Persistence Gold Group Ltd — Capital/Financing Update 2006

Jun 15, 2006

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

This announcement is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities.

SHANGHAI MERCHANTS HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

(Stock code: 1104)

MAJOR TRANSACTION

PROPOSED ACQUISITION OF TRADING BUSINESS INVOLVING THE ISSUANCE OF CONVERTIBLE BOND

AND REALLOCATION OF USE OF PROCEEDS

Financial Adviser to the Company

MAJOR TRANSACTION

The Board is pleased to announce that on 14 June 2006, the Company, the Purchaser and the Vendor entered into the Acquisition Agreement, pursuant to which the Purchaser has agreed to purchase or procure the purchase from the Vendor, and the Vendor has agreed to sell the Sale Interest and the Sale Loan at face value to the Purchaser subject to the terms in the Acquisition Agreement. The Consideration will be HK$2.0 million and will be satisfied by the issuance of the Convertible Bond by the Company upon Completion.

The number of New Shares which may be issued upon full conversion of the Convertible Bond at the Conversion Price will be 13,333,334, representing approximately 3.23% of the existing issued share capital of the Company as at the date of this announcement and approximately 3.13% of the issued share capital of the Company as enlarged by the issue of New Shares upon full conversion of the Convertible Bond.

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Completion of the Acquisition Agreement is conditional upon the fulfillment of all the conditions detailed below.

Pursuant to the Acquisition Agreement, in the event that the amount of net profit of Chinaright as disclosed in the 2006 Accounts falls short of the Guaranteed Profit, the Vendor shall compensate the Purchaser in cash for 60% of the amount of the shortfall of the Guaranteed Profit (up to HK$600,000).

The Purchaser and the Vendor also entered into the Option Agreement on 14 June 2006, whereby upon certain events as detailed in this announcement, the Purchaser shall have the option to put to the Vendor all of the Sale Interest and the amount represented by the Sale Loan then owed by Chinaright to the Purchaser, and the Vendor shall repurchase the same at a fixed consideration of HK$800,000 in accordance with the terms of the Option Agreement.

An application will be made to the Listing Committee of the Stock Exchange for the listing of and permission to deal in the New Shares.

GENERAL

The Acquisition constitutes a major transaction of the Company under the Listing Rules. As no Shareholder is required to abstain from voting if a special general meeting is to be held to approve the Acquisition and all the transactions contemplated thereunder, and Profit Harbour, who is interested in approximately 63.58% of the issued share capital of the Company, has provided its written approval for the Acquisition and all transactions contemplated thereunder, including but not limited to the Option Agreement and the Sale Loan Assignment, pursuant to Rule 14.44 of the Listing Rules, no special general meeting will be held in this regard. The accountants’ report of Chinaright will be issued after the date of this announcement for incorporation in the circular to Shareholders and Completion will only take place after fulfillment of the conditions for Completion detailed below, prior to which such accountants’ report with a clean opinion from the reporting accountants is expected to be issued. The New Shares will be issued under the general mandate to issue new Shares granted to the Directors on 23 May 2006.

A circular containing, among other things, details of the Acquisition, including the Option Agreement, the Sale Loan Assignment and the issuance of the Convertible Bond and the financial information of Chinaright will be despatched to the Shareholders as soon as practicable.

REALLOCATION OF USE OF PROCEEDS

It is stated in the announcement and the circular of the Company dated 12 April 2006 and 4 May 2006 respectively that the proceeds of approximately HK$35.1 million from the Assignment of Debt will be used mainly as working capital to finance the fabric products trading business of the Group. It is also stated in the announcement and the circular of the Company dated 11 May 2006 and 1 June 2006 respectively that part of the proceeds from the Rights Issue of HK$15 million will be used for the repayment of loan.

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The Company would like to announce that the proceeds from the Assignment of Debt and the Rights Issue will be reallocated in the following manner: (i) HK$15 million from the Assignment of Debt will be used for the repayment of loan; and (ii) HK$15 million out of the Rights Issue will be used as working capital to finance the fabric products trading business of the Group. The Directors consider that such reallocation will allow the Company to employ its financial resources more efficiently to reduce the finance charges of the Group.

