Magnus Concordia Group Limited - Proxy Solicitation & Information Statement 2011

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

If you have sold or transferred all your shares in Yue Yuen Industrial (Holdings) Limited (the “Company”), you should at once hand this circular and the enclosed form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or 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)

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

A notice convening a special general meeting of the Company to be held at Lotus Room, 6/F, Marco Polo Hongkong Hotel, 3 Canton Road, Tsimshatsui, Kowloon, Hong Kong on 28th September, 2011 at 10:00 a.m. is set out on pages 79 to 83 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 Suites 3307-09, 33/F., Tower 6, The Gateway, 9 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for holding the special general meeting. Completion and return of the form of proxy will not preclude you from attending and voting in person at the special general meeting or at any adjournment thereof, should you so wish.

* For identification only

5th September, 2011

	page
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	39
Letter from Somerley Limited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	40
Appendix – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	69
Notice of Special General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	79

DEFINITIONS

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

“Associate” the meaning ascribed thereto in the Listing Rules “Barits” Barits Development Corporation, a company incorporated in Taiwan and which is beneficially owned as to 99.59% by PCC “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 agreements: the Transactions” Production Agreement, GBD Management Service Agreement, PCC Management Service 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 Chien Technology Lease Agreement “Directors” directors of the Company “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 Group” GBD and its subsidiaries “GBD Management Service the management service agreement dated 13th December, 2001 Agreement” entered into between Highmark and GBD, as amended and supplemented by a first supplemental agreement dated 9th January, 2007 and by the Second Supplemental GBD Management Service Agreement “GBD Transactions” transactions under GBD Management Service 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 Group” Godalming and its subsidiaries

DEFINITIONS

“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, (v) the Supplemental Godalming Tenancy Agreement dated 9th January, 2007 to vary the terms of the Godalming Tenancy Extension Agreement and (vi) the Second Supplemental Godalming Tenancy Agreement

“Godalming Tenancy the tenancy agreement dated 30th August, 2002 between Yue Extension Agreement” Yuen International, Pou Yuen Industrial (Holdings) Limited, Ka Yuen Rubber Factory Limited and subsidiaries of Godalming
“Group” or “Yue Yuen Group”
the Company and its subsidiaries
“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” or “Independent Financial Adviser”
Somerley Limited, a corporation licensed to conduct type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO, is the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Continuing Connected Transactions
“Independent Board Committee”
a board committee comprising the independent non-executive Directors to be constituted to make recommendations to the Independent Shareholders in respect of the terms of the Continuing Connected Transactions (including their respective period caps)
“Independent Shareholders”
the meaning ascribed to it in Chapter 14A of the Listing Rules

DEFINITIONS

“Industrial Estate” the Yue Yuen Industrial Estate, situated in the He Lu Industrial Area, Huang Jiang Town, Dongguan, Guangdong Province, the PRC
“Latest Practicable Date” 31st August, 2011 being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Mr. Tsai” Mr. Tsai Chi Jui, a substantial shareholder of the Company for the purposes of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong)
“New Continuing Connected the Third Supplemental Production Agreement, Third Supplemental Transactions Agreements” PCC Management Service Agreement, Third Supplemental PCC Services Agreement, Second Supplemental PCC Connected Sales Agreement, Second Supplemental PCC Connected Purchases Agreement, Second Supplemental Pou Chien Lease Agreement, Second Supplemental Pou Yuen Lease Agreement, Second Supplemental Yue Dean Lease Agreement, Supplemental Pou Chien Technology Lease Agreement, Third Supplemental GBD Management Service Agreement and Third Supplemental Godalming Tenancy Agreement.

“NT$”

the lawful currency of Taiwan

“Original Pou Chien Lease the lease agreement dated 1st April, 2002 between Pou Chien Agreement” and PCC
“Original Pou Yuen Lease Agreement”

the lease agreement dated 10th September, 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 as amended and supplemented by the Supplemental PCC Connected Purchases Agreement

“PCC Connected Sales Agreement”

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

DEFINITIONS

“PCC Management Service the management service agreement dated 13th December, 2001 Agreement” entered into between Highmark and PCC, as amended and supplemented by a first supplemental agreement dated 9th January, 2007 and by the Second Supplemental PCC Management Service Agreement

“PCC Services Agreement” the services agreement dated 22nd February, 1997 entered into between the Company and PCC, as amended and supplemented by a first supplemental agreement dated 9th January, 2007 and by the Second Supplemental PCC Services Agreement
“Pou Chen Group” or PCC and its subsidiaries and associates other than members of “PCC Group” the Yue Yuen Group
“Pou Chien” Pou Chien Chemical Company Limited, a wholly-owned subsidiary of the Company
“Pou Chien Lease Agreement”
the lease agreement dated 9th January, 2007 entered into between Pou Chien and PCC as amended and supplemented by the Supplemental Pou Chien Lease Agreement
“Pou Chien Technology”
Pou Chien Technology Company Limited, a wholly-owned subsidiary of the Company
“Pou Chien Technology the lease agreement dated 20th November, 2008 entered into Lease Agreement” between PCC and Pou Chien Technology as amended and supplemented by the Supplemental Pou Chien Technology Lease Agreement
“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, as amended and supplemented by a first supplemental agreement dated 9th January, 2007
“Pou Yuen”
Pou Yuen Technology Co., Ltd., a company which is beneficially owned as to 99.39% by PCC
“Pou Yuen Lease Agreement”

the lease agreement dated 9th January, 2007 entered into between Pou Yuen and Yue Dean as amended and supplemented by the Supplemental Pou Yuen Lease Agreement

“PRC” The People’s Republic of China

DEFINITIONS

“Prime Asia” Prime Asia Leather Corporation, a wholly-owned subsidiary of the Company

“Prime Asia China” Prime Asia China Leather Corporation, a wholly-owned subsidiary of Prime Asia

“Production Agreement” the production agreement entered into between Barits and Prime Asia on 24th December, 1996, as amended and supplemented by a first supplemental agreement dated 9th January, 2007 and by the Second Supplemental Production Agreement

“RMB” Renminbi, the lawful currency of PRC
“Second Supplemental the agreement dated 20th November, 2008 as amended and GBD Management restated on 27th November 2008, entered into between Highmark Service Agreement” and GBD supplemental to the GBD Management Service Agreement
“Second Supplemental Godalming Tenancy Agreement”
the agreement dated 20th November, 2008 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
“Second Supplemental PCC Management Service Agreement”

the agreement dated 20th November, 2008 entered into between Highmark and PCC supplemental to the PCC Management Service Agreement

“Second Supplemental PCC Services Agreement”

the agreement dated 20th November, 2008 entered into between the Company and PCC supplemental to the PCC Services Agreement

“Second Supplemental Production Agreement”

the agreement dated 20th November, 2008 entered into between Barits and Prime Asia supplemental to the Production Agreement

“Second Supplemental PCC the agreement dated 25th August, 2011 entered into between Connected Purchases the Company and Pou Chen Group supplemental to the PCC Agreement” Connected Purchases Agreement
“Second Supplemental PCC Connected Sales Agreement”

the agreement dated 25th August, 2011 entered into between the Company and Pou Chen group supplemental to the PCC Connected Sales Agreement

“Second Supplemental Pou Chien Lease Agreement”

the agreement dated 25th August, 2011 entered into between Pou Chien and PCC supplemental to the Pou Chien Lease Agreement

DEFINITIONS

“Second Supplemental	the agreement dated 25th August, 2011 entered into between Pou
Pou Yuen Lease Agreement”	Yuen and Yue Dean supplemental to the Pou Yuen Lease
	Agreement
“Second Supplemental	the agreement dated 25th August, 2011 entered into between Yue
Yue Dean Lease Agreement”	Dean and PCC supplemental to the Yue Dean Lease Agreement
“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
	Lotus Room, 6/F, Marco Polo Hongkong Hotel, 3 Canton Road,
	Tsimshatsui, Kowloon, Hong Kong on 28th September, 2011 at
	10:00 a.m. to approve the Continuing Connected Transactions
“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 PCC Connected	the agreement dated 20th November, 2008 entered into between
Purchases Agreement”	the Company and the Pou Chen Group supplemental to the PCC
	Connected Purchases Agreement
“Supplemental PCC Connected	the agreement dated 20th November, 2008 entered into between
Sales Agreement”	the Company and the Pou Chen Group supplemental to the PCC
	Connected Sales Agreement
“Supplemental Pou Chien	the agreement dated 20th November, 2008 entered into between
Lease Agreement”	Pou Chien and PCC supplemental to the Pou Chien Lease
	Agreement
“Supplemental Pou Chien	the lease agreement dated 25th August, 2011 entered into between
Technology Lease Agreement”	PCC and Pou Chien Technology
“Supplemental Pou Yii	the agreement dated 9th January, 2007 entered into between Pou
Lease Agreement”	Yii and Pou Chien supplemental to the Pou Yii Lease Agreement
“Supplemental Pou Yuen	the agreement dated 20th November, 2008 entered into between
Lease Agreement”	Pou Yuen and Yue Dean supplemental to the Pou Yuen Lease
	Agreement
“Supplemental Yue Dean	the agreement dated 20th November, 2008 entered into between
Lease Agreement”	Yue Dean and PCC supplemental to the Yue Dean Lease
	Agreement

DEFINITIONS

“Third Supplemental GBD Management Service Agreement”

the agreement dated 25th August, 2011 entered into between Highmark and GBD supplemental to the GBD Management Service Agreement

“Third Supplemental Godalming Tenancy Agreement”
the agreement dated 25th August, 2011 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
“Third Supplemental PCC Management Service Agreement”

the agreement dated 25th August, 2011 entered into between Highmark and PCC supplemental to the PCC Management Service Agreement

“Third Supplemental PCC Services Agreement”

the agreement dated 25th August, 2011 entered into between the Company and PCC supplemental to the PCC Services Agreement

“Third Supplemental Production Agreement”

the agreement dated 25th August, 2011 entered into between Barits and Prime Asia supplemental to the Production Agreement

“US$” the lawful currency of the United States
“Yue Dean”
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
“Yue Dean Lease Agreement”
the lease agreement dated 9th January, 2007 entered into between PCC and Yue Dean as amended and supplemented by the Supplemental Yue Dean Lease Agreement
“Yue Yuen International” Yue Yuen International Limited, a previously wholly-owned subsidiary of the Company

Unless other 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$0.273. No representation is made that any amounts in US$, NT$ or HK$ could have been or could be converted at that rate or at any other rate.

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) Kuo Tai Yu Kung Sung Yen Chan Lu Min Li I Nan, Steve Tsai Pei Chun, Patty Kuo Li-Lien Lee Shao Wu

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

Principal Place of Business: Suites 3307-09, 33/F., Tower 6 The Gateway 9 Canton Road Tsim Sha Tsui Kowloon, Hong Kong

Independent Non-executive Directors: Liu Len Yu Leung Yee Sik Huang Ming-Fu Chu Li-Sheng

5th September, 2011

To the Shareholders,

Dear Sir or Madam,

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS

Reference is made to the Company’s announcement dated 25th August, 2011. For the purpose of continuing smooth operations of the Group, the Company has entered into various conditional agreements with the relevant connected parties to amend and formalise certain terms of the Continuing Connected 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 the Independent Board Committee; and (iii) to provide you with notice of SGM.

* For identification only

LETTER FROM THE BOARD

I. SUMMARY OF CONTINUING CONNECTED TRANSACTIONS

The Continuing Connected Transactions can be broadly divided into the following categories:

(A) Transactions between Pou Chen Group and Yue Yuen Group

Production Agreement

Under the Production Agreement, Barits agreed to provide tanning facilities and processing services to Prime Asia for the processing of Prime Asia’s raw leather 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.

The parties entered into the Third Supplemental Production Agreement to extend the term for three years to 30th September, 2014.

PCC Management Service Agreement

Under the PCC Management Service Agreement, Highmark agreed to provide PCC with management services in respect of a number of factories situated in the Industrial Estate operated by the PCC Group.

The parties entered into the Third Supplemental PCC Management Service Agreement to extend the term for three years to 30th September, 2014.

PCC Services Agreement

Under the PCC Services Agreement, 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.

The parties entered into the Third Supplemental PCC Services Agreement to extend the term for three years to 30th September, 2014.

PCC Connected Sales Agreement

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

The parties entered into the Second Supplemental PCC Connected Sales Agreement to extend the term for three years to 30th September, 2014.

LETTER FROM THE BOARD

PCC Connected Purchases Agreement

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

The parties entered into the Second Supplemental PCC Connected Purchases Agreement to extend the term for three years to 30th September, 2014.

Lease arrangements between the Group and the PCC Group

As part of the operational requirements of the Group, the Company and PCC have certain leasing arrangements in place between members of the Group and the PCC Group.

In compliance with the Listing Rules, each of the lease agreements entered into between members of the Group and the PCC Group were approved by the Independent Shareholders. The Company has renewed and amended the leasing arrangements in light of new changes since they were first entered into. A summary of each lease agreement as amended is set out below.

Pou Chien Lease Agreement

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

The parties entered into the Second Supplemental Pou Chien Lease Agreement to extend the term for three years to 30th September, 2014.

Pou Yuen Lease Agreement

Under the Pou Yuen Lease Agreement, Pou Yuen agreed to lease to Yue Dean a property in Taiwan which consists of building and land, for the purpose of running its manufacturing businesses.

The parties entered into the Second Supplemental Pou Yuen Lease Agreement to extend the term for three years to 30th September, 2014.

Yue Dean Lease Agreement

Under the Yue Dean Lease Agreement, PCC agreed to lease to Yue Dean a property in Taiwan which consists of building and land, for the purpose of running its manufacturing business.

The parties entered into the Second Supplemental Yue Dean Lease Agreement to extend the term for three years to 30th September, 2014.

LETTER FROM THE BOARD

Pou Chien Technology Lease Agreement

Under the Pou Chien Technology Lease Agreement, PCC agreed to lease to Pou Chien Technology an office unit in Taiwan for its administrative operations.

The parties entered into the Supplemental Pou Chien Technology Lease Agreement to extend the term for three years to 30th September, 2014.

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

GBD Management Service Agreement

Under the GBD Management Service Agreement, 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. The GBD Group ceased its manufacturing business in 2010 and became property investment holding.

The parties entered into the Third Supplemental GBD Management Service Agreement to extend the term for three years to 30th September, 2014.

(C) Transactions between Godalming and the Yue Yuen Group

Godalming Tenancy Agreement

Under the Godalming Tenancy Agreement, subsidiaries of 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.

The parties entered into the Third Supplemental Godalming Tenancy Agreement to amend the term for three years to 30th September, 2014 and to revise the annual cap for the financial year ending 30th September, 2011.

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, through Pou Sheng International (Holdings) Limited (whose shares are also listed on the Stock Exchange), also engages in wholesales/retail business of shoes and sportswear.

LETTER FROM THE BOARD

III. PRODUCTION AGREEMENT

The parties entered into the Production Agreement on 24th December, 1996. On 9th January, 2007, the parties entered into a first supplemental agreement to vary the terms of the original agreement including extending the term for three years from 1st October, 2005 to 30th September, 2008. The parties entered into the Second Supplemental Production Agreement to extend further the term for three years to 30th September, 2011. The parties entered into the Third Supplemental Production Agreement to further extend the term for three years to 30th September, 2014. 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 First supplemental agreement: 9th January, 2007 Second Supplemental 20th November, 2008 Production Agreement: Third Supplemental Production 25th August, 2011 Agreement: Parties Prime Asia: a wholly-owned subsidiary of the Company. Prime Asia engages in the business of leather trading and manufacturing

Barits: a subsidiary of PCC 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 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 based on the weekly average of the actual payment of the preceding month. Excess advance payments carried forward to next month and shortfall to be settled within 7 days.

