THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representations 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

*

(incorporated in Bermuda with limited liability)

(Stock Code: 1104)

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY AND UPDATES IN RESPECT OF BUSINESSES OF THE GROUP

Financial Adviser to Shanghai Merchants Holdings Limited

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Independent Financial Adviser

to the Independent Board Committee and the Independent Shareholders

( A M e m b e r o f M e l c o G r o u p )

A letter from the Independent Board Committee to the Independent Shareholders, containing its recommendation to the Independent Shareholders, is set out on pages 14 to 15 of this circular. A letter of advice from VC Capital, the independent financial adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 16 to 23 of this circular.

A notice convening the SGM to be held at 6:00 p.m. (or at the soonest time thereafter as the Annual General Meeting 2006 of the Company convened on the same date and at the same place shall be concluded or adjourned) on Tuesday, 23 May 2006 at 20/F., Central Tower, 28 Queen’s Road, Central, Hong Kong or any adjournment thereof is set out on pages 32 to 33 of this circular. Whether or not you are able to attend the SGM, please complete the accompanying form of proxy, in accordance with the instructions printed thereon, and deposit the same at the offices of the Company’s branch share registrar in Hong Kong, Secretaries Limited at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as practicable and in any event not less than 48 hours before the time appointed for the holding of 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 adjournment thereof should you so wish.

* For identification purpose only

4 May 2006

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Letter of advice from VC Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Appendix – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32

DEFINITIONS

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

“Acquisition”	has the meaning as defined in the sub-paragraph headed
	“Business outlook” under the paragraph headed “Updates
	in respect of businesses of the Group” in the section
	headed “Letter from the Board” in this circular
“Assignment of Debt”	the assignment of the Debt 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
“associates”	has the meaning ascribed to it under the Listing Rules
“Board”	the board of Directors
“Bye-Laws”	the existing bye-laws of the Company
“business day”	any day (other than a Saturday) on which banks are
	generally open for business in Hong Kong
“Company”	Shanghai Merchants Holdings Limited, a company
	incorporated in Bermuda with limited liability and the
	shares of which are listed on the Stock Exchange
“Debt”	the benefit of the Great Center Action up to the full
	amount of the debt of US$4.5 million, equivalent to
	approximately HK$35.1 million, due from Great Center
	to the Company
“Director(s)”	director(s) of the Company
“Great Center”	Great Center Limited, a company incorporated in the
	British Virgin Islands with limited liability
“Great Center Action”	has the meaning as defined in the paragraph headed
	“Background of the Debt” under the section headed
	“Letter from the Board” in this circular
“Group”	the Company and its subsidiaries
“Hong Kong”	Hong Kong Special Administrative Region of the PRC

– 1 –

DEFINITIONS

“Independent Board Committee”	the independent board committee, comprising Mr. Wong
	Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr.
	Wu Guo Jian, being all the independent non-executive
	Directors, formed to advise the Independent Shareholders
	as to the fairness and reasonableness of the terms of the
	Assignment of Debt
“Independent Shareholders”	Shareholders other than Profit Harbour and its associates,
	if any
“Latest Practicable Date”	2 May 2006, being the latest practicable date prior to the
	printing of this circular for the purpose of ascertaining
	certain information contained in this circular
“Listing Rules”	the Rules Governing the Listing of Securities on the
	Stock Exchange
“PRC”	the People’s Republic of China
“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 Jialin, being the Chairman
	and an executive director of the Company. Profit Harbour
	is interested in 262,602,000 Shares, representing
	approximately 63.58% in the existing issued share capital
	of the Company as at the Latest Practicable Date
“Receivers”	has the meaning as defined in the paragraph headed
	“Background of the Debt” under the section headed
	“Letter from the Board” in this circular
“Rights Issue”	the issue of rights shares to be proposed by the Company
	to the Shareholders on the basis of two rights shares for
	every existing Share held on the relevant record date at
	HK$0.10 each
“SFC”	Securities and Futures Commission of Hong Kong
“SFO”	the Securities and Futures Ordinance, Chapter 571 of the
	Laws of Hong Kong

– 2 –

DEFINITIONS

“SGM”	the special general meeting of the Company to be
	convened and held at 20/F., Central Tower, 28 Queen’s
	Road, Central, Hong Kong, on 23 May 2006 at 6:00 p.m.
	(or at the soonest time thereafter as the Annual General
	Meeting 2006 of the Company convened on the same date
	and at the same place shall be concluded or adjourned) to
	consider, including but not limited to, approval of the
	Assignment of Debt, the notice of which is set out on
	pages 32 to 33 of this circular
“Share(s)”	ordinary share(s) of nominal value of HK$0.10 each in
	the share capital of the Company
“Shareholder(s)”	holder(s) of the Share(s)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“VC Capital”	VC Capital Limited, a licensed corporation to carry out
	types 1 (dealing in securities) and 6 (advising on
	corporate finance) regulated activities under the SFO
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“US$”	United States dollars, the lawful currency of the United
	States
“%”	per cent.

Unless otherwise specified in this circular, amounts denominated in US$ are converted for purpose of illustration into Hong Kong dollars at the rate of US$1.0 to HK$7.8.

– 3 –

LETTER FROM THE BOARD

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SHANGHAI MERCHANTS HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

(Stock Code: 1104)

Executive Directors: Mr. Yue Jialin (Chairman) Mr. Lau Yau Cheung (Chief Executive Officer)

Independent Non-executive Directors:

Mr. Wong Wing Kuen, Albert Mr. Tsui Robert Che Kwong Mr. Wu Guo Jian

Registered office: Clarendon House 2 Church Street Hamilton HM11 Bermuda

Head office and principle place of business in Hong Kong: Rooms 2808-10 28/F., Wing On House 71 Des Voeux Road Central Hong Kong

4 May 2006

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY AND

UPDATES IN RESPECT OF BUSINESSES OF THE GROUP

1. INTRODUCTION

The Directors announced in the announcement of the Company dated 12 April 2006 that the Company and Profit Harbour had entered into a deed of assignment, pursuant to which Profit Harbour has conditionally agreed to acquire from the Company, the Debt in full. The Assignment of Debt is conditional upon the approval of the relevant resolution of Assignment of Debt by the Independent Shareholders at the SGM. The total consideration of US$4.5 million, equivalent to approximately HK$35.1 million, will be paid by Profit Harbour in full by cash within three business days from the date when the condition of the deed of assignment

* For identification purpose only

– 4 –

LETTER FROM THE BOARD

is fulfilled. The Directors (including the independent non-executive Directors) consider the terms of the proposed Assignment of Debt are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Profit Harbour is the controlling shareholder of the Company. Accordingly, the Assignment of Debt constitutes both a connected transaction and a major transaction of the Company under the Listing Rules. The Assignment of Debt is therefore subject to Independent Shareholders’ approval, voting by way of poll at the SGM, under the Listing Rules.

Profit Harbour is interested in 262,602,000 Shares in and representing approximately 63.58% of the entire issued share capital of the Company, therefore Profit Harbour and its associates, if any, are required to abstain from voting at the SGM.

The Independent Board Committee has been formed to advise the Independent Shareholders as to the fairness and reasonableness of the terms of the Assignment of Debt, whether the transactions contemplated under are in the interests of the Company and the Independent Shareholders as a whole and to advise the Independent Shareholders how to vote on the ordinary resolution to be proposed at the SGM for approving the Assignment of Debt. The Company has appointed VC Capital as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Assignment of Debt.

