THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

If you have sold or transferred all your shares in Precision Tsugami (China) Corporation Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, licensed dealer, or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 1651)

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

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A letter from the Board is set out on pages 6 to 23 of this circular. A letter from the Independent Board Committee containing its advice to the Independent Shareholders is set out on pages 24 to 25 of this circular. A letter from Lego Corporate Finance Limited, the Independent Financial Adviser, containing its advice and recommendations to the Independent Board Committee and the Independent Shareholders is set out on pages 26 to 45 of this circular.

A notice convening the EGM to be held at 24/F, Admiralty Centre 1, 18 Harcourt Road, Hong Kong on Monday, 16 August 2021 at 10:30 a.m. or after the conclusion of the 2021 annual general meeting (whichever is the earlier) is set out on pages 51 to 54 of this circular. Whether or not you are able 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 practicable and in any event not less than 48 hours before the time fixed for holding the EGM (or any adjournment thereof) to the office of the Company’s branch share registrar in Hong Kong, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting thereof if you so wish and in such event, the instrument appointing a proxy shall be deemed to be revoked.

PRECAUTIONARY MEASURES FOR THE EGM

Taking into account the recent developments of the novel coronavirus disease 2019 (COVID-19), the Company will implement the following prevention and control measures at the EGM to safeguard the health and safety of the Shareholders attending the EGM:

Compulsory body temperature check will be conducted for every Shareholder or proxy at the entrance of the venue. Any person with a body temperature of over 37.3 degrees Celsius will not be admitted to the venue.
Every Shareholder or proxy is required to wear surgical mask throughout the meeting.
Every Shareholder or proxy is required to complete a health declaration form before entering the venue.
GovernmentNo entry to theof thevenueHongis allowedKong Specialfor anyAdministrativeperson who hasRegionshown(theany“symptom Hong Kong of COVID-19 Government or ”).is subject to quarantine order by the
Appropriate distancing and spacing in compliance with the guidances from the Hong Kong Government will be observed and as such, the Company reserves the right to limit the number of the attendees at the EGM as may be necessary to avoid over-crowding.
No refreshments will be served and no corporate gifts will be distributed.

References to time and dates in this circular are to Hong Kong time and dates.

30 June 2021

	Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
LETTER FROM THE INDEPENDENT BOARD COMMITTEE. . . . . . . . . . . . . .	24
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . .	26
APPENDIX – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . .	46
NOTICE OF EGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51

– i –

DEFINITIONS

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

“Board”

the board of Directors;

“CAGR”

compound annual growth rate;

“CNC”

the abbreviation for “computerised numerical control”;

“Company”

Precision Tsugami (China) Corporation Limited, a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the Main Board of the Stock Exchange;

“connected person”

has its meaning as given to it under the Listing Rules;

“controlling shareholder”

has its meaning as given to it under the Listing Rules;

“COVID-19”

Novel Coronavirus (COVID-19) or Novel Coronavirus Pneumonia, a respiratory illness caused by a new strain of coronavirus and characterised especially by fever, cough, and shortness of breath and may progress to pneumonia and respiratory failure;

“Director(s)”

the director(s) of the Company;

“EGM”

the extraordinary general meeting of the Company to be convened and held for the Independent Shareholders to consider and, if thought fit, among other things, to approve and ratify the exceeding of the Original 2021 Technology Annual Caps; and to approve the Revised Annual Caps by way of ordinary resolutions;

“Existing Agreements”
collectively, the Master Sales Agreement, Master Purchase Agreement and Technology Licence Agreement;
“GDP”

gross domestic product;

“Group”

the Company and its subsidiaries;

“Hong Kong”

the Hong Kong Special Administrative Region of the People’s Republic of China;

– 1 –

DEFINITIONS

“Independent Board Committee”
“Independent Financial Adviser”
“Independent Shareholders”
“Independent Third Parties”
“Latest Practicable Date”
“Listing Rules”
“Master Purchase Agreement”
the committee of the Board comprising all the independent non-executive Directors established to advise the Independent Shareholders as to voting at the EGM on, among other things, the resolutions approving the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps;

Lego Corporate Finance Limited, a corporation licensed to carry out Type 6 (advising on corporate finance) regulated activity under the SFO, which is the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders in relation to the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps;

Shareholders other than Tsugami Japan and its associates, and any other Shareholder(s) who are considered as materially interested in the Existing Agreements and the transactions contemplated thereunder including the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps;

an individual(s) or a company(ies) who or which, as far as the Directors are aware after having made reasonable enquiries, is/are independent of and not connected with (within the meaning of the Listing Rules) the Company, any Director, chief executive or substantial shareholder of the Company, its subsidiaries or any of their respective associates;
28 June 2021, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contain herein;
the Rules Governing the Listing of Securities on the Stock Exchange;
the master purchase agreement dated 4 September 2017 entered into between the Company and Tsugami Japan and renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023, the principal terms of which are summarised in this circular;

– 2 –

DEFINITIONS

“Master Sales Agreement”
“Original 2021 Technology Annual Cap”
“Original 2022 and 2023 Annual Caps”
“Original 2022 and 2023 Purchase Annual Caps”
“Original 2022 and 2023 Sales Annual Caps”
“Original 2022 and 2023 Technology Annual Caps”
“Other Markets”
“PRC”
“Revised Annual Caps”
“Revised Purchase Annual Caps”
the master sales agreement dated 4 September 2017 entered into between the Company and Tsugami Japan and renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023, the principal terms of which are summarised in this circular;
the original annual cap amount for the year ended 31 March 2021 in respect of the Technology Licence Agreement;
collectively, the Original 2022 and 2023 Technology Annual Caps, the Original 2022 and 2023 Sales Annual Caps, and the Original 2022 and 2023 Purchase Annual Caps;
the original annual cap amounts for the two years ending 31 March 2023 respectively in respect of the Master Purchase Agreement as disclosed in this circular;
the original annual cap amounts for the two years ending 31 March 2023 respectively in respect of the Master Sales Agreement as disclosed in this circular;
the original annual cap amounts for the two years ending 31 March 2023 respectively in respect of the Technology Licence Agreement as disclosed in this circular;
markets outside the PRC and Taiwan;
People’s Republic of China, but for the purpose of this circular and for geographical reference only and except where the context requires otherwise, references in this circular to the “PRC” do not apply to Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan;
collectively, the Revised Technology Annual Caps, the Revised Sales Annual Caps, and the Revised Purchase Annual Caps;
the proposed annual cap amounts for the two years ending 31 March 2023 respectively in respect of the Master Purchase Agreement as disclosed in this circular;

