Persistence Gold Group Ltd — Proxy Solicitation & Information Statement 2002

Aug 19, 2002

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Shanghai Merchants Holdings Limited (the “Company”), you should at once hand this circular with the accompanying proxy form 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 transferee.

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

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SHANGHAI MERCHANTS HOLDINGS LIMITED 上海商貿控股有限公司[*]

(formerly known as Ying Wing Holdings Limited 盈榮集團有限公司 *)

(incorporated in Bermuda with limited liability)

CONNECTED TRANSACTION

SUBSCRIPTION OF NEW SHARES BY CONTROLLING SHAREHOLDER

Financial adviser to the Company

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KINGSWAY CAPITAL LIMITED

Independent financial adviser to the Independent Board Committee

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MENLO CAPITAL LIMITED

A notice convening a special general meeting of Shanghai Merchants Holdings Limited to be held at 10th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong on 10th September, 2002 at 3.00 p.m. is set out on pages 23 to 24 of this circular. Whether or not you intend to be present at the meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon and deposit with the Company’s Hong Kong branch share registrar, Secretaries Limited, at 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the SGM. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM should you so desire.

* for identification purpose only

19th August, 2002

CONTENTS

	Page
Responsibility statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
The Subscription Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Change of shareholding of substantial shareholder . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Reasons for the Subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Use of proceeds from the Subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Principal business of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Connected transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Application for listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Letter from Menlo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Appendix – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Notice of the SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23

– i –

RESPONSIBILITY STATEMENT

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

– ii –

DEFINITIONS

In this circular (other than in the notice of the SGM), the following expressions have the meanings respectively set opposite them unless the context otherwise requires:

• “Angel Field”

Angel Field Limited, a company incorporated in the British Virgin Islands with limited liability

• “associate(s)” has the meaning ascribed to it under the Listing Rules

• “Board” board of Directors

• “business day” a day (excluding Saturday) on which banks are open for business in Hong Kong

• “Menlo” Menlo Capital Limited, an investment adviser registered under the Securities Ordinance (Chapter 333 of the Laws of Hong Kong) and the independent financial adviser to the Independent Board Committee

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

• “Completion” Completion of the Subscription

• “Controlling Shareholder” Angel Field is interested in 55.83% of the existing issued share capital of the Company

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

• “Group”

the Company and its subsidiaries

• “Hong Kong” the Hong Kong Special Administrative Region of the PRC

• “Independent Board Committee” an independent committee of the Board comprising Mr. Lau Siu and Mr. Gordon Ng

• “Independent Shareholder(s)” Shareholder(s) other than the Controlling Shareholder

• “Latest Practicable Date”

• 16th August, 2002, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular

– 1 –

DEFINITIONS

“Listing Rules”

the Rules Governing the Listing of Securities on the Stock Exchange

• “PRC” the People’s Republic of China but, for the purpose of this circular, excluding Hong Kong

• “SDI Ordinance” Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong)

• “SGM” the special general meeting of the Company to be held on 10th September, 2002, the notice of which is set out on pages 23 to 24 of this circular

• “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

• “Subscription” the subscription of the Subscription Shares by Angel Field at the Subscription Price

• “Subscription Agreement” the subscription agreement dated 29th July, 2002 entered into between the Company and Angel Field in respect of the Subscription

• “Subscription Price” the subscription price of HK$0.418 per Subscription Share

• “Subscription Share(s)” 48,000,000 new Shares

• “HK$” Hong Kong dollars, the lawful currency of Hong Kong

• “%” per cent.

– 2 –

LETTER FROM THE BOARD

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SHANGHAI MERCHANTS HOLDINGS LIMITED 上海商貿控股有限公司[*]

(formerly known as Ying Wing Holdings Limited 盈榮集團有限公司 *)

(incorporated in Bermuda with limited liability)

Executive Directors: Ms. Mo Yuk Ping (Chairman) Mr. Shi Zhi Hong Mr. Shan Zhenglin Ms. Gong Bei Ying

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

Independent non-executive Directors: Mr. Lau Siu Mr. Gordon Ng

Principal place of business in Hong Kong: 67th Floor, The Center 99 Queen’s Road Central Hong Kong

19th August, 2002

To the Shareholders and

option holders for information only

Dear Sir or Madam,

CONNECTED TRANSACTION

SUBSCRIPTION OF NEW SHARES BY CONTROLLING SHAREHOLDER

INTRODUCTION

It was announced on 29th July, 2002 that the Company and Angel Field had entered into the Subscription Agreement on the same date, pursuant to which, the Company has conditionally agreed to allot and issue and Angel Field has conditionally agreed to subscribe for 48,000,000 new Shares at an issue price of HK$0.418 per Subscription Share. The Subscription Shares represent approximately 20% of the existing issued share capital of the Company and approximately 16.7% of the Company’s issued share capital as enlarged by the issue of the Subscription Shares.