The purpose of this circular is to provide you with, among other things, (i) further information on the Assignment of Debt; (ii) the letter from the Independent Board Committee to the Independent Shareholders containing its recommendations to the Independent Shareholders on the Assignment of Debt; (iii) the letter from VC Capital containing its advice to the Independent Board Committee and the Independent Shareholders on the Assignment of Debt; (iv) other general information of the Group; and (v) the notice of the SGM to consider and, if thought fit, approve the Assignment of Debt.

– 5 –

LETTER FROM THE BOARD

2. THE ASSIGNMENT OF DEBT

The deed of assignment

Date: 12 April 2006 Parties: The Company and Profit Harbour Assets to be assigned: Benefit of the Great Center Action up to the full amount of the debt of US$4.5 million, equivalent to approximately HK$35.1 million, due from Great Center to the Company Consideration: An amount of US$4.5 million, equivalent to approximately HK$35.1 million, being the face value of the Debt

Payment terms

The consideration will be paid in full by cash within three business days from the date when the condition of the Assignment of Debt set out below is fulfilled by means of a telegraphic transfer to an account designated by the Company with a licensed bank in Hong Kong or otherwise as instructed by the Company.

Basis of consideration

The consideration is determined after arm’s length negotiation between the Company and Profit Harbour, primarily based on the face value of the Debt.

Condition of the Assignment of Debt

The Assignment of Debt is conditional upon the approval by the Independent Shareholders at the SGM by way of poll of the Assignment of Debt.

Completion

Completion shall take place within three business days from the date when the condition of the Assignment of Debt set out above is satisfied. Thereafter, the Company shall not be required to bear any contingent liability or lien in relation to the consideration amount to be received by the Company upon completion of the Assignment of Debt.

– 6 –

LETTER FROM THE BOARD

3. BACKGROUND OF THE DEBT

Reference is made to the disclosure of litigation and contingent liabilities in the annual reports 2005 and 2004 of the Company.

After taking legal advice, the receivers of the Company, Mr. Alan Chung Wah Tang and Ms. Alison Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants (the “ Receivers ”), commenced legal proceedings on 2 July 2003 against Great Center for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank of Merchants (Hong Kong) Limited, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (the “ Great Center Action ”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained, on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing the assets of Great Center up to the value of US$4.5 million (the “ Injunction Order ”). The relevant bank, the lawyers of Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003, and on which date, the Injunction Order was continued until further order or final determination of the Great Center Action.

4. REASON FOR THE ASSIGNMENT OF DEBT

The Company and its legal adviser have been pursuing the settlement of the Debt for over 8 months. Having assessed the negotiation with Great Center over the past several months, the Board is of the view that the settlement of a substantial majority of the sum is highly probable. However, given the prolonged process of negotiation for the settlement, the Board is of the view that the Assignment of Debt at face value will allow the Company to expedite the recovery of the Debt so as to provide further financial flexibility for the Group’s operation.

Accordingly, the Board considers that the execution of the Assignment of Debt is inevitable and is in the best interests of the Company and its Shareholders as a whole.

5. USE OF PROCEEDS FROM THE ASSIGNMENT OF DEBT

As the Debt was recorded in face value (US$4.5 million, equivalent to approximately HK$35.1 million) in the financial statements of the Group as receivables, there will be no gain or loss as a result of completion of the Assignment of Debt save for the professional fees to be incurred relating to the Assignment of Debt of approximately HK$450,000. Accordingly, the Assignment of Debt will not have material impact on the assets and liabilities of the Group.

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, i.e. to secure new orders of fabric products from customers by increasing its purchase orders from the suppliers. As at the Latest Practicable Date, the Company did not have any investment plans except for the acquisition of a target which engages in the trading of electronic component business, the consideration of which will be satisfied by proposed issuance of convertible bonds by the Company. For details of the proposed Acquisition, please refer to the paragraph headed “Business outlook” below.

– 7 –

LETTER FROM THE BOARD

6. UPDATES IN RESPECT OF BUSINESSES OF THE GROUP

The Company is an investment holding company and its principal subsidiaries are engaged in trading, primarily in fabric products and other merchandises as well as base metals. The Group’s existing clients for fabric products are based in Hong Kong and Africa. As the Group was under receivership during the period from June 2003 to July 2004, its business operations were suspended during that time. The Directors were appointed to the Company as a result of a special general meeting held on 26 April 2004 and they took control of the Company in July 2004 upon the discharge of the receivers. After having taken control of the Company in July 2004, the Board immediately conducted a business and operational review of the Group and formulated strategies to revive the Company’s operations as well as to strengthen the overall business prospect of the Group. The Board has since re-established a customer and supplier network in support of the Group’s businesses. Further, leveraging on the extensive experience and business networks of the Directors, the Board has been exploring and exploiting other viable business opportunities to enhance the future business prospects of the Company. In September and December 2004 respectively, the Group resumed its fabric products and other merchandises trading and base metals trading businesses. The Company’s operation has experienced steady growth afterwards as shown in the paragraph headed “Financial summary of the Group” below.

As disclosed in the annual report 2005 of the Company, majority of the turnover for the year ended 31 December 2005 came from the trading in base metals sector. The turnover of the Group for the year ended 31 December 2005 was approximately HK$68.4 million, which showed an increase of approximately 207% from approximately HK$22.3 million of last year. Turnover of base metals accounted for approximately HK$44.9 million, which was approximately 65.7% of the total turnover in year 2005. The turnover for fabric products and other merchandises trading business segment was approximately HK$23.5 million for the year ended 31 December 2005, representing approximately 34.3% of the total turnover in year 2005. The Group recorded a net profit after tax of approximately HK$6.5 million for the current year, as compared to a loss of approximately HK$36.3 million in 2004.

Business outlook

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. On 19 April 2005, the Company entered into a heads of terms with the shareholders of an acquisition target in the PRC, which is engaged in the trading of electronic component business, to acquire their interests in the entire issued share capital of the target at a consideration of HK$4.5 million (the “ Acquisition ”), which will be settled by proposed issuance of convertible bonds by the Company. It is the present intention of the Company that the existing management of the target will form an integral part of the senior management of the Group following the Acquisition with a view to achieve operational and management efficiency of the target thereupon. The target is primarily engaged in the distribution of IC chips for set-top box, a reception device which receives and decodes the digital signal from either cable or satellite transmission. The target’s customers are located in Hong Kong and the PRC. The Board considers that the proposed Acquisition will keep the

– 8 –

LETTER FROM THE BOARD

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. As at the Latest Practicable Date, the Company was actively negotiating with the vendors to finalise the terms of the proposed Acquisition and the issue of convertible bonds, and will enter into formal agreement for the same as soon as possible.

Trading in fabric products and other merchandises

Leveraging on the extensive business networks of the controlling shareholder, directors and management of the Company, the Group plans to expand into other product categories and provide more value-added services including supply chain management, manufacturing sourcing and quality control, so as to increase its profit margin derived from the sales orders.

A major customer of the Group has indicated that it intends to increase its orders and to source high-end products, such as water-proof fabric from the Group. Another principal customer of the Group has also indicated to the Group its intention to source fabric from the Company for its US market, in addition to the existing orders for its African market. The Company is now in discussion with a potential customer, who intends to source bedding products from the Group, which the Directors consider will enhance the businesses of the Group. Based on the above and the substantial increase in turnover in 2005 of this business segment as detailed in the paragraph below, the Board is confident on the potential of this business segment and believes this will continue to be one of the principal components of the Group’s revenue going forward.

