 14.86 of the Listing Rules. The Controlling Shareholders holding in aggregate approximately 67.52% of the issued share capital of the Company as the Latest Practicable Date, have undertaken to vote in favour of the ordinary resolution to be proposed at the EGM to ratify and approve the Acquisition upon the exercise of the Option.

LETTER FROM THE BOARD

9. EGM

A notice convening the EGM to be held at Garden Room, 2nd Floor, New World Millennium Hong Kong Hotel, 72 Mody Road, Tsim Sha Tsui East, Kowloon, Hong Kong on Tuesday, 9 February 2021 at 4:30 p.m. or any adjournment is set out from pages EGM-1 to EGM-3 of this circular. A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the EGM in person, you are requested to complete and return the accompanying form of proxy to the Company’s Hong Kong branch share registrar and transfer office, Tricor Tengis Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM (i.e. not later than 4:30 p.m. on Sunday, 7 February 2021). Completion and return of the proxy form shall not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so desire.

10. CLOSURE OF REGISTER OF MEMBERS

The register of members of the Company will be closed from Thursday, 4 February 2021 to Tuesday, 9 February 2021 (both days inclusive), during which period no transfer of shares will be effected. In order to qualify for the right to attend and vote at the EGM, all transfers accompanied by the relevant share certificates must be lodged with the Company’s Hong Kong branch share registrar and transfer office, Tricor Tengis Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong no later than 4:30 p.m. on Wednesday, 3 February 2021 for registration of transfer.

11. RECOMMENDATION

The Directors (including the independent non-executive Director) consider that the Acquisition is fair and reasonable, and in the interests of the Company and its shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to ratify and approve the Acquisition upon the exercise of the Option.

12. ADDITIONAL INFORMATION

Your attention is drawn to the information set out in the appendices to this circular.

Yours faithfully, For and on behalf of

Four Seas Mercantile Holdings Limited Tai Tak Fung, Stephen, GBM, GBS, SBS, JP Chairman

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. FINANCIAL INFORMATION OF THE GROUP

Financial information on the Group for each of the three financial years ended 31 March 2020 and the 6 months ended 30 September 2020 are disclosed in the following documents which have been published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (www.fourseasgroup.com.hk):

Annual Report 2017/18 (pages 74 to 191):

https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0726/ltn20180726263.pdf

Annual Report 2018/19 (pages 69 to 203):

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0725/ltn20190725131.pdf

Annual Report 2019/20 (pages 72 to 203):

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0727/2020072700570.pdf

Interim Report 2020 (pages 1 to 26):

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1218/2020121800404.pdf

2. INDEBTEDNESS

As at 30 November 2020, being the latest practicable date for the purpose of the statement of indebtedness prior to the printing of this circular, the Group (as enlarged by the Target Group) had outstanding bank borrowings of approximately HK$1,301,620,000 comprising secured bank loans of approximately HK$277,760,000 and unsecured bank loans of approximately HK$1,023,860,000. The secured bank loans was secured by charges on certain assets of the Group.

As at 30 November 2020, the Group (as enlarged by the Target Group) had lease liabilities of approximately HK$383,558,000.

Save as aforesaid, and apart from intra-group liabilities, the Group (as enlarged by the Target Group) did not have any loan capital and/or debt securities issued and outstanding or agreed to be issued or otherwise created but unissued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills, if any) or acceptable credits, debentures, mortgage, charges, hire purchase commitments, guarantees or other material contingent liabilities outstanding at the close of business on 30 November 2020.

I-1

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3. WORKING CAPITAL

The Directors, after due and careful consideration, are of the opinion that, taking into account the internal resources, the existing available credit facilities of the Group, the Group has sufficient working capital for its present requirements for at least 12 months from the date of publication of this circular in the absence of unforeseen circumstances.

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

With its foundation in Hong Kong, the Group will continue developing the business in Hong Kong as well as expanding in the Mainland in order to maintain its leadership in the market.

It is envisaged that the Group will not only benefit from the synergies of cross-branding and sales between the Hong Kong/PRC subsidiaries on one hand and MYC in Japan on the other, but also the strengthening of sales capabilities and the broadening of combined customers base for the Group. The Group has a good competitive edge in the confectionery and food distribution market in Hong Kong and the PRC. It will leverage on its market distribution network and strengths to procure the premier Japanese confectionery products of the Target Group into these two markets.

In addition, the Group will also through the acquisition of the Target Group make a foray into the Japanese consumer market for the food products of the Group by having direct access to the existing customer base of the Target Group. It is intended that the Company will implement a series of financial and management control measures and corporate governance system to enhance the internal control of the Target Group, with a view to preventing future occurrence of irregular activities and to improving the operational efficiency and profitability of the Target Group.

5. MATERIAL ADVERSE CHANGE

The Directors confirm that there is no material adverse change in the financial or trading position or outlook of the Group since 31 March 2020, the date to which the latest published audited financial statement of the Group were made up.

I-2

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

The following is the text of a report set out on pages II-1 to II-98, received from the Company’s reporting accountants, RSM Hong Kong, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

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20 January 2021

ACCOUNTANTS’ REPORT OF HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF FOUR SEAS MERCANTILE HOLDINGS LIMITED

Introduction

We report on the historical financial information of Miyata Holding Co., Ltd. (the “Target Company”) and its subsidiaries (hereinafter collectively referred to as the “Target Group”) set out on pages II-6 to II-98, which comprises the consolidated statements of financial position of the Target Group as at 30 September 2017, 30 September 2018, 30 September 2019 and 31 July 2020, the statements of financial position of the Target Company as at 30 September 2017, 30 September 2018, 30 September 2019 and 31 July 2020, and the consolidated statements of profit or loss, the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows for each of the periods then ended (the “Relevant Periods”) and a summary of significant accounting policies and other explanatory information (together, the “Historical Financial Information”). The Historical Financial Information set out on pages II-6 to II-98 forms an integral part of this report, which has been prepared for inclusion in the circular of Four Seas Mercantile Holdings Limited (the “Company”) dated 20 January 2021 (the “Circular”) in connection with the proposed acquisition of the 55% equity interest in the Target Company.

Directors’ responsibility for the Historical Financial Information

The directors of the Company are responsible for the preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in note 2 to the Historical Financial Information, and for such internal control as the directors determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Reporting accountants’ responsibility

Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200 “Accountants’ Reports on Historical Financial Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement.

Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountants’ judgement, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountants consider internal control relevant to the entity’s preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation and presentation set out in note 2 to the Historical Financial Information in order to design procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Our work also included evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors of the Company, as well as evaluating the overall presentation of the Historical Financial Information.

We do not express an opinion on the Historical Financial Information of the Target Group for each of the periods ended 30 September 2017 and 30 September 2018 and on the consolidated statement of profit or loss, the consolidated statement of comprehensive income and consolidated statement of cash flows for the period ended 30 September 2019. Because of the significance of the matters described in the Basis for Disclaimer of Opinion sections of our accountants’ report, we have not been able to obtain sufficient appropriate evidence to provide a basis for an opinion.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our unmodified opinion on the statements of financial position of the Target Group and the Target Company as at 30 September 2019 and the Historical Financial Information for the period ended 31 July 2020.

Basis for Disclaimer of Opinion – Historical Financial Information for the periods ended 30 September 2017 and 30 September 2018

In July 2019 management of the Target Group discovered that certain fictitious sales transactions with customers of the nuts segment had been recorded in the Target Group’s financial statements for each of the periods ended 30 September 2017, 30 September 2018 and 30 September 2019. Management engaged two independent professional firms to conduct an investigation into the fictitious transactions and to restate the Target Group’s financial statements for each of the periods ended 30 September 2017, 30 September 2018 and 30 September 2019. The extent of the fictitious transactions was both material and pervasive to the Target Group’s financial statements and the restatements resulted in the reversal of

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

the fictitious sales and the related trade and other receivables, cost of sales, trade and other payables, and inventories amounts. We were unable to obtain sufficient appropriate evidence in respect of the completeness and accuracy of the restatements for the periods ended 30 September 2017 and 30 September 2018 as the Target Group’s accounting records in respect of the fictitious transactions were incomplete and a key accounting personnel had left the Target Group.

Scope limitation on inventory

We were appointed as the reporting accountants of the Target Group in July 2020, and thus we did not observe the counting of physical inventories as at 30 September 2017 and 30 September 2018. As the Target Group was unable to provide sufficient information or supporting documents for/to certain sales and purchase transactions related to the fictitious transactions for the periods ended 30 September 2017 and 30 September 2018, thus we were unable to perform inventory roll-back procedures for the inventory related to the fictitious transactions. We were unable to satisfy ourselves by alternative means concerning the quantities of inventories held by the Target Group as at 30 September 2017 and 30 September 2018. Accordingly, we are unable to obtain sufficient appropriate evidence to satisfy ourselves as to whether the carrying amounts of the inventories as at 30 September 2017 and 30 September 2018 were fairly stated. We are unable to determine whether any adjustments to the consolidated statements of profit or loss, consolidated statements of comprehensive income and the consolidated statements of cash flows for the periods ended 30 September 2017, 30 September 2018 and 30 September 2019 were necessary.

Had we not disclaimed our opinion in respect of the Historical Financial Information for the periods ended 30 September 2017 and 30 September 2018, we would have issued a qualified opinion due to scope limitation on our work on inventory as at 30 September 2017 and 30 September 2018.

Basis for Disclaimer of Opinion – Opening balances and the loss and cash flows for the period ended 30 September 2019

As described in the preceding paragraph, we were unable to express an opinion on the Target Group’s Historical Financial Information for the period ended 30 September 2018. Any adjustments that might have been found necessary to the Target Group’s consolidated statement of financial position as at 30 September 2018 and 1 October 2018 would have a consequential effect on the Target Group’s consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the period ended 30 September 2019.

Unqualified Opinion – Statements of financial position as at 30 September 2019 and Historical Financial Information for the period ended 31 July 2020

In our opinion, the Historical Financial Information gives, for the purposes of the accountants’ report, a true and fair view of the Target Company and the Target Group’s financial position as at 30 September 2019 and 31 July 2020 and of the Target Group’s financial performance and cash flows for the period ended 31 July 2020 in accordance with the basis of preparation and presentation set out in note 2 to the Historical Financial Information.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Material uncertainty related to going concern

We draw attention to note 2(b) in the Historical Financial Information which indicates that the Target Group had net current liabilities and net liabilities of JPY2,709 million and JPY2,670 million at 31 July 2020 respectively. As stated in note 2(b) these conditions indicate that a material uncertainty exists that may cast significant doubt on the Target Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Review of stub period comparative financial information

We were engaged to review the stub period comparative financial information of the Target Group which comprises statements of consolidated profit or loss, comprehensive income, changes in equity and cash flows for the ten months ended 31 July 2019 and other explanatory information (the “Stub Period Comparative Financial Information”). The directors of the Company are responsible for the preparation and presentation of the Stub Period Comparative Financial Information in accordance with the basis of preparation and presentation set out in note 2 to the Historical Financial Information. Our responsibility is to express a conclusion on the Stub Period Comparative Financial Information based on our review. We conducted our review in accordance with Hong Kong Standard on Review Engagements 2400 (Revised) “Engagements to Review Historical Financial Statements” issued by the HKICPA. However, because of the significance of the matters described in the preceding paragraphs, we have not been able to obtain sufficient appropriate evidence to form a conclusion. Accordingly, we do not express a review conclusion on the Stub Period Comparative Financial Information.

Report on matters under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page II-5 have been made.

Dividends

We refer to note 16 to the Historical Financial Information which contains information about dividend declared by the Target Company in respect of the Relevant Periods.

RSM Hong Kong

Certified Public Accountants

Hong Kong

II-4

APPENDIX II ACCOUNTANTS’ REPORT OF THE TARGET GROUP

HISTORICAL FINANCIAL INFORMATION OF THE TARGET GROUP

Preparation of Historical Financial Information

Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.

The financial statements of the Target Group for the Relevant Periods, on which the Historical Financial Information is based, were audited by RSM Hong Kong in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) (“Underlying Financial Statements”).

The Historical Financial Information is presented in Japanese Yen (“JPY”) and all values are rounded to the nearest million (JPY’000,000) except when otherwise indicated.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

A. CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

Notes REVENUE 8 Cost of sales Gross profit Other income and gains/(losses) 9 Selling and distribution expenses Administrative expenses Other operating expenses 10 Finance costs 11 Share of profits of associates PROFIT/(LOSS) BEFORE TAX FOR THE YEAR/PERIOD 12 Income tax (expense)/credit 13 PROFIT/(LOSS) FOR THE YEAR/PERIOD ATTRIBUTABLE TO OWNERS OF THE TARGET COMPANY EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO OWNERS OF THE TARGET COMPANY – Basic and diluted 17	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 33,967 37,009 38,508 (30,064) (32,951) (34,614) 3,903 4,058 3,894 872 232 68 (2,757) (2,966) (3,277) (990) (1,006) (1,058) (118) (446) (1,792) (55) (56) (71) * 855 (184) (2,236) (528) (313) 204 327 (497) (2,032) N/A N/A N/A	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 33,067 29,405 (29,745) (26,146) 3,322 3,259 57 87 (2,766) (2,393) (878) (723) (1,856) (54) (59) (60) (2,180) 116 165 (92) (2,015) 24 N/A N/A

Less than JPY1 million

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

B. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Notes PROFIT/(LOSS) FOR THE YEAR/PERIOD OTHER COMPREHENSIVE INCOME/(LOSS) Other comprehensive income/ (loss) that may not be reclassified to profit or loss in subsequent periods: Fair value changes in financial assets measured at fair value through other comprehensive income – Income tax arising from fair value changes thereof Remeasurement gains/(losses) of defined benefit obligation 34 – Income tax arising from remeasurement gains/(losses) thereof Other comprehensive income/ (loss) that may be reclassified to profit or loss in subsequent periods: Exchange differences on translation of foreign operations OTHER COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR/PERIOD, NET OF TAX TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR/PERIOD ATTRIBUTABLE TO OWNERS OF THE TARGET COMPANY	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 327 (497) (2,032) 114 11 (143) (39) (4) 49 2 1 (5) (1) * 2 76 8 (97) 9 (7) (16) 9 (7) (16) 85 1 (113) 412 (496) (2,145)	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) (2,015) 24 (151) (68) 52 23 (6) 3 2 (1) (103) (43) (8) (4) (8) (4) (111) (47) (2,126) (23)

Less than JPY1 million

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

C. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

					As at
		As at	30 September		31 July
	Notes	2017	2018	2019	2020
		_JPY’million JPY’million JPY’million _			JPY’million
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment	18	2,040	2,047	2,028	2,165
Investment properties	19	298	304	313	313
Other intangible assets	20	228	254	286	243
Investments in associates	21	4	4	4	48
Financial assets at fair value
through other comprehensive
income (“FVTOCI”)	22	376	397	206	146
Financial assets at fair value
through profit or loss (“FVTPL”)	23	139	149	5	5
Prepayments, deposits and
other receivables	27	321	326	293	68
Derivative financial assets	24	12	6	2	–
Deferred tax assets	35	38	25	309	265
Total non-current assets		3,456	3,512	3,446	3,253
CURRENT ASSETS
Inventories	25	1,180	2,159	1,615	1,085
Trade and bills receivables	26	3,797	4,092	4,255	3,812
Prepayments, deposits and other
receivables	27	249	552	590	475
Derivative financial assets	24	33	45	15	6
Tax recoverable		–	–	140	–
Fixed bank deposits and
pledged bank deposits	28	868	868	983	–
Cash and cash equivalents	28	919	979	1,388	3,147
Total current assets		7,046	8,695	8,986	8,525
LIABILITIES
CURRENT LIABILITIES
Trade payables, other payables
and accruals	29	3,839	4,653	4,771	3,547
Borrowings	30	3,863	6,771	7,643	5,840
Lease liabilities	31	–	–	–	128
Finance lease payables	31	35	36	21	–
Loans from shareholders	32	–	–	–	1,700
Derivative financial liabilities	24	27	16	34	3
Tax payable		175	150	3	16
Total current liabilities		7,939	11,626	12,472	11,234
NET CURRENT LIABILITIES		(893)	(2,931)	(3,486)	(2,709)
TOTAL ASSETS LESS
CURRENT LIABILITIES		2,563	581	(40)	544

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

C. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)

					As at
		As at	30 September		31 July
	Notes	2017	2018	2019	2020
		_JPY’million JPY’million JPY’million _			JPY’million
NON-CURRENT LIABILITIES
Other payables	29	8	11	50	41
Borrowings	30	1,230	1,974	2,303	2,827
Lease liabilities	31	–	–	–	200
Finance lease payables	31	79	115	93	–
Loans from shareholders	32	–	30	1,230	–
Derivative financial liabilities	24	143	42	3	1
Provisions	33	32	32	33	33
Defined benefit obligations	34	100	105	121	112
Total non-current liabilities		1,592	2,309	3,833	3,214
Net assets/(liabilities)		971	(1,728)	(3,873)	(2,670)

EQUITY
Equity attributable to owners
of the Target Company
Share capital	36	50	3	3	603
Reserves	37	921	(1,731)	(3,876)	(3,273)
Total equity/(Capital deficiency)		971	(1,728)	(3,873)	(2,670)

Less than JPY1 million

Note:

The Target Group has initially applied HKFRS 16 at 1 October 2019. Under the transition methods chosen, comparative information in the Historical Financial Information is not restated. Details of changes in accounting policies are disclosed in note 3 to the Historical Financial Information.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

D. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

At 1 October 2016 Total comprehensive income for the year Dividend declared Changes in equity for the year At 30 September 2017 At 1 October 2017 Total comprehensive loss for the year Issuance of shares pursuant to the Target Group Reorganisation Effect of the Target Group Reorganisation Dividend declared Changes in equity for the year At 30 September 2018	Share capital JPY’million 50 – – – 50 50 – 3 (50) – (47) 3	Capital surplus JPY’million (note37b(i)) – – – – – – – – – – – –	Attributable to owners of the Target Company Legal reserve Merger reserve Statutory reserve Financial assets at FVTOCI reserve Remeasure- ment reserve Exchange fluctuation reserve Retained profits/ (Accumulated losses) Total equity/ (Capital deficiency) JPY’million JPY’million JPY’million JPY’million JPY’million JPY’million JPY’million JPY’million (note37b(ii)) (note37b(iii)) (note37b(iv)) (note37b(v)) (note37b(vi)) (note37b(vii)) 13 – – 109 – (16) 408 564 – – – 75 1 9 327 412 – – – – – – (5) (5) – – – 75 1 9 322 407 13 – – 184 1 (7) 730 971 13 – – 184 1 (7) 730 971 – – – 7 1 (7) (497) (496) – – – – – – – 3 – (2,146) – – – – – (2,196) – – – – – – (10) (10) – (2,146) – 7 1 (7) (507) (2,699) 13 (2,146) – 191 2 (14) 223 (1,728)	Attributable to owners of the Target Company Legal reserve Merger reserve Statutory reserve Financial assets at FVTOCI reserve Remeasure- ment reserve Exchange fluctuation reserve Retained profits/ (Accumulated losses) Total equity/ (Capital deficiency) JPY’million JPY’million JPY’million JPY’million JPY’million JPY’million JPY’million JPY’million (note37b(ii)) (note37b(iii)) (note37b(iv)) (note37b(v)) (note37b(vi)) (note37b(vii)) 13 – – 109 – (16) 408 564 – – – 75 1 9 327 412 – – – – – – (5) (5) – – – 75 1 9 322 407 13 – – 184 1 (7) 730 971 13 – – 184 1 (7) 730 971 – – – 7 1 (7) (497) (496) – – – – – – – 3 – (2,146) – – – – – (2,196) – – – – – – (10) (10) – (2,146) – 7 1 (7) (507) (2,699) 13 (2,146) – 191 2 (14) 223 (1,728)
				407
				971

				971 (496) 3 (2,196) (10)
				(2,699)
				(1,728)

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

D. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)

At 1 October 2018 Total comprehensive loss for the year Transfer from other components of equity to retained earnings Transfer from retained earnings to statutory reserve Changes in equity for the year At 30 September 2019 At 1 October 2019 Adjustments on initial application of HKFRS 16_(note 3)_ Restated balance at 1 October 2019 Total comprehensive loss for the period Transfer from retained earnings to statutory reserve Issuance of shares Waiver of loan from a shareholder Changes in equity for the period At 31 July 2020 At 1 October 2018 Total comprehensive loss for the period Transfer from retained earnings to statutory reserve Changes in equity for the period At 31 July 2019 (unaudited)	Share capital JPY’million 3 – – – – 3 3 – 3 – – 600 – 600 603 3 – – – 3	Capital surplus JPY’million (note37b(i)) – – – – – – – – – – – 600 30 630 630 – – – – –	Legal reserve JPY’million (note37b(ii)) 13 – – – – 13 13 – 13 – – – – – 13 13 – – – 13	Attributable to owners of the Target Company Merger reserve Statutory reserve Financial assets at FVTOCI reserve Remeasure- ment reserve JPY’million JPY’million JPY’million JPY’million (note37b(iii)) (note37b(iv)) (note37b(v)) (note37b(vi)) (2,146) – 191 2 – – (94) (3) – – (18) – – 16 – – – 16 (112) (3) (2,146) 16 79 (1) (2,146) 16 79 (1) – – – – (2,146) 16 79 (1) – – (45) 2 – 4 – – – – – – – – – – – 4 (45) 2 (2,146) 20 34 1 (2,146) – 191 2 – – (99) (4) – 16 – – – 16 (99) (4) (2,146) 16 92 (2)	Exchange fluctuation reserve Retained profits/ (Accumulated losses) JPY’million JPY’million (note37b(vii)) (14) 223 (16) (2,032) – 18 – (16) (16) (2,030) (30) (1,807) (30) (1,807) – (4) (30) (1,811) (4) 24 – (4) – – – – (4) 20 (34) (1,791) (14) 223 (8) (2,015) – (16) (8) (2,031) (22) (1,808)	Total equity/ (Capital deficiency) JPY’million (1,728) (2,145) – –
						(2,145)
						(3,873)

						(3,873) (4)
						(3,877) (23) – 1,200 30
						1,207
						(2,670)

						(1,728) (2,126) –
						(2,126)
						(3,854)

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

E. CONSOLIDATED STATEMENTS OF CASH FLOWS

					Ten months
		Year ended 30 September			ended 31 July
	Notes	2017	2018	2019	2019	2020
		_JPY’million JPY’million _		_JPY’million _	JPY’million JPY’million
					(unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Profit/(loss) before tax		855	(184)	(2,236)	(2,180)	116
Adjustments for:
Share of profits of associates	21	*	*	*	*	*
Interest income	9	(3)	(3)	(3)	(2)	(1)
Dividend income	9	(5)	(5)	(6)	(6)	(4)
Change in fair value on investment
properties	9	(2)	(6)	(9)	(8)	–
Change in fair value on financial
assets at FVTPL		(2)	*	*	*	–
Change in fair value on derivative
financial assets		(65)	(53)	(9)	(9)	(9)
Change in fair value on derivative
financial liabilities		(636)	(41)	14	9	(5)
Exchange (gains)/losses		(24)	(24)	8	17	(8)
Finance costs	11	55	56	71	59	60
Unwinding of discounts		–	–	1	–	–
Loss/(gain) on disposal of financial
assets at FVTPL	9	2	–	(2)	–	–
Loss on written off of property,
plant and equipment	10	1	26	–	–	–
Loss on disposal of property,
plant and equipment	10	–	2	–	–	1
Depreciation of property, plant and
equipment, except right-of-use assets		109	113	112	93	72
Depreciation of right-of-use assets		–	–	–	–	122
Amortisation of other intangible assets		53	68	91	75	85
Impairment losses of property, plant and
equipment, except right-of-use assets	10	–	3	4	4	–
Impairment losses of other intangible assets	10	16	14	18	11	5
Write-down of slow-moving inventories		7	2	3	3	145
(Reversal of)/allowance for slow-moving
inventories		(7)	150	74	29	(135)
Provision for retirement benefit obligations		10	9	12	9	10
Release of lease liabilities		–	–	–	–	(131)
Written off of right-of-use assets		–	–	–	–	130
Operating profit/(loss) before
working capital changes		364	127	(1,857)	(1,896)	453

Less than JPY1 million

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

E. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

					Ten months	Ten months
		Year ended 30 September			ended 31 July
	Notes	2017	2018	2019	2019		2020
		_JPY’million JPY’million _		_JPY’million _	JPY’million JPY’million
					(unaudited)
Operating profit/(loss) before
working capital changes		364	127	(1,857)	(1,896)		453
(Increase)/decrease in inventories		(138)	(1,131)	467	441		520
(Increase)/decrease in trade and bills
receivables		(310)	(295)	(163)	(158)		443
Decrease/(increase) in prepayments,
deposits and other receivables		288	(308)	(112)	(52)		450
Increase/(decrease) in trade payables,
other payables and accruals		246	817	264	1,222	(1,343)
Settlement of retirement benefit obligation		*	(3)	(1)	(1)		(16)
Cash generated from/(used in) operations		450	(793)	(1,402)	(444)		507
Income taxes (paid)/refund		(239)	(329)	(316)	(315)		127
Interest portion of lease payments		–	–	–	–		(3)
Finance lease charges paid		(1)	(1)	(1)	(1)		–
Net cash flows generated from/(used in)
operating activities		210	(1,123)	(1,719)	(760)		631

Less than JPY1 million

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

E. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

					Ten months	Ten months
		Year ended 30 September			ended 31 July
	Notes	2017	2018	2019	2019		2020
		_JPY’million _	_JPY’million _	_JPY’million _	JPY’million JPY’million
					(unaudited)
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital injection of an associate		–	–	–	–		(44)
Interest received		3	3	3	2		1
Dividends received from listed investments		5	5	6	6		4
Purchases of property, plant and equipment		(21)	(79)	(97)	(63)		(2)
Purchases of other intangible assets		(125)	(108)	(141)	(85)		(47)
Purchases of financial assets at FVTPL		(10)	(10)	(8)	(8)		*
Purchase of equity investment designated at
FVTOCI		(8)	(10)	(9)	(9)		(8)
Proceeds from disposal of property, plant and
equipment		–	4	–	–		8
Proceeds from disposal of financial assets at
FVTPL		12	–	154	–		–
Proceeds from disposal of equity investment
designated at FVTOCI		–	–	57	–		–
Proceeds from disposal of assets held-for-sale		45	–	–	–		–
(Placement)/release in time deposit or pledged
bank deposits		–	–	(115)	(18)		983
Net cash (used in)/generated from investing
activities		(99)	(195)	(150)	(175)		895
CASH FLOWS FROM FINANCING
ACTIVITIES
Borrowings raised		27,150	30,800	28,227	27,748	8,723
Repayment of borrowings		(27,286)	(27,148)	(27,026)	(27,025)	(10,002)
Increase in loans from shareholders		–	30	1,200	1,200	1,700
Interest paid		(54)	(55)	(70)	(58)		(57)
Principal portion of lease payments		–	–	–	–		(127)
Repayment of finance lease payables		(52)	(39)	(37)	(32)		–
Issuance of shares		–	3	–	–		–
Deemed distribution to controlling shareholders
upon the Target Group Reorganisation		–	(2,196)	–	–		–
Dividend paid		(5)	(10)	–	–		–
Net cash (used in)/generated from financing
activities		(247)	1,385	2,294	1,833		237

Less than JPY1 million

II-14

ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

E. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

					Ten months	Ten months
		Year ended 30 September			ended 31 July
	Notes	2017	2018	2019	2019	2020
		_JPY’million JPY’million _		_JPY’million _	JPY’million JPY’million
					(unaudited)
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS		(136)	67	425	898	1,763
Effect of foreign exchange rate changes, net		9	(7)	(16)	(8)	(4)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR/PERIOD		1,046	919	979	979	1,388
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR/PERIOD		919	979	1,388	1,869	3,147

ANALYSIS OF CASH AND CASH
EQUIVALENTS
Cash and bank balances	28	731	791	1,314	1,699	3,147
Time deposits	28	188	188	74	170	–
		919	979	1,388	1,869	3,147

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

F. STATEMENTS OF FINANCIAL POSITION OF THE TARGET COMPANY

Notes ASSETS NON-CURRENT ASSETS Investments in subsidiaries CURRENT ASSETS Prepayments, deposits and other receivables 27 Cash and cash equivalents 28 Total current assets LIABILITIES CURRENT LIABILITIES Trade payables, other payables and accruals 29 Borrowings 30 Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Borrowings 30 Loan from shareholders 32 Total non-current liabilities Net assets EQUITY Equity attributable to owners of the Target Company Share capital 36 Reserves 37 Total equity	As at 30 September 2018 2019 JPY’million JPY’million 2,196 2,317 1 2 34 59 35 61 – – 1,200 167 1,200 167 (1,165) (106) 1,031 2,211 1,000 953 30 1,230 1,030 2,183 1 28 3 3 (2) 25 1 28	As at 31 July 2020 JPY’million 2,317 – 13 13 1,086 – 1,086 (1,073) 1,244 – – – 1,244 603 641 1,244

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

G. NOTES TO THE HISTORICAL FINANCIAL INFORMATION OF THE TARGET GROUP

1. GENERAL INFORMATION

Miyata Holding Co., Ltd. (the “Target Company”) was incorporated in Japan with limited liability. The address of its registered office and its principal place of business is 950-1 Wanagaya, Matsudo-City, Chiba, Japan.