CONTINUED SUSPENSION OF TRADING IN SHARES

Trading of the Shares will continue to be suspended until resumption of trading in Shares on the Stock Exchange is granted by the Stock Exchange.

MAJOR TRANSACTION

Reference is made to the announcements of the Company dated 12 April 2006 and 11 May 2006 respectively and the Company’s circulars dated 4 May 2006 and 1 June 2006 respectively, in which it was mentioned that the Company was proposing the Acquisition. The purpose of this announcement is to provide further details in relation to the Acquisition.

On 14 June 2006, the Company, the Purchaser and the Vendor entered into the Acquisition Agreement, pursuant to which the Purchaser has agreed to purchase or procure the purchase from the Vendor and the Vendor has agreed to sell the Sale Interest and the Sale Loan at face value to the Purchaser subject to the terms in the Acquisition Agreement.

The Acquisition Agreement

Date: 14 June 2006 Parties: Purchaser: Rise Cheer Limited, a wholly-owned subsidiary of the Company

Vendor: Professional Trading Limited, an investment holding company incorporated in the British Virgin Islands with limited liability and is wholly and beneficially owned by Mr. Wei Hark Man.

To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, the Vendor and its ultimate beneficiary are parties independent of the Company and its connected person(s) (as defined in the Listing Rules) and their respective associates.

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Assets to be acquired

The Sale Interest, being the 60,001 shares of nominal value of HK$1.00 each (representing approximately 60.0% of the entire issued capital of Chinaright) in the issued capital of Chinaright and the Sale Loan amounted to approximately HK$1 million.

For further information on Chinaright, please refer to the paragraph headed “Information on Chinaright” below.

Consideration:

The Consideration will be HK$2.0 million and will be satisfied by the issuance of the Convertible Bond by the Company upon the Completion.

The number of New Shares which may be issued upon full conversion of the Convertible Bond at the Conversion Price will be 13,333,334, representing approximately 3.23% of the existing issued share capital of the Company as at the date of this announcement and approximately 3.13% of the issued share capital of the Company as enlarged by the issue of New Shares upon full conversion of the Convertible Bond.

Upon the completion of the Rights Issue, the number of the New Shares which may be issued upon full conversion of the Convertible Bond at the adjusted conversion price of HK$0.10 per New Share will be 20,000,000 New Shares, representing (i) approximately 4.84% of the existing issue share capital of the Company as at the date of this announcement, (ii) approximately 1.59% of the issued share capital of the Company as enlarged by the issue of 20,000,000 New Shares upon full conversion of the Convertible Bond and the issue of 826,000,000 new Shares under the Rights Issue.

The Conversion Price represents a discount of approximately 42.3% to the closing price of HK$0.26 per Share as quoted on the Stock Exchange on the Last Trading Day; a discount of approximately 44.4% to average closing price of approximately HK$0.27 per Share as quoted on the Stock Exchange for the last ten Trading Days up to and including the Last Trading Day; and a premium of approximately 183.0% over the audited consolidated net asset value per Share of approximately HK$0.053 with reference to the audited consolidated net asset value of the Group as at 31 December 2005 as shown in the annual report 2005 of the Company.

Pursuant to the Acquisition Agreement, in the event that the amount of net profit of Chinaright as disclosed in the 2006 Accounts falls short of the Guaranteed Profit, the Vendor shall compensate the Purchaser in cash 60% of the amount of the shortfall of the Guaranteed Profit (up to HK$600,000) on the third Business Day from the date the Purchaser by written notice requires the Vendor of the same.