The Group’s turnover for fabric products and other merchandises trading business segment reached approximately HK$23.5 million for the year ended 31 December 2005 (2004: HK$8.8 million), an increase of approximately 167% over that of 2004. Segment profit attributable to the Group for the year ended 31 December 2005 amounted to approximately HK$966,000 (2004: HK$393,000), an increase of approximately 146% as compared with 2004. The Group’s management has been taking active actions to expand the operations under the constraints of available working capital.

Trading in base metals

The Group currently engages in base metals futures trading. The Group plans to focus mainly on the trading of copper pipes and sheeting for its physical base metals trading business. To enhance operational effectiveness, the Board has been actively searching for and has identified a candidate who has entrenched relationships with overseas suppliers and PRC clients to assist the Group in the execution of the Group’s physical base metals trading. The Group is negotiating with the candidate for the terms of the engagement and will finalise the relevant terms of engagement after resumption of trading in Shares.

Turnover for this sector for the year ended 31 December 2005 was approximately HK$44.9 million (2004: HK$13.5 million). A growth of approximately 232% was recorded as compared with last year. Following the resumption of the base metals trading business in 2004, the Group has scaled up its operation in this section in the year 2005. The base metals trading business segment contributed approximately HK$110,000 (2004: HK$121,000) to the Group’s operating profits which represented a drop of approximately 9%.

– 9 –

LETTER FROM THE BOARD

Financial summary of the Group

Set out below is a summary of the financial information of the Group as extracted from the annual reports 2005 and 2004 of the Company.

	For the year	For the year	For the year
	ended	ended	ended
	31 December	31 December	31 December
	2005	2004	2003
	(audited)	(audited)	(audited)
	HK$’000	HK$’000	HK$’000
Turnover	68,393	22,305	62,198
Net profit/(loss) after tax	6,501	(36,299)	(54,935)
Net asset value	21,881	15,380	51,679

Brief industry overview

Trading in fabric products and other merchandises

According to the latest data from the US Commerce Department, with China joining the WTO, China’s export of apparel products to the US has surged by 1,274% in the first three months of 2005 compared with the same period in 2004. A report from the World Trade Organization last year showed that China accounted for 12% of the US’s US$61 billion apparel market and could explode to 50% after the quota system is abolished. The European Union has experienced a similar trend in the first quarter of 2005.

Trading in base metals

According to the press release from International Copper Study Group (“ ICSG ”), an intergovernmental organization dedicated to copper industry, the global refined copper usage has been steadily on the rise from 1999 to 2004. The global usage reached about 16.4 million metric tons in 2004, a new high since the establishment of the ICSG. Asian countries showed particularly strong demand for copper as the rapid pace of China’s economy development propelled the import for copper. A report from China Mining has indicated that China’s refined copper usage accounted for 20% of the world’s total usage in 2004. The London Metal Exchange copper price increased about 73% from 1999 to 2004 and in the first quarter of 2005, the monthly average copper settlement price has further increased approximately 18%. The import of copper pipes by China has quintupled in 2004 and economists estimate China’s demand for copper will stay buoyant in the next five years while the manufacturing sector in China continues to surge in its dominance.

– 10 –

LETTER FROM THE BOARD

7. SGM

Set out on pages 32 to 33 of this circular is a notice convening the SGM of the Company to be held at 6:00 p.m. (or at the soonest time thereafter as the Annual General Meeting 2006 of the Company convened on the same date and at the same place shall be concluded or adjourned) on 23 May 2006 at 20/F., Central Tower, 28 Queen’s Road, Central, Hong Kong, whereat ordinary resolution will be proposed to approve the proposed Assignment of Debt.

The Independent Board Committee has been formed to advise the Independent Shareholders as to the fairness and reasonableness of the terms of the Assignment of Debt, whether transactions contemplated thereunder are in the interests of the Company and the Independent Shareholders as a whole and to advise the Independent Shareholders how to vote on the ordinary resolution to be proposed at the SGM for approving the Assignment of Debt. The Company has appointed VC Capital as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Assignment of Debts.

A form of proxy for use at the SGM is enclosed herewith. Whether or not you are able to attend and vote at the SGM, please complete the accompanying form of proxy, in accordance with the instructions printed thereon, and deposit the same at the office of the Company’s branch share registrar in Hong Kong, Secretaries Limited, at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as practicable and in any event not less than 48 hours before the time appointed for the holding of 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 adjournment thereof should you so wish.

– 11 –

LETTER FROM THE BOARD

8. PROCEDURES BY WHICH A POLL MAY BE DEMANDED AT GENERAL MEETING

Under the Bye-Laws, any resolution put to the vote at a general meeting of the Company shall be decided on a show of hands, unless voting by poll has been demanded before or on the declaration of the result of the show of hands or on the withdrawal of another demand for a poll to be taken.

Under the Bye-Laws, a poll may be properly demanded at a general meeting of the Company in one of the following manners:

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

9. RECOMMENDATION

VC Capital has been appointed as an independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Assignment of Debt. VC Capital considers that the Assignment of Debt is in the interests of the Company and the Independent Shareholders as a whole and its terms are fair and reasonable so far as the Independent Shareholders are concerned. The letter setting out the advice to the Independent Board Committee and the Independent Shareholders from VC Capital, containing the principal factors and reasons it has taken into consideration in arriving at its advice, is set out on pages 16 to 23 of this circular.

The Independent Board Committee, having taken into account the advice from VC Capital, considers the terms of the Assignment of Debt are fair and reasonable so far as the Independent Shareholders are concerned and the Assignment of Debt is in the interests of the Independent Shareholders and the Company as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favor of the ordinary resolution to be proposed at the SGM to approve the Assignment of Debt. The text of the letter of recommendation from the Independent Board Committee is set out on pages 14 to 15 of this circular.

– 12 –

LETTER FROM THE BOARD

10. FURTHER INFORMATION

Your attention is drawn to the letter of advice from VC Capital, which contains its advice to the Independent Board Committee and the Independent Shareholders in relation to the Assignment of Debt, and the letter from the Independent Board Committee setting out its recommendations to the Independent Shareholders in relation to the Assignment of Debt as contained in this circular. Your attention is also drawn to the general information as set out in the appendix to this circular.

The issue of this circular does not necessarily indicate that the Shares will be resumed for trading, which is subject to several conditions precedent. The resumption for trading in the Shares may or may not occur.

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

– 13 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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SHANGHAI MERCHANTS HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

(Stock Code: 1104)

4 May 2006

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY

Reference is made to the circular dated 4 May 2006 of the Company to the Shareholders, of which, this letter forms a part (the “ Circular ”). Capitalized terms used herein shall have the same meanings as defined in the Circular unless the context requires otherwise.

We have been appointed by the Board as members of the Independent Board Committee to advise you in respect of the proposed Assignment of Debt, the detailed terms of which is set out on pages 4 to 13 of the Circular, as to whether the terms are fair and reasonable so far as the Independent Shareholders are concerned and it is in the interests of the Company and the Independent Shareholders as a whole and how should the Independent Shareholders vote on the resolution approving the same at the SGM.

We wish to draw your attention to the “Letter from the Board” as set out on pages 4 to 13 of the Circular and the letter of advice set out on pages 16 to 23 of the Circular from VC Capital, who has been appointed to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the proposed Assignment of Debt are fair and reasonable so far as the Independent Shareholders are concerned and the Assignment of Debt is in the interests of the Company and the Independent Shareholders as a whole and how should the Independent Shareholders vote on the resolution approving the proposed Assignment of Debt.