The Target Company is an investment holding company. The principal activities of its subsidiaries are engaged in distribution of snack foods and confectionery in Japan.

In the opinion of the directors of the Target Company, as at 31 July 2020, Four Seas (Japan) Holdings Limited (“Four Seas (Japan)”), is the immediate parent of the Target Company, and Four Seas Mercantile Holdings Limited (“Four Seas”) is the ultimate controlling company.

As at the date of this report, the particulars of entities comprising the Target Group are set out below:

Name
Place of
incorporation/
establishment
and operation
Date of
incorporation
Particular of
issued share
capital
Directly held:
株式会社宮田
(“Miyata Co.,
Ltd.”)
(“Miyata”)
Japan
1 November 1955
JPY50,000,000
宮田世佳國際貿易
（天津）有限公司
(“Miyata (Tianjin)
International
Trading Co.,
Ltd.”) (“Miyata
Tianjin”)
The People’s
Republic of
China
(“The PRC”)
4 July 2014
US$400,000
*Indirectly held:
㈱オリーブ
(“Olive Co.,
Ltd.”)
(“Olive”)

***
Japan
12 June 2012
JPY3,000,000

Percentage of ownership interest/voting
power/profit sharing
As at
30 September
2017
As at
30 September
2018
As at
30 September
2019
As at
31 July
2020
Principal activities
100%
100%
100%
100%
1. General confectionery
wholesale business
2. Manufacturing of general
confectionery
3. Sales of general foods
4. Sales of processed foods
5. Leasing and management
of real estate
6. Life insurance and
non-life insurance agency
7. All business incidental to
the above
100%
100%
100%
100%
1. Wholesale sales of
general food
2. Wholesale sales of
confectionery
3. Product development and
wholesale of packaging
materials and household
goods
4. Export/import business
of the above products
100%
100%
100%
100%
1. Manufacturing and sales
of general confectionery
2. Wholesale of general
confectionery
3. Import and sales of
general confectionery
4. General food sales
business
5. Import and sales of
general foods
6. Sales of processed foods
7. Imported sales of
processed foods
8. All businesses incidental
to the above items

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Name
Place of
incorporation/
establishment
and operation
Date of
incorporation
Particular of
issued share
capital
Indirectly held:
㈱スイートボックス
(“Sweet Box Co.,
Ltd.”) (“Sweet
Box”)

Japan
1 July 2005
JPY10,000,000
㈱サンスイートトレ
ーディング
(“Sun Sweet
Trading Co.,
Ltd.”) (“Sun
Sweet Trading”)

*
Japan
12 March 2010
JPY10,000,000
㈱ハッピーポケット
(“Happy Pocket
Co., Ltd.”)
(“Happy Pocket”)

*
Japan
12 March 2010
JPY10,000,000
㈱ママ(“Mama Co.,
Ltd.”)
(“Mama”)

***
Japan
10 March 1973
JPY20,000,000

Percentage of ownership interest/voting
power/profit sharing
As at
30 September
2017
As at
30 September
2018
As at
30 September
2019
As at
31 July
2020
Principal activities
100%
100%
100%
100%
1. General confectionery
wholesale business
2. Import and sale of general
confectionery
3. Manufacture and sale of
general confectionery
4. All business incidental to
the above items
100%
100%
100%
100%
1. Manufacturing and sales
of general confectionery
2. Wholesale of general
confectionery
3. Import and sales of
general confectionery
4. General food sales
business
5. Import and sales of
general foods
6. Sales of processed foods
7. Imported sales of
processed foods
8. All businesses incidental
to the above items
100%
100%
100%
100%
1. Manufacturing and sales
of general confectionery
2. Wholesale of general
confectionery
3. Import and sales of
general confectionery
4. General food sales
business
5. Import and sales of
general foods
6. Sales of processed foods
7. Imported sales of
processed foods
8. All businesses incidental
to the above items
98.75%
Miyata
1.25%
Mr. Osamu
Miyata
98.75%
Miyata
1.25%
Mr. Osamu
Miyata
98.75%
Miyata
1.25%
Mr. Osamu
Miyata
98.75%
Miyata
1.25%
Mr. Osamu
Miyata
1. General confectionery
sales (wholesale)
2. All business incidental to
the above

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Name
Place of
incorporation/
establishment
and operation
Date of
incorporation
Particular of
issued share
capital
Indirectly held:
㈱錦糸堂(“Kinshido
Co., Ltd.”)
(“Kinshido”)

Japan
28 December
2007
JPY3,000,000
㈱満屋(“Mitsuruya
Co., Ltd.”)
(“Mitsuruya”)*
Japan
8 October 1997
JPY3,000,000

The English name of the subsidiary is used for identification purpose only. The official name of this entity is in Japanese.
** The English name of the subsidiary is used for identification purpose only. The official name of this entity is in Chinese.
*** The English name of these companies referred herein represent management best effort in translating the names of these companies for identification purpose only as no English names had been registered.
**** Mama was inactive during the Relevant Periods, the financial impact of the non-controlling interest were immaterial to the Historical Financial Information.

* The companies were inactive during the Relevant Periods.

Except for Miyata Tianjin has adopted 31 December as the financial year end date, all the companies now comprising the Target Group have adopted 30 September as the financial year end date.

Except for Miyata Tianjin, no statutory financial statements have been prepared for the Target Company and its subsidiaries listed above for the Relevant Periods as there is no statutory requirement in the country of its incorporation.

No statutory financial statement of Miyata Tianjin for the year ended 31 December 2017 has been issued. The statutory financial statements of Miyata Tianjin for the years ended 31 December 2018 and 2019 were audited by Tianjin Tiansuo Certified Public Accountants Firm with an unqualified opinion issued.

Miyata Tianjin has been audited by RSM Hong Kong in preparing the accountants’ report. Miyata Tianjin adopted the same financial year end and stub period as other companies in the Target Group.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

2. GROUP REORGANISATION AND BASIS OF PREPARATION AND PRESENTATION

(a) Group reorganisation

Prior to the completion of the Target Group Reorganisation, Miyata Co., Ltd., a subsidiary of the Target Company, is the parent company of Miyata Co., Ltd. and its subsidiaries (the “Miyata Group”). Upon incorporation of the Target Company on 2 July 2018, 100 shares was allotted and issued to the initial subscriber at par value of JPY30,000 each.

Pursuant to the sale and purchase agreement dated 17 July 2018, the Target Company purchased 36,000 shares at JPY60,991 each as consideration to acquire the Miyata Group from Mr. Osamu Miyata, Mrs. Yayoi Miyata and Ms. Kayono Miyata (the “Miyata Family”) (the “Reorganisation”). The Reorganisation was completed on 31 July 2018.

On 15 November 2019 and 16 April 2020, Four Seas Mercantile Holdings Limited (“Four Seas”) purchased 15% and 55% issued share capital from the Miyata Family respectively (the “Acquisition”). Upon the completion of the Acquisition, Four Seas became the controlling shareholder of the Target Group.

Pursuant to the Reorganisation, the Target Company became the holding company of the companies now comprising the Target Group. As the Reorganisation involved only the insertion of new holding companies at the top of the existing group and did not result in change in economic substance in terms of the ownership and control of the Target Group, the Historical Financial Information for the Relevant Periods has been prepared as a continuation of the existing group using the principles of merger accounting.

The consolidated statements of profit or loss, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements cash flows are prepared as if the current group structure had been in existence throughout the Relevant Periods. The consolidated statements of financial position as at 30 September 2017, 30 September 2018, 30 September 2019 and 31 July 2020 present the assets and liabilities of the companies now comprising the Target Group as if the current group structure had been in existence at those date.

(b) Basis of preparation and presentation

The Historical Financial Information has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”) issued by HKICPA. HKFRSs comprise Hong Kong Financial Reporting Standards (“HKFRS”); Hong Kong Accounting Standards (“HKAS”); and Interpretations. The Historical Financial Information also complies with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with the requirements of the Hong Kong Companies Ordinance (Cap. 622). Significant accounting policies adopted by the Target Group are disclosed as below.

Going concern basis

At 31 July 2020, the Target Group had net current liabilities and net liabilities of JPY2,709 million and JPY2,670 million respectively. These conditions indicate the existence of a material uncertainty which may cast significant doubt on the Target Group’s ability to continue as a going concern. Therefore, the Target Group may be unable to realise its assets and discharge its liabilities in the normal course of business.

These Historical Financial Information have been prepared on a going concern basis, the validity of which depends upon the financial support of Four Seas, an existing shareholder of the Target Group, at a level sufficient to finance the working capital requirements of the Target Group. Four Seas has agreed to provide adequate funds for the Target Group to meet its liabilities as they fall due. The directors are therefore of the opinion that it is appropriate to prepare the Historical Financial Information on a going concern basis. Should the Target Group be unable to continue as a going concern, adjustments would have to be made to the financial statements to adjust the value of the Target Group’s assets to their recoverable amounts, to provide for any further liabilities which might arise and to reclassify non-current assets and liabilities as current assets and liabilities respectively.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the Relevant Periods of the Target Group. For the purpose of preparing the Historical Financial Information, the accounting policies set out in note 4 have been applied consistently throughout the Relevant Periods, except for:

HKFRS 16 Leases which has been initially adopted on 1 October 2019.

Note 3(a) to the Historical Financial Information provides information on any changes in accounting policies resulting from initial application of these development to the extent that they are relevant to the Target Group for the Relevant Periods reflected in the Historical Financial Information.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

3. ADOPTION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

(a) Application of new and revised HKFRSs

The HKICPA has issued a number of new and revised HKFRSs that are first effective for the Relevant Periods of the Target Group’s Historical Financial Information for the initial application on 1 October 2019:

HKFRS 16 Leases

HKFRS 16 supersedes HKAS 17 Leases, and the related interpretations, HK(IFRIC) 4 Determining whether an Arrangement contains a Lease, HK(SIC) 15 Operating Leases – Incentives and HK(SIC) 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. HKFRS 16 introduced a single accounting model for lessees, which requires a lessee to recognise a right-of-use asset and a lease liability for all leases, except for leases that have a lease term of 12 months or less and leases of low-value assets.

Lessors will continue to classify leases as either operating or finance leases using similar principles as in HKAS 17. Therefore, HKFRS 16 did not have an impact or leases where the Target Group is the lessor. The lessor accounting requirements are brought forward from HKAS 17 substantially unchanged.

HKFRS 16 also introduces additional qualitative and quantitative disclosure requirements which aim to enable users of the financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.

The Target Group has initially adopted HKFRS 16 as from 1 October 2019. The Target Group has elected to use the modified retrospective approach and has therefore recognised the cumulative effect of initial application as an adjustment to the opening balance of equity at 1 October 2019. Comparative information has not been restated and continues to be reported under HKAS 17.

Further details of the nature and effect of the changes to previous accounting policies and the transition options applied are set out below :

(a) New definition of a lease

The change in the definition of a lease mainly relates to the concept of control. HKFRS 16 defines a lease on the basis of whether a customer controls the use of an identified asset for a period of time, which may be determined by a defined amount of use. Control is conveyed where the customer has both the right to direct the use of the identified asset and to obtain substantially all of the economic benefits from that use.

The Target Group applies the new definition of a lease in HKFRS 16 only to contracts that were entered into or changed on or after 1 October 2019. For contracts entered into before 1 October 2019, the Target Group has used the transitional practical expedient to grandfather the previous assessment of which existing arrangements are or contain leases. Accordingly, contracts that were previously assessed as leases under HKAS 17 continue to be accounted for as leases under HKFRS 16 and contracts previously assessed as non-lease service arrangements continue to be accounted for as executory contracts.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(b) Lessee accounting and transitional impact

HKFRS 16 eliminates the requirement for a lessee to classify leases as either operating leases or finance leases, as was previously required by HKAS 17. Instead, the Target Group is required to capitalise all leases when it is the lessee, including leases previously classified as operating leases under HKAS 17, other than those short-term leases and leases of low-value assets which are exempt.

When recognising the lease liabilities for leases previously classified as operating leases, the Target Group has applied the incremental borrowing rates of the relevant group entities at the date of initial application. The average incremental borrowing rates applied by the relevant group entities range from 0.69% to 1.2%.

To ease the transition to HKFRS 16, the Target Group applied the following recognition exemption and practical expedients at the date of initial application of HKFRS 16:

(i) elected not to apply the requirements of HKFRS 16 in respect of the recognition of lease liabilities and right-of-use assets to leases for which the remaining lease term ends within 12 months from the date of initial application of HKFRS 16, i.e. where the lease term ends on or before 30 September 2020;
(ii) applied a single discount rate to a portfolio of leases with a similar remaining terms for similar class of underlying assets in a similar economic environment;
(iii) used hindsight based on facts and circumstances as at date of initial application in determining the lease term for the Target Group’s leases with extension options;
(iv) excluded initial direct costs from measuring the right-of-use assets at the date of initial application; and
(v) relied on the assessment of whether leases are onerous by applying HKAS 37 as an alternative to an impairment review.

For the purposes of measuring deferred tax for leasing transactions in which the Target Group recognises the right-of-use assets and the related lease liabilities, the Target Group first determines whether the tax deductions are attributable to the right-of-use assets or the lease liabilities.

For leasing transactions in which the tax deductions are attributable to the lease liabilities, the Target Group applies HKAS 12 Income Taxes requirements to right-of-use assets and lease liabilities separately. Temporary differences relating to right-of-use assets and lease liabilities are not recognised at initial recognition and over the lease terms due to application of the initial recognition exemption.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

The following table reconciles the operating lease commitments as disclosed in note 39(b) as at 30 September 2019 to the opening balance for lease liabilities recognised as at 1 October 2019:

Operating lease commitments disclosed as at 30 September 2019
Less: commitments relating to lease exempt from capitalisation:
– short-term leases and other leases with remaining lease term ending on or before
30 September 2020
– leases of low-value assets
Add: lease payments for the additional periods where the Target Group considers
it reasonably certain that it will exercise the extension options
Less: total future interest expenses
Present value of remaining lease payments, discounted using
the incremental borrowing rate as at 1 October 2019
Add: finance lease liabilities recognised as at 30 September 2019
Lease liabilities recognised as at 1 October 2019
Of which are:
Current lease liabilities
Non-current lease liabilities

JPY’million
351
(26)
(3)
71
393
(8)
385
114
499
164
335
499

The right-of-use assets in relation to leases previously classified as operating leases have been recognised based on the carrying amount as if HKFRS 16 had always been applied, except for the incremental borrowing rate applied at 1 October 2019. Lease liabilities at 1 October 2019 were recognised based on the present value of the remaining lease payment, discounted using the incremental borrowing rate at 1 October 2019. The cumulate effect of the initial application as an adjustment to the opening balance of equity at 1 October 2019.

So far as the impact of the adoption of HKFRS 16 on leases previously classified as finance leases is concerned, the Target Group is not required to make any adjustments at the date of initial application of HKFRS 16, other than changing the captions for the balances. Accordingly, instead of “Finance leases payables”, these amounts are included within “Lease liabilities”, and the depreciated carrying amount of the corresponding leased assets is identified as right-of-use assets.

The following table summarises the impacts of the adoption of HKFRS 16 on the Target Group’s consolidated statement of financial position:

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

			Effects of adoption	of HKFRS 16
		Carrying			Carrying
Line items in the consolidated		amount			amount
statement of financial		as at			as at
position impacted by the		30 September		Recognition	1 October
adoption of HKFRS 16		2019	Reclassification	of leases	2019
	Note	JPY’million	JPY’million	JPY’million	JPY’million
Assets
Right-of-use assets		–	67	381	448
Property, plant and equipment	(i)	67	(67)	–	–
Liabilities
Lease liabilities		–	114	385	499
Finance lease payables	(ii)	114	(114)	–	–
Equities
Accumulated losses		(1,807)	–	(4)	(1,811)

Note:

(i) In relation to assets previously under finance leases, the Target Group recategorises the carrying amount of the relevant assets which were still leased as at 1 October 2019 amounting to JPY67 million as right-of-use assets.
(ii) The Target Group reclassified the obligation under finance leases of JPY21 million and JPY93 million to lease liabilities as current and non-current liabilities respectively at 1 October 2019.
(c) Impact of the financial results and cash flows of the Target Group

As a result of initially applying HKFRS 16, in relation to the leases that were previously classified as operating leases under HKAS 17 as at 30 September 2019, the Target Group recognised right-of-use assets amounting to JPY448 million including JPY148 million of furniture, fixtures and equipment, plant and machinery and motor vehicles and JPY300 million of leased properties respectively. Lease liabilities of JPY499 million were recognised with related right-of-use assets of JPY448 million as at 30 September 2019.

Also in relation to those leases under HKFRS 16, the Target Group has recognised depreciation and finance costs, instead of operating lease charges. During the ten months ended 31 July 2020, the Target Group recognised JPY122 million of depreciation and JPY3 million of finance costs from these leases.

(b) New and revised HKFRSs in issue but not yet effective

The Target Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective for the Relevant Periods. These new and revised HKFRSs include the following which may be relevant to the Target Group.

	Effective for
	accounting periods
	beginning on or after
Amendments to HKFRS 3 Definition of a Business	1 January 2020
Amendments to HKAS 1 and HKAS 8 Definition of Material	1 January 2020
Amendments to HKFRS 9, HKAS 39 and
HKFRS 7 Interest Rate Benchmark Reform	1 January 2020

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

The Target Group is in the process of making an assessment of what the impact of these amendments and new standards is expected to be in the period of initial application. So far it has concluded that the adoption of them is unlikely to have a significant impact on the consolidated financial statements.

4. SIGNIFICANT ACCOUNTING POLICIES

The Historical Financial Information has been prepared on the historical cost convention, unless mentioned otherwise in the accounting policies below (e.g. investment properties and certain financial instruments that are measured at fair value).

The preparation of Historical Financial Information in conformity with HKFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Target Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant are disclosed in note 5 to the Historical Financial Information.

The significant accounting policies applied in the preparation of the Historical Financial Information are set out below.

(a) Consolidation

The consolidated financial statements include the financial statements of the Target Company and its subsidiaries made up to the date of each year/period end. Subsidiaries are entities over which the Target Group has control. The Target Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Target Group has power over an entity when the Target Group has existing rights that give it the current ability to direct the relevant activities, i.e. activities that significantly affect the entity’s returns.

When assessing control, the Target Group considers its potential voting rights as well as potential voting rights held by other parties. A potential voting right is considered only if the holder has the practical ability to exercise that right.

Subsidiaries are consolidated from the date on which control is transferred to the Target Group. They are de-consolidated from the date the control ceases.

Intragroup transactions, balances and unrealised profits are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Target Group.

In the Target Company’s statements of financial position, investments in subsidiaries are stated at cost less impairment losses, unless classified as held for sale (or included in a disposal group that is classified as held for sale).

(b) Business combinations and goodwill

The acquisition method is used to account for the acquisition of a subsidiary in a business combination. The consideration transferred in a business combination is measured at the acquisition-date fair value of the assets given, equity instruments issued, liabilities incurred and any contingent consideration. Acquisition-related costs are recognised as expenses in the periods in which the costs are incurred and the services are received. Identifiable assets and liabilities of the subsidiary in the acquisition are measured at their acquisition-date fair values.

The excess of the sum of the consideration transferred over the Target Group’s share of the net fair value of the subsidiary’s identifiable assets and liabilities is recorded as goodwill. Any excess of the Target Group’s share of the net fair value of the identifiable assets and liabilities over the sum of the consideration transferred is recognised in consolidated profit or loss as a gain on bargain purchase which is attributed to the Target Group.

In a business combination achieved in stages, the previously held equity interest in the subsidiary is remeasured at its acquisition-date fair value and the resulting gain or loss is recognised in consolidated profit or loss. The fair value is added to the sum of the consideration transferred in a business combination to calculate the goodwill.

The non-controlling interests in the subsidiary are initially measured at the non-controlling shareholders’ proportionate share of the net fair value of the subsidiary’s identifiable assets and liabilities at the acquisition date.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

After initial recognition, goodwill is measured at cost less accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units (“CGUs”) or groups of CGUs that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the Target Group at which the goodwill is monitored for internal management purposes. Goodwill impairment reviews are undertaken annually, or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of the CGU containing the goodwill is compared to its recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.

(c) Associates

Associates are entities over which the Target Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of an entity but is not control or joint control over those policies. The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by other entities, are considered when assessing whether the Target Group has significant influence. In assessing whether a potential voting right contributes to significant influence, the holder’s intention and financial ability to exercise or convert that right is not considered.

Investment in an associate is accounted for in the Historical Financial Information by the equity method and is initially recognised at cost. Identifiable assets and liabilities of the associate in an acquisition are measured at their fair values at the acquisition date. The excess of the cost of the investment over the Target Group’s share of the net fair value of the associate’s identifiable assets and liabilities is recorded as goodwill. The goodwill is included in the carrying amount of the investment and is tested for impairment together with the investment at the end of each reporting period when there is objective evidence that the investment is impaired. Any excess of the Target Group’s share of the net fair value of the identifiable assets and liabilities over the cost of acquisition is recognised in consolidated profit or loss.

The Target Group’s share of an associate’s post-acquisition profits or losses and other comprehensive income is recognised in consolidated statements of profit or loss and other comprehensive income. When the Target Group’s share of losses in an associate equals or exceeds its interest in the associate (which includes any long-term interests that, in substance, form part of the Target Group’s net investment in the associate), the Target Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the Target Group resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

The gain or loss on the disposal of an associate that results in a loss of significant influence represents the difference between (i) the fair value of the consideration of the sale plus the fair value of any investment retained in that associate and (ii) the Target Group’s entire carrying amount of that associate (including goodwill) and any related accumulated foreign currency translation reserve. If an investment in an associate becomes an investment in a joint venture, the Target Group continues to apply the equity method and does not remeasure the retained interest.

In the Target Company’s statements of financial position, investments in associates are stated at cost less impairment losses, unless classified as held for sale (or included in a disposal group that is classified as held for sale).

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(d) Foreign currency translation

(i) Functional and presentation currency

Items included in the financial statements of each of the Target Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The Historical Financial Information is presented in JPY, which is the Target Company’s functional and presentation currency.

(ii) Transactions and balances in each entity’s financial statements

Transactions in foreign currencies are translated into the functional currency on initial recognition using the exchange rates prevailing on the transaction dates. Monetary assets and liabilities in foreign currencies are translated at the exchange rates at the end of each reporting period. Gains and losses resulting from this translation policy are recognised in profit or loss.

Non-monetary items that are measured at fair value in foreign currencies are translated using the exchange rates at the dates when the fair values are determined.

When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss is recognised in other comprehensive income. When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is recognised in profit or loss.

(iii) Translation on consolidation

The results and financial position of all the Target Group entities that have a functional currency different from the Target Company’s presentation currency are translated into the Target Company’s presentation currency as follows:

Assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;
Income and expenses are translated at average exchange rates for the period (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the exchange rates on the transaction dates); and
All resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve.

On consolidation, exchange differences arising from the translation of monetary items that form part of the net investment in foreign entities are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. When a foreign operation is sold, such exchange differences are reclassified to consolidated profit or loss as part of the gain or loss on disposal.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

(e) Property, plant and equipment

Property, plant and equipment, including land and buildings, held for use in the production or supply of goods or services, or for administrative purposes, are stated in the consolidated statements of financial position at cost, less subsequent accumulated depreciation and subsequent accumulated impairment losses, if any.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Target Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised in profit or loss during the period in which they are incurred.