* for identification purpose only

– 3 –

LETTER FROM THE BOARD

The net proceeds of the Subscription will amount to approximately HK$19.8 million and will be used for the Group’s fabric trading business and for general working capital purposes.

The Subscription Agreement constitutes a connected transaction of the Company under the Listing Rules and is subject to the approval by the Independent Shareholders.

THE SUBSCRIPTION AGREEMENT

Date of the Subscription Agreement

29th July, 2002

Subscriber

Angel Field is the controlling shareholder of the Company and is beneficially and solely owned by Mr. Chau Ching Ngai, who is the spouse of Ms. Mo Yuk Ping, the chairman and a director of the Company. As at the date of the Subscription Agreement, Angel Field is interested in 133,986,000 Shares, representing approximately 55.83% of the Company’s existing issued share capital.

Number of Subscription Shares

48,000,000 new Shares, representing 20% of the Company’s existing issued share capital and approximately 16.7% of the Company’s issued share capital as enlarged by the issue of the Subscription Shares.

Subscription Price

The Subscription Price of HK$0.418 per Subscription Share was determined after arm’s length negotiations between the Company and Angel Field with reference to the prevailing market prices of the Shares and the offer price per Share pursuant to an unconditional cash offer made on behalf of Angel Field (details of which were set out in the offer document dated 14th March, 2002 issued to the Company’s shareholders). The Subscription Price represents:

• (a) a premium of 10% to the closing price of HK$0.38 per Share as quoted on the Stock Exchange on 29th July, 2002, being the last day of trading in the Shares on the Stock Exchange prior to the signing of the Subscription Agreement;

• (b) a discount of approximately 8.1% to the average closing price of HK$0.455 per Share as quoted on the Stock Exchange for the last 10 trading days up to and including 29th July, 2002; and

– 4 –

LETTER FROM THE BOARD

• (c) a discount of approximately 1.6% to the closing price of the Shares of HK$0.425 as at the Latest Practicable Date.

Ranking of the Subscription Shares

The Subscription Shares, when issued and fully paid, will rank pari passu in all respects with the Shares in issue on the date of allotment and issue of the Subscription Shares including the right to any dividends or distributions.

Conditions of the Subscription

The Subscription is conditional upon the following conditions:

• (1) the passing of an ordinary resolution by the Independent Shareholders at the SGM of the Company to be convened to approve the Subscription Agreement and the transactions contemplated thereunder (including the issue of the Subscription Shares);

• (2) the Stock Exchange granting the listing of, and permission to deal in, the Subscription Shares; and

• (3) the filing of relevant documents or obtaining the necessary waiver relating to the Subscription as required by law in Bermuda, if necessary.

In the event that the conditions set out above are not fulfilled on or before 15th November, 2002 (or such later date as may be agreed between Angel Field and the Company), the Subscription Agreement shall lapse.

Completion of the Subscription

Completion shall take place on or before the second business day following the date on which all the abovementioned conditions are fulfilled (or such other date as may be agreed between Angel Field and the Company).

Issue of the Subscription Shares

The Subscription Shares will be issued under the authorization proposed to be obtained from the Independent Shareholders at the SGM.

– 5 –

LETTER FROM THE BOARD

CHANGE OF SHAREHOLDING OF SUBSTANTIAL SHAREHOLDER

The following interests of 10% or more in the issued share capital of the Company were recorded in the register of interests required to be kept by the Company pursuant to Section 16(1) of the Securities (Disclosure of Interests) Ordinance (Chapter 396 of the Laws of Hong Kong). The change of the shareholding of Angel Field in the Company as a result of the Subscription is also detailed as follows:

	Number of		Immediately	% of the issued
	Shares held as	% of the	after the	share capital as
	at the date of this	existing issued	completion of	enlarged by the
Name	Announcement	share capital	the Subscription	Subscription
Angel Field	133,986,000	55.83%	181,986,000	63.18%

Note : These figures assume that there will be no change to the issued share capital of the Company and interests in Shares from the date of the announcement in relation to the Subscription dated 29th July, 2002 up to Completion.

