Magnus Concordia Group Limited - Proxy Solicitation & Information Statement 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you are in any doubt as to any aspect of this circular, you should consult a licensed securities dealer, a bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Yue Yuen Industrial (Holdings) Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or the transferee or to the bank manager, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED 裕元工業（集團）有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 551)

CONTINUING CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

A notice convening a special general meeting to be held at 3rd Floor, Tang Room, Sheraton Hong Kong Hotel & Towers, 20 Nathan Road, Kowloon, Hong Kong on Thursday, 1st March, 2007 at 10:45 a.m. (or so soon thereafter as the annual general meeting of the Company convened at the same place and date at 10:30 a.m. shall have concluded or adjourned) is set out on pages 70 to 75 of this circular. A form of proxy for use at the special general meeting is also enclosed with this circular.

If you are not able to attend the meeting, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon to the Company’s principal place of business at 7th Floor, Blocks A–D, Hop Hing Industrial Building, 702 Castle Peak Road, Kowloon, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding such meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the meeting, or any adjournment thereof, should you so wish.

* for identification only

7th February, 2007

	Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
LETTER FROM THE INDEPENDENT BOARD COMMITTEE. . . . . . . . . . . . . . . . . . .	40
LETTER FROM SOMERLEY LIMITED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41
APPENDIX – GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	62
NOTICE OF SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	70

DEFINITIONS

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

“Annual Caps”	the annual caps for each of the Continuing Connected
	Transactions
“Associate”	the meaning ascribed thereto in the Listing Rules
“Barits”	Barits Development Corporation, a company
	incorporated in Taiwan and which is beneficially
	owned by PCC as to 98.34%
“Board”	the board of Directors
“Company”	Yue Yuen Industrial (Holdings) Limited, a company
	incorporated in Bermuda with limited liability and
	whose securities are listed on the Stock Exchange
“Continuing Connected	the transactions carried out under the following
Transactions”	agreements: Production Agreement, GBD Management
	Service Agreement, PCC Management Service
	Agreement, GBD Tenancy Agreement, GBD Box
	Agreement, PCC Services Agreement, PCC Connected
	Sales Agreement, PCC Connected Purchases
	Agreement, Godalming Tenancy Agreement, Pou Chien
	Lease Agreement, Pou Yuen Lease Agreement, Yue
	Dean Lease Agreement and Pou Yii Lease Agreement
“Directors”	directors of the Company
“FOB”	free on board
“GBD”	Golden Brands Developments Limited, a company
	incorporated in the British Virgin Islands and is owned
	as to 94.12% by Mr. Tsai and 5.88% by PCC
“GBD Box Agreement”	the agreement dated 9th January, 2007 entered into
	between Pou Ming and GBD in respect of the purchase
	and sale of packaging boxes
“GBD Group”	GBD and its subsidiaries
“GBD Management Service	the management service agreement dated 13th
Agreement”	December, 2001 entered into between Highmark and
	GBD

– 1 –

DEFINITIONS

“GBD Tenancy Agreement”

the tenancy agreement dated 13th December, 2001 entered into between Highmark and GBD

“GBD Transactions”

transactions under GBD Box Agreement, GBD Management Service Agreement and GBD Tenancy Agreement

“Godalming” Godalming Industries Limited, a company incorporated in the British Virgin Islands with limited liability and is owned as to 85.45% by a discretionary trust, the beneficiaries of which include a Director of the Company, Mr. Tsai Chi Neng, and his relatives

“Godalming Tenancy Agreement”
the tenancy agreement dated 8th June, 1992 entered into between Yue Yuen International and subsidiaries of Godalming, as amended by (i) a supplemental memorandum agreement dated 13th June, 1997 between Godalming and Yue Yuen International, (ii) a supplemental memorandum agreement dated 13th June, 1997 between Godalming and Pou Yuen Industrial (Holdings) Limited, a wholly-owned subsidiary of the Company, (iii) a supplemental memorandum agreement dated 13th June, 1997 between Godalming and Ka Yuen Rubber Factory Limited, a jointly controlled entity of the Company, (iv) a Godalming Tenancy Extension Agreement dated 30th August, 2002 between Yue Yuen International, Pou Yuen Industrial (Holdings) Limited, Ka Yuen Rubber Factory Limited and subsidiaries of Godalming and (v) the Supplemental Godalming Tenancy Agreement to vary the terms of the Godalming Tenancy Extension Agreement
“Group” or “Yue Yuen Group” the Company and its subsidiaries
“Guangzhou Pouxue”

廣州寶旭貿易有限公司 (Guangzhou Pouxue Trading Co. Ltd.), a company incorporated in the PRC and 100% beneficially owned by Dedicated Group Limited which is an indirect non-wholly owned subsidiary of the Company

“Guangzhou Pouxue Rest Assured Agreement”

the agreement dated 9th January, 2007 entered into between Guangzhou Pouxue and Rest Assured for the sourcing of shoes, sports apparel and sub-contractors and monitoring progress and quality control of the production of shoes, sports apparel and accessories merchandise

– 2 –

DEFINITIONS

“Highmark”	Highmark Services Limited, a limited liability
	company incorporated in the British Virgin Islands and
	wholly owned by the Company
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC
“IFA”	Somerley Limited, a corporation licensed under the
	SFO to conduct types 1 (dealing in securities), 4
	(advising on securities), 6 (advising on corporate
	finance) and 9 (asset management) regulated activities
	and the independent financial adviser to the
	Independent Board Committee and the Independent
	Shareholders in relation to the Continuing Connected
	Transactions and the Rest Assured Transactions
“Independent Board Committee”	a board committee comprising of the independent
	non-executive Directors constituted to make
	recommendations to the Independent Shareholders in
	respect of the Continuing Connected Transactions of
	the Group and the Rest Assured Transactions
“Independent Shareholders”	the meaning ascribed to it in Chapter 14A of the Listing
	Rules
“Industrial Estate”	the Yue Yuen Industrial Estate, situated in the He Lu
	Industrial Area, Huang Jiang Town, Dongguan,
	Guangdong Province, the PRC
“Jollyard”	Jollyard Investments Limited, a shareholder of certain
	non-wholly owned subsidiaries of the Company but
	which is otherwise independent of the Company
“Latest Practicable Date”	5th February, 2007, 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 of Hong Kong Limited
“Mr. Huang”	Mr. Huang Tsung Jen, a director and shareholder of
	certain non-wholly owned subsidiaries of the Company
	but who is otherwise independent of the Company
“Mr. Tsai”	Mr. Tsai Chi Jui, who is a substantial shareholder of
	the Company

– 3 –

DEFINITIONS

“NT$”

the lawful currency of Taiwan

“Original Pou Chien Lease Agreement”

the lease agreement dated 1st April, 2002 between Pou Chien and PCC

“Original Pou Yuen Lease Agreement”

the lease agreement dated 1st October, 2002 between Pou Yuen and Pou Chien or such other subsidiary of the Group as nominated by the Company

“PCC”

Pou Chen Corporation, a substantial shareholder of the Company

“PCC Connected Purchases Agreement”

the agreement dated 9th January, 2007 entered into between the Group and the Pou Chen Group for the purchase of raw materials and shoe-related products

“PCC Connected Sales the agreement dated 9th January, 2007 entered into Agreement” between the Group and the Pou Chen Group for the sale of leather, moulds, finished and semi-finished shoe products and packaging boxes

“PCC Management Service the management service agreement dated 13th Agreement” December, 2001 entered into between Highmark and PCC

“PCC Services Agreement” the services agreement dated 22nd February, 1997 entered into between the Company and PCC

“Pou Chen Group” or PCC and its subsidiaries and associates other than “PCC Group” members of the Yue Yuen Group

“Pou Chien” Pou Chien Chemical Company Limited, a whollyowned subsidiary of the Company

“Pou Chien Lease Agreement” the lease agreement dated 9th January, 2007 entered into between Pou Chien and PCC

“Pou Ming”

Pou Ming Paper Products Manufacturing Company Limited, a wholly-owned subsidiary of the Company

“Pou Yii” Pou Yii Development Company Limited, a non-wholly owned subsidiary of PCC

“Pou Yii Lease Agreement” the lease agreement dated 30th September, 2004 entered into between Pou Yii and Pou Chien Technology Company Limited

– 4 –

DEFINITIONS

“Pou Yuen”	Pou Yuen Technology Co., Ltd., a company which is
	beneficially owned by PCC as to 99.05%
“Pou Yuen Lease Agreement”	the lease agreement dated 9th January, 2007 entered
	into between Pou Yuen and Yue Dean
“PRC”	The People’s Republic of China
“Prime Asia”	Prime Asia Leather Corporation, a wholly-owned
	subsidiary of the Company
“Production Agreement”	the production agreement entered into between Barits
	and Prime Asia on 24th December, 1996
“Rest Assured”	Rest Assured Group Limited, a company incorporated
	in the British Virgin Islands and is beneficially owned
	in equal share by Mr. Tsai, Mr. David N F Tsai and
	Mr. Huang
“Rest Assured Agreements”	the Guangzhou Pouxue Rest Assured Agreement, the
	Yue Cheng Rest Assured Agreement and the YY Rest
	Assured Agreement
“Rest Assured Transactions”	transactions under the Rest Assured Agreements
“SFO”	the Securities and Futures Ordinance, Chapter 571 of
	the laws of Hong Kong
“SGM”	the special general meeting of the Company to be
	convened at 3/F, Tang Room, Sheraton Hong Kong
	Hotel & Towers, 20 Nathan Road, Kowloon, Hong
	Kong on Thursday, 1st March, 2007 at 10:45 a.m. (or
	so soon thereafter as the annual general meeting of
	the Company convened at the same place and date at
	10:30 a.m. shall have concluded or adjourned) or at
	any adjournment thereof
“Share(s)”	share(s) of HK$0.25 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Supplemental GBD	the agreement dated 9th January, 2007 entered into
Management Service	between Highmark and GBD supplemental to the GBD
Agreement”	Management Service Agreement

– 5 –

DEFINITIONS

“Supplemental GBD Tenancy Agreement”
“Supplemental Godalming Tenancy Agreement”
“Supplemental PCC Management Service Agreement”
“Supplemental PCC Services Agreement”
“Supplemental Pou Yii Lease Agreement”
“Supplemental Production Agreement”
“US$”
“Yue Cheng”
“Yue Cheng Rest Assured Agreement”

“Yue Dean”

the agreement dated 9th January, 2007 entered into between Highmark and GBD supplemental to the GBD Tenancy Agreement

the agreement dated 9th January, 2007 entered into between subsidiaries of Godalming, as landlords, and subsidiaries and a jointly controlled entity of the Company, as tenants, supplemental to the Godalming Tenancy Agreement

the agreement dated 9th January, 2007 entered into between Highmark and PCC supplemental to the PCC Management Service Agreement

the agreement dated 9th January, 2007 entered into between the Company and PCC supplemental to the PCC Services Agreement

the agreement dated 9th January, 2007 entered into between 寶乙建設股份有限公司 (Pou Yii Development Company Limited) as landlord and 寶建科技股份有限公司 (Pou Chien Technology Company Limited) as tenant supplemental to the Pou Yii Lease Agreement

the agreement dated 9th January, 2007 entered into between Barits and Prime Asia supplemental to the Production Agreement

the lawful currency of the United States

裕晟（昆山）體育用品有限公司 (Yue Cheng (Kunshan) Sports Co. Ltd.), a company incorporated in the PRC and which is wholly owned by Selangor Gold Limited which is an indirect non-wholly owned subsidiary of the Company

the agreement dated 9th January, 2007 entered into between Yue Cheng and Rest Assured for the sourcing of shoes, sports apparel and sub-contractors and monitoring progress and quality control of the production of shoes, sports apparel and accessories merchandise

裕典科技股份有限公司 (Yue Dean Technology Corporation), a company incorporated in Taiwan and a wholly-owned subsidiary of the Company

– 6 –

DEFINITIONS

“Yue Dean Lease Agreement”

the lease agreement dated 9th January, 2007 entered into between PCC and Yue Dean

“Yue Yuen International” Yue Yuen International Limited, a wholly-owned subsidiary of the Company

“YY Rest Assured Agreement” the agreement dated 9th January, 2007 entered into between the Company and Rest Assured for the supply of shoes and sportswear by Rest Assured to members of the Yue Yuen Group

Unless otherwise specified in this circular, translations of US$ and NT$ into HK$ are made in this circular, for illustration only, at the rate of US$1.00 to HK$7.80 and NT$1.00 to HK$0.241. No representation is made that any amounts in US$, NT$ or HK$ could have been or could be converted at that rate or at any other rate.

– 7 –

LETTER FROM THE BOARD

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YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED 裕元工業（集團）有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 551)

Board of Directors:

Executive Directors: Tsai Chi Neng (Chairman) David N. F. Tsai (Managing Director) Edward Y. Ku Kuo Tai Yu Lu Chin Chu Kung Sung Yen Chan Lu Min Li I Nan, Steve Tsai Pei Chun, Patty

Registered office:

Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Principal Place of Business: 7th Floor, Blocks A–D Hop Hing Industrial Building 702 Castle Peak Road Kowloon, Hong Kong

Non-executive Director:

John J. D. Sy

Independent Non-executive Directors:

So Kwan Lok Poon Yiu Kin, Samuel Liu Len Yu

7th February, 2007

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

Reference is made to the Company’s announcements dated 1st March, 2006 and 9th January, 2007. For some years and in compliance with the Listing Rules at all relevant times, the Group has engaged in certain continuing connected transactions (within the meaning of the Listing Rules) between the Group and the PCC Group or the GBD Group or Godalming and continuing connected transactions between the Group and Rest Assured during the period from 1st October, 2005 to 30th September, 2006. The Rest Assured Transactions have ceased since 30th September, 2006. The Company has agreed and entered into conditional agreements with the relevant connected parties amending and formalising certain terms of these transactions. The purpose of this circular is (i) to provide you with more information on these transactions; (ii) to provide you with advice from the IFA; and (iii) to provide you with notice of SGM.

* for identification only

– 8 –

LETTER FROM THE BOARD

I. SUMMARY OF CONTINUING CONNECTED TRANSACTIONS AND REST ASSURED TRANSACTIONS

(A) The Continuing Connected Transactions can be broadly divided into the following categories:
(i) Transactions between Pou Chen Group and Yue Yuen Group

Production Agreement

Under the Production Agreement and the Supplemental Production Agreement dated 9th January, 2007, Barits agreed to provide tanning facilities and processing services to Prime Asia for the processing of Prime Asia’s raw leather in Taiwan into finished leather. Barits also provides sales support to Prime Asia for sales of its finished leather. In return, Prime Asia pays Barits a monthly production fee.

PCC Management Service Agreement

Under the PCC Management Service Agreement and a supplemental agreement dated 9th January, 2007, Highmark agreed to provide PCC with management services in respect of a number of factories situated in the Industrial Estates operated by the PCC Group.

PCC Services Agreement

Under the PCC Services Agreement and a supplemental agreement dated 9th January, 2007, PCC agreed to provide research and development, know-how, technical and marketing services and to source raw materials and recruit staff in relation to the production and sale of the Group’s products.

PCC Connected Sales Agreement

Under the PCC Connected Sales Agreement dated 9th January, 2007, members of the Yue Yuen Group agreed to sell leather, moulds, finished and semi-finished shoe products and packaging boxes to PCC Group.