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APPENDIX II

Depreciation of property, plant and equipment is calculated at rates sufficient to write off their cost less their residual values over the estimated useful lives on a straight-line basis. The principal annual rates are as follows:

Land and buildings Over 3 – 50 years Leasehold improvements Over 4 – 22 years Furniture, fixtures and equipment Over 2 – 20 years Plant and machinery Over 2 – 10 years Motor vehicles Over 6 years

The residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at the end of each reporting period.

The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in profit or loss.

(f) Investment properties

Investment properties are land and/or buildings held to earn rentals and/or for capital appreciation. An owned investment property is measured initially at its cost including all direct costs attributable to the property.

After initial recognition, the investment property is stated at its fair value. Gains or losses arising from changes in fair value of the investment property are recognised in profit or loss for the period in which they arise.

The gain or loss on disposal of an investment property is the difference between the net sales proceeds and the carrying amount of the property, and is recognised in profit or loss. Rental income from investment properties is accounted for as described in note 4(s).

In the comparative period, when the Target Group held a property interest under an operating lease and used the property to earn rental income and/or for capital appreciation, the Target Group could elect on a property-by-property basis to classify and account for such interest as an investment property. Any such property interest which had been classified as an investment property was accounted for as if it were held under a finance lease, and the same accounting policies were applied to that interest as were applied to other investment properties leased under finance leases.

(g) Leases

At inception of a contract, the Target Group assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the use of the identified asset and to obtain substantially all of the economic benefits from that use.

(i) The Target Group as a lessee

Policy applicable from 1 October 2019

Where the contract contains lease component(s) and non-lease component(s), the Target Group has elected not to separate non-lease components and accounts for each lease component and any associated non-lease components as a single lease component for all leases.

At the lease commencement date, the Target Group recognises a right-of-use asset and a lease liability, except for short-term leases that have a lease term of 12 months or less and leases of low-value assets which, for the Target Group are primarily laptops and office furniture. When the Target Group enters into a lease in respect of a low-value asset, the Target Group decides whether to capitalise the lease on a lease-by-lease basis. The lease payments associated with those leases which are not capitalised are recognised as an expense on a systematic basis over the lease term.

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APPENDIX II

Where the lease is capitalised, the lease liability is initially recognised at the present value of the lease payments payable over the lease term, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, using a relevant incremental borrowing rate. After initial recognition, the lease liability is measured at amortised cost and interest expense is calculated using the effective interest method. Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability and hence are charged to profit or loss in the accounting period in which they are incurred.

The right-of-use asset recognised when a lease is capitalised is initially measured at cost, which comprises the initial amount of the lease liability plus any lease payments made at or before the commencement date, and any initial direct costs incurred. Where applicable, the cost of the right-of-use assets also includes an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, discounted to their present value, less any lease incentives received. The right-of-use asset is subsequently stated at cost less accumulated depreciation and impairment losses, except for the right-of-use assets that meet the definition of investment property are carried at fair value in accordance with note 4(f).

Right-of-use assets in which the Target Group is reasonably certain to obtain ownership of the underlying leased assets at the end of the lease term are depreciated from commencement date to the end of the useful life. Otherwise, right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term.

Refundable deposits paid are accounted under HKFRS 9 and initially measured at fair value. Adjustments to fair value at initial recognition are considered as additional lease payments and included in the cost of right-of-use assets.

The lease liability is remeasured when there is a change in future lease payments arising from a change in an index or rate, or there is a change in the Target Group’s estimate of the amount expected to be payable under a residual value guarantee, or there is a change arising from the reassessment of whether the Target Group will be reasonably certain to exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Target Group presents right-of-use assets that do not meet the definition of investment properties and lease liabilities separately in the consolidated statements of financial position.

Policy prior to 1 October 2019

In the comparative period, as a lessee the Target Group classified leases as finance leases if the leases transferred substantially all the risks and rewards of ownership to the Target Group. Leases which did not transfer substantially all the risks and rewards of ownership to the Target Group were classified as operating leases, except for the property held under operating leases that would otherwise meet the definition of an investment property was classified as investment property on a property-by-property basis and, if classified.

Where the Target Group acquired the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments, of such assets were recognised as property, plant and equipment and the corresponding liabilities, net of finance charges, were recorded as obligations under finance leases. Depreciation was provided at rates which wrote off the cost or valuation of the assets over the term of the relevant lease or, where it was likely the Target Group would obtain ownership of the asset, the life of the asset. Finance charges implicit in the lease payments were charged to profit or loss over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period. Contingent rentals were charged to profit or loss in the accounting period in which they were incurred.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Where the Target Group had the use of assets held under operating leases, payments made under the leases were charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis was more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received were recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals were charged to profit or loss in the accounting period in which they were incurred.

(ii) The Target Group as a lessor

When the Target Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to the ownership of an underlying assets to the lessee. If this is not the case, the lease is classified as an operating lease.

(h) Other intangible assets
(i) Intangible assets acquired separately – software

Software are stated at cost less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis over their estimated useful lives of 5 years.

(ii) Intangible assets acquired in business combination – customer relationships

Customer relationships are stated at cost less accumulated amortisation and impairment losses. Amortisation is calculated on a straight-line basis over their estimated useful lives of 5 years.

(i) Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis. The cost of finished goods and work in progress comprises raw materials, direct labour and an appropriate proportion of all production overhead expenditure, and where appropriate, subcontracting charges. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

(j) Recognition and derecognition of financial instruments

Financial assets and financial liabilities are recognised in the consolidated statements of financial position when the Target Group becomes a party to the contractual provisions of the instruments.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognised immediately in profit or loss.

The Target Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Target Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Target Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Target Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Target Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

The Target Group derecognises financial liabilities when, and only when, the Target Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss.

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APPENDIX II

Financial assets and liabilities are offset and the net amount reported in the statements of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty.

(k) Financial assets

All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets.

Debt investments

Debt investments held by the Target Group are classified into one of the following measurement categories:

amortised cost, if the investment is held for the collection of contractual cash flows which represent solely payments of principal and interest. Interest income from the investment is calculated using the effective interest method.
FVTOCI (recycling), if the contractual cash flows of the investment comprise solely payments of principal and interest and the investment is held within a business model whose objective is achieved by both the collection of contractual cash flows and sale. Changes in fair value are recognised in other comprehensive income, except for the recognition in profit or loss of expected credit losses (“ECL”), interest income (calculated using the effective interest method) and foreign exchange gains and losses. When the investment is derecognised, the amount accumulated in other comprehensive income is recycled from equity to profit or loss.
FVTPL, if the investment does not meet the criteria for being measured at amortised cost or FVTOCI (recycling). Changes in the fair value of the investment (including interest) are recognised in profit or loss.

Equity investments

An investment in equity securities is classified as FVTPL unless the equity investment is not held for trading purposes and on initial recognition of the investment the Target Group makes an election to designate the investment at FVTOCI (non-recycling) such that subsequent changes in fair value are recognised in other comprehensive income. Such elections are made on an instrument-by-instrument basis, but may only be made if the investment meets the definition of equity from the issuer’s perspective. Where such an election is made, the amount accumulated in other comprehensive income remains in the fair value reserve (non-recycling) until the investment is disposed of. At the time of disposal, the amount accumulated in the fair value reserve (non-recycling) is transferred to retained earnings. It is not recycled through profit or loss. Dividends from an investment in equity securities, irrespective of whether classified as at FVTPL or FVTOCI, are recognised in profit or loss as other income.

(l) Trade and bills and other receivables

A receivable is recognised when the Target Group has an unconditional right to receive consideration. A right to receive consideration is unconditional if only the passage of time is required before payment of that consideration is due. If revenue has been recognised before the group has an unconditional right to receive consideration, the amount is presented as a contract asset.

Receivables are stated at amortised cost using the effective interest method less allowance for credit losses.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(m) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Target Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement. Cash and cash equivalents are assessed for ECL.

(n) Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument under HKFRSs. An equity instrument is any contract that evidences a residual interest in the assets of the Target Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.

(o) Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred, and subsequently measured at amortised cost using the effective interest method.

Borrowings are classified as current liabilities unless the Target Group has an unconditional right to defer settlement of the liability for at least 12 months after each reporting period.

(p) Trade and other payables

Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost.

(q) Equity instruments

An equity instrument is any contract that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Target Company are recorded at the proceeds received, net of direct issue costs.

(r) Derivative financial instruments

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period.

Derivatives embedded in hybrid contracts with a financial asset host within the scope of HKFRS 9 are not separated. The entire hybrid contract is classified and subsequently measured as either amortised cost or fair value as appropriate.

Derivatives embedded in hybrid contracts with hosts that are not financial assets within the scope of HKFRS 9 are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL.

If the hybrid contract is a quoted financial liability, instead of separating the embedded derivative, the Target Group generally designates the whole hybrid contract at FVTPL.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(s) Revenue and other income

Revenue is recognised when control over a product or service is transferred to the customer, at the amount of promised consideration to which the Target Group is expected to be entitled, excluding those amounts collected on behalf of third parties. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

Revenue from the sale of goods is recognised when control of the products has transferred, being when the products are delivered to the customers. Delivery occurs when the products have been shipped to the specific location. A receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which the Target Group will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved.

When the contract contains a financing component which provides the customer with a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the Target Group and the customer at contract inception. When the contract contains a financing component which provides the Target Group a significant financial benefit for more than one year, revenue recognised under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in HKFRS 15.

Revenue from sales of snack foods and confectionery is recognised at the point in time when controls of assets is transferred to the customer, generally on delivery of the goods.

Interest income is recognised as it accrues using the effective interest method. For financial assets measured at amortised cost or FVTOCI (recycling) that are not credit-impaired, the effective interest rate is applied to the gross carrying amount of the asset. For credit impaired financial assets, the effective interest rate is applied to the amortised cost (i.e. gross carrying amount net of loss allowance) of the asset.

Dividend income is recognised when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Target Group and the amount of the dividend can be measured reliably.

Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term. Variable lease payments that do not depend on an index or a rate are recognised as income in the accounting period in which they are earned.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(t) Employee benefits

(i) Employee leave entitlements

Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the end of the reporting period.

Employee entitlements to sick leave and maternity leave are not recognised until the time of leave.

The Target Group operates various post-employment schemes, including defined benefit pension plans.

(ii) Defined benefit retirement plans

The liability recognised in the consolidated statements of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension obligation. If there is no deep market in such bonds, the market rates on government bonds are used.

Remeasurements of the defined benefit liability which include actuarial gains and losses are recognised in other comprehensive income in the period in which they arise and will not be reclassified to profit or loss. Service costs and interest on the defined benefit liability are recognised immediately in profit or loss.

Interest on the defined benefit liability is determined by multiplying the defined benefit liability by the discount rate used to measure defined benefit obligation at the start of the annual reporting period, taking account of any changes in the defined benefit liability during the period as a result of contribution and benefit payments.

(iii) Termination benefits

Termination benefits are recognised at the earlier of the dates when the Target Group can no longer withdraw the offer of those benefits and when the Target Group recognises restructuring costs involving the payment of termination benefits.

(u) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of the Target Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Effective from 1 October 2019, any specific borrowing that remain outstanding after the related asset is ready for its intended use or sale is included in the general borrowing pool for calculation of capitalisation rate on general borrowings.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

(v) Government grants

A government grant is recognised when there is reasonable assurance that the Target Group will comply with the conditions attaching to it and that the grant will be received.

Government grants relating to income are deferred and recognised in profit or loss over the period to match them with the costs they are intended to compensate.

Government grants that become receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Target Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

(w) Taxation

Income tax represents the sum of the current tax and deferred tax.

The tax currently payable is based on taxable profit for the year/period. Taxable profit differs from profit recognised in profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Target Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences, unused tax losses or unused tax credits can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, except where the Target Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is recognised in profit or loss, except when it relates to items recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity.

The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which the Target Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

For the purposes of measuring deferred tax for investment properties that are measured using the fair value model, the carrying amounts of such properties are presumed to be recovered through sale, unless the presumption is rebutted. The presumption is rebutted when the investment property is depreciable and is held within a business model of the Target Group whose business objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. If the presumption is rebutted, deferred tax for such investment properties are measured based on the expected manner as to how the properties will be recovered.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

For leasing transactions in which the tax deductions are attributable to the lease liabilities, the Target Group applies HKAS 12 requirements to right-of-use assets and lease liabilities separately. Temporary differences relating to right-of-use assets and lease liabilities are not recognised at initial recognition and over the lease terms due to application of the initial recognition exemption.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Target Group intends to settle its current tax assets and liabilities on a net basis.

(x) Impairment of non-financial assets

The carrying amounts of non-financial assets are reviewed at each reporting date for indications of impairment and where an asset is impaired, it is written down as an expense through the consolidated statements of profit or loss to its estimated recoverable amount. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs. Recoverable amount is the higher of value in use and the fair value less costs of disposal of the individual asset or the cash-generating unit.

Value in use is the present value of the estimated future cash flows of the asset/cash-generating unit. Present values are computed using pre-tax discount rates that reflect the time value of money and the risks specific to the asset/ cash-generating unit whose impairment is being measured.

Impairment losses for cash-generating units are allocated first against the goodwill of the unit and then pro rata amongst the other assets of the cash-generating unit. Subsequent increases in the recoverable amount caused by changes in estimates are credited to profit or loss to the extent that they reverse the impairment unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(y) Impairment of financial assets

The Target Group recognises a loss allowance for ECL on investments in debt instruments that are measured at amortised cost or at FVTOCI and trade and bills receivables. The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.

The Target Group always recognises lifetime ECL for trade and bills receivables. The ECL on these financial assets are estimated using a provision matrix based on the Target Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate.

For all other financial instruments, the Target Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Target Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL.

Lifetime ECL represents the ECL that will result from all possible default events over the expected life of a financial instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Significant increase in credit risk

In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Target Group compares the risk of a default occurring on the financial instrument at the reporting date with the risk of a default occurring on the financial instrument at the date of initial recognition. In making this assessment, the Target Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort. Forward-looking information considered includes the future prospects of the industries in which the Target Group’s debtors operate, obtained from economic expert reports, financial analysts, governmental bodies, relevant think-tanks and other similar organisations, as well as consideration of various external sources of actual and forecast economic information that relate to the Target Group’s core operations.

In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition:

an actual or expected significant deterioration in the financial instrument’s external (if available) or internal credit rating;
significant deterioration in external market indicators of credit risk for a particular financial instrument;
existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor’s ability to meet its debt obligations;
an actual or expected significant deterioration in the operating results of the debtor;
significant increases in credit risk on other financial instruments of the same debtor; and
an actual or expected significant adverse change in the regulatory, economic, or technological environment of the debtor that results in a significant decrease in the debtor’s ability to meet its debt obligations.

Irrespective of the outcome of the above assessment, the Target Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Target Group has reasonable and supportable information that demonstrates otherwise.

Despite the foregoing, the Target Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial instrument is determined to have low credit risk if:

(i) the financial instrument has a low risk of default;
(ii) the debtor has a strong capacity to meet its contractual cash flow obligations in the near term; and
(iii) adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations.

The Target Group considers a financial asset to have low credit risk when the asset has external credit rating of “investment grade” in accordance with the globally understood definition or if an external rating is not available, the asset has an internal rating of “performing”. Performing means that the counterparty has a strong financial position and there is no past due amounts.

The Target Group regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes past due.

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ACCOUNTANTS’ REPORT OF THE TARGET GROUP

APPENDIX II

Definition of default

The Target Group considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that receivables that meet either of the following criteria are generally not recoverable.

when there is a breach of financial covenants by the counterparty; or
information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Target Group, in full (without taking into account any collaterals held by the Target Group).

Credit-impaired financial assets

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:

significant financial difficulty of the issuer or the counterparty;
a breach of contract, such as a default or past due event;
the lender(s) of the counterparty, for economic or contractual reasons relating to the counterparty’s financial difficulty, having granted to the counterparty a concession(s) that the lender(s) would not otherwise consider;
it is becoming probable that the counterparty will enter bankruptcy or other financial reorganisation; or
the disappearance of an active market for that financial asset because of financial difficulties.

Write-off policy

The Target Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, including when the debtor has been placed under liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Target Group’s recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.

Measurement and recognition of ECL

The measurement of ECL is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data adjusted by forward-looking information as described above. As for the exposure at default, for financial assets, this is represented by the assets’ gross carrying amount at the reporting date.

For financial assets, the ECL is estimated as the difference between all contractual cash flows that are due to the Target Group in accordance with the contract and all the cash flows that the Target Group expects to receive, discounted at the original effective interest rate.

If the Target Group has measured the loss allowance for a financial instrument at an amount equal to lifetime ECL in the previous reporting period, but determines at the current reporting date that the conditions for lifetime ECL are no longer met, the Target Group measures the loss allowance at an amount equal to 12-month ECL at the current reporting date, except for assets for which simplified approach was used.

The Target Group recognises an impairment gain or loss in profit or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account, except for investments in debt instruments that are measured at FVTOCI, for which the loss allowance is recognised in other comprehensive income and accumulated in the investment revaluation reserve, and does not reduce the carrying amount of the financial asset in the statement of financial position.

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APPENDIX II

(z) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Target Group has a present legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow is remote.

(aa) Related parties

A party is considered to be related to the Target Group if:

(a) the party is a person or a close member of that person’s family and that person
(i) has control or joint control over the Target Group;
(ii) has significant influence over the Target Group; or
(iii) is a member of the key management personnel of the Target Group or of a parent of the Target Group; or
(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Target Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others);
(ii) one entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member);
(iii) the entity and the Target Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); and
(viii) the entity, or any member of a group of which it is a part, provides key management personnel services to the Target Group or to the parent of the Target Group.

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include:

(i) that person’s children and spouse or domestic partner;
(ii) children of that person’s spouse or domestic partner; and
(iii) dependents of that person or that person’s spouse or domestic partner.

(ab) Events after the reporting period

Events after the reporting period that provide additional information about the Target Group’s position at the end of the reporting period are adjusting events and are reflected in the consolidated financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes to the Historical Financial Information when material.

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5. CRITICAL JUDGEMENTS AND KEY ESTIMATES

Critical judgements in applying accounting policies

In the process of applying the Target Group’s accounting policies, the directors have made the following judgements that have the most significant effect on the amounts recognised in the Historical Financial Information:

(a) Going concern basis

These Historical Financial Information have been prepared on a going concern basis, the validity of which depends upon the financial support of the controlling shareholder at a level sufficient to finance the working capital requirements of the Target Group. Details are explained in note 2(b) to the Historical Financial Information.

(b) Distinction between investment properties and owner-occupied properties

Some properties comprise a portion that is held to earn rentals and another portion that is held for use in the production of goods. If these portions can be sold separately (or leased out separately under a finance lease), the Target Group accounts for the portions separately. If the portions cannot be sold separately, the property is accounted for as investment property only if an insignificant portion is held for use in the production of goods. Judgement is applied in determining whether ancillary services are so significant that a property does not qualify as an investment property. The Target Group considers each property separately in making its judgement.

(c) Deferred tax for investment properties

For the purposes of measuring deferred tax for investment properties that are measured using the fair value model, the directors have reviewed the Target Group’s investment property portfolios and concluded that the Target Group’s investment properties are not held under a business model whose objective is to consume substantially all of the economic benefits embodied in the investment properties over time, rather than through sale. Therefore, in determining the Target Group’s deferred tax for investment properties, the directors have adopted the presumption that investment properties measured using the fair value model are recovered through sale.

(d) Deferred tax assets

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

(e) Determining the lease term

In determining the lease term at the commencement date for leases that include renewal options exercisable by the Target Group, the Target Group evaluates the likelihood of exercising the renewal options taking into account all relevant facts and circumstances that create an economic incentive for the Target Group to exercise the option, including favourable terms, leasehold improvements undertaken and the importance of that underlying asset to the Target Group’s operation.

Generally, periods covered by an extension option in other properties leases have not been included in the lease liability because the Target Group could replace the assets without significant cost or business disruption. See note 31 to the Historical Financial Information for further information.

The lease term is reassessed when there is a significant event or significant change in circumstance that is within the Target Group’s control. During the Relevant Periods, no lease term has been reassessed.

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Key sources of estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

(a) Impairment of trade and bills receivables

The management of the Target Group estimates the amount of impairment loss for ECL on trade and bills receivables based on the credit risk of trade and bills receivables. The amount of the impairment loss based on ECL model is measured as the difference between all contractual cash flows that are due to the Target Group in accordance with the contract and all the cash flows that the Target Group expects to receive, discounted at the effective interest rate determined at initial recognition. Where the future cash flows are less than expected, or being revised downward due to changes in facts and circumstances, a material impairment loss may arise.

As at 30 September 2017, 2018, 2019 and 31 July 2020, the carrying amount of trade and bills receivables were JPY3,797 million, JPY4,092 million, JPY4,255 million and JPY3,812 million respectively, and no allowance were made during the Relevant Periods. Further details are given in Note 26 to the Historical Financial Information.

(b) Allowance for slow-moving inventories

Allowance for slow-moving inventories is made based on the ageing and estimated net realisable value of inventories. The assessment of the allowance amount involves judgement and estimates. Where the actual outcome in future is different from the original estimate, such difference will impact the carrying value of inventories and allowance charge/ write-back in the period in which such estimate has been changed. Allowance for slowing moving inventories were JPY36 million, JPY186 million, JPY260 million and JPY125 million as at 30 September 2017, 2018, 2019 and 31 July 2020, respectively.

(c) Impairment for property, plant and equipment, right-of-use assets and other intangible assets

Property, plant and equipment, right-of-use assets and other intangible assets are stated at costs less accumulated depreciation and amortisation, and impairment losses, if any. In determining whether an asset is impaired, the Target Group has to exercise judgement and make estimation, particularly in assessing: (1) whether an event has occurred or any indicators that may affect the asset value; (2) whether the carrying value of an asset can be supported by the recoverable amount, in the case of value in use, the net present value of future cash flows which are estimated based upon the continued use of the asset; and (3) the appropriate key assumptions to be applied in estimating the recoverable amounts including cash flow projections and an appropriate discount rate. When it is not possible to estimate the recoverable amount of an individual asset (including right-of-use assets), the Target Group estimates the recoverable amount of the cash-generating unit to which the assets belongs. Changing the assumptions and estimates, including the discount rates or the growth rate in the cash flow projections, could materially affect the net present value used in the impairment test.

As at 30 September 2017, 2018, 2019 and 31 July 2020, the carrying amount of property, plant and equipment, excluding right-of-use assets were JPY2,040 million, JPY2,047 million, JPY2,028 million and JPY1,882 million, respectively. As at 30 September 2017, 2018, 2019 and 31 July 2020, the carrying amount of other intangible assets were JPY228 million, JPY254 million, JPY286 million and JPY243 million, respectively. Further details are given in notes 18 and 20 to the Historical Financial Information.

(d) Leases – Estimating the incremental borrowing rate

The Target Group cannot readily determine the interest rate implicit in a lease, and therefore, it uses an incremental borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that the Target Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Target Group “would have to pay”, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when it needs to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Target Group estimates the IBR using observable inputs when available.

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(e) Fair value of investment properties

The Target Group appointed an independent professional valuer to assess the fair value of the investment properties. In determining the fair value, the valuer has utilised a method of valuation which involves certain estimates. The directors have exercised their judgement and are satisfied that the method of valuation and inputs used are reflective of the current market conditions.

The carrying amount of investment properties at 30 September 2017, 2018, 2019 and 31 July 2020 were JPY298 million, JPY304 million, JPY313 million, and JPY313 million, respectively. Further details are given in note 19 to the Historical Financial Information.

(f) Fair value of derivative financial instruments

As disclosed in note 24 to the Historical Financial Information, the fair value of foreign currency option, interest rate swap and foreign currency swap at the date of issue and the end of the reporting period were determined using option pricing models and discounted cash flows. Application of option pricing models and discounted cash flows requires the Target Group to estimate the prominent factors affecting the fair value, including but not limited to, the expected life of the derivative component, the expected volatility of the exchange rate, forward interest rate, forward exchange rate, risk-free rate of involved currencies, cumulative default rate and expected recovery rate. Where the estimation of these factors is different from those previously estimated, such differences will impact the fair value gain or loss on the derivative component in the period in which such determination is made.

As at 30 September 2017, 2018, 2019 and 31 July 2020, the carrying amount of derivative financial assets were JPY45 million, JPY51 million, JPY17 million and JPY6 million, respectively. As at 30 September 2017, 2018, 2019 and 31 July 2020, the carrying amount of derivative financial liabilities were JPY170 million, JPY58 million, JPY37 million and JPY4 million, respectively. Further details are given in note 24 to the Historical Financial Information.

(g) Income taxes

The Target Group is subject to income taxes in Japan and the PRC. Significant estimates are required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(h) Actuarial assumptions on defined benefit retirement plans

Accounting for defined benefit plans may be complex because actuarial assumptions are required to measure the obligation and the expense, with the possibility that actual results differ from the assumed results. These differences are known as actuarial gains and losses. Defined benefit obligations are measured using the Projected Unit Credit Method (“PUCM”), according to which the Target Group has to make a reliable estimate of the amount of benefits earned in return for services rendered in current and prior periods, using actuarial techniques. In addition, in cases where defined benefit plans are funded, the Target Group has to estimate the fair value of plan assets. As a result, the use of the PUCM involves a number of actuarial assumptions. These assumptions include demographic assumptions such as mortality, turnover and retirement age and financial assumptions such as discount rates, salary and benefit levels. Such assumptions are subject to judgements and may develop materially differently than expected and therefore may result in significant impacts on defined benefit obligations.

The carrying amount of retirement benefit obligations as at 30 September 2017, 2018, 2019 and 31 July 2020 were JPY100 million, JPY105 million, JPY121 million, and JPY112 million, respectively. Further details are given in note 34 to the Historical Financial Information.

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6. FINANCIAL RISK MANAGEMENT

The Target Group’s activities expose it to a variety of financial risks: foreign currency risk, price risk, credit risk, liquidity risk and interest rate risk. The Target Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Target Group’s financial performance.

(a) Foreign currency risk

The Target Group has minimal exposure to foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in the functional currencies of the group entities, Japanese Yen and Renminbi. The Target Group has foreign exposure of such direct overseas purchase. The Target Group currently does not have a foreign currency hedging policy in respect of foreign currency transactions, assets and liabilities. The Target Group monitors its foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise. The foreign currency risk is not significant to the Target Group.