So far as the Directors are aware of, no connected persons of the Company other than Angel Field and its associates were interested in the Shares.

REASONS FOR THE SUBSCRIPTION

The Directors are of the view that the Subscription will enlarge the capital base of the Company and will strengthen the financial position of the Group by providing a cost-effective means of raising additional capital for the Group.

USE OF PROCEEDS FROM THE SUBSCRIPTION

The Directors intend to use the net proceeds from the Subscription of approximately HK$19.8 million as to approximately HK$8.0 million for trade payables and as to the balance of approximately HK$11.8 million for the Group’s general working capital.

PRINCIPAL BUSINESS OF THE COMPANY

The Group is principally engaged in the processing of raw fabric and trading of fabric.

CONNECTED TRANSACTION

Angel Field is the controlling shareholder of the Company interested in 133,986,000 Shares, representing approximately 55.83% of the Company’s existing issued share capital.

– 6 –

LETTER FROM THE BOARD

Angel Field is beneficially and solely owned by Mr. Chau Ching Ngai, who is the spouse of Ms. Mo Yuk Ping, the chairman and a director of the Company. Accordingly, Angel Field is a connected person of the Company under the Listing Rules and the Subscription constitutes a connected transaction of the Company. Under Rule 14.26(3) of the Listing Rules, the Subscription is subject to approval by the Independent Shareholders at a general meeting of the Company at which Angel Field and its associates shall abstain from voting.

APPLICATION FOR LISTING

The Company will apply to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Subscription Shares.

SGM

The SGM is to be held at 3:00 p.m. on Tuesday, 10th September, 2002 at 10th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong. A notice of the SGM is set out on pages 23 to 24 of this circular. At the SGM, ordinary resolution will be proposed to approve, among other things, the Subscription Agreement and the issue of the Subscription Shares.

A form of proxy for use at the SGM is enclosed. Whether or not you intend to attend the SGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return it as soon as possible to the office of the Company’s branch share registrar in Hong Kong, Secretaries Limited, at 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong, and in any event not less than 48 hours before the time appointed for holding the SGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the SGM or any adjourned meeting should you wish.

RECOMMENDATIONS

An Independent Board Committee comprising Mr. Lau Siu and Mr. Gordon Ng has been appointed to advise the Independent Shareholders in relation to the terms and conditions of the Subscription Agreement. The Independent Financial Adviser has been appointed to advise the Independent Board Committee in this respect.

The Independent Board Committee, having taken into account the reasons set out on page 6 of this circular under the paragraph headed “Reasons for the Subscription” and based on the principal factors and reasons considered by the Independent Financial Adviser and as stated in its letter of advice as set out on pages 11 to 18 of this circular, considers that the terms and conditions of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders of the Company are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM to approve the Subscription Agreement and the issue of the Subscription Shares.

– 7 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is drawn to the letter from the Independent Board Committee set out on pages 9 to 10 of this circular, the letter from the Independent Financial Adviser set out on pages 11 to 18 of this circular, the notice of SGM set out on pages 23 to 24 of this circular and to the general information set out in the appendix to this circular.

Yours faithfully,

For and on behalf of the Board of Shanghai Merchants Holdings Limited Mo Yuk Ping

Chairman

– 8 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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SHANGHAI MERCHANTS HOLDINGS LIMITED 上海商貿控股有限公司[*]

(formerly known as Ying Wing Holdings Limited 盈榮集團有限公司 *) (incorporated in Bermuda with limited liability)

19th August, 2002

To the Independent Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION

SUBSCRIPTION OF NEW SHARES BY CONTROLLING SHAREHOLDER

Reference is made to the circular of Shanghai Merchants Holdings Limited dated 19th August, 2002 (the “Circular”) of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context otherwise requires.

We are independent non-executive Directors who have been appointed by the Board to advise you as to whether, in our opinion, the terms and conditions of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders as a whole are concerned.

The Independent Board Committee has appointed Menlo as the independent financial adviser to advise the Independent Board Committee on the Subscription Agreement. The text of the letter from Menlo containing its advice, together with the principal factors taken into consideration in arriving thereat, are set out on pages 11 to 18 of the Circular.

Having considered the terms of the Subscription Agreement and the advice given by Menlo, the Independent Board Committee is of the opinion that the terms of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders as a whole are concerned. Accordingly, the Independent Board Committee recommends that Independent Shareholders should vote in favour of the ordinary resolution in respect of the Subscription Agreement to be proposed at the SGM.