– 3 –

DEFINITIONS

“Revised Sales Annual Caps” the proposed annual cap amounts for the two years ending 31 March 2023 respectively in respect of the Master Sales Agreement as disclosed in this circular;
“Revised Technology Annual the proposed annual cap amounts for the two years Caps” ending 31 March 2023 respectively in respect of the Technology Licence Agreement as disclosed in this circular;
“RMB” Renminbi, the lawful currency of the PRC;
“SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);
“Shareholder(s)” shareholder(s) of the Company;
“Stock Exchange” The Stock Exchange of Hong Kong Limited;
“Technology” technical information and related intellectual property rights of Tsugami Japan for manufacturing certain types of CNC high precision machine tools of the Company and to provide aftersales services in connection with these products;
“Technology Licence Agreement”
the technology licence agreement dated 4 September 2017 entered into between the Company and Tsugami Japan and renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023, the principal terms of which are summarised in this circular;
“Third-party Components”
parts and components which are manufactured by thirdparty suppliers and procured from Tsugami Japan, excluding CNC system panels;
“Trademark(s)”
the trademarks licensed by Tsugami Japan to the Company from time to time pursuant to the Technology Licence Agreement;
“TSUGAMI brand”

Tsugami brand denoted by the trademark ;

– 4 –

DEFINITIONS

“Tsugami Japan” Tsugami Corporation (株式會社ツガミ), the controlling shareholder of the Company, a Japanese company incorporated in March 1937 and which is listed on the Tokyo Stock Exchange; “Tsugami Japan Group” Tsugami Japan and its subsidiaries (other than the Group).

– 5 –

LETTER FROM THE BOARD

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 1651)

Executive Directors: Registered Office: Dr. Tang Donglei (Chief executive officer) PO Box 309 Dr. Li Zequn Ugland House Grand Cayman Non-executive Directors: KY1-1104 Mr. Takao Nishijima (Chairman) Cayman Islands Ms. Mami Matsushita Mr. Kenji Yoneyama Principal place of

Principal place of business in Hong Kong: Level 54, Hopewell Centre 183 Queen’s Road East Hong Kong

Independent non-executive Directors: Dr. Eiichi Koda Dr. Huang Ping Mr. Tam Kin Bor

30 June 2021

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP

AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

INTRODUCTION

Reference is made to the announcement of the Company dated 8 June 2021 in relation to, among other things, the exceeding of the Original 2021 Technology Annual Cap and the proposed revision of the Original 2022 and 2023 Annual Caps.

The purpose of this circular is to provide you with, among other things, (i) information relating to the exceeding of the Original 2021 Technology Annual Cap; (ii) information relating to the Revised Annual Caps; (iii) a letter from the Independent Board Committee, which sets out the recommendations of the Independent Board Committee to the Independent Shareholders in relation thereto; (iv) a letter from the Independent Financial Adviser, which sets out the opinions and recommendations of the Independent Financial Adviser to the Independent Board Committee and Independent Shareholders in relation thereto; and a notice to convene the EGM.

– 6 –

LETTER FROM THE BOARD

EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP

In or around May 2021, in the course of preparing the annual results of the Company for the year ended 31 March 2021, the management of the Company noted that the aggregate amount of Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan for the year ended 31 March 2021 amounted to approximately RMB144.3 million, which exceeded the Original 2021 Technology Annual Cap of RMB129.0 million. The Company promptly initiated an internal review to assess the non-compliance. In this connection, the Company engaged external legal advisers to advise the Company on the Listing Rules implication.

Reasons for exceeding the Original 2021 Technology Annual Cap

The preliminary findings of the Company’s internal review are summarised as follows:

During the six months ended 30 September 2020, the Company noted that the sales performance of the Company’s CNC high precision machine tools had shown signs of slowing down. By the end of the six months ended 30 September 2020, only approximately 49% of the Original 2021 Technology Annual Cap was deployed. Taking into account that (i) when determining the Original 2021 Technology Annual Cap and the Original 2022 and 2023 Technology Annual Caps, the management of the Company has considered the projected sales performance with reasonable basis (please refer to “Historical transaction amounts and the Annual Caps – Basis for the Technology Annual Caps” of the circular of the Company dated 11 March 2020) after due and careful enquiry; and (ii) historically, the sales performance for the Company’s CNC high precision machine tools in the second half of the financial year was usually not as strong as the first half of the financial year, in particular, sales in the last quarter of the financial year was generally less due to the Chinese New Year, the Company was confident that the Original 2021 Technology Annual Cap would not be exceeded at the time.
It turned out that the sales performance of the Company was unexpectedly strong in the second half of the financial year ended 31 March 2021, in particular, the Company recorded unprecedented sales revenue for the last quarter of the financial year ended 31 March 2021. The total sales of the Company’s CNC high precision machine tools for the second half and last quarter of the financial year ended 31 March 2021 reached approximately RMB1,740 million and RMB980 million, respectively, representing an increase of approximately 100.5% and 168.5% compared to the second half and last quarter of the financial year ended 31 March 2020, respectively. The Directors believe that this was because the automobile parts and components industry has recovered completely from the downturn and began to grow significantly and the orders of the Group from the Other Markets have also improved gradually since the beginning of the fourth quarter of the financial year ended 31 March 2021, with signs of recovery to normal levels. In addition, the strong demand from the domestic market drove the increase in the Group’s sales revenue and profit significantly.

– 7 –

LETTER FROM THE BOARD

As the Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan pursuant to the Technology Licence Agreement correlate positively to the sales of the Group’s CNC high precision machine tools, there was an increase of approximately 28.4% in the Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan pursuant to the Technology License Agreement from the first half to the second half of the financial year ended 31 March 2021.
Against the background described above and due to inadvertent oversight, the Company failed to detect that the Original 2021 Technology Annual Cap has already been quickly deployed during the second half of the financial year ended 31 March 2021 to a point where it was finally exceeded in March 2021, the last month of the financial year ended 31 March 2021 to which the Original 2021 Technology Annual Cap applied.

