THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

This circular appears for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for the Shares described below.

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountants or other independent professional adviser.

If you have sold all your shares in Yugang International Limited, you should at once hand this circular and the accompanying proxy form to the purchaser or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser.

YUGANG INTERNATIONAL LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 613)

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE AND AMENDMENTS TO BYE-LAWS

Independent financial adviser to the Independent Director of Yugang International Limited

==> picture [152 x 33] intentionally omitted <==

A letter from the Independent Director is set out on page 17 of this circular.

A letter from Dao Heng Securities Limited, the independent financial adviser, containing its advice to the Independent Director is set out on pages 18 to 32 of this circular.

A notice convening a special general meeting of the Company to be held at the Company’s head office at Rooms 3301-3307 China Resources Building, 26 Harbour Road, Wanchai, Hong Kong on Thursday, 15 July 2004 to consider and, if thought fit, to pass the ordinary and special resolutions is set out on pages 39 to 47 of this circular. If you do not intend to attend the meeting, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the meeting or any adjourned meeting should you so desire.

14 June 2004

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Chairman
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
2.	Subscription Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
3.	Shareholding of the Significant Shareholders . . . . . . . . . . . . . . . . . . . . . . . . .	10
4.	Effects on the Financial Position of the Group . . . . . . . . . . . . . . . . . . . . . . . .	12
5.	Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
6.	Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
7.	Poll Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
8.	Amendments to the Bye-Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
9.	Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Letter from the Independent Director. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		17
Letter from Dao Heng Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		18
Appendix	— General Information
1.	Responsibility Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
2.	Disclosure of Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
3.	Qualifications of Expert, Qualified Accountant and Secretary . . . . . . . . . . .	37
4.	Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	37
5.	Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
6.	Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
7.	Documents available for Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
8.	Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	38
Notice of Special General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		39

— i —

DEFINITIONS

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

“associates”	the meaning ascribed to it under the Listing Rules
“Board”	the board of Directors
“Business Day”	a day (excluding Saturday) on which banks in Hong Kong are
	generally open for business
“Bye-laws”	the bye-laws of the Company adopted at the annual general
	meeting of the Company held on 12 June 2000
“Chongqing Industrial”	Chongqing Industrial Limited, a company incorporated in Hong
	Kong, being the controlling shareholder of the Company holding
	approximately 37.79% of the issued share capital of the
	Company as at the Latest Practicable Date, and beneficially
	owned by Mr. Cheung Chung Kiu, a Director, and his associates
“Companies Act”	the Companies Act 1981 of Bermuda, as amended from time
	to time
“Companies Ordinance”	the Companies Ordinance (Chapter 32 of the Laws of Hong
	Kong), as amended from time to time
“Company”	Yugang International Limited, a company incorporated in
	Bermuda with limited liability and the shares of which are
	listed on the Stock Exchange
“Convertible Note”	the convertible note of HK$70,000,000 to be issued by the
	Company to the Subscriber
“Convertible Note Issue”	the allotment and issue of the Convertible Note under the
	Subscription Agreement
“Conversion Price”	HK$0.075 per Share for the First Year, HK$0.082 per Share
	for the Second Year and HK$0.089 per Share for the Third
	Year. The conversion price is subject to adjustment for, among
	other matters, subdivision or consolidation of Shares, bonus
	issues, capital reduction, rights issues and other events which
	have diluting effects on the issued share capital of the Company

— 1 —

DEFINITIONS

“Conversion Shares”	the Shares to be issued upon exercise by the Noteholder of the
	conversion rights attaching to the Convertible Note
“Dao Heng Securities”	Dao Heng Securities Limited, a corporation deemed licensed
	under the SFO to conduct types 1, 4, 6, 7 and 9 regulated
	activities under the SFO, who has been appointed as an
	independent financial adviser to advise the Independent Director
	in relation to the Convertible Note Issue
“Director(s)”	the director(s) of the Company
“Existing Convertible Note”	the existing convertible note with a principal value of
	HK$100,000,000 maturing on 31 July 2004 with a conversion
	price of HK$0.12 per Share issued to the Subscriber in 2001
	and still being held by the Subscriber
“First Year”	the period from the date of issue of the Convertible Note up to
	the first anniversary of the date of issue of the Convertible
	Note
“Group”	the Company and its subsidiaries
“HK$”	Hong Kong dollars
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Independent Director”	Mr. Wong Wai Kwong, David has been appointed as an
	independent director of the Board to advise the Independent
	Shareholders on the Subscription Agreement and the
	transactions contemplated thereby including but not limited to
	the allotment and issue of the Conversion Shares
“Independent Shareholders”	the Shareholders other than the Subscriber and its associates
	together with Mr. Cheung Chung Kiu, Chongqing Industrial
	and their associates and, if any, any other shareholder of the
	Company who has a material interest in the connected
	transaction in relation to the Subscription Agreement pursuant
	to the Listing Rules
“Latest Practicable Date”	9 June 2004 being the latest practicable date prior to the printing
	of this circular

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

— 2 —

DEFINITIONS

“Noteholder”	the person who is for the time being the holder of the
	Convertible Note
“PRC”	the People’s Republic of China
“Second Year”	the period from the date immediately following the first
	anniversary of the date of issue of the Convertible Note up to
	the second anniversary of the date of issue of the Convertible
	Note
“SGM”	the special general meeting of the Company to be convened at
	the Company’s head office at Rooms 3301-3307 China
	Resources Building, 26 Harbour Road, Wanchai, Hong Kong
	to approve (i) by way of a poll by Independent Shareholders,
	the entering into the Subscription Agreement, the issue of the
	Convertible Note and the allotment and issue of the Conversion
	Shares and all transactions as may be contemplated under the
	Subscription Agreement, and (ii) by the Shareholders, the
	amendments to the Bye-laws
“Share(s)”	share(s) of HK$0.01 each in the share capital of the Company
	with an authorised share capital of HK$500,000,000 and an
	issued and paid up share capital of HK$84,533,217 as at the
	Latest Practical Date
“Shareholder(s)”	the shareholder(s) of the Company
“SFC”	the Securities and Futures Commission
“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Subscriber”	Timmex Investment Limited, a company incorporated in the
	British Virgin Islands and 100% beneficially owned by Mr.
	Cheung Chung Kiu, a Shareholder and a Director
“Subscription Agreement”	the conditional subscription agreement dated 25 May 2004
	entered into between the Company and the Subscriber pursuant
	to which the Company agreed to issue and the Subscriber
	conditionally agreed to subscribe for the Convertible Note in
	cash

— 3 —

DEFINITIONS

“Third Year”

“%”

the period from the date immediately following the second anniversary of the date of issue of the Convertible Note up to the third anniversary of the date of issue of the Convertible Note

per cent.

— 4 —

LETTER FROM THE CHAIRMAN

YUGANG INTERNATIONAL LIMITED

(Incorporated in Bermuda with limited liability)

Directors:

CHEUNG Chung Kiu (Chairman and Managing Director) YUEN Wing Shing ZHANG Qing Xin LAM Hiu Lo LIANG Kang LEE Ka Sze, Carmelo WONG Wai Kwong, David

independent non-executive directors

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

Principal place of business: Rooms 3301-3307 China Resources Building 26 Harbour Road Wanchai Hong Kong

14 June 2004

To the Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE AND AMENDMENTS TO THE BYE-LAWS

1. INTRODUCTION

The Company announced on 25 May 2004 that the Subscription Agreement was entered into between the Company and the Subscriber in relation to the subscription of the Convertible Note of HK$70,000,000.

Pursuant to the Subscription Agreement, the Company has agreed with the Subscriber to issue and the Subscriber has agreed to subscribe the Convertible Note in cash.

The net proceeds derived from the issue of the Convertible Note in the amount of HK$70,000,000 will be used for repayment on 31 July 2004 of part of the outstanding amount of the Existing Convertible Note (with the balance to be paid from internal resources of the Company).

— 5 —

LETTER FROM THE CHAIRMAN

As the Subscriber is 100% beneficially owned by Mr. Cheung Chung Kiu, a shareholder and the chairman of the Company and a Director, the entering into of the Subscription Agreement by the Subscriber constitutes a connected transaction of the Company under the Listing Rules. The Company confirms that, to the best of the Directors’ knowledge, information and belief, having made all reasonable enquiry, the Subscriber and the ultimate beneficial owner (Mr. Cheung Chung Kiu, a shareholder and the chairman of the Company and a Director) are connected persons of the Company.

The Convertible Note Issue is subject to, among other things, the approval of the Independent Shareholders and the voting will be conducted by way of a poll. In view of the interests of the Subscriber in the Convertible Note Issue, the Subscriber and its associate, including Mr. Cheung Chung Kiu, Chongqing Industrial and their associates, and any other shareholder of the Company who has a material interest in the connected transaction in relation to the Subscription Agreement will abstain from voting at the SGM in this regard.

Mr. Wong Wai Kwong, David has been appointed as an independent Director to advise the Independent Shareholders in respect of the Convertible Note Issue. As Messrs. Woo, Kwan, Lee & Lo is acting as the legal advisers in relation to the Convertible Note Issue as well as rendering professional legal services from time to time and receiving professional legal fees for such services, Mr. Lee Ka Sze, Carmelo, a partner of the said law firm and a non-executive Director, has not been appointed as an independent Director. Dao Heng Securities has been appointed as an independent financial adviser to advise the Independent Director in respect of the Convertible Note Issue.

The main purpose of this circular is (a) to provide you with further information relating to the Convertible Note Issue; (b) to set out the letter of advice from Dao Heng Securities to the Independent Director and the recommendation and opinion of the Independent Director as advised by Dao Heng Securities in respect of the Convertible Note Issue; (c) to seek your approval by way of a poll at the SGM of the ordinary resolution in relation to the Subscription Agreement and the Convertible Note Issue; and (d) to seek your approval at the SGM of a special resolution in relation to the amendments to the Byelaws set out in the notice of the SGM.

2. SUBSCRIPTION AGREEMENT

Date of agreement

25 May 2004

Parties

The parties to the Agreement are:

The Company: The Company’s principal activity is investment holding. The principal activities of its principal subsidiaries are

— 6 —

LETTER FROM THE CHAIRMAN

manufacturing and trading of watch boxes, gift boxes, spectacles cases, bags and pouches, display units and general trading and of its principal associated company are property investment.

The Subscriber: Timmex Investment Limited, a company incorporated in the British Virgin Islands and 100% beneficially owned by Mr. Cheung Chung Kiu, (a shareholder and the chairman of the Company). The Subscriber’s sole business is holding interests in the Existing Convertible Note and entering into the Subscription Agreement.

The Company has agreed with the Subscriber to issue and the Subscriber has agreed to subscribe the Convertible Note convertible into Conversion Shares.