* for identification purpose only

– 9 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Your attention is drawn to the letter from the Board set out on pages 3 to 8 of the Circular and the additional information set out in the appendix to this Circular.

Yours faithfully,

For and on behalf of The Independent Board Committee Lau Siu and Gordon Ng Independent non-executive Directors

– 10 –

LETTER FROM MENLO

The following is the text of a letter from Menlo in connection with the Subscription Agreement which has been prepared for the purpose of inclusion in this circular.

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Menlo Capital Limited

Room 505, Nan Fung Tower 173 Des Voeux Road Central Hong Kong

19th August, 2002

• To the Independent Board Committee of Shanghai Merchants Holdings Limited

Dear Sirs,

CONNECTED TRANSACTION

SUBSCRIPTION OF NEW SHARES BY CONTROLLING SHAREHOLDER

We refer to our appointment to advise the Independent Board Committee in respect of the Subscription Agreement, details of which are set out in the letter from the Board (the “Board’s Letter”) contained in the circular of the Company dated 19th August, 2002 (the “Circular”) of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context of this letter otherwise requires.

The Company and Angel Field had entered into the Subscription Agreement on 29th July, 2002, pursuant to which, the Company has conditionally agreed to allot and issue and Angel Field has conditionally agreed to subscribe for 48,000,000 new Shares at an issue price of HK$0.418 per Subscription Share. Angel Field is the controlling shareholder of the Company interested in 133,986,000 Shares, representing approximately 55.83% of the Company’s existing issued share capital. Angel Field is beneficially and solely owned by Mr. Chau Ching Ngai, who is the spouse of Ms. Mo Yuk Ping, the chairman and a director of the Company. Accordingly, Angel Field is a connected person of the Company under the Listing Rules and the Subscription constitutes a connected transaction of the Company. Under Rule 14.26(3) of the Listing Rules, the Subscription is subject to approval by the Independent Shareholders at a general meeting of the Company at which Angel Field and its associates shall abstain from voting.

In formulating our opinion, we have relied on the statements, information, opinions and representations contained in the Circular and the information and representations provided to us by the Directors and management of the Company. We have assumed that all information, representations and opinions contained or referred to in the Circular and all information,

– 11 –

LETTER FROM MENLO

representations and opinions which have been provided by the Directors or management of the Company for which they are solely responsible, are true and accurate at the time they were made and will continue to be accurate at the date of the despatch of the Circular.

We consider that we have been provided with sufficient information on which to form a reasonable basis for our opinion. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any fact or circumstance which would render the information provided and representations and opinions made to us untrue, inaccurate or misleading. Having made all reasonable enquiries, the Directors have further confirmed that, to the best of their knowledge, they believe there are no other facts or representations the omission of which would make any statement in the Circular, including this letter, misleading. We have not, however, carried out any independent verification of the information provided by the Directors and management of the Company, nor have we conducted an independent investigation into the business and affairs of the Company.

PRINCIPAL FACTORS TAKEN INTO ACCOUNT

In arriving at our advice to the Independent Board Committee in respect of the Subscription Agreement, we have taken the following principal factors and reasons into consideration:

I. Rationale of the Subscription Agreement

Financial performance and prospects of the Group

The Group is principally engaged in the processing of raw fabric and trading of fabric. As stated in the annual report of the Company 2001, the year ended 31st December, 2001 was a difficult year for the Group. The Group recorded a turnover of approximately HK$38,140,000, representing a significant decrease of 69% as compared to the last year. Loss for the year amounted to approximately HK$45,558,000, as compared to loss for the year of HK$13,601,000 recorded in year 2000. Substantial drop in operating results was mainly due to keen competition in the fabric processing industry and unfavourable performance of the Group’s snack food business. Pursuant to a disposal agreement dated 22nd January, 2002, the Group agreed to dispose of the snack food business and the disposal completed in March 2002 and the Group recorded no material gain or loss on the disposal in its financial statements.

As confirmed by the Directors, subsequent to the unconditional cash offer made on behalf of Angel Field, the Group’s financial position has been improved. The Directors are of the view that the Subscription will enlarge the capital base of the Company and will strengthen the financial position of the Group by providing a cost-effective means of raising additional capital for the Group.