PCC Connected Purchases Agreement

Under the PCC Connected Purchases Agreement dated 9th January, 2007, members of the Yue Yuen Group agreed to purchase from PCC Group raw materials, production tools and shoe-related products for its production needs.

– 9 –

LETTER FROM THE BOARD

Pou Chien Lease Agreement

Under the Pou Chien Lease Agreement dated 9th January, 2007, PCC agreed to lease to Pou Chien certain properties in Taiwan, including buildings and land, for the purpose of running its manufacturing business.

Pou Yuen Lease Agreement and Yue Dean Lease Agreement

Under the Pou Yuen Lease Agreement and Yue Dean Lease Agreement both dated 9th January, 2007, Pou Yuen and PCC agreed to lease to Yue Dean two separate properties in Taiwan which consist of buildings and land, for the purpose of running its manufacturing businesses.

Pou Yii Lease Agreement

Under the Pou Yii Lease Agreement and the Supplemental Pou Yii Lease Agreement dated 9th January, 2007, Pou Yii agreed to lease to Pou Chien Technology Company Limited, a wholly-owned subsidiary of the Company, a premise in Taiwan for its administrative operations.

(ii) Transactions between GBD Group and the Yue Yuen Group

GBD Management Service Agreement and GBD Tenancy Agreement

Under the GBD Management Service Agreement and a supplemental agreement dated 9th January, 2007, Highmark agreed to provide GBD with management services in respect of a number of factories situated in the Industrial Estate operated by GBD and its subsidiaries.

Under the GBD Tenancy Agreement and a supplemental agreement dated 9th January, 2007, Highmark agreed to lease to GBD such dormitories situated in the Industrial Estate as GBD may from time to time require.

GBD Box Agreement

Under the GBD Box Agreement dated 9th January, 2007, Pou Ming agreed to supply packaging boxes to GBD for its operations.

– 10 –

LETTER FROM THE BOARD

(iii) Transactions between Godalming and the Yue Yuen Group

Godalming Tenancy Agreement

Under the Godalming Tenancy Agreement and a supplemental agreement dated 9th January, 2007, Godalming agreed to lease to members of the Yue Yuen Group certain premises in the PRC for production purposes, including shoe/sole factory buildings and dormitories for workers.

(B) Rest Assured Transactions between Rest Assured and the Yue Yuen Group

Rest Assured Agreements

Under the Yue Cheng Rest Assured Agreement and the Guangzhou Pouxue Rest Assured Agreement both dated 9th January, 2007, Rest Assured agreed to source shoes, sports apparel and sub-contractors and to monitor progress and quality control of the production of shoes, sports apparel and accessories merchandise for Yue Cheng and Guangzhou Pouxue.

Under the YY Rest Assured Agreement dated 9th January, 2007, Rest Assured agreed to supply shoes and sportswear to the Group.

II. BUSINESS OF THE GROUP

The Company is an investment holding company. The principal activities of the Group are the manufacture (as original equipment manufacturer and original design manufacturer) and sales of athletic footwear, athletic style leisure footwear, casual and outdoor footwear. The Group also engages in wholesale and retail of shoes and sportswear.

III. PRODUCTION AGREEMENT

The parties entered into the Production Agreement on 24th December, 1996. On 9th January, 2007, the parties entered into the Supplemental Production Agreement to vary the terms of the original agreement including extending the term for three years from 1st October, 2005. A summary of the terms of the agreements is set out below.

Dates

Production Agreement: 24th December, 1996, effective as of 1st January, 1997 with no definite term

Supplemental Production 9th January, 2007 Agreement:

– 11 –

LETTER FROM THE BOARD

Parties

Prime Asia: a wholly-owned subsidiary of the Company. Prime Asia engages in the business of leather trading and manufacturing Barits: a member of the Pou Chen Group and therefore a connected person of the Company. Barits is engaged primarily in production of leather

Terms

Barits provides tanning facilities and processing services to Prime Asia for the processing of Prime Asia’s raw leather in Taiwan into finished leather. Barits also provides sales support to Prime Asia for sales of its finished leather. In return, Prime Asia pays Barits a monthly production fee.

Payment terms

Weekly payment in advance. Excess advance payments carried forward to next month and shortfall to be settled within 7 days.

The production fee (payable in cash) is equal to the total of the following:

Variable costs principally costs for chemicals, supplies and labour (and related pension costs), which are charged to Prime Asia at cost;

Selling, general and selling, general and administrative costs of Barits administrative provided by personnel located at the Barits factory, costs such as scheduling, inventory control, invoicing, product control, delivery and customer service and insurance, goods and services purchased by Barits for the purposes of the Production Agreement, which are charged to Prime Asia at cost; Fixed costs including rental of land, building, equipment and machinery. Rental charges for land and building is a fixed monthly rental determined based on an independent valuation. Rental charges for equipment and machinery are calculated by reference to the depreciation of their acquisition cost amortised over the estimated useful lives plus a mark-up (being the sum of the net book value multiplied by a rate representing the aggregate of 3-month London Interbank Offered Rate (“LIBOR”) and 2.5% spread); and thereafter at an annual rate of 3% of their original acquisition cost until the equipment is retired.

– 12 –

LETTER FROM THE BOARD

According to the audited consolidated financial statements of the Group for the two financial years ended 30th September, 2004 and 2005 and the unaudited management accounts of the Company for the first half of the financial year ended 30th September, 2006, the relevant transaction amounts are:

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	13,341,000	12,102,000	5,186,000

Previous Stock Exchange Waiver and Shareholder Approval

The Stock Exchange had on 29th October, 2002, granted a waiver to the Company from strict compliance with the disclosure requirements under the Listing Rules in connection with the Production Agreement, with annual cap calculated by reference to the consolidated net tangible assets of the Company. The Production Agreement was also approved by the Company’s Independent Shareholders in a special general meeting on 29th October, 2002. There was no expiry date for the waiver granted by the Stock Exchange.

IV. GBD MANAGEMENT SERVICE AGREEMENT, PCC MANAGEMENT SERVICE AGREEMENT, AND GBD TENANCY AGREEMENT

The principal business of GBD is investment holding. Through its subsidiaries, it principally engages in the manufacturing and trading of computer hardware, computer accessories and components.

On 13th December, 2001, Highmark, a wholly-owned subsidiary of the Company, entered into the GBD Management Service Agreement and the PCC Management Service Agreement with GBD and PCC respectively to provide them with management services. On 9th January, 2007, the parties entered into the Supplemental GBD Management Service Agreement and the Supplemental PCC Management Service Agreement to vary the terms of the original agreements. Under both agreements, Highmark agreed to provide management services to members of the GBD Group and of the PCC Group respectively. A summary of the terms of the agreements is set out below.

Highmark principally engages in management of the Industrial Estate which houses factories belonging to the Group and others. It is not a utility provider although the management services it provides to occupants of the Industrial Estate include the management of electricity supply (which involves the generation and supply of electricity, maintenance of a power station to ensure continued supply of electricity and provision of support service in installing equipment for transmission of electricity supply), water supply and general up-keeping of the common areas, provision of security and up-keep of all drains in common areas and the Group receives fees for these services. A number of factories in the Industrial Estate are operated by members of the GBD Group and of the PCC Group. The Industrial Estate is situated in He Lu Industrial Area, Huang Jiang Town,

– 13 –

LETTER FROM THE BOARD

Dongguan, Guangdong Province, PRC. Highmark has also, on 13th December, 2001, entered into the GBD Tenancy Agreement with GBD whereby it agreed to lease to GBD such dormitories within the Industrial Estate as GBD may from time to time require. The parties entered into the Supplemental GBD Tenancy Agreement to vary the terms of the original agreement. A summary of the terms of the agreements is set out below.

The GBD Management Service Agreement and the PCC Management Service Agreement

GBD Management Service Agreement

Dates

GBD Management Service 13th December, 2001, with no definite term Agreement: Supplemental GBD 9th January, 2007 Management Service Agreement:

Parties

Highmark: a wholly owned subsidiary of the Company GBD: a company incorporated in the British Virgin Islands which is ultimately owned as to 94.12% by Mr. Tsai and 5.88% by PCC. GBD is an investment holding company and the principal business of its subsidiaries is the manufacturing and trading of computer hardware, computer accessories and components.

Payment terms

45 days payable from date of invoice

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	10,043,000	5,626,000	1,452,000

– 14 –

LETTER FROM THE BOARD

PCC Management Service Agreement

Dates

PCC Management Service 13th December, 2001, with no definite term Agreement: Supplemental PCC 9th January, 2007 Management Service Agreement:

Parties

a wholly owned subsidiary of the Company

Highmark: a wholly owned subsidiary of the Company PCC: a substantial shareholder of the Company and a manufacturer of branded athletic and casual footwear and of electronic products and components

Payment terms

45 days payable from date of invoice

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	10,877,000	16,762,000	13,987,000

Term

The GBD Management Service Agreement has been amended by the Supplemental GBD Management Service Agreement to continue in force for a period of three years commencing from 1st October, 2005 and the PCC Management Service Agreement has been amended by Supplemental PCC Management Service Agreement to continue in force for a period of three years from 1st October, 2005 for both the GBD Group and the PCC Group as users of the services.

– 15 –

LETTER FROM THE BOARD

Management Fees

The fees charged under the above agreements are on the same basis as those charged to all users of the Industrial Estate. A breakdown of the management fees under both of the GBD Management Service Agreement and the PCC Management Service Agreement and the basis on which the management fees (payable in cash) are charged is set out below:

(a) Common services (security and maintenance of common areas)

Charges for common services are calculated by dividing the total cost base by the number of factories pro rata to their size in the Industrial Estate. The total cost base is calculated by adding all the costs incurred by Highmark in the provision of the common services (i.e. the costs of hiring security staff and the costs of up-keeping the common area) and adding a margin of 10% for the aggregate costs incurred.

(b) Individual services for the supply of electricity

The charges for supply of electricity are by reference to consumption (as per meters in each factory) of each of GBD and PCC. This is based on a fixed price per unit of electricity consumed. The unit price is equivalent to the aggregate of (i) 105% of the cost of oil consumed for generating the electricity; and (ii) all other overheads incurred for the production of electricity for GBD and PCC during the relevant period.

(c) Individual services for the supply of water

The charges for individual services (for example supply of water, etc.) other than electricity are by reference to consumption (as per meters in each factory) of each of GBD and PCC and the price charged by the local authority for such utilities. Apart from the aforesaid, hot water will also be supplied under Supplemental GBD Management Service Agreement under which individual services for water provided at about 60 degree Celsius shall be charged on the same basis as provided above in this paragraph, plus the fuel charges for heating the water.

GBD Tenancy Agreement

Dates

GBD Tenancy Agreement: 13th December, 2001 (automatically extended indefinitely pursuant to Clause 9 of the agreement)

Supplemental GBD Tenancy 9th January, 2007 Agreement:

– 16 –

LETTER FROM THE BOARD

Parties

Lessor: Highmark Lessee: GBD

Terms

Under the GBD Tenancy Agreement, Highmark has agreed to lease to GBD:

(a) the expatriate dormitories A and B in the Industrial Estate with a total gross floor area of 42,300 sq.m.;
(b) Dormitories A to F in the Industrial Estate with a total gross floor area of 52,400 sq.m.; and
(c) Dormitories U1 to U4 and the central kitchen with a total gross floor area of 41,300 sq.m.

The properties above are of rentable area of 136,000 sq.m. and are leased to GBD Group as may from time to time required by them.

The rental payment under the agreement, which is based on open market rates, is reviewed and agreed by the parties annually and payable in cash. There is only one tenancy agreement, which will cover all dormitories from time to time leased under these arrangements. The GBD Tenancy Agreement has been amended by the Supplemental GBD Tenancy Agreement to continue in force for a period of three years from 1st October, 2005.

Payment terms

First day of each month

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	2,096,000	2,068,000	1,015,000

– 17 –

LETTER FROM THE BOARD

Previous Stock Exchange Waiver and Shareholder Approval

The Stock Exchange had on 4th January, 2002, granted a waiver to the Company from strict compliance with the disclosure requirements under the Listing Rules in connection with the GBD Management Service Agreement, the PCC Management Service Agreement and the GBD Tenancy Agreement, with annual caps calculated by reference to the consolidated net tangible assets of the Company. The waiver granted by the Stock Exchange expired on 30th September, 2004. In order to recomply with the Listing Rules, these transactions will be put forward to Independent Shareholders for their approval at the SGM.

V. GBD BOX AGREEMENT

Since October 2003, the Group has been supplying packaging boxes to GBD through Pou Ming which is principally engaged in manufacturing and supplying of boxes. On 9th January, 2007, the parties formalised the arrangements between them by entering into the GBD Box Agreement. A summary of the terms of the agreement is set out below.

Date

GBD Box Agreement: 9th January, 2007

Parties

Purchaser: GBD Supplier: Pou Ming

Terms

Under the GBD Box Agreement, which is conditional on the approval of Independent Shareholders, GBD may place its requirements for packaging boxes with Pou Ming. GBD is required to specify the terms of purchase in each order. Pou Ming is required to supply boxes of such specifications as may be ordered by GBD on the terms of each order accepted by it. The prices of the packaging boxes are based on costs plus a percentage profit mark-up and in any event no more favourable than they are available to third parties and are payable in cash.

The GBD Box Agreement commenced from 1st October, 2005 and will continue in force for a period of three years thereafter unless or until terminated earlier.

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LETTER FROM THE BOARD

Payment terms

45 days, payable from the date of invoice

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	3,217,000	2,007,000	499,000

Previous Stock Exchange Waiver and Shareholder Approval

In compliance with the requirements of Rule 14A.35 of the Listing Rules, Pou Ming formalised the arrangements between it and GBD by entering into the GBD Box Agreement. As the relevant transactions only took place since October 2003, no waivers from the Stock Exchange have been granted. The GBD Box Agreement is subject to approval by the Independent Shareholders at the SGM.

VI. PCC SERVICES AGREEMENT

On 22nd February, 1997, the Company and PCC entered into the PCC Services Agreement, which was then approved by Independent Shareholders on 27th March, 1997. On 9th January, 2007, the parties entered into the Supplemental PCC Services Agreement to vary the terms of the original agreement. A summary of the terms is set out below.

Date

PCC Services Agreement: 22nd February, 1997, with no definite term Supplemental PCC 9th January, 2007 Services Agreement:

Parties

The Company for itself and on behalf of each member of the Group

and

PCC

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LETTER FROM THE BOARD

Terms

The Supplemental PCC Services Agreement dated 9th January, 2007 is in force for a period of three years from 1st October, 2005.

Fees

The Company will pay to PCC the following fees in cash in respect of:

(i) the Group’s products developed by Pou Chen Group and sold by the Group, 0.5 per cent. of the net invoiced amounts of such products;
(ii) materials, machinery and other goods purchased by shipment arranged for and inspected by the Pou Chen Group on behalf of the Group from within Taiwan, 1 per cent. of the merchandise cost invoiced to the Pou Chen Group; and
(iii) materials, machinery and other goods sourced by Pou Chen Group on behalf of the Group in Taiwan or overseas whereby purchases are directly handled by the Group, 0.5 per cent. of the cost of merchandise invoiced to the Group.