Subject to the Conditions Precedent, the Convertible Note shall be issued on the third Business Day following the date on which the Conditions Precedent of the Subscription are fulfilled or such other date as the Company and the Subscriber may agree.

Principal terms of the Convertible Note

The terms of the Convertible Note were negotiated between the Company and the Subscriber on an arm’s length basis and the principal terms of which are summarised below:

Principal amount:	HK$70,000,000
Interest:	3% per annum accrued from the date of issue on a day
	to day basis on the principal amount of the Convertible
	Note outstanding, payable annually in arrears.
Maturity:	The Company shall repay principal amount outstanding
	under the Convertible Note to the Noteholder together
	with all interest accrued on the third anniversary of the
	date of the issue of the Convertible Note.
Completion date:	The third Business Day following the date on which the
	conditions precedent are fulfilled or such other date as
	the Company and the Subscriber may agree for the issue
	of Convertible Note.
Conditions precedent:	The conditions precedent set out in the section headed
	“Conditions Precedent” of this circular.

— 7 —

LETTER FROM THE CHAIRMAN

Conversion price:

HK$0.075 per Share for the First Year, HK$0.082 per Share for the Second Year and HK$0.089 per Share for the Third Year. The Conversion Price is subject to adjustment for, among other matters, subdivision or consolidation of Shares, bonus issues, capital reduction, rights issues and other events which have diluting effects on the issued share capital of the Company.

Conversion period:

The Noteholder will have the right to convert the whole or part of the principal amount of the Convertible Note into Shares at any time and from time to time, from the date of issue of the Convertible Note up to the third anniversary of the issue of the Convertible Note in amounts not less than HK$1,000,000 on each conversion, save that if at any time, the principal outstanding amount of the Convertible Note is less than HK$1,000,000, the whole (but not part only) of the principal amount of the Convertible Note may be converted.

Ranking of the Conversion Shares:
Shares to be issued upon conversion shall rank pari passu in all respects with all other existing Shares outstanding at the date of the conversion notice and be entitled to all dividends and other distributions the record date of which falls on a date on or after the date of the conversion notice.
Transferability:
Subject to any requirements of the Stock Exchange, the Convertible Note may be assigned or transferred to any one in whole or in part of its principal amount outstanding and the Company shall facilitate any such assignment or transfer of the Convertible Note, including making any necessary applications to the Stock Exchange.

Voting:

The Noteholder will not be entitled to attend or vote at any meeting of the Company by reason of it being the Noteholder.

Listing:

No application will be made for the listing of the Convertible Note on the Stock Exchange. An application will be made to the Stock Exchange for the listing of Shares to be issued on exercise of the conversion rights attaching to the Convertible Note.

— 8 —

LETTER FROM THE CHAIRMAN

Assuming the exercise in full of the conversion rights attaching to the Convertible Note at the lowest conversion price of HK$0.075 per share, a total number of 933,333,333 new Shares will be issued, representing approximately 11.04% of the Company’s existing issued share capital of 8,453,321,700 Shares and approximately 9.94% of the Company’s issued share capital of 9,386,655,033 as enlarged by the issue and allotment of such new Shares.

The conversion price of HK$0.075, HK$0.082 and HK$0.089 per Share represents (a) approximately 107.14%, 117.14% and 127.14% to the closing price of HK$0.070 per Share quoted on the Stock Exchange on 24 May 2004 respectively; (b) approximately 110.46%, 120.77% and 131.08% to the average closing price of HK$0.0679 per Share quoted on the Stock Exchange for the ten consecutive trading days up to and including 24 May 2004 respectively; (c) approximately 105.63%, 115.49% and 125.35% to the closing price of HK$0.071 per Share quoted on the Stock Exchange on 9 June 2004, being the Latest Practicable Date respectively; and (d) approximately 103.02%, 112.64% and 122.25% to the average closing price of HK$0.0728 per Share respectively quoted on the Stock Exchange for the ten consecutive trading days up to and including 9 June 2004, being the Latest Practicable Date.

Conditions Precedent

The subscription of the Convertible Note is conditional upon the fulfilment of the following conditions precedent:

(a) the Listing Committee of Stock Exchange shall have granted (either unconditionally or subject only to conditions to which neither the Company nor the Subscriber shall reasonably object) listing of and permission to deal in the Conversion Shares;
(b) if so required, the Bermuda Monetary Authority shall have approved the issue of the Convertible Note and the Conversion Shares; and
(c) the Independent Shareholders shall have approved by way of a poll at the SGM (i) the entering into the Subscription Agreement, (ii) the issue of the Convertible Note and the allotment and issue of the Conversion Shares and (iii) all transactions as may be contemplated under the Subscription Agreement.

If the above conditions are not fulfilled on or before 31 August 2004 or such later date as may be agreed between the Subscriber and the Company, the Subscription Agreement will lapse and become null and void and the parties to the Subscription Agreement will be released from all obligations thereunder, save the liabilities for any antecedent breaches thereof.

— 9 —

LETTER FROM THE CHAIRMAN

Use of proceeds

Reasons for the issue of the Convertible Note

The Directors consider that the Convertible Note Issue represents a good opportunity to raise funds for repayment of part of the outstanding amount of the Existing Convertible Note. The Directors believe that the terms of the Subscription Agreement and the Convertible Note are fair and reasonable and for commercial benefits and in the best interests of the Company.

Connected Transaction

Given that Mr. Cheung Chung Kiu is the chairman of the Company and the Subscriber is wholly owned by him, the entering into of the Subscription Agreement by the Subscriber constitutes a connected transaction for the Company under the Listing Rules. A SGM will be convened to approve by way of a poll (i) the entering into the Subscription Agreement; (ii) the issue of the Convertible Note and the allotment and issue of the Conversion Shares; and (iii) all transactions as may be contemplated under the Subscription Agreement, in which the Subscriber, Mr. Cheung Chung Kiu, Chongqing Industrial and their respective associates will abstain from voting.

3. SHAREHOLDING OF THE SIGNIFICANT SHAREHOLDERS

As at the Latest Practicable Date, Mr. Cheung Chung Kiu and his associates (including Chongqing Industrial and the Subscriber) are directly and indirectly interested in approximately 38.42% of the existing issued share capital of the Company.

Upon the exercise in full of the conversion rights attaching to the Convertible Note but, on the basis that the Subscriber does not exercise any of its conversion rights attached to the Existing Convertible Note and based on the lowest conversion price of HK$0.075 per Share, a total number of 933,333,333 new Shares will be allotted and issued and the shareholding of Mr. Cheung Chung Kiu and his associates (including Chongqing Industrial and the Subscriber) will be increased to approximately 44.54% of the issued share capital of the Company as enlarged by the allotment and issue of such new Shares resulting from exercises in full of the conversion rights attaching to the Convertible Note.

— 10 —

LETTER FROM THE CHAIRMAN

Upon the exercise in full of the conversion rights attaching to the Convertible Note but, on the basis that the Subscriber does not exercise any of its conversion rights attached to the Existing Convertible Note and based on the conversion price of HK$0.082 per Share, a total number of 853,658,536 new Shares will be allotted and issued and the shareholding of Mr. Cheung Chung Kiu and his associates (including Chongqing Industrial and the Subscriber) will be increased to approximately 44.06% of the issued share capital of the Company as enlarged by the allotment and issue of such new Shares resulting from exercises in full of the conversion rights attaching to the Convertible Note.

Upon the exercise in full of the conversion rights attaching to the Convertible Note but, on the basis that the Subscriber does not exercise any of its conversion rights attached to the Existing Convertible Note and based on the highest conversion price of HK$0.089 per Share, a total number of 786,516,853 new Shares will be allotted and issued and the shareholding of Mr. Cheung Chung Kiu and his associates (including Chongqing Industrial and the Subscriber) will be increased to approximately 43.66% of the issued share capital of the Company as enlarged by the allotment and issue of such new Shares resulting from exercises in full of the conversion rights attaching to the Convertible Note.

The Subscriber has undertaken to the Company that it would not exercise any of its conversion rights attached to the Existing Convertible Note until and including its maturity date.

So far as the Directors are aware, the following persons will, as at the following indicated event, have the following interests in the Shares (on the basis that the Subscriber does not exercise any of its conversion rights attached to the Existing Convertible Note):

Mr. Cheung Chung Kiu Chongqing Industrial (Note 1) Subscriber (Note 2) Directors_(Note 3)_ Public Total:	Existing No. of Shares % 53,320,000 3,194,434,684 0 90,064,000 5,115,503,016 8,453,321,700	No. of Shares after exercise in full the conversion rights attached to the Convertible Note at Approximate the conversion price of of shareholding HK$0.075 per Share % 0.63% 53,320,000 37.79% 3,194,434,684 0% 933,333,333 1.07% 90,064,000 60.51% 5,115,503,016 100% 9,386,655,033	Approximate of shareholding 0.57% 34.03% 9.94% 0.96 % 54.50%
			100%

— 11 —

LETTER FROM THE CHAIRMAN

Notes:

The voting rights of 3,194,434,684 Shares are exercisable by Chongqing Industrial. Mr. Cheung Chung Kiu, Peking Palace Limited, Miraculous Services Limited and Prize Winner Limited have a 35%, 30%, 5% and 30% equity interest in Chongqing Industrial, respectively. Peking Palace Limited and Miraculous Services Limited are beneficially owned by Palin Discretionary Trust, a family discretionary trust, the objects of which include Mr. Cheung Chung Kiu and his family. Prize Winner Limited is beneficially owned by Mr. Cheung Chung Kiu and his associates. By virtue of the SFO, Mr. Cheung Chung Kiu and Palin Discretionary Trust are respectively deemed to be interested in the Shares in which Chongqing Industrial Limited has a beneficial interest.
Mr. Cheung Chung Kiu has a beneficial interest of 100% in the Subscriber. By virtue of the SFO, Mr. Cheung Chung Kiu is deemed to be interested in the Shares in which the Subscriber has a beneficial interest. The Subscriber also has interest in 833,333,333 and 933,333,333 underlying Shares which are issuable upon the exercise of the Existing Convertible Note held by and of the Convertible Note to be issued to the Subscriber respectively.
13,600,000, 41,800,000 and 34,664,000 Shares are personally owned by Mr. Zhang Qing Xin, Mr. Lam Hiu Lo and Mr. Liang Kang respectively, all being the executive Directors.

4. EFFECTS ON THE FINANCIAL POSITION OF THE GROUP

Indebtedness

Based on the interest rate of 3.0% carried by the Convertible Note and assuming no conversion of the Convertible Note, this will translate into interest expense of approximately HK$2.1 million per annum, representing approximately 0.1% of the Group’s NAV as at 31 December 2003 and approximately 2.0% of the Group’s audited consolidated profit attributable to the Shareholders for the year ended 31 December 2003.