– 12 –

LETTER FROM MENLO

We noted from the Directors that trading of fabric requires high level of working capital and the granting of flexible credit terms to the customers will enhance the competitiveness of the Group. Based on the aforesaid, we concur with the view of the Directors that the Subscription will provide additional funding to the Company to enhance its financial position to capture opportunities in fabric industry and is in the interests of the Company and the Independent Shareholders as a whole.

Use of proceeds from the Subscription

The Directors intend to use the net proceeds from the Subscription of approximately HK$19.8 million as to approximately HK$8.0 million for trade payables and as to the balance of approximately HK$11.8 million for the Group’s general working capital.

As explained above, the historical financial performance of the Group has been adversely affected by the difficult operating environment of the fabric industry in the PRC. Additional funding enables the Group to grant more flexible credit terms to its existing and new customers in order to maintain and attract more business. Accordingly, it is an appropriate strategy for the Company to raise additional fund to maintain the Group’s competitiveness in soliciting customers in the fabric industry.

Other means of fund raising

We note that the Group has successfully raised new funding of approximately HK$17.53 million and HK$3.75 million by way of placing of new Shares to 30 independent third parties in April 2002 and to 10 independent third parties in May 2002 respectively. Based on our discussion with the Directors, the Directors have considered various other means of fund raising including, inter alia, debt financing, placing of new Shares to independent investors and rights issue. The Company was in negotiation with several banks for suitable bank facilities but was unable to finalise such facilities. Despite the fact that the interest rate for bank loan is comparatively lower than before, further cost of debt financing involved is not in the interest of the Group as there was a loss for the financial year ended 31st December 2001. The interest cost will further widen the loss position of the Group. Taking consideration of this, we agree that debt financing may not be in the interest of the Group. Although debt financing would not dilute the Shareholders’ interests in the Company, the increase in finance costs is not in the interest of the Group. In addition, given the recent difficult market sentiment in Hong Kong and the unsatisfactory historical financial performance of the Group, the Directors confirmed that they have experienced difficulties in securing independent placing agents/underwriters in the market to raise the fund required through placing and rights issue. Given that longer time is required for the Company to negotiate with the relevant placing agents/underwriters to finalise comparable terms in placing/rights issue similar to the Subscription, we are of the view that the Subscription is a relatively convenient method to raise fund under the current market condition.

– 13 –

LETTER FROM MENLO

Based on the commercial rationale as explained above, we consider that it is judicious for the Company to enter into the Subscription Agreement and put forward the Subscription Agreement to the Independent Shareholders for approval.

II. Terms of the Subscription Agreement

The Subscription Price

The Subscription Price of HK$0.418 per Subscription Share was determined after arm’s length negotiations between the Company and Angel Field with reference to the prevailing market prices of the Shares and the offer price per Share pursuant to an unconditional cash offer made on behalf of Angel Field (details of which were set out in the offer document dated 14th March, 2002 issued to the Company’s shareholders). The Subscription Price represents:

• (a) a premium of 10% to the closing price of HK$0.38 per Share as quoted on the Stock Exchange on 29th July, 2002, being the last day of trading in the Shares on the Stock Exchange prior to the signing of the Subscription Agreement;

• (b) a discount of approximately 8.1% to the average closing price of HK$0.455 per Share as quoted on the Stock Exchange for the last 10 trading days up to and including 29th July, 2002;

• (c) a discount of approximately 1.6% to the closing price of the Shares of HK$0.425 as at the Latest Practicable Date;

• (d) a premium of approximately 16.1% to the pro forma unaudited consolidated net assets before the Subscription of approximately HK$0.36 per Share as shown in the section headed “Financial effects of the Subscription Agreement” below; and

• (e) a premium of approximately 13.0% to the pro forma unaudited consolidated net assets after the Subscription of approximately HK$0.37 per Share as shown in the section headed “Financial effects of the Subscription Agreement” below.

– 14 –

LETTER FROM MENLO

Historical performance of the Shares

The following charts set out the daily turnover and closing price of the Shares on the Stock Exchange for the period from 3rd July, 2001 to the Latest Practicable Date:

==> picture [370 x 396] intentionally omitted <==

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

2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
0
3-Jul-0113-Jul-0125-Jul-016-Aug-0116-Aug-0128-Aug-017-Sep-0119-Sep-013-Oct-0115-Oct-0125-Oct-016-Nov-0116-Nov-0128-Nov-0110-Dec-0120-Dec-014-Jan-0216-Jan-0228-Jan-027-Feb-0222-Feb-026-Mar-0218-Mar-0228-Mar-0212-Apr-0224-Apr-027-May-0217-May-0230-May-0211-Jun-0221-Jun-024-Jul-0216-Jul-0226-Jul-027-Aug-0216-Aug-02
3-Jul-0113-Jul-0125-Jul-016-Aug-0116-Aug-0128-Aug-017-Sep-0119-Sep-013-Oct-0115-Oct-0125-Oct-016-Nov-0116-Nov-0128-Nov-0110-Dec-0120-Dec-014-Jan-0216-Jan-0228-Jan-027-Feb-0222-Feb-026-Mar-0218-Mar-0228-Mar-0212-Apr-0224-Apr-027-May-0217-May-0230-May-0211-Jun-0221-Jun-024-Jul-0216-Jul-0226-Jul-027-Aug-0216-Aug-02
Share price (HK$)
Volume (Shares)
----- End of picture text -----

During the period from 3rd July, 2001 to 21st January, 2002 (the last trading day immediately before the announcement in relation of the unconditional general offer made by Angel Field), the closing price per Share ranged from HK$1.1 to HK$1.8 but no trade was recorded during such period. Starting from the 28th January, 2002 and up to the Latest Practicable Date, the average closing price was approximately HK$0.579 which represents approximately 38.5% premium to the Subscription Price and the average daily trading volume was approximately 2,655,559 Shares which represents approximately 1.11% of the existing issued share capital of the Company.

– 15 –

LETTER FROM MENLO

For comparison purposes, we have assessed recent transactions conducted by listed companies in Hong Kong in July 2002 and identified 8 placing/ subscription of new shares (the “Transactions”). Details of the Transactions are set out below:

			Discounts to the
			closing share price
			immediately prior
			to the release
	Announcement	Subscription	of the relevant
Name of the issuer	date	price	announcement
		(HK$)
Premium Land Limited	31/07/02	0.218	9.90%
TechCap Holdings Limited	29/07/02	0.01	0%
Coslight Technology International	19/07/02	2.15	6.52%
Group Limited
Melco International Development	11/07/02	1.45	11.58%
Limited
Hi Sun Group Limited	09/07/02	0.82	11.83%
Poly Investments Holdings Limited	05/07/02	0.30	14.30%
Global Green Tech Group Limited	04/07/02	2.1	3.70%
Sun Man Tai Holdings Company	04/07/02	0.3	6.25%
Limited

We note that the discounts to the closing share prices of the Transactions range from nil to 14.30% and the average discount to the closing share prices of the Transactions is 8.01%. Given that (i) there is a premium of 10% for the Subscription Price to the closing price of the Shares on the trading day immediately prior the signing of the Subscription Agreement instead of discounts as other Transactions; and (ii) there is a premium for the Subscription Price to the pro forma unaudited consolidated net assets value per Share, we consider that the Subscription Price is fair and reasonable so far as the Independent Shareholders are concerned.

– 16 –

LETTER FROM MENLO

III. Dilution of percentage shareholding

Assuming that the Subscription Agreement and allotment and issue of the Subscription Shares are approved, 48,000,000 new Shares will be issued by the Company representing 20% of the Company’s existing issued share capital and approximately 16.7% of the Company’s issued share capital as enlarged by the issue of the Subscription Shares. Upon completion of the Subscription, the shareholding of Angel Field in the Company will increase from approximately 55.83% to approximately 63.18%. The aggregate shareholding of the public Shareholders in the Company will be diluted from the current level of approximately 44.17% to approximately 36.82%. In light of the improvement of the financial position of the Company and the net tangible assets per share which in return to the benefit of both the Company and the Independent Shareholders as a result of the Subscription and the need of additional funding to maintain the Group’s competitiveness by granting flexible credit terms to the customers, we consider that the dilution of the shareholding interest of the existing Independent Shareholders arisen from the issue of the Subscription Shares is acceptable.

IV. Financial effects of the Subscription Agreement

Net assets

The following is a statement of pro forma consolidated net assets of the Group based on the audited net tangible asset value of the Group as at 31st December, 2001, after making the following adjustments:

Consolidated net assets of the Group as at 31st December, 2001 Proceeds from the placing of Shares as stated in the announcement of the Company dated 16th April, 2002 Proceeds from the placing of Shares as stated in the announcement of the Company dated 7th May, 2002 Pro forma adjusted consolidated net assets of the Group before the Subscription Estimated net proceeds from the Subscription Pro forma adjusted consolidated net assets of the Group after the Subscription Pro forma consolidated net assets per Share: – before the Subscription (based on 240,000,000 Shares in issue) – after the Subscription (based on 288,000,000 Shares in issue)	HK$’000 65,515 17,530 3,750
	86,795 19,800
	106,595
	HK$0.36
	HK$0.37

– 17 –

LETTER FROM MENLO

Based on the above table, the consolidated net assets of the Group will be increased from approximately HK$86.8 million before the Subscription to approximately HK$106.6 million after the Subscription. The consolidated net asset value per Share will be increased from approximately HK$0.36 before the Subscription to approximately HK$0.37 after the Subscription representing approximately 3% increase. Based on the aforesaid change, we are of the view that the financial position of the Group will be improved after the Subscription Agreement.