The Purchaser and the Vendor also entered into the Option Agreement on 14 June 2006, whereas (i) in the event that the Purchaser has not received the abovementioned compensation payment for the shortfall in Guaranteed Profit from the Vendor within the specific period mentioned above; and (ii) upon the occurrence of any events as stated under the paragraph “Termination” below post-Completion and up to the earlier of one month after

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the date of the production of the 2006 Accounts or the date the Vendor’s obligation to compensate for the shortfall in Guaranteed Profit within the period specified above has been met, the Purchaser shall have the option to put to the Vendor all of the Sale Interest and the amounts represented by the Sale Loan then owed by Chinaright to the Purchaser, and the Vendor shall repurchase the same at a fixed consideration of HK$800,000 (“ Put Option ”), which was arrived at after arm’s length negotiations between the parties, in accordance with the terms of the Option Agreement.

The Consideration was arrived at after arm’s length negotiations between the Purchaser and the Vendor after taking into account the growth potential of Chinaright in its industry sector, its knowledge and experience of Chinaright’s key management and accumulated goodwill, its established PRC clientele, its financial positions (see the paragraph headed “Information on Chinaright” below) and the market condition. The Guaranteed Profit was arrived at after arm’s length negotiations between the Purchaser and the Vendor after taking into account the recent performance of Chinaright. As disclosed under the paragraph headed “Information on Chinaright” below, Chinaright incurred losses for the last two financial years, the Directors consider that it is to the interests and for the protection of the Company and the Shareholders to have the Vendor to provide a profit guarantee under the Acquisition Agreement. After series of negotiations, the Vendor has agreed to set the Guarantee Profit to be HK$1 million. Based on the amount of HK$1 million under the Profit Guarantee, HK$600,000 will be attributable to the Company’s approximately 60% interest in Chinaright, amounting to approximately 30% of the Consideration, which is considered to be reasonable by the Directors. The repurchase amount under the Put Option was arrived at after arm’s length negotiations between the Purchaser and the Vendor after taking into account the possible synergy that brought by the Acquisition, including but not limited to providing an opportunity for the Group to diversify its income stream as well as to expand the existing customer base of the Group.

The terms of the Acquisition, including the Consideration and the Put Option, were determined on arm’s length negotiations between the Company and the Vendor with reference to the financial information of Chinaright available to the Group and the Profit Guarantee.

The Directors, including the independent non-executive Directors, consider that the terms under the Acquisition Agreement, including the Consideration and the Put Option, are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

The New Shares will rank pari passu in all respects with the other Shares in issue on the date of conversion including the right to all dividend and distributions at any time thereafter, and shall be free from all charges, claims, third party rights and all other encumbrances of any nature whatever.

The issue of the Convertible Bond, the Option Agreement and the Sale Loan Assignment will take effect upon completion of the Acquisition.

An application will be made to the Listing Committee of the Stock Exchange for the listing of and permission to deal in the New Shares. The Stock Exchange has indicated that the approval for the listing of New Shares, when issued, will be conditional on, amongst other things, the completion of the Assignment of Debt and the Rights Issue.

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As at the date of this announcement, the Company has no other derivatives, options, warrants and conversion rights or the similar rights which are convertible or exchangeable into Shares.

Profit Guarantee and Profit Adjustment

Pursuant to the Acquisition Agreement, the Vendor has provided certain representation and warranties to the Purchaser, which include but not limited to the Profit Guarantee.

According to the Profit Guarantee, the net profit of Chinaright as disclosed in the 2006 Accounts shall be no less than HK$1 million less any Profit Adjustment, without taking into account any shareholder’s loan waived as disclosed in the 2006 Accounts.

If the existing business of Chinaright shall have been materially or adversely affected by any of the following events which may not be reasonably anticipated as at the date of the Acquisition Agreement: - (a) the introduction of any new law or regulation or any change in existing laws or regulations or change in the interpretation or application thereof; or (b) the occurrence of any act of god (including earthquakes, floods or fire), the consequences of which are not preventable or avoidable, then the Guaranteed Profit shall be reduced by the extent of the adverse impact on the amount of net profit of Chinaright as disclosed in the 2006 Accounts for the same period which is a direct and natural consequence of the occurrence of such event (the amount of such reduction shall be referred to as “ Profit Adjustment ”). Any dispute arising in connection with the amount of Profit Adjustment and net profit of Chinaright shall be referred to the decision of an independent reporting accountant jointly appointed by the Purchaser and the Vendor, failing the agreement of the Vendor and the Purchaser for such appointment, the Vendor and the Purchaser shall appoint such reporting accountant as nominated by the Purchaser. The decision of such reporting accountant shall, in the absence of manifest error, be binding on the Purchaser and the Vendor. The costs and expenses for such review shall be borne by the Vendor and the Purchaser in equal shares.