* For identification purpose only

– 14 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having examined the terms of the proposed Assignment of Debt and taken into account recommendation from VC Capital and reasons and factors VC Capital has considered in arriving at its opinion, we consider that the terms of the proposed Assignment of Debt are fair and reasonable so far as the Independent Shareholders are concerned and it is in the interests of the Company and the Independent Shareholders as a whole.

Therefore, we recommend the Independent Shareholders to vote in favor of the ordinary resolution to be proposed at the SGM to approve the proposed Assignment of Debt.

Yours faithfully,

Independent Board Committee of Shanghai Merchants Holdings Limited Wong Wing Kuen, Albert Tsui Robert Che Kwong

Wu Guo Jian

Independent Non-executive Directors

– 15 –

LETTER OF ADVICE FROM VC CAPITAL

The following is the full text of the letter of advice from VC Capital dated 4 May 2006 setting out its advice to the Independent Board Committee and the Independent Shareholders.

( A M e m b e r o f M e l c o G r o u p )

4 May 2006

The Independent Board Committee and the Independent Shareholders of Shanghai Merchants Holdings Limited Room 2808-10 28th Floor, Wing On House 71 Des Voeux Road Central Hong Kong

Dear Sirs and Madams,

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the proposed Assignment of Debt, details of which are set out in this circular. Capitalised terms used in this letter of advice shall have the same meaning as defined in the circular unless the context requires otherwise.

On 12 April 2006, the Company and Profit Harbour entered into a deed of assignment, pursuant to which Profit Harbour has conditionally agreed to acquire from the Company, the Debt amounted to US$4.5 million, equivalent to approximately HK$35.1 million, in full. As Profit Harbour is the controlling Shareholder holding 262,602,000 Shares in the Company, representing approximately 63.58% of the entire issued share capital of the Company, the Assignment of Debt constitutes a connected transaction of the Company under the Listing Rules. In addition, the Assignment of Debt constitutes a major transaction of the Company under the Listing Rules. Therefore, the Assignment of Debt is subject to Independent Shareholders’ approval, voting by way of poll at the SGM, under the Listing Rules. Profit Harbour and its associates will abstain from voting on the resolution for the approval of the Assignment of Debt.

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LETTER OF ADVICE FROM VC CAPITAL

The Independent Board Committee, comprising three independent non-executive Directors namely Mr. Wong Wing Kuen, Albert, Mr. Tsui Robert Che Kwong and Mr. Wu Guo Jian, has been formed to advise the Independent Shareholders as to whether the terms in respect of the Assignment of Debt are fair and reasonable so far as the Independent Shareholders are concerned and the Assignment of Debt is in the interest of the Company and the Independent Shareholders as a whole.

BASIS OF OUR ADVICE

In arriving at our opinion, advice and recommendation, we have relied on the accuracy of the information contained in this circular and information, opinion and representations supplied and expressed to us by the Directors and the management of the Company. We have assumed that the information contained and representations made to us or referred to in this circular are true, accurate and complete at the time when they were made and continue to be so as at the date of this circular. We consider that we have been provided sufficient information to reach an informed view, to justify relying on the accuracy of the information contained in this circular and to provide a reasonable basis for our opinion.

We have reviewed, amongst other things, the deed of assignment dated 12 April 2006 entered into between the Company and Profit Harbour, the published information of the Company including, amongst others, the annual reports for the two financial years ended 31 December 2005 and other information provided by the Company such as the legal opinion issued by the Company’s legal advisers to the Company dated 14 January 2005. Based on our review on the said legal opinion, we are not aware of anything which we consider it should be brought to the attention of the Shareholders.

We consider that we have reviewed sufficient information, to reach an informed view, to justify reliance on the accuracy of the information in this circular and to provide a reasonable basis of our recommendation. We have no reason to suspect that any material facts have been omitted or withheld from the information contained or opinions expressed in this circular nor or doubt the truth, accuracy and completeness of the information and representations provided to us by the Company. We have not, however, conducted an independent verification of the information provided by the Directors and the management of the Company nor have we carried out any independent investigation into the business and affairs of the Company or any of its respective subsidiaries or associates.

PRINCIPAL FACTORS CONSIDERED

In order to assess whether the terms of the Assignment of Debt are fair and reasonable so far as the Independent Shareholders are concerned and the Assignment of Debt is in the interests of the Company and the Independent Shareholders as a whole, we have considered the following principal factors and reasons:

Background of the Group

The Group, through its subsidiaries, is principally engaged in trading, primarily in fabric products and other merchandises as well as base metals. Trading in the Shares on the Stock Exchange has been suspended since June 2003.

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LETTER OF ADVICE FROM VC CAPITAL

Financial highlights of the Group

For the year ended 31 December 2004

Turnover of the Group for the year ended 31 December 2004 was approximately HK$22.3 million, representing a decrease of approximately 64.1% as compared with that for the year ended 31 December 2003. The reason for the substantial decrease in turnover is that the Group was under receivership during the period from June 2003 to July 2004 and therefore its business operations were suspended during the period from January 2004 to July 2004. The Group resumed its fabric products and other merchandises trading business and base metals trading business in September and December 2004 respectively. Loss attributable to Shareholders for the year ended 31 December 2004 was amounted to approximately HK$36.3 million, representing a decrease of approximately 33.9% as compared to that for the year ended 31 December 2003.

The net working capital of the Group decreased from approximately HK$27.8 million as at 31 December 2003 to approximately HK$15.4 million as at 31 December 2004, representing a decrease of approximately 44.7%. The decrease in the net working capital was resulted from the decrease in the bank balance and cash from approximately HK$16.8 million to approximately HK$6.9 million. The trade and other receivables balance as at 31 December 2004 was approximately HK$42.6 million which included the amount of US$4.5 million (approximately HK$35.1 million) receivable from Great Center.

As at 31 December 2004, the Group had a cash and bank balances of approximately HK$6.9 million, representing a decrease of approximately 58.8% from approximately HK$16.8 million as of 31 December 2003. Also, the Group recorded a net cash outflow amounted to approximately HK$24.9 million from its operating activities and investing activities for the year ended 31 December 2004.

For the year ended 31 December 2005

The Group recorded a turnover amounted to approximately HK$68.4 million for the year ended 31 December 2005, representing an increase of approximately 206.6% as compared with that for the year ended 31 December 2004. The reason for the substantial increase in turnover is mainly due to the reviving business operations of the Group in 2005 after the resumption of business operations in the second half of 2004. Profit attributable to the Shareholders for the year ended 31 December 2005 was amounted to approximately HK$6.5 million as compared with the loss for the year ended 31 December 2004 amounted to approximately HK$36.3 million. Such profit was mainly attributable to the credit arising from a scheme of arrangement with creditors, amounting to approximately HK$15.4 million. The scheme of arrangement was undertaken by a Hong Kong incorporated subsidiary of the Company, namely Merchants (Hong Kong) Limited, pursuant to which Merchants (Hong Kong) Limited had on 28 February 2005 through a court sanctioned meeting obtained the approval of its creditors present thereat. The scheme was duly confirmed by the High Court on 19 April 2005, with the relevant order duly filed with the Registrar of Companies on the same date. After deducting the credit arising from a scheme of arrangement with creditors from the profit for the year ended 31 December 2005, the Group recorded a net loss of approximately HK$8.9 million for the year ended 31 December 2005.