LETTER FROM THE BOARD

The production fee 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 administrative costs:

selling, general and administrative costs of Barits provided by personnel located at the Barits factory, such as scheduling, inventory control, invoicing, product control, delivery and customer service and insurance for the facility in Taiwan, 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, buildings and equipment. Rental charges for land and buildings are fixed monthly rentals determined based on an independent valuation. Rental charges for equipment which were acquired by Barits on or after 1st January, 1995 are calculated by reference to the depreciation of their acquisition cost amortised over the estimated useful lives plus a mark-up (being the net book value multiplied by a rate representing the aggregate of 3-month London Interbank Offered Rate (“LIBOR”) and 1.5% spread); and after it has been fully depreciated, at an annual rate of 1% of their original acquisition cost until the equipment is retired. Rental charges for equipment which were acquired by Barits before 1st January, 1995 are at an annual rate of 1% of their original acquisition cost until the equipment is retired.

According to the audited consolidated financial statements of the Group for the two financial years ended 30th September, 2010 and the unaudited consolidated accounts of the Group for the six months ended 31st March, 2011, the relevant transaction amounts are:

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	8,078	6,432	3,412

LETTER FROM THE BOARD

IV. GBD MANAGEMENT SERVICE AGREEMENT AND PCC MANAGEMENT SERVICE AGREEMENT

The principal business of GBD is investment holding. Through its subsidiaries, it was previously principally engaged in the manufacturing and trading of computer hardware, computer accessories and components. The GBD Group ceased its manufacturing business in 2010 and became property investment holding.

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 supplemental agreements 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. On 20th November, 2008, Highmark entered into the Second Supplemental GBD Management Service Agreement and the Second Supplemental PCC Management Service Agreement to amend and extend the terms for three years to 30th September, 2011. On 27th November, 2008, the relevant parties entered into amended and restated agreements in respect of the Second Supplemental GBD Management Service Agreement to reflect the change in the expected aggregate annual caps for the transactions with the GBD Group that were previously agreed under the Second Supplemental GBD Management Service Agreement. On 25th August, 2011, Highmark entered into the Third Supplemental GBD Management Service Agreement and the Third Supplemental PCC Management Service Agreement to extend the terms for three years to 30th September, 2014.

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, steam 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. Highmark also provides accommodation, housekeeping and laundry services in the Industrial Estate from time to time as requested by PCC. A number of factories buildings in the Industrial Estate owned by members of the GBD Group are now either in vacant situation or leased to third parties. The PCC Group operates some factories in the Industrial Estate. The Industrial Estate is situated in He Lu Industrial Area, Huang Jiang Town, Dongguan, Guangdong Province, PRC.

LETTER FROM THE BOARD

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 Agreement:

13th December, 2001, with no definite term

First supplemental agreement:

9th January, 2007

Second Supplemental GBD Management Service Agreement:

20th November, 2008 as amended and restated on 27th November, 2008

Third Supplemental GBD Management Service Agreement:

25th August, 2011

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. Through its subsidiaries, it was previously principally engaged in the manufacturing and trading of computer hardware, computer accessories and components. The GBD Group ceased its manufacturing business in 2010 and became property investment holding.

Payment terms

45 days from date of invoice.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	1,151	870	13

LETTER FROM THE BOARD

PCC Management Service Agreement

Dates

PCC Management Service 13th December, 2001, with no definite term Agreement: First supplemental agreement: 9th January, 2007 Second Supplemental PCC 20th November, 2008 Management Service Agreement: Third Supplemental PCC 25th August, 2011 Management Service Agreement:

Parties

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 from date of invoice.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount (US$’000)	5,918	3,365	277

Term

The GBD Management Service Agreement has been amended by the Third Supplemental GBD Management Service Agreement to continue in force for a period of three years commencing from 1st October, 2011 and the PCC Management Service Agreement has been amended by the Third Supplemental PCC Management Service Agreement to continue in force for a period of three years from 1st October, 2011 for both the GBD Group and the PCC Group as users of the services.

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 (as amended by the Third Supplemental GBD Management Service Agreement) and the PCC Management Service Agreement (as amended by the Third Supplemental PCC Management Service Agreement) and the basis on which the management fees are charged is set out below.

PCC Management Service Agreement

(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

In the Second Supplemental PCC Management Service Agreement, the parties made arrangements for electricity to be provided by the public sector (the price of which is less affected by changes in oil price) to PCC. Highmark will continue to generate and supply electricity to PCC in the event that the electricity supplied by the public sector is insufficient to meet the operational needs of PCC in the Industrial Estate. The charges for supply of electricity are by reference to consumption (as per meters in each factory) of PCC. This is based on a fixed price per unit of electricity consumed. The unit price for electricity generated and supplied by Highmark is 105% of the cost of oil consumed and the relevant overhead incurred for generating the electricity. In respect of electricity provided by the public sector, a service fee of RMB0.16 for each kilowatt-hour unit of electricity is charged in addition to the price charged by the public sector.

(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 PCC and the price charged by the local authority for such utilities.

(d) Accomodation-related services

Accomodation-related services (which include provision of accommodation, housekeeping and laundry services) are subject to a charge of the prevailing fair market rent value of service apartments.

LETTER FROM THE BOARD

GBD Management Service Agreement

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

(b) Individual services for the supply of electricity

Highmark will no longer be providing electricity to GBD.

Highmark will no longer be providing water and steam to GBD.

V. PCC SERVICES AGREEMENT

On 22nd February, 1997, the Company and PCC entered into the PCC Services Agreement. On 9th January, 2007, the parties entered into the first supplemental agreement to vary the terms of the original agreement. The parties entered into the Second Supplemental PCC Services Agreement to extend the term for three years to 30th September, 2011. The parties have entered into the Third Supplemental PCC Services Agreement to extend the term for three years to 30th September, 2014. A summary of the terms is set out below.

Dates

PCC Services Agreement: 22nd February, 1997, with no definite term First supplemental agreement: 9th January, 2007 Second Supplemental PCC 20th November, 2008 Services Agreement: Third Supplemental PCC 25th August, 2011 Services Agreement:

Parties

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

LETTER FROM THE BOARD

Terms

The services agreed upon in the PCC Services Agreement include, inter alia, PCC providing 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. The services may be provided by or through any member of the Pou Chen Group, but PCC remains fully liable for the provision of these services. The obligations of the Company under the agreement may be performed through other members of the Group but PCC’s only recourse under the agreement is to the Company itself.

The first supplemental agreement dated 9th January, 2007 was in force for a period of three years from 1st October, 2005. The Second Supplemental PCC Services Agreement extended the term for three years to 30th September, 2011. The Third Supplemental PCC Services Agreement extends the term for another three years to 30th September, 2014.

Fees

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

(i) the Group’s products developed by the Pou Chen Group and sold by the Group, 0.5% 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% of the merchandise cost invoiced to the Pou Chen Group; and
(iii) materials, machinery and other goods sourced by the Pou Chen Group on behalf of the Group in Taiwan or overseas whereby purchases are directly handled by the Group, 0.5% 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:

(i) in respect of the purchase of 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, the Company will reimburse the cost of merchandise paid by the 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.

LETTER FROM THE BOARD

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.

Payment terms

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

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	302,991	400,653	228,464

VI. 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 was approved by the Independent Shareholders. The parties entered into the Supplemental PCC Connected Sales Agreement to extend the term for three years to 30th September, 2011. The parties entered into the Second Supplemental PCC Connected Sales Agreement to extend the term for a further three years to 30th September, 2014. A summary of the terms of the agreement is set out below.

Dates

PCC Connected Sales Agreement: 9th January, 2007 Supplemental PCC Connected 20th November, 2008 Sales Agreement: Second Supplemental PCC 25th August, 2011 Connected Sales Agreement: Parties Purchaser: the Pou Chen Group Supplier: the Group

LETTER FROM THE BOARD

Terms

Under the PCC Connected Sales Agreement, 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 shall be no less favourable to the Group than those available to independent third parties.

The PCC Connected Sales Agreement, was in force for a period of three years from 1st October, 2005. The Supplemental PCC Connected Sales Agreement extended the term for three years to 30th September, 2011. The Second Supplemental PCC Connected Sales Agreement extends the term for a further three years to 30th September, 2014.

Payment terms

45 days from date of invoice.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	16,574	20,505	13,236

VII. PCC CONNECTED PURCHASES AGREEMENT

Since 1988, the Group has purchased raw materials, production tools and shoe-related 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 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) based on open market rates and are no less favourable to the Group than those available from independent third parties. On 9th January, 2007, the parties formalised the arrangements between them by entering into the PCC Connected Purchases Agreement, which was approved by the Independent Shareholders. The parties entered into the Supplemental PCC Connected Purchases Agreement to extend the term for three years to 30th September, 2011. The parties entered into the Second Supplemental PCC Connected Purchases Agreement to further extend the term for three years to 30th September, 2014. A summary of the terms of the agreement is set out below.

LETTER FROM THE BOARD

Dates

PCC Connected Purchases 9th January, 2007 Agreement: Supplemental PCC Connected 20th November, 2008 Purchases Agreement: Second Supplemental PCC 25th August, 2011 Connected Purchases Agreement: Parties Purchaser: the Group Supplier: the Pou Chen Group

Terms

Under the PCC Connected Purchases Agreement, the Group may place its requirements for raw materials, production tools or shoe-related products for its production needs with the Pou Chen Group. The Group is required to specify the terms of purchase in each order. The 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 PCC Connected Purchases Agreement was in force for a period of three years from 1st October, 2005. The parties entered into the Supplemental PCC Connected Purchases Agreement to extend the term for three years to 30th September, 2011. The parties entered into the Second Supplemental PCC Connected Purchases Agreement to further extend the term for three years to 30th September, 2014.

Payment terms

45 days from date of invoice.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	795	706	523

LETTER FROM THE BOARD

VIII. 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 first supplemental agreement to vary the terms of the Godalming Tenancy Extension Agreement, which was approved by the Independent Shareholders. The parties entered into the Second Supplemental Godalming Tenancy Agreement to extend the term for three years to 30th September, 2011. The parties entered into the Third Supplemental Godalming Tenancy Agreement to extend the term for three years to 30th September, 2014. A summary of the terms of the agreements is set out below.

Dates

Godalming Tenancy 8th June, 1992 Agreement: Three supplemental 13th June, 1997 memoranda: Godalming Tenancy 30th August, 2002, with a 5-year term Extension Agreement: First supplemental agreement: 9th January, 2007 Second Supplemental 20th November, 2008 Godalming Tenancy Agreement: Third Supplemental 25th August, 2011 Godalming Tenancy Agreement: Parties Tenants: wholly-owned subsidiaries and a jointly-controlled entity of 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.

LETTER FROM THE BOARD

Premises

Name of properties	Nature of building	No. of blocks
Yue Yuen Industrial Estate,	Factory	15
Gao Bu Chen, Dongguan, PRC	Dormitory	25
	Office	5
	Auxiliary	25
Pou Yuen Industrial Estate, Di Chung,	Factory	8
Dongguan, PRC	Dormitory	8
	Office	2
	Auxiliary	11
Pou Yuen Baishi Industrial Estates,	Factory	9
Shi Long Wan Baishi, Zhong Shan, PRC	Auxiliary	13
Cui Jing Garden, Qian Shan and Huayang	Dormitory	2
Building, Jida, PRC
Ping Tain Zi Industrial Complex,	Factory	2
Baishi, Zhong Shan, PRC	Auxiliary	5

The properties above are leased to the Yue Yuen Group as may from time to time require by the Group. These properties are leased to the 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 rates. The rentals on the additional premises are also based on the open market rates. On 9th January, 2007, the parties entered into the first supplemental agreement to revise the term of the tenancy to a period of three years commencing from 1st October, 2005. The parties entered into the Second Supplemental Godalming Tenancy Agreement to extend the terms for three years to 30th September, 2011. The parties entered into the Third Supplemental Godalming Tenancy Agreement to extend the terms for three years to 30th September, 2014. The current monthly rentals on the premises are approximately charged at market rates valued by an independent professional valuer.

Payment terms

First day of each month.

LETTER FROM THE BOARD

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	6,729	6,653	3,575

Revision of annual cap

The existing annual cap for the financial year ending 30th September 2011 is US$6,410,000. The transaction amount for the ten months ended 31st July, 2011 was US$5,957,000. The existing annual cap was determined with reference to the anticipated usage of the Group. Under the Godalming Tenancy Agreement, the properties are leased to the Yue Yuen Group as may from time to time require by the Group. This means that the Group can choose to increase the utilised area and surrender any unutilised area having regard to its production needs. As there has been increase in utilised areas of certain industrial buildings in the Yue Yuen Industrial Estate, Gao Bu Chen, Dongguan, PRC than originally anticipated since latter half of 2010, this is expected to result in rent of US$740,000 being payable to the Landlords exceeding the original anticipated amount.

The existing annual cap of US$6,410,000 will therefore be exceeded if no revision is made. In order to accommodate the increase in rent, the Third Supplemental Godalming Tenancy Agreement also revises the annual cap for the financial year ending 30th September, 2011 from US$6,410,000 to US$7,150,000. As stipulated in the Third Supplemental Godalming Tenancy Agreement, the Tenants are not obliged to pay any sum thereunder if and to the extent that as a result the aggregate sums paid by the Yue Yuen Group would exceed the period caps without the prior approval of the Shareholders obtained in accordance with the Listing Rules. Therefore, on the basis of that contract term, the parties have agreed to postpone payment of rent for August and September 2011 pending the approval of the revised annual cap by Independent Shareholders.

IX. 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. The parties entered into the Supplemental Pou Chien Lease Agreement to change the leased premises and to extend the term for three years to 30th September, 2011. The parties entered into the Second Supplemental Pou Chien Lease Agreement to extend the term for three years to 30th September, 2014. A summary of the terms of the agreements is set out below.

Dates

Original Pou Chien Lease 1st April, 2002 Agreement:

LETTER FROM THE BOARD

Pou Chien Lease Agreement: 9th January, 2007 Supplemental Pou Chien 20th November, 2008 Lease Agreement: Second Supplemental Pou 25th August, 2011 Chien Lease Agreement:

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 Original 台灣彰化縣永靖鄉永褔路一段265號 (No. 265, Section 1 Pou Chien Lease Yong Fu Road, Yong Jing Hsian, Chang Hua, Taiwan), Agreement: 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 Pou Chien 台灣彰化縣永靖鄉永褔路一段277號 (No. 277, Section 1 Lease Agreement: 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 Premises under the ( 1 ) 台灣彰化縣永靖鄉永褔路一段 2 6 5 號部份及 Supplemental Pou Chien ( 2 ) 台灣彰化縣永靖鄉永褔路一段 2 7 7 號部份 Lease Agreement: ((1) part of No. 265 and (2) part of No. 277 of Section 1 Yong Fu Road, Yong Jing Hsian, Chang Hua, Taiwan), which consist of two buildings and land. The floor area for the buildings and the land being approximately (1) 2,807 m[2] and 1,595 m[2] and (2) 3,054 m[2] and 2,121 m[2] , respectively

Premises under the Second ( 1 ) 台灣彰化縣永靖鄉永褔路一段 2 6 5 號部份及 Supplemental Pou Chien ( 2 ) 台灣彰化縣永靖鄉永褔路一段 2 7 7 號部份 Lease Agreement: ((1) part of No. 265 and (2) part of No. 277 of Section 1 Yong Fu Road, Yong Jing Hsian, Chang Hua, Taiwan), which consist of two buildings and land. The floor area for the buildings and the land being approximately (1) 2,807 m[2] and 1,595 m[2] and (2) 3,054 m[2] and 2,121 m[2] , respectively

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$130,024) 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 a change of leased premises, the parties entered into the Pou Chien Lease Agreement on 9th January, 2007, which was approved by the 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$327,711) which was based on open market rental at the relevant time. The parties entered into the Supplemental Pou Chien Lease Agreement to reflect the change of leased premises and to extend the term for three years to 30th September, 2011. The rentals under the Supplemental Pou Chien Lease Agreement were NT$597,766 (equivalent to approximately HK$163,190) per month in respect of the premises at No. 265 of Section 1 Yong Fu Road and NT$615,086 (equivalent to approximately HK$167,918) per month in respect of the premises at No. 277 of Section 1 Yong Fu Road which are based on open market rentals at the relevant time.