Conditions of the Acquisition

Completion will be conditional upon the fulfillment of, all but not part only of, the following conditions:

• (a) the necessary resolutions being passed by (i) the Board; and (ii) the Shareholders, as appropriate, to approve the acquisition of the Sale Interest and the Sale Loan contemplated under the Acquisition Agreement, the Option Agreement, the Sale Loan Assignment, the issue of the Convertible Bond and the allotment and issue of the New Shares, provided always that the Company shall exercise its best endeavour to procure the passing of such respective resolutions;

• (b) the resumption of trading in and continued listing of the Shares on the Stock Exchange;

• (c) the Listing Committee of the Stock Exchange granting (either unconditionally or subject only to conditions to which the Company, the Purchaser and the Vendor have no reasonable objection) the listing of and permission to deal in the New Shares;

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• (d) all necessary approvals (if any) from the relevant parties, governmental or regulatory authorities in Hong Kong or Bermuda, in particular the Bermuda Monetary Authority, as and when required on the part of the Vendor, the Purchaser and the Company for the sale and purchase of the Sale Interest and the Sale Loan, allotment and issue of the Convertible Bond and the New Shares having been obtained; and

• (e) the execution of the Option Agreement and the Sale Loan Assignment by the Purchaser and Vendor.

In the event that any of the conditions stated above is not fulfilled (or not reasonably capable of being fulfilled) in the sole opinion of the Purchaser, on or before the Long Stop Date, the Acquisition Agreement shall be terminated and of no further effect.

As at the date of this announcement, conditions (a) and (e) had been fulfilled.

Termination

If at any time prior to Completion:

• (i) it becomes apparent that there is or will be a material breach of any of the Warranties and such breach has not been remedied by the Vendor within three Business days or any longer period as may be permitted by the Purchaser after the Purchaser becoming aware or being notified by the Vendor of such breach;

• (ii) the Purchaser shall become aware of any matter or event showing that any of the accounts, nature of business operations, representation and Warranties was, when given, untrue or inaccurate in an material respect or would be untrue or inaccurate in any material respect if appeared as at the date on which the Purchaser becomes so aware;

• (iii) the Vendor commits any material breach of or omits to observe any of its obligations or undertakings expressed to be assumed by it under the Acquisition Agreement, Option Agreement or the Sale Loan Assignment in any material respect; or

• (iv) Chinaright shall sustain a loss or damage (howsoever caused and whether or not the subject of any insurance or claim against any person) which constitutes a material adverse change (or effect) (as such term is defined in the Acquisition Agreement), otherwise than with the prior approval in writing by the Purchaser;

then, in any such case, the Purchaser may in its absolute discretion without any liability on its part, by notice in writing to the Vendor, terminate the Acquisition Agreement.

Completion

Completion shall take place on the third Business Day (or such other date as the parties to the Acquisition Agreement may agree in writing) after the Long Stop Date provided that (i) all the conditions of the Acquisition Agreement have been fulfilled on or before the Long Stop Date, and (ii) the conditions of the Acquisition Agreement remain fulfilled on or before the Completion.

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Principal terms of the Convertible Bond

The Convertible Bond shall have the following terms:-

(a) Period and means of conversion

By written notice to the Company, the principal amount of the Convertible Bond is convertible in whole or in part into New Shares, from the period of one month after the date of the Completion until Maturity, in amounts of not less than HK$500,000 and in integral multiples thereof, saves that if at any time, the outstanding principal amount of the Convertible Bond is less than HK$500,000, the whole (but not part only) of such outstanding amount may be converted.