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LETTER OF ADVICE FROM VC CAPITAL

The net working capital of the Group increased from approximately HK$15.4 million as at 31 December 2004 to approximately HK$21.9 million as at 31 December 2005, representing an increase of approximately 42.5%. The increase in the net working capital is mainly due to the decrease in trade and other payables from approximately HK$27.1 million as at 31 December 2004 to approximately HK$6.1 million as at 31 December 2005, resulting from the repayment of other payables during the year.

The Group had a cash and bank balances of approximately HK$1.5 million as at 31 December 2005, representing a decrease of 78.9% from approximately HK$6.9 million as of 31 December 2004. The decrease in the cash and bank balances is mainly due to the repayment of other payables during the year. During the year ended 31 December 2005, the Group repaid the short-term loan of HK$15 million, which was secured by floating charges over trade and other receivables, cash and bank balances as well as the Company’s interest in its subsidiaries, borne an interest of 12% per annum and was repayable within one year from 31 December 2004, and obtained a new short-term loan amounted to HK$15 million from a financial institution, which is secured by floating charges over trade and other receivables, cash and bank balances as well as the Company’s interests in its subsidiaries, bear interest at Hong Kong Prime Rate plus 5% per annum and is repayable on 30 October 2006.

Notwithstanding that business operations have been resumed, in view of the sluggish cash position as demonstrated by the declining cash and bank balances during the two financial years ended 31 December 2005 as stated above and the loss-making position (without taking into account the credit arising from the scheme of arrangement with creditors) of the Group, we are of the view that the Group is in need of additional cash to finance is business operations. Details in relation to the utilisation of proceeds from the Assignment of Debt is set out under the paragraph headed “Reasons for and benefits of the Assignment of Debt”.

Background of the Debt

Reference should be made to the section headed “Background of the Debt” as set out in the letter from the Board on page 7 of this circular.

As noted from the Company 2004 and 2005 annual reports, the Group was under receivership during the period from June 2003 to July 2004. Having obtained the legal advice, the then receivers of the Company, Mr. Alan Chung Wah Tang and Ms. Alision Wong Lee Fung Ying, both from Grant Thornton, Certified Public Accountants, commenced legal proceedings on 2 July 2003 against Great Center for the repayment of two sums totaling US$4.5 million (or approximately HK$35.1 million), remitted on or about 21 May 2003 with no apparent justification, from the bank account of Merchants (Hong Kong) Limited, a wholly-owned subsidiary of the Company, to a bank account maintained in the name of Great Center, and interest thereon, damages and costs of the legal proceedings (the “Great Center Action”). In order to prevent the dissipation of Great Center’s assets, an injunction order was applied for, and successfully obtained, on 30 June 2003, from the High Court to restrict Great Center from, inter alia, disposing of or otherwise dealing with or diminishing the assets of Great Center up to the value of US$4.5 million (the “Injunction Order”). The relevant bank, the lawyers of

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LETTER OF ADVICE FROM VC CAPITAL

Great Center and other relevant persons have been notified of the Injunction Order. The Injunction Order remained valid up to and including 11 July 2003, and on which date, the Injunction Order was continued until further order or final determination of the Great Center Action. The Injunction Order remains valid as at the Latest Practicable Date and will so continue in force unless otherwise discharged by the court.

Reasons for and benefits of the Assignment of Debt

As mentioned in the section headed “Background of the Debt”, the Group was under receivership during the period from June 2003 to July 2004 and the then receivers of the Company commenced legal proceedings on 2 July 2003 against Great Center for the repayment of the Debt amounted US$4.5 million. Negotiations were conducted between the legal advisers of the Company and solicitors representing Great Center. The Company’s legal advisers have advised that Great Center has indicated in many occasions that they are willing to settle the claim without further litigation. The Company’s legal advisers also noted that Great Center has not filed any witness statement with the court up to the Latest Practicable Date, which is also a strong indication that they are prepared to settle the claim as opposed to further proceedings. Accordingly, the Board is of the view that the settlement of a substantial majority of the sum is highly probable. However, given the prolonged process of negotiation for the settlement and the default risk resulting from the uncertainty in the result of the legal proceedings against Great Center, the Board is of the view that the Assignment of Debt at face value will allow the Company to expedite the recovery of the Debt.

As mentioned in the subsection headed “Financial highlights of the Group” under the section headed “Background of the Group” above, the Group is in need of additional cash to finance its business operations. It is contemplated by the Company that the proceeds from the Assignment of Debt will be used mainly as the working capital to finance its fabric products trading business of the Group. As stated in the “Letter from the Board”, the Company did not have any investment plans as at the Latest Practicable Date except for the acquisition of a target which engages in the trading of electronic component business, the consideration of which will be satisfied by proposed issuance of convertible bonds by the Company. The Directors consider that the proceeds generated from the Assignment of Debt will further strengthen the cash position of the Group to finance its fabric products trading business. In addition, the Directors consider that the Assignment of the Debt would result in the immediate recovery of the Debt. Notwithstanding that the Board and the Company’s legal advisers are optimistic in claiming a substantial portion of the Debt through proceeding legal actions against Great Center, in the event that the final judgement of the Court is against the Company, the Company would receive nothing but have to bear all the legal expenses. Even if the Court’s judgement is in favour of the Company, since Great Center has been put under liquidation since November 2003, there is no assurance that the Group would be able to receive the full amount (i.e. US$4.5 million) and interest thereon, damages and costs of the legal proceedings as claimed by the Company in the Great Center Action. We noted that the Injunction Order has been granted to the Company and the bank account of Great Center has been frozen. As discussed with the legal advisors of the Company, it is highly possible that the Group may not be able to receive the full amount of claims given the fact that the legal costs for both parties in relation to the

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LETTER OF ADVICE FROM VC CAPITAL

litigation would be deducted therefrom. Up to the Latest Practicable Date, the Group has not received any interest payment from Great Center on the Debt. Moreover, it is inevitable to incur additional legal costs in the event that the Company continue with the legal proceedings. Through the Assignment of Debt, the Group will also be discharged from incurring additional legal costs to proceed with the litigation against Great Center. The Group would be able to reserve more time and resources to refocus its efforts on the development of the Company’s business operations and to seek for profitable business opportunities. Without incurring additional costs for further proceeding negotiations with or legal actions against Great Center while the Debt can be fully and immediately recovered, the Directors consider the Assignment of Debt would be an amicable and cost-effective way to recover the Debt. Accordingly, the Group would be able to redeploy more efforts and resources to increase the Shareholders’ value.

We have reviewed the deed of assignment dated 12 April 2006 entered into between the Company and Profit Harbour. Based on our discussions with the legal advisers and the auditor of the Company and the confirmation sought from the Company, so far as we are aware, no lien, charge or contingent liability will remain in respect of the Debt (being the benefit of the Great Center Action up to the full amount of US$4.5 million) on the part of the Company after completion of the deed for the Assignment of Debt. There is no provision under the deed which would otherwise subject the Debt to any lien, charge or contingent liability on the part of the Company upon completion of the Assignment of Debt. As confirmed with the Company, no provision will be made to the cash item of approximately HK$35.1 million (before deducting expenses) generated pursuant to completion of the Assignment of Debt, prior to which the same amount exists as a receivable recorded under the Group’s balance sheet. As the Debt has been recorded in face value (US$4.5 million, equivalent to approximately HK$35.1 million) in the financial statements of the Group as receivables and the Assignment of Debt is without recourse, the management of the Company considers that no provision will be made to the cash item of approximately HK$35.1 million.