The issuance of the Convertible Note will bring the Group’s non-current liabilities up by HK$70 million but the repayment of the Existing Convertible Note will lower the Group’s current liabilities by HK$100 million. As a result, the issuance of the Convertible Note and the repayment of the Existing Convertible Note, as a whole, will reduce the Group’s total liabilities by HK$30 million and, at the same time, secure a longer term of financing resources for the Group.

— 12 —

LETTER FROM THE CHAIRMAN

NAV

Set out below is the adjusted NAV of the Group before and after the full conversion of the Convertible Note during the First Year, the Second Year and the Third Year.

Table: Effects of the Convertible Note on the Group’s NAV

	Immediately before the	Full conversion
	conversion of the	of the Convertible
	Convertible Note	Note
	(Note 3)	(Note 3)
As at 31 December 2003
NAV (HK$ million)	1,799.4	N/A
NAV per Share (HK$)(Note 2)	0.2129	N/A
By end of the First Year
Adjusted NAV (HK$ million) (Note 1)	1,797.3	1,867.3
Adjusted NAV per Share (HK$)(Note 2)	0.2126	0.1989
By end of the Second Year
Adjusted NAV (HK$ million)(Note 1)	1,795.2	1,865.2
Adjusted NAV per Share (HK$)(Note 2)	0.2124	0.2004
By end of the Third Year
Adjusted NAV (HK$ million)(Note 1)	1,793.1	1,863.1
Adjusted NAV per Share (HK$)(Note 2)	0.2121	0.2016

Notes:

(1) Based on the audited consolidated financial statements of the Group as at 31 December 2003 less any interest expense accumulated during different periods pursuant to the Convertible Note (which are assumed to be converted at each anniversary).
(2) Based on 8,453,321,700 Shares in issue as at the Latest Practicable Date and the Shares to be issued upon conversion of the Convertible Note during different periods as set out in the paragraph headed “Dilution effect on the interests of Independent Shareholders” below.
(3) Assuming no Existing Convertible Note would be converted into Shares before its maturity on 31 July 2004 under all scenarios.

Full conversion of the Convertible Note during different periods will decrease the NAV per Share from approximately HK$0.2129 to utmost approximately HK$0.1989.

— 13 —

LETTER FROM THE CHAIRMAN

5. RECOMMENDATIONS

Your attention is drawn to (a) the letter from the Independent Director to the Independent Shareholders which contains the recommendation of the Independent Director to the Independent Shareholders concerning the proposed Convertible Note Issue; and (b) the letter from Dao Heng Securities to the Independent Director which contains the advice of Dao Heng Securities to the Independent Director in relation to the proposed Convertible Note Issue and the principal factors and reasons considered by Dao Heng Securities in arriving at its advice.

As Messrs. Woo, Kwan, Lee & Lo is acting as the legal advisers in relation to the Convertible Note Issue as well as rendering professional legal services from time to time and receiving professional legal fees for such services, Mr. Lee Ka Sze, Carmelo, a partner of the said law firm and a non-executive Director, has not been appointed as an independent Director.

The Board believes that the terms of the Subscription Agreement are fair and reasonable and the Convertible Note Issue is for commercial benefits and in the best interests of the Company and its Shareholders and that the amendments to the Bye-laws are necessary in order to comply with the requirements of the Stock Exchange, and accordingly, recommends (a) the Independent Shareholders to vote by way of a poll in favour of the ordinary resolution to be proposed at the SGM to consider and, if thought fit, to approve the Convertible Note Issue, and (b) the Shareholders to vote in favour of the special resolution to be proposed at the SGM to consider and, if thought fit, to approve the amendments to the Bye-laws.

6. SPECIAL GENERAL MEETING

Set out on pages 39 to 47 of this circular is a notice convening the SGM at which (a) an ordinary resolution will be proposed to the Independent Shareholders to consider and, if thought fit, to approve by way of a poll the Convertible Note Issue and (b) a special resolution will be proposed to the Shareholders to consider and, if thought fit, to approve the amendments to the Bye-laws.

A form of proxy for use at the SGM is enclosed. If you do not intend to attend the meeting you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible to the Company’s branch registrar in Hong Kong, Tengis Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong and in any event not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting at the meeting or any adjournment thereof should you so desire.

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LETTER FROM THE CHAIRMAN

The Subscriber and its associates, including Mr. Cheung Chung Kiu, Chongqing Industrial and their respective associates, will abstain from voting on the ordinary resolution to be proposed at the SGM in respect of the Convertible Note Issue.

7. POLL DEMAND

By virtue of the Listing Rules , the resolutions for connected transactions are required to be voted by way of a poll. According to the Bye-laws of the Company, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands) a poll is duly demanded. A poll may be demanded by:

a. the chairman of a meeting, or
b. at least three members present in person (or in the case of a corporation, by its duly authorised representative) or proxy for the time being entitled to vote at the meeting, or
c. a member or members present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and representing not less than onetenth of the total voting rights of all members having the right to vote at the meeting, or
d. a member or members present in person (or in the case of a corporation, by its duly authorised representative) or by proxy and holding Shares 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.

If a poll is duly demanded the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. On a poll votes may be given either personally or by proxy. A person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting shall be entitled to a second or casting vote in addition to any other vote he may have.

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LETTER FROM THE CHAIRMAN

8. AMENDMENTS TO THE BYE-LAWS

As announced by the Stock Exchange in its press release dated 30 January 2004, the Stock Exchange has revised the Listing Rules based on the results of the Consultation Conclusions on Proposed Amendments to the Listing Rules relating to Corporate Governance Issues issued in January 2003. To ensure compliance with the revised Appendix 3 to the Listing Rules, which came into effect on 31 March 2004, a special resolution for amending the Bye-laws is proposed at the SGM. Details of the amendments are referred to in the Notice of Special General Meeting of this circular.

9. ADDITIONAL INFORMATION

Your attention is drawn to the letter from the Independent Director, the letter from Dao Heng Securities, the notice of the SGM attached to this circular and the general information of the Company as set out in the appendix to this circular.

Yours faithfully, By order of the board Yugang International Limited Cheung Chung Kiu

Chairman

— 16 —

LETTER FROM THE INDEPENDENT DIRECTOR

YUGANG INTERNATIONAL LIMITED

(Incorporated in Bermuda with limited liability)

14 June 2004

To the Independent Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE

I refer to the circular to the Shareholders dated 14 June 2004 (the “Circular”), of which this letter forms part. Unless the context requires otherwise, terms used in this letter shall have the same meanings given to them in the definition section of the Circular.

In view of the interests of the Subscriber in the Convertible Note Issue, I have been appointed by the Board to advise the Independent Shareholders in relation to the allotment and issue of the Convertible Note which constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. In this connection, Dao Heng Securities has been appointed as an independent financial adviser to advise on whether the terms of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders are concerned and whether the Convertible Note Issue is for commercial benefits and in the best interests of the Company and the Independent Shareholders as a whole. Details of, and the reasons for, the Subscription Agreement together with the actions to be taken by the Independent Shareholders are contained in the Letter from the Chairman set out on pages 5 to 16 of the Circular.

As the Independent Director, I have discussed with the management of the Company as to the reasons for the Convertible Note Issue. I also wish to draw your attention to the letter of advice from Dao Heng Securities set out on pages 18 to 32 of the Circular. I have also discussed with Dao Heng Securities as to the basis upon which its advice has been given to me. I have also noted the letter and the advice contained therein and have considered, amongst others, the various factors contained in such letter. In my opinion, the terms of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders are concerned and the Convertible Note Issue is for commercial benefits and in the best interests of the Company and the Independent Shareholders taken as a whole. Accordingly, as the Independent Director, I recommend the Independent Shareholders to vote in favour of the ordinary resolution which will be proposed at the Special General Meeting to approve by way of a poll the Convertible Note Issue.

Yours faithfully, Independent Director Wong Wai Kwong, David

— 17 —

LETTER FROM DAO HENG SECURITIES

The following is the text of the letter of advice to the Independent Director from Dao Heng Securities in connection with the terms of the Subscription Agreement, which has been prepared for the purpose of inclusion in this circular.

==> picture [120 x 35] intentionally omitted <==

14 June 2004

To the Independent Director Yugang International Limited Rooms 3301-7 China Resources Building 26 Harbour Road Wanchai Hong Kong

Dear Sirs,

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE

INTRODUCTION

We refer to our engagement by the Company as an independent financial adviser to advise the Independent Director with respect to the Subscription Agreement. Details of the principal terms of the Subscription Agreement are contained in the Letter from the Chairman in the circular dated 14 June 2004 to the Shareholders (the “Circular”), of which this letter forms part. Terms defined in the Circular bear the same meanings herein unless the context otherwise requires.

On 25 May 2004, the Company and the Subscriber entered into the Subscription Agreement, pursuant to which the Company has agreed to issue and the Subscriber has agreed to subscribe for the Convertible Note in the principal amount of HK$70 million in cash.

As the Subscriber is 100% beneficially owned by Mr. Cheung Chung Kiu, a Director, the entering into of the Subscription Agreement by the Subscriber constitutes a connected transaction of the Company under the Listing Rules and, accordingly, the Convertible Note Issue is conditional upon, among other things, the approval of the Independent Shareholders by way of a poll at the SGM in which the Subscriber, its associates, Mr. Cheung Chung Kiu and Chongqing Industrial and their associates and any other Shareholder who has a material interest in the connected transaction in relation to the Subscription Agreement will abstain from voting. Mr. Wong Wai Kwong, David has been appointed as an Independent Director to

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LETTER FROM DAO HENG SECURITIES

advise the Independent Shareholders in respect of the Convertible Note Issue. As Messrs. Woo, Kwan, Lee & Lo is acting as the legal advisers in relation to the Convertible Note Issue as well as rendering professional legal services from time to time and receiving professional legal fees for such services, Mr. Lee Ka Sze, Carmelo, a partner of the said law firm and a non-executive Director, has not been appointed as an Independent Director.

Our role as the independent financial adviser to the Independent Director is to give our opinion as to whether the terms of the Subscription Agreement are fair and reasonable and in the interests of the Company and its Shareholders as a whole.

In formulating our recommendations, we have relied on the accuracy of the information and representations contained in the Circular, which have been provided by the Directors and have assumed that all information and representations made or referred to in the Circular are true and accurate in all material respects. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have been advised by the Directors that no material facts have been omitted from the information provided and referred to in the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify relying on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent investigation into the business and affairs or the future prospects of the Group.