The Company shall ensure that all New Shares issued upon the conversion of the Convertible Bond will be promptly, duly and validly issued fully paid (rounded up to the nearest whole number of Share) and registered in the name of the Vendor or nominee(s) thereof.

(b) Conversion Price

The principal amount of the Convertible Bond is convertible at the initial conversion price of HK$0.15 per New Share (subject to adjustments).

In the event the present issued share capital of the Company, being 413,000,000 Shares, is enlarged by any issue of Shares, or securities convertible into Shares exercisable, within the conversion period mentioned in (a) above (the “ Dilution Event ”), the conversion price per New Share will be adjusted downwards so that the aggregate percentage of Shares which would otherwise be convertible under (a) above but for the occurrence of the Dilution Event, on the basis of the issued share capital of the Company as at the date of the Acquisition Agreement and the initial conversion price per New Share before any adjustments is made, will remain as much as possible (rounded up to the nearest whole number of Share) the same (but not greater than it was before the occurrence of such Dilution Event), provided that the conversion price per Share shall at all time remain above the par value per Share as required under the laws of Bermuda and the memorandum of association and bye-laws of the Company.

Accordingly, following the Rights Issue of 826 million Shares by the Company, the conversion price will be adjusted to HK$0.10 per New Share, being the par value per Share, and therefore the maximum number of New Shares to be issued upon the full conversion of the Convertible Bond will be 20,000,000.

(c) Principal amount and outstanding principal amount

The principal amount of the Convertible Bond shall be the amount of Consideration as may be reduced by way of conversion or redemption under (a) above and (f) below, if any.

(d) Interests

Interests is to be calculated from the date of issue of the Convertible Bond and payable annually in arrears in cash, on dates falling a year after the date of issue of the Convertible

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Bond and on the anniversary of such date thereafter, on the outstanding principal amount at the prime interests rate for Hong Kong dollars as quoted by the Hongkong and Shanghai Banking Corporation Hong Kong branch from time to time. In the event that the Convertible Bond has been repaid or redeemed (in whole or in part) interest shall accrue in respect of such part or the whole of the principal amount being repaid or redeemed for the period from the immediately preceding interest payment date (or the date of issue of the Convertible Bond, as the case may be) up to and including the date the relevant notice of repayment or relevant redemption in accordance with (f) below concerned has been received. Interest shall accrue from day to day and shall be calculated on the basis of the actual number of days elapsed and a 365-day year, including the first day of the period during which it accrues and including the last. Provided always that if the Convertible Bond is being converted (in whole or in part) in a particular year, the interest payable for that year shall be forgiven.

(e) Term and maturity

The Convertible Bond will remain in full force and effect for a term of 24 months from the date of its issue, until fully converted or upon occurrence of any events of default as set out in (i) below, whichever is earlier.

(f) Redemption and repayment

The holder of the Convertible Bond may by written notice to the Company, given at any time after the period of one month from the date of the Completion until Maturity and while a principal amount is still outstanding request the Company to repay such principal amount outstanding (or a part thereof) together with interests accrued pursuant to (d) above up to the date of such notice for repayment.

The Company shall, at any time or immediately upon Maturity and at its sole discretion, repay and redeem the Convertible Bond in immediately available funds (at the principal amount outstanding together with interest accrued thereon up to and including the date of Maturity), or by the allotment and issue of Shares pursuant to the terms of (b) above or by any combination of the same.

(g) Voting

The holder of the Convertible Bond will not be entitled to attend or vote at any general meeting of the Company by reason only of its being the holder of the Convertible Bond.

(h) Transferability

The Convertible Bond may be transferred or assigned with notice to the Company to any associate of the holder thereof or with the prior written approval of the Company to any third party. For the avoidance of doubt, the Convertible Bond may not be transferred to persons who are connected persons of the Company (as defined in the Listing Rules) without the prior written consent of the Company.

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• (i) Events of default

If any of the event specified below occurs, the Company must within five Business Days of such event occurring give notice to the holder of the Convertible Bond. Within five Business Days after the Company despatches the notice, the holder of the Convertible Bond may give notice to the Company that the Convertible Bond has become immediately due and payable, whereupon it shall so become immediately due and payable.