Based on the above-mentioned merits of the Assignment of Debt, we consider that the execution of the Assignment of Debt is in the best interests of the Company and the Independent Shareholders as a whole.

Payment terms and consideration of the Assignment of Debt

Pursuant to the deed of assignment entered into between the Company and Profit Harbour on 12 April 2006, the Company has agreed to assign the Debt in the sum of US$4.5 million, equivalent to approximately HK$35.1 million, owed to it by Great Center in full. The consideration will be paid in full by Profit Harbour to the Company in cash within three business days from the day when the condition of the Assignment of Debt as set out in the section headed “the Assignment of Debt” in the letter from the Board on page 6 of this circular is fulfilled.

Given that the prolonged process of negotiation for the settlement of Debt over the past 8 months and the default risk resulting from the uncertainty in the result of the legal proceedings against Great Center, the Directors are of the view that the Company should reach

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LETTER OF ADVICE FROM VC CAPITAL

the immediate settlement of Debt. As the consideration will be paid in full by Profit Harbour to the Company in cash within three business days from completion of the Assignment of Debt, the Directors consider that the Assignment of Debt would facilitate an instant recovery of the Debt without spending time on further negotiations and therefore are of the view that the payment terms of the Assignment of Debt are fair and reasonable and to the interest of the Independent Shareholders as a whole. In addition, the consideration is equivalent to the face value of the outstanding debts owed by Great Center to the Company of approximately HK$35.1 million and therefore, the Directors consider that the consideration represents full recovery of the Debt and the Assignment of Debt is fair and reasonable and to the interest of the Independent Shareholders as a whole.

In view of the facts that (i) the prompt payment by Profit Harbour to the Company under the Assignment of Debt; and (ii) the consideration represents the full recovery of the Debt, we consider that the payment terms and the consideration of the Assignment of Debt are fair and reasonable and to the interest of the Independent Shareholders as a whole so far as the Independent Shareholders are concerned.

Financial effects of the Assignment of Debt

(a) Earnings

The audited profit attributable to the Shareholders for the year ended 31 December 2005 was approximately HK$6.5 million.

As the consideration of the Assignment of Debt is equivalent to the face value of the Debt (i.e. US$4.5 million), which is recorded in the financial statement of the Group as receivables, there will be no gain or loss as a result of the Assignment of Debt. Accordingly, the Assignment of Debt is not expected to have any significant impact on the Group’s earnings.

(b) Net asset value

The audited net asset value of the Group as at 31 December 2005 was approximately HK$21.9 million. As discussed under the paragraph headed “Earnings” above, the Group will not incur any profit or loss due to the Assignment of Debt save for the expenses to be incurred relating to the Assignment of Debt of approximately HK$450,000. Consequently, there will be no material impact on the net asset value of the Group.

(c) Liquidity and cash position

As at 31 December 2005, the Group had the cash and bank balances of approximately HK$1.5 million and pledged deposits of approximately HK$4 million. Based on our review on the bank statements of the Company as at 31 March 2006, we have noted that there has been no material difference in the cash and bank balances of the Company since 31 December 2005. Upon completion of the Assignment of Debt, the cash and bank balances of the Group, after taken into account the expenses to be incurred in relation to the Assignment of Debt of approximately HK$450,000, would increase by approximately HK$34.7 million and the Group’s liquidity and cash position would be substantially improved.

Based on the foregoing, we are of the view that the Assignment of Debt would have no material adverse financial impact on the Group’s earnings and net asset value while would substantially improve the liquidity and cash position of the Group.

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LETTER OF ADVICE FROM VC CAPITAL

CONCLUSION AND RECOMMENDATION

Having considered the factors and reasons stated above, in particular,

(i) the Assignment of Debt at face value will provide an opportunity for the Group to expedite the recovery of the Debt given the prolonged process of negotiation for the settlement of Debt and the default risk resulting from the uncertainty in the result of the legal proceedings against Great Center;
(ii) the proceeds generated from the Assignment of Debt will further strengthen the cash position of the Group to finance its fabric products trading business;
(iii) the Assignment of Debt would result in the immediate recovery of the Debt, enabling the Group to discharge from incurring additional legal costs to proceed with the litigation against Great Center; therefore, the Group would be able to redeploy more efforts and resources to increase the Independent Shareholders’ value;
(iv) the payment terms and consideration of the Assignment of Debt are fair and reasonable and to the interest of the Shareholders as a whole; and
(v) the Assignment of Debt would have no material adverse financial impact on the Group’s earnings and net asset value while would substantially improve the liquidity and cash position of the Group,

we are of the opinion that the Assignment of Debt is in the interests of the Independent Shareholders and the Company as a whole and its terms are fair and reasonable so far as the Independent Shareholders are concerned.

In light of the above, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolution(s) in relation to the Assignment of Debt, which will be proposed at the SGM.

Yours faithfully, For and on behalf of VC Capital Limited

Philip Chau

Keith Lou

Managing Director Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group.

The Directors collectively and individually accept the 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.

2. SHARE CAPITAL

The authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:

Authorised 1,000,000,000 Shares as at the Latest Practicable Date Issued and fully paid or credited as fully paid 413,000,000 Shares as at the Latest Practicable Date	HK$ 100,000,000

	HK$ 41,300,000

As at the Latest Practicable Date, the Company had no other derivatives, options, warrants and conversion rights on the similar rights which are convertible or exchangeable into Shares.

As at the Latest Practicable Date, all the Shares in issue ranked equally in all respects among themselves and in all respects, including but not limited to the right to receive all dividends, distributions or entitlements declared, paid or made, among the Shares.

The issued Shares are listed on the Stock Exchange. No part of the securities of the Company is listed or dealt in, nor is listing or permission to deal in the securities of the Company being or proposed to be sought, on any other stock exchange.

3. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

The Group is principally engaged in investment holding, trading in base metals, and trading in fabric products and other merchandises.

With a view to expanding the Group’s business operations and enhancing its financial performance, the Group and its controlling shareholder, Profit Harbour, entered into a deed of assignment on 12 April 2006, pursuant to which Profit Harbour has conditionally agree to acquire from the Group its receivable due from Great Center of US$4.5 million (approximately

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GENERAL INFORMATION

APPENDIX

HK$35.1 million) in full at its face value. The Assignment of Debt is conditional upon the approval by the Independent Shareholders at the SGM to be held on 23 May 2006.

As stated in the latest annual report 2005 of the Company, the Company proposed to raise approximately HK$82.6 million before expenses by way of the Rights Issue. The proposed Rights Issue can provide additional working capital and financial flexibility to the existing business operation of the Company.

During the year ended 31 December 2005, the Company entered into a heads of terms with the shareholders of an acquisition target in the PRC, which is engaged in the trading of electronic component business, to acquire their interests in the entire issue share capital of the target at a consideration which will be settled by issuance of convertible bonds by the Company. The target is primarily engaged in the distribution of IC chips for set-top box, a reception device which receives and decodes the digital signal from either cable or satellite transmission. The target’s customers are located in Hong Kong and the PRC. The Board considers that the proposed acquisition will 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.

As at the Latest Practicable Date, no material investment nor acquisition opportunities have been identified yet other than the Acquisition. For further details of the prospects of the Group, please refer to the sub-paragraph headed “Business outlook” under the paragraph headed “Updates in respect of businesses of the Group” in the section headed “Letter from the Board” in this circular.

To the best knowledge of the Directors, there are no material information which may be relevant to the financial and trading prospects of the Group, including all special trade factors or risks which are not mentioned elsewhere in this circular and which are unlikely to be known or anticipated by the general public, and which could materially affect the profits.