The Company is also obliged to reimburse PCC in respect of the following costs and expenses in cash:

(i) in respect of the purchase of materials, machinery and other goods purchased by shipment arranged for and inspected by Pou Chen Group on behalf of the Group from Taiwan, the Company will reimburse the cost of merchandise paid by Pou Chen Group to the suppliers on a 45 days credit period basis; and
(ii) in respect of all the reasonable expenses and other related costs directly incurred or charged by the Pou Chen Group in the provision of services of research and development, sourcing of materials, marketing, recruitment and other general services relating to remuneration of personnel as defined in the PCC Services Agreement, the Company shall pay to PCC, in advance, an amount equivalent to PCC’s estimate of the relevant monthly expenses and costs and any balances arising as a result of actual expenses and costs, in respect of which PCC shall render statements of account, shall be settled between PCC and the Company within 45 days after the end of relevant month.

Reimbursement of the costs and expenses under the agreement is made on normal commercial terms and as part of the ordinary and usual course of business of the Group relating to the use of services provided by PCC.

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LETTER FROM THE BOARD

Payment terms

30 to 45 days for services fees and 45 days for others, payable from date of invoice

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	299,892,000	331,756,000	165,379,000

Previous Stock Exchange Waiver and Shareholder Approval

The Stock Exchange had on 5th May, 1997, granted a waiver to the Company from strict compliance with the disclosure requirements under the Listing Rules in connection with the PCC Service Agreement, with annual cap calculated by reference to the audited consolidated turnover of the Yue Yuen Group. The PCC Service Agreement was also approved by the Company’s Independent Shareholders on 27th March, 1997 at a special general meeting. There was no expiry date for the waiver granted by the Stock Exchange.

VII. PCC CONNECTED SALES AGREEMENT

Since 1988, the Group has sold semi-finished shoe products to PCC. On 4th July, 1996, PCC became a substantial shareholder of the Company, and these transactions have since then become connected party transactions. These continuing connected transactions have been approved by Independent Shareholders at a shareholders’ meeting on 11th September, 1996. On 9th January, 2007, the parties formalised the arrangements between them by entering into the PCC Connected Sales Agreement, which is conditional on the approval of Independent Shareholders. A summary of the terms of the agreement is set out below.

Date

PCC Connected Sales 9th January, 2007 Agreement:

Parties

Purchaser: Pou Chen Group Supplier: The Group

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LETTER FROM THE BOARD

Terms

Under the PCC Connected Sales Agreement dated 9th January, 2007, the Pou Chen Group may place its requirements for leather, moulds, finished and semi-finished shoe products and packaging boxes with the Group. The Pou Chen Group is required to specify the terms of purchase in each order. The Group is required to supply such leather, moulds, finished and semi-finished shoe products and packaging boxes as may be ordered by the Pou Chen Group on the terms of each order accepted by the Group. For semi-finished shoe products, the selling price is based on costs (including all related fixed and variable costs for production and sale of the semi-finished shoe products) with a profit margin of 3% of the selling price. For leather, moulds, finished shoe products and packaging boxes, the selling price is no more favourable than they are available to third parties. The consideration of the transactions is payable in cash.

The PCC Connected Sales Agreement, will be in force for a period of three years from 1st October, 2005.

Payment terms

45 days, payable from date of invoice

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	26,053,000	21,464,000	8,957,000

Previous Stock Exchange Waiver and Shareholder Approval

The Stock Exchange had on 20th September, 1996 granted a waiver to the Company from strict compliance with the disclosure requirements under the Listing Rules in connection with such connected sales by the Group, with annual cap calculated by reference to the audited consolidated turnover of the Yue Yuen Group. There was no expiry date for the waiver granted by the Stock Exchange, and shareholders’ approval for the annual sales cap was obtained on 11th September, 1996.

VIII. PCC CONNECTED PURCHASES AGREEMENT

Since 1988, the Group has purchased raw materials, production tools and shoerelated products for its production needs from PCC. On 4th July, 1996, PCC became a substantial shareholder of the Company, and these transactions have since then become

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LETTER FROM THE BOARD

connected party transactions. These continuing connected purchase transactions have been approved by Independent Shareholders at shareholders’ meeting on 11th September, 1996 and 27th March, 1997 respectively. These purchase transactions have been conducted at price(s) no less favourable than those available from third parties. On 9th January, 2007, the parties formalised the arrangements between them by entering into the PCC Connected Purchases Agreement, which is conditional on the approval of Independent Shareholders. A summary of the terms of the agreement is set out below.

Date

PCC Connected Purchases 9th January, 2007 Agreement:

Parties

Purchaser: the Group Supplier: Pou Chen Group

Terms

Under the PCC Connected Purchases Agreement dated 9th January, 2007, the Group may place its requirements for raw materials, production tools or shoe-related products for its production needs with Pou Chen Group. The Group is required to specify the terms of purchase in each order. Pou Chen Group is required to supply its own products of raw materials, production tools or shoe-related products ordered by the Group on the terms of each order accepted by the Pou Chen Group. The Group is free to place an order with any person it may choose. The consideration of the transactions is payable in cash.

The PCC Connected Purchases Agreement will be in force for a period of three years from 1st October, 2005.

Payment terms

45 days, payable from date of invoice

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	2,769,000	3,013,000	803,000

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LETTER FROM THE BOARD

Previous Stock Exchange Waiver and Shareholder Approval

The Stock Exchange had on 5th May, 1997, granted a waiver to the Company from strict compliance with the disclosure requirements under the Listing Rules in connection with the purchases from the Pou Chen Group, with annual cap by reference to the audited consolidated turnover of the Yue Yuen Group. Such purchases were also approved by the Company’s Independent Shareholders on 27th March, 1997 at a special general meeting. There was no expiry date for the waiver granted by the Stock Exchange.

IX. GODALMING TENANCY AGREEMENT

On 8th June, 1992, Yue Yuen International entered into the Godalming Tenancy Agreement with subsidiaries of Godalming. The original agreement was supplemented with three supplemental memoranda all dated 13th June, 1997 to cover additional premises and tenants who are wholly owned subsidiaries and a jointly controlled entity of the Company. The original agreement as supplemented was renewed by the Godalming Tenancy Extension Agreement dated 30th August, 2002. On 9th January, 2007, the parties entered into the Supplemental Godalming Tenancy Agreement to vary the terms of the Godalming Tenancy Extension Agreement, which is conditional on the approval of Independent Shareholders. A summary of the terms of the agreements is set out below.

Dates

Godalming Tenancy 8th June, 1992 Agreement: 3 Supplemental memoranda: 13th June, 1997 Godalming Tenancy 30th August, 2002, with a 5-year term Extension Agreement: Supplemental Godalming 9th January, 2007 Tenancy Agreement:

Parties

Tenants:

wholly-owned subsidiaries and a jointly controlled entity of the Company

Landlords: wholly-owned subsidiaries of Godalming

Godalming is owned as to 85.45% by a discretionary trust, the beneficiaries of which include a Director of the Company, Mr. Tsai Chi Neng and his relatives. Godalming’s principal business activity is property investment in the PRC.

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LETTER FROM THE BOARD

Premises

(i) a gross floor area of around 310,000 m[2] in Yue Yuen Industrial Estate, Gao Bu Chen, Dongguan, PRC;
(ii) a gross floor area of around 150,000 m[2] in Pou Yuen Industrial Estate, Di Chung, Dongguan, PRC;
(iii) a gross floor area of around 70,000 m[2] in two Bai Shi Industrial Estates, Zhong Shan, PRC; and
(iv) a gross floor area of around 1,400 m[2] of a block of building at Cui Wei Cui Jing Industrial Area, Zhuhai, PRC.

The properties above are of total rentable area of around 531,400 m[2] and are leased to Yue Yuen Group as may from time to time required by the Group. These properties are leased to Yue Yuen Group for production purposes, and include shoe/ sole factory buildings and dormitories for workers.

Terms

The rentals on the premises paid to Godalming are based on the open market rates at the time the agreement was renewed in 2002 and were reviewed periodically pursuant to the agreement and based on the then open market rental rate. The rentals on the additional premises are also based on the open market rates. On 9th January, 2007, the parties entered into the Supplemental Godalming Tenancy Agreement to revise the term of the tenancy to a period of three years commencing from 1st October, 2005. The current monthly rentals on the premises are charged at approximate market rates determined by independent professional valuer and are payable in cash.

Payment terms

First day of each month

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	6,688,000	7,135,000	3,568,000

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LETTER FROM THE BOARD

Previous Stock Exchange Waiver and Shareholder Approval

In compliance with the requirements of Rule 14A.35 of the Listing Rules, the parties entered into the Supplemental Godalming Tenancy Agreement which is conditional on the approval of Independent Shareholders. No application has been made with the Stock Exchange for a waiver from compliance with the requirements of the Listing Rules as the Company considers such waiver application is not applicable under the existing Rules. The Company is required to comply with the relevant reporting, announcement and/or independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

X. POU CHIEN LEASE AGREEMENT

PCC and Pou Chien entered into the Original Pou Chien Lease Agreement on 1st April, 2002 which expired on 31st December, 2003. PCC continued to lease the premises to Pou Chien following the expiry of the agreement until 30th September, 2005. On 9th January, 2007, the parties entered into the Pou Chien Lease Agreement to reflect the changes of leased premises. A summary of the terms of the agreements is set out below.

Dates

Original Pou Chien Lease 1st April, 2002 Agreement:

Pou Chien Lease Agreement: 9th January, 2007

Parties

Landlord: PCC

Tenant: Pou Chien, a wholly owned subsidiary of the Company and a manufacturer of chemical products used in shoe manufacturing

Premises under the 台灣彰化縣永靖鄉永褔路一段 265號 (No. 265, original agreement: Section 1 Yong Fu Road, Yong Jing Hsian, Chang Hua, Taiwan), which consists of building and land. The floor area for the building and the land is approximately 8,142 m[2] and 5,809 m[2] respectively

Premises under the 台灣彰化縣永靖鄉永褔路一段 277號 (No. 277, new agreement: Section 1 Yong Fu Road, Yong Jing Hsian, Chang Hua, Taiwan), which consists of building and land. The floor area for the building and the land is approximately 5,808 m[2] and 3,761 m[2] respectively

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LETTER FROM THE BOARD

Terms

The rentals paid on the premises to PCC under the original agreement were NT$476,280 (equivalent to approximately HK$114,783) per month. The original agreement expired on 31st December, 2003. PCC continued to lease the premises to Pou Chien at revised rental comparable to the then market rate following the expiry of the agreement. Due to change of leased premises, the parties entered into the Pou Chien Lease Agreement on 9th January, 2007, which is conditional on the approval of Independent Shareholders, for a term of three years commencing from 1st October, 2005 at a monthly rental of NT$1,200,407 (equivalent to approximately HK$289,298) which is based on open market rental at the relevant time and payable in cash.

Payment terms

No later than the 16th day of each month

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	365,000	383,000	218,000

Previous Stock Exchange Waiver and Shareholder Approval

In compliance with the requirements of Rule 14A.35 of the Listing Rules, the parties entered into the Pou Chien Lease Agreement which is conditional on the approval of Independent Shareholders. No application has been made with the Stock Exchange for a waiver from compliance with the requirements of the Listing Rules as the Company considers such waiver application is not applicable under the existing Rules. The Company is required to comply with the relevant reporting, announcement and/or independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

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LETTER FROM THE BOARD

XI. POU YUEN LEASE AGREEMENT

Pou Yuen and Pou Chien and Yue Dean (which was subsequently nominated by the Company) entered into the Original Pou Yuen Lease Agreement on 1st October, 2002. The parties terminated it and entered into the Pou Yuen Lease Agreement on 9th January, 2007. A summary of the terms of the agreements is set out below.

Dates

Original Pou Yuen Lease from 1st October, 2002 to 30th September, 2005 Agreement:

Pou Yuen Lease Agreement: from 1st October, 2005 to 30th September, 2008

Parties

Landlord:

Pou Yuen, a company which is beneficially owned by PCC as to 99.05% and is engaged in research and development of shoe moulds

Tenant: Yue Dean, a wholly owned subsidiary of the Company and is engaged in research and development and production of shoe moulds

Premises: 台灣彰化縣福興鄉三豐段福工路 4 號 (No. 4, Fu Kung Road, Fu Hsin Hsian, Chang Hua, Taiwan), which consists of building and land. The floor area for the building and land is approximately 8,355 m[2] and 4,110 m[2] respectively.

Terms

Under the Original Pou Yuen Lease Agreement, Pou Yuen leases to Pou Chien and Yue Dean the assets (including the premises mentioned above), facilities and equipment owned by Pou Yuen for the research and development and production purpose of shoe moulds for a period of 36 months from 1st October, 2002 to 30th September, 2005. The parties terminated the Original Pou Yuen Lease Agreement by entering into the Pou Yuen Lease Agreement on 9th January, 2007, which is conditional on the approval of Independent Shareholders, to formalise the rental and term of the tenancy, for a period of three years commencing from 1st October, 2005. The current rental is NT$3,077,737 (equivalent to approximately HK$741,735) per month which is based on open market rental at the relevant time and payable in cash.

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LETTER FROM THE BOARD

Payment terms

No later than the 16th day of each month

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	528,000	561,000	560,000

Previous Stock Exchange Waiver and Shareholder Approval

In compliance with the requirements of Rule 14A.35 of the Listing Rules, the parties entered into the Pou Yuen Lease Agreement which is conditional on the approval of Independent Shareholders. No application has been made with the Stock Exchange for a waiver from compliance with the requirements of the Listing Rules as the Company considers such waiver application is not applicable under the existing Rules. The Company is required to comply with the relevant reporting, announcement and/or independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

XII. YUE DEAN LEASE AGREEMENT

On 9th January, 2007, PCC and Yue Dean entered into the Yue Dean Lease Agreement. A summary of the terms of the agreement is set out below.

Date

Yue Dean Lease Agreement: 9th January, 2007

Parties

Landlord:

PCC

Tenant:

Yue Dean, a wholly owned subsidiary of the Company and is engaged in research and development and production of shoe moulds

Premises:

台灣彰化縣福興鄉福工路六之一號 (6-1, Fu Kung Road, Fu Hsin Hsian, Chang Hua, Taiwan), which consists of building and land. The floor area for the building and land is approximately 2,092 m[2] and 722 m[2] respectively.

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LETTER FROM THE BOARD

Terms

The rental payable for the premises to PCC is NT$406,863 (equivalent to approximately HK$98,054) per month which is based on open market rentals at the relevant time. The Yue Dean Lease Agreement dated 9th January, 2007, which is conditional on the approval of Independent Shareholders will continue in force for a period of three years from 1st October, 2005 at the same rental which is payable in cash.

Payment terms

No later than the 16th day of each month

According to the audited consolidated financial statements of the Group for the two financial years ended 30th September, 2004 and 2005 and the unaudited management accounts of the Company for the first half year of the financial year ended 30th September, 2006, the relevant transaction amounts are:

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	–	–	74,000

Previous Stock Exchange Waiver and Shareholder Approval

In compliance with the requirements of Rule 14A.35 of the Listing Rules, the parties entered into the Yue Dean Lease Agreement which is conditional on the approval of Independent Shareholders. No application has been made with the Stock Exchange for a waiver from compliance with the requirements of the Listing Rules as the Company considers such waiver application is not applicable under the existing Rules. The Company is required to comply with the relevant reporting, announcement and/or independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

XIII. POU YII LEASE AGREEMENT

The Pou Yii Lease Agreement was entered into between 寶乙建設股份有限公司 (Pou Yii Development Company Limited) and 寶建科技股份有限公司 (Pou Chien Technology Company Limited) on 30th September, 2004, for one year, from 1st October, 2004 to 30th September, 2005. On 9th January, 2007, the parties entered into the Supplemental Pou Yii Lease Agreement to extend the term of the Pou Yii Lease Agreement, which is conditional on the approval of Independent Shareholders, for 3 years commencing from 1st October, 2005.