(b) Price risk

The Target Group is exposed to equity price risk mainly through its investment in equity securities. The management manages this exposure by maintaining a portfolio of investments with different risk and return profiles. The Target Group’s equity price risk is mainly concentrated on equity securities classified as financial assets at FVTOCI quoted on the Tokyo Stock Exchange.

The sensitivity analysis below have been determined based on the exposure to equity price risk at the end of each reporting period.

	Increase/(decrease)
	in other	Increase/
	comprehensive	(decrease)
	income before tax	in equity
	JPY’million	JPY’million
For the year ended 30 September 2017
Increase by 10%	38	25
Decrease by 10%	(38)	(38)
For the year ended 30 September 2018
Increase by 10%	40	26
Decrease by 10%	(40)	(40)
For the year ended 30 September 2019
Increase by 10%	21	14
Decrease by 10%	(21)	(21)
For the ten months ended 31 July 2020
Increase by 10%	15	10
Decrease by 10%	(15)	(15)
For the ten months ended 31 July 2019 (unaudited)
Increase by 10%	25	17
Decrease by 10%	(25)	(25)

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(c) Credit risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Target Group is exposed to credit risk from its operating activities (primarily trade and bills receivables) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Target Group’s exposure to credit risk arising from cash and cash equivalents and derivative financial assets is limited because the counterparties are banks and financial institutions with high credit-rating assigned by international credit-rating agencies, for which the Target Group considers to have low credit risk.

Trade and bills receivables

Customer credit risk is managed by each business unit subject to the Target Group’s established policy, procedures and control relating to customer credit risk management. Individual credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Trade and bills receivables are generally due within one to three months from the date of billing. Normally, the Target Group does not obtain collateral from customers.

The Target Group measures loss allowances for trade and bills receivables at an amount equal to lifetime ECLs, which is calculated using a provision matrix. As the Target Group’s historical credit loss experience does not indicate significantly different loss patterns for different customer segments, the loss allowance based on past due status is not further distinguished between the Target Group’s different customer bases. The Target Group’s exposure to credit risk and ECLs for trade and bills receivables as at 30 September 2017, 2018 and 2019 and 31 July 2020 are estimated as immaterial as the trade and bills receivables were neither past due nor has recent history of default.

Expected loss rates are based on actual loss experience over the Relevant Periods. These rates are adjusted to reflect differences between economic condition during the period over which the historic data has been collected, current conditions and the Target Group’s view of economic conditions over the expected lives of the receivables.

Financial assets at FVTOCI and amortised cost

All of the Target Group’s investments at FVTOCI and amortised cost are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12-month expected losses. Management considers ‘low credit risk’ for listed debt securities to be an investment grade credit rating with at least one major rating agency. Other instruments are considered to be low credit risk when they have a low of default and the issuer has a strong capacity to meet its contractual cash flow obligations in the near term.

Financial assets at amortised cost include deposits and other receivables.

The carrying amount of deposits and other receivables approximated to their fair value as at the end of each reporting period. Their recoverability was assessed with reference to the credit status of the debtors, and the ECL is considered to be immaterial.

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Financial assets at FVTPL

The Target Group is also exposed to credit risk in relation to insurance premium that are measured at FVTPL. The maximum exposure at the end of the period is the carrying amount of these insurance policies of:

		30 September		As at 31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Insurance premium	139	149	5	5

(d) Liquidity risk

The Target Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it maintains sufficient reserves of cash to meet its liquidity requirements in the short and longer term.

The maturity profile of the Target Group’s non-derivative financial liabilities as at the end of the year/period, based on the contractual undiscounted payments, is as follows:

On demand or less than 12 months JPY’million As at 30 September 2017 Financial liabilities included in trade payables, other payables and accruals 3,839 Borrowings 3,873 Finance lease payables 36 7,748 As at 30 September 2018 Financial liabilities included in trade payables, other payables and accruals 4,653 Borrowings 6,783 Loans from shareholders – Finance lease payables 38 11,474	Between 1 and 2 years JPY’million – 574 27 601 3 651 – 23 677	Between 2 and 5 years JPY’million – 664 25 689 – 913 – 46 959	Over 5 years JPY’million – – 32 32 – 431 31 53 515	Total JPY’million 3,839 5,111 120 9,070 4,656 8,778 31 160 13,625	Carrying amount JPY’million 3,839 5,093 114
					9,046

					4,656 8,745 30 151
					13,582

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On demand or less than 12 months JPY’million As at 30 September 2019 Financial liabilities included in trade payables, other payables and accruals 4,771 Borrowings 7,739 Loans from shareholders 5 Finance lease payables 23 12,538 As at 31 July 2020 Financial liabilities included in trade payables, other payables and accruals 3,547 Borrowings 5,902 Loan from shareholders 1,700 Lease liabilities 131 11,280	Between 1 and 2 years JPY’million 13 795 5 19 832 12 566 – 75 653	Between 2 and 5 years JPY’million 28 1,241 15 53 1,337 20 2,353 – 107 2,480	Over 5 years JPY’million – 286 1,251 27 1,564 – – – 25 25	Total JPY’million 4,812 10,061 1,276 122 16,271 3,579 8,821 1,700 338 14,438	Carrying amount JPY’million 4,812 9,946 1,230 114
					16,102

					3,579 8,667 1,700 328
					14,274

As at 30 September 2017, 2018 and 2019 and 31 July 2020, there were no term loans repayable over one year containing a repayment on demand clause.

The maturity profile of the Target Group’s derivative financial liabilities as at the end of the year/period is as follows. The table has been drawn up based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrative by the yield curves at the end of the reporting period.

As at 30 September 2017 Derivative – net settlement Interest rate swaps Derivative – gross settlement Foreign currency swaps – inflow – outflow	Less than 12 months JPY’million (1) (1) 334 (316) 18	Between 1 and 2 years JPY’million () () 327 (316) 11	Between 2 and 5 years JPY’million () () 232 (230) 2	Over 5 years JPY’million – – – – –	Total JPY’million (1)
					(1)

					893 (862)
					31

Less than JPY1 million

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As at 30 September 2018 Derivative – net settlement Interest rate swaps Derivative – gross settlement Foreign currency swaps – inflow – outflow As at 30 September 2019 Derivative – net settlement Interest rate swaps Derivative – gross settlement Foreign currency swaps – inflow – outflow As at 31 July 2020 Derivative – net settlement Interest rate swaps Derivative – gross settlement Foreign currency swaps – inflow – outflow	Less than 12 months JPY’million () () 335 (316) 19 () () 139 (137) 2 () () 114 (114) –	Between 1 and 2 years JPY’million () () 141 (136) 5 () () 78 (78) – – – – – –	Between 2 and 5 years JPY’million () () 73 (73) – – – – – – – – – – –	Over 5 years JPY’million – – – – – – – – – – – – – – –	Total JPY’million (*)
					(*)

					549 (525)
					24

					(*)
					(*)

					217 (215)
					2

					(*)
					(*)

					114 (114)
					–

Less than JPY1 million

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(e) Interest rate risk

The Target Group’s cash flow interest rate risk primarily relates to variable-rate bank loans. It is the Target Group’s policy to keep its borrowing at floating rate of interest so as to minimise the fair value interest rate risk. In the Relevant Periods, the Target Group has been using interest rate swaps in order to mitigate its exposure associated with fluctuations relating to interest cash flows. The critical terms of these interest rate swaps are similar to those of the hedged loans. These interest rate swaps are designated as effective cash flow hedges of interest rate risk.

The Target Group’s cash flow interest rate risk is mainly concentrated on the fluctuation of TIBOR arising from the Target Group’s JPY denominated borrowings.

The Target Group’s bank deposits and bank borrowings bear interests at fixed interest rates and therefore are subject to fair value interest rate risks.

The Target Group’s exposure to interest-rate risk arises from its bank deposits and bank borrowings. These deposits and borrowings bear interests at variable rates that vary with the then prevailing market condition.

The interest rate risk is not significant to the Target Group.

(f) Categories of financial instruments

Financial assets: Financial assets at FVTPL: – Mandatorily measured at FVTPL Derivative financial assets Financial assets measured at amortised cost Financial assets measured at FVTOCI – Equity instruments Financial liabilities: Derivative financial liabilities Financial liabilities at amortised cost	As 2017 JPY’million 139 45 5,968 376 170 9,046	at 30 September 2018 2019 JPY’million JPY’million 149 5 51 17 6,444 7,101 397 206 58 37 13,582 16,102	As at 31 July 2020 JPY’million 5 6 7,434 146

			4 14,274

(g) Fair value

The carrying amounts of the Target Group’s financial assets and financial liabilities as reflected in the consolidated statements of financial position approximate their respective fair values.

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7. FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following disclosures of fair value measurements use a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value:

Level 1 inputs: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Target Group can access at the measurement date.

Level 2 inputs: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs: unobservable inputs for the asset or liability.

The Target Group’s policy is to recognise transfers into and transfers out of any of the three levels as of the date of the event or change in circumstances that caused the transfer.

(a) Disclosures of level in fair value hierarchy at the end of each reporting period:

Description Recurring fair value measurements: Financial assets Financial assets at FVTPL Insurance premium Derivatives Foreign currency options Foreign currency swaps Financial assets at FVTOCI Listed equity securities Investment properties Warehouse unit – Japan Residential units – Japan Total Recurring fair value measurements: Financial liabilities Derivatives Interest rate swaps Foreign currency options Total	Fair value measurement Level 1 Level 2 JPY’million JPY’million – – – – – – – – 376 – – – – – – – 376 – – – – – – – – –	using: Level 3 JPY’million 139 15 30 45 – 152 146 298 482 (1) (169) (170) (170)	30 September 2017 Total JPY’million 139 15 30 45 376 152 146 298 858 (1) (169) (170) (170)

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Description Recurring fair value measurements: Financial assets Financial assets at FVTPL Insurance premium Derivatives Foreign currency options Foreign currency swaps Financial assets at FVTOCI Listed equity securities Investment properties Warehouse unit – Japan Residential units – Japan Total Recurring fair value measurements: Financial liabilities Derivatives Interest rate swaps Foreign currency options Total	Fair value measurement Level 1 Level 2 JPY’million JPY’million – – – – – – – – 397 – – – – – – – 397 – – – – – – – – –	using: Level 3 JPY’million 149 28 23 51 – 152 152 304 504 (*) (58) (58) (58)	30 September 2018 Total JPY’million 149 28 23 51 397 152 152 304 901 (*) (58) (58) (58)

Less than JPY1 million

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Description Recurring fair value measurements: Financial assets Financial assets at FVTPL Insurance premium Derivatives Foreign currency options Foreign currency swaps Financial assets at FVTOCI Listed equity securities Investment properties Warehouse unit – Japan Residential units – Japan Total Recurring fair value measurements: Financial liabilities Derivatives Interest rate swaps Foreign currency options Foreign currency swaps Total	Fair value measurement Level 1 Level 2 JPY’million JPY’million – – – – – – – – 206 – – – – – – – 206 – – – – – – – – – – –	using: Level 3 JPY’million 5 15 2 17 – 152 161 313 335 () (37) () (37) (37)	30 September 2019 Total JPY’million 5 15 2 17 206 152 161 313 541 () (37) () (37) (37)

Less than JPY1 million

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Description Recurring fair value measurements: Financial assets Financial assets at FVTPL Insurance premium Derivatives Foreign currency options Financial assets at FVTOCI Listed equity securities Investment properties Warehouse unit – Japan Residential units – Japan Total Recurring fair value measurements: Financial liabilities Derivatives Interest rate swaps Foreign currency options Foreign currency swaps Total	Fair value measurement Level 1 Level 2 JPY’million JPY’million – – – – 146 – – – – – – – 146 – – – – – – – – – – –	using: Level 3 JPY’million 5 6 – 150 163 313 324 () (4) () (4) (4)	31 July 2020 Total JPY’million 5 6 146 150 163 313 470 () (4) () (4) (4)

Less than JPY1 million

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(b) Reconciliation of assets/liabilities measured at fair value based on level 3:

Description At 1 October 2016 Addition Total gains recognised in profit or loss Settlement Transfer to exchange gain/loss At 30 September 2017 and 1 October 2017 Addition Total gains recognised in profit or loss Transfer to exchange gain/loss At 30 September 2018 and 1 October 2018 Addition Total gains/(losses) recognised in profit or loss Settlement Transfer to exchange gain/loss At 30 September 2019 and 1 October 2019 Addition Total gains/(losses) recognised in profit or loss Transfer to exchange gain/loss At 31 July 2020	Financial asset at FVTPL Insurance premium JPY’ million 141 10 – (12) – 139 10 – 149 8 2 (154) – 5 – – 5	Derivative financial liabilities Interest rate swaps JPY’million (2) – 1 – – (1) – 1 – () – () – () – () (*)	Derivative financial assets Foreign currency swaps JPY’million – – 31 – (1) 30 – 8 (15) 23 – (6) – (15) 2 – 2 (4) –	Derivative financial liabilities Foreign currency swaps JPY’million (122) – 103 – 19 – – – – – – () – – () – () – ()	Derivative financial assets Foreign currency options JPY’million 12 – 34 – (31) 15 – 45 (32) 28 – 15 – (28) 15 – 7 (16) 6	Derivative financial liabilities Foreign currency options JPY’million (738) – 532 – 37 (169) – 40 71 (58) – (14) – 35 (37) – 5 28 (4)	Investment properties JPY’million 296 – 2 – – 298 – 6 – 304 – 9 – – 313 – – – 313	Total JPY’million (413) 10 703 (12) 24
								312 10 100 24
								446 8 6 (154) (8)
								298 * 14 8
								320

The total gains or losses recognised in profit or loss including those for assets held at end of each reporting period are presented in “Other income and gains/(losses)” in the consolidated statements of profit or loss.

Less than JPY1 million

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(c) Disclosure of valuation process used by the Target Group and valuation techniques and inputs used in fair value measurements at the end of each reporting period:

The Target Group’s financial controller is responsible for the fair value measurements of assets and liabilities required for financial reporting purposes, including level 3 fair value measurements. The financial controller reports directly to the Board of Directors for these fair value measurements. Discussions of valuation processes and results are held between the financial controller and the Board of Directors at least twice a year.

For level 3 fair value measurements, the Target Group will normally engage external valuation experts with the recognised professional qualifications and recent experience to perform the valuations.

Level 3 fair value measurements

					Fair Value	Fair Value
		Observable/		Effect on	As at
	Valuation	unobservable		fair value for	30 September 2017
Description	technique	inputs	Range	increase of inputs	JPY’million
					Assets	Liabilities
Investment properties	Cost approach	Building unit cost	JPY131,000-	Increase	298	–
			JPY681,000 per
			square meter
Financial asset	N/A	Surrender value	N/A	N/A	139	–
at FVTPL –
Insurance premium
Derivatives – Foreign	Black-scholes option	Volatility of the	9.8% – 11.27%	Decrease in asset	15	(169)
currency options	pricing model	exchange rate as at		Increase in liability
		valuation date
		Risk-free rate of JPY	-0.14% – (-0.09%)	Increase in asset
				Decrease in liability
		Risk-free rate of US$	1.42% – 1.85%	Decrease in asset
				Increase in liability
		Cumulative default rate	0.37% – 46.42%	Decrease
		Expected recovery rate	37.10% – 44.50%	Increase
Derivatives – Interest	Discounted cash flows	Forward interest rate	0.34% – 0.45%	Decrease	–	(1)
rate swaps
		Risk-free rate of JPY	-0.22% – (-0.07%)	Decrease
		Cumulative default rate	44.06%	Decrease
		Expected recovery rate	37.40%	Increase
Derivatives – Foreign	Discounted cash flows	Forward exchange rate	US$1 to JPY102.60	Increase	30	–
currency swaps			– US$1 to JPY112.49
		Risk-free rate of JPY	-0.22% – (-0.07%)	Increase
		Risk-free rate of US$	0.94% – 1.75%	Increase
		Cumulative default rate	0.25% – 0.37%	Decrease
		Expected recovery rate	44.50% – 45.00%	Increase

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					Fair Value	Fair Value
		Observable/		Effect on	As at
	Valuation	unobservable		fair value for	30 September 2018
Description	technique	inputs	Range	increase of inputs	JPY’million
					Assets	Liabilities
Investment properties	Cost approach	Building unit cost	JPY131,000	Increase	304	–
			– JPY681,000 per
			square meter
Financial asset at	N/A	Surrender value	N/A	N/A	149	–
FVTPL – Insurance
premium
Derivatives – Foreign	Black-scholes option	Volatility of the	6.40% – 9.61%	Decrease in asset	28	(58)
currency options	pricing model	exchange rate as at		Increase in liability
		valuation date
		Risk-free rate of JPY	-0.14% – (-0.09%)	Increase in asset
				Decrease in liability
		Risk-free rate of US$	2.43% – 2.90%	Decrease in asset
				Increase in liability
		Cumulative default rate	0.06% – 43.97%	Decrease
		Expected recovery rate	30.36% – 44.97%	Increase
Derivatives – Interest	Discounted cash flows	Forward interest rate	0.36% – 0.49%	Decrease	–	(*)
rate swaps
		Risk-free rate of JPY	-0.15% – (-0.05%)	Decrease
		Cumulative default rate	41.03%	Decrease
		Expected recovery rate	38.50%	Increase
Derivatives – Foreign	Discounted cash flows	Forward exchange rate	US$1 to JPY103.10	Increase	23	–
currency swaps			– US$1 to JPY113.23
		Risk-free rate of JPY	-0.15% – (-0.05%)	Increase
		Risk-free rate of US$	2.11% – 2.87%	Increase
		Cumulative default rate	0.14% – 0.24%	Decrease
		Expected recovery rate	42.57% – 44.97%	Increase

Less than JPY1 million

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					Fair Value	Fair Value
		Observable/		Effect on	As at
	Valuation	unobservable		fair value for	30 September 2019
Description	technique	inputs	Range	increase of inputs	JPY’million
					Assets	Liabilities
Investment properties	Cost approach	Building unit cost	JPY131,000	Increase	313	–
			– JPY681,000 per
			square meter
Financial asset at	N/A	Surrender value	N/A	N/A	5	–
FVTPL – Insurance
premium
Derivatives – Foreign	Black-scholes option	Volatility of the	4.80% – 7.38%	Decrease in asset	15	(37)
currency options	pricing model	exchange rate as at		Increase in liability
		valuation date
		Risk-free rate of JPY	-0.33% – (-0.18%)	Increase in asset
				Decrease in liability
		Risk-free rate of US$	1.59% – 1.87%	Decrease in asset
				Increase in liability
		Cumulative default rate	0.14% – 26.89%	Decrease
		Expected recovery rate	38.60% – 45.00%	Increase
Derivatives – Interest	Discounted cash flows	Forward interest rate	0.26% – 0.38%	Decrease	–	(*)
rate swaps
		Risk-free rate of JPY	-0.38% – (-0.18%)	Decrease
		Cumulative default rate	36.27%	Decrease
		Expected recovery rate	39.00%	Increase
Derivatives – Foreign	Discounted cash flows	Forward exchange rate	US$1 to JPY103.47	Increase in asset	2	(*)
currency swaps			– US$1 to JPY107.53	Decrease in liability
		Risk-free rate of JPY	-0.38% – (-0.18%)	Increase in asset
				Decrease in liability
		Risk-free rate of US$	1.65% – 1.87%	Increase in asset
				Decrease in liability
		Cumulative default rate	0.06% – 0.14%	Decrease
		Expected recovery rate	30.40% – 42.60%	Increase

Less than JPY1 million

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					Fair Value	Fair Value
		Observable/		Effect on	As at
	Valuation	unobservable		fair value for	31 July 2020
Description	technique	inputs	Range	increase of inputs	JPY’million
					Assets	Liabilities
Investment properties	Cost approach	Building unit cost	JPY131,000	Increase	313	–
			– JPY681,000 per
			square meter
Financial asset	N/A	surrender value	N/A	N/A	5	–
at FVTPL
– Insurance premium
Derivatives – Foreign	Black-scholes option	Volatility of the	5.60% – 11.85%	Decrease in asset	6	(4)
currency options	pricing model	exchange rate as at		Increase in liability
		valuation date
		Risk-free rate of JPY	-0.16% – (-0.09%)	Increase in asset
				Decrease in liability
		Risk-free rate of US$	0.09% – 0.11%	Decrease in asset
				Increase in liability
		Cumulative default rate	0.05% – 27.08%	Decrease
		Expected recovery rate	35.15% – 45.33%	Increase
Derivatives – Interest	Discounted cash flows	Forward interest rate	0.29% – 0.35%	Decrease	–	(*)
rate swaps
		Risk-free rate of JPY	-0.17% – (-0.09%)	Decrease
		Cumulative default rate	27.08%	Decrease
		Expected recovery rate	38.13%	Increase
Derivatives – Foreign	Discounted cash flows	Forward exchange rate	US$1 to JPY103.78	Decrease	–	(*)
currency swaps			– US$1 to JPY104.32
		Risk-free rate of JPY	-0.17% – (-0.09%)	Decrease
		Risk-free rate of US$	0.09% – 0.11%	Decrease
		Cumulative default rate	27.08%	Decrease
		Expected recovery rate	38.13%	Increase

Less than JPY1 million

During the Relevant Periods, there were no changes in the valuation techniques used.

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8. REVENUE AND SEGMENT INFORMATION

(a) Disaggregation of revenue

Disaggregation of revenue from contracts with customers by major products line for the year/period is as follows:

Revenue from contract with customers within the scope of HKFRS 15: – Sales of snack foods and confectionery Timing of revenue recognition – At a point in time	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 33,967 37,009 38,508 33,967 37,009 38,508	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 33,067 29,405 33,067 29,405	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 33,067 29,405 33,067 29,405

			29,405

The Target Group has only one reportable operating segment. The Target Group derives most of its revenue from sales of snack foods and confectionery in Japan. The chief operating decision maker, being the management of the Target Group, monitors the revenue, results, assets and liabilities of the business as a whole based on the management accounts prepared in accordance with HKFRSs, and considers the assets and liabilities of the business, which included all assets and liabilities as stated in the consolidated statements of financial position, and considers the revenue and results of the business which represented revenue and profit for the year/period as stated in the consolidated statements of profit or loss and consolidated statements of comprehensive income.

Accordingly, the management of the Target Group has determined that, on the basis of the information used by the chief operating decision maker for the purposes of resources allocation and performance evaluation, the Target Group operates in one operating segment under the requirement of HKFRS 8 Operating Segments.

Furthermore, as most of its revenue is derived from Japan based on the location of operation of the Target Group, no geographical information is presented.

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(b) Transaction price allocated to the remaining performance obligation for contracts with customers

The amounts of transaction prices allocated to the remaining performance obligations (unsatisfied or partially unsatisfied) as at the end of each reporting period and the expected timing of recognising revenue are as follows:

				As at
	As	at 30 September		31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Amounts expected to be recognised as revenue:
Within one year	25	33	8	26

The amounts of transaction prices allocated to the remaining performance obligations are expected to be recognised as revenue within one year.

9. OTHER INCOME AND GAINS/(LOSSES)

An analysis of other income and gains/(losses) is as follows:

Bank interest income Other interest income Total interest income Service income Commission income Dividend income Rental income Fair value gain on investment properties (note 19) Fair value gains/(losses) on financial assets at FVTPL and derivative financial assets (Loss)/gain on disposal of financial assets at FVTPL Net foreign exchange gains/(losses) Others	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 1 1 1 2 2 2 3 3 3 3 8 13 9 8 9 5 5 6 31 29 34 2 6 9 703 94 (5) (2) – 2 97 39 (17) 21 40 14 872 232 68	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 2 1 2 1 11 11 8 3 6 4 29 24 8 – * 14 – – (23) 11 16 19 57 87	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 2 1 2 1 11 11 8 3 6 4 29 24 8 – * 14 – – (23) 11 16 19 57 87
			1 11 3 4 24 – 14 – 11 19
			87

Less than JPY1 million

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10. OTHER OPERATING EXPENSES

Loss on write-off of raw materials and other materials Loss on written off of property, plant and equipment Loss on disposal of property, plant and equipment Impairment losses of property, plant and equipment Impairment losses of other intangible assets Fraud losses_(note)_ Others	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 7 2 3 1 26 – – 2 – – 3 4 16 14 18 91 393 1,761 3 6 6 118 446 1,792	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 3 8 – – – 1 4 – 11 5 1,831 38 7 2 1,856 54	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 3 8 – – – 1 4 – 11 5 1,831 38 7 2 1,856 54
			54

Note: The fraud losses represented the payments arising from the fictitious transactions to the customers of nuts business during the Relevant Periods. The management of the Target Group expected such overpayments were irrecoverable.

11. FINANCE COSTS

An analysis of finance costs is as follows:

Interest expenses on bank loans Interest expenses on finance lease Interest expenses on lease liabilities Others	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 46 47 64 1 1 1 – – – 8 8 6 55 56 71	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 52 57 1 – – 3 6 – 59 60	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 52 57 1 – – 3 6 – 59 60
			60

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12. PROFIT/(LOSS) BEFORE TAX FOR THE YEAR/PERIOD

The Target Group’s profit/(loss) before tax for the year/period is arrived at after charging/(crediting):

Cost of inventories sold Depreciation of property, plant and equipment (excluding right-of-use assets) Depreciation of right-of-use assets Amortisation of other intangible assets Operating lease charges – Office, warehouse and staff quarters – Others Employee benefit expenses (excluding directors’ remuneration_(note 15))_: – Salaries, bonuses, allowances and benefits in kind – Pension scheme contributions Loss on disposal/write-off of property, plant and equipment, net Impairment losses of property, plant and equipment Impairment losses of other intangible assets Net foreign exchange (gains)/losses Direct operating expenses of investment properties that generate rental income (Reversal of)/allowance of slow-moving inventories * Write-down of slow-moving inventories **	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 30,071 32,801 34,540 109 113 112 – – – 53 68 91 117 159 228 49 49 65 780 831 842 92 97 97 872 928 939 1 28 – – 3 4 16 14 18 (97) (39) 17 10 8 9 (7) 150 74 7 2 3	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 29,716 26,144 93 72 – 122 75 85 186 63 53 41 710 631 86 74 796 705 – 1 4 – 11 5 23 (11) 7 6 29 (135) 3 145

The (reversal of)/allowance of slow-moving inventories is included in “Cost of sales” in the consolidated statements of profit or loss.

** The write-down of slow-moving inventories is included in “Other operating expenses” and “Cost of sales” in the consolidated statements of profit or loss.