As the Original 2021 Technology Annual Cap was exceeded in March 2021, the last month to which the Original 2021 Technology Annual Cap applied, there is no continuing non-compliance for the Company as at the Latest Practicable Date. The Company confirms that the Trademarks and Technology license fees and aftersales services fees paid and payable to Tsugami Japan as at the Latest Practicable Date are still within the annual cap for the current financial year for transactions contemplated under the Technology Licence Agreement.

The Company also confirms that the annual caps for the financial year ended 31 March 2021 and the current financial year for transactions contemplated under the Master Sales Agreement and the Master Purchase Agreement have not been exceeded.

Remedial measures and internal control measures

The Company has adopted and implemented a management system for connected transactions, and the Board and various internal departments of the Company are responsible for the control and management in respect of continuing connected transactions.

In order to improve the Company’s compliance with the applicable Listing Rules requirements going forward, the Company will take steps to further strengthen its internal monitoring procedures to prevent recurrence of similar non-compliance incidents as follows:

(a) the finance manager of the Company will closely monitor the actual transaction amounts incurred pursuant to the continuing connected transactions of the Company on a monthly basis. The senior management of the Company will monitor and double-check these actual transaction amounts. If the actual transaction amount(s) reaches 80% or more of the relevant annual cap(s) at any time, the matter shall promptly be escalated to the executive Directors and the Board, who will decide whether appropriate measure shall be taken, including but not limited to revising the relevant annual cap(s) and seeking approval from the Independent Shareholders in accordance with the requirements of the Listing Rules, if necessary;

– 8 –

LETTER FROM THE BOARD

(b) the management of the Company will closely monitor the sales performance of the CNC high precision machine tools and regular assessments will be carried out to monitor the projected sales to assess whether an exceeding of the annual cap(s) may occur, having regard to the number of months that are remaining in the given financial year and the amount of annual cap(s) that have been deployed;
(c) the Company will arrange for regular training for its employees, including the business operation, finance and compliance departments, to strengthen their knowledge of the Listing Rules and enhance their awareness of the importance of compliance with the Listing Rules; and
(d) the Company’s internal audit department will monitor the effectiveness and adequacy of the internal monitoring procedures, and will make recommendations and report to the Audit Committee of the Company on a regular basis.

The Board’s View

The Board has taken the non-compliance seriously and is of the view that it is of utmost importance to and remains committed to satisfactorily addressing, resolving and ratifying it. The Board considers that the exceeding of the Original 2021 Technology Annual Cap was an isolated event, and the Company will take steps to strengthen its internal control and compliance procedures to prevent recurrence of a similar event in the future. The Board believes that the exceeding of the Original 2021 Technology Annual Cap does not bring about any material impact on the business and operations of the Company, nor does it have a material financial impact on the Company.

REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

The Company proposes to revise the Original 2022 and 2023 Annual Caps as follows:

(A) The Technology Licence Agreement

On 4 September 2017, the Company and Tsugami Japan entered into the Technology Licence Agreement for a term of three years commencing from 25 September 2017 to 31 March 2020, which was renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023, and will be automatically renewed for successive periods of three years thereafter unless notified by the Company to Tsugami Japan by written notice of not less than 30 days before the expiry of the subsequent successive periods or otherwise terminated earlier in accordance with the Technology Licence Agreement. There has been no change in the terms of the Technology Licence Agreement since it was entered into on 4 September 2017.

– 9 –

LETTER FROM THE BOARD

The principal terms of the Technology Licence Agreement are summarized below:

Date : 4 September 2017 Parties : (a) the Company (b) Tsugami Japan Duration : The Technology Licence Agreement shall continue to be effective up to and including 31 March 2023, which may be automatically renewed for successive periods of three years thereafter unless notified by the Company to Tsugami Japan by written notice of not less than 30 days before the expiry of any subsequent successive periods, or otherwise terminated earlier in accordance with the Technology Licence Agreement. Continuing transactions : Tsugami Japan agreed to irrevocably grant to the Company:

(a) an exclusive licence to use the Technology necessary for the manufacture of the CNC high precision machine tools of the Company and to provide aftersales services in connection with these products; and
(b) as the sole licensee, the right to use the Trademarks in the PRC, Hong Kong and Taiwan, and a non-exclusive licence to use the Trademarks in any regions (excluding the PRC, Hong Kong and Taiwan).

Pricing guideline

The aftersales services fees to be charged by Tsugami Japan will be determined based on the daily rate of approximately JPY46,000 multiplied by the total number of working days of the staff of Tsugami Japan.

– 10 –

LETTER FROM THE BOARD

Historical transaction amounts

	For the year	For the year	For the year	For the year
	ended	ended	ended	ended
	31 March 2018	31 March 2019	31 March 2020	31 March 2021
	RMB (million)	RMB (million)	RMB (million)	RMB (million)
Trademarks and
Technology license
fees and aftersales
services fees	107.5	128.5	90.4	144.3

Revision of annual caps

	For the year	For the year
	ending	ending
	31 March 2022	31 March 2023
	RMB (million)	RMB (million)
Original 2022 and 2023 Technology
Annual Caps	161.0	193.0
Revised Technology Annual Caps	231.0	276.0

Basis for the Revised Technology Annual Caps

In determining the Revised Technology Annual Caps, the Directors considered (i) the historical Trademarks and Technology licence fees and aftersales services fees paid to Tsugami Japan for the four years ended 31 March 2021; (ii) the actual orders and agreements on hand for the CNC high precision machine tools of the Group to be produced and delivered for the year ending 31 March 2022; (iii) the royalty rate of 1.0% or 5.0% and the aftersales services fees payable to Tsugami Japan pursuant to the Technology Licence Agreement; (iv) the projected growth for the sales of the CNC high precision machine tools of the Group for the two years ending 31 March 2023, with reference to the total sales of the Group for the year ended 31 March 2021; and (v) the estimated increase in market price of or demand for the CNC high precision machine tools of the Group for the two years ending 31 March 2023.

As the Trademarks and Technology licence fees payable to Tsugami Japan shall be calculated based on the royalty rate multiplied by the total sales of the CNC high precision machine tools, the Trademarks and Technology licence fees are highly correlated to the overall sales performance of the Group. In this regard, the Company has set the Revised Technology Annual Caps taking into account the sales projections and expected demand for its CNC high precision machine tools both in the PRC and the Other Markets for the two years ending 31 March 2023 as explained in the paragraphs “(B) The Master Sales Agreement – Basis for the

– 11 –

LETTER FROM THE BOARD

Revised Sales Annual Caps” and “(C) The Master Purchase Agreement – Basis for the Revised Purchase Annual Caps” below. Based on the above, the Board considers the basis for the Revised Technology Annual Caps are fair and reasonable.