The parties entered into the Second Supplemental Pou Chien Lease Agreement to reflect the change of leased premises and to extend the term for three years to 30th September, 2014. The new rentals under the Second Supplemental Pou Chien Lease Agreement are NT$569,615 (equivalent to approximately HK$155,505) per month in respect of the premises at No. 265 of Section 1 Yong Fu Road and NT$588,697 (equivalent to approximately HK$160,714) per month in respect of the premises at No. 277 of Section 1 Yong Fu Road which are based on open market rentals at the relevant time. The rent is not subject to change for the three years ending 30th September, 2014.

Payment terms

No later than the 16th day of each month.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	439	454	241

LETTER FROM THE BOARD

X. POU YUEN LEASE AGREEMENT

Pou Yuen and Pou Chien entered into the Original Pou Yuen Lease Agreement on 10th September, 2002. Following a group re-organisation, Yue Dean was nominated by the Company to replace Pou Chien under the Original Pou Yuen Lease Agreement by entering into the Pou Yuen Lease Agreement with Pou Yuen on 9th January, 2007. The parties entered into a Supplemental Pou Yuen Lease Agreement, which does not include the leasing of facilities and equipment under the Pou Yuen Lease Agreement, for a term of three years starting from 1st October, 2008. The parties entered into a Second Supplemental Pou Yuen Lease Agreement to further extend the term for three years commencing from 1st October, 2011. A summary of the terms of the agreements is set out below.

Dates

Original Pou Yuen Lease 10th September, 2002 Agreement: Pou Yuen Lease Agreement: 9th January, 2007 Supplemental Pou Yuen 20th November, 2008 Lease Agreement: Second Supplemental 25th August, 2011 Pou Yuen Lease Agreement:

Parties

Landlord: Pou Yuen, a company which is beneficially owned by PCC as to 99.39% 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 under the Pou 台灣彰化縣福興鄉福工路 4 號 ( N o . 4 , F u K u n g Yuen Lease Agreement: 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. Premises under the 台灣彰化縣福興鄉福工路4號 (No. 4, Fu Kung Road, Supplemental Pou Yuen Fu Hsin Hsian, Chang Hua, Taiwan), which consists of Lease Agreement: building and land. The floor area for the building and land is approximately 8,356 m[2] and 3,984 m[2] respectively.

LETTER FROM THE BOARD

Premises under the Second Supplemental Pou Yuen Lease Agreement:

台灣彰化縣福興鄉福工路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 8,356 m[2] and 3,984 m[2] respectively.

Terms

Under the Original Pou Yuen Lease Agreement, Pou Yuen leases to Pou Chien 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 and Yue Dean entered into the Pou Yuen Lease Agreement with Pou Yuen on 9th January, 2007, which was approved by the Independent Shareholders, to formalise the rental and term of the tenancy, for a period of three years commencing from 1st October, 2005. The parties entered into the Supplemental Pou Yuen Lease Agreement, which does not include the leasing of facilities and equipment under the Pou Yuen Lease Agreement, for a term of three years to 30th September, 2011. The rental under the Pou Yuen Lease Agreement was NT$3,077,737 (equivalent to approximately HK$840,222) per month which was based on open market rental at the relevant time. The rental under the Supplemental Pou Yuen Lease Agreement is NT$1,568,800 (equivalent to approximately HK$428,282) per month which is based on open market rental at the relevant time.

The parties entered into the Second Supplemental Pou Yuen Lease Agreement, which does not include the leasing of facilities and equipment under the Pou Yuen Lease Agreement, for a further term of three years to 30th September, 2014. The new rental under the Second Supplemental Pou Yuen Lease Agreement is NT$1,721,978 (equivalent to approximately HK$470,100) per month which is based on open market rental at the relevant time. The rent is not subject to change for the three years ending 30th September, 2014.

Payment terms

No later than the 16th day of each month.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	568	587	311

LETTER FROM THE BOARD

XI. YUE DEAN LEASE AGREEMENT

On 9th January, 2007, PCC and Yue Dean entered into the Yue Dean Lease Agreement. The parties entered into the Supplemental Yue Dean Lease Agreement to change the leased premises and extend the term for three years to 30th September, 2011. The parties entered into the Second Supplemental Yue Dean Lease Agreement to extend the term for three years to 30th September, 2014. A summary of the terms of the agreement is set out below.

Dates

Yue Dean Lease Agreement: 9th January, 2007 Supplemental Yue Dean 20th November, 2008 Agreement: Second Supplemental 25th August, 2011 Yue Dean Agreement:

Parties

Landlord: PCC

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

Premises under the Yue Dean 台灣彰化縣福興鄉福工路六之一號 (6-1, Fu Kung Road, Lease Agreement: 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.

Premises under the 台灣彰化縣福興鄉福工路六之一號 (6-1, Fu Kung Road, Supplemental Yue Dean Fu Hsin Hsian, Chang Hua, Taiwan), which consists of Lease Agreement: building and land. The floor area for the building and land is approximately 2,092 m[2] and 1,054 m[2] respectively. Premises under the Second 台灣彰化縣福興鄉福工路六之一號 (6-1, Fu Kung Road, Supplemental Yue Dean Fu Hsin Hsian, Chang Hua, Taiwan), which consists of Lease Agreement: building and land. The floor area for the building and land is approximately 2,092 m[2] and 1,219 m[2] respectively.

LETTER FROM THE BOARD

Terms

The rental payable under the Yue Dean Lease Agreement to PCC was NT$406,863 (equivalent to approximately HK$111,074) per month which was based on open market rentals at the relevant time. The Supplemental Yue Dean Lease Agreement will continue in force for a period of three years from 1st October, 2008 at a rental of NT$399,235 (equivalent to approximately HK$108,991) per month which is based on open market rentals at the relevant time. The Second Supplemental Yue Dean Lease Agreement will continue in force for a further period of three years from 1st October, 2011 at a rental of NT$461,076 (equivalent to approximately HK$125,874) per month which is based on open market rentals at the relevant time. The rent is not subject to change for the three years ending 30th September, 2014.

Payment terms

No later than the 16th day of each month.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	145	150	79

XII. POU YII LEASE AGREEMENT AND POU CHIEN TECHNOLOGY LEASE AGREEMENT

For the purposes of complying with requirements of Taiwan authorities, leasing arrangements were put in place for PCC or a member of the PCC Group to lease premises to Pou Chien Technology. The Pou Yii Lease Agreement was entered into between Pou Yii and Pou Chien Technology on 30th September, 2004, for one year, from 1st October, 2004 to 30th September, 2005. On 9th January, 2007, the parties entered into a Supplemental Pou Yii Lease Agreement to extend the term of the Pou Yii Lease Agreement, which was approved by the Independent Shareholders, for 3 years commencing from 1st October, 2005. PCC and Pou Chien Technology entered into the Pou Chien Technology Lease Agreement to continue similar leasing arrangements for a term of 3 years starting from 1st October, 2008. PCC and Pou Chien Technology entered into the Supplemental Pou Chien Technology Lease Agreement to continue similar leasing arrangements for a term of 3 years starting from 1st October, 2011. A summary of the terms of the agreement is set out below.

Dates

Pou Yii Lease Agreement: 30th September, 2004

LETTER FROM THE BOARD

Supplemental Pou Yii 9th January, 2007 Lease Agreement: Pou Chien Technology 20th November, 2008 Lease Agreement: Supplemental Pou Chien 25th August, 2011 Technology Lease Agreement:

Parties

Pou Yii Lease Agreement and Supplemental Pou Yii Lease Agreement

Landlord: Pou Yii, a non-wholly owned subsidiary of PCC. The principal activities of Pou Yii are the authorised construction of business building, and hiring and selling residence

Tenant: Pou Chien Technology, a wholly-owned subsidiary of the Company. The principal activity of Pou Chien Technology is wholesale of synthetic rubber

Premises: 台灣台中市南屯區東興路2段177號1樓 (1/F., No. 177 Tong Shing Road, Section 2, Nan Twen District, Taichung, Taiwan)

Pou Chien Technology Lease Agreement and Supplemental Pou Chien Technology Lease Agreement

Landlord: PCC Tenant: Pou Chien Technology Premises: 台灣台中市西屯區台中港路三段78之2號10樓 (10/F., No. 78-2, Section 3, Taichung Kang Road, Xitun District, Taichung, Taiwan) the floor area for the building is approximately 17 m[2] .

LETTER FROM THE BOARD

Terms

The rent under the Pou Yii Lease Agreement and the Supplemental Pou Yii Lease Agreement for the premises was NT$3,000 per month (equivalent to approximately HK$819) which was based on open market rental at the relevant time. The rent under the Pou Chien Technology Lease Agreement for the premises is NT$3,000 per month (equivalent to approximately HK$819) based on open market rentals at the relevant time. The rent under the Supplemental Pou Chien Technology Lease Agreement for the premises is NT$3,000 per month (equivalent to approximately HK$819) based on open market rentals at the relevant time and will continue in force for a period of 3 years from 1st October, 2011. The rent is not subject to change for the three years ending 30th September, 2014.

Payment terms

No later than the 16th day of each month.

			2011
Financial year ended			(six months ended
30th September (except 2011)	2009	2010	31st March)
Transaction amount_(US$’000)_	1	1	1

XIII. REASONS AND BENEFITS FOR THE CONTINUING CONNECTED 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, through Pou Sheng International (Holdings) Limited (whose shares are also listed on the Stock Exchange), also engages in the wholesale and retail of shoes and sportswear. The Continuing Connected 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 renegotiating all terms of the transactions. Accordingly, the Directors (including the independent non-executive Directors) believe that the terms of the Continuing Connected Transactions are fair and reasonable and are in the interest of and are beneficial to the Group and Shareholders as a whole.

XIV. CONNECTED PERSONS, PERIOD AMOUNTS AND SPECIAL GENERAL MEETING

PCC indirectly owns or controls approximately 49.98% of the Company’s issued share capital. GBD is ultimately owned as to 94.12% by Mr. Tsai, 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 and, GBD and Godalming are therefore connected persons of the Company within the meaning of the Listing Rules.

LETTER FROM THE BOARD

For ease of future administration, the relevant agreements, if approved by the Independent Shareholders, will take effect from 1st October, 2011 to coincide with the Company’s current financial year. These agreements are conditional upon the approval of Independent Shareholders at the SGM.

The Group’s current financial year end is 30th September. As a number of the Group’s subsidiaries are established in the PRC, the Company is considering the possibility of changing the Group’s financial year end to 31st December but no decision has been made.

In order to provide flexibility, the Company proposes to seek approval from the Independent Shareholders in respect of the Continuing Connected Transactions with 3 months and 9 months period caps covering three years ending 30th September, 2014. The table below illustrates the different periods in respect of which the period caps are proposed to cover under a change or no change in year end.

	The periods in respect	The periods in respect
The periods in respect	of which period caps	of which period caps
of which period caps	are proposed to cover	are proposed to cover
are proposed to cover	(on the basis of a	(on the basis of a
(on the basis of no	change in financial	change in financial
change in financial	year end to	year end to
year end) and total	31st December in 2012)	31st December in 2013)
annual cap	and total annual cap	and total annual cap
(US$’000)	(US$’000)	(US$’000)
1st October 2011 to	1st October 2011 to	1st October 2011 to
30th September 2012	31st December 2012	30th September 2012
602,952	781,197	602,952
1st October 2012 to	1st January 2013 to	1st October 2012 to
30th September 2013	31st December 2013	31st December 2013
712,770	745,486	923,731
1st October 2013 to	1st January 2014 to	1st January 2014 to
30th September 2014	30th September 2014	30th September 2014
843,638	632,677	632,677

For purposes of compliance with the Listing Rules, in terms of future annual review of the Continuing Connected Transactions, the auditors of the Company will be asked to confirm whether the Continuing Connected Transactions have been conducted within the period caps on a 12 months basis or in the case of a change in year end, a 15 months basis.

LETTER FROM THE BOARD

Based on historical amounts and estimated future business needs, the expected period caps for each group of connected transactions in the years 2012, 2013 and 2014 are set out below.

Connected Group PCC Third Supplemental Production Agreement Third Supplemental PCC Management Service Agreement Third Supplemental PCC Services Agreement Second Supplemental PCC Connected Sales Agreement Second Supplemental PCC Connected Purchases Agreement Second Supplemental Pou Chien Lease Agreement Second Supplemental Pou Yuen Lease Agreement Second Supplemental Yue Dean Lease Agreement Supplemental Pou Chien Technology Lease Agreement Sub-Total*:	1st October 2011 to 31st December 2011 (US$’000) 1,768 119 138,367 7,942 301 122 181 49 1 148,850	1st January 2012 to 30th September 2012 (US$’000) 5,302 357 415,101 23,825 903 365 543 146 1 446,543	Period 1st October 1st January 2012 to 2013 to 31st December 30th September 2012 2013 (US$’000) (US$’000) 1,817 5,450 134 401 164,048 492,142 9,530 28,590 346 1,038 122 365 181 543 49 146 1 1 176,228 528,676	1st October 2013 to 31st December 2013 (US$’000) 1,870 150 194,635 11,436 398 122 181 49 1 208,842	1st January 2014 to 30th September 2014 (US$’000) 5,610 451 583,904 34,308 1,194 365 543 146 1
					626,522

LETTER FROM THE BOARD

Connected Group GBD Third Supplemental GBD Management Service Agreement Sub-Total: Godalming Third Supplemental Godalming Tenancy Agreement Sub-Total: Total	1st October 2011 to 31st December 2011 (US$’000) 15 15 1,900 1,900 150,765	1st January 2012 to 30th September 2012 (US$’000) 44 44 5,600 5,600 452,187	Period 1st October 1st January 2012 to 2013 to 31st December 30th September 2012 2013 (US$’000) (US$’000) 17 49 17 49 2,000 5,800 2,000 5,800 178,245 534,525	1st October 2013 to 31st December 2013 (US$’000) 19 19 2,100 2,100 210,961	1st January 2014 to 30th September 2014 (US$’000) 55
					55 6,100
					6,100 632,677

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

The aggregate values of the relevant Continuing Connected Transactions for each of the two financial years ended 30th September, 2010 and the six months ended 31st March, 2011 were approximately US$343,389,000, US$440,376,000 and US$250,132,000 respectively. Under Rule 14A.25 of the Listing Rules, the Continuing Connected Transactions have been aggregated and have not been 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 period caps (on a 12 months basis or in the case of a change in financial year end, a 15 months basis) under their respective connected group. The consideration under each of the Continuing Connected 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 and the period caps are fair and reasonable and are in the interest of and are beneficial to the Group and Shareholders as a whole.

LETTER FROM THE BOARD

XV. GENERAL

The Independent Board Committee has been constituted to make a recommendation to the Independent Shareholders in respect of the resolutions to approve the Continuing Connected 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 (under the Third Supplemental Production Agreement, Third Supplemental PCC Management Service Agreement, Third Supplemental PCC Services Agreement, Second Supplemental PCC Connected Sales Agreement, Second Supplemental PCC Connected Purchases Agreement, Second Supplemental Pou Chien Lease Agreement, Second Supplemental Pou Yuen Lease Agreement, Second Supplemental Yue Dean Lease Agreement, Supplemental Pou Chien Technology Lease Agreement, Third Supplemental GBD Management Service Agreement, Third Supplemental Godalming Tenancy Agreement and the proposed period caps) are on normal commercial terms, in the ordinary and usual course of business, fair and reasonable and in the interest of the Company and the Shareholders as a whole.

The SGM will be held on 28th September, 2011 for the purpose of, among other things, obtaining approval from the Independent Shareholders in respect of the Continuing Connected Transactions by way of poll. As at the Latest Practicable Date, PCC directly and indirectly owns and is entitled to exercise control of 49.98% of the voting rights in respect of the issued share capital of the Company and is hence a connected person of the Company as defined under the Listing Rules. In accordance with the Listing Rules, any connected person and any Shareholder and their respective Associates with a material interest in the Continuing Connected Transactions will not vote on the resolutions in respect of the Continuing Connected Transactions and accordingly, each of PCC, GBD, Godalming, Mr. Tsai and their respective Associates who are Shareholders will abstain from voting on the resolutions to approve the relevant Continuing Connected Transactions and the proposed period caps 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 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.