PRINCIPAL TERMS OF THE SUBSCRIPTION AGREEMENT

Pursuant to the Subscription Agreement dated 25 May 2004, the Company has agreed to issue and the Subscriber has agreed to subscribe for the Convertible Note in principal amount of HK$70 million in cash. Subject to the conditions as set out in the Letter from the Chairman in the Circular, principal terms of the Convertible Note are set out as follows:

i.	Principal amount	:	HK$70 million
ii.	Interest	:	3.0% per annum accrued from the date of issue (“Issue
			Date”) on a day to day basis on the principal amount of the
			Convertible Note outstanding, payable annually in arrears
iii.	Maturity	:	The third anniversary of the Issue Date of the Convertible
			Note
iv.	Conversion price	:	HK$0.075 per Share (the “First Year Conversion Price”) in
			the First Year;

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LETTER FROM DAO HENG SECURITIES

HK$0.082 per Share (the “Second Year Conversion Price”) in the Second Year; and

HK$0.089 per Share (the “Third Year Conversion Price”) in the Third Year

v. Conversion period : Any time from the Issue Date of the Convertible Note up to the third anniversary of the Issue Date of the Convertible Note in amounts not less than HK$1,000,000 on each conversion, save that if at any time, the principal outstanding amount of the Convertible Note is less than HK$1,000,000, the whole (but not part only) of the principal amount of the Convertible Note may be converted
vi. Ranking of the : Shares to be issued upon conversion shall rank pari passu Conversion Shares in all respects with all other existing Shares outstanding at the date of the conversion notice and be entitled to all dividends and other distributions the record date of which falls on a date on or after the date of the conversion notice
vii. Transferability
: Subject to any requirements of the Stock Exchange, the Convertible Note may be assigned or transferred to any one in whole or in part of its principal amount outstanding and the Company shall facilitate any such assignment or transfer of the Convertible Note, including making any necessary applications to the Stock Exchange
viii. Voting : The Noteholder will not be entitled to attend or vote at any meeting of the Company by reason of being the Noteholder
ix. Listing
: No application will be made for the listing of the Convertible Note on the Stock Exchange. An application will be made to the Stock Exchange for the listing of Shares to be issued upon exercise of the conversion rights attaching to the Convertible Note

Independent Shareholders are advised to refer to the Letter from the Chairman in the Circular for the terms of the Convertible Notes in details.

— 20 —

LETTER FROM DAO HENG SECURITIES

PRINCIPAL FACTORS AND REASONS CONSIDERED

In giving our opinion as to the fairness and reasonableness of the terms of the Subscription Agreement and giving our advice to the Independent Director, we have taken into account the following factors and reasons:

A. Principal terms of the Convertible Note

(i) Conversion Price

The premiums/discounts of the conversion prices over/to the closing prices of the Share for different periods are set out in the following table.

Table 1: Comparison of conversion prices of the Convertible Note with the Share prices

		Premium/(Discount)	Premium/(Discount)	of the
		conversion	price over/to the closing
		price/average closing price per
	Closing price/	Share in the respective period
	average	First Year Second Year		Third Year
	closing price	Conversion	Conversion	Conversion
	per Share	Price of	Price of	Price of
Date/period	for the period	HK$0.075	HK$0.082	HK$0.089
	(HK$)
As at 24 May 2004 (being	0.070	7.1%	17.1%		27.1%
the last trading day prior to
the date of the Subscription
Agreement)
10 days up to and including	0.068	10.3%	20.6%		30.9%
24 May 2004
One month up to and including	0.074	1.4%	10.8%		20.3%
24 May 2004
Three months up to and	0.088	(14.8)%	(6.8)%		1.1%
including 24 May 2004
Six months up to and	0.091	(17.6)%	(9.9)%		(2.2)%
including 24 May 2004
One year up to and including	0.072	4.2%	13.9%		23.6%
24 May 2004
(the “One-year Period”)
As at the Latest	0.071	5.6%	15.5%		25.4%
Practicable Date
From 25 May 2004 (being	0.073	2.7%	12.3%		21.9%
the first trading day after the
issue of the announcement
regarding the Subscription
Agreement) to the Latest
Practicable Date
(the “Latest Period”)

— 21 —

LETTER FROM DAO HENG SECURITIES

The above table shows that the conversion prices represent premiums over the average closing prices for most of the periods during the One-year Period ranging from approximately 1.1% to 30.9%, except that they represent discounts range from approximately 2.2% to 17.6% to the three-month average closing price and the six-month average closing price.

Chart 1: The closing prices and the trading volume of the Share for the One-year Period

==> picture [349 x 187] intentionally omitted <==

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

0.14
0.12 HK$0. 089 200,000,000
HK$0. 082
0.1 HK$0. 075
150,000,000
0.08
0.06 100,000,000
0.04
50,000,000
0.02
0 -
Volume
traded
Closing
26-May-0323-Jun-0321-Jul-0315-Aug-0311-Sep-0310-Oct-036-Nov-033-Dec-03 2-Jan-04 2-Feb-0427-Feb-0425-Mar-0426-Apr-0424-May-04 price
Closing price (HK$) Trading volume (Shares)
----- End of picture text -----

As illustrated in Table 1 and Chart 1 above, each of the conversion prices, in general, represents premium over the closing prices of the Shares throughout the One-year Period except for the period from 22 December 2003 to 19 April 2004. We have looked at the announcements published by the Company during such period to look for the reason for such surge in Share prices. We note that the Company issued two messages through the Stock Exchange on 22 and 23 December 2003 and stated that it was not aware of any reason for such increases in the Share price and its trading volume. In order to assess the fairness and reasonableness of the conversion price of the Convertible Note, we have looked into the recent issuance of convertible notes by listed companies in Hong Kong. We have identified 44 convertible note issues during the One-year Period. Of these 44 convertible note issues, three of them have maturity of three years and have issue size of more than HK$50 million but less than HK$100 million, which are considered comparable issues (“Comparable Issues”) to the Convertible Note. Set out below is a summary of the Comparable Issues.

— 22 —

LETTER FROM DAO HENG SECURITIES

Table 2: Summary of the Comparable Issues

				Premium/(discount)
				of the conversion
				price over/to the
				average closing price
			Principal	of shares in the last
			amount of	10 trading days prior	Interest
Stock		Date of	convertible	to the related	rate per
code	Company	announcement	note	announcement	annum
			(HK$ million)	(%)	(%)
613	The Company	25 May 2004	70.0	(Note 1)(A) 10	3.0
				(B) 21
				(C) 31
897	Wai Yuen Tong	8 July 2003	70.0	233 and 400	2.0
	Medicine Holdings			(Note 2)
	Limited (“WYT”)
76	Sen Hong Resources	8 January 2004	72.0	(17)	5.0
	Holdings Limited
1051	Credit Card DNA	13 April 2004	69.0	3	2.0
	Security System
	(Holdings) Limited

Notes:

(1) (A), (B) and (C) represent the premiums of the First Year Conversion Price, the Second Year Conversion Price and the Third Year Conversion Price over the average closing price for the last 10 trading day prior to the date of the related announcement respectively.
(2) As stated in the announcement dated 8 July 2003 published by WYT, being the issuer of one of the Comparable Issues, the shares of WYT might be traded at prices lower than HK$0.01 under cross-trade arrangements and the system of the Stock Exchange did not record individual trading transactions that trade below HK$0.01. The premium of approximately 233% and 400% of the conversion price over the prevailing share price were calculated based on two individual transactions under the cross-trade arrangements during the past five trading days prior to the issue of the related announcement, of which the shares of WYT were traded at HK$0.003 and HK$0.002 per share.

Although the conversion price of WYT’s convertible note as shown above represents significant premiums over its prevailing share prices during the last five trading days prior to the publish of the announcement, we understand that shares of companies which are incorporated in Bermuda are not permitted to be issued lower than their nominal values pursuant to the Companies Act and the

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LETTER FROM DAO HENG SECURITIES

conversion price of WYT’s convertible note was set equivalent to the nominal value of its shares. Therefore, we consider that it may not be appropriate to compare the conversion price of the Convertible Note with that of WYT and exclude the issue of WYT in our analysis of conversion price.

The conversion price of one of the other two Comparable Issues was set at a discount of approximately 17% to the average closing price of shares in the last 10 trading days prior to the publish of the related announcement and that of the other Comparable Issue was set at a premium of approximately 3%. The lowest conversion price of the Convertible Note represents a premium of approximately 10% over the average closing price of the Shares in the last 10 trading days prior to the date of the Subscription Agreement, which is higher than those of the two Comparable Issues. Given the conversion prices of the Convertible Note are in general higher than the Share prices during the One-year Period and the conversion prices of the Convertible Note represent significant premiums over the last 10 trading days prior to the date of the Subscription Agreement, which are higher than those of the Comparable Issues, we consider that the conversion prices as stipulated under the Convertible Note are fair and reasonable so far as the Company and its Shareholders are concerned.

(ii) Interest rate

The Directors consider that, given the peg between Hong Kong currency and the United States currency, the interest rate in Hong Kong is likely to experience an upward adjustment in the coming year. Hence, the Directors are of the view that it is an appropriate time and beneficial for the Group to lock in a fixed financing cost by entering into the Subscription Agreement which would enable the Group to save interest spending before any possible cyclical uptrend of the interest rate in the foreseeable future. As such, the Directors are of the view that the interest rate of 3.0% per annum as stipulated under the Convertible Note is fair and reasonable.

As confirmed by the Directors, the Group did not have any outstanding secured nor unsecured borrowing with term over one year as at the date of the Subscription Agreement. Hence, we looked into the interest rate of the Comparable Issues in order to assess the fairness and reasonableness of the interest rate carried by the Convertible Note. The Comparable Issues carry annual interest rates ranging from 2.0% to 5.0% (the “Range”) with an average of approximately 3.0%. The Convertible Note carries interest rate of 3.0% per annum, which falls within the Range and equals to the average interest rate of the Comparable Issues. Given that the interest rate of the Convertible Note equals to the average interest rate of the Comparable Issues, we consider that the annual interest rate of the Convertible Note is fair and reasonable.

— 24 —

LETTER FROM DAO HENG SECURITIES

B. Reasons for the proposed issuance of Convertible Note

As stated in the Letter from the Chairman in the Circular, the Directors consider that the Convertible Note Issue represents a good opportunity to raise funds for repayment of part of the outstanding amount of the Existing Convertible Note.