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13. INCOME TAX EXPENSE/(CREDIT)

Income tax has been recognised in profit or loss as following:

Current tax – Japan Charge for the year/period Current tax – the PRC Charge for the year/period Deferred tax_(note 35)_	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 272 281 3 17 23 26 289 304 29 239 9 (233) 528 313 (204)	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) – 8 24 18 24 26 (189) 66 (165) 92	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) – 8 24 18 24 26 (189) 66 (165) 92
			26 66
			92

The Target Group is subject to national corporate income tax, inhabitants tax and enterprise tax in Japan, which, in aggregate, resulted in effective statutory income tax rates of approximately 34.48%, 34.48%, 33.76%, 33.76% and 34.26% for the years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2019 and 2020, respectively.

As a result of the 2016 Tax Reform that was approved on 29 March 2016, the national corporate income tax rate of Japan was reduced from 23.9% to 23.4% from fiscal years beginning on or after 1 April 2016, followed by a further rate reduction from 1 April 2018 to 23.2%.

The PRC Enterprise Income Tax has been provided at a rate of 25% for the Relevant Periods.

The Target Group measured the current income tax for the Relevant Periods based on revised applicable income tax rates. The relevant deferred tax assets and liabilities have been remeasured at the tax rates that are expected to apply to the period when the related assets and liabilities are realised or settled.

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The reconciliation between the income tax expense/(credit) and the product of profit/(loss) before tax multiplied by the effective statutory income tax rate in Japan is as follows:

Income tax has been recognised in profit or loss as following:

Profit/(loss) before tax Tax calculated at effective statutory income tax rate in Japan Tax effect of income that is not taxable Tax effect of expenses that are not deductible Tax losses not recognised Effect of withholding tax of 10% on distributable profits of the Target Group’s subsidiary in Mainland China Effect of different tax rates of subsidiaries Effect of changes in tax rates	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 855 (184) (2,236) 295 (64) (755) (278) (49) (6) 518 434 561 * 1 6 – – 5 (7) (9) (9) – – (6) 528 313 (204)	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) (2,180) 116 (736) 40 (5) (10) 578 66 4 – 5 – (6) (6) (5) 2 (165) 92	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) (2,180) 116 (736) 40 (5) (10) 578 66 4 – 5 – (6) (6) (5) 2 (165) 92
			40 (10) 66 – – (6) 2
			92

Less than JPY1 million

14. EMPLOYEE BENEFIT EXPENSES

Employee benefit expenses: Salaries, bonuses and allowances Retirement benefit scheme contributions	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 780 831 842 92 97 97 872 928 939	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 710 631 86 74 796 705	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 710 631 86 74 796 705
			705

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(a) Five highest paid individuals

During the years ended 30 September 2017, 2018, 2019 and ten months ended 31 July 2019, the five highest paid individuals in the Target Group during the Relevant Periods included five directors whose emoluments are reflected in the analysis presented in note 15.

During the ten months ended 31 July 2020, the five highest paid individuals in the Target Group included one director whose emolument is reflected in the analysis presented in note 15. The emoluments of the remaining four individuals are set out below:

==> picture [400 x 226] intentionally omitted <==

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

Ten months
ended 31 July
2020
JPY’million
Employee benefits expenses:
Salaries, bonuses and allowances 31
Retirement benefit scheme contributions
31
Less than JPY1 million
The emoluments fell within the following band:
Ten months
ended 31 July
2020
Nil to HK$1 million (equivalent to Nil to JPY14 million) 4
----- End of picture text -----

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15. BENEFITS AND INTERESTS OF DIRECTORS

(a) Directors’ emoluments

The remuneration of every director for the Relevant Periods is set out below:

For the year ended 30 September 2017 Mr. Osamu Miyata Mr. Yoshio Tahara_(note (i)) Mrs. Yayoi Miyata(note (v)) Mr. Hisakazu Kusama(note (vi)) Mr. Kazutaka Nakagawa (note (ii)) Mr. Tamotsu Miyata(note (iv)) For the year ended 30 September 2018 Mr. Osamu Miyata Mrs. Yayoi Miyata(note (v)) Mr. Takayuki Miwa(note (iii)) Mr. Hisakazu Kusama(note (vi)) Mr. Kazutaka Nakagawa (note (ii)) Mr. Tamotsu Miyata(note (iv)) For the year ended 30 September 2019 Mr. Osamu Miyata Mrs. Yayoi Miyata(note (v)) Mr. Takayuki Miwa(note (iii)) Mr. Hisakazu Kusama(note (vi)) Mr. Kazutaka Nakagawa (note (ii))_	Fees JPY’million – – – – – – – Fees JPY’million – – – – – – – Fees JPY’million – – – – – –	Salaries, bonuses and allowances JPY’million 61 37 15 14 4 131 Salaries, bonuses and allowances JPY’million 80 18 15 14 15 – 142 Salaries, bonuses and allowances* JPY’million 67 14 13 13 12 119	Discretionary bonus Retirement benefit scheme contributions JPY’million JPY’million – 1 – 1 – 1 – 1 – – – – 4 Discretionary bonus Retirement benefit scheme contributions JPY’million JPY’million – 1 – 1 – 1 – 1 – 1 – – – 5 Discretionary bonus Retirement benefit scheme contributions* JPY’million JPY’million – 1 – 1 – 1 – 1 – 1 – 5	Total JPY’million 62 38 16 15 4 *
				135

				Total JPY’million 81 19 16 15 16 –
				147

				Total JPY’million 68 15 14 14 13
				124

Less than JPY1 million

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For the ten months ended 31 July 2019 (unaudited) Mr. Osamu Miyata Mrs. Yayoi Miyata_(note (v)) Mr. Takayuki Miwa(note (iii)) Mr. Hisakazu Kusama(note (vi)) Mr. Kazutaka Nakagawa (note (ii)) For the ten months ended 31 July 2020 Mr. Osamu Miyata Mr. Takayuki Miwa(note (iii)) Mr. Hisakazu Kusama(note (vi)) Mr. Kazutaka Nakagawa (note (ii)) Mr. Tai Chun Kit(note (vii)) Mr. Wu Wing Biu(note (viii))_	Fees JPY’million – – – – – – Fees JPY’million – – – – – – –	Salaries, bonuses and allowances JPY’million 61 13 11 11 11 107 Salaries, bonuses and allowances JPY’million 30 4 2 1 – – 37	Discretionary bonus Retirement benefit scheme contributions JPY’million JPY’million – 1 – 1 – 1 – 1 – 1 – 5 Discretionary bonus Retirement benefit scheme contributions JPY’million JPY’million – – – – – – – – – –	Total JPY’million 62 14 12 12 12
				112

				Total JPY’million 30 4 2 1 – –
				37

Less than JPY1 million

Notes: (i) Mr. Yoshio Tahara has resigned as a director on 1 July 2017.

(ii) Mr. Kazutaka Nakagawa was appointed as a director on 1 July 2017 and has resigned as a director on 28 November 2019.
(iii) Mr. Takayuki Miwa was appointed as a director on 1 October 2017 and has resigned as a director on 31 January 2020.
(iv) Mr. Tamotsu Miyata has resigned as a director on 1 October 2017.
(v) Mrs. Yayoi Miyata has resigned as a director on 30 September 2019.
(vi) Mr. Hisakazu Kusama has resigned as a director on 30 November 2019.
(vii) Upon the Acquisition, Mr. Tai Chun Kit was appointed as a director on 16 April 2020.
(viii) Upon the Acquisition, Mr. Wu Wing Biu was appointed as a director on 16 April 2020.

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(b) Directors’ material interests in transactions, arrangements or contracts

Except for transaction disclosed in note 40 to the Historical Financial Information, no significant transactions, arrangements and contracts in relation to the Target Group’s business to which the Target Company was a party and in which a director of the Target Company and the director’s connected party had a material interest, whether directly or indirectly, subsisted at the end of each reporting period or at any time during the Relevant Periods.

During the Relevant Periods, no remunerations were paid by the Target Group to the directors as an inducement to join or upon joining the Target Group or as compensation for loss of office. No directors of the Target Company waived or agreed to waive any remunerations during the Relevant Periods.

16. DIVIDENDS

During the Relevant Periods, the Target Group made the following dividend distributions:

Dividends declared and paid during the Relevant Periods: 2017 final – JPY138.89 per ordinary share 2018 final – JPY278.00 per ordinary share	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 5 – – – 10 – 5 10 –	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) – – – – – –	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) – – – – – –
			–

Prior to the Target Group Reorganisation, dividends were declared and paid by Miyata Co., Ltd., a subsidiary of the Target Company.

17. EARNINGS/(LOSSES) PER SHARE

Earnings per share information is not presented as its inclusion, for the purpose of this Historical Financial Information, is not considered meaningful due to the Target Group Reorganisation and the preparation of the results of the Target Group for the Relevant Periods as disclosed in note 2 to the Historical Financial Information.

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18. PROPERTY, PLANT AND EQUIPMENT

Owned assets Right-of-use assets (a) Owned assets Cost At 1 October 2016 Additions Disposals/write-off At 30 September 2017 and 1 October 2017 Additions Disposals/write-off At 30 September 2018 and 1 October 2018 Additions Disposals/write-off At 30 September 2019 and 1 October 2019 (as originally presented) Effect on adoption of HKFRS 16_(note (i))_ At 1 October 2019 (as restated) Additions Disposals/write-off At 31 July 2020	As at 30 September 2017 2018 Notes JPY’million JPY’million (a) 2,040 2,047 (b) – – 2,040 2,047 Land and buildings Leasehold improvements Furniture, fixtures and equipment Plant and machinery JPY’million JPY’million JPY’million JPY’million 2,599 10 123 302 8 4 9 – – – (10) (1) 2,607 14 122 301 37 24 14 66 (103) – (7) – 2,541 38 129 367 50 – 17 30 – – – – 2,591 38 146 397 – – (24) (186) 2,591 38 122 211 – – – 2 (5) (13) – – 2,586 25 122 213	As at 30 September 2017 2018 Notes JPY’million JPY’million (a) 2,040 2,047 (b) – – 2,040 2,047 Land and buildings Leasehold improvements Furniture, fixtures and equipment Plant and machinery JPY’million JPY’million JPY’million JPY’million 2,599 10 123 302 8 4 9 – – – (10) (1) 2,607 14 122 301 37 24 14 66 (103) – (7) – 2,541 38 129 367 50 – 17 30 – – – – 2,591 38 146 397 – – (24) (186) 2,591 38 122 211 – – – 2 (5) (13) – – 2,586 25 122 213	2019 JPY’million 2,028 – 2,028 Motor vehicles JPY’million 27 10 – 37 14 (12) 39 – (7) 32 (17) 15 – – 15	As at 31 July 2020 JPY’million 1,882 283
				2,165

				Total JPY’million 3,061 31 (11) 3,081 155 (122) 3,114 97 (7) 3,204 (227) 2,977 2 (18) 2,961

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Accumulated depreciation and impairment At 1 October 2016 Charge for the year Disposals/write-off At 30 September 2017 and 1 October 2017 Charge for the year Impairment losses Disposals/write-off At 30 September 2018 and 1 October 2018 Charge for the year Impairment losses Disposals/write-off At 30 September 2019 and 1 October 2019 (as originally presented) Effect on adoption of HKFRS 16_(note (i))_ At 1 October 2019 (as restated) Charge for the period Disposals/write-off At 31 July 2020 Carrying amount At 30 September 2017 At 30 September 2018 At 30 September 2019 At 31 July 2020	Land and buildings Leasehold improvements Furniture, fixtures and equipment JPY’million JPY’million JPY’million 698 1 78 56 1 12 – – (9) 754 2 81 54 2 13 2 1 – (78) – (6) 732 5 88 49 4 14 2 – 2 – – – 783 9 104 – – (19) 783 9 85 43 2 9 (5) (4) – 821 7 94 1,853 12 41 1,809 33 41 1,808 29 42 1,765 18 28	Plant and machinery JPY’million 151 36 (1) 186 39 – – 225 40 – – 265 (129) 136 16 – 152 115 142 132 61	Motor vehicles JPY’million 14 4 – 18 5 – (6) 17 5 – (7) 15 (12) 3 2 – 5 19 22 17 10	Total JPY’million 942 109 (10)
				1,041 113 3 (90)
				1,067 112 4 (7)
				1,176 (160)
				1,016 72 (9)
				1,079

				2,040

				2,047

				2,028

				1,882

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Notes:

(i) As a result of the adoption of HKFRS 16 as at 1 October 2019, the Target Group’s leased assets, including furniture, fixtures and equipment, plant and machinery and motor vehicles, have been reclassified to right-of-use-assets.
(ii) As at 30 September 2017, 2018, 2019 and 31 July 2020, the carrying amounts of property, plant and equipment pledged as security for the Target Group’s borrowings were JPY1,306 million, JPY1,313 million, JPY1,322 million and JPY1,322 million, respectively (note 30).
(iii) For the years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the impairment charges related to certain owned assets of property, plant and equipment amounting to JPYNil, JPY3 million, JPY4 million and JPYNil have been recorded in “Other operating expenses” in the profit or loss, respectively. In view of the operating losses in certain cash-generating units, management considered that indicators of potential impairment of property, plant and equipment existed at the end of each reporting period. The Target Group assessed the recoverable amounts of these cash-generating units based on the higher of its fair value less costs of disposal and its value in use using discounted cash flow method. The recoverable amount was determined based on its value in use by using the discounted cash flow method for the Relevant Periods. The Target Group prepares cash flow forecasts derived from the financial budgets approved by the directors of the Target Group for the next five years with the residual period using the growth rate of 3% and discount rate of 10%. As a result, impairment losses were recognised for the Relevant Periods.

(b) Right-of-use assets

As at 1 October 2019 Additions Write-off_(note)_ Depreciation As at 31 July 2020	Leased properties JPY’million 300 64 (130) (84) 150	Furniture, fixtures and equipment JPY’million 13 1 – (4) 10	Plant and machinery JPY’million 61 – – (12) 49	Motor vehicles JPY’million 74 22 – (22) 74	Total JPY’million 448 87 (130) (122)
					283

Note: The Target Group early terminated one of the lease agreements and an amount of JPY130 million was written off.

Lease liabilities of JPY328 million are recognised with related right-of-use assets of JPY283 million as at 31 July 2020. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.

	Ten months ended
	31 July 2020
	JPY’million
Depreciation expenses on right-of-use assets	122
Interest expense on lease liabilities (included in finance costs)	3
Expenses relating to short-term lease (included in selling and
distribution expenses, and administrative expenses)	104

Details of total cash outflow for leases is set out in note 38(c).

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During the Relevant Periods, the Target Group leases various offices, warehouses and staff quarters for its operations. Lease contracts are entered into for fixed term ranged from 2 to 7 years, but may have extension and termination options as described below. Certain leases of equipment were accounted for as finance leases during the years ended 30 September 2017, 2018 and 2019 and carried interest ranged from 1.2% to 1.5%. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. In determining the lease term and assessing the length of the non-cancellable period, the Target Group applies the definition of a contract and determines the period for which the contract is enforceable.

In addition, the Target Group owns several industrial buildings where its manufacturing facilities are primarily located and office buildings. The Target Group is the registered owner of these property interests, including the underlying lands. Lump sum payments were made upfront to acquire these property interests.

19. INVESTMENT PROPERTIES

The Target Group leases out various residential flats of a residential property and a warehouse under operating leases with rentals payable monthly. The leases typically run for an initial period of 2 to 3 years, with unilateral rights to extend the lease beyond initial period held by lessees only.

The Target Group is not exposed to foreign currency risk as a result of the lease arrangements, as all leases are denominated in the respective functional currencies of Target Group entities. The lease contracts do not contain residual value guarantee and/or lessee’s option to purchase the property at the end of lease term.

Carrying amount at beginning of year/period Fair value gain_(note 9)_ Carrying amount at end of year/period	As 2017 JPY’million 296 2 298	at 30 September 2018 2019 JPY’million JPY’million 298 304 6 9 304 313	As at 31 July 2020 JPY’million 313 –
			313

The Target Group’s investment properties represent a residential property in Tokyo, Japan, and a warehouse in Nagoya, Japan. The Target Group’s investment properties were revalued on 30 September 2017, 2018 and 2019 and 31 July 2020 based on a valuation performed by Colliers International Japan KK, independent professionally qualified valuers, at JPY298 million, JPY304 million, JPY313 million and JPY313 million, respectively. Valuation for the investment properties were derived using the cost approach based on building unit cost without any significant adjustment being made to the market observable data.

At 30 September 2017, 2018 and 2019 and 31 July 2020, all the investment properties are pledged as securities for the Target Group’s bank borrowings (note 30).

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20. OTHER INTANGIBLE ASSETS

Cost At 1 October 2016 Additions At 30 September 2017 and 1 October 2017 Additions At 30 September 2018 and 1 October 2018 Additions Write-off At 30 September 2019 and 1 October 2019 Additions Transfer At 31 July 2020 Accumulated amortisation and impairment losses At 1 October 2016 Amortisation for the year Impairment losses At 30 September 2017 and 1 October 2017 Amortisation for the year Impairment losses At 30 September 2018 and 1 October 2018 Amortisation for the year Impairment losses Disposals At 30 September 2019 and 1 October 2019 Amortisation for the period Impairment losses At 31 July 2020 Carrying amount At 30 September 2017 At 30 September 2018 At 30 September 2019 At 31 July 2020	Customer relationship JPY’million 50 – 50 – 50 – – 50 – – 50 17 10 – 27 10 – 37 10 – – 47 3 – 50 23 13 3 –	Software – CIP JPY’million – – – – – 43 – 43 – (43) – – – – – – – – – – – – – – – – – 43 –	Software JPY’million 279 125 404 108 512 98 (5) 605 47 43 695 140 43 16 199 58 14 271 81 18 (5) 365 82 5 452 205 241 240 243	Total JPY’million 329 125 454 108 562 141 (5) 698 47 – 745 157 53 16 226 68 14 308 91 18 (5) 412 85 5 502 228 254 286 243

As at 30 September 2017, 2018 and 2019 and 31 July 2020, the average remaining amortisation period of the customer relationship and software are 5 years and 5 years, respectively.

The Target Group carried out reviews of the recoverable amount of non-current assets during the Relevant Periods. The review led to the recognition of impairment losses of JPY16 million, JPY14 million, JPY18 million and JPY5 million for software at 30 September 2017, 2018 and 2019 and 31 July 2020, respectively. The recoverable amount has been determined on the basis of higher of its fair value less costs to disposal and its value in use using discounted cash flow method. The discount rate used was 10% for the Relevant Periods.

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21. INVESTMENTS IN ASSOCIATES

Unlisted investments: Share of net assets Goodwill	As 2017 JPY’million 4 – 4	at 30 September 2018 2019 JPY’million JPY’million 4 4 – – 4 4	As at 31 July 2020 JPY’million 48 –
			48

Details of the Target Group’s associates are as follows:

			Percentage of ownership interest/voting	Percentage of ownership interest/voting	Percentage of ownership interest/voting
				power/profit sharing
	Place of		As at	As at	As at	As at
	incorporation/	Issued and	30 September	30 September	30 September	31 July	Principal
Name	registration	paid up capital	2017	2018	2019	2020	activities
(株)菓子蔵人	Japan	JPY10,000,000	40%	40%	40%	40%	Sales of snack and
							confectionary
							products
天津三永食品	The PRC	RMB8,880,000	–	–	–	33.3%	Sales of snack and food
有限責任公司*							processing

The company was inactive during the Relevant Periods.

The following table illustrates the aggregate financial information of the Target Group’s associates that are not individually material:

				As at
	As	at 30 September		31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Share of the associates’ profit for the year/period	*	*	*	*
Share of the associates’ total comprehensive income/(loss)	*	*	*	*
Aggregate carrying amount of the
Target Group’s investments in associates	4	4	4	48

Less than JPY1 million

22. FINANCIAL ASSETS AT FVTOCI

	As	at 30 September		As at 31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Non-current assets
Listed investments, at fair value
Equity securities	376	397	206	146

Financial assets at FVTOCI are all denominated in JPY. The fair values of listed securities are based on current bid prices.

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23. FINANCIAL ASSETS AT FVTPL

	As	at 30 September		As at 31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Non-current assets
Insurance premium	139	149	5	5

The carrying amounts of the above financial assets are mandatorily measured at FVTPL in accordance with HKFRS 9.

The investment included above represent life insurance policies to insure the directors of the Target Group’s subsidiaries. At 30 September 2017 and 2018, under the policies, the beneficiary and policy holders are Miyata and Mitsuruya with total insured sum of JPY232 million and JPY60 million, respectively. Insurance policies held by Miyata with total insured sum of JPY232 million were ceased during the year ended 30 September 2019.

24. DERIVATIVE FINANCIAL ASSETS/(LIABILITIES)

Financial assets Derivatives Foreign currency options Foreign currency swaps Analysed as: Current assets Non-current assets Financial liabilities Derivatives Interest rate swaps Foreign currency options Foreign currency swaps Analysed as: Current liabilities Non-current liabilities	As 2017 JPY’million 15 30 45 33 12 45 (1) (169) – (170) (27) (143) (170)	at 30 September 2018 2019 JPY’million JPY’million 28 15 23 2 51 17 45 15 6 2 51 17 () () (58) (37) – (*) (58) (37) (16) (34) (42) (3) (58) (37)	As at 31 July 2020 JPY’million 6 –
			6

			6 –
			6

			() (4) ()
			(4)

			(3) (1)
			(4)

The underlying currency of the interest rate swap contracts is denominated in JPY.

Less than JPY1 million

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At 30 September 2017, 2018 and 2019 and 31 July 2020, the major terms of the outstanding interest rate swaps, foreign currency options and foreign currency swap contracts to which the Target Group are committed are as follows:

Notional amount JPY’million 215 155 95 45 Notional amount Maturity Short put US$ 100,000 1/4/2021 200,000 26/1/2021 200,000 22/3/2022 200,000 9/12/2019 200,000 15/9/2020 200,000 10/6/2020 300,000 31/10/2019 300,000 31/5/2019 300,000 23/4/2020 100,000 1/4/2021 200,000 26/1/2021 200,000 22/3/2022 200,000 9/12/2019 200,000 15/9/2020 200,000 10/6/2020 300,000 31/10/2019 300,000 31/5/2019 300,000 23/4/2020 100,000 1/4/2021 200,000 26/1/2021 200,000 22/3/2022 200,000 9/12/2019 200,000 15/9/2020 200,000 10/6/2020 300,000 31/10/2019 300,000 23/4/2020 100,000 1/4/2021 200,000 26/1/2021 200,000 22/3/2022 200,000 15/9/2020	Swaps 0.73% for TIBOR + 0.3%	Swaps 0.73% for TIBOR + 0.3%

	0.73% for TIBOR + 0.3%

	0.73% for TIBOR + 0.3%

	0.73% for TIBOR + 0.3%

Notional amount Short put US$ 100,000 200,000 200,000 200,000 200,000 200,000 300,000 300,000 300,000 100,000 200,000 200,000 200,000 200,000 200,000 300,000 300,000 300,000 100,000 200,000 200,000 200,000 200,000 200,000 300,000 300,000 100,000 200,000 200,000 200,000		Exchange rate US$1: JPY99.95 US$1: JPY104.45 US$1: JPY101.19 US$1: JPY111.90 US$1: JPY112.75 US$1: JPY112.80 US$1: JPY107.90 US$1: JPY110.40 US$1: JPY114.00

		US$1: JPY99.95 US$1: JPY104.45 US$1: JPY101.19 US$1: JPY111.90 US$1: JPY112.75 US$1: JPY112.80 US$1: JPY107.90 US$1: JPY110.40 US$1: JPY114.00

		US$1: JPY99.95 US$1: JPY104.45 US$1: JPY101.19 US$1: JPY111.90 US$1: JPY112.75 US$1: JPY112.80 US$1: JPY107.90 US$1: JPY114.00

		US$1: JPY99.95 US$1: JPY104.45 US$1: JPY101.19 US$1: JPY112.75

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Foreign currency swaps As at 30 September 2017 As at 30 September 2018 As at 30 September 2019 As at 31 July 2020	Notional amount JPY 1,873,600,000 939,200,000 1,918,400,000 1,873,600,000 939,200,000 1,918,400,000 1,873,600,000 939,200,000 1,918,400,000 939,200,000	Notional amount US$ 16,000,000 8,000,000 16,000,000 16,000,000 8,000,000 16,000,000 16,000,000 8,000,000 16,000,000 8,000,000	Maturity 31/1/2020 31/7/2021 15/12/2019 31/1/2020 31/7/2021 15/12/2019 31/1/2020 31/7/2021 15/12/2019 31/7/2021	Swaps 6.74% for 7.50% 6.66% for 7.50% 6.63% for 7.50%

				6.74% for 7.50% 6.66% for 7.50% 6.63% for 7.50%

				6.74% for 7.50% 6.66% for 7.50% 6.63% for 7.50%

				6.66% for 7.50%

The fair values of the foreign currency swaps and interest rate swap contracts as at 30 September 2017, 2018, 2019 and 31 July 2020 are based on the discounted cash flow method using the applicable yield curve for the duration of the corresponding contracts.

The fair values of foreign currency option contracts as at 30 September 2017, 2018, 2019 and 31 July 2020 are based on the Black-scholes option pricing model using the applicable yield curve for the duration of the corresponding contracts.

25. INVENTORIES

Raw materials Work in progress Finished goods	As 2017 JPY’million 423 2 755 1,180	at 30 September 2018 2019 JPY’million JPY’million 291 510 1 2 1,867 1,103 2,159 1,615	As at 31 July 2020 JPY’million 260 1 824
			1,085

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26. TRADE AND BILLS RECEIVABLES

	As	at 30 September		As at 31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Trade and bills receivables	3,797	4,092	4,255	3,812

The Target Group’s trading terms with its customers are mainly on credit, except for new customers, where payment in advance is normally required. The credit period is generally for a period of one to three months for major customers. Each customer has a maximum credit limit. The Target Group seeks to maintain strict control over its outstanding receivables to minimise credit risk. Overdue balances are reviewed regularly by senior management. In view of the aforementioned and the fact that the Target Group’s trade and bills receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. The Target Group does not hold any collateral or other credit enhancements over its trade and bills receivables. Trade and bills receivables are non-interest-bearing.