The following are the events of default referred to in the immediately preceding paragraph:-

• (i) a default is made by the Company in the performance or observance of any covenant, condition or provision contained in the Acquisition Agreement with respect to the issue of the Convertible Bond and any New Shares and on its part to be performed or observed and such default continues for the period of thirty days next following the service by the holder of the Convertible Bond on the Company of notice requiring such default to be remedied; or

• (ii) a resolution is passed or an order of a court of competent jurisdiction is made that the Company (or a principal subsidiary of the Company) be wound up or dissolved otherwise than for the purposes of or pursuant to and followed by a consolidation, amalgamation, merger or reconstruction the terms of which shall have previously been approved in writing by the holder of the Convertible Bond.

Information on Chinaright

Chinaright is primarily engaged in the distribution of integrated circuit chips for set-top boxes, a reception device which receives and decodes the digital signal from either cable or satellite transmission. Chinaright is one of the authorized dealers of ST Microelectronics Inc., the second largest integrated circuit chips manufacturer in France, for its integrated circuit chips for set-top boxes. Such integrated circuit chips can be used in digital consumer segment which includes DVD, DVB, DCAM, and MP3. The customers of Chinaright, being manufacturers or traders of set-top boxes, are located in Hong Kong and the PRC.

Set out below is a brief financial summary of Chinaright based on the current information available to the Board:

	**For the year **	ended 31
	December
	2005	2004
	(audited)	(audited)
	HK$’000	HK$’000
Turnover	56,640	179,132
Net loss before taxation	4,460	887
Net loss after taxation	4,525	887

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			As at 31 December	As at 31 December
			2005	2004
			(audited)	(audited)
			HK$’000	HK$’000
Net	asset	value	18	4,543

Reason for the Acquisition

Since the Board took control of the Company in July 2004, it has been searching for viable business opportunities through their extensive business networks in the PRC and Hong Kong with a view to expanding its business operations and enhancing the financial performance of the Group. Chinaright’s business is trading in nature, in which the chief executive officer of the Company, who oversees the Group’s existing trading business, has extensive management experience. Besides, it is the present intention of the Company to retain the senior management of Chinaright to directly manage this part of business. On the basis of the above, the Board considers the Acquisition will help to diversify the trading business of the Group and keep the Company abreast of the lucrative growth opportunities that the PRC market presents, thereby strengthening the Company’s ability to meet the rising demand from its customers. Accordingly, the Board considers that the Acquisition is in the interests of the Company and the Shareholders as a whole.

Information on the Group

The Company is an investment holding company and its principal subsidiaries are engaged in trading businesses primarily in fabric products and other merchandises as well as base metals.

Shareholding structure of the Company

Set out below is the shareholding structure of the Company immediately before and after conversion of Convertible Bond at the Conversion Price:

			Immediately after the	Immediately after the
			**conversion of **	Convertible
	**Immediately **	before the	Bond (assuming the
	conversion of Convertible		**conversion **	price to be
		Bond	**HK$0.15 per **	New Share)
	Shares	Percentage	Shares	Percentage
	(approximately)		(approximately)
Profit Harbour (Note)	262,602,000	63.58%	262,602,000	61.60%
Vendor	—	—	13,333,334	3.13%
Public Shareholders	150,398,000	36.42%	150,398,000	35.27%
Total	413,000,000	100.00%	426,333,334	100.00%

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• Note: The entire issued share capital of Profit Harbour is owned by Mr. Yue. Accordingly, Mr. Yue is deemed to be interested in all the shares in which Profit Harbour has interest pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

GENERAL

The Acquisition constitutes a major transaction of the Company under the Listing Rules. As no Shareholder is required to abstain from voting if a special general meeting is to be held to approve the Acquisition and all transactions contemplated thereunder, and Profit Harbour, who is interested in approximately 63.58% of the issued share capital of the Company, has provided its written approval for the Acquisition and all transactions contemplated thereunder, including but not limited to the Option Agreement and the Sale Loan Assignment, pursuant to Rule 14.44 of the Listing Rules, no special general meeting will be held in this regard. The accountants’ report of Chinaright will be issued after the date of this announcement for incorporation in the circular to Shareholders and Completion will only take place after fulfillment of the conditions for Completion detailed above, prior to which such accountants’ report with a clean opinion from the reporting accountants is expected to be issued. The New Shares will be issued under the general mandate to issue new Shares granted to the Directors on 23 May 2006.