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LETTER FROM THE BOARD

Parties

Landlord:

(寶乙建設股份有限公司 ) Pou Yii Development Company Limited, a non-wholly owned subsidiary of PCC. The principal activities of (寶乙建設股份有限公司 ) Pou Yii Development Company Limited are construction of business building, and hiring and selling residence

Tenant:

(寶建科技股份有限公司 ) Pou Chien Technology Company Limited, a wholly-owned subsidiary of the Company. The principal activity of (寶建科技股份有限公司 ) Pou Chien Technology Company Limited is wholesale of synthetic rubber

Premises:

台灣台中市南屯區大同里東興路 2段 177號 1 樓 (1/F., No. 177 Tong Shing Road, Section 2, Nan Twen District, Taichung, Taiwan

Term: 3 years commencing from 1st October, 2005

The rent for the premises is NT$3,000 per month (equivalent to approximately HK$723) which is based on open market rental at the relevant time and payable in cash. The extended lease agreement, would continue in force for a period of 3 years from 1st October 2005.

Payment terms

No later than the 16th day of each month

			2006
Financial year ended			(first
30th September (except 2006)	2004	2005	half year)
Transaction amount_(US$)_	–	1,000	550

Previous Stock Exchange Waiver and Shareholder Approval

In compliance with the requirements of Rule 14A.35 of the Listing Rules, the parties entered into the Supplemental Pou Yii Lease Agreement which is conditional on the approval of Independent Shareholders. No application has been made with the Stock Exchange for a waiver from compliance with the requirements of the

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LETTER FROM THE BOARD

Listing Rules as the Company considers such waiver application is not applicable under the existing Rules. The Company is required to comply with the relevant reporting, announcement and/or independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

XIV. REST ASSURED AGREEMENTS

Since late 2004, Rest Assured has been sourcing shoes, sports apparel and subcontractors for and on behalf of Yue Cheng and Guangzhou Pouxue. Other members of the Yue Yuen Group also purchase from Rest Assured shoes and sportswear. Rest Assured is a connected person of the Company and transactions between Rest Assured and each of the members of the Yue Yuen Group, Yue Cheng and Guangzhou Pouxue are connected transactions for the purposes of the Listing Rules.

On 9th January, 2007, the parties formalised the arrangements between them by entering into the Rest Assured Agreements. A summary of the principal terms of the agreements is set out below.

Date

9th January, 2007

Parties

Yue Cheng Rest Assured Agreement

Yue Cheng: a wholly-owned subsidiary of Selangor Gold Limited, which is a non-wholly owned subsidiary of the Company owned as to 70% ultimately by the Company, as to 17.5% by Jollyard and as to 12.5% by Mr. Huang. Yue Cheng is in the business of manufacturing and sale of shoes, sports apparel and accessories merchandise

Rest Assured: a company beneficially owned in equal share by Mr. Tsai, Mr. David N. F. Tsai and Mr. Huang. It engages in providing sourcing, quality control, design and product development to clients

Payment terms

30 days, payable from the date of invoice

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LETTER FROM THE BOARD

Guangzhou Pouxue Rest Assured Agreement

Guangzhou Pouxue: a company which is 100% beneficially owned by Dedicated Group Limited, which is a non-wholly owned subsidiary of the Company, owned as to 70% ultimately by the Company, as to 17.5% by Jollyard, and 12.5% ultimately by Mr. Huang. Guangzhou Pouxue engages in wholesale and retail trading of sports shoes, leather shoes, apparel and accessories

Rest Assured:

a company beneficially owned in equal share by Mr. Tsai, Mr. David N. F. Tsai and Mr. Huang. It engages in providing sourcing, quality control, design and product development to clients

Payment terms

30 days, payable from date of invoice

YY Rest Assured Agreement

Members of the subsidiaries of Yue Yuen Yue Yuen Group:

Rest Assured: a company beneficially owned in equal share by Mr. Tsai, Mr. David N. F. Tsai and Mr. Huang. It engages in providing sourcing, quality control, design and product development to clients

Payment terms

30 days, payable from date of invoice

Terms

Each of Yue Cheng and Guangzhou Pouxue may request Rest Assured to source shoes, sports apparel and accessories merchandise for them and on their behalf. Yue Cheng or Guangzhou Pouxue, as the case may be, is free to place an order with any person it may choose.

Each of Yue Cheng and Guangzhou Pouxue may also request Rest Assured to find suitable subcontractors for and on their behalf. If Rest Assured accepts any such engagement, Rest Assured is required to monitor the progress of the subcontractors’ production and to carry out inspection and checking on the quality of the finished products manufactured by the subcontractors.

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LETTER FROM THE BOARD

In return for the services provided by Rest Assured, Yue Cheng and Guangzhou Pouxue will pay to Rest Assured a fee equivalent to 5 per cent. of the FOB price set out in the purchase order from Yue Cheng or Guangzhou Pouxue as the case may be.

Under the YY Rest Assured Agreement dated 9th January, 2007, Rest Assured agreed to supply shoes and sportswear to members of the Yue Yuen Group. If Rest Assured accepts any order placed by wholesale/retail members of the Yue Yuen Group, it will supply the products to the Group on the terms of the relevant order and the price will be payable in cash.

The Rest Assured Agreements, will be in force for a period of one year from 1st October, 2005. According to the audited consolidated financial statements of the Group for the two financial years ended 30th September, 2004 and 2005 and the unaudited management accounts of the Company for the first half of the financial year ended 30th September, 2006, the relevant transaction amounts are:

Financial year ended 30th September (except 2006) 2004 Service fee paid by Yue Cheng_(US$) N/A Service fees paid by Guangzhou Pouxue(US$) N/A Connected purchases from Rest Assured(US$) N/A Total transaction amount(US$)_ N/A	2005 901,000 113,000 703,000 1,717,000	2006 (first half year) 447,000 54,000 2,025,000
		2,526,000

These transactions have been terminated since 30th September, 2006.

Previous Stock Exchange Waiver and Shareholder Approval

The Rest Assured Agreements are not subject to the approval of the Independent Shareholders since the annual aggregate values of the transactions thereunder are less than the thresholds for Independent Shareholders approval requirement but more than the thresholds for announcement and reporting requirement under the Listing Rules. However, the Stock Exchange has indicated that the GBD and Rest Assured Transactions should be aggregated by virtue of Mr. Tsai’s interest in these companies. As such, the Rest Assured Agreements will also be put forward to Independent Shareholder for their ratification and approval in compliance with the Listing Rules.

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LETTER FROM THE BOARD

XV. REASONS AND BENEFITS FOR THE CONTINUING CONNECTED TRANSACTIONS AND REST ASSURED TRANSACTIONS

The Company, through its subsidiaries, engages in the manufacture (as original equipment manufacturer and original design manufacturer) and sale of athletic footwear, athletic style leisure footwear, casual and outdoor footwear. The Group also engages in wholesale and retail business of shoes and sportswear. The Continuing Connected Transactions and Rest Assured Transactions have been taking place for some time and are essential for the continued operation and growth of the business of the Group. Without them, the Group would have to conduct these transactions with other business partners. This will involve identifying companies and re-negotiating all terms of the transactions. Accordingly, the Directors (including the independent non-executive Directors who have been advised by the IFA) believe that the terms of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions are fair and reasonable and are in the interest of and are beneficial to the Group and Shareholders as a whole. The Directors are of the opinion that there are no disadvantages to the Continuing Connected Transactions.

XVI. CONNECTED PERSONS, ANNUAL AMOUNTS AND SPECIAL GENERAL MEETING

PCC indirectly owns or controls approximately 49.54% of the Company’s issued share capital. GBD is ultimately owned as to 94.12% by Mr. Tsai, an ultimate substantial shareholder of the Company, and 5.88% by PCC. Godalming has no shareholding in the Company but is owned as to 85.45% by a discretionary trust, the beneficiaries of which include a Director of the Company, Mr. Tsai Chi Neng and his relatives. PCC, GBD and Godalming are therefore connected persons of the Company within the meaning of the Listing Rules. Rest Assured is also a connected person of the Company for the reasons stated in the paragraph under the section headed “XIV. REST ASSURED AGREEMENTS”.

The Continuing Connected Transactions in respect of which indefinite waivers have been granted by the Stock Exchange have been carried on in compliance with the conditions of such waivers. The Company has terminated the transactions, or entered into supplemental agreements, or formalised previous dealings by entering into written agreements with the relevant parties, so as to comply with the existing Listing Rules requirements. For ease of future administration, the relevant agreements, if approved by the Independent Shareholders, will take effect from 1st October, 2005 to coincide with the Company’s financial year. These agreements are conditional upon the approval of Independent Shareholders at the SGM.

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LETTER FROM THE BOARD

The following is a summary of the historical transaction amounts for each of the Continuing Connected Transactions and the Rest Assured Transactions for the two years ended 30th September, 2005 and six months ended 31st March, 2006:

Connected Group

PCC Supplemental Production Agreement Supplemental PCC Management Service Agreement Supplemental PCC Services Agreement PCC Connected Sales Agreement PCC Connected Purchases Agreement Pou Chien Lease Agreement Pou Yuen Lease Agreement Yue Dean Lease Agreement Supplemental Pou Yii Lease Agreement Sub-Total: Supplemental GBD Management Service Agreement Supplemental GBD Tenancy Agreement GBD Box Agreement Sub-Total: Godalming Supplemental Godalming Tenancy Agreement Sub-Total: Rest Assured Yue Cheng Rest Assured Agreement Guangzhou Poxue Rest Assured Agreement YY Rest Assured Agreement Sub-Total: Total:	For the year ended 30th September, 2004 2005 (US$) (US$) 13,341,000 12,102,000 10,877,000 16,762,000 299,892,000 331,756,000 26,053,000 21,464,000 2,769,000 3,013,000 365,000 383,000 528,000 561,000 – – – 1,000 353,825,000 386,042,000 10,043,000 5,626,000 2,096,000 2,068,000 3,217,000 2,007,000 15,356,000 9,701,000 6,688,000 7,135,000 6,688,000 7,135,000 – 901,000 – 113,000 – 703,000 – 1,717,000 375,869,000 404,595,000	For the six months ended 31st March, 2006 (US$) 5,186,000 13,987,000 165,379,000 8,957,000 803,000 218,000 560,000 74,000 550
		195,164,550

		1,452,000 1,015,000 499,000
		2,966,000

		3,568,000
		3,568,000

		447,000 54,000 2,025,000
		2,526,000

		204,224,550

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LETTER FROM THE BOARD

Based on historical amounts and estimated future business needs, the expected annual caps for each group of connected transactions in the years 2006, 2007 and 2008 are set out below.

Connected Group

PCC Supplemental Production Agreement Supplemental PCC Management Service Agreement Supplemental PCC Services Agreement PCC Connected Sales Agreement PCC Connected Purchases Agreement Pou Chien Lease Agreement Pou Yuen Lease Agreement Yue Dean Lease Agreement Supplemental Pou Yii Lease Agreement Sub-Total: GBD Supplemental GBD Management Service Agreement Supplemental GBD Tenancy Agreement GBD Box Agreement Sub-Total: Godalming Supplemental Godalming Tenancy Agreement Sub-Total: Rest Assured Yue Cheng Rest Assured Agreement Guangzhou Pouxue Rest Assured Agreement YY Rest Assured Agreement Sub-Total: Total	For the financial year ending 30th September 2006 2007 2008 (US$) (US$) (US$) 12,000,000 12,000,000 12,000,000 31,900,000 39,100,000 43,600,000 370,600,000 415,100,000 465,900,000 21,500,000 47,000,000 47,000,000 3,000,000 3,000,000 3,000,000 450,000 450,000 450,000 1,150,000 1,150,000 1,150,000 160,000 160,000 160,000 1,000 1,000 1,000 440,761,000 517,961,000 573,261,000 3,000,000 3,300,000 3,700,000 2,300,000 2,300,000 2,300,000 1,100,000 1,100,000 1,100,000 6,400,000 6,700,000 7,100,000 7,000,000 7,300,000 7,300,000 7,000,000 7,300,000 7,300,000 1,100,000 – – 110,000 – – 3,000,000 – – 4,210,000 – – 458,371,000 531,961,000 587,661,000	For the financial year ending 30th September 2006 2007 2008 (US$) (US$) (US$) 12,000,000 12,000,000 12,000,000 31,900,000 39,100,000 43,600,000 370,600,000 415,100,000 465,900,000 21,500,000 47,000,000 47,000,000 3,000,000 3,000,000 3,000,000 450,000 450,000 450,000 1,150,000 1,150,000 1,150,000 160,000 160,000 160,000 1,000 1,000 1,000 440,761,000 517,961,000 573,261,000 3,000,000 3,300,000 3,700,000 2,300,000 2,300,000 2,300,000 1,100,000 1,100,000 1,100,000 6,400,000 6,700,000 7,100,000 7,000,000 7,300,000 7,300,000 7,000,000 7,300,000 7,300,000 1,100,000 – – 110,000 – – 3,000,000 – – 4,210,000 – – 458,371,000 531,961,000 587,661,000
		573,261,000

		3,700,000 2,300,000 1,100,000
		7,100,000

		7,300,000
		7,300,000

		– – –
		–

		587,661,000

Each of the Continuing Connected Transactions in each connected group will be subject to the sub-total for such connected group.

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LETTER FROM THE BOARD

The aggregates values of these Continuing Connected Transactions for each of the two financial years ended 30th September, 2005 were approximately US$375,869,000 and US$404,595,000 respectively. The Stock Exchange has indicated that the Continuing Connected Transactions should be aggregated and should not be considered on an individual agreement basis for the purposes of ascertaining the disclosure and independent shareholders’ approval requirements under the Listing Rules. For the purpose of continuing compliance with the Listing Rules, each of these Continuing Connected Transactions will be subject to aggregate annual caps for each of the three financial years ending 30th September, 2008 on a connected group basis. The consideration under each of the Continuing Connected Transactions and the Rest Assured Transactions have been and will be satisfied from internal resources of the Group.

The Directors (including the independent non-executive Directors) believe that the terms of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions are fair and reasonable and are in the interest of and are beneficial to the Group and Shareholders as a whole.

XVII. GENERAL

An Independent Board Committee has been constituted to make a recommendation to the Independent Shareholders in respect of the resolution to approve the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions. Its advice is contained in the “Letter from the Independent Board Committee” in this circular. The IFA has been appointed by the Company to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions are fair and reasonable so far as the Shareholders are concerned. The SGM will be held on 1st March, 2007 for the purpose of, among others, obtaining approval from the Independent Shareholders in respect of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions by way of poll. Each of PCC, GBD, Godalming, Rest Assured and Mr. Tsai or any connected person and their respective Associates who are Shareholders will abstain from voting on the resolution to approve the relevant Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions at the SGM.

In accordance with the requirements of Rule 14A.37 of the Listing Rules, the independent non-executive Directors will also review the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions and confirm in the Company’s annual report and accounts that the transactions have been entered into:

(a) in the ordinary and usual course of business of the Group;
(b) either on normal commercial terms or on terms no less favourable to members of the Group than terms available to or from independent third parties; and
(c) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole.