An ageing analysis of the trade and bills receivables as at the end of the reporting period, based on the invoice date and net of losses allowance, is as follows:

Within 1 month 1 to 2 months 2 to 3 months Over 3 months	As 2017 JPY’million 2,211 1,394 152 40 3,797	at 30 September 2018 2019 JPY’million JPY’million 2,895 3,108 977 936 172 106 48 105 4,092 4,255	As at 31 July 2020 JPY’million 2,743 893 174 2
			3,812

As at 30 September 2017, 2018, 2019 and 31 July 2020, no trade and bills receivables were past due nor impaired.

The carrying amounts of the Target Group’s trade and bills receivables are denominated in the following currencies:

JPY RMB	As 2017 JPY’million 3,760 37 3,797	at 30 September 2018 2019 JPY’million JPY’million 4,046 4,154 46 101 4,092 4,255	As at 31 July 2020 JPY’million 3,725 87
			3,812

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27. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

The Target Group

Prepayments Deposits Other receivables Due from a related party Due from an immediate holding company Less: Prepayments, deposits and other receivables classified as non-current assets Current portion The Target Company Prepayments Current portion	As at 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 186 373 408 102 109 118 63 177 138 219 219 219 – – – 570 878 883 (321) (326) (293) 249 552 590 As at 30 September 2018 2019 JPY’million JPY’million 1 2 1 2	As at 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 186 373 408 102 109 118 63 177 138 219 219 219 – – – 570 878 883 (321) (326) (293) 249 552 590 As at 30 September 2018 2019 JPY’million JPY’million 1 2 1 2	As at 31 July 2020 JPY’million 68 236 166 – 73
			543 (68)
			475

			As at 31 July 2020 JPY’million –
			–

28. FIXED BANK DEPOSITS, PLEDGED BANK DEPOSITS AND CASH AND CASH EQUIVALENTS

The Target Group

Cash and bank balances Bank deposits with original maturity of less than three months when acquired Cash and cash equivalents Non-pledged bank deposits 3-12 months Pledged bank deposits Fixed bank deposit and pledged bank deposit	As 2017 JPY’million 731 188 919 408 460 868	at 30 September 2018 2019 JPY’million JPY’million 791 1,314 188 74 979 1,388 408 243 460 740 868 983	As at 31 July 2020 JPY’million 3,147 –
			3,147

			– –
			–

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The Target Group’s pledged bank deposits represented deposits pledged to banks to secure banking facilities granted to the Target Group as set out in note 30 to the Historical Financial Information.

The carrying amount of the fixed bank deposits, pledged bank deposits and cash and cash equivalents are denominated in the following currencies:

JPY United States dollars Euro RMB	As 2017 JPY’million 1,506 83 95 103 1,787	at 30 September 2018 2019 JPY’million JPY’million 1,472 2,184 125 65 73 – 177 122 1,847 2,371	As at 31 July 2020 JPY’million 2,927 86 – 134
			3,147

At 30 September 2017, 2018 and 2019 and 31 July 2020, the cash and bank balances of the Target Group denominated in Renminbi (“RMB”) amounted to JPY103 million, JPY177 million, JPY122 million and JPY134 million, respectively. Conversion of RMB into foreign currencies is subject to the PRC’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations.

The Target Company

Cash and bank balances	As at 30 September 2018 2019 JPY’million JPY’million 34 59 34 59	As at 31 July 2020 JPY’million 13
		13

All the cash and cash equivalents of the Target Company were denominated in JPY.

29. TRADE PAYABLES, OTHER PAYABLES AND ACCRUALS

The Target Group

Notes Trade payables (a) Other payables Accruals Due to a related Company Less: Other payables classified as non-current liabilities Current portion	As 2017 JPY’million 3,167 472 183 25 3,847 (8) 3,839	at 30 September 2018 2019 JPY’million JPY’million 3,943 4,283 494 386 213 148 14 4 4,664 4,821 (11) (50) 4,653 4,771	As at 31 July 2020 JPY’million 3,157 326 105 –
			3,588 (41)
			3,547

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The Target Company

Other payables Current portion	As at 30 September 2018 2019 JPY’million JPY’million – – – –	As at 31 July 2020 JPY’million 1,086
		1,086

Note:

(a) An ageing analysis of the trade payables as at the end of the year/period, based on the invoice date, is as follows:

Within 1 month 1 to 2 months 2 to 3 months Over 3 months	As 2017 JPY’million 2,018 825 109 215 3,167	at 30 September 2018 2019 JPY’million JPY’million 2,322 2,251 880 984 173 534 568 514 3,943 4,283	As at 31 July 2020 JPY’million 2,316 740 99 2
			3,157

(b) The carrying amounts of the Target Group’s trade payables are denominated in the following currencies:

JPY RMB	As 2017 JPY’million 3,141 26 3,167	at 30 September 2018 2019 JPY’million JPY’million 3,907 4,241 36 42 3,943 4,283	As at 31 July 2020 JPY’million 3,099 58
			3,157

30. BORROWINGS

The Target Group

Bank loan – unsecured Bank loan – secured Corporate bonds	As 2017 JPY’million 2,126 2,848 119 5,093	at 30 September 2018 2019 JPY’million JPY’million 5,102 4,481 3,583 5,465 60 – 8,745 9,946	As at 31 July 2020 JPY’million 4,074 4,593 –
			8,667

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The borrowings are repayable as follows:

Within one year More than one year, but not exceeding two years More than two years, but not exceeding five years More than five years Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months	As 2017 JPY’million 3,863 545 685 – 5,093 (3,863) 1,230	at 30 September 2018 2019 JPY’million JPY’million 6,771 7,643 643 787 903 1,231 428 285 8,745 9,946 (6,771) (7,643) 1,974 2,303	As at 31 July 2020 JPY’million 5,840 515 2,312 –
			8,667 (5,840)
			2,827

All the Target Group’s borrowings are denominated in JPY.

The average interest rates at the end of year/period were as follows:

	As at	30 September		As at 31 July
	2017	2018	2019	2020
Bank loan – unsecured	0.87%	0.80%	0.74%	1.27%
Bank loan – secured	0.87%	0.69%	0.52%	1.27%
Corporate bonds	0.4%	0.4%	–	–

At 30 September 2017, 2018, 2019 and 31 July 2020, borrowings of JPY3,631 million, JPY5,361 million, JPY7,171 million and JPYNil are arranged at fixed interest rates and expose the Target Group to fair value interest rate risk. The remaining borrowings are arranged at floating rates, thus exposing the Target Group to cash flow interest rate risk.

At 30 September 2017, 2018 and 2019 and 31 July 2020, bank borrowings of JPY2,848 million, JPY3,583 million, JPY5,465 million and JPY4,593 million are secured by a charge over the Target Group’s land and buildings (note 18), investment properties (note 19) and pledged bank deposits (note 28).

At 30 September 2017, 2018 and 2019, bank borrowings of JPY1,991 million, JPY5 million and JPY265 million are guaranteed by Mr. Osamu Miyata, the director of the Target Company. At 31 July 2020, all the bank borrowings are guaranteed by Four Seas, the ultimate controlling company of the Target Company.

The Target Company

All the borrowings are unsecured bank loans as at 30 September 2018 and 2019.

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The borrowings are repayable as follows:

Within one year More than one year, but not exceeding two years More than two years, but not exceeding five years More than five years Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months	As at 30 September 2018 2019 JPY’million JPY’million 1,200 167 143 167 429 501 428 285 2,200 1,120 (1,200) (167) 1,000 953	As at 31 July 2020 JPY’million – – – –
		– –
		–

At 30 September 2018 and 2019, all the bank borrowings were unsecured and arranged at floating rates, thus exposing the Target Company to cash flow interest rate risk.

At 30 September 2018 and 2019, the Target Company had bank borrowings of JPY1,475 million and JPY1,120 million guaranteed by Miyata, the subsidiary of the Target Company.

All the bank borrowings were fully repaid during the ten months ended 31 July 2020.

31. LEASE LIABILITIES (2017, 2018 AND 2019: FINANCE LEASE PAYABLES)

Within one year In the second to fifth years, inclusive After five years Less: Future finance charges Present value of lease obligations	As 2017 JPY’million 36 52 32 120 (6) 114	Minimum lease payments at 30 September 2018 2019 JPY’million JPY’million 38 23 69 72 53 27 160 122 (9) (8) 151 114	As at 31 July 2020 JPY’million 131 182 25
			338 (10)
			328

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Within one year In the second to fifth years, inclusive After five years Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months All the lease payments are denominated in JPY.	Present value of minimum lease payments As at 30 September As at 31 July 2017 2018 2019 2020 JPY’million JPY’million JPY’million JPY’million 35 36 21 128 52 67 70 179 27 48 23 21 114 151 114 328 (35) (36) (21) (128) 79 115 93 200	Present value of minimum lease payments As at 30 September As at 31 July 2017 2018 2019 2020 JPY’million JPY’million JPY’million JPY’million 35 36 21 128 52 67 70 179 27 48 23 21 114 151 114 328 (35) (36) (21) (128) 79 115 93 200
		328 (128)
		200

The Target Group has initially applied HKFRS 16 using the modified retrospective approach and adjusted the opening balances at 1 October 2019 to recognise lease liabilities relating to leases which were previously classified as operating leases under HKAS 17. These liabilities have been aggregated with the brought forward balances relating to leases previously classified as finance leases. Comparative information as at 30 September 2017, 2018 and 2019 have not been restated and relates solely to leases previously classified as finance leases. Further details on the impact of the transition to HKFRS 16 are set out in note 3.

32. LOANS FROM SHAREHOLDERS

The Target Group

Note Mr. Osamu Miyata (i) Mrs. Yayoi Miyata (ii) Four Seas (Japan) (iii) Current Non-current	As 2017 JPY’million – – – – As 2017 JPY’million – – –	at 30 September 2018 2019 JPY’million JPY’million 30 730 – 500 – – 30 1,230 at 30 September 2018 2019 JPY’million JPY’million – – 30 1,230 30 1,230	As at 31 July 2020 JPY’million – – 1,700
			1,700

			As at 31 July 2020 JPY’million 1,700 –
			1,700

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Note:

(i) Mr. Osamu Miyata is the shareholder of the Target Group. The loans lent to the Target Group were unsecured, charged at 0.4% per annum before 14 December 2019 and interest-free after 14 December 2019. Amount of JPY700 million is subsequently injected to the capital of the Target Company on 16 April 2020 (note 38(a)). On 10 April 2020, the loan of JPY30 million was waived.
(ii) Mrs. Yayoi Miyata, the spouse of Mr. Osamu Miyata, is the shareholder of the Target Group. The loan lent to the Target Group was unsecured, charged at 0.4% per annum before 14 December 2019 and interest-free after 14 December 2019. The loan is subsequently injected to the capital of the Target Company on 16 April 2020 (note 38(a)).
(iii) Four Seas (Japan) became the immediate parent of the Target Company since the acquisition of shares of the Target Company from Mr. Osamu Miyata and Mrs. Yayoi Miyata was completed on 16 April 2020. The loans were unsecured, interest-free and payable on 30 November 2020.

The Target Company

At 30 September 2018 and 2019 and 31 July 2020, the Target Group had long-term loans from shareholders of JPY30 million, JPY1,230 million and JPYNil respectively. All the loans from shareholders were unsecured, charged at 0.4% per annum before 14 December 2019 and interest free after 14 December 2019. Amount of JPY1,200 million is subsequently injected to the capital of the Target Company on 16 April 2020 (note 38(a)) and amount of JPY30 million was waived on 10 April 2020.

33.	PROVISIONS
		Assets retirement
		obligation
		JPY’million
		(note)
	At 1 October 2016, 30 September 2017, 1 October 2017, 30 September 2018 and 1 October 2018	32
	Unwinding of discounts	1
	At 30 September 2019, 1 October 2019 and 31 July 2020	33

Note: Assets retirement obligation is provided for the future decommissioning and restoration of leasehold land where one of the investment properties locates.

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34. RETIREMENT BENEFIT OBLIGATIONS

The Target Group has unfunded defined benefit retirement plans which cover all full-time employees and directors of the Target Group depending on their length of service, salary in the final years leading up to retirement and the retirement factor.

The Target Group’s defined benefit retirement plans are the unfunded pension plans for fulltime employees and directors upon retirement.

(a) Movements in the Target Group’s retirement benefit obligations during the year/period are as follows:

At beginning of year/period Amounts recognised in profit or loss: Current service cost Interest cost Benefits paid Past service cost Actuarial (gains)/losses At end of year/period	As 2017 JPY’million 92 9 1 (*) – (2) 100	at 30 September 2018 2019 JPY’million JPY’million 100 105 9 12 * 1 (3) (1) – (1) (1) 5 105 121	As at 31 July 2020 JPY’million 121 10 * (16) – (3)
			112

Less than JPY1 million
(b) The defined benefit retirement plans of the Target Group are measured at present value, which are determined with reference to the valuation performed by IIC Partners Co., Ltd., an independent qualified professional valuer. The valuation was carried out by Projected Unit Credit Method.
(c) Expense recognised in profit or loss is as follows:

Current service cost Interest cost Past service cost	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 9 9 12 1 * 1 – – (1) 10 9 12	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 9 10 1 * (1) – 9 10	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 9 10 1 * (1) – 9 10
			10

Less than JPY1 million

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(d) Item recognised in other comprehensive income is as follows:

	Year	ended 30 September	ended 30 September	Ten months	ended 31 July
	2017	2018	2019	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million	JPY’million
				(unaudited)
Actuarial gains/(losses)
recognised	2	1	(5)	(6)	3

(e) The principal actuarial assumptions adopted at each of the reporting periods are as follows:

	As at	30 September		As at 31 July
	2017	2018	2019	2020
	%	%	%	%
Discount rate	0.6%	0.7%	0.4%	0.6%
Future salary growth rate	2.0%	2.0%	2.0%	2.0%

Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience. These assumptions translate into an average life expectancy in years for a regular employee and a director of the Target Group retiring at age 60 and 65 respectively.

Through its defined benefit pension plans, the Target Group is exposed to a number of risks, the most significant of which are detailed below:

Risk

Description

Asset volatility

The plan liabilities are calculated using a discount rate set with reference to corporate bond yields. If plan assets underperform this yield, this will create a deficit.

Changes in bond yields

A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.

Inflation risk

The majority of the plans’ benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities. The majority of the plan assets are either unaffected by (fixed interest bonds) or loosely correlated with (equities) inflation, meaning that an increase in inflation will also increase the deficit.

Life expectancy

The majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plan liabilities.

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(f) The Target Group’s sensitivity analysis for a significant actuarial assumption as of the end of the reporting period based on reasonably possible change of the relevant actuarial assumption is as follows:

Change in discount rate	Impact of (increase)/decrease on defined benefit obligation	Impact of (increase)/decrease on defined benefit obligation	Impact of (increase)/decrease on defined benefit obligation	Impact of (increase)/decrease on defined benefit obligation
	As	at 30 September		As at 31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Increased by 0.5%	7	7	8	8
Decreased by 0.5%	(8)	(8)	(9)	(9)

The above sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur. When calculating the sensitivity of the defined benefit obligation to the significant actuarial assumption the same method (present value of the defined benefit obligation calculated with the Projected Unit Credit Method at the end of the reporting period) has been applied as when calculating the pension liability recognised within the combined statements of financial position.

The methods and types of assumptions used in preparing the sensitivity analysis did not change during the Relevant Periods.

The Target Group finances the funding requirements of the pension plan by internal resources and does not have any funding arrangements and funding policy that will affect future contributions.

The weighted average duration of the Target Group’s defined benefit obligation is 13.9 years during the Relevant

Periods.

35. DEFERRED TAX

The following are the deferred tax liabilities and assets recognised by the Target Group.

At 1 October 2016 (Charged)/credited to profit or loss for the year Charged to other comprehensive income for the year At 30 September 2017 and 1 October 2017 (Charged)/credited to profit or loss for the year (Charged)/credited to other comprehensive income for the year At 30 September 2018 and 1 October 2018	Accelerated tax depreciation JPY’million 4 3 – 7 (15) – (8)	Other intangible assets JPY’million (15) (12) – (27) (3) – (30)	Financial assets at FVTOCI JPY’million (57) – (39) (96) – (4) (100)	Doubtful debts JPY’million (8) (10) – (18) (2) – (20)	Derivatives JPY’million 292 (249) – 43 (40) – 3	Inventory provisions JPY’million 17 2 – 19 44 – 63	Retirement benefit obligations JPY’million 57 6 (1) 62 9 * 71	Tax losses JPY’million 16 – – 16 (1) – 15	Others JPY’million 11 21 – 32 (1) – 31	Total JPY’million 317 (239) (40) 38 (9) (4) 25

Less than JPY1 million

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At 1 October 2018 (Charged)/credited to profit or loss for the year Credited to other comprehensive income for the year Transfer to retained earnings At 30 September 2019 and 1 October 2019 (Charged)/credited to profit or loss for the period (Charged)/credited to other comprehensive income for the period At 31 July 2020	Accelerated tax depreciation JPY’million (8) – – – (8) 1 – (7)	Other intangible assets JPY’million (30) – – – (30) 9 – (21)	Financial assets at FVTOCI JPY’million (100) – 49 10 (41) – 23 (18)	Doubtful debts JPY’million (20) 8 – – (12) – – (12)	Derivatives JPY’million 3 5 – – 8 (9) – (1)	Inventory provisions JPY’million 63 26 – – 89 (43) – 46	Retirement benefit obligations JPY’million 71 (1) 2 – 72 (11) (1) 60	Tax losses JPY’million 15 214 – – 229 (8) – 221	Others JPY’million 31 (19) – (10) 2 (5) – (3)	Total JPY’million 25 233 51 –
										309 (66) 22
										265

The following is the analysis of the deferred tax balances for consolidated statements of financial position purposes:

Deferred tax assets Deferred tax liabilities	As 2017 JPY’million 179 (141) 38	at 30 September 2018 2019 JPY’million JPY’million 183 400 (158) (91) 25 309	As at 31 July 2020 JPY’million 327 (62)
			265

The expiration date of unused tax losses available for offset against future profits is as follows:

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028	As at 30 September 2017 2018 JPY’million JPY’million 1 1 1 1 20 16 30 30 – – – – – – – – – 2 – – 52 50	2019 JPY’million – 1 12 30 – – – – 3 644 690	As at 31 July 2020 JPY’million – 1 8 30 – – – – – 610 649

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A deferred tax asset has been recognised in respect of JPY48 million, JPY44 million, JPY668 million and JPY644 million of such losses at 30 September 2017, 2018 and 2019 and 31 July 2020, respectively.

Pursuant to the PRC Corporate Income Tax Law, a 10% withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in Mainland China. The requirement is effective from 1 January 2008 and applies to earnings after 31 December 2007. A lower withholding tax rate may be applied if there is a tax treaty between Mainland China and jurisdiction of the foreign investors. The Target Group is therefore liable for withholding taxes on dividends distributed by those subsidiaries established in Mainland China in respect of earnings generated from 1 January 2008.

36. SHARE CAPITAL

The Target Group and The Target Company

Note Authorised: At 1 October 2016, 30 September 2017 and 1 October 2017 Prior to the Target Group Reorganisation Effect of the Target Group Reorganisation (b) At 30 September 2018, 1 October 2018, 30 September 2019 and 1 October 2019 Increase of authorised capital (c) At 31 July 2020 Note Issued and fully paid: At 1 October 2016, 30 September 2017 and 1 October 2017 Prior to the Target Group Reorganisation (a) Effect of the Target Group Reorganisation (b) At 30 September 2018, 1 October 2018, 30 September 2019 and 1 October 2019 Increase of issued capital (c) At 31 July 2020	Number of shares 36,000 (35,000) 1,000 1,999,000 2,000,000 Number of shares 36,000 (35,900) 100 1,799,998 1,800,098	Amount JPY’million 50 (47) 3 600 603

Note:

(a) Prior to the completion of the Target Group Reorganisation, the share capital as represented is the aggregated of issued and fully paid share capital of Miyata Co., Ltd., a subsidiary of the Target Company, of 36,000 ordinary shares of JPY50 million.

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(b) Upon incorporation of the Target Company on 2 July 2018, 100 shares was allotted and issued to the initial subscriber at JPY30,000 each.

Pursuant to the sale and purchase agreement dated 17 July 2018, the Target Company purchased 36,000 shares at JPY60,991 each as consideration to acquire Miyata Co., Ltd., and its subsidiaries (the “Miyata Group”) from Mr. Osamu Miyata, Mrs. Yayoi Miyata and Ms. Kayono Miyata (the “Miyata Family”). The Reorganisation was completed on 31 July 2018.

After the undertaking of Target Group Reorganisation, the Target Company became ultimate holding company and the share capital as represented is the aggregated of issued and fully paid share capital of the company of 100 ordinary shares of JPY3 million.

(c) On 16 April 2020, according to the resolution of the Target Company, the Target Company further issued and allotted 1,799,998 shares at JPY667 which representing to injection of JPY600 million in share capital and JPY600 million credited to capital surplus respectively.

The Target Group’s objectives when managing capital are to safeguard the Target Group’s ability to continue as a going concern and to maximise the return to the shareholders through the optimisation of the debt and equity balance.

The Target Group sets the amount of capital in proportion to risk. The Target Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Target Group may adjust the payment of dividends, issue new shares, buy-back shares, raise new debts, redeem existing debts or sell assets to reduce debts.

The Target Group monitors capital on the basis of the debt-to-adjusted capital ratio. This ratio is calculated as net debt divided by adjusted capital. Total debt comprises borrowings (except for bank overdrafts), loans from shareholders, corporate bond and lease liabilities (30 September 2017, 2018 and 2019: finance leases payables). Adjusted capital comprises all components of equity (i.e. share capital, retained profits/(accumulated losses) and other reserves) except for non-controlling interests.

No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods. The debt-to-adjusted capital ratios at the end of the reporting period were as follows:

Interest-bearing borrowings Less: cash and cash equivalents Equity attributable to equity holders of the Target Company Gearing ratio (%)	As 2017 JPY’million 5,207 (919) 4,288 921 466%	at 30 September 2018 2019 JPY’million JPY’million 8,926 11,290 (979) (1,388) 7,947 9,902 (1,731) (3,876) N/A N/A	As at 31 July 2020 JPY’million 8,995 (3,147) 5,848 (3,273) N/A

At 30 September 2018 and 2019 and 31 July 2020, as the Target Group were in capital deficiencies, calculation of the debt-to-adjusted capital ratio became meaningless.

Breaches in meeting the financial covenants would permit the bank to immediately call borrowings. There have been no breaches in the financial covenants of any interest-bearing borrowing for the Relevant Periods.

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37. RESERVES

(a) Reserves of the Target Group

The amounts of the Target Group’s reserves and the movements therein are presented in the consolidated statements of profit or loss, consolidated statements of comprehensive income and consolidated statements of changes in equity.

(b) Nature and purpose of reserves

i) Capital surplus

Under the Companies Act (会社法) of Japan (Act No.86 of 2005) (the “Japan Companies Act”), a certain percentage of the proceeds from the issuance of share capital shall be credited to the share capital and remaining proceeds shall be credited to capital surplus (known as “additional paid-in capital”). The additional paid-in capital may be transferred back to the share capital upon approval of the general meeting of shareholders.

The capital surplus also comprises the waiver of loan from Mr. Osamu Miyata.

ii) Legal reserve

The Japan Company Law provides that a 10% dividend of retained earnings shall be appropriated as legal reserve (a component of either capital surplus or retained earnings) until an aggregate amount of additional paid-up capital and legal reserve equal 25% of share capital. The legal reserve may be used to reduce a deficit or transfer to retained earnings upon approval of the general meeting of shareholders.

iii) Merger reserve

The merger reserve represent the difference between the consideration paid and the net asset value of the acquire arising from the business combinations under common control as detail in note 2(a).

iv) Statutory reserve

The statutory reserve, which are non-distributable, is appropriated from the profit after taxation of the Target Group’s PRC subsidiaries under applicable laws and regulations in the PRC.

v) Financial assets at FVTOCI reserve

The financial assets at FVTOCI reserve comprises the cumulative net change in the fair value of financial assets at FVTOCI held at the end of the reporting period and is dealt with in accordance with the accounting policy in note 4(k) to the Historical Financial Information.

vi) Remeasurement reserve

The remeasurement reserve comprises the actuarial gains/losses of defined benefit obligation.

vii) Exchange fluctuation reserve

The exchange fluctuation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The reserve is dealt with in accordance with the accounting policies set out in note 4(d) to the Historical Financial Information.

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The Target Company

STATEMENTS OF CHANGES IN EQUITY

At 2 July 2018 (Date of incorporation) Total comprehensive loss for the period Changes in equity for the period At 30 September 2018 At 1 October 2018 Total comprehensive income for the year Changes in equity for the year At 30 September 2019 At 1 October 2019 Total comprehensive loss for the period Issuance of shares Waiver of loan from a shareholder Changes in equity for the period At 31 July 2020	Capital surplus JPY’million (note 37b(i)) – – – – – – – – – – 600 30 630 630	Retained profits/ (Accumulated losses) JPY’million – (2) (2) (2) (2) 27 27 25 25 (14) – – (14) 11	Total equity/ (Capital deficiency) JPY’million – (2) (2) (2) (2) 27 27 25 25 (14) 600 30 616 641

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38. NOTE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

(a) Major non-cash transaction

During the year ended 30 September 2017, 2018 and 2019, the Target Group had non-cash additions to property, plant and equipment amounted of JPY10 million, JPY76 million and JPYNil respectively, which were financed by finance leases.

During the ten months ended 31 July 2020, the Target Group had non-cash additions to right-of-use assets and lease liabilities of JPY87 million and JPY87 million, respectively, in respect of lease arrangements for property, plant and equipment.

During the ten months ended 31 July 2020, the Target Group issued and allotted 1,799,998 at JPY667 which representing to injection of JPY600 million in share capital and JPY600 million credited to capital surplus respectively. The issuance of shares is debt for equity swaps transaction and had non-cash additions to equity.

During the ten months ended 31 July 2020, a shareholder of the Target Group waived a loan of JPY30 million which representing to JPY30 million credited to capital surplus.

(b) Reconciliation of liabilities arising from financing activities

The table below details changes in the Target Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Target Group’s consolidated statements of cash flows as cash flows from financing activities.