(B) The Master Sales Agreement

On 4 September 2017, the Company and Tsugami Japan entered into the Master Sales Agreement for a term of three years commencing from 25 September 2017 to 31 March 2020, which was renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023, and will be automatically renewed for successive periods of three years thereafter unless terminated, amongst other matters, by either party with not less than 30 business days’ prior written notice, subject to compliance of the Listing Rules. There has been no change in the terms of the Master Sales Agreement since it was entered into on 4 September 2017.

The principal terms of the Master Sales Agreement are summarized below:

Date : 4 September 2017 Parties : (a) the Company (b) Tsugami Japan Duration : The Master Sales Agreement shall continue to be effective up to and including 31 March 2023, which may be automatically renewed for successive periods of three years thereafter unless terminated, amongst other matters, by either party with not less than 30 business days’ prior written notice, subject to compliance of the Listing Rules.

Continuing transactions : The Group agreed to sell its CNC high precision machine tools to the Tsugami Japan Group.

Pricing guideline

The transactions contemplated under the Master Sales Agreement will be conducted in the ordinary and usual course of business of the Group and that of the Tsugami Japan Group, on normal commercial terms or better and on terms which are fair and reasonable and in the interests of the Group and the Shareholders as a whole. The selling price in respect of each definitive agreement under the Master Sales Agreement will be determined in line with similar products provided to the Independent Third Parties.

– 12 –

LETTER FROM THE BOARD

The Group sold its CNC high precision machine tools, with or without customisations, to the Tsugami Japan Group. In determining the selling prices of the CNC high precision machine tools sold to the Tsugami Japan Group, the Company will consider factors including the level of customisations, time and effort required for making various specifications and/or customisations to the CNC high precision machine tools, purchase quantity, the delivery schedule, whether sales and marketing, aftersales services and technical support services are needed, etc. No special discount will be offered to the Tsugami Japan Group by virtue of the fact that the Tsugami Japan Group is a connected person of the Company. After taking into account the above factors, the Company will provide a quotation which is comparable to at least two transactions with independent third party customers of similar products for the same period.

To ensure the transactions conducted pursuant to the Master Sales Agreement are priced fairly and reasonably and in the interests of the Group and its Shareholders as a whole, the Company has adopted the following internal control measures:

The finance department of the Company will be responsible for gathering information from time to time about the prevailing market prices and the market trend for comparable products through various channels, including, for example, conducting market price research through various independent industry information websites, discussing with third party industry players and attending events held by industry associations;
The Company will analyse and compare the prevailing market prices for comparable products in the market with the selling prices of the CNC high precision machine tools offered to the Tsugami Japan Group;
The Company will consider at least two comparable transactions with the independent third party customers of similar products for the same period to ensure no better terms are offered to the Tsugami Japan Group; and
The finance department of the Company will conduct regular checks on the sales transactions with the Tsugami Japan Group, monitoring the amounts of transactions and conducting assessment and evaluation on the fairness of the transaction terms and pricing terms.

– 13 –

LETTER FROM THE BOARD

Historical transaction amounts

	For the year	For the year	For the year	For the year
	ended	ended	ended	ended
	31 March 2018	31 March 2019	31 March 2020	31 March 2021
	RMB (million)	RMB (million)	RMB (million)	RMB (million)
Total sales of CNC high
precision machine
tools to the Tsugami
Japan Group	634.5	822.7	490.1	384.6

Revision of annual caps

			For the year	For the year
			ending	ending
			31 March 2022	31 March 2023
			RMB (million)	RMB (million)
Original	2022	and 2023 Sales Annual Caps	1,050.0	1,260.0
Revised	Sales	Annual Caps	1,380.0	1,650.0

Basis for the Revised Sales Annual Caps

In determining the Revised Sales Annual Caps, the Directors considered (i) the historical sales amounts for the CNC high precision machine tools of the Group to the Tsugami Japan Group for the four years ended 31 March 2021; (ii) the actual orders and agreements on hand for the CNC high precision machine tools of the Group to be produced and delivered to the Tsugami Japan Group for the year ending 31 March 2022; (iii) the expected demand for the CNC high precision machine tools of the Group from the Tsugami Japan Group for the two years ending 31 March 2023, with reference to the expected increase in total demand for the CNC high precision machine tools of the Group in the Other Markets after challenges caused by COVID-19 epidemic ease; and (iv) the estimated increase in market price of the CNC high precision machine tools of the Group for the two years ending 31 March 2023.

Although the total sales amounts for the Group’s CNC high precision machine tools to the Tsugami Japan Group decreased for the two years ended 31 March 2021, the Directors believe that this was mainly attributable to (i) the evident downward trend of the overall economy since the second half of the year ended 31 March 2019; (ii) a downturn in the automotive industry as a result of the downturn trend in the national automotive sales; (iii) the impact of the Sino-US trade frictions; and (iv) the outbreak and spread of COVID-19 around the world, which were beyond the control of the Group and led to great uncertainties. As such, the Company is of the view that the decreasing trend in the two years ended 31 March 2021 cannot truly reflect the demand in the Other Markets, any possible strong rebound and the Group’s upward potential in its business and sales performance for the two years ending 31 March 2023.

– 14 –

LETTER FROM THE BOARD

As disclosed in the positive profit alert announcement of the Company dated 20 April 2021, the Group is expected to record an increase of approximately 150% in the profit attributable to the Shareholders for the year ended 31 March 2021 as compared to that for the year ended 31 March 2020, primarily due to the impact of COVID-19 epidemic in the PRC has been getting under control, the domestic manufacturing sector in the PRC has started to recover with the orders of the Group from the Other Markets also improved gradually since the beginning of the fourth quarter of the financial year ended 31 March 2021. In respect of the projected growth and expected demand for its CNC high precision machine tools from the Tsugami Japan Group, the Company has, in particular, taken into account the improved financial performance of the Tsugami Japan Group. As disclosed in the annual results announcement of Tsugami Japan for the year ended 31 March 2021, despite the impact of COVID-19 epidemic, the Other Markets have been in an adjustment phase, and from mid-2020 onwards, there was a surge in orders received by Tsugami Japan Group, which reflected a recovery of demand. Taking into account that particularly for the Other Markets, the actual orders and agreements on hand for the Company’s CNC high precision machine tools received and signed in the two months ended 31 May 2021 have increased by approximately 135% comparing to the two months ended 31 May 2020, the Company expects that the sales performance in the Other Markets, which has been suppressed by COVID-19 epidemic, will follow a reviving trend similar to that in the PRC market as the impact of COVID-19 epidemic came into control in the Other Markets. In view of the mass production capabilities of the Group, the Company expects that the Tsugami Japan Group will procure more CNC high precision machine tools of the Group to sell to its customers based in the Other Markets, with or without customisations, to cope with the expected increase in demand for CNC high precision machine tools in the Other Markets.