According to the Company’s annual report for the year ended 31 December 2003, the Group’s cash-on-hand (including cash and bank balances, time deposits and pledged time deposits) as at 31 December 2003 were approximately HK$523 million. As advised by the Directors, such cash-on-hand of the Group of approximately HK$523 million consisted of, among others, (i) cash balance of approximately HK$201 million from Qualipak International Holdings Limited, a non wholly-owned subsidiary of the Company whose shares are listed on the Stock Exchange; and (ii) a short-term unsecured bank loan of HK$80 million, which was subsequently repaid in January 2004. Accordingly, the remaining cash balance available to the Group amounted to approximately HK$242 million. Based on such cash balance available to the Group as at 31 December 2003 and assuming no issuance of the Convertible Note and no other external fund would have been obtained, the Group’s available cash balance would be decreased by HK$100 million to HK$142 million upon settlement of the Existing Convertible Note by solely using its internal resources, representing a drop of approximately 41%. Hence it is prudent for the Company to obtain additional financing prior to the maturity of the Existing Convertible Note in case there will be any growing funding needs for its business.

As stated in the Letter from the Chairman, the Company will settle the Existing Convertible Note as to HK$70 million by applying the net proceeds of the Convertible Note and as to the remaining HK$30 million by using its internal resources. With the Convertible Note Issue, the cash balance available to the Group will only be decreased by approximately 12% to approximately HK$212 million (based on the available cash balances as at 31 December 2003 after taking into account the amounts mentioned in (i) and (ii) above), enabling the Group to maintain a sufficient level of cash and bank balances and buffer for its operation. As such, we concur with the Directors’ view that the Convertible Note Issue represents a good opportunity to raise funds for repayment of part of the outstanding amount of the Existing Convertible Note.

C. Alternative way of financing

The Directors have considered other financing alternatives, such as banking facilities, placing of new Shares or rights issue. Most of the interest rates of the bank borrowings in Hong Kong are based upon either Hong Kong Interbank Offered Rate or the best lending rate as quoted by The Hongkong and Shanghai Banking Corporation from time to time, which fluctuates upon various economic and political factors. As stated in the

— 25 —

LETTER FROM DAO HENG SECURITIES

sub-paragraph headed “Interest rate” under the paragraph headed “Principal terms of the Convertible Note” above, the Directors are of the view that it is beneficial for the Group to lock in a fixed financing cost by issuance of the Convertible Note before any possible upturn of the local interest rate in the foreseeable future.

Table 3 : Trading performance of the Shares in different periods ended 24 May 2004

				Daily
				turnover as a
				percentage of
				HK$70 million,
			Daily volume	being the
			over the total	aggregate principal
Periods ended	Average daily	Average daily	number of	amount of the
24 May 2004	volume	turnover	Shares in issue	Convertible Note
	(Shares)	(HK$)	(%)	(%)
One month	936,000	65,588	0.01	0.09
Three months	3,065,880	294,258	0.04	0.42
Six months	10,294,052	961,195	0.12	1.37
One year	13,585,424	941,673	0.16	1.35

The Directors are of the opinion that, given the thin trading of the Shares as illustrated in the Table 3 above, placing of new Shares or rights issue would require a subscription price being set at a substantial discount to the prevailing market price of the Shares and, in case of placing of new Shares, will result in the immediate dilution effect to the existing Shareholders.

In light of the above, we concur with the Directors’ view that the Convertible Note Issue is at present a feasible alternative of raising fund for the Group.

D. Effect on the financial position of the Group

Indebtedness

Based on the audited consolidated financial statements of the Group for the year ended 31 December 2003, the audited consolidated net asset value (“NAV”) of the Group as at 31 December 2003 was approximately HK$1,799.4 million and profit attributable to the Shareholders for the year was approximately HK$107.3 million. Based on the interest rate of 3.0% carried by the Convertible Note and assuming no conversion of the Convertible Note, this will translate into interest expense of approximately HK$2.1 million per annum, representing approximately 0.1% of the Group’s NAV as at 31 December 2003 and approximately 2.0% of the Group’s audited consolidated profit attributable to the Shareholders for the year ended 31 December 2003.

— 26 —

LETTER FROM DAO HENG SECURITIES

As at 31 December 2003, the Group had total liabilities of approximately HK$302 million, which is mainly the current liabilities of approximately HK$301 million. The Group’s indebtedness as at 31 December 2003 amounted to approximately HK$180 million, comprising the Existing Convertible Note of HK$100 million and a short-term bank borrowing of HK$80 million. The Convertible Note Issue will bring the Group’s non-current liabilities up by HK$70 million but the repayment of the Existing Convertible Note will lower the Group’s current liabilities by HK$100 million. As a result, the Convertible Note Issue and the repayment of the Existing Convertible Note, as a whole, will reduce the Group’s total liabilities by HK$30 million and, at the same time, secure a longer term of financing resources for the Group.

NAV

Set out below is the adjusted NAV of the Group before and after the full conversion of the Convertible Note during the First Year, the Second Year and the Third Year.

Table 4 : Effects of the Convertible Note on the Group’s NAV

Immediately before the	Immediately before the
	conversion of the	Full conversion of the
	Convertible Note	Convertible Note
	(Note 3)	(Note 3)
As at 31 December 2003
NAV (HK$ million)	1,799.4	N/A
NAV per Share (HK$)(Note 2)	0.2129	N/A
By end of the First Year
Adjusted NAV (HK$ million)(Note 1)	1,797.3	1,867.3
Adjusted NAV per Share (HK$)(Note 2)	0.2126	0.1989
By end of the Second Year
Adjusted NAV (HK$ million)(Note 1)	1,795.2	1,865.2
Adjusted NAV per Share (HK$)(Note 2)	0.2124	0.2004
By end of the Third Year
Adjusted NAV (HK$ million)(Note 1)	1,793.1	1,863.1
Adjusted NAV per Share (HK$)(Note 2)	0.2121	0.2016

— 27 —

LETTER FROM DAO HENG SECURITIES

Notes:

(1) Based on the audited consolidated financial statements of the Group as at 31 December 2003 less any interest expense accumulated during different periods pursuant to the Convertible Note (which are assumed to be converted at each anniversary).
(2) Based on 8,453,321,700 Shares in issue as at the Latest Practicable Date and the Shares to be issued upon conversion of the Convertible Note during different periods as set out in the paragraph headed “Dilution effect on the interests of Independent Shareholders” below.
(3) Assuming no Existing Convertible Note would be converted into Shares before its maturity on 31 July 2004 under all scenarios.

Full conversion of the Convertible Note during different periods will decrease the NAV per Share from approximately HK$0.2129 to utmost approximately HK$0.1989. Although there is a dilution in the adjusted NAV per Share, Independent Shareholders should note that they would face a deeper level of dilution if placing of securities or rights issue of Shares of the size of the Convertible Note is conducted, as the subscription price of which would usually be set at a substantial discount to the prevailing market price of the Shares, while the conversion prices of the Convertible Note, in general, represent various premiums thereof.

Based on the foregoing, together with (i) the fact that there is no immediate effect on the NAV per Share upon the Convertible Note Issue as the Subscriber currently intends not to convert the Convertible Note if the Share prices subsist at the current level; and (ii) the reasons for the proposed issuance of the Convertible Note that such proceeds will be used to satisfy the Group’s obligation in repayment of the Existing Convertible Note, we consider that the dilution in the Group’s NAV per Share upon exercise of the Convertible Note is fair and reasonable so far as the Company and its Shareholders are concerned.

E. Dilution effect on the interests of Independent Shareholders

As at the Latest Practicable Date, the Subscriber, which is wholly-owned by Mr. Cheung Chung Kiu, did not have any interest in the share capital of the Company, except for its subscription right attached to the Existing Convertible Note. As stated in the Letter from the Chairman, the Subscriber has undertaken to the Company that it would not exercise any of its conversion rights attached to the Existing Convertible Note until and including its maturity date.

The following table sets out the number of Shares to be issued upon full conversion of the Convertible Note during different periods within the conversion period.

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LETTER FROM DAO HENG SECURITIES

Table 5: Number of Shares to be issued upon full conversion of the Convertible Note

		Number of Shares
		to be issued upon
Period at which full conversion	Conversion price in	full conversion of the
takes place	different period	Convertible Note
	(HK$)	(Shares)
First Year	0.075	933,333,333
Second Year	0.082	853,658,536
Third Year	0.089	786,516,853

Based on the undertaking given by the Subscriber to the Company that it would not exercise any of its conversion rights attached to the Existing Convertible Note until and including its maturity date, the dilution effect on the shareholding of the Independent Shareholders upon the full conversion of the Convertible Note during different periods is tabulated as follows:

Table 6 : Dilution effect on the shareholding of the Independent Shareholders upon the full conversion of the Convertible Note

		Shareholding	Shareholding	Shareholding
		upon full	upon full	upon full
	Shareholding	conversion of	conversion of	conversion of
	as at the	the Convertible	the Convertible	the Convertible
	Latest	Note in the	Note in the	Note in the
	Practicable	First Year	Second Year at	Third Year at
	Date	at HK$0.075	HK$0.082	HK$0.089
	(%)	(%)	(%)	(%)
Mr. Cheung Chung Kiu	0.63	0.57	0.57	0.58
Chongqing Industrial_(Note 1)_	37.79	34.03	34.32	34.57
Subscriber_(Note 2)_	—	9.94	9.17	8.51
Directors_(Note 3)_	1.07	0.96	0.97	0.98
Sub-total	39.49	45.50	45.03	44.64
Public	60.51	54.50	54.97	55.36
Total	100.00	100.00	100.00	100.00

— 29 —

LETTER FROM DAO HENG SECURITIES

Notes:

(1) The voting rights of 3,194,434,684 Shares are exercisable by Chongqing Industrial. Mr. Cheung Chung Kiu, Peking Palace Limited, Miraculous Services Limited and Prize Winner Limited have a 35%, 30%, 5% and 30% equity interest in Chongqing Industrial, respectively. Peking Palace Limited and Miraculous Services Limited are beneficially owned by Palin Discretionary Trust, a family discretionary trust, the objects of which include Mr. Cheung Chung Kiu and his family. Prize Winner Limited is beneficially owned by Mr. Cheung Chung Kiu and his associates. By virtue of the SFO, Mr. Cheung Chung Kiu and Palin Discretionary Trust are respectively deemed to be interested in the Shares in which Chongqing Industrial has a beneficial interest.
(2) Mr. Cheung Chung Kiu has a beneficial interest of 100% in the Subscriber. By virtue of the SFO, Mr. Cheung Chung Kiu is deemed to be interested in the Shares in which the Subscriber has beneficial interest. The Subscriber also has interests in 833,333,333 and 933,333,333 underlying Shares which are issuable upon the exercise of the Existing Convertible Note held by and of the Convertible Note to be issued to the Subscriber respectively.
(3) 13,600,000 Shares (being approximately 0.16% of the Shares in issue as at the Latest Practicable Date), 41,800,000 Shares (being approximately 0.49% of the Shares in issue as at the Latest Practicable Date) and 34,664,000 Shares (being approximately 0.41% of the Shares in issue as at the Latest Practicable Date) are personally owned by Mr. Zhang Qing Xin, Mr. Lam Hiu Lo, Mr. Liang Kang respectively, all being the executive Directors.