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LETTER FROM THE BOARD

XVIII. RECOMMENDATIONS

The Directors consider that the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions are in the interest of the Company and the Shareholders as a whole. Accordingly, the Directors recommend that the Shareholders vote in favour of all resolutions to be proposed at the SGM in respect of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions. Your attention is drawn to the letter from the Independent Board Committee, the letter from the IFA and the appendix to this circular.

XIX. RIGHT TO DEMAND A POLL

Pursuant to bye-law 66 of bye-laws of the Company, a resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(a) by the chairman; or
(b) by at least three (3) Members present in person (or in the case of a Member being a corporation by its duly authorised representative) or by proxy for the time being entitled to vote at the meeting; or
(c) by a Member or Members present in person (or in the case of a Member being a corporation by its duly authorised representative) or by proxy and representing not less than one-tenth of the total voting rights of all Members having the right to vote at the meeting; or
(d) by a Member or Members present in person (or in the case of a Member being a corporation by its duly authorised representative) or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

Yours faithfully, For and on behalf of

Yue Yuen Industrial (Holdings) Limited Tsai Chi Neng

Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED 裕元工業（集團）有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 551)

7th February, 2007

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We have been appointed as members of the Independent Board Committee to advise the Independent Shareholders of Yue Yuen Industrial (Holdings) Limited in respect of the resolution to approve the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions, details of which are set out in the “Letter from the Board” contained in the circular of the Company (the “Circular”) of which this letter forms part. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings when used in this letter.

Your attention is drawn to the “Letter from the Board”, the advice of the IFA in its capacity as the IFA to the Independent Board Committee and the Independent Shareholders in respect of whether the terms of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions are fair and reasonable and in the interest of the Company and its Independent Shareholders as a whole, as set out in the “Letter from Somerley Limited” as well as other additional information set out in other parts of the Circular.

Having taken into account the advice of, and the principal factors and reasons considered by the IFA in relation thereto as stated in its letter, we consider the terms of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions to be fair and reasonable and are in the interests of the Company and the Independent Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM in respect of the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions.

Yours faithfully, Independent Board Committee So Kwan Lok, Poon Yiu Kin, Samuel and Liu Len Yu Independent Non-executive Directors

* for identification only

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LETTER FROM SOMERLEY LIMITED

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SOMERLEY LIMITED

10th Floor The Hong Kong Club Building 3A Chater Road Central Hong Kong

7th February, 2007

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders on the Continuing Connected Transactions between the Group and the PCC Group or the GBD Group or Godalming. We are also engaged to advise on the continuing connected transactions between the Group and Rest Assured conducted pursuant to the Yue Cheng Rest Assured Agreement, Guangzhou Pouxue Rest Assured Agreement and YY Rest Assured Agreement (the “Rest Assured Transactions”). The Rest Assured Transactions have been terminated with effect from 1st October, 2006. Details of the Continuing Connected Transactions and their respective Annual Caps for the three years ending 30th September, 2008, together with details of the Rest Assured Transactions, are set out in the letter from the Board contained in the circular of the Company to the Shareholders dated 7th February, 2007 (the “Circular”), of which this letter forms a part. Unless otherwise defined herein, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

As at the Latest Practicable Date, PCC was the controlling shareholder (as defined under the Listing Rules) holding approximately 49.5% of the issued share capital of the Company. GBD is owned as to 94.1% by Mr. Tsai Chi Jui (“Mr. Tsai”) who is a substantial shareholder (as defined under the Listing Rules) holding approximately 12.8% of the issued share capital of the Company. Godalming is 85.5% owned by a discretionary trust of which Mr. Tsai Chi Neng, a Director, and his relatives are beneficiaries. Rest Assured is owned in equal shares by Mr. Tsai, Mr. David N. F. Tsai (a Director) and Mr. Huang (a director and substantial shareholder of certain subsidiaries of the Company). As a result, PCC, GBD, Godalming and Rest Assured constitute connected persons of the Company under the Listing Rules. Accordingly, the transactions between the Group and the PCC Group, the GBD Group, Godalming and Rest Assured constitute connected transactions of the Company under the Listing Rules and require approval by the Independent Shareholders by poll at the SGM.

The Independent Board Committee, comprising all the three independent nonexecutive Directors, namely Mr. So Kwan Lok, Mr. Poon Yiu Kin, Samuel and Dr. Liu Len Yu, has been established to make recommendations to the Independent Shareholders as to

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LETTER FROM SOMERLEY LIMITED

whether the terms of the Continuing Connected Transactions (including the Annual Caps) and the Rest Assured Transactions are fair and reasonable and whether entering into the Continuing Connected Transactions and the Rest Assured Transactions is in the interests of the Company and the Shareholders as a whole. We, Somerley Limited, have been appointed to advise the Independent Board Committee and the Independent Shareholders in relation to the above.

In formulating our opinion and recommendation, we have relied on the information and facts supplied, and the opinions expressed, by the Directors and have assumed that the information and facts provided and opinions expressed to us were true, accurate and complete in all material aspects at the time they were made and remain true, accurate and complete up to the time of the holding of the SGM. We have also sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed to us. We consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter and that it is justified for us to rely on such information. We have no reason to believe that any material information has been withheld from us, nor doubt the truth or accuracy of the information provided. We have relied on such information and consider that the information we have received is sufficient for us to reach an informed view. We have not, however, conducted any independent investigation into the business and affairs of the Group, the PCC Group, the GBD Group, Godalming or Rest Assured.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion on the terms of the Continuing Connected Transactions and the Rest Assured Transactions and the Annual Caps for each of the Continuing Connected Transactions, we have taken into consideration the following principal factors and reasons:

1. Reasons for the Continuing Connected Transactions and the Rest Assured Transactions

(A) The Continuing Connected Transactions can be broadly divided into the following categories:
- (i) transactions with the PCC Group

PCC is the controlling shareholder of the Company and a company listed on the Taiwan Stock Exchange Corporation. The PCC Group is principally engaged in the manufacturing and sales of footwear and its related products in Taiwan and has been in the industry since 1969. It is also engaged in the manufacturing and trading of computer hardware, computer accessories and components. The Group is principally engaged in the manufacturing and sales of athletic footwear, athletic style leisure footwear, casual and outdoor and sportswear footwear with its principal production facilities being located in the PRC, Vietnam and Indonesia. Being the controlling shareholder of the Company, PCC has provided a

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LETTER FROM SOMERLEY LIMITED

non-competition undertaking (the “Undertaking”) in favour of the Group. Pursuant to the Undertaking, the PCC Group shall not be engaged or interested in any business (other than through the Company) which is engaged in the production on a commercial scale of raw materials, components, machinery, moulds and tools for shoes outside Taiwan and in such places where the Company or its associates (as defined in the Listing Rules) have operations and/or sales.

The Group has been conducting ongoing transactions with the PCC Group and they are carried out under the following agreements:

(a) PCC Services Agreement

Pursuant to the PCC Services Agreement, the PCC Group shall purchase and source materials and machinery in Taiwan or overseas on behalf of the Group; perform product research and development and produce sample footwear for the Group based on customers’ specifications; and recruit staff in Taiwan on behalf of the Group.

The Directors advise that retention of the above services from the PCC Group is essential or expeditious to the Group’s operations. The Group does not consider it cost efficient to establish its own research centre for the design and development of footwear in Taiwan. However, as a number of the Group’s major customers have their Far East bases established in Taiwan, they normally prefer to have the shoe design and development activities carried out in Taiwan. In addition, the long-established presence of the PCC Group in the shoe manufacturing industry in Taiwan has enabled the PCC Group to nurture close relationships with its suppliers. As such, it would be in the interest of the Group to leverage on such network in sourcing and purchasing materials and machinery through the PCC Group under the PCC Services Agreement. Such arrangements have been in existence since 1992 and have worked well in the past.

(b) Production Agreement

Prime Asia, a wholly-owned subsidiary of the Company, is one of the largest full grain leather tanneries in the world. The leather produced is used for the manufacturing of sport and/or casual footwear. Barits, a subsidiary of PCC, possesses the expertise and production facilities in Taiwan for producing quality leather. The Group therefore entered into the Production Agreement in order to gain access to the expertise and the tanning facilities owned by Barits. Pursuant to the Production Agreement, Barits’ tannery shall be made available for use by the Group on an exclusive basis.

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LETTER FROM SOMERLEY LIMITED

(c) PCC Connected Sales Agreement

As the PCC Group is restricted by the Undertaking from conducting shoe-related activities outside Taiwan, the PCC Group may purchase leather, moulds, finished and semi-finished shoe products and packaging boxes from the Group, which has the benefit of having its manufacturing operations in lower-cost countries such as the PRC, Vietnam and Indonesia.

(d) PCC Connected Purchases Agreement

Pursuant to the above agreement, the Group may purchase raw materials, production tools such as moulds and shoe-related products manufactured by the PCC Group in Taiwan.

(e) Pou Chien Lease Agreement

The PCC Group agrees to lease to Pou Chien Chemical Company Limited (“Pou Chien”), a wholly-owned subsidiary of the Company, a property situated at Yong Fu Road, Chang Hua, Taiwan. The property is used by Pou Chien for production of chemical products for use in shoe manufacturing.

(f) Pou Yuen Lease Agreement and Yue Dean Lease Agreement

The PCC Group agrees to lease to the Group two separate properties situated at Fu Kung Road, Chang Hua, Taiwan (together with facilities and equipment housed inside the property in the case of the Pou Yuen Lease Agreement) for the production of shoe moulds by the Group.

(g) Pou Yii Lease Agreement

Pou Chien Technology Company Limited, a wholly-owned subsidiary of the Company, rents from the PCC Group a property situated at Tong Shing Road, Taichung, Taiwan for use as its office.

(h) PCC Management Service Agreement

The PCC Group operates a number of computer manufacturing factories in the Industrial Estate situated at He Lu Industrial Area, Huang Jiang Town, Dongguan, Guangdong, the PRC. The Group is the estate manager of the Industrial Estate. The Group has entered into the PCC Management Service Agreement with the PCC Group whereby the Group shall provide management services (“Management Services”), including supply of electricity and water, upkeep of common areas and provision

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LETTER FROM SOMERLEY LIMITED

of security services, to the factories in the Industrial Estate and operated by the PCC Group;

(ii) transactions with the GBD Group

The GBD Group is controlled by Mr. Tsai who is a substantial shareholder of the Company. The principal business of the GBD Group is the manufacturing and trading of computer hardware, computer accessories and components.

The ongoing transactions between the Group and the GBD Group are carried out under the following agreements:

(a) GBD Management Service Agreement and GBD Tenancy Agreement

The GBD Group is also an occupant of the Industrial Estate. Apart from the Management Services provided by the Group as the estate manager to all occupants in the Industrial Estate, the Group also supplies hot water to the GBD Group’s dormitories in the Industrial Estate at GBD’s special request.

Besides being the estate manager, the Group owns a number of units of the Industrial Estate. Pursuant to the GBD Tenancy Agreement, the Group agrees to lease to the GBD Group properties in the Industrial Estate with a size requested by the GBD Group from time to time, subject to the condition that the leased gross floor area shall not exceed approximately 136,000 square metres. The leased properties are used by the GBD Group as dormitories.

(b) GBD Box Agreement

Under the GBD Box Agreement, the Group agrees to supply packaging boxes to the GBD Group.

(iii) transactions with Godalming

(a) Godalming Tenancy Agreement

Godalming is 85.5% owned by a discretionary trust of which Mr. Tsai Chi Neng, a Director, and his relatives are beneficiaries. The Group has entered into the Godalming Tenancy Agreement with Godalming pursuant to which Godalming agrees to lease to the Group properties in different towns of the Guangdong Province in the PRC with a size requested by the Group from time to time, subject to the conditions that the aggregate leased gross floor area shall not exceed approximately 531,400 square meters. The Group uses these premises as shoe/sole factories or workers’ dormitories.

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LETTER FROM SOMERLEY LIMITED

(B) Rest Assured Transactions

Rest Assured is owned in equal shares by Mr. Tsai (a substantial shareholder), Mr. David N. F. Tsai (a Director) and Mr. Huang (a director and substantial shareholder of certain subsidiaries of the Company). Rest Assured is principally engaged in sourcing, design and development of shoes, sports apparel and accessories. It also performs, on behalf of customers, quality control work on products sourced by it. Besides manufacturing products on its own, the Group used to source, on a small scale, products of certain brands through Rest Assured. This arrangement with Rest Assured has been terminated with effect from 1st October, 2006.

The transactions between the Group and Rest Assured were carried out under the following agreements:

(a) Yue Cheng Rest Assured Agreement and Guangzhou Pouxue Rest Assured Agreement

Pursuant to the above agreements, Rest Assured agreed to perform development; find the suitable subcontractors; monitor the production of these subcontractors; and perform inspection and quality control on finished products of shoes, sports apparel and accessories for Yue Cheng and Guangzhou Pouxue, which are indirectly held non-wholly owned subsidiaries of the Group.

(b) YY Rest Assured Agreement

Under the YY Rest Assured Agreement, Rest Assured agreed to sell shoes and sportswear products to the Group.

2. Pricing basis

(i) cost based

(a) Production Agreement

The charges pursuant to the Production Agreement are principally based on cost. Under the Production Agreement, the Group will reimburse the PCC Group for all variable costs and direct selling, general and administration expenses incurred for the Group’s tanning activities. As for the fixed costs incurred by Barits for maintaining the manufacturing facilities (including property, plant and equipments) exclusively for use by the Group, the Group will pay the PCC Group rental charges. Rental charges for land and building are determined based on independent valuation, while those for equipments and machinery are at cost plus a funding charge. Rental for equipments and machinery during their depreciable lives are calculated by reference to

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LETTER FROM SOMERLEY LIMITED

their acquisition cost, amortised over the estimated useful lives of 10 years, plus a mark-up (being the net book value multiplied by a rate representing the aggregate of 2.5% and 3-month London Interbank Offered Rate (“LIBOR”)); and thereafter at an annual rate of 3% of their original acquisition cost.

According to the 2006 annual report of the Company, the longterm borrowing cost of the Group ranged from 4.5% to 6.7% per annum during the year ended 30th September, 2006. The current mark-up as agreed under the Production Agreement of 7.9% (based on the 3-month LIBOR at the Latest Practicable Date of approximately 5.4%) is slightly higher than the borrowing cost of the Group. However, as the Production Agreement enables the Group to make use of the full tanning facilities of Barits without having to bear the fixed cost required to set up its own facilities, we consider a higher mark-up justified.

(ii) cost plus basis

(b) PCC Services Agreement

The Group shall reimburse the PCC Group all costs for the materials and machinery purchased by it on behalf of the Group and staff costs and other overheads incurred by the PCC Group for rendering the services pursuant to the PCC Services Agreement to the Group. In addition, the Group will also pay the PCC Group the followings fees (“Services Fees”):

(1) 0.5% of the net invoiced amounts of products developed by the PCC Group and sold by the Group;
(2) 1% of the invoiced merchandise cost where purchases of materials, machinery and other goods from within Taiwan (including inspection and logistics arrangements) are handled by the PCC Group on behalf of the Group; and
(3) 0.5% of the invoiced merchandise cost where the PCC Group will identify the suppliers of materials, machinery and other goods for the Group, but purchase, inspection and logistics arrangements of which are handled directly by the Group.