LETTER FROM THE BOARD

XVI. RECOMMENDATIONS

The Directors consider that the terms of the Continuing Connected Transactions and the proposed period caps are fair and reasonable and they 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 and the proposed period caps. Your attention is drawn to the letter from the Independent Board Committee, the letter from Somerley Limited and the appendix to this circular.

Yours faithfully, For and on behalf of

Yue Yuen Industrial (Holdings) Limited Tsai Chi Neng Chairman

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [55 x 56] 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)

5th September, 2011

To the Independent Shareholders

Dear Sir or Madam,

RENEWAL OF 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 resolutions to approve the New Continuing Connected Transactions Agreements (including the proposed period caps), details of which are set out in the “Letter from the Board” contained in this 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” and to 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 New Continuing Connected Transactions Agreements (including the proposed period caps) 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 New Continuing Connected Transactions Agreements (including the proposed period caps) 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 New Continuing Connected Transactions Agreements (including the proposed period caps).

Yours faithfully, For and on behalf of the

Independent Board Committee Liu Len Yu, Leung Yee Sik, Huang Ming-Fu and Chu Li-Sheng Independent Non-executive Directors of Yue Yuen Industrial (Holdings) Limited

* For identification only

LETTER FROM SOMERLEY LIMITED

The following is the letter of advice from Somerley Limited to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

SOMERLEY LIMITED

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

5 September 2011

To: the Independent Board Committee and

the Independent Shareholders

Dear Sirs,

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS

We refer to our appointment as independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of the Continuing Connected Transactions entered into between the Group and (i) the PCC Group, (ii) GBD, and (iii) the Godalming Group in the Group’s ordinary and usual course of business. Details of the Continuing Connected Transactions and their respective aggregate period caps (either on a 12 months or 15 months basis depending on whether and when a possible change in financial year end from 30 September to 31 December will occur) covering the three years ending 30 September 2014 (“Aggregate Period Caps”) are set out in the “Letter from the Board” contained in the circular of the Company to the Shareholders dated 5 September 2011 (the “Circular”), of which this letter forms a part. Unless otherwise defined, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

As at the Latest Practicable Date, PCC is a substantial shareholder of the Company indirectly holding an aggregate of 824,143,835 Shares, representing approximately 49.98% of the entire issued share capital of the Company. Godalming is, on the other hand, owned as to approximately 85.45% by a discretionary trust, the beneficiaries of which include a Director, Mr. Tsai Chi Neng and his relatives. As such, PCC and Godalming are connected persons of the Company under Chapter 14A of the Listing Rules. GBD is beneficially owned as to approximately 94.12% by Mr. Tsai, the brother of Mr. Tsai Chi Neng, a Director, and is therefore a connected person under Listing Rule 14A.11(4)(b)(ii).

As the Aggregate Period Caps on an annual basis with all of the connected persons (i.e. the PCC Group, GBD and the Godalming Group) and their respective applicable percentage ratios are expected to exceed HK$10 million and 5% respectively, the entering into of the New Continuing Connected Transactions Agreements and the transactions contemplated thereunder constitute non-exempt continuing connected transactions and are subject to approval by the Independent Shareholders at the SGM under Chapter 14A of the Listing Rules. PCC, GBD, Godalming, Mr. Tsai and their respective Associates shall abstain from voting on the resolutions approving the Continuing Connected Transactions at the SGM.

LETTER FROM SOMERLEY LIMITED

The Independent Board Committee, comprising all the four independent non-executive Directors, namely Dr. Liu Len Yu, Mr. Leung Yee Sik, Mr. Huang Ming-Fu and Mr. Chu Li-Sheng, has been established to make recommendations to the Independent Shareholders as to whether the terms of the Continuing Connected Transactions and the Aggregate Period Caps are fair and reasonable so far as the Independent Shareholders are concerned and whether they are in the interests of the Company and the Shareholders as a whole. We, Somerley Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

In formulating our opinion, we have relied on the information and facts supplied, and the opinions expressed, by the executive Directors and management of the Group and have assumed that they are true, accurate and complete and will remain so up to the date of the SGM. We have also sought and received confirmation from the executive Directors that all material relevant information has been supplied to us and that no material facts have been omitted from the information supplied and opinions expressed to us. We have relied on such information and consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter and to justify our reliance on such information. We have no reason to believe that any material information has been omitted or withheld from us, nor to doubt the truth, accuracy or completeness of the information provided to us. We have, however, not conducted any independent investigation into the business and affairs of the Group, the PCC Group, GBD and the Godalming Group, nor have we carried out any independent verification of the information supplied.

EXECUTIVE SUMMARY

The Group has been carrying out, in the ordinary and usual course of its business, various continuing connected transactions with the PCC Group, GBD and the Godalming Group, subject to the annual caps and the terms of the respective master agreements. The purpose of these agreements is to assist the Group in running its operations in a flexible and efficient manner. The master contracts and the annual caps in respect of these continuing connected transactions for the three years ending 30 September 2011 will expire soon. To regulate the future transactions between the Company and its connected persons and to facilitate the ongoing operations of the Group, the Group has, in August 2011, entered into supplemental agreements to the relevant master contracts to extend certain continuing connected transactions for a term of three years commencing from 1 October 2011 and ending on 30 September 2014. Each of the supplementary agreements has been entered into on substantially the same terms as its corresponding previous one. The Company therefore proposes to obtain approval by the Independent Shareholders at the SGM of the following:

(1) the Third Supplemental PCC Services Agreement, the Second Supplemental PCC Connected Sales Agreement and the Second Supplemental PCC Connected Purchases Agreement, whereby the terms of the original agreements will be extended by a further period of three years ending 30 September 2014;

LETTER FROM SOMERLEY LIMITED

(2) the Third Supplemental Production Agreement, the Third Supplemental PCC Management Service Agreement, the Second Supplemental Pou Chien Lease Agreement, the Second Supplemental Pou Yuen Lease Agreement, the Second Supplemental Yue Dean Lease Agreement, the Supplemental Pou Chien Technology Lease Agreement, the Third Supplemental GBD Management Service Agreement and the Third Supplemental Godalming Tenancy Agreement, whereby the terms of the original agreements will be extended by a further period of three years ending 30 September 2014. In addition, certain amendments have been made to the original agreements, which are principally related to the rentals for the subject leases. In respect of the Third Supplemental Production Agreement, rental charges for equipment are amended. As for the Third Supplemental PCC Management Service Agreement, it includes a new clause for provision of accommodation-related services (which include provision of accommodation, housekeeping and laundry services). Regarding the Third Supplemental GBD Management Service Agreement, the clauses in relation to the supply of electricity, water and steam are deleted in their entirety;
(3) the proposed Aggregate Period Caps for all of the above agreements covering the three years ending 30 September 2014; and
(4) the revision of the annual cap for the Godalming Tenancy Agreement for the year ending 30 September 2011 from US$6,410,000 to US$7,150,000.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In considering whether the terms of the Continuing Connected Transactions and the Aggregate Period Caps are fair and reasonable so far as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons set out below:

1. Background to and reasons for the Continuing Connected Transactions

Introduction

The Group is principally engaged in the manufacture (as original equipment manufacturer and original design manufacturer) and sales of athletic footwear, athletic style leisure footwear, casual and outdoor footwear with its principal production facilities located in the PRC, Vietnam and Indonesia. The Group, through Pou Sheng International (Holdings) Limited (the shares of which are also listed on the Stock Exchange), is also engaged in the wholesale and retail of shoes and sportswear.

LETTER FROM SOMERLEY LIMITED

(i) Transactions with the PCC Group

PCC is the controlling shareholder of the Company, the shares of which are listed on Taiwan Stock Exchange Corporation. The PCC Group is principally engaged in the manufacturing and sales of footwear and its related products. The PCC Group’s products are sold in Taiwan and exported to the United States, South East Asia and Europe.

Being the controlling shareholder of the Company, PCC has provided a 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 have operations and/or sales.

The Group has been conducting ongoing transactions with the PCC Group under the following agreements:

(a) Production Agreement and Third Supplemental Production Agreement (the “Production Agreements”)

Pursuant to the Production Agreements entered into between Prime Asia, a whollyowned subsidiary of the Company, and Barits, a subsidiary of PCC, Barits provides tanning facilities and processing services to Prime Asia for processing of raw cattle hides into finished leather. Barits also provides sales support to Prime Asia for sales of its finished leather. Prime Asia 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 possesses the expertise and production facilities in Taiwan for producing quality leather. The Production Agreements allow Prime Asia to gain access to the expertise and the tanning facilities owned by Barits in Taiwan on an exclusive basis. Without prior written consent from Prime Asia, Barits cannot provide leather manufacturing or processing services to any third party or utilise its tanning facilities for its own account. Under the Production Agreements, Prime Asia will directly supervise and manage the tanning operations.

(b) PCC Services Agreement and Third Supplemental PCC Services Agreement (the “PCC Services Agreements”)

Pursuant to the PCC Services Agreements entered into between the Company and PCC, the Company has engaged the PCC Group to provide research and development, know-how, technical, procurement, marketing and recruitment services in relation to the production and sales of the Group’s products on behalf of the Group, in view of the PCC Group’s expertise in these areas and its long experience in the industry. As advised by the management of the Company, the PCC Group provides these services to the Group exclusively.

LETTER FROM SOMERLEY LIMITED

Under the Sales Agreements, the PCC Group shall purchase leather, moulds, packaging boxes, semi-finished and finished shoe products from the Group, taking advantage of the Group’s manufacturing operations in low cost countries such as the PRC, Vietnam and Indonesia. It also enables the Group to make use of its unutilised production capacity.

(d) PCC Connected Purchases Agreement and Second Supplemental PCC Connected Purchases Agreement (the “Purchases Agreements”)

Pursuant to the Purchases Agreements, the Group shall purchase raw materials, manufacturing equipment and tools and shoe-related products manufactured by the PCC Group.

(e) PCC Management Service Agreement and Third Supplemental PCC Management Service Agreement (the “PCC Management Service Agreements”)

The PCC Group operates some manufacturing factories in the Industrial Estate situated in the He Lu Industrial Area, Huang Jiang Town, Dongguan, Guangdong Province, the PRC. Highmark, a wholly-owned subsidiary of the Company, is a property management company and is principally engaged in the management of the Industrial Estate. Highmark provides certain management services to occupants of the Industrial Estate including 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, steam supply and general up-keeping of the common areas, provision of security and upkeeping of all drains in common areas. Highmark also provides accommodation-related services including accommodation, housekeeping and laundry services in the Industrial Estate.

Pursuant to the PCC Management Service Agreements, Highmark shall supply electricity and water, provide general up-keeping of common area and security services and furnish accommodation-related services to the PCC Group.

(f) Pou Chien Lease Agreement and Second Supplemental Pou Chien Lease Agreement (the “Pou Chien Lease Agreements”)

Pursuant to the Pou Chien Lease Agreements, PCC agrees to lease to Pou Chien, a wholly-owned subsidiary of the Company, certain properties situated at Yong Fu Road, Yong Jing Hsian, Chang Hua, Taiwan, for the purpose of running its manufacturing business.

LETTER FROM SOMERLEY LIMITED

(g) Pou Yuen Lease Agreement and Second Supplemental Pou Yuen Lease Agreement (the “Pou Yuen Lease Agreements”)

Pursuant to the Pou Yuen Lease Agreements, Pou Yuen, a subsidiary of PCC, agrees to lease to Yue Dean, a wholly-owned subsidiary of the Company, a property situated at Fu Kung Road, Fu Hsin Hsian, Chang Hua, Taiwan, for the purpose of running its manufacturing business.

(h) Yue Dean Lease Agreement and Second Supplemental Yue Dean Lease Agreement (the “Yue Dean Lease Agreements”)

Pursuant to the Yuen Dean Lease Agreements, PCC agrees to lease to Yue Dean a property situated at Fu Kung Road, Fu Hsin Hsian, Chang Hua, Taiwan, for the purpose of running its manufacturing business.

(i) Pou Chien Technology Lease Agreement and Supplemental Pou Chien Technology Lease Agreement (the “Pou Chien Technology Lease Agreements”)

Pursuant to the Pou Chien Technology Lease Agreements, PCC agrees to lease to Pou Chien Technology, a wholly-owned subsidiary of the Company, a property situated at Taichung Kang Road, Xitun District, Taichung, Taiwan, for use as an office unit for its administrative operations.

(ii) Transaction with the GBD Group

GBD is beneficially owned as to approximately 94.12% by Mr. Tsai and approximately 5.88% by PCC. Mr. Tsai is the brother of Mr. Tsai Chi Neng, a Director. The GBD Group was previously engaged in the manufacturing and trading of computer hardware, computer accessories and components in the Industrial Estate. However, the GBD Group ceased this business in 2010 and is now principally engaged in property investment holding.

(a) GBD Management Service Agreement and Third Supplemental GBD Management Service Agreement (the “GBD Management Service Agreements”)

Pursuant to the GBD Management Service Agreements, Highmark agrees to provide GBD with certain management services, including security service and maintenance service of common areas, in respect of a number of factories situated in the Industrial Estate.

(iii) Transaction with Godalming

Godalming is approximately 85.45% owned by a discretionary trust of which Mr. Tsai Chi Neng, a Director, and his relatives are beneficiaries. The principal business activity of Godalming is property investment in the PRC.

LETTER FROM SOMERLEY LIMITED

(a) Godalming Tenancy Agreement and Third Supplemental Godalming Tenancy Agreement (the “Godalming Tenancy Agreements”)

Pursuant to the Godalming Tenancy Agreements, Godalming and its subsidiaries agree to make available for rental by the subsidiaries and a jointly-controlled entity of the Company properties in different towns of Guangdong Province, for uses by the Group as factories and workers’ dormitories, for the three years ending 30 September 2014. The exact occupancy area of the leased properties would be determined by the Group from time to time.

2. Pricing basis

(i) Cost based

Production Agreements

The charges pursuant to the Production Agreements are principally based on cost. In consideration of the tanning facilities and processing services provided by Barits under the Production Agreements, Prime Asia shall pay Barits a production fee comprising all actual variable costs and selling, general and administrative expenses incurred by Barits for the Group’s tanning activities and the fixed costs on the rentals for land, buildings and equipment used by the Group exclusively.

Variable costs include chemicals and supplies, labor and pension costs, direct factory overhead and utilities whereas selling, general and administrative expenses include scheduling, inventory control, invoicing, product control, delivery, customer service and insurance for the facility in Taiwan, all of which are incurred by Barits in the performance of its processing duties under the Production Agreements.

Rental charge on land and buildings is equivalent to the open market rental value as certified by an independent valuer. Rental charges for equipment are calculated with reference to the costs of the equipment and the associated funding costs.

Equipment purchased by Barits before 1 January 1995 and still in service will be rented based on an annual rate of 1% of the original purchase cost until the equipment is retired. Equipment purchased by Barits on or after 1 January 1995 will be rented based on the sum of depreciation (being amortization of original purchase cost on a straight line basis over its estimated useful life) plus interest taken on the net book value at the annual rate representing the aggregate of 1.5% and the 3-month London Interbank Offered Rate (“LIBOR”). If the equipment has been fully depreciated and is still in service, rental will be charged at an annual rate of 1% of original purchase cost until the equipment is retired.

As disclosed in the 2009/2010 annual report of the Company, the weighted average effective interest rate on the Group’s floating-rate bank borrowings as at 30 September 2010 was approximately 3.02% per annum. Based on the 3-month LIBOR at the Latest Practicable Date of approximately 0.33%, the variable annual rate of approximately 1.83% and the fixed annual rate of 1%, as agreed under the Production Agreements, are both lower than the abovementioned 3.02%.

LETTER FROM SOMERLEY LIMITED

Coupled with the fact that the Production Agreements enable the Group to have immediate access to the expertise and to make use of the full tanning facilities of Barits in Taiwan without having to fund the fixed cost required to set up its own facilities and to obtain all necessary approvals and/or permits for processing leather on its own, we consider the pricing bases above justified.