The shareholding interests of Independent Shareholders will be reduced from approximately 60.51% to:

(i) approximately 54.50% in case of full conversion of the Convertible Note in the First Year;
(ii) approximately 54.97% in case of full conversion of the Convertible Note in the Second Year (but no conversion in the First Year); and
(iii) approximately 55.36% in case of full conversion of the Convertible Note in the Third Year (but no conversion in the First Year and the Second Year).

As advised by the Directors, the Subscriber has, at present, no intention to convert the Convertible Note if the Share prices subsist at the current level, which is lower than the conversion price of the Convertible Note. Hence, the Directors believe that under the current market conditions, there is no immediate dilution effect on the shareholding interests of the Independent Shareholders as the Convertible Note may or may not be converted into the Shares prior to its maturity. Nevertheless, Independent Shareholders are reminded that (i) the conversion prices of the Convertible Note represent various degree of premiums over most of the average closing prices of the Shares in the Oneyear Period; and (ii) the conversion prices of the Convertible Note represent premiums ranging from approximately 2.7% to 21.9% over the average closing price of the Shares of HK$0.073 during the period from the date of the Subscription Agreement to the Latest Practicable Date, and premiums ranging from approximately 5.6% to 25.4% over the closing price of the Share of HK$0.071 as at the Latest Practicable Date. It is also

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LETTER FROM DAO HENG SECURITIES

noted that should the change of the equity interest of the Subscriber, together with parties acting in concert with it, following the exercise of any conversion rights attaching to the Convertible Note triggers a general offer for the Shares under Rule 26 of the Takeovers Code, the Subscriber and all parties acting in concert with it are expected to comply with the requirements under the Takeovers Code from time to time.

Having considered:

(i) that there is no immediate dilution effect on the shareholding interests of the Independent Shareholders;
(ii) that the conversion prices of the Convertible Note represent various degree of premiums to most of the average Share prices in different periods during the One-year Period and the premium of First Year Conversion Price (being the lowest conversion price) over the average closing price of Shares in the last 10 trading days prior to the date of the Subscription Agreement is higher than those of the Comparable Issues;
(iii) that the interest rate of the Convertible Note of 3.0% per annum equals to the average interest rate carried by the Comparable Issues;
(iv) the benefits arising from the lock-in of a fixed financing cost by the Convertible Note Issue before any possible upturn of the local interest rate in the foreseeable future; and
(v) that a substantial discount of subscription price to the prevailing market Share price would be required if placing of Shares or rights issue is sought instead of issuance of Convertible Note,

we consider that the dilution effects on the shareholding of the Independent Shareholders based on the assumption that the Convertible Note is exercised in full during the conversion period are acceptable.

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LETTER FROM DAO HENG SECURITIES

RECOMMENDATION

Having taken into account the above factors and reasons, we consider that the terms of the Subscription Agreement are fair and reasonable so far as the interests of the Independent Shareholders are concerned. Accordingly, we recommend the Independent Director to advise the Independent Shareholders to vote at the SGM in favour of the resolution being proposed to approve it.

Yours faithfully, For and on behalf of Dao Heng Securities Limited Venus Choi Jenny Leung Executive Director Director, Corporate Finance

— 32 —

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This document 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 full responsibility for the accuracy of the information contained in this document and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts not contained herein the omission of which would make any statement contained in this document misleading.

2. DISCLOSURE OF INTERESTS

2.1 Directors

2.1.1 Disclosure under the Securities and Futures Ordinance

As at the Latest Practicable Date, the interests of Directors and their associates in the securities of the Company or any of its associated corporations (within the meaning of the Part XV of the SFO) as notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests which they are taken or deemed to have under such provisions) or as entered in the register required to be kept therein pursuant to section 352 of the SFO, or pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers, were as follows:

(i) Long positions in the Company’s Shares:

	Type of	Number of	Approximate
Director	interests	Shares held	Percentage
Mr. Cheung	Corporate	3,194,434,684	37.79%
Chung Kiu	(Note 1)
	Personal	53,320,000	0.63%
Mr. Lam Hiu Lo	Personal	41,800,000	0.49%
Mr. Liang Kang	Personal	34,664,000	0.41%
Mr. Zhang	Personal	13,600,000	0.16%
Qing Xin
(Note 2)

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GENERAL INFORMATION

APPENDIX

(ii) Long positions in the Company’s convertible notes:

			Number of
	Convertible	Type of	underlying	Approximate
Director	notes held	interests	Shares held	Percentage
	(HK$)
Mr. Cheung	100,000,000	Corporate	833,333,333	9.86%
Chung Kiu		(Note 3)
	70,000,000	Corporate	933,333,333	11.04%
		(Note 3)

(iii) Long positions in Chongqing Industrial:

	Type of	Number of	Approximate
Director	Interests	Shares held	Percentage
Mr. Cheung	Corporate	1,857,143	65.00%
Chung Kiu	(Note 4)
	Personal	1,000,000	35.00%

(iv) Long positions in Qualipak International Holdings Limited, a listed subsidiary of the Company:

	Type of	Number of	Approximate
Director	Interests	Shares held	Percentage
Mr. Cheung	Corporate	2,352,396,360	59.71%
Chung Kiu	(Note 5)
Mr. Lee Ka Sze,	Family	1,000,000	0.03%
Carmelo

(v) Long position in Y. T. Realty Group Limited, a listed associate of the Company:

	Type of	Number of	Approximate
Director	Interests	Shares held	Percentage
Mr. Cheung	Corporate	273,000,000	34.25%
Chung Kiu	(Note 6)

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GENERAL INFORMATION

APPENDIX

Notes:

The voting rights of these Shares are exercisable by Chongqing Industrial. Mr. Cheung Chung Kiu, Peking Palace Limited, Miraculous Services Limited and Prize Winner Limited have approximately a 35%, 30%, 5% and 30% equity interest in Chongqing Industrial, respectively.

Peking Palace Limited and Miraculous Services Limited are wholly and beneficially owned by Palin Discretionary Trust, a family discretionary trust, the objects of which include Mr. Cheung Chung Kiu and his family.

Prize Winner Limited is beneficially owned as to 100% by Mr. Cheung Chung Kiu and his associates.

Mr. Zhang Qing Xin is the father of Mr. Cheung Chung Kiu.
The two convertible notes were held by Timmex Investment Limited, in which Mr. Cheung Chung Kiu has a beneficial interest of 100%.
Peking Palace Limited, Miraculous Services Limited and Prize Winner Limited respectively own 857,143, 142,857 and 857,143 shares in, representing approximately 30%, 5% and 30% of the issued share capital of, Chongqing Industrial.
The 2,352,396,360 shares were held by Regulator Holdings Limited (“Regulator”). Regulator is indirectly controlled by Palin Holdings Limited as trustee for the Palin Discretionary Trust, a family discretionary trust, the objects of which include Mr. Cheung Chung Kiu and his family.
The 273,000,000 shares were held by Funrise Limited (“Funrise”) and Funrise is indirectly controlled by Palin Holdings Limited as trustee for the Palin Discretionary Trust, a family discretionary trust, the objects of which include Mr. Cheung Chung Kiu and his family.

In addition to the above, certain directors have non-beneficial interests in certain subsidiaries held for the benefit of the Company solely for the purpose of complying with the minimum company membership requirements.

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors or their respective associates has any interests in the securities of the Company or any of its associated corporations (within the meaning of the Part XV of the SFO) as notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests which they are taken or deemed to have under such provisions) or as entered in the register required to be kept therein pursuant to section 352 of the SFO, or pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers.

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GENERAL INFORMATION

APPENDIX

2.1.2 Disclosure of Other Interests

There are no existing or proposed service contracts between any of the Directors and any member of the Group (excluding contracts expiring or terminable by the employer within one year without compensation (other than statutory which will be compensated)).

None of the Directors has any direct or indirect interest in any assets which have since 31 December 2003 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

None of the Directors is materially interested in any contract or arrangement entered into by any member of the Group subsisting at the date of this document which is significant in relation to the business of the Group.

2.2 Substantial Shareholders

As at the Latest Practicable Date so far as is known to, or can be ascertained after reasonable enquiry by, the Directors, the following persons (other than the directors and chief executives of the Company) have beneficial interests or short positions in any Shares or underlying Shares of the Company 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 SFO, or are directly and/or indirectly interested in 5% or more of the nominal value of any class of the share capital carrying rights to vote in all circumstances at general meetings of any member of the Group, as recorded in the register required to be kept under section 336 of the SFO:

	Type of	Number of	Approximate
Shareholder	Interests	Shares	Percentage
Chongqing Industrial	Corporate	3,194,434,684	37.79%
(Note 1)
Palin Holdings Limited	Corporate	3,194,434,684	37.79%
(Note 1)
Timmex Investment Limited	Corporate	1,766,666,666	20.90%
(Note 2)

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GENERAL INFORMATION

APPENDIX

Notes:

The voting rights of these Shares are exercisable by Chongqing Industrial, Mr. Cheung Chung Kiu, Peking Palace Limited, Miraculous Services Limited and Prize Winner Limited have approximately a 35%, 30%, 5% and 30% equity interest in Chongqing Industrial, respectively. Peking Palace Limited and Miraculous Services Limited are wholly and beneficially owned by Palin Discretionary Trust, a family discretionary trust, the objects of which include Mr. Cheung Chung Kiu and his family.
The interest represents the shares issuable upon the exercise of the conversion right attaching to the convertible notes of HK$100,000,000 and HK$70,000,000 held by Timmex Investment Limited, in which Mr. Cheung Chung Kiu has a beneficial interest of 100%.

Save as disclosed above, there is no person, other than the directors and chief executives of the Company, whose interests are set out in the section headed “Directors”, known to the Directors who, as at the Latest Practicable Date, have beneficial interests or short positions in any Shares or underlying Shares of the Company 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 SFO, or are directly and/or indirectly interested in 5% or more of the nominal value of any class of the share capital carrying rights to vote in all circumstances at general meetings of any member of the Group, as recorded in the register required to be kept under section 336 of the SFO.

As at the Latest Practicable Date so far as is known to, or can be ascertained after reasonable enquiry by, the Directors, the connected transaction under the Subscription Agreement will not result a change of control of the Company.

3. QUALIFICATIONS OF EXPERT, QUALIFIED ACCOUNTANT AND SECRETARY

Dao Heng Securities, the independent financial adviser of the Independent Director, is deemed licensed under the SFO to conduct types 1 (dealing in securities), 4 (advising on securities), 6 (advising on corporate finance), 7 (providing authomated trading services) and 9 (asset management) regulated activities under the SFO.