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LETTER FROM SOMERLEY LIMITED

With regard to the research and development services provided by the PCC Group (i.e. Service Fees in item (1) mentioned above), we have referred to the pricing basis of a number of licence agreements announced by companies listed on the Stock Exchange since 2004. The table below summarizes the terms of the relevant agreements:

					Date of public
Parties	Nature of transaction		Pricing basis		documents
AAC Acoustic	•	Licence to use the	•	One-off fee; and	14th September,
Technologies		patents and know-how			2006
Holdings Inc.		in relation to	•	1% of the gross sales
(Stock code: 2018)		electroluminescent		for the first 100 million
		products		pieces of products; and
and				0.5% of the gross sales
				thereafter
Novatech Electro-
Luminescent Inc.
Advanced	•	Provision of	•	3% of the net price	27th March, 2006
Semiconductor		information, technology
Manufacturing		and technical	•	10% of the net price
Corporation Limited		assistance and grant
(Stock code: 3355)		of licence to
		manufacture
and		semiconductors
Koninklijke Philips	•	Licence to use
Electronics N.V.		intellectual property
		rights to manufacture
		identification products
Culturecom Holdings	•	Licence to use certain	•	One-off fee of	30th September,
Limited		technology to		US$10 million; and	2005
(Stock code: 343)		manufacture		a fixed percentage of
		microprocessors used		the net sales
and		for computers
Transmeta Corporation
COSCO International	•	Transfer of technology	•	One-off fee; and	15th June, 2005
Holdings Limited		and know-how for the
(Stock code: 517)		manufacturing of	•	0.5% of net sales from
		different coatings to a		2003 to 2007; and 0.75%
and		joint venture in		of the net sales for the
		Shanghai		remaining term
Kansai Paint Co., Ltd.
	•	Transfer of technology	•	One-off fee; and
		and know-how for the
		manufacturing of	•	0.5% of the net sales
		different coatings to
		a joint venture in
		Tianjian
Tencent Holdings	•	Licence to use certain	•	40% of all gross	7th June, 2004
Limited		technology and		revenue
(Stock code: 700)		intellectual property
		for the implementation
and		of instant messaging
MIH QQ (BVI) Limited

– 48 –

LETTER FROM SOMERLEY LIMITED

					Date of public
Parties	Nature of transaction		Pricing basis		documents
TCL Multimedia	•	Licence to use certain	•	A fixed rate for every	31st May, 2004
Technology Holdings		patents to manufacture		television receiver
Limited		television receivers		produced
(Stock code:1070)
and
Thomson S.A.
China Resources Logic	•	Licence to use certain	•	2% of the net sales for	28th July, 2004
Limited		technologies to		the first six months;
(Stock code: 1193)		manufacture		and 3% of net sales for
		compressors used for		the remaining term
and		air-conditioners
Sanyo Electric Co., Ltd

Sources: The announcements or circulars of the respective companies.

As illustrated in the above table, the licensing fees are largely charged as a percentage of sales price and the range is from 0.5% to 40%. The fee to be charged by the PCC Group for the research and development service provided to the Group is within the range.

In assessing the pricing bases for the purchasing and sourcing services to be charged by the PCC Group (i.e. Item (2) and (3) mentioned above) pursuant to the PCC Services Agreement, we have reviewed the pricing basis of a number of sourcing or purchasing agreements as announced by companies listed on the Stock Exchange since 2004. The table below summarizes the terms of the relevant agreements:

	Nature of	Nature of			Date of public
Parties	transaction		Pricing basis		documents
Automated System	•	Purchase of products	•	not higher than 8%	21st February,
Holdings Limited		in areas where		of the cost	2006
(Stock code: 771)		another party has
		no presence
and		(a reciprocal
		arrangement)
Computer Sciences
Corporation
China Telecom	•	Provision of	•	1% of the contract	15th December,
Corporation		comprehensive		value for imported	2005
Limited		procurement		equipments
(Stock code: 728)		service
			•	3% of the contract
and				value for domestic
				equipments and
China				materials
Telecommunications
Corporation

– 49 –

LETTER FROM SOMERLEY LIMITED

	Nature of	Nature of			Date of public
Parties	transaction		Pricing basis		documents
China Special Steel	•	Sourcing of iron ore	•	90% of the market	13th December,
Holdings Company				price, and no less	2005
Limited				favourable than those
(Stock code: 2889)				from independent
				third parties
and
East Grow Management
Limited
China Yurun Food	•	Procurement of	•	3% of the amount of	20th September,
Group Limited		packaging materials		the materials procured	2005
(Stock code: 1068)
and
Anhui Xuerun Meat
Product Co., Ltd.
China Netcom Group	•	Procurement of	•	not more than 1% of	12th September,
Corporation		imported and domestic		the contract value	2005
(Hong Kong) Limited		telecommunication		for imported
(Stock code: 906)		equipment		equipments
and			•	not more than 3% of
				the contract value for
China Network				domestic equipment
Communications				and materials
Group Corporation
Minmetals Resources	•	Sourcing of alumina	•	RMB 1 per tonne	30th June, 2005
Limited
(Stock code: 1208)
and
China Minmetals
Non-ferrous Metals
Company Limited
Jolimark Holdings	•	Sourcing of electronic	•	1% of the contract	20th June, 2005
Limited		parts and components		price
(Stock code: 2028)		and raw materials
and
Kong Yue Technology
(S) Pte. Ltd.

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LETTER FROM SOMERLEY LIMITED

	Nature of	Nature of			Date of public
Parties	transaction		Pricing basis		documents
TCL Communication	•	Purchase of raw	•	0.2% of the invoice	20th September,
Technology Holdings		materials for		price (in the case of	2004
Limited (“TCL Com”)		each other		purchases made by
(Stock code: 2618)				TCL Corp on behalf of
				TCL Com)
and
			•	market price (in the
TCL Corporation				case of purchases
(“TCL Corp”)				made by TCL Com
				on behalf of TCL Corp)

Source: The announcements or circulars of the respective companies.

Based on the above table, we note that the fees for purchasing and sourcing services are largely charged with a mark-up in the range of 0.2% to 8%. The fees for the purchasing and sourcing services charged by the PCC Group under the PCC Services Agreement fall within the range.

(c) Yue Cheng Rest Assured Agreement and Guangzhou Pouxue Rest Assured Agreement

The Group agrees to pay a service fee equivalent to 5% of the FOB price of the products purchased by the Group under the above agreements.

In assessing the fee paid to Rest Assured for the services provided under the Yue Cheng Rest Assured Agreement and Guangzhou Pouxue Rest Assured Agreement, we have reviewed a sourcing contract entered into between the Group and an independent party in respect of similar scope of services as those provided by Rest Assured and note that the service fee charged by Rest Assured is no less favourable to the Group than that offered by the independent third party.

(d) PCC Connected Sales Agreement – in respect of sale of semi-finished shoe products

Under the PCC Connected Sales Agreement, the Group will sell to the PCC Group semi-finished shoe products at cost plus a mark-up of approximately 3% of the sales price.

The cost for the semi-finished shoe products includes all related fixed and variable cost incurred in producing and selling the semifinished shoe products. In determining the mark-up under the PCC Connected Sales Agreement, the Directors have made reference to the operating profit margin of the Group of approximately 10% for the year ended 30th September 2006. Having considered that the sales to the

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LETTER FROM SOMERLEY LIMITED

PCC Group have negligible credit risk and the contract enables the Group to utilize its spare production capacity, we agree with the Directors that a 3% mark-up for the above transactions is acceptable in the circumstances. We also note that the annual sales of semi-finished shoe products under this contract is insignificant to the Group, amounting to less than 1% of the Group’s total turnover for the year ended 30th September, 2006.

(iii) Market price

(d) PCC Connected Sales Agreement – in respect of sale of products other than the semi-finished shoe products

Pursuant to the terms of the PCC Connected Sales Agreement, in relation of the Group’s sale of leather, moulds, finished shoe products and packaging boxes to the PCC Group, the Group will charge the PCC Group prices no more favorable than those available to independent third parties.

(e) PCC Connected Purchase Agreement and GBD Box Agreement

The pricing basis for the Group’s purchases from the PCC Group under the PCC Connected Purchase Agreement is on price no less favourable than those available from the independent third parties.

The pricing basis for the Group’s sale to the GBD Group under the GBD Box Agreement is on cost plus a mark-up, and in any event no more favourable than those available to the independent third parties.

(f) PCC Management Service Agreement and GBD Management Service Agreement

As the estate manager, the Group provides general management services to all occupants of the Industrial Estate for fees that are charged on the same pricing basis. The above occupants include parties who are not connected persons of the Company (as defined under the Listing Rules). The charges for consumption of electricity and water are based on usage and the fee for the upkeep of common areas and provision of security services are charged based on the areas occupied by the respective occupants in the Industrial Estate.

As mentioned above, in addition to the general management services, the Group also supplies hot water to the GBD Group at the latter’s special request. In return, the Group charges the GBD Group an additional fuel charge. The Directors informed us that the Group would agree the additional fuel charge with the GBD Group by reference to the oil cost of the Group. The Directors also informed us that this additional fee is insignificant in amount.

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LETTER FROM SOMERLEY LIMITED

(g) Pou Chien Lease Agreement, Pou Yuen Lease Agreement, Yue Dean Lease Agreement, Pou Yii Lease Agreement, GBD Tenancy Agreement and Godalming Tenancy Agreement

Except for the GBD Tenancy Agreement, all of the above leasing agreements are charged at market rentals as at the effective date of the agreements as assessed by independent valuers and the rentals are not subject to adjustments. Rentals for the GBD Tenancy Agreement are subject to annual adjustments and are charged at the then prevailing market rates.

(h) YY Rest Assured Agreement

Charges for the Group’s purchases of shoes and sportswear from Rest Assured under the YY Rest Assured Agreement were based on market prices.

We consider the market pricing basis a normal and fair pricing mechanism to the Group.

In conclusion, based on the above analysis, we conclude that a fair and reasonable basis has been established for each type of Continuing Connected Transactions and the Rest Assured Transactions to conduct on normal commercial terms.

3. Payment terms

The table below summarises the payment terms of the relevant agreements:

Payment terms

Supplemental PCC Services 30 to 45 days for services fees and Agreement 45 days for the others Supplemental Production Weekly payment in advance. Excess Agreement advance payments carried forward to next month and shortfall shall be settled within 7 days PCC Connected Sales Agreement 45 days PCC Connected Purchases 45 days Agreement

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LETTER FROM SOMERLEY LIMITED

Payment terms

Pou Chien Lease Agreement	No later than the 16th day of
	each month
Pou Yuen Lease Agreement	No later than the 16th day of
	each month
Yue Dean Lease Agreement	No later than the 16th day of
	each month
Supplemental Pou Yii Lease	No later than the 16th day of
Agreement	each month
Supplemental PCC Management	45 days
Service Agreement
Supplemental GBD Management	45 days
Service Agreement
Supplemental GBD Tenancy	First day of each month
Agreement
GBD Box Agreement	45 days
Supplemental Godalming Tenancy	First day of each month
Agreement
Yue Cheng Rest Assured Agreement	30 days
Guangzhou Pouxue Rest Assured	30 days
Agreement
YY Rest Assured Agreement	30 days

We regard the above payment terms normal. We also understand from the Directors that payment terms for the Group’s purchases or sales with independent third parties are largely 45 days.

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LETTER FROM SOMERLEY LIMITED

4. The Annual Caps for the Continuing Connected Transactions

The following is a summary of the historical transaction amounts for each of the Continuing Connected Transactions for the two years ended 30th September, 2005 and six months ended 31st March, 2006 as well as the respective Annual Caps for each of the three years ending 30th September, 2008:

		Historical figures	Historical figures	Historical figures		Annual Caps	Annual Caps
			(in US’000)			(in US’000)
				For the
				six
				months
		For the		ended
		year	ended	31st	For the year ended
		30th September,		March,		30th September,
Name of Agreement		2004	2005	2006	2006	2007	2008
(i) with PCC Group
Supplemental PCC Services
Agreement		299,892	331,756	165,379	370,600	415,100	465,900
Supplemental Production
Agreement		13,341	12,102	5,186	12,000	12,000	12,000
PCC Connected Sales
Agreement		26,053	21,464	8,957	21,500	47,000	47,000
PCC Connected Purchases
Agreement		2,769	3,013	803	3,000	3,000	3,000
Pou Chien Lease Agreement	1	365	383	218	450	450	450
Pou Yuen Lease Agreement	1	528	561	560	1,150	1,150	1,150
Yue Dean Lease Agreement	1	–	–	74	160	160	160
Supplemental Pou Yii Lease
Agreement	1	–	1	0.55	1	1	1
Supplemental PCC Management
Service Agreement		10,877	16,762	13,987	31,900	39,100	43,600
Annual Caps for transactions with PCC					440,761	517,961	573,261
(ii) with GBD Group
Supplemental GBD Management
Service Agreement		10,043	5,626	1,452	3,000	3,300	3,700
Supplemental GBD Tenancy
Agreement	2	2,096	2,068	1,015	2,300	2,300	2,300
GBD Box Agreement		3,217	2,007	499	1,100	1,100	1,100
Annual Caps for transactions with GBD					6,400	6,700	7,100
(iii) with Godalming
Supplemental Godalming
TenancyAgreement	3	6,688	7,135	3,568	7,000	7,300	7,300
Annual Caps for transactions with
Godalming					7,000	7,300	7,300

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LETTER FROM SOMERLEY LIMITED

Notes : (1) The rentals in NT$ paid by the Group for the two years ended 30th September, 2005 pursuant to the Pou Chien Lease Agreement and the Pou Yuen Lease Agreement were of the same amount. The difference in US$ amount of rentals paid for the year ended 30th September 2004 and 2005 as shown above is a result of movement in exchange rates during the years. The rentals in NT$ paid by the Group for the year ended 30th September, 2006 were pursuant to the terms of the Pou Chien Lease Agreement, the Pou Yuen Lease Agreement, Yue Dean Lease Agreement and the Pou Yii Lease Agreement. The difference in US$ amount of rentals paid and the caps for these agreements were a result of movement in exchange rates during the year.

(2) During the year ended 30th September, 2006, the areas occupied by the GBD Group increased from about 113,600 square meters in October, 2005 to about 117,000 square meters in September, 2006.
(3) During the year ended 30th September, 2006, the areas occupied by the Group decreased from about 408,000 square meters in October, 2005 to about 403,000 square meters in September, 2006.
(4) As advised by the Directors, the actual transaction amounts of the Continuing Connected Transactions conducted with PCC, GBD and Godalming for the year ended 30th September, 2006 were approximately US$382.6 million, US$6.2 million and US$7.0 million respectively (prepared on the basis of the terms of the Continuing Connected Transactions).

(a) PCC Services Agreement

The increase in the historical transaction amounts under the PCC Services Agreement for the two years ended 30th September, 2005 was generally in line with the growth in the sales of the Group during the same years.

Having considered the about 15% growth in the sales of the Group for the year ended 30th September, 2006 and the expected continuous growth in sales of the Group for the two years ending 30th September, 2008 of about 15%, the Directors expect that the cost for materials and machinery purchased by the PCC Group on behalf of the Group and Service Fees payable by the Group will increase in the same magnitude. We note that the compound annual growth rate of the sales of the Group for the past ten years was also 15%.

In view of the tighter control on staff costs and overheads implemented in recent years, the Directors estimate that the staff costs and overheads to be incurred by the PCC Group in providing the services to the Group pursuant to the PCC Services Agreement will only have a slight increase during the three years ending 30th September, 2008.