A circular containing, among other things, details of the Acquisition, including the Option Agreement, the Sale Loan Assignment, and the issuance of the Convertible Bond and the financial information of Chinaright will be despatched to the Shareholders as soon as practicable.

REALLOCATION OF USE OF PROCEEDS

It is stated in the announcement and the circular of the Company dated 12 April 2006 and 4 May 2006 respectively that the proceeds of approximately HK$35.1 million from the Assignment of Debt will be used mainly as working capital to finance the fabric products trading business of the Group. It is also stated in the announcement and the circular of the Company dated 11 May 2006 and 1 June 2006 respectively that part of the proceeds from the Rights Issue of HK$15 million will be used for the repayment of loan.

The Company would like to announce that the proceeds from the Assignment of Debt and the Rights Issue will be reallocated in the following manner:

• (i) HK$15 million from the Assignment of Debt will be used for the repayment of loan; and

• (ii) HK$15 million out of the Rights Issue will be used as working capital to finance the fabric products trading business of the Group.

The Directors consider that such reallocation will allow the Company to employ its financial resources more efficiently to reduce the finance charges of the Group.

CONTINUED SUSPENSION OF TRADING IN SHARES

Trading of the Shares will continue to be suspended until resumption of trading in Shares on the Stock Exchange is granted by the Stock Exchange.

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DEFINITIONS

• “2006 Accounts”

• audited financial statements of Chinaright for the year ending 31 December 2006 prepared in accordance with the Hong Kong Generally Accepted Accounting Principles

• “Acquisition” the acquisition by the Purchaser from the Vendor of the Sale Interest and the Sale Loan pursuant to the Acquisition Agreement

• “Acquisition Agreement” the agreement dated 14 June 2006 entered into among the Company, the Purchaser and the Vendor in relation to the Acquisition

• “Assignment of Debt”

• the assignment of the debt of US$4.5 million in full from the Company at face value to Profit Harbour pursuant to a deed of assignment entered into between the Company and Profit Harbour dated 12 April 2006. Please refer to the announcement and circular of the Company dated 12 April 2006 and 4 May 2006 respectively in this regard

• “associates” has the meaning ascribed to it under the Listing Rules

• “Board” the board of Directors

• “Business Day” any day (other than a Saturday) on which banks are generally open for business in Hong Kong throughout their normal business hours

• “Chinaright” Chinaright Electronics Limited, a limited liability company incorporated under the laws of Hong Kong having an aggregate issued share capital of HK$100,001 divided into 100,001 shares of per value HK$1.00 each and is approximately 60.0% owned by the Vendor and the remaining approximately 40% was owned by Kam Sau Yee, a third party independent of the Company and its connected person(s) (as defined in the Listing Rules) and their respective associates

• “Company” Shanghai Merchants Holdings Limited, a company incorporated in Bermuda with limited liability and the shares of which are listed on the Stock Exchange

• “Completion” the completion of the Acquisition Agreement in accordance with the terms thereof

• “Consideration” consideration for the Acquisition, being HK$2.0 million which will be satisfied by the issuance of the Convertible Bond upon the Completion

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• “Convertible Bond”

• redeemable convertible bond exchangeable into the New Shares for the principal sum of HK$2.0 million at the Conversion Price

• “Conversion Price”

• HK$0.15 per New Share (subject to adjustment), being the initial conversion price for the Convertible Bond

• “Director(s)” director(s) of the Company

• “Group”

• the Company and its subsidiaries

• “Guaranteed Profit”