Gearing ratio

As confirmed by the Directors, the Company had no bank borrowings as at the Latest Practicable Date. As a result, the Subscription will not have any material impact on the gearing of the Company.

RECOMMENDATION

Taking into consideration of the above principal factors of consideration, we are of the view that the terms of Subscription Agreement are fair and reasonable so far as the interests of the Shareholders are concerned. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM to approve the Subscription Agreement.

Yours faithfully, For and on behalf of

Menlo Capital Limited Michael Leung Director

– 18 –

GENERAL INFORMATION

APPENDIX

1. DISCLOSURE OF DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests of the Directors and their associates in the share capital of the Company and its associated corporations (within the meaning of the SDI Ordinance) which were recorded in the register kept by the Company pursuant to section 29 of the SDI Ordinance were as follows:

(i) Interest in Shares

		Number of Shares
	Personal	Corporate	Family
Name of Director	interests	interests	interests
Mo Yuk Ping	–	133,986,000	133,986,000
		(Note)	(Note)

• Note: Ms. Mo Yuk Ping is the spouse of Mr. Chau Ching Ngai who is deemed to be interested in 133,986,000 Shares in the issued share capital of the Company.

(ii) Interest in share options granted under the share option scheme

Name of	Number of	Exercise
Director	share options	price	Exercise period
		HK$
Mo Yuk Ping	240,000	0.556	2nd July, 2002 to 1st July, 2007
Shi Zhi Hong	2,400,000	0.556	2nd July, 2002 to 1st July, 2007
Shan Zhenglin	2,400,000	0.556	2nd July, 2002 to 1st July, 2007
Gong Bei Ying	2,400,000	0.556	2nd July, 2002 to 1st July, 2007

Save as disclosed above and other than certain nominee shares in subsidiaries held in trust for the Group by certain Directors, as at the Latest Practicable Date, none of the Directors or their associates had any personal interests, family interests, corporate interests or other interests in the securities of the Company or any of its associated corporations (within the meaning of the SDI Ordinance) which have to be notified to the Company and the Stock Exchange pursuant to section 28 of the SDI Ordinance (including the interests which they were deemed or taken to have under section 31 or Part I of the Schedule to the SDI Ordinance) or which were required pursuant to section 29 of the SDI Ordinance, to be entered in the register referred to therein or which are required, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies, to have been notified to the Company and the Stock Exchange.

– 19 –

GENERAL INFORMATION

APPENDIX

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which had been acquired, disposed of by or leased to since 31st December, 2001 (the date to which the latest published audited consolidated accounts of the Company were made up) or proposed to be so acquired, disposed of or leased.

There is no contract or arrangement subsisting at the Latest Practicable Date in which any of the Directors is materially interested and which is significant in relation to the business of the Group taken as a whole.

2. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, and save for the interests disclosed in paragraph 1 or this appendix, according to the register of substantial shareholders maintained under Section 16(1) of the SDI Ordinance and so far as is known to, or can be ascertained after reasonable enquiry by the Directors the following company was interested in 10% or more in the issued share capital of the Company:

		Percentage of the
	Number of	total issued share
Name of Shareholder	Shares held	capital of the Company
Angel Field	133,986,000	55.83%
Mr. Chau Ching Ngai*	133,986,000	55.83%

• As at the Latest Practicable Date, Mr. Chau Ching Ngai was deemed under Sections 8(2), (3) and (4) of the SDI Ordinance to be interested in the 133,986,000 Shares held by Angel Field in which he can exercise one-third or more of its voting rights by virtue of his beneficial holding of the entire issued share capital of Angel Field.

Save as disclosed above, the Company had not been notified by any person who holds interests representing 10% or more in the issued share capital of the Company.

3. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2001, being the date to which the latest published audited accounts of the Group were made up.