After taking into account principally the above two factors, the Directors propose a respective Annual Cap of approximately US$371 million for the year ended 30th September, 2006 (representing an approximately 12% increase over the historical transaction amounts for the year ended 30th September, 2005); US$415 million for the year ending 30th September, 2007 (representing an approximately 12% increase over the proposed Annual Cap for the year ending 30th September, 2006); and US$466 million for the year ending 30th

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LETTER FROM SOMERLEY LIMITED

September, 2008 (representing an approximately 12% increase over the proposed Annual Cap for the year ending 30th September, 2007).

(b) Production Agreement

The historical transaction amounts under the Production Agreement are largely stable, except that the transaction volume is generally lower in the first half of the financial year of the Group (i.e. from October to March). This is because the holiday seasons are largely within the first half of the Group’s financial year. The Annual Caps under the Production Agreement for the three years ending 30th September, 2008 are determined based on the transaction amount for the year ended 30th September, 2006 and a buffer for potential increase in use of the tanning facilities.

(c) PCC Connected Sales Agreement

We understand from the management of the Group that the decrease in the transaction amounts under the PCC Connected Sales Agreement for the two years ended 30th September, 2006 was mainly attributable to the decrease in PCC’s sales of shoes during the said years. The lower figure recorded under the PCC Connected Sales Agreement for the six months ended 31st March, 2006 was also due to the abovementioned seasonal factor.

The Annual Caps for transactions under the PCC Connected Sales Agreement for the three years ending 30th September, 2008 are determined principally based on the historical transaction amounts.

As advised by the Directors, an anti-dumping duty has been imposed since October 2006 on certain shoes which are manufactured in the PRC and Vietnam and exported to members of the European Union (“EU”). As a result, shoes manufactured by the PCC Group in Taiwan would become more pricecompetitive in the EU market. Having taken into account the expected increase in demand for shoes manufactured in Taiwan, the Directors expect that the purchases of semi-finished shoe products by the PCC Group would increase and has therefore increased the Annual Caps for the two years ending 30th September, 2008.

(d) PCC Connected Purchases Agreement

The historical transaction amounts under the PCC Connected Purchases Agreement for the two years ended 30th September, 2005 were largely stable. According to the management of the Company, the relatively low figure recorded for the six months ended 31st March, 2006 and for the year ended 30th September, 2006 under the PCC Connected Purchases Agreement was due to fewer purchases of moulds by the Group. However, it is uncertain whether the purchases of moulds in the future would stay at this relatively low level. In order not to limit the Group’s flexibility in conducting business, the Directors propose that Annual Caps of about US$3 million for the PCC

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LETTER FROM SOMERLEY LIMITED

Connected Purchases Agreement for the three years ending 30th September, 2008, which is approximately the same level as recorded for the year ended 30th September, 2005.

(e) Pou Chien Lease Agreement, Pou Yuen Lease Agreement, Yue Dean Lease Agreement, Pou Yii Lease Agreement, GBD Tenancy Agreement and Godalming Tenancy Agreement

The fixed rentals as agreed under the Pou Chien Lease Agreement, Pou Yuen Lease Agreement, Yue Dean Lease Agreement and Pou Yii Lease Agreement are denominated in NT$. The Annual Caps represent the US$ equivalent of the fixed annual rentals as agreed under the respective agreements for the three years ending 30th September, 2008. The substantial increase in the Annual Caps under the Pou Yuen Lease Agreement for the three years ended 30th September, 2008 was attributable to the increase in market rentals of the properties thereunder as at the effective date of the agreement.

Unlike the above rental agreements which have prescribed the exact size of the areas to be leased to the relevant parties during the 3-year term, the GBD Tenancy Agreement and the Godalming Tenancy Agreement have only prescribed the maximum areas that would be subject to the lease, being approximately 136,000 square metres in the case of the GBD Tenancy Agreement and approximately 531,400 square metres in the case of the Godalming Tenancy Agreement.

The Annual Caps for the GBD Tenancy Agreement for the three years ended 30th September, 2008 are set on the assumption that the maximum areas are leased to the GBD Group for the entire rental period.

The Annual Caps for the Godalming Tenancy Agreement for the year ending 30th September, 2006 are based on the areas occupied by the Group during the year. The Directors expect that the Group would lease additional premises from Godalming for the two years ending 30th September, 2008 and has therefore included an additional amount of approximately US$0.3 million in the Annual Caps for the two years ending 30th September, 2008.

(f) PCC Management Service Agreement and GBD Management Service Agreement

The business activities engaged in by the PCC Group and the GBD Group in the Industrial Estate are manufacturing and trading of computer hardware, accessories and components. The GBD Group has from time to time disposed of some of its factories in the Industrial Estate to the PCC Group. Accordingly, the historical transaction amounts under the GBD Management Service Agreement as reflected in the above table had decreased; whereas the transaction amounts under the PCC Management Service Agreement reflected an increase.

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LETTER FROM SOMERLEY LIMITED

The historical transaction amounts under the PCC Management Service Agreement and the GBD Management Service Agreement were mainly attributable to the fees charged for the consumption of electricity and water in the Industrial Estate which were directly related to the production activities of the PCC Group and the GBD Group.

With the historical fluctuation in oil price, the Group has agreed with the occupants of the Industrial Estate a revised charging basis for supply of electricity. Instead of charging a fixed unit price, starting from 1st October, 2005, electricity will be charged principally based on a mark-up on the cost of oil consumed by the Group. Given this, the Directors has estimated the Annual Caps for the provision of electricity principally based on the consumption of electricity by the PCC Group and the GBD Group for the year ended 30th September, 2006 and do not regard the historical transaction amounts for the two years ended 30th September, 2005 under these two agreements as the key factor in deriving the Annual Caps for the three years ending 30th September, 2008.

Besides the above, the principal factors taken into account in determining the Annual Caps under the PCC Management Service Agreement and the GBD Management Service Agreement can be summarised as follows:

(i) the historical transaction amounts under the PCC Management Service Agreement and the GBD Management Service Agreement for the year ended 30th September, 2006;
(ii) the expected increases in electricity and water consumptions arising from business expansions of the PCC Group;
(iii) a buffer for the expected electricity and water consumptions of the GBD Group so as to cater for any possible business expansion of the GBD Group;
(iv) the expected increase in the oil cost of the Group for provision of electricity to occupants in the Industrial Estate; and
(v) the expected appreciation of RMB which would result in an increase in the US$ equivalent of the transaction amounts under the PCC Management Service Agreement and the GBD Management Service Agreement.

(g) GBD Box Agreement

The decrease in the historical transaction amounts under the GBD Box Agreement as reflected in the above table was mainly attributable to the closing down of factories occupied by the GBD Group in the Industrial Estate during the year/period.

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LETTER FROM SOMERLEY LIMITED

The Annual Caps under the GBD Box Agreement for the three years ending 30th September, 2008 are determined principally based on the transaction amount recorded for the year ended 30th September, 2006.

Based on the above, we are of the view that the Annual Caps for each of the Continuing Connected Transactions have been determined by the Board with due care and are fair and reasonable and in the interests of the Company and the Shareholders as a whole. We consider the Annual Caps for the Continuing Connected Transactions provide sufficient flexibility for the Group to conduct business with the PCC Group or the GBD Group and to cater for potential growth of the Group’s business.

Shareholders should note that the Annual Caps should not be construed as an assurance or forecast by the Group of its future revenue.

5. Annual review of the continuing connected transactions

The procedures for the annual review of continuing connected transactions as set out in the Listing Rules are as follows:

(i) the independent non-executive directors will review the continuing connected transactions and confirm in the annual report and accounts that the continuing connected transactions have been entered into:
(a) in the ordinary and usual course of business of the group;
(b) either on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the group than terms available to or from (as appropriate) independent third parties; and
(c) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the shareholders as a whole;
(ii) the auditors will review the continuing connected transactions and issue a letter to the board confirming that the continuing connected transactions:
(a) have received the approval of the board;
(b) are conducted in accordance with the pricing policies of the group in respect of transactions involving provision of goods and services by the group;

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LETTER FROM SOMERLEY LIMITED

(c) have been entered into in accordance with the relevant agreements governing the transactions; and
(d) have not exceeded the relevant annual caps;

the board must state in the annual report whether the auditors have made such confirmation in relation to the continuing connected transactions; and

(iii) the company will promptly notify the Stock Exchange and publish an announcement if it believes that the independent non-executive directors and/or the auditors will not be able to issue the aforesaid confirmation.

The independent non-executive Directors and the auditors of the Company have reviewed the continuing connected transactions of the Group conducted during the two years ended 30th September, 2005 and have provided the relevant confirmations as required under the Listing Rules. As advised by the Directors, the actual transaction amounts of the Continuing Connected Transactions for the year ended 30th September, 2006 have not exceeded the relevant Annual Caps.

In light of the above, in particular, we are of the view that there exists appropriate measures to govern the conduct of the Continuing Connected Transactions and the Rest Assured Transactions and safeguard the interests of the Independent Shareholders.

OPINION

Having taking into account the above principal factors, we consider that the Continuing Connected Transactions and the Rest Assured Transactions are conducted on normal commercial terms. We also consider that the terms of the Continuing Connected Transactions (including the Annual Caps) and the Rest Assured Transactions are fair and reasonable so far as the Independent Shareholders are concerned and the entering into of the Continuing Connected Transactions and the Rest Assured Transactions is or was in the interests of the Company and the Shareholders as a whole. Accordingly, we advise, and recommend the Independent Board Committee to advise, the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve or ratify the Continuing Connected Transactions, the Annual Caps and the Rest Assured Transactions.

Yours faithfully, for and on behalf of SOMERLEY LIMITED Sylvia Leung Director

– 61 –

APPENDIX

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

I. Interests of Directors

As at the Latest Practicable Date, so far as the Directors of the Company are aware, none of the Directors or chief executive of the Company has interests and short positions in the Shares, underlying Shares or debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they are taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as set out in appendix 10 of the Listing Rules, to be notified to the Company and the Stock Exchange save as follows:

Long position in Shares of HK$0.25 each of the Company

Number of ordinary shares

				Approximate
				% of the
				issued share
		Nature of	Number of	capital of
Name of director	Capacity	interest	shares held	the Company
Chan Lu Min	Beneficial	Personal	40,000	0.0024
	owner	interest

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APPENDIX

GENERAL INFORMATION

II. Interests of Shareholders discloseable pursuant to the SFO

As at the Latest Practicable Date, so far as is known to the Directors or supervisor of the Company, the following persons (other than a Director or supervisor of the Company) had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or who were, directly or indirectly, interested in 10 per cent. or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other members of the Group are as follows:

(a) Interests in the Shares

		Current
		percentage
		interest in
	Number of	the issued
	ordinary shares	share capital of
Name of substantial shareholder	beneficially held	the Company
Long Position
Pou Chen Corporation (“PCC”)(Note a)	824,143,835	49.54%
Wealthplus Holdings Limited
(“Wealthplus”)(Note a)	767,707,605	46.15%
Max Creation Industrial Limited
(“Max Creation”)(Note b)	213,365,500	12.82%
Quicksilver Profits Limited
(“Quicksilver”)(Note b)	149,494,822	8.98%
World Future Investments Limited
(“World Future”)(Note c)	213,365,500	12.82%
Mr. Tsai Chi Jui_(Note c)_	213,685,500	12.84%
Notes:

(a) Of the 824,143,835 ordinary Shares beneficially owned by PCC, 767,707,605 ordinary Shares were held by Wealthplus as listed above, 49,127,532 ordinary Shares were held by Win Fortune Investments Limited (“Win Fortune”) and 7,308,698 ordinary Shares were held by Top Score Investments Limited (“Top Score”). Both Wealthplus and Win Fortune are wholly-owned subsidiaries of PCC and Top Score is a 98.46% owned subsidiary of PCC.

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APPENDIX

GENERAL INFORMATION

(b) Of the 213,365,500 ordinary Shares beneficially owned by Max Creation, 149,494,822 ordinary Shares were held by Quicksilver as listed above, 46,467,440 ordinary Shares were held by Red Hot Investments Limited (“Red Hot”) and 17,403,238 ordinary Shares were held by Moby Dick Enterprises Limited (“Moby Dick”). Quicksilver, Red Hot and Moby Dick are wholly-owned subsidiaries of Max Creation.
(c) World Future is deemed to be interested in 213,365,500 ordinary Shares under the SFO by virtue of its interest in more than one third of the voting shares in Max Creation. Mr. Tsai Chi Jui, brother of Mr. Tsai Chi Neng, is also deemed to be interested in these 213,365,500 ordinary Shares under the same section as he holds 100% of the issued share capital of World Future. In addition, Mr. Tsai Chi Jui also personally holds 320,000 ordinary Shares.

(b) Substantial Shareholders of other members of the Group

As at the Latest Practicable Date, so far as is known to the Directors of the Company, the following parties, other than a Director, are, 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 other members of the Group:

		% of the issued
		share capital
		in the relevant
Name of subsidiary	Name of shareholder	subsidiary
A-Grade Holdings	Jollyard Investments Limited	17.5
Limited	Sports Group Limited	12.5
Charming Technology	Jollyard Investments Limited	17.5
Limited	Huang Tsung Jen	12.5
Business Network	Jollyard Investments Limited	17.5
Holdings Limited	Sports Group Limited	12.5
Wellmax Business	Jollyard Investments Limited	17.5
Group Limited	Sports Group Limited	12.5
Dedicated Group	Jollyard Investments Limited	17.5
Limited	Sports Group Limited	12.5
Selangor Gold Limited	Jollyard Investments Limited	17.5
	Huang Tsung Jen	12.5
Orisol Asia Limited	Authentic Trading Limited	25
Prodigy Management	Substantial Industries Limited	25
Limited

– 64 –

APPENDIX

GENERAL INFORMATION

		% of the issued
		share capital
		in the relevant
Name of subsidiary	Name of shareholder	subsidiary
Sunplus Industrial	Sun Print 3-D Label Enterprise	49
Limited	Co., Ltd.
Intelligent Plus Limited	Excel Union Limited	26
EthoSport Development	Aurora Development Corp.	40
Corp.
Bestample Investments	L & K Engineering Co., Ltd.	15
Limited
PT Pou Chen	Inn Chu Trading Co. Limited	10
Indonesia
Essington Developments	Great Triumph Enterprises	45
Limited	Limited
High Shine Investments	Huang Ming Hua	25
Limited	Huang Ming Te	24
Octavia Developments	Shing Cheong International	49
Limited	Limited
Ontime Ventures Limited	Yen Ming Ho	10
PT. Sukses Permata	Yen Ming Ho	10
Indonusa
Aimful Investments	Wei Hsien Der	49
Limited
Top Units Developments	Charm Life Limited	49
Limited
Valuable Developments	South East Asia Holdings Limited	49
Limited
Chifley Tower Limited	Yang Shun Hsien	49
Precise Zone Investments	Headpath Investments Limited	45
Limited

– 65 –

APPENDIX

GENERAL INFORMATION

		% of the issued
		share capital
		in the relevant
Name of subsidiary	Name of shareholder	subsidiary
重慶寶渝工貿有限公司	Zheng Shu Nan	10
(Chongqing Bao Yu
Industrial Co., Limited)
福州寶閩貿易有限公司	Cheng Yi Guang	20
(Fu Zhou Bao Hong	Xie Ze Ming	10
Trading Co., Limited)
青島寶瑞納體育用品	Liu Guo Zhong	28
有限公司(Tsing Dao
Bao Rui Na Health
Products Co., Limited)
福建寶閩體育用品	Glorious Win Developments	10
有限公司(Fu Jian Bao	Limited
Hong Health Products
Co., Limited)
寶渝(成都)商貿有限公司	Zheng Shu Nan	10
(Bao Yu (Chengdao)
Trading Co., Limited)

Save as disclosed above, the Directors are not aware that there is any party (not being a Director) who, as at the Latest Practicable Date, had an interest or short positions in the Shares and underlying Shares which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO, or who is, 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 meeting of any other member of the Group or had any options in respect of such shares.