Furthermore, the Company also expects there will be an upward adjustment of the selling price of its CNC high precision machine tools in view of the general increasing cost of production (including but not limited to labour and raw material costs). The Company has also applied additional buffer to cater for unexpected business growth, inflation and currency fluctuations and on the principal assumptions that, during the projected period, there will not be any adverse change or disruption in market conditions, operation and business environment or government policies which may materially affect the businesses of the Group.

Based on the above, the Board considers the basis for the Revised Sales Annual Caps are fair and reasonable.

(C) The Master Purchase Agreement

On 4 September 2017, the Company and Tsugami Japan entered into the Master Purchase Agreement for a term of three years commencing from 25 September 2017 to 31 March 2020, which was renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023, and will be automatically renewed for successive periods of three years thereafter unless terminated, amongst other matters, by either party with not less than 30 business days’ prior written notice, subject to compliance of the Listing Rules. There has been no change in the terms of the Master Purchase Agreement since it was entered into on 4 September 2017.

– 15 –

LETTER FROM THE BOARD

The principal terms of the Master Purchase Agreement are summarized below:

Date : 4 September 2017

Parties : (a) the Company
(b) Tsugami Japan
Duration : The Master Purchase Agreement shall continue to be effective up to and including 31 March 2023, which may be automatically renewed for successive periods of three years thereafter unless terminated, among other matters, by either party with not less than 30 business days’ prior written notice, subject to the compliance of the Listing Rules.
Continuing transactions : The Group may procure parts and components (including the relevant warranty costs in relation to the CNC system panels procured through Tsugami Japan), production machinery and equipment, and CNC high precision machine tools manufactured by the Tsugami Japan Group.

Pricing guideline

The transactions contemplated under the Master Purchase Agreement will be conducted in the ordinary and usual course of business of the Group and that of the Tsugami Japan Group, on normal commercial terms or better and on terms which are fair and reasonable and in the interests of the Group and its Shareholders as a whole.

In respect of the parts and components which are manufactured by independent third party suppliers but procured from the Tsugami Japan Group (including the Third-party Components and CNC system panels for the CNC high precision machine tools sold or to be sold overseas (including in Taiwan)), such products are sold to the Group at cost incurred by the Tsugami Japan Group in purchasing such products from the independent third party suppliers plus certain handling and administrative charges.

In respect of the parts and components, production machinery and equipment and CNC high precision machine tools which are manufactured and uniquely designed for the Group’s needs by the Tsugami Japan Group, such products are sold to the Group at cost incurred by the Tsugami Japan Group in developing and manufacturing such products plus certain handling and administrative charges.

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LETTER FROM THE BOARD

To ensure the transactions conducted pursuant to the Master Purchase Agreement are priced fairly and reasonably and in the interests of the Group and its Shareholders as a whole, the Company has adopted the following internal control measures:

In respect of the parts and components which are manufactured by independent third party suppliers but procured from the Tsugami Japan Group:
(i) The finance department of the Company will be responsible for gathering information from time to time about the market prices offered by the independent third party suppliers and the market trend for comparable parts and components through various channels including, for example, conducting market price research through various independent industry information websites, discussing with third party industry players and attending events held by industry associations;
(ii) Before making the purchase orders, the Company will obtain at least two quotations from the independent third party suppliers and/or review two comparable transactions with independent third party suppliers for the same period;
(iii) The Company will compare whether the purchase prices offered by the Tsugami Japan Group are at a more favourable level than the prices offered by the independent third party suppliers;
(iv) If the purchase prices offered by the Tsugami Japan Group are not at a relatively competitive level, the Company will purchase such parts and components directly from the independent third party suppliers;
In respect of the parts and components, production machinery and equipment and CNC high precision machine tools which are manufactured and uniquely designed for the Group’s needs by the Tsugami Japan Group:
(i) The Company will explore whether the Company has the production, customisation and development capabilities to develop and manufacture such products;
(ii) The Company will compare the time and costs incurred by the Company if the Company directly develops and manufactures such products with the purchase prices offered by the Tsugami Japan Group;
(iii) The Directors will carry out due and careful enquiries with the management of the Tsugami Japan Group in relation to the costs incurred by the Tsugami Japan Group in developing and manufacturing such products;

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LETTER FROM THE BOARD

(iv) If the purchase prices offered by the Tsugami Japan Group are not at a relatively competitive level, the Company will develop and manufacture such products directly;
(v) The procurement department of the Company will be responsible for gathering information from time to time whether there are alternative suppliers who can design and manufacture such parts and components and production machinery and equipment which suit the Company’s needs at a competitive pricing level; and
The finance department of the Company will conduct regular checks on the purchase transactions with the Tsugami Japan Group, monitoring the amounts of transactions and conducting assessment and evaluation on the fairness of the transaction terms and pricing terms.

Historical transaction amounts

			For the year	For the year	For the year	For the year
			ended	ended	ended	ended
			31 March 2018	31 March 2019	31 March 2020	31 March 2021
			RMB (million)	RMB (million)	RMB (million)	RMB (million)
Purchases	from	Tsugami
Japan			295.0	236.5	170.0	152.4

Revision of annual caps

	For the year	For the year
	ending	ending
	31 March 2022	31 March 2023
	RMB (million)	RMB (million)
Original 2022 and 2023 Purchase
Annual Caps	448.0	538.0
Revised Purchase Annual Caps	607.0	726.0

Basis for the Revised Purchase Annual Caps

In determining the Revised Purchase Annual Caps, the Directors considered (i) the historical purchase costs paid to Tsugami Japan for the four years ended 31 March 2021; (ii) the actual orders and agreements on hand for the CNC high precision machine tools of the Group to be produced and delivered for the year ending 31 March 2022; (iii) the projected growth for the sales of the CNC high precision machine tools of the Group for the two years

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LETTER FROM THE BOARD

ending 31 March 2023 as the challenges caused by COVID-19 epidemic ease; and (iv) the expected increase in production costs of parts and components leading to an increase in procurement cost to be incurred by the Group.