(ii) Cost plus basis

PCC Services Agreements

In consideration of the services provided by the PCC Group under the PCC Services Agreements, the Group shall reimburse the PCC Group all costs for the materials, machinery and other goods purchased by it on behalf of the Group and other costs incurred by the PCC Group for rendering research and development, know-how, technical, procurement, marketing and recruitment services pursuant to the PCC Services Agreements to the Group. In addition, the Group shall pay the PCC Group the following fees:

(a) 0.5% of the net invoiced amounts of products developed by the PCC Group and sold by the Group;
(b) 1% of the merchandise cost invoiced to the PCC Group where materials, machinery and other goods are purchased by, and inspection and logistics arrangements are handled by the PCC Group on behalf of the Group; and
(c) 0.5% of the merchandise cost invoiced to the Group where the PCC Group identifies the suppliers of materials, machinery and other goods for the Group in Taiwan or overseas, but where purchases are handled directly by the Group.

To assess the pricing bases of the purchasing and sourcing services to be provided by the PCC Group (i.e. items (b) and (c) as mentioned above), we have reviewed the pricing bases of a number of transactions involving provision of procurement and purchasing services based on actual cost and a premium on top of it and charged by listed companies to connected persons or vice versa (the “Procurement Comparable Transactions”) as identified from announcements, circulars or prospectus published by companies listed on the Stock Exchange since 2008. We note that the Procurement Comparable Transactions do not include listed companies which are also involved in shoe manufacturing, as in the case of the Company. However, in our opinion, the nature of services, as against the nature of business of listed companies, is in the present circumstances a

LETTER FROM SOMERLEY LIMITED

more relevant criterion in selecting the Procurement Comparable Transactions, given shoe products or related raw materials are not differentiated or specialised products. The table below summarises the terms of the Procurement Comparable Transactions:

Date of public Parties Nature of transaction Pricing basis documents China Communications ➢ Provision of supplies ➢ 1% of the contract 12 November 2010 Services Corporation Limited value at the maximum procurement services by (“CCSC”) CCSC to CTC and vice for imported (Stock code: 552) telecommunications and versa supplies; and China Telecommunications Corporation (“CTC”) ➢ 3% of the contract value at the maximum for domestic telecommunications supplies and other domestic non-telecommunications materials China Unicom (Hong Kong) ➢ To procure purchases of ➢ up to 3% of the contract 29 October 2010 Limited (“China Unicom”) imported and domestic value for domestic (Stock code: 762) telecommunications equipment procurement; and equipment and other and China United Network domestic Communications Group non-telecommunications ➢ up to 1% of the contract Company Limited equipment for a value for imported (“Unicom Group”) wholly-owned subsidiary equipment procurement of China Unicom by Unicom Group

LETTER FROM SOMERLEY LIMITED

					Date of public
Parties	Nature of transaction		Pricing basis		documents
China Telecom Corporation	➢	Provision of procurement	➢	1% of the contract	25 August 2010
Limited (“China Telecom”)		services by China		value at the maximum
(Stock code: 728)		Telecommunications		for imported
and		Corporation and/		telecommunications
China Telecommunications		or its associates to		supplies; and
Corporation		China Telecom and its
		subsidiaries	➢	3% of the contract
				value at the maximum
				for domestic
				telecommunications
				supplies and other
				domestic
				non-telecommunications
				materials
Chia Tai Enterprises	➢	To perform certain	➢	1% of the cost of	25 March 2010
International Limited		purchasing functions for		goods sold of CPH’s
(“Chia Tai”)		CPH and its subsidiaries		hypermarket stores
(Stock code: 121)		in relation to CPH’s
and		hypermarket stores
C.P. Holding (BVI)
Investment Company Limited
(“CPH”)
Inspur	➢	Provision of sourcing	➢	a premium of not less than	27 February 2009
International Limited		services for overseas		1.5% above the purchase
(“Inspur”)		products and component by		price paid by the Inspur
(Stock code: 596)		Inspur and its subsidiaries		Group
and		(the “Inspur Group”) to
Inspur Group Limited		IPG and its subsidiaries
(“IPG”)
Hembly International	➢	Provision of sourcing	➢	6% of free on board price	5 December 2008
Holdings Limited (“Hembly”)		services for all sourcing of		plus delivery and duty
(Stock code: 3989)		sport apparel, leisure wear		costs paid
and		and related accessories by
Sergio Tacchini International		a subsidiary of Hembly to
S.P.A. (“Sergio”)		Sergio

LETTER FROM SOMERLEY LIMITED

					Date of public
Parties	Nature of transaction		Pricing basis		documents
Automated System Holdings	➢	Purchase of products	➢	not higher than 8% of the	24 November 2008
Limited		in areas where another		cost
(Stock code: 771)		party has no presence (a
and		reciprocal arrangement)
Computer Sciences
Corporation
China Unicom Limited	➢	To provide procurement	➢	0.35%-0.55% of the	15 August 2008
(“Unicom”)		services for foreign		contract value for
(Stock code: 762)		and domestic		imported equipment; and
and		telecommunications
China United		equipment and other	➢	0.15%-0.25% for domestic
Telecommunications		materials by CUTC’s		equipment
Corporation (“CUTC”)		subsidiaries to Unicom’s
		subsidiaries

Source: The announcements, circulars or prospectus of the respective companies

As summarised in the table above, the fees for purchasing and sourcing services in the Procurement Comparable Transactions are largely charged on the basis of a mark-up in the range of 0.15% to 8%. As the fees charged by the PCC Group for the purchasing and sourcing services provided to the Group falls within this range, we consider the pricing bases in respect of the purchasing and sourcing services pursuant to the PCC Services Agreements justified.

The pricing bases for the research and development services provided by the PCC Group (i.e. item (a) as mentioned above) are assessed by reference to a number of transactions involving provision of research and development services and technology licences where the pricing bases are based on actual cost and a premium on top of it and charged by listed companies to connected persons or vice versa (the “R&D Comparable Transactions”) as identified from announcements, circulars or prospectus published by companies listed on the Stock Exchange since 2008. We note that the R&D Comparable Transactions do not include listed companies which are also involved in shoe manufacturing, as in the case of the Company. However, in our opinion, the nature of services,

LETTER FROM SOMERLEY LIMITED

as against the nature of business of listed companies, is in the present circumstances a more relevant criterion in selecting the R&D Comparable Transactions, given shoe products or related raw materials are not differentiated or specialised products. The table below summarises the terms of the R&D Comparable Transactions:

					Date of public
Parties	Nature of transaction		Pricing basis		documents
Advanced	➢	To transfer relevant	➢	3% of the net selling price	5 August 2011
Semiconductor		knowledge and experience;		to customers
Manufacturing Corporation		to grant a licence to
Limited (“ASMC”)		manufacture products;
(Stock code: 3355)		to provide technical
and		assistance; and to provide
NXP B.V.		technical training, by NXP
		B.V. to ASMC
Advanced	➢	To grant a licence over	➢	10% of the net selling price	5 August 2011
Semiconductor		certain intellectual		to customers
Manufacturing Corporation		property rights for
Limited (“ASMC”)		use in manufacturing
(Stock code: 3355)		identification products by
and		NXP Semiconductors to
NXP Semiconductors		ASMC
Netherlands B.V.
(“NXP Semiconductors”)
COSCO International	➢	Provision of technology	➢	0.5% of the net sales	28 December 2010
Holdings Limited		and know-how in		revenue of the three
(“COSCO”)		manufacturing container		non-wholly owned
(Stock code: 517)		coatings, marine coatings		subsidiaries of COSCO
and		and heavy-duty
Kansai Paint Co., Ltd.		anti-corrosion coatings by
(“Japan Kansai”)		Japan Kansai to three
		non-wholly owned
		subsidiaries of COSCO

LETTER FROM SOMERLEY LIMITED

					Date of public
Parties	Nature of transaction		Pricing basis		documents
First Tractor Company	➢	Provision of development	➢	0.2% of the sales revenue	21 December 2010
Limited (“FT”)		recommendation and		of the FT Group for
(Stock code: 38)		product improvement		provision of Daily
and		(collectively the “Daily		Services;
Tractors Research Company		Services”), technology
(“TR”)		research and development,	➢	either the State price, the
		technology consultation as		market price or costs plus
		well as other technology		a percentage mark-up
		services in connection		(within the range of 10% to
		with tractors by TR and		30%) for provision of other
		its subsidiaries to FT and		services
		its subsidiaries (the “FT
		Group”)
Vietnam Manufacturing and	➢	Provision of a licence by	➢	4% of the annual net	10 December 2009
Export Processing (Holdings)		Sanyang to a subsidiary		selling price of products
Limited (“VMEPH”)		of VMEPH to use the		manufactured using such
(Stock code: 422)		technology,		technology from Sanyang
and		know-how, trade secrets		and sold by the subsidiary
Sanyang Industry Co.,		and production information		of VMEPH
Limited (“Sanyang”)		in connection with the
		manufacture and sales of
		motorbikes and related
		parts by VMEPH and its
		subsidiaries

LETTER FROM SOMERLEY LIMITED

					Date of public
Parties	Nature of transaction		Pricing basis		documents
Win Hanverky Holdings	➢	Grant of an exclusive right	➢	6% to 25% of the total	30 October 2009
Limited (“Win Hanverky”)		to sell Umbro products and		sales of Umbro products
(Stock code: 3322)		to use certain trademarks,
and		logos and designs of	➢	the cost of manufacture
Umbro International Limited		Umbro International		actually charged to Umbro
(“Umbro International”)		in connection with any		International or UAS
		marketing, advertising,		together with any agreed
		promotion and sale of		sourcing commission up
		Umbro products, by		to 5% of such cost of
		Umbro International		manufacture
		to a subsidiary of Win
		Hanverky
	➢	Grant of a non-exclusive
		licence to have the
		Umbro products
		manufactured by the
		authorised manufacturers
		or a division of Umbro
		International (“UAS”),
		by Umbro International
		to a subsidiary of Win
		Hanverky
Sinotruk (Hong Kong)	➢	Provision of technology	➢	cost plus a 10% margin	21 April 2009
Limited (“Sinotruk”)		research and development,
(Stock code: 3808)		technology consultancy
and		and support services
China National Heavy Duty		by Sinotruck and its
Truck Group Company		subsidiaries to CNHTC and
Limited (“CNHTC”)		its associates
A-S China Plumbing	➢	Licence to use trademark,	➢	3.8% to 7% of net sales;	25 November 2008
Products Limited		technical assistance and
(Stock code: 8262)		management assistance	➢	5% of net sales of
and				products bearing licensed
Ideal Standard Global Ltd.				trademarks; or
			➢	2% to 2.5% of net sales
				and 3% of net sales of
				products bearing licensed
				trademarks

Source: The announcements, circulars or prospectus of the respective companies

LETTER FROM SOMERLEY LIMITED

As illustrated in the table above, the licence or service fees charged in the R&D Comparable Transactions are largely based on a percentage of sales price, the range of which was from 0.2% to 25%. As the fees charged by the PCC Group for the research and development services provided to the Group fall within this range, we consider the pricing basis in respect of the research and development services pursuant to the PCC Services Agreements justified.

Sales Agreements- in respect of sale of semi-finished shoe products

Pursuant to the Sales Agreements, the Group will sell to the PCC Group semi-finished shoe products at costs plus a mark-up of approximately 3% of the selling price. In determining the markup under the Sales Agreements, the Directors have made reference to the operating profit margin of the Group of approximately 9.2% for the year ended 30 September 2010. The costs of semi-finished shoe products comprise all related fixed and variable costs incurred in producing and selling semifinished shoe products. Having considered (a) the sales to the PCC Group have a low credit risk and enable the Group to utilise its spare production capacity, and (b) the sales of leathers, moulds, packaging boxes, semi-finished and finished shoe products pursuant to the Sales Agreements are not material, amounting to less than 0.4% of the Group’s total turnover for the year ended 30 September 2010, we concur with the Directors’ view that a 3% mark-up for the above transaction is acceptable.

(iii) Market price basis

Sales Agreements – in respect of sale of finished products

In respect of the Group’s sales of leather, moulds, packaging boxes and finished shoe products to the PCC Group under the Sales Agreements, the selling prices shall be no less favourable to the Group than those available to independent third party customers of the Group.

Purchases Agreements

In respect of the Group’s purchases of raw materials for production of footwear and footwear accessories, manufacturing equipment and tools and shoe-related products under the Purchases Agreements, the purchase prices shall be based on market prices but in any event no less favourable to the Group than those available from independent third parties.

PCC Management Service Agreements and GBD Management Service Agreements

As the estate manager of the Industrial Estate, Highmark provides general management services, including security and maintenance services of common areas, to the PCC Group’s and the GBD Group’s manufacturing establishments in the Industrial Estate. Highmark also supplies electricity and water to the PCC Group’s factories and provides accommodation-related services (which include accommodation, housekeeping and laundry services) to the PCC Group. For the three years ending 30 September 2014, Highmark will no longer supply and charge the GBD Group for the provision of electricity, hot water and stream, as the GBD Group ceased to operate its manufacturing business in the Industrial Estate and is now principally engaged in property investment holding.

LETTER FROM SOMERLEY LIMITED

The charges for consumption of electricity and water are based on the actual usage and the fees for the up-keep of commons areas and the provision of security service are charged based on the areas occupied by the respective occupants in the Industrial Estate. The charges for the accommodation-related services provided by Highmark to the PCC Group are based on the prevailing fair market rental value of service apartments as certified by an independent valuer. As the pricing bases under the PCC Management Service Agreements and the GBD Management Service Agreements are the same as those charged to independent third party occupants in the Industrial Estate, we consider the pricing bases above justified.

Pou Chien Lease Agreements, Pou Yuen Lease Agreements, Yue Dean Lease Agreements, Pou Chien Technology Lease Agreements and Godalming Tenancy Agreements

Rentals for the Godalming Tenancy Agreements are determined based on the actual area utilised by the Group and the open market rental values as certified by an independent valuer when the supplemental agreement is entered into.

Rentals for other lease agreements are fixed with reference to the open market rental values when the relevant agreements are entered into and are not subject to any change for the three years ending 30 September 2014.

Based on the above analysis, we conclude that the pricing bases in respect of the Continuing Connected Transactions are fair and reasonable.

LETTER FROM SOMERLEY LIMITED

3. Payment terms

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

Agreements	Payment terms
Third Supplemental	Weekly payment in advance. Excess advance
Production Agreement	payments carried forward to next month and shortfall shall
	be settled within 7 days
Third Supplemental PCC	30 to 45 days for service fees and 45 days for others,
Services Agreement	payable from date of invoice
Second Supplemental PCC	45 days from date of invoice
Connected Sales Agreement
Second Supplemental PCC	45 days from date of invoice
Connected Purchases
Agreement
Third Supplemental PCC	45 days from date of invoice
Management Service
Agreement
Second Supplemental Pou Chien	No later than the 16th day of each month
Lease Agreement
Second Supplemental Pou Yuen	No later than the 16th day of each month
Lease Agreement
Second Supplemental Yue Dean	No later than the 16th day of each month
Lease Agreement
Supplemental Pou Chien	No later than the 16th day of each month
Technology Lease
Agreement
Third Supplemental GBD	45 days from date of invoice
Management Service
Agreement
Third Supplemental Godalming	First day of each month
Tenancy Agreement

As disclosed in the 2009/2010 annual report of the Company, the credit periods for the Group’s purchases or sales range from 30 days to 90 days. We regard the above payment terms reflects normal commercial credit terms commonly approved by vendors or suppliers in such circumstances.