III. Interests in competing business

As at the Latest Practicable Date, none of the Directors has any interest in any competing business which are required to be disclosed pursuant to Rule 8.10 of the Listing Rules.

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APPENDIX

GENERAL INFORMATION

3. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into or proposed to enter into any service contract with any member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

4. LITIGATION

As at the Latest Practicable Date, no member of the Group was engaged in any litigation or claims of material importance and, so far as the Directors are aware, no litigation or claims of material importance are pending or threatened by or against any member of the Group.

5. MATERIAL ADVERSE CHANGE

Your attention is drawn to the enquiries raised by the Inland Revenue Department regarding profits tax payable by the Group, details of which are described in the 2006 annual report. The Directors are not aware of any material adverse change in the financial or trading position of the Group since 30th September, 2006, being the date up to which the latest published audited financial statements of the Group were made up.

6. EXPERT

(a) The following is the qualification of IFA, which has given its opinion or advice which is contained in this circular:

Name

Qualification

Somerley Limited

a corporation licensed under the SFO to conduct types 1 (dealing in securities), 4 (advising on securities), 6 (advising on corporate finance) and 9 (asset management) regulated activities

(b) As at the Latest Practicable Date, Somerley Limited did not have any shareholding, direct or indirect, in the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in the Group, nor did it have any interest, direct or indirect, in any assets which had, since 30th September, 2006, being the date up to which the latest published audited financial statements of the Group were made up, been acquired or disposed of by or leased to the Group, or were proposed to be acquired or disposed of by or leased to the Group.
(c) Somerley Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which they appear.

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APPENDIX

GENERAL INFORMATION

7. DIRECTOR’S INTERESTS IN ASSETS/CONTRACTS AND OTHER INTERESTS

(a) None of Directors has any direct or indirect interest in any assets which have 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 since 30th September, 2006, being the date up to which the latest published audited financial statements of the Group were made.
(b) None of the Directors is materially interested in any contract or arrangement entered into by any member of the Group subsisting at the date of this circular which is significant in relation to the business of the Group.

8. MISCELLANEOUS

(a) The secretary of the Company is Lee Wai Fun, Betty. She is a professional company secretary retained by the Company for the purpose of attending and assisting the Company in ensuring compliance with filing requirements under the Companies Ordinance. She is also an employee of Richards Butler, legal advisers to the Company. She is an associate member of the Institute of Chartered Secretaries and Administrators in the United Kingdom and The Hong Kong Institute of Chartered Secretaries.
(b) The principal place of business of Company in Hong Kong is at 7th Floor, Blocks A–D, Hop Hing Industrial Building, 702 Castle Peak Road, Kowloon, Hong Kong. The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda. The branch share registrar and transfer office of the Company is Secretaries Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(c) The directors of the Company are Mr. Tsai Chi Neng, Mr. David N. F. Tsai, Mr. Edward Y. Ku, Mr. Kuo Tai Yu, Mr. Lu Chin Chu, Mr. Kung Sung Yen, Mr. Chan Lu Min, Mr. Li I Nan, Steve, Miss. Tsai Pei Chun, Patty Mr. John J. D. Sy, Mr. So Kwan Lok, Mr. Poon Yiu Kin, Samuel and Dr. Liu Len Yu.
(d) The English text of this document and the form of proxy shall prevail over the Chinese text.

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APPENDIX

GENERAL INFORMATION

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on any weekday (except public holidays) at the office of the Company situated at Suites 3307–9, 33rd Floor, Tower 6, The Gateway, 9 Canton Road, Tsimshatsui, Kowloon, Hong Kong, from the date of this circular, until the date of the SGM:

(a) this circular;
(b) the Articles of Association of the Company;
(c) the letter from the Independent Board Committee, the text of which is set out on page 40 of this circular;
(d) the letter from Somerley Limited, the text of which is set out on pages 41 to 61 of this circular;
(e) the written consent of Somerley Limited referred to in the section headed “Expert” in this Appendix;
(f) the agreements in respect of the Continuing Connected Transactions as referred to in this circular; and
(g) the Rest Assured Agreements.

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NOTICE OF SGM

==> picture [60 x 61] intentionally omitted <==

YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED 裕元工業（集團）有限公司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 551)

NOTICE IS HEREBY GIVEN THAT a special general meeting of Yue Yuen Industrial (Holdings) Limited (the “Company”) will be held at 3/F, Tang Room, Sheraton Hong Kong Hotel & Towers, 20 Nathan Road, Kowloon, Hong Kong on Thursday, 1st March, 2007 at 10:45 a.m. (or so soon thereafter as the annual general meeting of the Company convened at the same place and date at 10:30 a.m. shall have concluded or adjourned) or at any adjournment thereof for the purpose of considering and, if thought fit, passing the following resolutions, with or without amendments, which will be proposed as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

“(A) THAT the supplemental agreement (the “Supplemental Production Agreement”) dated 9th January, 2007 between Barits Development Corporation (“Barits”) and Prime Asia Leather Corporation (“Prime Asia”) (which is a supplemental to the Production Agreement (as defined in the Company’s circular dated 7th February, 2007) under which (i) Barits agreed to provide tanning facilities and processing services to Prime Asia for the processing of Prime Asia’s raw leather in Taiwan into finished leather, (ii) Barits agreed to provide sales support to Prime Asia for sales of its finished leather and (iii) Prime Asia agreed to pay Barits a monthly production fee) be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Supplemental Production Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental Production Agreement.
(B) THAT the supplemental agreement (the “Supplemental PCC Management Service Agreement”) dated 9th January, 2007 between Highmark Services Limited (“Highmark”) and Pou Chen Corporation (“PCC”) (which is a supplemental to the PCC Management Service Agreement (as defined in the Company’s circular dated 7th February, 2007) under which Highmark agreed to provide PCC with management services in respect of a number of factories situated in the Industrial Estate operated by the PCC and its subsidiaries) be and is hereby approved, confirmed and ratified and that the annual caps in

* for identification only

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NOTICE OF SGM

respect of such transactions as set out in the Supplemental PCC Management Service Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental PCC Management Service Agreement.

(C) THAT the supplemental agreement (the “Supplemental PCC Services Agreement”) dated 9th January, 2007 between the Company and PCC (which is a supplemental to the PCC Services Agreement (as defined in the Company’s circular dated 7th February, 2007) under which PCC agreed to provide research and development, know-how, technical and marketing services and to source raw materials and recruit staff in relation to the production and sale of the Group’s products) be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Supplemental PCC Services Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental PCC Services Agreement.
(D) THAT the agreement (the “PCC Connected Sales Agreement”) dated 9th January, 2007 between the Company and PCC under which the Company and its subsidiaries agreed to sell leather, moulds, finished and semi-finished shoe products and packaging boxes to PCC and its subsidiaries (the “PCC Group”) be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the PCC Connected Sales Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the PCC Connected Sales Agreement.
(E) THAT the agreement (the “PCC Connected Purchases Agreement”) dated 9th January, 2007 between the Company and PCC under which the Company and its subsidiaries agreed to purchase from PCC and its subsidiaries raw materials, production tools and shoe-related products for its production needs be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the PCC Connected Purchases Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the PCC Connected Purchases Agreement.

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NOTICE OF SGM

(F) THAT the agreement (the “Pou Chien Lease Agreement”) dated 9th January, 2007 between Pou Chien Chemical Company Limited (“Pou Chien”) and PCC under which PCC agreed to lease to Pou Chien certain properties in Taiwan, including buildings and land, for the purpose of running its manufacturing business be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Pou Chien Lease Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Pou Chien Lease Agreement.
(G) THAT the agreement (the “Pou Yuen Lease Agreement”) dated 9th January, 2007 between Pou Yuen Technology Co., Ltd. (“Pou Yuen”) and Yue Dean Technology Corporation (“Yue Dean”) under which Pou Yuen agreed to lease to Yue Dean properties in Taiwan which consist of buildings and land, for the purpose of running its manufacturing businesses be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Pou Yuen Lease Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Pou Yuen Lease Agreement.
(H) THAT the agreement (the “Yue Dean Lease Agreement”) dated 9th January, 2007 between PCC and Yue Dean under which PCC agreed to lease to Yue Dean properties in Taiwan which consist of buildings and land, for the purpose of running its manufacturing businesses be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Yue Dean Lease Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Yue Dean Lease Agreement.
(I) THAT the supplemental agreement (the “Supplemental Pou Yii Lease Agreement”) dated 9th January, 2007 between Pou Yii Development Company Limited (“Pou Yii”) as landlord and Pou Chien Technology Company Limited (“Pou Chien Technology”) as tenant (which is a supplemental to the Pou Yii Lease Agreement (as defined in the Company’s circular dated 7th February, 2007) under which Pou Yii agreed to lease to Pou Chien Technology premises in Taiwan for its administrative operations) be and is hereby approved,

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NOTICE OF SGM

confirmed and ratified and that the annual caps in respect of such transactions as set out in the Supplemental Pou Yii Lease Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental Pou Yii Lease Agreement.

(J) THAT the supplemental agreement (the “Supplemental GBD Management Service Agreement”) dated 9th January, 2007 between Highmark Services Limited (“Highmark”) and Golden Brands Developments Limited (“GBD”) (which is a supplemental to the GBD Management Service Agreement (as defined in the Company’s circular dated 7th February, 2007) under which Highmark agreed to provide GBD with management services in respect of a number of factories situated in the Industrial Estate operated by GBD and its subsidiaries) be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Supplemental GBD Management Service Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental GBD Management Service Agreement.
(K) THAT the supplemental agreement (the “Supplemental GBD Tenancy Agreement”) dated 9th January, 2007 between Highmark and GBD (which is a supplemental to the GBD Tenancy Agreement (as defined in the Company’s circular dated 7th February, 2007) under which Highmark agreed to lease to GBD such dormitories situated in the Industrial Estate as GBD may from time to time require) be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Supplemental GBD Tenancy Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental GBD Tenancy Agreement.
(L) THAT the agreement (the “GBD Box Agreement”) dated 9th January, 2007 between Pou Ming Paper Products Manufacturing Company Limited (“Pou Ming”) and GBD under which Pou Ming agreed to supply packaging boxes to GBD for its operations be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the GBD Box Agreement (the details of which are summarised in the circular of the Company

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NOTICE OF SGM

dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the GBD Box Agreement.

(M) THAT the supplemental agreement (the “Supplemental Godalming Tenancy Agreement”) dated 9th January, 2007 between Godalming Industries Limited (“Godalming”) as landlord and certain wholly-owned subsidiaries and a jointly controlled entity of the Company as tenants (which is a supplemental to the Godalming Tenancy Agreement (as defined in the Company’s circular dated 7th February, 2007) under which Godalming agreed to lease to members of the Company and its subsidiaries and a jointly controlled entity certain premises in the PRC for production purposes, including shoe/sole factory buildings and dormitories for workers) be and is hereby approved, confirmed and ratified and that the annual caps in respect of such transactions as set out in the Supplemental Godalming Tenancy Agreement (the details of which are summarised in the circular of the Company dated 7th February, 2007) and the transactions contemplated therein be and are hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Supplemental Godalming Tenancy Agreement.
(N) THAT the agreement (the “Yue Cheng Rest Assured Agreement”) dated 9th January, 2007 between Yue Cheng (Kunshan) Sports Co. Ltd. (“Yue Cheng”) and Rest Assured Group Limited (“Rest Assured”) under which Rest Assured agreed to source shoes, sports apparel and sub-contractors and to monitor progress and quality control of the production of shoes, sports apparel and accessories merchandise for Yue Cheng be and is hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Yue Cheng Rest Assured Agreement.
(O) THAT the agreement (the “Guangzhou Pouxue Rest Assured Agreement”) dated 9th January, 2007 between Guangzhou Pouxue Trading Co. Ltd. (“Guangzhou Pouxue”) and Rest Assured under which Rest Assured agreed to source shoes, sports apparel and sub-contractors and to monitor progress and quality control of the production of shoes, sports apparel and accessories merchandise for Guangzhou Pouxue be and is hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the Guangzhou Pouxue Rest Assured Agreement.

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NOTICE OF SGM

(P) THAT the agreement (the “YY Rest Assured Agreement”) dated 9th January, 2007 between the Company and Rest Assured under which Rest Assured agreed to supply shoes and sportswear to the Group be and is hereby approved, confirmed and ratified and that the directors of the Company be and are hereby authorised to take all actions and execute all documents which they deem necessary, required or appropriate, in order to implement and validate anything related to the YY Rest Assured Agreement.”

By Order of the Board Lee Wai Fun, Betty Company Secretary

Hong Kong, 7th February, 2007

Principal Place of Business:

7th Floor, Blocks A-D Hop Hing Industrial Building 702 Castle Peak Road Kowloon, Hong Kong

Note: A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint a proxy or proxies (if such member is the holder of two or more shares) to attend and, in the event of a poll, vote in his stead. A proxy need not be a member of the Company. In order to be valid, the form of proxy must be deposited at the Company’s principal place of business in Hong Kong together with a power of attorney or other authority, if any, under which it is signed or a certified copy of that power or authority, not less than 48 hours before the time for holding the meeting or adjourned meeting.

– 75 –

AI assistant

Magnus Concordia Group Limited — Proxy Solicitation & Information Statement 2007

49743_rns_2007-02-07_5c7fd1e5-27d9-49fd-abab-4a509e39d8cb.pdf

YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED 裕元工業（集團）有限公司 *

CONTINUING CONNECTED TRANSACTIONS

SOMERLEY LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

YUE YUEN INDUSTRIAL (HOLDINGS) LIMITED 裕元工業（集團）有限公司 *

Board of Directors:

Registered office:

Non-executive Director:

CONTINUING CONNECTED TRANSACTIONS

I. SUMMARY OF CONTINUING CONNECTED TRANSACTIONS AND REST ASSURED TRANSACTIONS

Production Agreement

(ii) Transactions between GBD Group and the Yue Yuen Group

(B) Rest Assured Transactions between Rest Assured and the Yue Yuen Group

II. BUSINESS OF THE GROUP

III. PRODUCTION AGREEMENT

Dates

Parties

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

IV. GBD MANAGEMENT SERVICE AGREEMENT, PCC MANAGEMENT SERVICE AGREEMENT, AND GBD TENANCY AGREEMENT

The GBD Management Service Agreement and the PCC Management Service Agreement

Dates

Parties

Payment terms

Dates

Parties

Payment terms

Term

Management Fees

GBD Tenancy Agreement

Dates

Parties

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

V. GBD BOX AGREEMENT

Date

Parties

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

VI. PCC SERVICES AGREEMENT

Date

Parties

Terms

Fees

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

VII. PCC CONNECTED SALES AGREEMENT

Date

Parties

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

VIII. PCC CONNECTED PURCHASES AGREEMENT

Date

Parties

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

IX. GODALMING TENANCY AGREEMENT

Dates

Parties

Premises

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

X. POU CHIEN LEASE AGREEMENT

Dates

Parties

Terms

Payment terms

Previous Stock Exchange Waiver and Shareholder Approval

Magnus Concordia Group Limited Proxy Solicitation & Information Statement 2007