The expected demands for procurement from the Tsugami Japan Group follow a linear relationship with the overall sales performance of the Group. Apart from taking into account the expected growth of demands for the Group’s CNC high precision machine tools in the Other Markets for the two years ending 31 March 2023 as explained in “(B) The Master Sales Agreement – Basis for the Revised Sales Annual Caps” above, the Company has, in particular, considered the positive outlook of the PRC CNC high precision machine tool industry. Benefiting from the development of CNC technology and favourable PRC government policies, where the PRC government had specifically stated that it will focus and provide support on developing precision machine tools in the “Made in China 2025” strategy, it is expected that the market size of the PRC CNC high precision machine tool industry will continue to grow. Furthermore, the Company noted that the automobile industry has overcome the cyclical changes and coupled with the trend of energy saving and emission control in the automobile market, there will be an expected increasing demand for CNC high precision machine tools in the PRC automobile industry for the two years ending 31 March 2023. In addition, the PRC’s GDP grew by approximately 18.3% in the first quarter of 2021 in comparison to the same period of last year and according to the Purchasing Managers’ Index, an indication of each month of economic activities in the PRC manufacturing sector, the index has increased from 35.7 in February 2020 to 51.9 in March 2021 which indicates that the PRC manufacturers’ operations are resuming gradually. As such, there are indications that the PRC’s overall economy, and in particular, the manufacturing industry has recovered to and even surpassed the pre-pandemic levels. In this connection, the Company expects there will be an increase in demand for parts and components to cope with the upward adjusted sales projections and expected demands for its CNC high precision machine tools for the two years ending 31 March 2023.

Based on the above, the Board considers the basis for the Revised Purchase Annual Caps are fair and reasonable.

REASONS FOR AND BENEFITS OF REVISING THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

In view of the historical transaction amount for the four years ended 31 March 2021, the expected strong demands in the reviving PRC market, the expected improvement in the sales performance for the CNC high precision machine tools in the PRC and in the Other Markets after the challenges caused by COVID-19 epidemic ease, the Board anticipates that the transactions with Tsugami Japan and/or the Tsugami Japan Group pursuant to the Existing Agreements may exceed the original projection for the two years ending 31 March 2023, such that the Original 2022 and 2023 Annual Caps approved by the Independent Shareholders in 2020 will not be sufficient to meet the Company’s requirements for the two years ending 31

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LETTER FROM THE BOARD

March 2023. Accordingly, the Company proposes to revise the Original 2022 and 2023 Annual Caps. Save for the revision of the Original 2022 and 2023 Annual Caps, all terms and conditions of the Existing Agreements remain unchanged.

The Directors (including the independent non-executive Directors) are of the view that the Revised Annual Caps in respect of the transactions contemplated under the Existing Agreements are in the ordinary and usual course of business of the Company, fair and reasonable, on normal commercial terms, and in the interests of the Company and the Shareholders as a whole.

INFORMATION OF THE COMPANY

The Company is an established foreign-owned CNC high precision machine tool manufacturer in the PRC. The principal activities of the Group are the manufacture and sales of a wide range of CNC high precision machine tools under the TSUGAMI brand based in the PRC.

INFORMATION OF TSUGAMI JAPAN

Tsugami Japan is a long-established Japanese manufacturer of machine tools established in March 1937 and has been listed on the Tokyo Stock Exchange for over 60 years. The Tsugami Japan Group primarily engages in the design, research, development, manufacture and sales of machine tools.

LISTING RULES IMPLICATIONS

As at the Latest Practicable Date, Tsugami Japan is the controlling shareholder of the Company and therefore, members of the Tsugami Japan Group are connected persons of the Company. Accordingly, the transactions contemplated under the Existing Agreements constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

As the actual Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan for the year ended 31 March 2021 exceeded the Original 2021 Technology Annual Cap, the Company did not comply with Rule 14A.54 of the Listing Rules by re-complying with the announcement and shareholders’ approval requirements before the Original 2021 Technology Annual Cap was exceeded. As a remedial measure, the Company will convene the EGM for the Independent Shareholders to consider and, if thought fit, among other things, to ratify the non-compliance.

– 20 –

LETTER FROM THE BOARD

As one or more applicable percentage ratios (as defined under Rule 14.07 of the Listing Rules) in respect of the Revised Annual Caps is 5% or above, the Revised Annual Caps are subject to reporting, announcement and Independent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

As Dr. Tang Donglei, Mr. Takao Nishijima, Ms. Mami Matsushita and Mr. Kenji Yoneyama hold directors or senior management positions with Tsugami Japan and are considered as materially interested in the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps, each of Dr. Tang Donglei, Mr. Takao Nishijima, Ms. Mami Matsushita and Mr. Kenji Yoneyama has abstained from voting on the relevant board resolutions approving the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps. Save as disclosed above, none of the Directors has a material interest in the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps.

As Dr. Tang Donglei has interests in 150,000 Shares, representing approximately 0.03% of the issued share capital of the Company, he will not vote at the EGM. Each of Mr. Takao Nishijima, Ms. Mami Matsushita and Mr. Kenji Yoneyama does not hold any Shares and therefore, none of them are expected to vote at the EGM.

GENERAL

The EGM will be held for the Independent Shareholders to consider and, if thought fit, among other things, to ratify the exceeding of the Original 2021 Technology Annual Cap; and to approve the Revised Annual Caps by way of ordinary resolutions.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not you are able 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 practicable and in any event not less than 48 hours before the time fixed for holding the EGM (or any adjournment thereof) to the office of the Company’s branch share registrar in Hong Kong, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjourned meeting thereof if you so wish and in such event, the instrument appointing a proxy shall be deemed to be revoked.

– 21 –

LETTER FROM THE BOARD

As at the Latest Practicable Date, Tsugami Japan and its associates controlled, and were entitled to exercise control, over the voting rights in respect of 270,000,000 Shares, representing approximately 70.90% of the issued share capital of the Company. Tsugami Japan and its associates shall, therefore, abstain from voting on the resolutions for approving the ratification of the exceeding of the Original 2021 Technology Annual Caps and the Revised Annual Caps. To the best of the Directors’ knowledge and information after having made all reasonable enquiries, other than Tsugami Japan and/or its associates and Dr. Tang Donglei, no other Shareholder is required to abstain from voting at the EGM for the proposed resolutions ratifying the exceeding of the Original 2021 Technology Annual Cap; and to approve the Revised Annual Caps.