4. LITIGATION

Neither the Company nor any of its subsidiaries is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

– 20 –

GENERAL INFORMATION

APPENDIX

5. SERVICE CONTRACTS

As at the Latest Practicable Date, there are no existing or proposed directors’ service contracts with any member of the Group, other than contracts terminable on not more than one year’s notice without compensation (other than statutory compensation).

6. CONSENT

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

Name Qualification Menlo Registered investment adviser

Menlo has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which it appears.

Menlo also confirms that it does not have any shareholding 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.

Menlo also confirms that it does not have any interest, direct or indirect, in any assets which have been, since 31st December, 2001 (being the date to which the latest published audited accounts of the Group were made up), acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

7. MISCELLANEOUS

1. The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

2. The head office and principal place of business of the Company in Hong Kong is at 67th Floor, the Center, 99 Queen’s Road Central, Hong Kong.

3. The company secretary of the Company is Tse Wai Kuen, Catherine who is an associate member of the Institute of Chartered Secretaries and Administrators in the United Kingdom and The Hong Kong Institute of Company Secretaries.

4. The branch share registrar of the Company in Hong Kong is Secretaries Limited, at 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong.

– 21 –

GENERAL INFORMATION

APPENDIX

1. The English text of this circular shall prevail over the Chinese text in the case of inconsistency.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company, at 67th Floor, the Center, 99 Queen’s Road Central, Hong Kong during normal business hours on any weekday (public holidays excepted) up to and including the date of the SGM:

• (i) the memorandum of association and bye-laws of the Company;

• (ii) the letter from the Independent Board Committee set out on pages 9 to 10 of this circular;

• (iii) the letter of advice from Menlo, the text of which is set out on pages 11 to 18 of this circular;

• (iv) the written consent from Menlo referred to in the paragraph headed “Consent” in this appendix;

• (v) the audited consolidated financial statements of the Group for the year ended 31st December, 2001; and

• (vi) the Subscription Agreement dated 29th July, 2002 entered into between the Company and Angel Field.

– 22 –

NOTICE OF THE SGM

==> picture [52 x 56] intentionally omitted <==

SHANGHAI MERCHANTS HOLDINGS LIMITED 上海商貿控股有限公司[*]

(formerly known as Ying Wing Holdings Limited 盈榮集團有限公司 *)

(incorporated in Bermuda with limited liability)

NOTICE is hereby given that a special general meeting of Shanghai Merchants Holdings Limited (the “Company”) will be held at 3:00 p.m. on 10th September, 2002 at 10th Floor, Hutchison House, 10 Harcourt Road, Central, Hong Kong for the purpose of considering and, if thought fit, passing (with or without amendments) the following resolution as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT the subscription agreement dated 29th July, 2002 entered into between the Company and Angel Field Limited as subscriber in relation to the subscription (“Subscription”) by Angel Field Limited of 48,000,000 new shares at the subscription price of HK$0.418 each (“Subscription Shares”) at the total subscription price of HK$20,064,000 be and it is hereby approved in all respects and that all the transactions contemplated therein be and they are hereby approved and that any of the directors of the Company be and they are hereby authorized to allot and issue the Subscription Shares to Angel Field Limited or as it may direct at completion of the subscription agreement and take all actions which are in their opinion necessary, appropriate, desirable or expedient for the implementation and contemplation of the transactions therein contemplated and all other matters incidental thereto or in connection therewith and to agree to the variation and waiver of all matters relating thereto that are, in the opinion of the directors of the Company, not material to transactions contemplated thereby and are in the best interests of the Company.”

By order of the Board of Shanghai Merchants Holdings Limited Mo Yuk Ping Chairman

Hong Kong, 19th August, 2002

* for identification purpose only

– 23 –

NOTICE OF THE SGM

Principal place of business in Hong Kong:

67th Floor, The Center 99 Queen’s Road Central Hong Kong

Notes:

• (1) A member entitled to attend and vote at the above meeting is entitled to appoint one or more than one proxy to attend and to vote in his stead. A proxy need not be a member of the Company.

• (2) A form of proxy of the meeting is enclosed. If the appointer is a corporation, the form of proxy must be under its common seal or, under the hand of an officer or attorney duly authorised on its behalf.

• (3) To be valid, a form of proxy must be deposited at the Company’s Hong Kong branch share registrar, Secretaries Limited, at 5th Floor, Wing On Centre, 111 Connaught Road Central, Hong Kong, as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the special general meeting or any adjournment thereof.

– 24 –