The secretary of the Company is Mr. Albert T. da Rosa, Jr., a solicitor in Hong Kong.

The qualified accountant of the Company is Mr. Leung Wai Fai, a fellow member of both The Association of Chartered Certified Accountants and the Hong Kong Society of Accountants.

4. FINANCIAL POSITION

So far as the Directors are aware, there is no material adverse change in the financial or trading position of the Company since 31 December 2003, the date to which the latest published audited financial statements of the Company were made up.

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GENERAL INFORMATION

APPENDIX

5. LITIGATION

No member of the Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known by the Directors to be pending or threatened against any member of the Group.

6. EXPERT

(i) Dao Heng Securities does not have any shareholding in any member of the Group nor any right to subscriber for or to nominate persons to subscribe for securities in any member of the Group.
(ii) Dao Heng Securities has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and reference to its name in the form and context in which it appear.
(iii) Dao Heng Securities does not have any direct or indirect interest in any assets which have since 31 December 2003, the date to which the latest published audited accounts of the Group were made up, acquired or disposed of 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.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at Woo, Kwan, Lee & Lo at 27th Floor, Jardine House, 1 Connaught Place, Central, Hong Kong up to and including 28 June 2004:

(i) the Subscription Agreement;
(ii) a draft of the Convertible Note;
(iii) the letter from Dao Heng Securities as set out in this circular;
(iv) the written consent from Dao Heng Securities referred to in paragraph 6(ii) of this appendix; and
(iv) the published annual reports of the Company for the latest two financial years.

8. MISCELLANEOUS

The English text of this circular and the form of proxy shall prevail over the Chinese text.

— 38 —

NOTICE OF SPECIAL GENERAL MEETING

YUGANG INTERNATIONAL LIMITED

(Incorporated in Bermuda with limited liability)

NOTICE IS HEREBY GIVEN that a special general meeting (the “Meeting”) of Yugang International Limited (the “Company”) will be held at Rooms 3301-3307, China Resources Building, 26 Harbour Road, Wanchai, Hong Kong at 9:00 a.m. on Thursday, 15 July 2004 for the purpose of considering and, if thought fit, passing the following resolutions which will be proposed as an ordinary resolution and a special resolution:

ORDINARY RESOLUTION

“THAT, the conditional subscription agreement dated 25 May 2004 (the “Subscription Agreement”) relating to the convertible note with a principal amount of HK$70,000,000 to be issued by the Company (the “Convertible Note”) and entered into between the Company as issuer and Timmex Investment Limited as subscriber (the “Subscriber”), a copy of which has been produced by the Chairman of the meeting and marked “A” for identification, be and is hereby approved and that all transactions contemplated therein be and are hereby approved and that any one director of the Company be and is hereby authorised to do such act or execute such other documents by hand or, in case of execution of documents under seal, to do so jointly with either the Secretary or a duly appointed representative of the directors or a second director of the Company so as to give effect to the terms of the Subscription Agreement and, subject to the satisfaction of the conditions of the Subscription Agreement, the directors of the Company be and are hereby authorised to issue to the Subscriber or to such other person as may be specified by the Subscriber the Convertible Note and the shares in the capital of the Company pursuant to the exercise of the conversion rights attaching to the Convertible Note, in accordance with the terms of the Subscription Agreement and the Convertible Note respectively.”

SPECIAL RESOLUTION

“THAT the existing Bye-laws of the Company be and are hereby amended in the following manner:

(A) Bye-law 1

(i) By adding the following new definition immediately after the definition of “Act”:
““associate(s)”
the meaning attributed to it in the Listing Rules from time to time.”

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NOTICE OF SPECIAL GENERAL MEETING

(ii) By deleting the definition of “clearing house” in its entirety and substituting therefor the following new definition:
““clearing house” a clearing house recognised by the laws of the jurisdiction in which the shares of the Company are listed or quoted on a stock exchange in such jurisdiction.”
(iii) By adding the following new definition immediately after the definition of “head office”:

““Listing Rules” the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.”

(B) Bye-law 2

(i) By adding the words “, and including where the representation takes the form of electronic display, provided that both the mode of service of the relevant document or notice and the Member’s election comply with all applicable Statutes, rules and regulations” after the words “visible form” at the end of Bye-law 2(e).
(ii) By deleting the full stop “.” at the end of Bye-law 2(j) and substituting therefor a semi-colon “;”.
(iii) By adding the following new Bye-law 2(k) immediately following Bye-law 2(j):

“references to a document being executed include references to it being executed under hand or under seal or by electronic signature or by any other method and references to a notice or document include a notice or document recorded or stored in any digital, electronic, electrical, magnetic or other retrievable form or medium and information in visible form whether having physical substance or not.”

(C) Bye-law 44

By adding the words “or by any means in such manner as may be accepted by the Designated Stock Exchange” immediately after the words “any other newspapers in accordance with the requirements of any Designated Stock Exchange” in Byelaw 44.

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NOTICE OF SPECIAL GENERAL MEETING

(D) Bye-law 51

By adding the words “or by any means in such manner as may be accepted by the Designated Stock Exchange” after the words “any other newspapers in accordance with the requirements of any Designated Stock Exchange” in Bye-law 51.

(E) Bye-law 68

By deleting the sentence “There shall be no requirement for the chairman to disclose the voting figures on a poll.” in Bye-law 68.

(F) Bye-law 77A

By adding the following new Bye-law 77A immediately following Bye-law 77:

“77A. Where the Company has knowledge that any Member, under the Listing Rules, is required to abstain from voting on any particular resolution of the Company or restricted to voting only for or against any particular resolution of the Company, any votes cast by or on behalf of such Member in contravention of such requirement or restriction shall not be counted.”

(G) Bye-law 88

By deleting Bye-law 88 in its entirety and substituting therefor the following new Bye-law:

“88. No person other than a Director retiring at the meeting shall, unless recommended by the Directors for election, be eligible for election as a Director at any general meeting, unless a Notice signed by a Member (other than the person to be proposed) duly qualified to attend and vote at the meeting for which such notice is given of his intention to propose such person for election and also a Notice signed by the person to be proposed of his willingness to be elected shall have been lodged at the head office or at the Registration Office provided that the minimum length of the period, during which such Notice(s) are given, shall be at least 7 days and that the period for lodgement of such Notice(s) shall commence no earlier than the day after the despatch of the notice of the meeting appointed for such election and end no later than 7 days prior to the date of such general meeting.”

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NOTICE OF SPECIAL GENERAL MEETING

(H) Bye-law 103

By deleting Bye-law 103 in its entirety and substituting therefor the following new Bye-law:

“103 (1) Save as otherwise provided by these Bye-laws, a Director shall not vote (nor be counted in the quorum) on any resolution of the Board in respect of any contract or arrangement or any other proposal whatsoever in which he or any of his associate(s) is materially interested, but this prohibition shall not apply to any of the following matters:
(i) the giving of any security or indemnity to the Director or his associate(s) in respect of money lent or obligations incurred or undertaken by him or any of them at the request of or for the benefit of the Company or any of its subsidiaries;
(ii) the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his associate(s) has himself/themselves assumed responsibility in whole or in part and whether alone or jointly under a guarantee or indemnity or by the giving of security;
(iii) any proposal concerning an offer of shares or debentures or other securities of or by the Company or of its subsidiaries or any other company which the Company may promote or be interested in for subscription or purchase where the Director or his associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer;
(iv) any proposal concerning any other company in which the Director or his associate(s) is/are interested only, whether directly or indirectly, as an officer or executive or shareholder or in which the Director or his associate(s) is/are beneficially interested in shares of that company, provided that the Director and any of his associates are not in aggregate beneficially interested in five per cent. or more of the issued shares of any class of such company (or of any third company through which his interest or that of his associates is derived) or of the voting rights available to members of the relevant company;

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NOTICE OF SPECIAL GENERAL MEETING

(v) any proposal concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death or disability benefits scheme or other arrangement which relates both to Directors, his associate(s) and employees of the Company or any of its subsidiaries and does not provide in respect of any Director or his associate(s), as such any privilege or advantage not generally accorded to the class of persons to which such scheme or fund relates;
(vi) any contract or arrangement in which the Director or his associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company.”
(2) A company shall be deemed to be a company in which a Director and/or his associate(s) own(s) five (5) per cent. or more if and so long as (but only if and so long as) he and/or his associate(s) (either directly or indirectly) are the holder(s) of or beneficially interested in five (5) per cent. or more of any class of the equity share capital of such company or of the voting rights available to members of such company (or of any third company through which his interest or that of any of his associate(s) is derived). For the purpose of this paragraph there shall be disregarded any shares held by a Director or his associate(s) as bare or custodian trustee and in which he or any of them has no beneficial interest, any shares comprised in a trust in which the interest of the Director or his associate(s) is/are in reversion or remainder if and so long as some other person is entitled to receive the income thereof, and any shares comprised in an authorised unit trust scheme in which the Director and/or his associate(s) is/are interested only as a unit holder and any shares which carry no voting right at general meetings and very restrictive dividend and return of capital right.
(3) Where a company in which a Director and/or his associate(s) holds five (5) per cent. or more is materially interested in a transaction, then that Director and/or his associate(s) shall also be deemed materially interested in such transaction.
(4) If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the chairman of the meeting) or his associate(s) or as to the entitlement of any Director (other than such chairman) to vote and such question is not resolved

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NOTICE OF SPECIAL GENERAL MEETING

by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to such other Director shall be final and conclusive except in a case where the nature or extent of the interest of the Director and/ or his associate(s) concerned as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the chairman of the meeting such question shall be decided by a resolution of the Board (for which purpose such chairman shall not vote thereon) and such resolution shall be final and conclusive except in a case where the nature or extent of the interest of such chairman as known to such chairman has not been fairly disclosed to the Board.”

(I) Bye-law 153

by adding the words “and Bye-law 153A” after the words “Subject to Section 88 of the Act” in Bye-law 153.

(J) Bye-laws 153A and 153B

By adding the following new Bye-laws 153A and 153B immediately following Bye-law 153:

“153A. To the extent permitted by and subject to due compliance with all applicable Statutes, rules and regulations, including, without limitation, the rules of the Designated Stock Exchange, and to obtaining all necessary consents, if any, required thereunder, the requirements of Bye-law 153 shall be deemed satisfied in relation to any person by sending to the person in any manner not prohibited by the Statutes, a summary financial statement derived from the Company’s annual accounts and the directors’ report which shall be in the form and containing the information required by applicable laws and regulations, provided that any person who is otherwise entitled to the annual financial statements of the Company and the directors’ report thereon may, if he so requires by notice in writing served on the Company, demand that the Company sends to him, in addition to a summary financial statement, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon.
153B. The requirement to send to a person referred to in Bye-law 153 the documents referred to in that Bye-law or a summary financial report in accordance with Bye-law 153A shall be deemed satisfied where,

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NOTICE OF SPECIAL GENERAL MEETING

in accordance with all applicable Statutes, rules and regulations, including, without limitation, the rules of the Designated Stock Exchange, the Company publishes copies of the documents referred to in Bye-law 153 and, if applicable, a summary financial report complying with Bye-law 153A, on the Company’s computer network or in any other permitted manner (including by sending any form of electronic communication), and that person has agreed or is deemed to have agreed to treat the publication or receipt of such documents in such manner as discharging the Company’s obligation to send to him a copy of such documents.”