The votes to be taken at the EGM will be taken by poll, the results of which will be announced after the EGM.

CLOSURE OF REGISTER OF MEMBERS OF THE COMPANY

The register of members of the Company will be closed from Wednesday, 11 August 2021 to Monday, 16 August 2021 (both days inclusive) during which period no transfer of Share(s) will be effected. In order to determine the entitlement to attend and vote at the EGM, all transfers of Share(s), accompanied by the relevant share certificate(s) with the properly completed transfer form(s) either overleaf or separately, must be lodged with the branch share registrar of the Company in Hong Kong, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong for registration not later than 4:30 p.m. on Tuesday, 10 August 2021. Shareholders whose names appear on the register of members of the Company on Wednesday, 11 August 2021 will be entitled to attend and vote at the EGM.

RECOMMENDATIONS

Your attention is drawn to the letter from the Independent Board Committee set out on pages 24 to 25 of this circular which contains its recommendation to the Independent Shareholders. In addition, your attention is drawn to the letter of advice from the Independent Financial Adviser set out on pages 26 to 45 of this circular which contains its advice to the Independent Board Committee and the Independent Shareholders and the principal factors and reasons considered by it in formulating its advice.

The Independent Board Committee, having taken into account the advice of the Independent Financial Adviser, considers that the transactions relevant to the exceeding of the Original 2021 Technology Annual Cap were entered into and conducted in the ordinary and usual course of business of the Company, fair and reasonable, on normal commercial terms, and in the interests of the Company and the Shareholders as a whole, and that the Revised Annual Caps are fair and reasonable and in the interests of the Group and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to, among other things, ratify the exceeding of the Original 2021 Technology Annual Cap; and approve the Revised Annual Caps.

– 22 –

LETTER FROM THE BOARD

ADDITIONAL INFORMATION

Your attention is also drawn to the information set out in the appendix to this circular and the notice of the EGM set out in this circular.

By order of the Board Precision Tsugami (China) Corporation Limited Dr. Tang Donglei

Chief Executive Officer and Executive Director

– 23 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is a full text of the letter from the Independent Board Committee to the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 1651)

30 June 2021

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

We refer to the circular of the Company dated 30 June 2021 (the “ Circular ”) of which this letter forms part. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings when used herein.

We have been authorised by the Board to form the Independent Board Committee to consider and advise the Independent Shareholders as to whether, in our opinion, the transactions relevant to the exceeding of the Original 2021 Technology Annual Cap were entered into and conducted in the ordinary and usual course of business of the Company, fair and reasonable, on normal commercial terms, and in the interests of the Company and the Shareholders as a whole, and that the Revised Annual Caps are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

We wish to draw your attention to the letter of advice from the Independent Financial Adviser set out on pages 26 to 45 of the Circular which contains its advice to the Independent Board Committee and the Independent Shareholders and the principal factors and reasons considered by it in formulating its advice.

Having considered the ratification of the exceeding of the Original 2021 Technology Annual Cap; and the Revised Annual Caps, and the factors and reasons considered by, and the advice of the Independent Financial Adviser in relation thereto as set out on pages 26 to 45 of the Circular, we are of the opinion that the transactions relevant to the exceeding of the

– 24 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Original 2021 Technology Annual Cap were entered into and conducted in the ordinary and usual course of business of the Company, fair and reasonable, on normal commercial terms, and in the interests of the Company and the Shareholders as a whole, and that the Revised Annual Caps are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to, among other things, ratify the exceeding of the Original 2021 Technology Annual Cap; and approve the Revised Annual Caps.

Yours faithfully, For and on behalf of

Dr. Eiichi Koda

the Independent Board Committee Dr. Huang Ping

Mr. Tam Kin Bor

Independent Non-executive Directors

– 25 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter of advice from Lego Corporate Finance Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the ratification of the exceeding of the Original 2021 Technology Annual Cap and the adoption of the Revised Annual Caps, which has been prepared for the purpose of inclusion in this circular.

==> picture [403 x 43] intentionally omitted <==

30 June 2021

To the Independent Board Committee and the Independent Shareholders

Dear Sirs or Madams,

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

INTRODUCTION

We refer to our appointment as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the ratification of the exceeding of the Original 2021 Technology Annual Cap and the adoption of the Revised Annual Caps, details of which are set out in the “Letter from the Board” (the “ Letter from the Board ”) contained in the circular issued by the Company to the Shareholders dated 30 June 2021 (the “ Circular ”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as defined in the Circular unless the context otherwise requires.

Moreover, in view of the historical transaction amount for the four years ended 31 March 2021, the expected strong demands in the reviving PRC market, the expected improvement in the sales performance for the CNC high precision machine tools in the PRC and in the Other Markets after the challenges caused by COVID-19 epidemic ease, the Board anticipates that the transactions with Tsugami Japan and/or the Tsugami Japan Group pursuant to the Existing Agreements may exceed the original projection for the two years ending 31 March 2023, such that the Original 2022 and 2023 Annual Caps approved by the Independent Shareholders in 2020 will not be sufficient to meet the Company’s requirements for the two years ending 31 March 2023. Accordingly, the Company proposes to revise the Original 2022 and 2023 Annual Caps. Save for the revision of the Original 2022 and 2023 Annual Caps, all terms and conditions of the Existing Agreements remain unchanged.

– 26 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee, consisting of all independent non-executive Directors, being Dr. Eiichi Koda, Dr. Huang Ping and Mr. Tam Kin Bor, each of whom has no interests in the transactions, has been appointed by the Board to consider and advise the Independent Shareholders as to (i) whether to approve the ratification of the exceeding of the Original 2021 Technology Annual Cap; and (ii) whether the Revised Annual Caps are fair and reasonable so far as the Company and the Independent Shareholders are concerned, and are in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders as to whether to vote in favour of the relevant resolutions to be proposed at the EGM to approve the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps. As the Independent Financial Adviser, our role is to give an independent opinion to the Independent Board Committee and the Independent Shareholders in such regards.