4. SUFFICIENCY IN WORKING CAPITAL

The Directors are of the opinion that upon the completion of Assignment of Debt and based on available banking and other facilities and internal resources of the Group, the Group has sufficient working capital for its requirements, currently and the period ending 12 months from the date of this circular.

5. STATEMENT OF INDEBTEDNESS

As at the close of business on 31 March 2006, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding total borrowings of approximately HK$17 million, comprising a term loan of HK$15 million and trust receipt loans of approximately HK$2 million.

Term loan are secured by floating charge over the undertaking, property and assets of the Company and one of its subsidiaries. Trust receipt loans are secured by bank deposits of the Group. All borrowings are repayable within one year.

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APPENDIX

GENERAL INFORMATION

Save as aforesaid or as otherwise disclosed herein, and apart from intra-Group liabilities, at the close of business on 31 March 2006, the Group did not have any debt securities issued and outstanding, or authorised or otherwise created but unissued, any term loans (secured, unsecured, guarantee or not), any other borrowings or indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptances (other than normal trade bills) or acceptance credits or hire purchase commitments (whether secured or unsecured, guarantee or not), any mortgages or charges, or other material contingent liabilities or guarantee.

The Directors confirm that, save for the repayment of trust receipt loans of approximately HK$2 million, there is no material change in indebtedness and contingent liabilities of the Group since 31 March 2006 up to and including the Latest Practicable Date.

6. DISCLOSURE OF INTEREST BY DIRECTORS

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the Shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by the Directors of the Listed Companies contained in the Listing Rules, were as follows:

(a) Shares

	No. of
	ordinary		% of issues
Name of Director	shares	Capacity and nature	share capital
Yue Jialin	262,602,000	Interest of controlled	63.58%
		Corporation in
		262,602,000 shares
		(Note)

Note: These shares are registered in the name of, and beneficially owned by Profit Harbour.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors nor the chief executive of the Company had or was deemed to have any interests or short positions in the Shares, underlying shares or debentures of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) which (i) were required 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 were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein; or (iii) were

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GENERAL INFORMATION

APPENDIX

required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Companies contained in the Listing Rules.

(b) Interests in competing businesses

As at the Latest Practicable Date, none of the Directors nor their respective associates had any business which competes or is likely to compete, either directly or indirectly, with any business of the Group.

(c) Interests in assets of the Group

As at the Latest Practicable Date, save for the Assignment of Debt which Mr. Yu Jialin (being the Chairman and an executive Director) is indirectly interested in as a result of its shareholding in Profit Harbour, full particulars as disclosed in this circular, none of the Directors had any direct or indirect interests in any assets which have been acquired or disposed or by, or leased to, or which are proposed to be acquired or disposed of by or leased to, the Company or any of its subsidiaries since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

(d) Interests in contracts of the Company

None of the Directors is materially interested in any contract or arrangement subsisting as at the Latest Practicable Date which is significant in relation to the business of the Group.

7. DISCLOSURE OF INTERESTS BY SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to the Directors and chief executive of the Company, the following persons (not being Directors or chief executives of the Company) had, or were deemed to have, interests or short positions in the Shares and underlying shares of the Company which would fall to be disclosed to the Company or the Stock Exchange 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 member of the Group or had an option in respect of such capital were as follows:

		Number of	% of total
Name	of shareholders	shares held	issued shares
Profit	Harbour	262,602,000	63.58%
Note:	The entire issued capital of Profit Harbour is owned by Mr. Yue Jialin.

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APPENDIX

GENERAL INFORMATION

Save as disclosed above, as at the Latest Practicable Date, the Directors and chief executive of the Company were not aware of any other persons (other than Directors or chief executives of the Company) had, or were deemed to have, interests or short positions in the Shares and underlying shares (including any interests in options in respect of such capital), which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of part XV of the SFO, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or had any option in respect of such capital.

8. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors have any existing or proposed services contract with any members of the Group excluding contracts expiring or determinable by the employer within one year without payment of compensations other than statutory compensation.

9. MATERIAL LITIGATIONS

As at the Latest Practicable Date, so far as the Directors are aware, the following are the only litigations or claims of material importance which have been pending or threatened against any member of the Group:

The Great Center Action, the particulars of which are as disclosed in the paragraph headed “Background of the Debt” under the section headed “Letter from the Board” on page 7 of this circular;
Further on 10 July 2004, the Company had issued a revised writ of summons in relation to the Great Center Action amending its original claim to include claims for the amounts of HK$12.8 million and HK$22.0 million, together with interest thereon, damages and costs of the legal proceedings. Including the US$4.5 million initially claimed under the Great Center Action, the sum of claims under the amended writ amounted to approximately HK$69.9 million; and
On 23 August, 2003 the Receivers commenced legal proceedings against Win Victory Holdings Limited (“ Win Victory ”), a company incorporated in Hong Kong, for the repayment of a sum of HK$37.0 million, together with interest thereon, damages and costs of the legal proceedings. Further, the Receivers, on behalf of the Company, petitioned for the winding-up of Win Victory on the grounds, inter alia, that Win Victory is unable to pay its debts and provisional liquidators were appointed. Due to the lack of funds in Win Victory, the provisional liquidators have not undertaken an extensive investigation and have recently made an application to the court for the discharge of their appointment and their application is fixed to be heard on 20 April 2006. The continuation of the winding-up petition was to enable a more thorough investigation of the flow of funds in and out of Win Victory. In

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APPENDIX

GENERAL INFORMATION

view of the application by the provisional liquidators, the official receiver made an application to restore the winding-up petition, which has been adjourned to 24 April 2006 for hearing. The court had on the hearing of 24 April 2006 ordered that Win Victory be wound-up on the petition of the Company.

The Directors are of the opinion that the above litigations or claims would have no material impact on the operations of the Group.

As at the Latest Practicable Date and save for those disclosed above, no member of the Group was engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened against any member of the Group.

10. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company or any of its subsidiaries within the two years immediately preceding the date of this circular and are or may be material:

(i) the loan agreement and the supplemental loan agreement dated 30 August 2004 and 22 November 2004 respectively entered into between the lender, being an independent third party and qualified money lender under the Money Lenders Ordinance, and the Company, pursuant to which the lender had agreed to provide to the Company a six months term loan facility commencing from the drawdown date on 30 August 2004, for an amount of HK$5,000,000.00 at the interest rate of 1% per month payable monthly in arrears, and such loan facility were subsequently increased to HK$15,000,000.00 pursuant to the supplemental loan agreement commencing from the drawdown of such increased sum on 22 November 2004; and
(ii) The deed of assignment dated 12 April 2006 in relation to the Assignment of Debt.

11. MATERIAL ADVERSE CHANGE IN THE FINANCIAL OR TRADING POSITION

As at the Latest Practicable Date, the Directors were not aware of any circumstances or events which may give rise to material adverse change in the financial or trading position of the Group since 31 December 2005, being the date to which the latest published audited consolidated financial statements of the Company were made up.

– 29 –

GENERAL INFORMATION

APPENDIX

12. EXPERT AND CONSENT

The following is the qualifications of the expert who has given opinions or advice which are contained in this circular:

Name

Qualification

VC Capital

a licensed corporation to carry out type 1 (dealing in securities) and 6 (advising on corporate finance) regulated activities under the SFO

VC Capital has given and not withdrawn its written consent to the issue of this circular with the inclusion of its letter dated 4 May 2006 for incorporation in this circular and reference to its name in the form and context in which it appears.