(K) Bye-law 160

By deleting Bye-law 160 in its entirety and substituting therefor the following new Bye-law:

“160. Any Notice or document (including any “corporate communication” within the meaning ascribed thereto under the rules of the Designated Stock Exchange), whether or not, to be given or issued under these Bye-laws from the Company to a Member shall be in writing or by cable, telex or facsimile transmission message or other form of electronic transmission or communication and any such Notice and document may be served or delivered by the Company on or to any Member either personally or by sending it through the post in a prepaid envelope addressed to such Member at his registered address as appearing in the Register or at any other address supplied by him to the Company for the purpose or, as the case may be, by transmitting it to any such address or transmitting it to any telex or facsimile transmission number or electronic number or address or website supplied by him to the Company for the giving of Notice to him or which the person transmitting the notice reasonably and bona fide believes at the relevant time will result in the Notice being duly received by the Member or may also be served by advertisement in appointed newspapers (as defined in the Act) or in the newspapers in accordance with the requirements of any Designated Stock Exchange or, to the extent permitted by the applicable laws, by placing it on the Company’s website or the website of the Designated Stock Exchange, and giving to the Member a notice stating that the notice or other document is available there (a “notice of availability”). The notice of availability may be given to the Member by any of the means set out above. In the case of joint holders of a share, all notices shall be given to that one of the joint holders whose name stands first in the Register and notice so given shall be deemed a sufficient service on or delivery to all the joint holders.”

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NOTICE OF SPECIAL GENERAL MEETING

(L) Bye-law 161

By deleting Bye-law 161 in its entirety and substituting therefor the following new Bye-law:

“161. Any Notice or other document:
(a) if served or delivered by post, shall where appropriate be sent by airmail or an equivalent service that is no slower and shall be deemed to have been served or delivered on the day following that on which the envelope containing the same, properly prepaid and addressed, is put into a post office; and in proving such service or delivery, it shall be sufficient to prove that the envelope or wrapper containing the notice or document was properly addressed and put into the post office and a certificate in writing signed by the Secretary or other officer of the Company or other person appointed by the Board that the envelope or wrapper containing the notice or other document was so addressed and put into such post office shall be conclusive evidence thereof;
(b) if sent by electronic communication, shall be deemed to be given on the day on which it is transmitted from the server of the Company or its agent. A notice placed on the Company’s website or the website of the Designated Stock Exchange is deemed given by the Company to a Member on the day following that on which a notice of availability is deemed served on the Member;
(c) if served or delivered in any other manner contemplated by these Bye-laws, shall be deemed to have been served or delivered at the time of personal service or delivery or, as the case may be, at the time of the relevant despatch, transmission or publication; and in proving such service or delivery a certificate in writing signed by the Secretary or other officer of the Company or other person appointed by the Board as to the fact and time of such service, delivery, despatch, transmission or publication shall be conclusive evidence thereof;
(d) if served by advertisement in appointed newspapers (as defined in the Act) or newspapers in accordance with the requirements of any Designated Stock Exchange, shall be deemed to have been served on the day on which such notice or document is first published; and

— 46 —

NOTICE OF SPECIAL GENERAL MEETING

(e) may be given to a Member either in the English language or the Chinese language, subject to due compliance with all applicable Statutes, rules and regulations.”

(M) Bye-law 163

By adding the words “or electronic” after the words “a cable or telex or facsimile” in Bye-law 163.

By order of the board Albert T. da Rosa, Jr. Secretary

14 June 2004

Head office and principal place of business in Hong Kong:

Rooms 3301-3307

China Resources Building

26 Harbour Road

Wanchai, Hong Kong

Notes:

A form of proxy for use at the meeting is enclosed.
Any member entitled to attend and vote at the meeting of the Company shall be entitled to appoint one or more proxies to attend and vote instead of him.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same.
The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered to the Company’s branch share registrar in Hong Kong, Tengis Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote.
A proxy need not be a member. A member may appoint a proxy in respect of part only of his holding of shares in the Company.
In the case of joint holders of a share if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.

— 47 —

YUGANG INTERNATIONAL LIMITED （渝港國際有限公司） **[*]**

(Incorporated in Bermuda with limited liability)

(Stock Code: 613)

Form of proxy for use at the special general meeting to be held on 15 July 2004 (or at any adjournment thereof)

I/We [(Note 1)]

registered holder(s) of [(Note 2)]

being the

shares of HK$0.01 each in the capital of Yugang

International Limited (the “Company”), HEREBY APPOINT [(Note 3)] the chairman of the special general meeting, or

of as my/our proxy to attend for me/us at the special general meeting (and at any adjournment thereof) of the Company, to be held at Rooms 3301-3307, China Resources Building, Wanchai, Hong Kong on Thursday, 15 July 2004 at 9:00 a.m. for the purpose of considering and, if thought fit, passing the ordinary resolution and special resolution as set out in the notice convening the said meeting and at such meeting (or at any adjournment thereof) to vote for me/us and in my/our name(s) in respect of the said resolutions as hereunder indicated.

	FOR(Note 4)	AGAINST(Note 4)
ORDINARY RESOLUTION
1. To consider and approve the Subscription Agreement and the transactions as contemplated therein.
SPECIAL RESOLUTION
2. To consider and approve the amendments to the Bye-laws.

Signature(s)

Date

Notes:

Full name(s) and address(es) must be inserted in BLOCK CAPITAL . 2. Please insert the number of shares registered in your name(s) to which the proxy relates. If no number is inserted, this form of proxy will be deemed to relate to all the shares of the Company registered in your name(s).
If any proxy other than the chairman is preferred, strike out “the chairman of the special general meeting, or” and insert the name and address of the proxy desired in the space provided. A member may appoint one or more proxies to attend and vote in his stead. ANY ALTERATION MADE TO THIS FORM OF PROXY MUST BE INITIALLED BY THE PERSON(S) WHO SIGN(S) IT.
IMPORTANT: IF YOU WISH TO VOTE FOR A RESOLUTION, TICK THE BOX MARKED “FOR”. IF YOU WISH TO VOTE AGAINST A RESOLUTION, TICK THE BOX MARKED “AGAINST”. Failure to tick either box will entitle your proxy to cast your vote or abstain at his discretion. Your proxy will also be entitled to vote at his discretion on any resolution properly put to the said meeting other than those referred to in the notice convening the meeting.
Any member entitled to attend and vote at the meeting of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same.
The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered to the Company’s branch share registrar in Hong Kong, Tengis Limited at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong, not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote.
A proxy need not be a member. A member may appoint a proxy in respect of part only of his holding of shares in the Company.
In the case of joint holders of a share if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holder, and for this purpose seniority shall be determined by the order in which the names stand in the register in respect of the joint holding.
For identification purposes only.

AI assistant

Planetree International Development Limited — Proxy Solicitation & Information Statement 2004

49339_rns_2004-06-14_71000f2e-a629-46ab-9955-4792653cda87.pdf

YUGANG INTERNATIONAL LIMITED

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE AND AMENDMENTS TO BYE-LAWS

CONTENTS

DEFINITIONS

DEFINITIONS

YUGANG INTERNATIONAL LIMITED

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE AND AMENDMENTS TO THE BYE-LAWS

1. INTRODUCTION

LETTER FROM THE CHAIRMAN

2. SUBSCRIPTION AGREEMENT

Date of agreement

Parties

Principal terms of the Convertible Note

LETTER FROM THE CHAIRMAN

LETTER FROM THE CHAIRMAN

Conditions Precedent

Use of proceeds

Reasons for the issue of the Convertible Note

Connected Transaction

3. SHAREHOLDING OF THE SIGNIFICANT SHAREHOLDERS

LETTER FROM THE CHAIRMAN

4. EFFECTS ON THE FINANCIAL POSITION OF THE GROUP

Indebtedness

NAV

5. RECOMMENDATIONS

6. SPECIAL GENERAL MEETING

7. POLL DEMAND

8. AMENDMENTS TO THE BYE-LAWS

9. ADDITIONAL INFORMATION

YUGANG INTERNATIONAL LIMITED

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE

CONNECTED TRANSACTION PROPOSED ISSUE OF A CONVERTIBLE NOTE

INTRODUCTION

LETTER FROM DAO HENG SECURITIES

PRINCIPAL TERMS OF THE SUBSCRIPTION AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED

A. Principal terms of the Convertible Note

(i) Conversion Price

Table 1: Comparison of conversion prices of the Convertible Note with the Share prices

Table 2: Summary of the Comparable Issues

(ii) Interest rate

B. Reasons for the proposed issuance of Convertible Note

C. Alternative way of financing

LETTER FROM DAO HENG SECURITIES

Table 3 : Trading performance of the Shares in different periods ended 24 May 2004

D. Effect on the financial position of the Group

Indebtedness

NAV

E. Dilution effect on the interests of Independent Shareholders

Table 5: Number of Shares to be issued upon full conversion of the Convertible Note

LETTER FROM DAO HENG SECURITIES

RECOMMENDATION

1. RESPONSIBILITY STATEMENT

2. DISCLOSURE OF INTERESTS

2.1 Directors

2.1.1 Disclosure under the Securities and Futures Ordinance

2.1.2 Disclosure of Other Interests

2.2 Substantial Shareholders

3. QUALIFICATIONS OF EXPERT, QUALIFIED ACCOUNTANT AND SECRETARY

4. FINANCIAL POSITION

5. LITIGATION

6. EXPERT

7. DOCUMENTS AVAILABLE FOR INSPECTION

8. MISCELLANEOUS

YUGANG INTERNATIONAL LIMITED

ORDINARY RESOLUTION

SPECIAL RESOLUTION

(A) Bye-law 1

(B) Bye-law 2

(C) Bye-law 44

(D) Bye-law 51

(E) Bye-law 68

(F) Bye-law 77A

(G) Bye-law 88

(H) Bye-law 103

(I) Bye-law 153

(J) Bye-laws 153A and 153B

Planetree International Development Limited Proxy Solicitation & Information Statement 2004

YUGANG INTERNATIONAL LIMITED （渝港國際有限公司） **[*]**