LETTER FROM SOMERLEY LIMITED

4. The Aggregate Period Caps

The Company is currently considering the possibility of changing the Group’s financial year end from 30 September to 31 December but no decision has been made yet. To provide more flexibility to the Group, each of the proposed annual caps of the Continuing Connected Transactions for the three years ending 30 September 2014 is divided into 3 months and 9 months period caps. Each of the Continuing Connected Transactions will then be subject to aggregate period caps either on a 12 months basis or in the case of a change in financial year end, a 15 months basis. The period caps for the Continuing Connected Transactions covering the three years ending 30 September 2014 are set out below:

31 Agreements (in US$’000) (i) with PCC Group Third Supplemental Production Agreement Third Supplemental PCC Services Agreement Second Supplemental PCC Connected Sales Agreement Second Supplemental PCC Connected Purchases Agreement Third Supplemental PCC Management Service Agreement Second Supplemental Pou Chien Lease Agreement Second Supplemental Pou Yuen Lease Agreement Second Supplemental Yue Dean Lease Agreement Supplemental Pou Chien Technology Lease Agreement Sub-total(see Note 2)	1 October 2011 to December 30 2011 1,768 138,367 7,942 301 119 122 181 49 1 148,850	1 January 2012 to September 31 2012 5,302 415,101 23,825 903 357 365 543 146 1 446,543	Period caps (see Note 1) For the period from 1 October 1 January 2012 to 2013 to December 30 September 31 2012 2013 1,817 5,450 164,048 492,142 9,530 28,590 346 1,038 134 401 122 365 181 543 49 146 1 1 176,228 528,676	1 October 2013 to December 30 2013 1,870 194,635 11,436 398 150 122 181 49 1 208,842	1 January 2014 to September 2014 5,610 583,904 34,308 1,194 451 365 543 146 1
					626,522

LETTER FROM SOMERLEY LIMITED

31 Agreements (in US$’000) (ii) with GBD Third Supplemental GBD Management Service Agreement Sub-total(see Note 2) (iii) with Godalming Group Third Supplemental Godalming Tenancy Agreement Sub-total(see Note 2) Total	1 October 2011 to December 30 2011 15 15 1,900 1,900 150,765	1 January 2012 to September 31 2012 44 44 5,600 5,600 452,187	Period caps (see Note 1) For the period from 1 October 1 January 2012 to 2013 to December 30 September 31 2012 2013 17 49 17 49 2,000 5,800 2,000 5,800 178,245 534,525	1 October 2013 to December 30 2013 19 19 2,100 2,100 210,961	1 January 2014 to September 2014 55
					55

					6,100
					6,100

					632,677

Notes:

1. The period caps are derived from the corresponding Annual Caps (as defined below) on a pro-rata basis.

2. Each of the Continuing Connected Transactions under each group of connected persons will be subject to the sub-total of such group aggregated either on a 12 months or 15 months basis, depending on whether and when a change in financial year end will occur. Details of different scenario regarding a possible change in financial year end are discussed below.

The followings illustrate different sets of Aggregate Period Caps covering the three years ending 30 September 2014, under the scenarios of (i) no change in financial year end, (ii) a change in financial year end to 31 December in 2012, and (iii) a change in financial year end to 31 December in 2013, which are derived from one of or a combination of the period caps as mentioned above. The assessment of the Aggregate Period Caps below will be made on the basis of no change in financial year end.

LETTER FROM SOMERLEY LIMITED

On the basis of no change in financial year end

The following is a summary of the historical transaction amounts for each of the Continuing Connected Transactions for the two years ended 30 September 2010 and the six months ended 31 March 2011 as well as the respective annual caps (the “Annual Caps”) for each of the three years ending 30 September 2014, on the basis of no change in financial year end:

Agreements (i) with PCC Group Third Supplemental Production Agreement Third Supplemental PCC Services Agreement Second Supplemental PCC Connected Sales Agreement Second Supplemental PCC Connected Purchases Agreement Third Supplemental PCC Management Service Agreement Second Supplemental Pou Chien Lease Agreement (see Note 1) Second Supplemental Pou Yuen Lease Agreement (see Note 1) Second Supplemental Yue Dean Lease Agreement (see Note 1) Supplemental Pou Chien Technology Lease Agreement (see Note 1) Sub-total(see Note 4)	Historical figures (in US$’000) For the For the year 6 months ended ended 30 September 31 March 2009 2010 2011 8,078 6,432 3,412 302,991 400,653 228,464 16,574 20,505 13,236 795 706 523 5,918 3,365 277 439 454 241 568 587 311 145 150 79 1 1 1 335,509 432,853 246,544	Annual Caps (in US$’000) For the year ending 30 September (see Note 3) 2012 2013 7,070 7,267 553,468 656,190 31,767 38,120 1,204 1,384 476 535 487 487 724 724 195 195 2 2 595,393 704,904	2014 7,480 778,539 45,744 1,592 601 487 724 195 2
			835,364

LETTER FROM SOMERLEY LIMITED

Agreements (ii) with GBD Third Supplemental GBD Management Service Agreement Sub-total(see Note 4) (iii) with Godalming Group Third Supplemental Godalming Tenancy Agreement_(see Note 2) Sub-total(see Note 4)_ Total	Historical figures (in US$’000) For the For the year 6 months ended ended 30 September 31 March 2009 2010 2011 1,151 870 13 1,151 870 13 6,729 6,653 3,575 6,729 6,653 3,575 343,389 440,376 250,132	Annual Caps (in US$’000) For the year ending 30 September (see Note 3) 2012 2013 59 66 59 66 7,500 7,800 7,500 7,800 602,952 712,770	2014 74
			74

			8,200
			8,200

			843,638

Notes:

1. The rentals in NT$ paid by the Group for the two years ended 30 September 2010 pursuant to the Pou Chien Lease Agreements, Pou Yuen Lease Agreements, Yuen Dean Lease Agreements and Pou Chien Technology Lease Agreements were of the same amount. The difference in US$ amount of rentals paid for the two years ended 30 September 2010 as shown above is a result of movement in exchange rates during the years.

2. The rentals paid for the two years ended 30 September 2010 pursuant to the Godalming Tenancy Agreements were calculated based on the actual areas utilised by the Group.

3. The Annual Caps for each of the Continuing Connected Transactions under each group of connected persons for each of the three years ending 30 September 2014 are equivalent to the sum of the period caps covering the corresponding financial year.

4. Each of the Continuing Connected Transactions under each group of connected persons will be subject to the sub-total of such group in each of the three years ending 30 September 2012, 30 September 2013 and 30 September 2014.

LETTER FROM SOMERLEY LIMITED

On the basis of a change in financial year end to 31 December in 2012

The following is a summary of respective Aggregate Period Caps for the three years ending 30 September 2014, on the basis of a change in financial year end to 31 December in 2012:

31 Agreements (i) with PCC Group Third Supplemental Production Agreement Third Supplemental PCC Services Agreement Second Supplemental PCC Connected Sales Agreement Second Supplemental PCC Connected Purchases Agreement Third Supplemental PCC Management Service Agreement Second Supplemental Pou Chien Lease Agreement Second Supplemental Pou Yuen Lease Agreement Second Supplemental Yue Dean Lease Agreement Supplemental Pou Chien Technology Lease Agreement Sub-total(see Note 2) (ii) with GBD Third Supplemental GBD Management Service Agreement Sub-total(see Note 2) (iii) with Godalming Group Third Supplemental Godalming Tenancy Agreement Sub-total(see Note 2) Total	Aggregate Period Caps (in US$’000) Period (see Note 1) 1 October 1 January 1 January 2011 to 2013 to 2014 to December 31 December 30 September 2012 2013 2014 8,887 7,320 5,610 717,516 686,777 583,904 41,297 40,026 34,308 1,550 1,436 1,194 610 551 451 609 487 365 905 724 543 244 195 146 3 2 1 771,621 737,518 626,522 76 68 55 76 68 55 9,500 7,900 6,100 9,500 7,900 6,100 781,197 745,486 632,677	Aggregate Period Caps (in US$’000) Period (see Note 1) 1 October 1 January 1 January 2011 to 2013 to 2014 to December 31 December 30 September 2012 2013 2014 8,887 7,320 5,610 717,516 686,777 583,904 41,297 40,026 34,308 1,550 1,436 1,194 610 551 451 609 487 365 905 724 543 244 195 146 3 2 1 771,621 737,518 626,522 76 68 55 76 68 55 9,500 7,900 6,100 9,500 7,900 6,100 781,197 745,486 632,677
		626,522

		55
		55

		6,100
		6,100

		632,677

Notes:

1. The Aggregated Period Caps for each of the Continuing Connected Transactions under each group of connected persons for each of the periods covering 15 months ending 31 December 2012, one year ending 31 December 2013 and nine months ending 30 September 2014 are equivalent to the sum of the period caps covering the corresponding financial period.

2. Each of the Continuing Connected Transactions under each group of connected persons will be subject to the sub-total of such group in each of the periods covering 15 months ending 31 December 2012, one year ending 31 December 2013 and nine months ending 30 September 2014.

LETTER FROM SOMERLEY LIMITED

On the basis of a change in financial year end to 31 December in 2013

The following is a summary of respective Aggregate Period Caps for the three years ending 30 September 2014, on the basis of a change in financial year end to 31 December in 2013:

	Aggregate Period Caps	Aggregate Period Caps	Aggregate Period Caps
		(in US$’000)
		Period
		(see Note 1)
	1 October	1 October	1	January
	2011 to	2012 to		2014 to
	30 September	31 December	30 September
Agreements	2012	2013		2014
(i) with PCC Group
Third Supplemental Production Agreement	7,070	9,137		5,610
Third Supplemental PCC Services Agreement	553,468	850,825		583,904
Second Supplemental PCC Connected Sales Agreement	31,767	49,556		34,308
Second Supplemental PCC Connected Purchases Agreement	1,204	1,782		1,194
Third Supplemental PCC Management Service Agreement	476	685		451
Second Supplemental Pou Chien Lease Agreement	487	609		365
Second Supplemental Pou Yuen Lease Agreement	724	905		543
Second Supplemental Yue Dean Lease Agreement	195	244		146
Supplemental Pou Chien Technology Lease Agreement	2	3		1
Sub-total(see Note 2)	595,393	913,746		626,522

(ii) with GBD
Third Supplemental GBD Management Service Agreement	59	85		55
Sub-total(see Note 2)	59	85		55

(iii) with Godalming Group
Third Supplemental Godalming Tenancy Agreement	7,500	9,900		6,100
Sub-total(see Note 2)	7,500	9,900		6,100

Total	602,952	923,731		632,677

Notes:

1. The Aggregated Period Caps for each of the Continuing Connected Transactions under each group of connected persons for each of the periods covering one year ending 30 September 2012, 15 months ending 31 December 2013 and nine months ending 30 September 2014 are equivalent to the sum of the period caps covering the corresponding financial period.

2. Each of the Continuing Connected Transactions under each group of connected persons will be subject to the sub-total of such group in each of the periods covering one year ending 30 September 2012, 15 months ending 31 December 2013 and nine months ending 30 September 2014.

LETTER FROM SOMERLEY LIMITED

We understand from the management of the Group that the bases for setting the Annual Caps can be summarised as follows:

(i) Based on projected transaction amounts in the year ending 30 September 2011

In respect of the Production Agreements, the PCC Services Agreements, the Sales Agreements and the Purchases Agreements, the starting points of the Annual Caps are principally based on (a) the projected transaction amounts of the relevant agreements for the year ending 30 September 2011 by reference to the actual transaction amounts incurred during the year, and (b) an estimated compound annual growth in the coming three financial years.

Production Agreements

The Annual Caps for the Production Agreements, including variable costs, selling, general and administrative expenses, and rental charges for land, buildings and equipment, are principally set with reference to (a) a compound annual growth rate of approximately 4% in variable costs and selling, general and administrative expenses (denominated in US$) incurred by Barits for the Group’s tanning activities for the three years ending 30 September 2014, and (b) an independent valuation of the open market rental value of land and buildings of approximately NT$3,280,566 per month.

Having considered the general inflation rate of Taiwan of approximately 1.32% in July 2011 and the appreciation of NT$ against US$ of approximately 8% during October 2010 to July 2011, we consider it reasonable for the Directors to determine the Annual Caps based on a compound annual growth rate of approximately 4% as mentioned above. Furthermore, the Annual Caps for the Production Agreements also include rental charges for land and buildings which are fixed and will not vary with the volume of production.

Although the Directors expect that the tanning services provided by Barits will remain at the same level as before, it will be less than the growth in expected sales of the Group. The management of the Group intends to continue to shift leather tanning to the PRC and Vietnam, given that it is relatively less expensive to undertake tanning services in the PRC and Vietnam than in Taiwan.

PCC Services Agreements

The Annual Caps for the PCC Services Agreements are based on a compound annual growth rate of approximately 19% of the transaction amounts for the three years ending 30 September 2014, taking into account the estimated compound annual growth of approximately 23% in the transaction amounts from the year ended 30 September 2009 to the year ending 30 September 2011, which we consider reasonable in light of the intention of the Group to (a) source more materials and machinery from the PRC, Vietnam and Indonesia rather than Taiwan, and (b) conduct more product research and development in the PRC, Vietnam and Indonesia. The 23% compound annual growth as mentioned above is estimated based on the historical transaction amounts for the two years ended 30 September 2010 and the six months ended 31 March 2011.

LETTER FROM SOMERLEY LIMITED

Sales Agreements

The Annual Caps for the Sales Agreements are determined with reference to a compound annual growth rate of approximately 20% in the transaction amounts for the three years ending 30 September 2014, after considering the estimated compound annual growth in total sales of the PCC Group of approximately 17% from the year ended 31 December 2009 to the year ending 31 December 2011. The Directors are of the view that, in estimating the foregoing annual caps, a certain degree of flexibility is required for the Group to meet additional demand from the PCC Group in the coming three years as a result of market recovery. As such, we consider the abovementioned 20% compound annual growth rate reasonable.

Purchases Agreements

The Annual Caps for the Purchases Agreements are estimated with reference to a compound annual growth rate of approximately 15% in the transaction amounts for the three years ending 30 September 2014, which is in turn determined based on the estimated compound annual growth of approximately 15% in total sales of the Group from the year ended 30 September 2009 to the year ending 30 September 2011, which we consider reasonable. The 15% compound annual growth in total sales of the Group is estimated based on the historical sales for the two years ended 30 September 2010 and the six months ended 31 March 2011.

(ii) Based on estimated usage by occupants in the Industrial Estate

PCC Management Service Agreements

The Annual Caps for the PCC Management Service Agreements are determined mainly with reference to the areas occupied by the PCC Group in the Industrial Estate, the expected usages of water and electricity, the expected unit prices of water and electricity, the number of staff who is expected to utilise the accommodation-related services and the prevailing fair market rental values of service apartments as assessed by an independent valuer.

In respect of the provision of security service and maintenance service of common areas in the Industrial Estate, the Annual Caps for the PCC Management Service Agreements have taken into account the areas occupied by the PCC Group in the Industrial Estate in July 2011 as the base for the year ending 30 September 2012 and an estimated compound annual growth of approximately 10% in the areas occupied by the PCC Group for the subsequent two years which, in the view of the Directors, provides a certain degree of flexibility for the Group to cater for additional demand from the PCC Group in the coming three years.

The expected usages of water and electricity for the three years ending 30 September 2014 are determined with reference to the projected usages for the year ending 30 September 2011 based on the actual usages for the eight months ended 31 May 2011 and an estimated compound annual growth of approximately 10% which has taken into account a certain degree of flexibility which the Directors consider necessary for the Group to cater for additional demand from the PCC Group in the coming three years.

LETTER FROM SOMERLEY LIMITED

The expected unit prices of water for the three years ending 30 September 2014 remain the same and are determined with reference to the current unit price charged by the local authority and an expected increase in the unit price charged by the local authority in future. The Directors anticipate the unit price of water charged by the local authority will increase by approximately 10% in the financial year 2012 and remain unchanged for the subsequent two financial years, which are based on the previous extent of increase in the unit price of water charged by the local authority. As for the unit prices of electricity generated by the Group for the three years ending 30 September 2014, they are determined based on the current unit price charged by the Group and an increase, as estimated by the Directors based on the increase in the unit price during the past year, of approximately 10% annually in the cost of the oil consumed and the overheads incurred for generating electricity in the coming three years. In respect of electricity provided by the public sector, for the three years ending 30 September 2014, a service fee of RMB0.16 for each kilowatt-hour of electricity is charged by the Group to the PCC Group on top of the electricity cost separately charged by the public sector. As advised by the Directors, the Group will continue to generate and supply electricity to the occupants in the Industrial Estate in the event that the electricity supplied by the public sector is insufficient to meet the operational requirements of the occupants in the Industrial Estate.