At 1 October 2016 Inception Changes from financing cash flows At 30 September 2017 and 1 October 2017 Inception Changes from financing cash flows At 30 September 2018 and 1 October 2018 Changes from financing cash flows At 30 September 2019 and 1 October 2019 Effect of adoption of HKFRS 16 Restated balance at 1 October 2019 Inception Early release Changes from financing cash flows Non-cash movements_(note 38(a))_ At 31 July 2020	Finance lease payables JPY’million 156 10 (52) 114 76 (39) 151 (37) 114 (114) – – – – – –	Lease liabilities JPY’million – – – – – – – – – 499 499 87 (131) (127) – 328	Borrowings JPY’million 5,229 – (136) 5,093 – 3,652 8,745 1,201 9,946 – 9,946 – – (1,279) – 8,667	Loans from shareholders JPY’million – – – – – 30 30 1,200 1,230 – 1,230 – – 1,700 (1,230) 1,700	Total JPY’million 5,385 10 (188) 5,207 76 3,643 8,926 2,364 11,290 385 11,675 87 (131) 294 (1,230) 10,695

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(c) Total cash outflow for lease

Amounts included in the cash flow statements for leases comprise the following:

Within operating activities Within financing activities These amounts relate to the following: Lease rental paid Payments for right-of-use assets	Ten months ended 31 July 2020 JPY’million 107 127
	234

	Ten months ended 31 July 2020 JPY’million 104 130
	234

39. CAPITAL COMMITMENTS AND OPERATING LEASE ARRANGEMENTS

(a) Capital commitments contracted for at the end of the reporting period but not yet incurred are as follows:

The Target Group

		30 September		As at 31 July
	2017	2018	2019	2020
	JPY’million	JPY’million	JPY’million	JPY’million
Software	1	–	44	–

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(b) Operating lease commitments

The Target Group as lessee

At the end of the reporting period, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year In the second to fifth years, inclusive After five years	As 2017 JPY’million 133 239 1 373	at 30 September 2018 2019 JPY’million JPY’million 194 168 300 183 1 – 495 351	As at 31 July 2020 JPY’million 3 – –
			3

Operating lease payments represent rentals payable by the Target Group for certain of its premises (including offices, warehouses, carparks and staff quarters), machineries and motor vehicles. Leases are negotiated for an average term of one to six years and rentals are fixed over the lease terms and do not include contingent rentals.

The Target Group as lessor

Property rental income earned for the years ended 30 September 2017, 2018 and 2019 are JPY31 million, JPY29 million and JPY34 million, respectively. All of the Target Group’s investment properties are held for rental purposes.

At the end of the reporting period, the total future minimum lease payments under non-cancellable operating leases are receivable as follows:

Within one year In the second to fifth years, inclusive After five years	As 2017 JPY’million 16 3 – 19	at 30 September 2018 2019 JPY’million JPY’million 24 25 50 47 16 5 90 77	at 30 September 2018 2019 JPY’million JPY’million 24 25 50 47 16 5 90 77
			77

Operating leases relate to investment properties owned by the Target Group with initial lease terms of two to seven years. All operating lease contracts contain market review clauses in the event that the lessee exercises its options to renew. The lessee does not have an option to purchase the property at the expiry of the lease period.

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Minimum lease payments receivable on leases are as follows:

Within year one In the second year In the third year In the fourth year In fifth year Total The following table presents the amounts reported in profit or loss: Lease income on operating leases	As at 31 July 2020 JPY’million 21 13 11 11 7
	63

	Ten months ended 31 July 2020 JPY’million 24

40. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions and balances detailed elsewhere in the Historical Financial Information, the Target Group had the following material transactions with its related parties during the year/period:

			Year	ended 30 September	ended 30 September		Ten months	Ten months	ended 31 July
Related party	Type of transactions		2017	2018		2019		2019	2020
		Note	JPY’million	JPY’million	JPY’million		JPY’million		JPY’million
							(unaudited)
鹿兒島商事株式會社	– Sales of goods	(a)	–	–		–		–	18
Four Seas Mercantile	– Purchase of goods
Limited		(a), (f)	–	–		–		–	7
Mr. Osamu Miyata	– Interest expense	(c)	–	–		2		2	1
Mrs. Yayoi Miyata	– Interest expense	(d)	–	–		2		2	–

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(b) Outstanding balances with related parties during the year/period:

				As at 30 September		As at 31 July
Related party	Type of transactions		2017	2018	2019	2020
		Note	JPY’million	JPY’million	JPY’million	JPY’million
Four Seas (Japan)	– Loans from shareholder	(b), (f)	–	–	–	1,700
	– Expense paid on behalf	(b)	–	–	–	73
Mr. Osamu Miyata	– Loans from shareholder	(c)	–	30	730	–
Mrs. Yayoi Miyata	– Loan from shareholder	(d)	–	–	500	–
Kusama Co., Ltd.	– Other receivable	(e)	219	219	219	–
	– Consideration for acquisition of
	business right		25	14	4	–

Note:

(a) Subsidiary of Four Seas.
(b) Immediate parent of the Target Company. The maximum balance during the ten months ended 31 July 2020 is JPY1,700 million.
(c) Director and shareholder of the Target Group. The maximum balance during the year ended 30 September 2018 and 2019 and the ten months ended 31 July 2020 is JPY30 million, JPY730 million and JPY730 million respectively.
(d) Director and shareholder of the Target Group and spouse of Mr. Osamu Miyata. The maximum balance during the year ended 30 September 2019 and the ten months ended 31 July 2020 is JPY500 million and JPY500 million respectively.
(e) A director of the Target Group, Mr. Hisakazu Kusama, has significant influence over the related company.
(f) The Target Company and its subsidiaries became the subsidiaries of Four Seas since 16 April 2020 after the completion of share transfer.

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Short term employee benefits Pension scheme contributions	Year ended 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 114 145 121 4 5 5 118 150 126	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 107 38 5 – 112 38	Ten months ended 31 July 2019 2020 JPY’million JPY’million (unaudited) 107 38 5 – 112 38
			38

Further details of directors’ emoluments are included in note 15 to the Historical Financial Information.

41. COMPARATIVE FIGURES

As further explained in note 3 to the Historical Financial Information, the Target Group adopted HKFRS 16 on 1 October 2019 using the modified retrospective approach. Under this approach, the comparative amounts in the Historical Financial Information were not restated and continued to be reported under the requirements of the previous standard, HKAS 17, and related interpretations.

42. EVENT AFTER THE RELEVANT PERIODS

After the COVID-19 outbreak in early 2020, a series of precautionary and control measures have been and continued to be implemented across the globe. The Target Group is paying close attention to the development of, and the disruption to business and economic activities caused by, the COVID-19 outbreak and evaluate its impact on the financial position, cash flows and operating results of the Target Group. Given the dynamic nature of the COVID-19 outbreak, it is not practicable to provide a reasonable estimate of its impact on the Target Group’s financial position, cash flows and operating results at the date on which these Historical Financial Information are authorised for issue.

On 24 November, 2020, the Target Company was merged to its wholly owned subsidiary, Miyata (the “Merger”). Miyata, being the surviving company after the Merger, succeeded all the assets, liabilities, rights and obligations of the Target Company which ceased to exist after the Merger becoming effective. On the day of the Merger, Miyata issued its own shares to each of the shareholders of the Target Company whose name appeared in the shareholders’ register of the Target Company on the day immediately before the Merger, with the ratio of one share of Miyata for one share of the Target Company. Consequently, the Purchaser was issued 1,260,069 shares of Miyata representing 70% of its share capital and equivalent to the shareholding percentage of the Purchaser in the Target Company before the Merger. Since Miyata was a wholly owned subsidiary of the Target Company before the Merger and succeeded all the assets, liabilities, rights and obligations of the Target Company, the Merger did not have any financial effect to the Target Group as a whole.

43. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the Target Group have been prepared in respect of any period subsequent to 31 July 2020 and up to the date of approval of the Historical Financial Information.

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MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

Set out below is the management discussion and analysis on the Target Group for the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020 (the “ Relevant Periods ”). The following financial information is based on the accountants’ report of the Target Group as set out in Appendix II to this circular.

BUSINESS REVIEW

The Target Company was a company incorporated in Japan and was a special purpose vehicle established for the purpose of holding the investment in its principal subsidiary, Miyata Co., Ltd. (宮田株式会社) (i.e. MYC) and other subsidiaries. Established in 1955, MYC is a renowned snack food and confectionery distributor in Japan specialised in the wholesaling and distribution of confectionery. In about 2008, MYC expanded its business to nut products. MYC currently has seven sales offices and eight distribution centers in Japan. MYC also sells its own brand-named products produced by other OEM manufacturers. In 2014, Tianjin Miyata was established in Tianjin, the PRC, the principal activity of which is the procurement of OEM products in the PRC for the related companies of MYC’s customers in the PRC market.

MYC has a strong sales and distribution network and broad customer base in Japan. Its customers span from established nationwide supermarket chains and convenience stores (including but not limited to AEON, Daiso 100-yen shop, Muji), regional retailers, wholesalers and exporters/overseas customers. On the supply side, MYC has a stronghold of over 600 suppliers for a vast variety of confectionery and nuts products. To ensure prime quality of its products, MYC not only procures products locally in Japan, but also from overseas including United States and the PRC. Further, MYC also procures finished products from overseas suppliers including from Malaysia, South Korea, Turkey, France and Ukraine.

The Target Group has only one reportable operating segment during the Relevant Periods. The Target Group derives most of its revenue from sales of snack foods and confectionery in Japan.

FINANCIAL REVIEW

Revenue

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group generated revenue of approximately JPY34 billion, JPY37 billion, JPY39 billion and JPY29 billion, respectively.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

The increase in the Target Group’s revenue during the three years ended 30 September 2019 followed the Target Group’s primary objective of and efforts on revenue growth.

Nevertheless, due to the impact of COVID-19 which adversely affected the consumer market of Japan and the adoption of a more selective strategy in terms of customers and products, the Target Group’s revenue for the ten months ended 31 July 2020 decreased as compared to that for the ten months ended 31 July 2019.

Cost of sales

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s cost of sales was approximately JPY30 billion, JPY33 billion, JPY35 billion and JPY26 billion, respectively.

Gross profit margin

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s gross profit was approximately JPY4 billion, JPY4 billion, JPY4 billion and JPY3 billion, respectively. The Target Group’s gross profit margin was approximately 11%, 11%, 10% and 11%, respectively during the same periods.

The Target Group’s gross profit margin was relatively stable during the Relevant Periods.

Other income and gains/(losses)

The Target Group’s other income and gains/(losses) during the Relevant Periods included interest income, service income, commission income, dividend income, rental income, fair value gains/(losses), net foreign exchange gains/(losses) and others.

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s other income and gains/(losses) was approximately JPY872 million, JPY232 million, JPY68 million and JPY87 million, respectively.

The substantial amount of other income and gains recorded by the Target Group for the year ended 30 September 2017 was mainly attributable to fair value gains on financial assets at FVTPL and derivative financial assets of approximately JPY703 million.

Selling and distribution expenses

The Target Group’s selling and distribution expenses during the Relevant Periods mainly consisted of transportation and packaging expenses, payroll expenses, rental and warehousing expenses.

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s selling and distribution expenses was approximately JPY3 billion, JPY3 billion, JPY3 billion and JPY2 billion, respectively.

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APPENDIX III

Administrative expenses

The Target Group’s administrative expenses during the Relevant Periods mainly consisted of payroll expenses and amortization of computer software system.

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s administrative expenses was approximately JPY990 million, JPY1,006 million, JPY1,058 million and JPY723 million, respectively.

Other operating expenses

The Target Group’s other operating expenses during the Relevant Periods mainly consisted of the fraud losses represented the payments arising from the fictitious transactions to the customers of Nuts Business during the Relevant Periods. The management of the Target Group expected such overpayments were irrecoverable.

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s other operating expenses was approximately JPY118 million, JPY446 million, JPY1,792 million and JPY54 million, respectively.

Finance costs

The Target Group’s finance costs during the Relevant Periods mainly consisted of interest expenses on bank borrowings.

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s finance costs was approximately JPY55 million, JPY56 million, JPY71 million and JPY60 million, respectively.

Income tax expense/(credit)

For each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, the Target Group’s income tax expense/(credit) was approximately JPY528 million, JPY313 million, JPY(204) million and JPY92 million, respectively.

The Target Group is subject to national corporate income tax, inhabitants tax and enterprise tax in Japan, which, in aggregate, resulted in effective statutory income tax rates of approximately 34.48%, 34.48%, 33.76% and 34.26% for the years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, respectively.

PRC Enterprise Income Tax has been provided at a rate of 25% for the Relevant Periods.

III-3

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX III

Profit/(Loss) for the year/period

As a result of the discussion above, the Target Group recorded profit/(loss) of approximately JPY327 million, JPY(497) million, JPY(2,032) million and JPY24 million for each of the three years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020, respectively. The profit for the year ended 30 September 2017 was mainly attributable to the other income derived from fair value gains on financial assets at FVTPL in the amount of approximately JPY703 million. The loss for the year ended 30 September 2019 was mainly attributable to the fraud loss represented the payments in the amount of JPY1,761 million arising from the fictitious transactions to the customers of Nuts Business.

Financial Position

As at 30 September 2017

The non-current assets and current assets of the Target Group as at 30 September 2017 were approximately JPY3,456 million and JPY7,046 million respectively. The Target Group’s non-current assets as at 30 September 2017 mainly comprised property, plant and equipment, and the Target Group’s current assets as at 30 September 2017 mainly comprised trade and bills receivables. The non-current liabilities and current liabilities of the Target Group as at 30 September 2017 were approximately JPY1,592 million and JPY7,939 million respectively. The Target Group’s non-current liabilities as at 30 September 2017 mainly comprised borrowings, and the Target Group’s current liabilities as at 30 September 2017 mainly comprised borrowings, trade payables, other payables and accruals.

As at 30 September 2018

The non-current assets and current assets of the Target Group as at 30 September 2018 were approximately JPY3,512 million and JPY8,695 million respectively. The Target Group’s non-current assets as at 30 September 2018 mainly comprised property, plant and equipment, and the Target Group’s current assets as at 30 September 2018 mainly comprised trade and bills receivables. The non-current liabilities and current liabilities of the Target Group as at 30 September 2018 were approximately JPY2,309 million and JPY11,626 million respectively. The Target Group’s non-current liabilities as at 30 September 2018 mainly comprised borrowings, and the Target Group’s current liabilities as at 30 September 2018 mainly comprised borrowings, trade payables, other payables and accruals.

As at 30 September 2019

The non-current assets and current assets of the Target Group as at 30 September 2019 were approximately JPY3,446 million and JPY8,986 million respectively. The Target Group’s non-current assets as at 30 September 2019 mainly comprised property, plant and equipment, and the Target Group’s current assets as at 30 September 2019 mainly comprised trade and bills receivables. The non-current liabilities and current liabilities of the Target Group as at 30 September 2019 were approximately JPY3,833 million and JPY12,472 million respectively. The Target Group’s non-current liabilities as at 30 September 2019 mainly comprised borrowings and loans from shareholders, and the Target Group’s current liabilities as at 30 September 2019 mainly comprised borrowings, trade payables, other payables and accruals.

III-4

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX III

As at 31 July 2020

The non-current assets and current assets of the Target Group as at 31 July 2020 were approximately JPY3,253 million and JPY8,525 million respectively. The Target Group’s non-current assets as at 31 July 2020 mainly comprised property, plant and equipment, and the Target Group’s current assets as at 31 July 2020 mainly comprised trade and bills receivables and cash and cash equivalents. The non-current liabilities and current liabilities of the Target Group as at 31 July 2020 were approximately JPY3,214 million and JPY11,234 million respectively. The Target Group’s non-current liabilities as at 31 July 2020 mainly comprised borrowings, and the Target Group’s current liabilities as at 31 July 2020 mainly comprised borrowings, trade payables, other payables and accruals and loans from shareholders.

Liquidity and financial resources

As at 30 September 2017, 2018 and 2019 and 31 July 2020, the Target Group had net current liabilities of approximately JPY893 million, JPY2,931 million, JPY3,486 million and JPY2,709 million respectively. The increase in net current liabilities as at 30 September 2018 as compared with net current liabilities as at 30 September 2017 was primarily due to increase in bank borrowings. The increase in net current liabilities as at 30 September 2019 as compared with net current liabilities as at 30 September 2018 was primarily due to increase in bank borrowings. The decrease in net current liabilities as at 31 July 2020 as compared with current liabilities as at 30 September 2019 mainly due to the decrease in borrowings, trade payables, other payables and accruals.

The Target Group recorded net cash outflow of approximately JPY136 million for the year ended 30 September 2017, mainly due to the net cash generated from the operating activities offset by the net cash used in investing activities and financing activities. The Target Group recorded net cash inflow of approximately JPY67 million for the year ended 30 September 2018, mainly due to the net cash used in the operating activities and investing activities offset by net cash inflow generated from the financing activities contributed by the borrowings raised. The Target Group recorded net cash inflow of approximately JPY425 million for the year ended 30 September 2019, mainly due to the net cash used in operating activities and investing activities offset by the net cash generated from financing activities mainly contributed by borrowings raised and increase in loan from shareholders. The Target Group recorded net cash inflow of approximately JPY1,763 million for the ten months ended 31 July 2020, mainly due to the loans advanced by Four Seas (Japan) Holdings Limited to the Target Group with the total amount of JPY1,700 million during the period.

At 30 September 2017, 2018, 2019 and 31 July 2020, borrowings of approximately JPY3,631 million, JPY5,361 million, JPY7,171 million and nil were arranged at fixed interest rates and exposed the Target Group to fair value interest rate risk. The remaining borrowings are arranged at floating rates, thus exposed the Target Group to cash flow interest rate risk.

At 30 September 2017, 2018 and 2019 and 31 July 2020, bank borrowings of approximately JPY2,848 million, JPY3,583 million, JPY5,465 million and JPY4,593 million are secured by a charge over the Target Group’s land and buildings, investment properties and pledged bank deposits.

III-5

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

At 30 September 2017, 2018 and 2019, bank borrowings of approximately JPY1,991 million, JPY5 million and JPY265 million were guaranteed by Mr. Osamu Miyata, the director of the Target Company. At 31 July 2020, all the bank borrowings are guaranteed by Four Seas Mercantile Holdings Limited, the ultimate controlling company of the Target Company.

The average interest rates at the end of year/period were as follows:

	As at	30 September		As at 31 July
	2017	2018	2019	2020
Bank loan – unsecured	0.87%	0.80%	0.74%	1.27%
Bank loan – secured	0.87%	0.69%	0.52%	1.27%
Corporate bonds	0.4%	0.4%	–	–

The total equity/(capital deficiency) of the Target Group as at 30 September 2017, 2018 and 2019 and 31 July 2020 was approximately JPY971 million, JPY(1,728) million, JPY(3,873) million and JPY(2,670) million respectively.

A syndicated bank loan was granted to the Target Group which spans from 31 July 2020 to 31 July 2023 with total committed banking facilities of JPY8,723 million to cover its funding requirement.

Gearing ratio

The Target Group monitors capital on the basis of the debt-to-adjusted capital ratio. This gearing ratio is calculated as net debt divided by adjusted capital. The Target Group’s gearing ratio was approximately 466% as at 30 September 2017. At 30 September 2018 and 2019 and 31 July 2020, as the Target Group was in capital deficiencies, calculation of the debt-to-adjusted capital ratio became meaningless.

Capital commitments

Save as and except for approximately JPY1 million in respect of software as at 30 September 2017 and approximately JPY44 million in respect of software as at 30 September 2019, the Target Group did not have any significant capital commitments as at 30 September 2017, 2018 and 2019 and 31 July 2020.

III-6

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX III

Operating lease commitments

The Target Group as lessee

At the end of the reporting period, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within one year In the second to fifth years, inclusive After five years	As 2017 JPY’million 133 239 1 373	at 30 September 2018 2019 JPY’million JPY’million 194 168 300 183 1 – 495 351	As at 31 July 2020 JPY’million 3 – –
			3

The Target Group as lessor

Property rental income earned for the years ended 30 September 2017, 2018 and 2019 are approximately JPY31 million, JPY29 million and JPY34 million, respectively. All of the Target Group’s investment properties are held for rental purposes.

At the end of the reporting period, the total future minimum lease payments under non-cancellable operating leases are receivable as follows:

Within one year In the second to fifth years, inclusive After five years	As at 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 16 24 25 3 50 47 – 16 5 19 90 77	As at 30 September 2017 2018 2019 JPY’million JPY’million JPY’million 16 24 25 3 50 47 – 16 5 19 90 77
		77

III-7

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX III

Contingent liabilities

The Target Group did not have any significant contingent liabilities as at 30 September 2017, 2018 and 2019 and 31 July 2020.

Financial risk management

During the Relevant Periods, the Target Group’s activities expose it to a variety of financial risks: foreign currency risk, price risk, credit risk, liquidity risk and interest rate risk. The Target Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Target Group’s financial performance. For details of the exposure to such risks and the relevant risk management policies and practices adopted by the Target Group, please refer to note 6 of the Historical Financial Information to the Accountants’ Report of the Target Group as set out in Appendix II to this circular.

Significant investments

The Target Group’s investment properties represent a residential property in Tokyo, Japan, and a warehouse in Nagoya, Japan. The Target Group’s investment properties were revalued on 30 September 2017, 2018 and 2019 and 31 July 2020 based on a valuation performed by Colliers International Japan KK, independent professionally qualified valuers, at approximately JPY298 million, JPY304 million, JPY313 million and JPY313 million, respectively.

Save as above, for the years ended 30 September 2017, 2018 and 2019 and the ten months 31 July 2020, the Target Group did not have any significant investments.

Employees and remuneration policies

As at 30 September 2017, 2018 and 2019 and 31 July 2020, the Target Group had a total of 143, 143, 145 and 143 full time employees respectively. The total employee benefit expenses were approximately JPY872 million, JPY928 million, JPY939 million and JPY705 million, respectively, for the years ended 30 September 2017, 2018 and 2019 and the ten months ended 31 July 2020.

The Target Group adopts a remuneration policy with equal emphasis on the market competitiveness of the remuneration and fairness among the employees.

III-8

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The unaudited pro forma financial information (the “ Unaudited Pro Forma Financial Information ”) of the Company and its subsidiaries and the Target Group, comprising the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as at 31 March 2020 and related notes, has been prepared by the Directors in accordance with Rule 4.29 of the Listing Rules and is solely prepared for the purpose to illustrate the effect of the Acquisition to the Group as if the Acquisition has been completed on 31 March 2020.

The Unaudited Pro Forma Financial Information is prepared based on (i) the audited consolidated statement of financial position of the Group as at 31 March 2020 which has been extracted from the annual report of the Group for the year ended 31 March 2020 (“ FY2020 Annual Report ”); and (ii) the audited consolidated statement of financial position of the Target Group as at 31 July 2020 which have been extracted from the financial information of the Target Group thereon set out in Appendix II to this circular, after making certain pro forma adjustments that are (i) directly attributable to the Acquisition; and (ii) factually supportable, as further described in the accompanying notes.

The Unaudited Pro Forma Financial Information is prepared based on a number of assumptions, estimates, uncertainties and currently available information, and is provided for illustrative purposes only. As a result of the hypothetical nature of the Unaudited Forma Financial Information, it may not give a true picture of the actual financial position of the Group that would have been attained had the proposed Acquisition been completed on 31 March 2020. Furthermore, the Unaudited Pro Forma Financial Information does not purport to predict the Enlarged Group’s future financial position. The Unaudited Pro Forma Financial Information should be read in conjunction with the financial information of the Group, as referred to (including but not limited to the FY2020 Annual Report) and incorporated by reference in Appendix I to this circular, and that of the Target Group, as set out in Appendix II to this circular, and other financial information included elsewhere in this circular.

IV-1

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(continued)

The Unaudited Pro Forma Financial Information

Non-current assets Property, plant and equipment Investment properties Goodwill Other intangible assets Investment in associates Financial assets at fair value through other comprehensive income Financial assets at fair value through profit or loss Prepayments, deposits and other receivables Deferred tax assets Total non-current assets Current assets Inventories Trade and bills receivables Prepayments, deposits and other receivables Tax recoverable Financial assets at fair value through profit or loss Cash and cash equivalents Total current assets	The Group as at 31 March 2020 HK$’000 (note 1) 937,966 19,037 42,858 321 155,107 1 33,340 28,426 7,996 1,225,052 345,511 528,382 244,495 2,001 41,354 506,981 1,668,724	The Target Group as at 31 July 2020 JPY’million (note 2) 2,165 313 – 243 48 146 5 68 265 3,253 1,085 3,812 475 – 6 3,147 8,525	The Target Group as at 31 July 2020 HK$’000 (note 2) 156,010 22,555 – 17,511 3,459 10,521 360 4,900 19,096 234,412 78,185 274,693 34,229 – 432 226,773 614,312	Pro forma adjustments HK$’000 HK$’000 HK$’000 (note 3) (note 4) (note 5) 48,701 – – – – – 85,744 – – 49,637 – – – – – (1) – – – – – – – – – – – 184,081 – – – – – – – – – (122,502) – – – – – – – – – – – (122,502) –	Unaudited pro forma of the Enlarged Group HK$’000 1,142,677 41,592 128,602 67,469 158,566 10,521 33,700 33,326 27,092
					1,643,545
					423,696 803,075 156,222 2,001 41,786 733,754
					2,160,534

IV-2

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(continued)

The Unaudited Pro Forma Financial Information (continued)

Current liabilities Trade payables, other payables and accruals Interest-bearing bank borrowings Loan from a shareholder Derivative financial liabilities Lease liabilities Tax payable Total current liabilities Net current assets/ (liabilities) Total assets less current liabilities Non-current liabilities Interest-bearing bank borrowings Derivative financial liabilities Provisions Defined benefit liabilities Lease liabilities Deferred tax liabilities Other payables Total non-current liabilities Net assets/(liabilities)	The Group as at 31 March 2020 HK$’000 (note 1) 330,391 699,424 – – 133,074 7,543 1,170,432 498,292 1,723,344 60,000 – – – 302,063 16,083 – 378,146 1,345,198	The Target Group as at 31 July 2020 JPY’million (note 2) 3,547 5,840 1,700 3 128 16 11,234 (2,709) 544 2,827 1 33 112 200 – 41 3,214 (2,670)	The Target Group as at 31 July 2020 HK$’000 (note 2) 255,597 420,830 122,502 216 9,224 1,153 809,522 (195,210) 39,202 203,714 72 2,378 8,071 14,412 – 2,954 231,601 (192,399)	Pro forma adjustments HK$’000 HK$’000 HK$’000 (note 3) (note 4) (note 5) – – 27,990 – – – – (122,502) – – – – – – – – – – – (122,502) 27,990 – – (27,990) 184,081 – (27,990) – – – – – – – – – – – – – – – 30,024 – – – – – 30,024 – – 154,057 – (27,990)	Unaudited pro forma of the Enlarged Group HK$’000 613,978 1,120,254 – 216 142,298 8,696
					1,885,442
					275,092
					1,918,637
					263,714 72 2,378 8,071 316,475 46,107 2,954
					639,771
					1,278,866

IV-3

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(continued)

The Unaudited Pro Forma Financial Information (continued)

Notes:

The figures are extracted from the audited consolidated statement of financial position of the Group as set out in the published annual report of the Company for the year ended 31 March 2020.
The amounts represent the audited consolidated statement of financial position as at 31 July 2020 of the Target Group which is extracted from the financial information of the Target Group thereon set out in Appendix II to this circular.