13. EXPERT’S INTEREST IN ASSETS

As at the Latest Practicable Date, VC Capital did not have any shareholding interest in any member of the Group nor the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any member of the Group.

As at the Latest Practicable Date, VC Capital did not have any direct or indirect interests in any assets which had since 31 December 2005 (being the date to which the latest published audited consolidated financial statements of the Company were made up) been acquired or disposed of to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group.

14. MISCELLANEOUS

(a) The company secretary and the qualified accountant of the Company as appointed pursuant to Rule 3.24 of the Listing Rules is Mr. Ng Kwok Ping. Mr. Ng Kwok Ping is a qualified accountant and member of the Hong Kong Institute of Certificate Public Accounts.
(b) The Company’s Hong Kong share registrar is Secretaries Limited, 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(c) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda and principal place of business of the Company is at Rooms 2808-10, 28/F., Wing On House, 71 Des Voeux Road, Central, Hong Kong.
(d) The English text of this circular shall prevail over the Chinese text.

– 30 –

GENERAL INFORMATION

APPENDIX

15. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection during normal business hours at the head office of the Company at Rooms 2808-10, 28/F., Wing On House, 71 Des Voeux Road, Central, Hong Kong from the date of this circular up to and including 23 May 2006 and at the SGM:

(a) the memorandum of association and Bye-Laws of the Company;
(b) the material contracts referred to under the paragraph headed “Material contracts” in this appendix;
(c) the annual reports of the Company for the two financial years ended 31 December 2005;
(d) the letter from the Independent Board Committee to the Independent Shareholders, the context of which is set out on pages 14 to 15 to this circular;
(e) the letter of advice from VC Capital to the Independent Board Committee and the Independent Shareholders, the context of which is set out on pages 16 to 23 to this circular;
(f) the consent letter from VC Capital referred to in the paragraph headed “Expert and consent” in this appendix; and
(g) this circular.

– 31 –

NOTICE OF SGM

==> picture [51 x 57] intentionally omitted <==

SHANGHAI MERCHANTS HOLDINGS LIMITED

(incorporated in Bermuda with limited liability)

(Stock Code: 1104)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the special general meeting (the “Meeting”) of Shanghai Merchants Holdings Limited (the “Company”) will be held at 20th Floor, Central Tower, 28 Queen’s Road, Central, Hong Kong on Tuesday, 23 May 2006 at 6:00 p.m. (or at the soonest time thereafter as the Annual General Meeting 2006 of the Company convened on the same date and at the same place shall be concluded or adjourned) for the purpose of considering and, if thought fit, passing, with or without modifications, the following as an ordinary resolution of the Company:

ORDINARY RESOLUTION

“ THAT the Assignment of Debt (as defined in the circular of the Company dated 4 May 2006 (the “Circular”)) on the terms and subject to the conditions set out in the deed of assignment dated 12 April 2006, a copy of which has been produced to this meeting, and the transactions contemplated thereunder be approved, confirmed and ratified and that any one director of the Company or any other person authorized by the board of directors of the Company from time to time be authorized to execute all documents and to perform all acts for implementation of the same.”

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

Hong Kong, 4 May, 2006

Registered office: Head office and principal place Clarendon House of business in Hong Kong: 2 Church Street Rooms 2808-10, 28/F., Hamilton HM11 Wing On House Bermuda 71 Des Voeux Road Central Hong Kong

* For identification purpose only

– 32 –

NOTICE OF SGM

Notes:

(1) Any member of the Company entitled to attend and vote at the meeting is entitled to appoint another person as his proxy to attend and vote instead of him. A proxy need not be a member of the Company. A member who is the holder of two or more shares of the Company may appoint more than one proxy to represent him to attend and vote on his behalf.
(2) A form of proxy for use in connection with the special general meeting is enclosed with this circular. To be valid, the form of proxy, together with the power of attorney or other authority (if any) under which it is signed or a certified copy of that power of attorney or authority must be deposited at the branch share registrars of the Company in Hong Kong, Secretaries Limited, 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof.
(3) Since the Assignment of Debt will constitute connected transaction for the Company under Chapter 14A of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Long Limited (the “Listing Rules”), the resolution proposed at the meeting will be voted on a poll pursuant to Rule 13.39(4) of the Listing Rules.

– 33 –

AI assistant

Persistence Gold Group Ltd — Proxy Solicitation & Information Statement 2006

50623_rns_2006-05-04_997fad64-a023-4149-a517-04ed4d3fe8e3.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

SHANGHAI MERCHANTS HOLDINGS LIMITED

*

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY AND UPDATES IN RESPECT OF BUSINESSES OF THE GROUP

Financial Adviser to Shanghai Merchants Holdings Limited

Independent Financial Adviser

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

SHANGHAI MERCHANTS HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY AND

UPDATES IN RESPECT OF BUSINESSES OF THE GROUP

1. INTRODUCTION

LETTER FROM THE BOARD

LETTER FROM THE BOARD

2. THE ASSIGNMENT OF DEBT

The deed of assignment

Payment terms

Basis of consideration

Condition of the Assignment of Debt

Completion

LETTER FROM THE BOARD

3. BACKGROUND OF THE DEBT

4. REASON FOR THE ASSIGNMENT OF DEBT

5. USE OF PROCEEDS FROM THE ASSIGNMENT OF DEBT

LETTER FROM THE BOARD

6. UPDATES IN RESPECT OF BUSINESSES OF THE GROUP

Business outlook

LETTER FROM THE BOARD

Trading in fabric products and other merchandises

Trading in base metals

LETTER FROM THE BOARD

Financial summary of the Group

Brief industry overview

Trading in fabric products and other merchandises

Trading in base metals

LETTER FROM THE BOARD

7. SGM

LETTER FROM THE BOARD

8. PROCEDURES BY WHICH A POLL MAY BE DEMANDED AT GENERAL MEETING

9. RECOMMENDATION

LETTER FROM THE BOARD

10. FURTHER INFORMATION

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

SHANGHAI MERCHANTS HOLDINGS LIMITED

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Yours faithfully,

Wu Guo Jian

LETTER OF ADVICE FROM VC CAPITAL

MAJOR AND CONNECTED TRANSACTION PROPOSED ASSIGNMENT OF THE DEBT OF US$4.5 MILLION TO THE CONTROLLING SHAREHOLDER OF THE COMPANY

INTRODUCTION

LETTER OF ADVICE FROM VC CAPITAL

BASIS OF OUR ADVICE

PRINCIPAL FACTORS CONSIDERED

Background of the Group

LETTER OF ADVICE FROM VC CAPITAL

Financial highlights of the Group

For the year ended 31 December 2004

For the year ended 31 December 2005

LETTER OF ADVICE FROM VC CAPITAL

Background of the Debt

LETTER OF ADVICE FROM VC CAPITAL

Reasons for and benefits of the Assignment of Debt

LETTER OF ADVICE FROM VC CAPITAL

Payment terms and consideration of the Assignment of Debt

LETTER OF ADVICE FROM VC CAPITAL

Financial effects of the Assignment of Debt

(a) Earnings

(b) Net asset value

(c) Liquidity and cash position

LETTER OF ADVICE FROM VC CAPITAL

CONCLUSION AND RECOMMENDATION

Keith Lou

1. RESPONSIBILITY STATEMENT

Persistence Gold Group Ltd Proxy Solicitation & Information Statement 2006