The Annual Caps for the PCC Management Service Agreements decrease significantly as compared to the historical transaction amounts, which are mainly attributed to the disposal of approximately 40% beneficial interest in Global Brands Manufacture Limited (“GBM”) by PCC in March 2010. Since then, GBM is no longer controlled by PCC and is not a connected person of the Company. The Annual Caps for the PCC Management Service Agreements have therefore not taken into account the transaction amounts with GBM. In respect of the annual caps for the PCC Management Service Agreement for each of the three years ending 30 September 2011, as approved by the then Independent Shareholders on 23 December 2008, approximately 79%, 80% and 82% of which are related to the transaction amounts with GBM respectively.

GBD Management Service Agreements

The Annual Caps for the GBD Management Service Agreements are principally determined with reference to the areas occupied by the GBD Group in the Industrial Estate in July 2011 as the base for the year ending 30 September 2012 and an estimated compound annual growth of approximately 10% in the areas occupied by the GBD Group for the subsequent two years which, in the view of the Directors, provides a certain degree of flexibility for the Group to cater for additional demand from the GBD Group in the coming three years.

The Annual Caps for the GBD Management Service Agreements decrease significantly as compared to the historical transaction amounts, as the Group will no longer supply and charge the GBD Group for the provision of electricity, hot water and steam, as the GBD Group ceased to operate its manufacturing business in the Industrial Estate and is now principally engaged in property investment holding.

LETTER FROM SOMERLEY LIMITED

(iii) Rental agreements

The rentals pursuant to the Pou Chien Lease Agreements, Pou Yuen Lease Agreements, Yue Dean Lease Agreements and Pou Chien Technology Lease Agreements are fixed with reference to the open market rental values when the relevant agreements are entered into and are denominated in NT$. The Annual Caps for these agreements represent the US$ equivalent of the fixed NT$ denominated rentals as agreed under the respective agreements.

Unlike the other rental agreements, the Godalming Tenancy Agreements have not prescribed the exact areas to be leased to the Group during the three-year term. The Annual Caps for the Godalming Tenancy Agreements are based on the areas expected to be occupied by the Group in the coming three years in addition to the relevant open market rental values as assessed by an independent valuer. As advised by the management of the Company, the areas expected to be occupied by the Group under the Godalming Tenancy Agreements for the three years ending 30 September 2014 are approximately 436,000, 449,000 and 462,000 square meters respectively. As a result, the Annual Caps for the Godalming Tenancy Agreements show a compound annual growth rate of approximately 5% for the three years ending 30 September 2014. The 5% compound annual growth rate is considered reasonable given the transaction amount for the year ending 30 September 2011 exhibits an annual growth rate of approximately 7% when compared to the last year.

Generally speaking, in our opinion, it is in the interests of the Group for the Aggregate Period Caps to be as accommodating to the Group as possible (within reason). Provided that the pricing bases for the Continuing Connected Transactions are fair and reasonable and the conduct of those transactions are subject to annual review by the independent non-executive Directors and auditors of the Company (as discussed below) as required under the Listing Rules, the Group would have flexibility in conducting its businesses if the Aggregate Period Caps are tailored to future business growth. In assessing the reasonableness of the Aggregate Period Caps, we have discussed with the management of the Group their projected growth in sales, the bases of the calculation and the factors contributing to the fixing of the Aggregate Period Caps, which we consider reasonable. Based on the above analysis, we are of the view that the Aggregate Period Caps for the Continuing Connected Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

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

5. Annual review of the Continuing Connected Transactions

Pursuant to Rules 14A.37 to 14A.40 of the Listing Rules, the Continuing Connected Transactions are subject to the following annual review requirements:

(a) each year the independent non-executive Directors must review the Continuing Connected Transactions and confirm in the annual report and accounts that the Continuing Connected Transactions have been entered into:

LETTER FROM SOMERLEY LIMITED

(i) in the ordinary and usual course of business of the Group;
(ii) either on normal commercial terms or, if there are not 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
(iii) 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;
(b) each year the auditors of the Company must provide a letter to the Board (with a copy provided to the Stock Exchange at least 10 business days prior to the bulk printing of the Company’s annual report), confirming that the Continuing Connected Transactions:
(i) have received the approval of the Board;
(ii) are in accordance with the pricing policies of the Group if the transactions involve provision of goods or services by the Group;
(iii) have been entered into in accordance with the relevant agreements governing the Continuing Connected Transactions; and
(iv) have not exceeded the Aggregate Period Caps;
(c) the Company shall allow, and shall procure the relevant counterparties to the Continuing Connected Transactions to allow, the Company’s auditors to have sufficient access to their records for the purpose of the reporting on the Continuing Connected Transactions as set out in paragraph (b). The Board must state in the annual report whether the Company’s auditors have confirmed the matters stated in Listing Rule 14A.38; and
(d) the Company shall promptly notify the Stock Exchange and publish an announcement in accordance with the Listing Rules if it knows or has reason to believe that the independent non-executive Directors and/or the auditors of the Company will not be able to confirm the matters set out in paragraphs (a) and/or (b) respectively.

The independent non-executive Directors and the auditors of the Company have reviewed the then continuing connected transactions conducted during the two years ended 30 September 2010 and have provided the above confirmations as required under the Listing Rules, details of which are contained in the Company’s annual reports for the years ended 30 September 2009 and 2010. The required confirmations in respect of the relevant continuing connected transactions conducted during the year ended 30 September 2011 would be included in the Company’s annual report for the year ended 30 September 2011.

LETTER FROM SOMERLEY LIMITED

In light of the reporting requirements for the Continuing Connected Transactions, in particular, (a) the restriction of the values of the Continuing Connected Transactions by way of the Aggregate Period Caps; and (b) the requirement under the Listing Rules for ongoing review by the independent non-executive Directors and the auditors of the Company of the terms of the Continuing Connected Transactions and the Aggregate Period Caps, we are of the view that there exist appropriate measures to govern the conduct of the Continuing Connected Transactions and to safeguard the interests of the Independent Shareholders.

REVISION OF ANNUAL CAP FOR THE GODALMING TENANCY AGREEMENT FOR THE YEAR ENDING 30 SEPTEMBER 2011

As a result of the increase in the utilised areas of certain industrial buildings of the Godalming Group by the Group than originally anticipated, the Directors expect that the existing annual cap for the year ending 30 September 2011 under the Second Supplemental Godalming Tenancy Agreement will be exceeded. However, the landlords have agreed to allow the Company to postpone payment of rent for August and September 2011 until the approval of the revised annual cap by the Independent Shareholders is obtained. Taking into account the actual rental expenses incurred by the Group for the ten months ended 31 July 2011 and the open market rental values of relevant premises as assessed by an independent valuer when the Second Supplemental Godalming Tenancy Agreement was entered into, we consider the revision of the annual cap for the year ending 30 September 2011 from US$6,410,000 to US$7,150,000 reasonable.

OPINION AND RECOMMENDATION

Taking into account the above principal factors and reasons, we consider that the entering into of the New Continuing Connected Transactions Agreements is on normal commercial terms, in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole. We also consider the terms of the New Continuing Connected Transactions Agreements and the Aggregate Period Caps are fair and reasonable. Accordingly, we advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the relevant ordinary resolutions to be proposed at the SGM.

Yours faithfully, for and on behalf of SOMERLEY LIMITED David Ching Director

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

I. Interests of Directors

As at the Latest Practicable Date, so far as the Directors 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$0.01 each of Pou Sheng International (Holdings) Limited (“Pou Sheng”), an associated corporation within the meaning of Part XV of the SFO.

				Number of ordinary shares
Name of director	Capacity	Nature of interest	Number of	Percentage of the issued
			shares held	share capital of Pou Sheng
Chan Lu Min	Beneficial owner	Personal interest	681,000	0.01%
Tsai Pei Chun, Patty	Beneficial owner	Personal interest	4,460,000	0.10%
David N. F. Tsai	Beneficial owner	Personal interest	4,833,000	0.11%

GENERAL INFORMATION

APPENDIX

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% 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
	Number of	interest in the
	ordinary shares	issued share capital
Name of substantial shareholder	beneficially held	of the Company
Long Position
Pou Chen Corporation (“PCC”)(Note a)	824,143,835	49.98%
Wealthplus Holdings Limited (“Wealthplus”)
(Note a)	767,707,605	46.55%
Max Creation Industrial Limited (“Max Creation”)
(Note b)	115,001,998	6.97%
World Future Investments Limited (“World Future”)
(Note c)	115,001,998	6.97%
Mr. Tsai Chi Jui_(Note c)_	115,001,998	6.97%
Merrill Lynch & Co. Inc.(Note d)	99,315,703	6.02%
Citigroup Inc.(Note e)	99,361,074	6.02%
Short Position
Merrill Lynch & Co. Inc.(Note d)	109,341,792	6.63%
Citigroup Inc.(Note e)	1,162,057	0.07%

GENERAL INFORMATION

APPENDIX

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 and 50,987,532 ordinary shares were held by Win Fortune Investments Limited (“Win Fortune”). Both Wealthplus and Win Fortune are wholly-owned subsidiaries of PCC. Mr. David N.F. Tsai, Mr. Chan Lu Min and Mr. Kuo Tai Yu who are directors of the Company are also directors of PCC. Mr. Chan Lu Min, Mr. Kuo Tai Yu, Mr. Kung Sung Yen, Mr. David N.F. Tsai and Ms. Tsai Pei Chun, Patty (who are directors of the Company) are directors of Wealthplus. Mr. Chan Lu Min and Mr. David N.F. Tsai are directors of Win Fortune.
(b) Of the 115,001,998 ordinary shares beneficially owned by Max Creation, 80,494,822 ordinary shares were held by Quicksilver Profits Limited (“Quicksilver”), 20,631,440 ordinary shares were held by Red Hot Investments Limited (“Red Hot”) and 13,875,736 ordinary shares were held by Moby Dick Enterprises Limited (“Moby Dick”). Quicksilver, Red Hot and Moby Dick are whollyowned subsidiaries of Max Creation. Mr. Tsai Chi Neng who is a director of the Company is also a director of Quicksilver, Red Hot and Moby Dick. Mr. Tsai Chi Neng and Mr. David N. F. Tsai (who are directors of the Company) are directors of Max Creation.
(c) World Future is deemed to be interested in 115,001,998 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 115,001,998 ordinary shares under the same section as he holds 100% of the issued share capital in World Future. In addition, Mr. Tsai Chi Jui holds 320,000 ordinary shares directly.
(d) Merrill Lynch & Co., Inc. is deemed to be interested in 35,000 ordinary shares (long position) held directly by Merrill Lynch Portfolio Managers Limited under the SFO by virtue of its interest in more than one-third of the voting shares in Merrill Lynch Portfolio Managers Limited. Merrill Lynch Portfolio Managers Limited is wholly-owned by ML Invest, Inc., which is in turn whollyowned by Merrill Lynch Group, Inc., which is in turn wholly-owned by Merrill Lynch & Co., Inc..

Merrill Lynch & Co., Inc. is also deemed to be interested in 5,985,785 ordinary shares (long position) and 2,620,000 ordinary shares (short position) held directly by Blackrock, Inc. (for discretionary clients) under the SFO by virtue of its interest in more than one-third of the voting shares in Blackrock, Inc.. Merrill Lynch & Co., Inc. owns 49.8% of Blackrock, Inc. through various subsidiaries, namely, Princeton Services, Inc., Princeton Administrators, L.P., Merrill Lynch Investment Managers, L.P. and Fund Asset Management, L.P., which are all 99% owned by Merrill Lynch & Co., Inc. except for Princeton Services, Inc., which is wholly-owned by Merrill Lynch Group, Inc.. Merrill Lynch Group, Inc. which is wholly-owned by Merrill Lynch & Co., Inc., is also deemed to be indirectly interested in the 5,985,785 ordinary shares (long position) and 2,620,000 ordinary shares (short position) held directly by Blackrock, Inc..

In light of the above, Merrill Lynch & Co. Inc. is deemed to be interested in an aggregate of 6,020,785 ordinary shares (long position) and 2,620,000 ordinary shares (short position).

GENERAL INFORMATION

APPENDIX

Merrill Lynch & Co., Inc. is also deemed to be interested in 93,294,918 ordinary shares (long position) and 106,721,792 ordinary shares (short position) held directly by Merrill Lynch International under the SFO by virtue of its interest in more than one-third of the voting shares in Merrill Lynch International. Merrill Lynch & Co., Inc. holds Merrill Lynch International through six wholly-owned subsidiaries, namely Merrill Lynch International Incorporated, Merrill Lynch International Holdings Inc., Merrill Lynch Europe Plc, Merrill Lynch Europe Intermediate Holdings, Merrill Lynch Holdings Limited and ML UK Capital Holdings. ML UK Capital Holdings is wholly-owned by Merrill Lynch Holdings Limited, which is in turn wholly-owned by Merrill Lynch Europe Intermediate Holdings, which is in turn wholly-owned by Merrill Lynch Europe Plc, which is in turn wholly-owned by Merrill Lynch International Holdings Inc., which is in turn wholly-owned by Merrill Lynch International Incorporated, which is in turn wholly-owned by Merrill Lynch & Co., Inc.. Merrill Lynch International is 97.2% owned by ML UK Capital Holdings.

(e)

The 99,361,074 ordinary shares (long position) are held as to 2,470,661 ordinary shares as corporate interest, 4,266,662 ordinary shares in the capacity as custodian corporation/approved lending agent, 375,831 ordinary shares as security interest and 92,247,920 ordinary shares as trustee. Further, 1,162,057 ordinary shares in short position are held as corporate interest. Of the 99,361,074 ordinary shares in long position, 93,935,422 ordinary shares represent underlying interests in physically settled unlisted derivatives.

Of the 99,361,074 ordinary shares (long position) held by Citigroup Inc., 437,338 ordinary shares (long position) are directly held by Citigroup Global Markets Inc., 483,305 ordinary shares (long position) are directly held by Morgan Stanley Smith Barney Holdings LLC, 10,827 ordinary shares (long position) are directly held by Citigroup Global Markets Financial Products LLC, 1,913,167 ordinary shares (long position) are directly held by Citigroup Global Markets Limited, 92,247,920 ordinary shares (long position) are directly held by Citicorp International Limited, 4,267,837 ordinary shares (long position) are directly held by Citibank N.A. and 680 ordinary shares (long position) are directly held by Citicorp Trust South Dakota.

Of the 1,162,057 ordinary shares (short position) interested by Citigroup Inc., 433,938 ordinary shares (short position) are directly interested by Citigroup Global Markets Inc., 19,118 ordinary shares (short position) are directly interested by Citigroup Global Markets Financial Products LLC and 709,001 ordinary shares (short position) are directly interested by Citigroup Global Markets Limited.

GENERAL INFORMATION

APPENDIX

Morgan Stanley Smith Barney Holdings LLC is owned as to 49% by Citigroup Global Markets Inc., which is in turn wholly-owned by Citigroup Financial Products Inc.. Citigroup Global Markets Financial Products LLC is wholly-owned by Citigroup Global Markets Holdings GmbH, which is in turn owned as to 24.3% by Citigroup Global Markets Pacific Holding Company Inc. and as to 75.7% by Citigroup Global Markets (International) Finance AG. Both Citigroup Global Markets Pacific Holding Company Inc. and Citigroup Global Markets (International) Finance AG are wholly-owned by Citigroup Financial Products Inc.. Citigroup Global Markets Limited is wholly-owned by Citigroup Global Markets Europe Limited, which is in turn owned as to 35.22% by Citigroup Global Markets International LLC, 64.67% by Citigroup Financial Products Inc. and 0.11% by Citigroup Global Markets (International) Finance AG. Citigroup Global Markets (International) Finance AG and Citigroup Global Markets International LLC are in turn whollyowned by Citigroup Financial Products Inc.. Citigroup Financial Products Inc. is therefore deemed to be interested in an aggregate of 2,844,637 ordinary shares (long position) and 1,162,057 ordinary shares (short position). Citigroup Financial Products Inc. is wholly-owned by Citigroup Global Markets Holdings Inc., which is in turn wholly-owned by Citigroup Inc.