• HK$1 million, less any Profit Adjustment without taking into account any amount of shareholder’s loan waived as disclosed in the 2006 Accounts, being the amount of profit guaranteed under the Profit Guarantee

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

• “Last Trading Day”

• 30 May 2003, being the last Trading Day prior to the suspension of the trading of the Shares on the Stock Exchange on 2 June 2003

• “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange

• “Long Stop Date” 14 July 2006 or such later date as may be determined at the sole discretion of Purchaser

• “Maturity”

• a term of 24 months from the date of the issue of the Convertible Bond, until fully converted or upon occurrence of any events of default as set out in (i) under the paragraph headed “Principal terms of the Convertible Bond” of this announcement, whichever is earlier.

• “Mr. Yue”

• Mr. Yue Jialin, the executive director and the Chairman of the Company. Mr. Yue was also deemed to be interested in 262,602,000 Shares, representing approximately 63.58% in the existing issued share capital of the Company as at the date of this announcement by virtue of his interest in Profit Harbour

• “New Share(s)” new Shares to be issued by the Company upon the conversion of the Convertible Bond

• “Option Agreement”

• the written agreement dated 14 June 2006 in respect of the Put Option entered into between the Vendor and the Purchaser pursuant to the terms of the Acquisition Agreement

• “PRC”

• the People’s Republic of China

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• “Profit Adjustment”

• shall have such meaning as defined in the paragraph headed “Profit Guarantee and Profit Adjustment” in this announcement

• “Profit Guarantee” the guarantee in respect of the Guaranteed Profit provided by the Vendor under the Acquisition Agreement in relation to the audited net profit of Chinaright for the financial year ending 31 December 2006

• “Profit Harbour” Profit Harbour Investments Limited, an investment holding company incorporated in the British Virgin Islands with limited liability and is wholly and beneficially owned by Mr. Yue. Profit Harbour was interested in 262,602,000 Shares, representing approximately 63.58% in the existing issued share capital of the Company, as at the date of this announcement

• “Purchaser” Rise Cheer Limited, a limited liability company incorporated in the British Virgin Islands and a wholly owned subsidiary of the Company

• “Put Option” shall have such meaning as defined in the paragraph headed “Consideration” in this announcement

• “Rights Issue”

• the issue of the new shares of the Company on the basis of two new Shares for every existing Share held on Monday, 19 June 2006, or such other date as may be agreed in writing between the Company and Sun Hung Kai International Limited, being the underwriter to the Rights Issue, at the subscription price of HK$0.10 as detailed in the announcement and the circular of the Company dated 11 May 2006 and 1 June 2006 respectively

• “Sale Interest” the 60,001 shares of nominal value of HK$1.00 each in the issued capital of Chinaright

• “Sale Loan”

• the debt owed by Chinaright to the Vendor as at the date of Completion of approximately HK$1 million

• “Sale Loan Assignment”

• the deed dated 14 June 2006 in respect of the assignment of the Sale Loan entered into between the Purchaser and the Vendor pursuant to the terms of the Acquisition Agreement

• “Share(s)”

• ordinary share(s) of HK$0.10 each in the share capital of the Company

• “Shareholder(s)” holder(s) of the Share(s)

• “Stock Exchange”

The Stock Exchange of Hong Kong Limited

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“Trading Day(s)” a day on which the Stock Exchange is open for trading

“Vendor” “Warranties”

Professional Trading Limited

the representation and warranties provided by the Vendor as specified in the Acquisition Agreement

“HK$” Hong “%” per cent.

Hong Kong dollars, the lawful currency of Hong Kong

By order of the Board Shanghai Merchants Holdings Limited Yue Jialin Chairman

Hong Kong, 15 June 2006

As at the date of this announcement, the Board comprises two executive Directors, namely Mr. Yue Jialin (Chairman) and Mr. Lau Yau Cheung (Chief Executive Officer) and three independent non-executive Directors namely Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Wu Guo Jian.

* For identification purpose only

Please also refer to the published version of this announcement in The Standard.

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