For the purpose of this Unaudited Pro Forma Financial Information, the balances stated in Japanese Yen are converted into Hong Kong dollars at the rate of HK$7.206 to JPY100. No representation is made that Japanese Yen amounts have been, could have been or may be converted into Hong Kong dollars, or vice versa, at that rate.

The Company originally indirectly owned 15% equity interest in the Target Company and recognised as financial assets at fair value through other comprehensive income as at 31 March 2020 before the Acquisition. Upon completion of the Acquisition, the Group owned 70% equity interest in the Target Company and the Target Company became an indirect non-wholly owned subsidiary of the Company. The identifiable assets and liabilities of the Target Group are accounted for in the consolidated financial statements of the Enlarged Group at their fair value under acquisition method of accounting, in accordance with Hong Kong Financial Reporting Standard 3 (Revised) “Business Combinations” (“HKFRS 3”). The measurement of goodwill, identifiable assets acquired and liabilities assumed at the date of completion of the Acquisition is subject to finalization within one year from such date in accordance with HKFRS 3. Any adjustment to the provisional amounts, if necessary, will be reflected in the upcoming consolidated financial statements of the Group.

If the Acquisition was completed on 31 March 2020, the total consideration for the Acquisition would amount to HK$1,000 according to the Share Sale Agreement and the Supplemental Agreement. Assuming that the Acquisition had been completed on 31 March 2020, the accounting impact of the Acquisition on the Group’s assets and liabilities as at 31 March 2020 would be as follows:

Consideration
Provisional fair value of identifiable assets and liabilities acquired
Property, plant and equipment
Investment properties
Investments in associates
Financial assets at fair value through other comprehensive income
Financial assets at fair value through profit or loss
Prepayments, deposits and other receivables
Deferred tax assets
Other intangible assets
Inventories
Trade receivables
Pledged bank deposits
Cash and cash equivalents
Trade payables, other payables and accruals
Interest-bearing bank borrowings
Lease liabilities
Loans from a shareholder
Financial liabilities at fair value through profit or loss
Tax payable
Defined benefit obligations
Deferred tax liabilities
Net identifiable liabilities
Non-controlling interests
Goodwill

Provisional fair value
Unaudited
Unaudited
JPY’million
HK$’000
0.011
1
2,886
207,986
315
22,699
49
3,509
143
10,293
16
1,168
553
39,827
272
19,574
953
68,687
1,140
82,133
4,679
337,151
762
54,939
2,710
195,235
(4,445)
(320,282)
(9,100)
(655,755)
(354)
(25,543)
(1,700)
(122,502)
(8)
(601)
(38)
(2,724)
(115)
(8,261)
(417)
(30,024)
(1,699)
(122,491)
510
36,748
(1,189)
(85,743)
1,189
85,744

IV-4

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

The adjustment represents:

(a) Deemed disposal of carrying amount of HK$1,000 of the 15% equity interest in the financial assets at fair value through other comprehensive income;
(b) Fair value adjustment to property, plant and equipment of JPY411 million (equivalent to HK$29,651,000) and re-classification of other intangible assets to property, plant and equipment of JPY264 million (equivalent to HK$19,050,000) in line with the classification policy of the Group, giving rise to total adjustments of JPY675 million (equivalent to HK$48,701,000) to property, plant and equipment;
(c) Customers relationship of JPY953 million (equivalent to HK$68,687,000) recognised as other intangible assets by the Group relating to the acquisition of the Target Group, together with the re-classification of other intangible assets to property, plant and equipment of JPY264 million (equivalent to HK$19,050,000) as mention in note 3 (b) above, giving rise to a net adjustment of JPY689 million (equivalent to HK$49,637,000) to other intangible assets;
(d) Deferred tax liabilities of JPY417 million (equivalent to HK$30,024,000) relating to the taxable temporary differences between the provisional fair value of the identifiable assets and liabilities acquired and their carrying amounts.
The adjustment represents the elimination between the loan receivables included in prepayments, deposits and other receivables of the Group and loan payables included in loans from a shareholder of the Target Group amounting to approximately HK$122,502,000, being the aggregate amount of the First Loan and the Second Loan.
The adjustment represents the legal and professional fee related to the Acquisition of approximately HK$27,990,000 charged/chargeable to the profit or loss. The amounts are assumed to be paid after the release of this circular.
No adjustments have been made to adjust any trading results or other transactions of the Enlarged Group subsequent to 31 March 2020.
The Unaudited Pro Forma Financial Information is prepared for illustrative purpose only and is based on the audited consolidated statement of financial position of the Group as at 31 March 2020 and the audited consolidated statement of financial position of the Target Group as at 31 July 2020 with certain pro forma adjustments. The Group has published its 2020-21 interim report that includes the unaudited condensed consolidated financial statements of the Group for the 6 months ended 30 September 2020 which consolidated the results, assets and liabilities of the Target Group. The Group’s 2020-21 interim report could be found in the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (www.fourseasgroup.com.hk):

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1218/2020121800404.pdf

IV-5

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of a report from the Company’s reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this circular.

==> picture [87 x 70] intentionally omitted <==

Ernst & Young 22/F, CITIC Tower 1 Tim Mei Avenue Central, Hong Kong

To the Directors of Four Seas Mercantile Holdings Limited

We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of Four Seas Mercantile Holdings Limited (the “ Company ”) and its subsidiaries (hereinafter collectively referred to as the “ Group ”) prepared by the directors of the Company (the “ Directors ”) for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma consolidated statement of assets and liabilities as at 31 March 2020 and related notes as set out in Appendix IV to the circular dated 20 January 2021 (the “ Circular ”) issued by the Company (the “ Unaudited Pro Forma Financial Information ”) in connection with the acquisition of the additional 55% equity interest in Miyata Holding Co., Ltd. and its subsidiaries (collectively, the “ Target Group ”). Upon the completion of the acquisition, the Company effectively holds 70% equity interest in the Target Group. The applicable criteria on the basis of which the Directors have compiled the Unaudited Pro Forma Financial Information are described in Appendix IV to the Circular.

The Unaudited Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of the acquisition of the Target Group on the Group’s assets and liabilities as at 31 March 2020 as if the acquisition of the Target Group had taken place on 31 March 2020. As part of this process, information about the Group’s financial position has been extracted by the Directors from the Group’s financial statements for the year ended 31 March 2020, on which an auditor’s report has been published.

Directors’ responsibility for the Unaudited Pro Forma Financial Information

The Directors are responsible for compiling the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Listing Rules ”) and with reference to Accounting Guideline (“ AG ”) 7 Preparation of Pro Forma Financial Information for Inclusion in Circulars issued by the Hong Kong Institute of Certified Public Accountants (the “ HKICPA ”).

IV-6

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

Our firm applies Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements , and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

Reporting Accountants’ responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA.

For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Unaudited Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Unaudited Pro Forma Financial Information.

The purpose of the Unaudited Pro Forma Financial Information included in the Circular is solely to illustrate the impact of the acquisition of the Target Group on unadjusted financial information of the Group as if the acquisition of the Target Group had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the acquisition of the Target Group would have been as presented.

IV-7

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A reasonable assurance engagement to report on whether the Unaudited Pro Forma Financial Information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the Unaudited Pro Forma Financial Information provide a reasonable basis for presenting the significant effects directly attributable to the acquisition of the Target Group, and to obtain sufficient appropriate evidence about whether:

the related pro forma adjustments give appropriate effect to those criteria; and
the Unaudited Pro Forma Financial Information reflects the proper application of those adjustments to the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting accountants’ understanding of the nature of the Group, the acquisition of the Target Group in respect of which the Unaudited Pro Forma Financial Information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the Unaudited Pro Forma Financial Information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

Ernst & Young

Certified Public Accountants Hong Kong

20 January 2021

IV-8

GENERAL INFORMATION

APPENDIX V

1. RESPONSIBILITY STATEMENTS

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 respect to the Group. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Directors

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the Shares or, underlying shares or debenture of the Company or any of its associated corporations (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 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 maintained by the Company referred to therein, or (iii) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:

Long positions in the ordinary shares of the Company

			Approximate
			percentage of
		Number of	the Company’s
		ordinary shares	total issued
Name of directors	Capacity	held/interested	shares
Tai Tak Fung, Stephen_(Note 1)_	Interest of controlled	259,478,000	67.52%
	corporations
Wu Mei Yung, Quinly_(Note 2)_	Interest of spouse and	259,478,000	67.52%
	interest of controlled
	corporations

Note 1: Such shares comprise:

(a) 70,000,000 shares, representing approximately 18.22% of the Company’s total issued shares, are held by Careful Guide Limited (“ CGL ”) which is wholly owned by Dr. Tai;

(b) 74,250,000 shares, representing approximately 19.32% of the Company’s total issued shares, are held by Special Access Limited (“ SAL ”) which is wholly owned by Dr. Tai, and his spouse, Dr. Wu. Accordingly, Dr. Tai and Dr. Wu are deemed to be interested in the 74,250,000 shares of the Company held by SAL; and

V-1

GENERAL INFORMATION

APPENDIX V

(c) 115,228,000 shares, representing approximately 29.98% of the Company’s total issued shares, are held by Capital Season Investments Limited (“ CSI ”). CSI is wholly owned by Advance Finance Investments Limited (“ AFI ”) which is a wholly-owned subsidiary of Hong Kong Food Investment Holdings Limited (“ HKFH ”). Accordingly, HKFH is deemed to be interested in the 115,228,000 shares of the Company. HKFH is owned as to 0.07% by the Company, 2.59% by Dr. Tai, 20.38% by SAL, and 11.91% by CGL. Dr. Wu, as the spouse of Dr. Tai, is deemed to be interested in the shares of Dr. Tai and vice versa. Therefore, Dr. Tai and Dr. Wu are considered to have deemed interests in the 115,228,000 shares of the Company held by CSI by virtue of their interests in HKFH.
Note 2: As mentioned in note 1(b) above, Dr. Wu and her spouse, Dr. Tai, are deemed to be interested in the 74,250,000 shares of the Company held by SAL. In addition to the deemed interests of 115,228,000 shares in the Company’s total issued shares as stated in note 1(c) above, Dr. Wu is also deemed to be interested in the 70,000,000 shares through the interests of her spouse, Dr. Tai in CGL as mentioned in note 1(a) above.

Save as disclosed in this circular, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interests and short positions in the shares, underlying shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which were required (i) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including the interests and short positions 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 maintained by the Company referred to therein, or (iii) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange.

V-2

GENERAL INFORMATION

APPENDIX V

(b) Substantial shareholders

As at the Latest Practicable Date, so far as is known to the Directors and the chief executive of the Company, Shareholders (other than the Directors or chief executive of the Company) who had an interest or short position in the Shares and underlying Shares which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, 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 the Company:

Long positions in the ordinary shares of the Company:

			Approximate
		Number of	percentage of
		ordinary	the Company’s
Name of substantial		shares held/	total issued
shareholders	Capacity	interested	shares
SAL	Beneficial owner	74,250,000	19.32%
CGL	Beneficial owner	70,000,000	18.22%
CSI	Beneficial owner	115,228,000	29.98%
AFI_(Note 1)_	Interest of controlled	115,228,000	29.98%
	corporation
HKFH_(Note 1)_	Interest of controlled	115,228,000	29.98%
	corporation

Note 1: The entire issued share capital of CSI is held by AFI which in turn is wholly owned by HKFH. Accordingly, each of AFI and HKFH is deemed to be interested in the same 115,228,000 shares of the Company held by CSI.

Save as disclosed in this circular, as at the Latest Practicable Date, so far as is known to the Directors and the chief executive of the Company, other than the Directors or chief executive of the Company, no persons had interests or short position in the Shares or underlying Shares which fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, 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 the Company.

V-3

GENERAL INFORMATION

APPENDIX V

3. DIRECTORS’ SERVICE CONTRACTS

None of the Directors had any existing or proposed service contracts with any member of the Group or any associated company of the Company (excluding contracts expiring or determinable within one year without payment of compensation, other than statutory compensation).

4. MATERIAL CONTRACTS

As at the Latest Practicable Date, the following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Group within the two years preceding the Latest Practicable Date, not being a contract entered into in the ordinary course of business carried on or intended to be carried on by the Group:

(a) the Share Sale Agreement;
(b) the First Loan Agreement;
(c) the Second Loan Agreement; and
(d) the Supplemental Agreement.

5. LITIGATION

On 24 June 2020, a former supplier to the Target Group filed a claim against Miyata Co., Ltd. (“ MYC ”) at the Tokyo District Court alleging MYC for an alleged outstanding payables to the said supplier in the amount of approximately JPY1,271 million (equivalent to approximately HK$93.35 million) and associated costs of approximately JPY127 million (equivalent to approximately HK$9.33 million). MYC has denied the claim and will vigorously contest against the claim. Based on the advice from Japanese counsel, the claim was without basis and the chance of a successful claim is remote. Accordingly, (i) no provision has been made in the financial statements of the Target Group in respect of the claim and (ii) the Company considers that the claim will not have any material adverse impact to the Target Group’s business operation and financial position. The litigation proceeding is still on-gong as at the Latest Practicable Date.

Save as disclosed above, so far as the Company is aware, as at the Latest Practicable Date, no member of the Group was engaged in any litigation or arbitration of material importance and there was no litigation or claim of material importance known to the Directors to be pending or threatened against any member of the Group.

6. COMPETING BUSINESS INTEREST OF DIRECTORS

As at the Latest Practicable Date, none of the Directors nor their respective close associates was interested in any business apart from the business of the Group, which competes or is likely to compete, either directly or indirectly, with that of the Group.

V-4

GENERAL INFORMATION

APPENDIX V

7. EXPERTS’ QUALIFICATION AND CONSENT

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

Name Qualification Ernst & Young Certified Public Accountants RSM Hong Kong Certified Public Accountants

Each of the above experts has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letters, reports and/or opinion, as the case may be, and references to its name in the form and context in which they respectively appear. As at the Latest Practicable Date, each of the above experts did not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, each of the above experts did not have, directly or indirectly, any interest in any assets which had since 31 March 2020 (being the date to which the latest published consolidated audited financial statements of the Group were made up) been 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.

8. MISCELLANEOUS

(a) As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which have been acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 March 2020, being the date to which the latest published audited accounts of the Group were made up.
(b) As at the Latest Practicable Date, none of the Directors was materially interested in contract or arrangement subsisting as at the Latest Practicable Date which was significant in relation to the business of the Group.
(c) The company secretary of the Company is Mr. Nam Chi Ming, Gibson. Mr. Nam is a member of the Hong Kong Institute of Certified Public Accountants, a fellow member of the Association of Chartered Certified Accountants in the United Kingdom and an associate of both The Hong Kong Institute of Chartered Secretaries and the Chartered Governance Institute.
(d) The registered office of the Company is Whitehall House, 238 North Church Street, P.O. Box 1043, George Town, Grand Cayman KY1-1102, Cayman Islands.
(e) The principal place of business of the Company in Hong Kong is 21/F., Manhattan Place, No. 23 Wang Tai Road, Kowloon Bay, Kowloon, Hong Kong.

V-5

GENERAL INFORMATION

APPENDIX V

(f) The principal share registrar of the Company in Cayman Islands is Sterling Trust (Cayman) Limited at Whitehall House, 238 North Church Street, P.O. Box 1043, George Town, Grand Cayman KY1-1102, Cayman Islands.
(g) The branch share registrar and transfer office of the Company in Hong Kong is Tricor Tengis Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(h) The English text of this circular shall prevail over their respective Chinese text for the purpose of interpretation.

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the Company’s principal place of business in Hong Kong at 21/F., Manhattan Place, No. 23 Wang Tai Road, Kowloon Bay, Kowloon, Hong Kong during normal business hours on any weekdays, except public holidays, from the date of this circular up to and including 9 February 2021:

(a) the memorandum and articles of association of the Company;
(b) the annual reports of the Company for the three financial years ended 31 March 2020;
(c) the interim report of the Company for the six months ended 30 September 2020;
(d) the material contracts referred to in the paragraph headed “Material Contracts” in this appendix;
(e) the Share Sale Agreement and the Supplemental Agreement;
(f) the accountants’ report of the Target Company as set out in Appendix II to this circular;
(g) the report on the unaudited pro forma of the Enlarged Group as set out in Appendix IV to this circular;
(h) the written consents referred to in the paragraph under the heading “EXPERTS’ QUALIFICATION AND CONSENT” in this appendix; and
(i) this circular.

V-6

NOTICE OF EGM

==> picture [72 x 50] intentionally omitted <==

**FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]**

(Incorporated in the Cayman Islands with limited liability) (Stock Code: 374)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the “ EGM ”) of Four Seas Mercantile Holdings Limited (the “ Company ”) will be held at Garden Room, 2nd Floor, New World Millennium Hong Kong Hotel, 72 Mody Road, Tsim Sha Tsui East, Kowloon, Hong Kong on Tuesday, 9 February 2021 at 4:30 p.m. for the following purpose:

To consider and, if thought fit, pass with or without amendments, the following resolution as an ordinary resolution:

“ THAT :

(a) the acquisition of such number of shares (the “ Option Shares ”) representing 55% of the issued shares of Miyata Holding Co., Ltd. by Four Seas (Japan) Holdings Company Limited (the “ Purchaser ”) under the option exercisable by the Purchaser to require Mr. Osamu Miyata to sell the Option Shares to the Purchaser at the aggregate consideration of JPY1,000 be and is hereby ratified and approved; and
(b) the directors of the Company be and are hereby authorised to execute all such documents, instruments and agreements and do all such acts, matters and things as they may in their absolute discretion consider necessary, desirable or expedient for the purposes of or in connection with implementing, completing and giving effect to such acquisition as they may in their absolute discretion consider necessary or desirable with full power to authorise any other person to do so in the name of and as the act of the Company.”

By Order of the Board

Four Seas Mercantile Holdings Limited Nam Chi Ming, Gibson Executive Director

Hong Kong, 20 January 2021

For identification purpose only

EGM-1

NOTICE OF EGM

Notes:

All resolutions at the EGM will be taken by poll except where the chairman decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands pursuant to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). The results of the poll will be published on the websites of Hong Kong Exchanges and Clearing Limited and the Company in accordance with the Listing Rules.
Any shareholder of the Company entitled to attend and vote at the EGM is entitled to appoint more than one proxy to attend and vote instead of him. A proxy need not be a shareholder of the Company. If more than one proxy is appointed, the number of shares in respect of which each such proxy so appointed must be specified in the relevant form of proxy. Every shareholder of the Company present in person or by proxy shall be entitled to one vote for each share held by him.
In order to be valid, the form of proxy together with the power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power of attorney or authority, must be deposited at the Company’s branch share registrar and transfer office in Hong Kong, Tricor Tengis Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time appointed for the EGM (i.e. not later than 4:30 p.m. on Sunday, 7 February 2021) or the adjourned meeting (as the case may be). Completion and return of the form of proxy shall not preclude a shareholder of the Company from attending and voting in person at the EGM and, in such event, the instrument appointing a proxy shall be deemed to be revoked.
For determining the entitlement to attend and vote at the EGM, the Register of Members of the Company will be closed from Thursday, 4 February 2021 to Tuesday, 9 February 2021, both dates inclusive, during which period no transfer of shares will be registered. In order to be eligible to attend and vote at the EGM, unregistered holders of shares of the Company shall ensure that all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s branch share registrar and transfer office in Hong Kong, Tricor Tengis Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong for registration not later than 4:30 p.m. on Wednesday, 3 February 2021.
A circular containing further details concerning the resolution set out in the above notice will be sent to all shareholders of the Company.
If tropical cyclone warning signed number 8 or above is hoisted, “extreme conditions” caused by super typhoons or a black rainstorm warning signal is in force at or at any time between 10:00 a.m. and 12:00 noon on the date of EGM, the EGM will be postponed. Shareholders are requested to visit the website of the Company at www.fourseasgroup.com.hk and the website of Hong Kong Exchanges and Clearing Limited at www.hkexnews.hk for details of alternative meeting arrangements. The EGM will be held as scheduled when an amber or red rainstorm warning signal is in force. Shareholders should decide on their own whether they would attend the EGM under bad weather conditions bearing in mind their own situations and if they do so, they are advised to exercise care and caution.

EGM-2

NOTICE OF EGM

Precautionary Measures for EGM

Considering of the recent development of the epidemic caused by COVID-19, the Company will implement the following precautionary measures at the EGM against the epidemic to protect the shareholders from risk of infection:

i. Compulsory body temperature check will be conducted for every shareholder, proxy or other attendee(s) at the entrance of the meeting venue. Any person with a body temperature of 37.4 degrees Celsius or above will not be given access to the meeting venue.
ii. Every shareholder, proxy and attendee is required to wear surgical facial mask throughout the meeting.
iii. No refreshment will be provided.
iv. Each attendee may be asked whether (a) he/she had travelled outside of Hong Kong within the 14-day period immediately before the EGM; and (b) he/she is subject to any Hong Kong Government prescribed quarantine. Anyone who responds positively to any of these questions will be denied entry into the meeting venue or be required to leave the meeting venue.

Furthermore, the Company wishes to recommend shareholders, particularly shareholders who are subject to quarantine in relation to COVID-19, to appoint any person or the chairman of the EGM as their proxy to vote on the resolution, instead of attending the EGM in person.

If any shareholder chooses not to attend the meeting in person but has any question about any resolution or about the Company, or has any matter for communication with the board of directors of the Company, he/she is welcome to send such question or matter in writing to our head office and principal place of business in Hong Kong.

If any shareholder has any question relating to the meeting, please contact Tricor Tengis Limited, the Company’s branch share registrar and transfer office in Hong Kong as follows:

Tricor Tengis Limited Level 54, Hopewell Centre 183 Queen’s Road East Hong Kong Email: [email protected] Tel: (852) 2980 1333 Fax: (852) 2810 8185

References to time and dates in this notice are to Hong Kong time and dates.

As at the date of this Notice, the executive directors of the Company are Mr. TAI Tak Fung, Stephen, Ms. WU Mei Yung, Quinly, Mr. TAI Chun Kit, Mr. MAN Wing Cheung, Ellis, Mr. WU Wing Biu and Mr. NAM Chi Ming, Gibson and the independent non-executive directors of the Company are Ms. LEUNG Mei Han, Mr. CHAN Yuk Sang, Peter and Mr. Tsunao KIJIMA.

EGM-3

AI assistant

Le Saunda Holdings Limited — Proxy Solicitation & Information Statement 2021

49436_rns_2021-01-20_3be3dabf-ab98-4f96-a208-f192b1ff237b.pdf

FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]

(1) MAJOR TRANSACTION – EXERCISE OF OPTION TO ACQUIRE A CONTROLLING STAKE IN MIYATA HOLDING CO., LTD.

AND

(2) NOTICE OF EGM

PRECAUTIONARY MEASURES FOR THE EGM

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]

(1) MAJOR TRANSACTION – EXERCISE OF OPTION TO ACQUIRE A CONTROLLING STAKE IN MIYATA HOLDING CO., LTD.

AND

(2) NOTICE OF EGM

1. INTRODUCTION

LETTER FROM THE BOARD

2. BACKGROUND INFORMATION ON THE EXERCISE OF THE OPTION

3. INFORMATION ON THE PARTIES

The Purchaser

The Vendor and Mrs. Miyata

4. EXERCISE OF THE OPTION

Shareholding structure of the Target Company at time of the Acquisition

LETTER FROM THE BOARD

Immediately after the Acquisition

5. INFORMATION ON THE TARGET GROUP

Business and background

LETTER FROM THE BOARD

Before the Merger

LETTER FROM THE BOARD

The Irregular Transactions

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Internal control

LETTER FROM THE BOARD

Financial information

Reporting Accountants’ opinion

6. REASONS FOR AND BENEFITS OF THE TRANSACTION

LETTER FROM THE BOARD

7. FINANCIAL EFFECTS

Net asset value

Working capital and gearing

8. LISTING RULES IMPLICATIONS

9. EGM

10. CLOSURE OF REGISTER OF MEMBERS

11. RECOMMENDATION

12. ADDITIONAL INFORMATION

1. FINANCIAL INFORMATION OF THE GROUP

2. INDEBTEDNESS

3. WORKING CAPITAL

4. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

5. MATERIAL ADVERSE CHANGE

ACCOUNTANTS’ REPORT OF HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF FOUR SEAS MERCANTILE HOLDINGS LIMITED

Introduction

Directors’ responsibility for the Historical Financial Information

Reporting accountants’ responsibility

Basis for Disclaimer of Opinion – Historical Financial Information for the periods ended 30 September 2017 and 30 September 2018

APPENDIX II

Scope limitation on inventory

Basis for Disclaimer of Opinion – Opening balances and the loss and cash flows for the period ended 30 September 2019

Unqualified Opinion – Statements of financial position as at 30 September 2019 and Historical Financial Information for the period ended 31 July 2020

Material uncertainty related to going concern

Review of stub period comparative financial information

Report on matters under the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited

Adjustments

Dividends

RSM Hong Kong

HISTORICAL FINANCIAL INFORMATION OF THE TARGET GROUP

Preparation of Historical Financial Information

A. CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

B. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

C. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

C. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)

D. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

D. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Continued)

E. CONSOLIDATED STATEMENTS OF CASH FLOWS

E. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

E. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

APPENDIX II

Le Saunda Holdings Limited Proxy Solicitation & Information Statement 2021

**FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]**

**FOUR SEAS MERCANTILE HOLDINGS LIMITED 四洲集團有限公司[*]**