Citicorp International Limited is wholly-owned by Citigroup Holding (Singapore) Private Limited, which is in turn wholly-owned by Citigroup Asia Pacific Holding Corporation, which is in turn wholly-owned by Citibank Overseas Investment Corporation, which is in turn wholly-owned by Citibank N. A.. Citigroup Trust – Delaware, National Association is wholly-owned by Citibank N.A., which is in turn wholly-owned by Citicorp Holdings Inc., which is in turn wholly-owned by Citigroup Inc.. Citicorp Holdings Inc.. is therefore deemed to be interested in an aggregate of 96,515,757 ordinary shares (long position).

Citicorp Trust South Dakota is wholly-owned by Citibank (South Dakota) National Association, which is in turn wholly-owned by Citigroup Inc. Citibank (South Dakota) National Association is therefore deemed to be interested in an aggregate of 680 ordinary shares (long position).

In light of the above, Citigroup Inc. is deemed to be interested in an aggregate of 99,361,074 ordinary shares (long position) and 1,162,057 ordinary shares (short position). The above have been prepared based on the latest disclosure of interest form filed with the Company as at the Latest Practicable Date.

Other than the interests disclosed above, the Company has not been notified of any other relevant interests or short positions in the shares or underlying shares of the Company as at the Latest Practicable Date.

GENERAL INFORMATION

APPENDIX

(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
Lucky Crown Group Limited	Good Work International Limited	20
Top Century Management Limited	Rest Assured Group Limited	49
New Peak Services Limited	Wonderful World International Co., Ltd.	25.50
Orisol Asia Limited	Authentic Trading Limited	25
Prodigy Management Limited	Substantial Industries Limited	10
Sunplus Industrial Limited	Sun Print 3-D Label Enterprise Co., Ltd.	49
Bestample Investments Limited	L & K Engineering Co., Ltd.	15
PT Pou Chen Indonesia	Inn Chu Trading Co. Limited	10
High Shine Investments Limited	Huang Ming Hua	25
	Huang Ming Te	24
Octavia Developments Limited	Shing Cheong International Limited	49
Ontime Ventures Limited	Yen Ming Ho	10
PT. Sukses Permata Indonusa	Yen Ming Ho	10
Aimful Investments Limited	Wei Hsien Der	49
Top Units Developments Limited	Charm Life Limited	49
Valuable Developments Limited	South East Asia Holdings Limited	49
Chifley Tower Limited	Yang Shun Hsien	49
Keen Vision Holdings Limited	Song Chang Keun	40

GENERAL INFORMATION

APPENDIX

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

The Company has a 56.13% indirect interest in Pou Sheng which is accounted for as a subsidiary of the Company. Pou Sheng is listed on the main board of the Stock Exchange. The principal business activities of Pou Sheng and its subsidiaries are the retail and wholesale sales of sportswear and footwear in the PRC. Pou Sheng and its subsidiaries also manufactures footwear at its factory in Taicang, PRC.

There is little potential competition between the manufacturing business of the Company and Pou Sheng. On 23th May, 2008, the Company entered into a business separation deed with Pou Sheng to put in place certain mechanisms to separate the Company’s manufacturing businesses from those of Pou Sheng.

The Company and Pou Sheng provided certain undertakings in relation to their respective manufacturing businesses. In compliance with such undertakings, the Company confirms that it would not (except through Pou Sheng and its subsidiaries) solicit or manufacture for any of the brands: Li Ning, ANTA, Kappa, 361°, Umbro and XTEP between the period from 6th June, 2008 (the date when the shares of Pou Sheng were first listed on the Stock Exchange) and up to and including 30th September, 2010. A meeting of board of directors of the Company was held on 16th December, 2008 to approve Pou Sheng to engage in the business of manufacturing two new brands, namely, Lotto and Diadora (the “New Business”), for which the Company confirmed that it did not wish to (except through Pou Sheng and its subsidiaries) take up the opportunity of the New Business between the period from 16th December, 2008 and up to and including 30th September, 2010. Another meeting of board of directors of the Company was held on 20th January, 2010 to approve Pou Sheng to engage in the business of manufacturing two new brands, namely PONY and FOOTZONE (“Another New Business”), for which the Company confirmed that it did not wish to (except through Pou Sheng and its subsidiaries) take up the opportunity of Another New Business between the period from 20th January, 2010 and up to and including 30th September, 2010.

As at the Latest Practicable Date, Mr. David N.F. Tsai, Ms. Tsai Pei Chun, Patty and Ms. Kuo Li-Lien who are Directors, were also directors of Pou Sheng. Mr. David N.F. Tsai and Ms. Tsai Pei Chun, Patty also hold shares in Pou Sheng. As the Company and Pou Sheng are separate listed entities run by separate and independent management teams, the Directors believe that the Company is capable of carrying on its business independently of, and at arms length from Pou Sheng. The Company intends to maintain its shareholding in Pou Sheng.

GENERAL INFORMATION

APPENDIX

The Company also has an investment in Symphony Holdings Limited (“Symphony”) whose shares are listed on the main board of the Stock Exchange. The principal activities of Symphony and its subsidiaries are the manufacturing and sales of footwear products. It also engages in retail and wholesale business of apparel and footwear in the PRC. Mr. Chan Lu Min and Mr. Li I Nan, Steve, both of whom are Directors, are also directors of Symphony. As Symphony is operated under separate and independent management, the Directors believe that the Company is capable of carrying on its business independently of, and at arms length from Symphony.

Save as described above, at the Latest Practicable Date, none of the Directors had any interest in a business which may compete with that of the Group and which is required to be disclosed pursuant to Rule 8.10 of the Listing Rules

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 were pending or threatened by or against any member of the Group.

5. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 30th September, 2010, 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 Somerley Limited, the 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 type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities

GENERAL INFORMATION

APPENDIX

(b) As at the Latest Practicable Date, Somerley Limited did not have any shareholding, direct or indirect, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group, nor did it have any interest, direct or indirect, in any assets which had, since 30th September, 2010, 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 any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of 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 included in this circular in the form and context in which they appear.

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

(a) None of the 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, 2010, 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 Ng Lok Ming, William. He is a solicitor of the High Court of Hong Kong and is Head of Legal Department of the Group.
(b) The principal place of business of Company in Hong Kong is at Suites 3307-09, 33/F., Tower 6, The Gateway, 9 Canton Road, Tsim Sha Tsui, 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 Tricor Secretaries Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(c) As at the date of this circular, Mr. Tsai Chi Neng, Mr. David N. F. Tsai, Mr. Kuo Tai Yu, Mr. Kung Sung Yen, Mr. Chan Lu Min, Mr. Li I Nan, Steve, Ms. Tsai Pei Chun, Patty, Ms. Kuo Li-Lien and Mr. Lee Shao Wu are the Executive Directors, and Dr. Liu Len Yu, Mr. Leung Yee Sik, Mr. Huang Ming-Fu and Mr. Chu Li-Sheng are the Independent Nonexecutive Directors.
(d) The English text of this document and the form of proxy shall prevail over the Chinese text.

GENERAL INFORMATION

APPENDIX

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 3307–09, 33/F, Tower 6, The Gateway, 9 Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong, from the date of this circular, until the date of the SGM:

(a) this circular;
(b) the Memorandum of Association and Bye-laws of the Company;
(c) the letter from the Independent Board Committee, the text of which is set out on page 39 of this circular;
(d) the letter from Somerley Limited, the text of which is set out on pages 40 to 68 of this circular;
(e) the written consent of Somerley Limited referred to in the section headed “Expert” in this Appendix; and
(f) the agreements in respect of the Continuing Connected Transactions referred to in this circular.

NOTICE OF SPECIAL GENERAL MEETING

==> picture [55 x 56] 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)

SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting of Yue Yuen Industrial (Holdings) Limited (the “Company”) will be held at Lotus Room, 6/F, Marco Polo Hongkong Hotel, 3 Canton Road, Tsimshatsui, Kowloon, Hong Kong on 28th September, 2011 at 10:00 a.m. 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 third supplemental agreement (the “Third Supplemental Production Agreement”) dated 25th August, 2011 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 5th September,2011) under which (i) Barits agreed to provide tanning facilities and processing services to Prime Asia for the processing of Prime Asia’s raw leather 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 period caps in respect of such transactions as set out in the Third Supplemental Production Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Third Supplemental Production Agreement;
(B) THAT the third supplemental agreement (the “Third Supplemental PCC Management Service Agreement”) dated 25th August, 2011 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 5th September, 2011) 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 period caps in respect of such transactions as set out in the Third Supplemental PCC Management Service Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) and the transactions contemplated therein be and are hereby approved,

* For identification only

NOTICE OF SPECIAL GENERAL MEETING

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 Third Supplemental PCC Management Service Agreement;

(C) THAT the third supplemental agreement (the “Third Supplemental PCC Services Agreement”) dated 25th August, 2011 between the Company and PCC (which is a supplemental to the PCC Services Agreement (as defined in the Company’s circular dated 5th September, 2011) under which PCC agreed to provide research and development, knowhow, technical and marketing services and to source raw materials and recruit staff in relation to the production and sale of products of the Company and it’s subsidiaries (the “Group”)) be and is hereby approved, confirmed and ratified and that the period caps in respect of such transactions as set out in the Third Supplemental PCC Services Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Third Supplemental PCC Services Agreement;
(D) THAT the second supplemental agreement (the “Second Supplemental PCC Connected Sales Agreement”) dated 25th August, 2011 between the Company and PCC (which is a supplemental to the PCC Connected Sales Agreement (as defined in the Company’s circular dated 5th September, 2011) 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 period caps in respect of such transactions as set out in the Second Supplemental PCC Connected Sales Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Second Supplemental PCC Connected Sales Agreement;
(E) THAT the second supplemental agreement (the “Second Supplemental PCC Connected Purchases Agreement”) dated 25th August, 2011 between the Company and PCC (which is a supplemental to the PCC Connected Purchases Agreement (as defined in the Company’s circular dated 5th September, 2011) 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 period caps in respect of such transactions as set out in the Second Supplemental PCC Connected Purchases Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Second Supplemental PCC Connected Purchases Agreement;

NOTICE OF SPECIAL GENERAL MEETING

(F) THAT the second supplemental agreement (the “Second Supplemental Pou Chien Lease Agreement”) dated 25th August, 2011 between Pou Chien Chemical Company Limited (“Pou Chien”) and PCC (which is a supplemental to the Pou Chien Lease Agreement (as defined in the Company’s circular dated 5th September, 2011) 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 period caps in respect of such transactions as set out in the Second Supplemental Pou Chien Lease Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Second Supplemental Pou Chien Lease Agreement;
(G) THAT the second supplemental agreement (the “Second Supplemental Pou Yuen Lease Agreement”) dated 25th August, 2011 between Pou Yuen Technology Co., Ltd. (“Pou Yuen”) and Yue Dean Technology Corporation (“Yue Dean”) (which is a supplemental to the Pou Yuen Lease Agreement (as defined in the Company’s circular dated 5th September, 2011) 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 period caps in respect of such transactions as set out in the Second Supplemental Pou Yuen Lease Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Second Supplemental Pou Yuen Lease Agreement;
(H) THAT the second supplemental agreement (the “Second Supplemental Yue Dean Lease Agreement”) dated 25th August, 2011 between PCC and Yue Dean (which is a supplemental to the Yue Dean Lease Agreement (as defined in the Company’s circular dated 5th September, 2011) 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 period caps in respect of such transactions as set out in the Second Supplemental Yue Dean Lease Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Second Supplemental Yue Dean Lease Agreement;
(I) THAT the supplemental agreement (the “Supplemental Pou Chien Technology Lease Agreement”) dated 25th August, 2011 between PCC as landlord and Pou Chien Technology Company Limited (“Pou Chien Technology”) as tenant (which replaces the Pou Yii Lease Agreement (as defined in the Company’s circular dated 5th September, 2011) under which

NOTICE OF SPECIAL GENERAL MEETING

Pou Yii agreed to lease to Pou Chien Technology premises in Taiwan for its administrative operations) be and is hereby approved, confirmed and ratified and that the period caps in respect of such transactions as set out in the Supplemental Pou Chien Technology Lease Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Chien Technology Lease Agreement;

(J) THAT the third supplemental agreement (the “Third Supplemental GBD Management Service Agreement”) dated 25th August, 2011 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 5th September, 2011) 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 period caps in respect of such transactions as set out in the Third Supplemental GBD Management Service Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Third Supplemental GBD Management Service Agreement;
(K) THAT the third supplemental agreement (the “Third Supplemental Godalming Tenancy Agreement”) dated 25th August, 2011 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 5th September, 2011) 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 period caps (including the revised annual cap for the financial year ending 30th September, 2011) in respect of such transactions as set out in the Third Supplemental Godalming Tenancy Agreement (the details of which are summarised in the circular of the Company dated 5th September, 2011) 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 Third Supplemental Godalming Tenancy Agreement.

By Order of the Board Tsai Chi Neng Chairman

Hong Kong, 5th September, 2011

NOTICE OF SPECIAL GENERAL MEETING

Principal Place of Business: Suites 3307-09, 33/F Tower 6, The Gateway 9 Canton Road, Tsim Sha Tsui Kowloon, Hong Kong

Notes:

A form of proxy for use at the SGM or any adjournment thereof is enclosed.
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.
Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting convened and in such event, the instrument appointing a proxy shall be deemed to be revoked.
Where there are joint holders of any share any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorized in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorized to sign the same. In the case of an instrument of proxy purporting to be signed on behalf of a corporation by an officer thereof it shall be assumed, unless the contrary appears, that such officer was duly authorized to sign such instrument of proxy on behalf of the corporation without further evidence of the fact.

AI assistant

Magnus Concordia Group Limited — Proxy Solicitation & Information Statement 2011

49743_rns_2011-09-02_f990a7dd-c25a-4e8b-91a6-f7741a3bf17f.pdf

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS

SOMERLEY LIMITED

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

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

RENEWAL OF CONTINUING CONNECTED TRANSACTIONS

I. SUMMARY OF CONTINUING CONNECTED TRANSACTIONS

(A) Transactions between Pou Chen Group and Yue Yuen Group

Production Agreement

PCC Services Agreement

PCC Connected Sales Agreement

PCC Connected Purchases Agreement

Lease arrangements between the Group and the PCC Group

Pou Chien Lease Agreement

Pou Yuen Lease Agreement

Yue Dean Lease Agreement

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

(C) Transactions between Godalming and the Yue Yuen Group

II. BUSINESS OF THE GROUP

LETTER FROM THE BOARD

III. PRODUCTION AGREEMENT

Dates

Terms

Payment terms

LETTER FROM THE BOARD

IV. GBD MANAGEMENT SERVICE AGREEMENT AND PCC MANAGEMENT SERVICE AGREEMENT

The GBD Management Service Agreement and the PCC Management Service Agreement

Dates

Parties

Payment terms

LETTER FROM THE BOARD

Dates

Parties

Payment terms

Term

LETTER FROM THE BOARD

Management Fees

PCC Management Service Agreement

(c) Individual services for the supply of water

V. PCC SERVICES AGREEMENT

Dates

Parties

LETTER FROM THE BOARD

Terms

Fees

Payment terms

VI. PCC CONNECTED SALES AGREEMENT

Dates

LETTER FROM THE BOARD

Terms

Payment terms

VII. PCC CONNECTED PURCHASES AGREEMENT

LETTER FROM THE BOARD

Dates

Terms

Payment terms

LETTER FROM THE BOARD

VIII. GODALMING TENANCY AGREEMENT

Dates

LETTER FROM THE BOARD

Premises

Terms

Payment terms

LETTER FROM THE BOARD

Revision of annual cap

IX. POU CHIEN LEASE AGREEMENT

Dates

LETTER FROM THE BOARD

Parties

Terms

Magnus Concordia Group Limited Proxy Solicitation & Information Statement 2011

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

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