OUR INDEPENDENCE

As at the Latest Practicable Date, Lego Corporate Finance Limited did not have any relationships or interests with the Company or any other parties that could reasonably be regarded as relevant to the independence of Lego Corporate Finance Limited. In the last two years, there was no engagement between the Company and Lego Corporate Finance Limited. Apart from normal professional fees paid or payable to us in connection with this appointment as the Independent Financial Adviser, no arrangement exists whereby we had received or will receive any fees or benefits from the Company or any other party to the transactions. Accordingly, we consider that we are eligible to give independent advice on the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps.

– 27 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

BASIS OF OUR OPINION

In formulating our opinion and advice, we have relied on (i) the information and facts contained or referred to in the Circular; (ii) the information supplied by the Company and its advisers; (iii) the opinions expressed by and the representations of the Directors and the management of the Company (the “ Management ”); and (iv) our review of the relevant public information. We have assumed that all the information provided and representations and opinions expressed to us or contained or referred to in the Circular were true, accurate and complete in all respects at the time they were made and up to the Latest Practicable Date and may be relied upon. We have also assumed that all such statements of belief, opinions and intention of the Directors and the Management and those as set out or referred to in the Circular were reasonably made after due and careful enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and/or the Management. We have also sought and received confirmation from the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular and that all information or representations provided to us by the Directors and the Management were true, accurate, complete and not misleading in all respects at the time they were made and continued to be so up to the Latest Practicable Date.

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information provided, representations made or opinion expressed by the Management, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of the Company, Tsugami Japan Group or any of their respective subsidiaries or associates.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation in respect of the ratification of the exceeding of the Original 2021 Technology Annual Cap and the adoption of the Revised Annual Caps, we have considered the following principal factors and reasons:

I. Background information of the Group and Tsugami Japan

1. The Group

– 28 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Set out below is a summary of the consolidated financial information of the Company as extracted from the annual report of the Company for the year ended 31 March 2020 (the “ 2019-2020 Annual Report ”) and the interim report of the Company for the six months ended 30 September 2020 (the “ 2020-2021 Interim Report ”).

			Six months ended	Six months ended
	Year ended	31 March	30 September
	2020	2019	2020	2019
	RMB’000	RMB’000	RMB’000	RMB’000
	(audited)	_(audited) _	_(unaudited) _	(unaudited)
Revenue	1,943,569	2,850,883	1,378,832	1,075,854
Gross profit	392,093	712,816	320,620	234,775
Profit attributable to
Shareholders for
the year/period	155,823	367,605	148,358	100,744

For the year ended 31 March 2019 and 2020

Revenue of the Group amounted to approximately RMB1,943.6 million for the year ended 31 March 2020, representing a decrease of approximately 31.8% as compared to that of approximately RMB2,850.9 million for the year ended 31 March 2019. According to the 2019-2020 Annual Report, such decrease was primarily the results of (i) the evident downward trend of the overall economy since the second half of the year ended 31 March 2019; (ii) a downturn in the automotive industry as a result of the downturn in the national automotive sales market; and (iii) the impact of the Sino-US trade frictions and the COVID-19 epidemic outbreak that began during the Chinese Spring Festival. As a result of the foregoing, the Group’s gross profit and profit attributable to Shareholders decreased by approximately 45.0% and 57.6% for the year ended 31 March 2020, respectively, as compared to that for the year ended 31 March 2019.

For the six months ended 30 September 2019 and 2020

Revenue of the Group amounted to approximately RMB1,378.8 million for the six months ended 30 September 2020, representing an increase of approximately 28.2% as compared to that of approximately RMB1,075.9 million for the six months ended 30 September 2019. As disclosed in the 2020-2021 Interim Report, such increase was primarily due to the significant increase in the volume of orders and delivery of the Group as a result of the rebound in demand in certain industries with the gradual and effective containment of the COVID-19 epidemic in the PRC, as well as the improvement of the overall economic situation after March and April 2020 in the PRC. As a result of the foregoing, the Group’s gross profit and the profit attributable to Shareholders increased by approximately 36.6% and 47.3% for the six months ended 30 September 2020, respectively, as compared to that for the six months ended 30 September 2019.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

2. Tsugami Japan

Tsugami Japan, the controlling shareholder of the Company, is a long-established Japanese manufacturer of machine tools established in March 1937 and has been listed on the Tokyo Stock Exchange for over 60 years. The Tsugami Japan Group primarily engages in the design, research, development, manufacture and sales of CNC high precision machine tools.

II. Exceeding of the Original 2021 Technology Annual Cap and the ratification

In or around May 2021, in the course of preparing the annual results of the Company for the year ended 31 March 2021, the Management noted that the aggregate amount of Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan for the year ended 31 March 2021 amounted to approximately RMB144.3 million, which exceeded the Original 2021 Technology Annual Cap of RMB129.0 million. The Company promptly initiated an internal review to assess the non-compliance. In this connection, the Company engaged external legal advisers to advise the Company on the Listing Rules implication.

1. Reasons for exceeding the Original 2021 Technology Annual Cap

As disclosed in the Letter from the Board, in view of (i) the unexpectedly strong sales performance in the second half of the financial year ended 31 March 2021; and (ii) an inadvertent oversight of the Company, the Original 2021 Technology Annual Cap was exceeded in March 2021, being the last month of the 2021 financial year to which the Original 2021 Technology Annual Cap applied.

We have discussed with the Management and noted that the sales performance of the Company was unexpectedly strong in the second half of the financial year ended 31 March 2021, in particular, the Company recorded unprecedented sales revenue for the last quarter of the financial year ended 31 March 2021. As disclosed in the Letter from the Board, the total sales of the Group’s CNC high precision machine tools for the second half and last quarter of the financial year ended 31 March 2021 reached approximately RMB1,740 million and RMB980 million, respectively, representing an increase of approximately 100.5% and 168.5% compared to the second half and last quarter of the financial year ended 31 March 2020, respectively. Such increase was mainly because the automobile parts and components industry has recovered completely from the downturn and began to grow significantly and the orders of the Group from the Other Markets have also improved gradually since the beginning of the fourth quarter of the financial year ended 31 March 2021, with signs of recovery to normal levels. In addition, the strong demand from the domestic market drove the increase in the Group’s sales revenue and profit significantly.

As the Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan pursuant to the Technology Licence Agreement correlate positively to the sales of the Group’s CNC high precision machine tools, there was an increase of approximately 28.4% in the Trademarks and Technology license fees and aftersales services fees paid to Tsugami Japan pursuant to the Technology Licence Agreement from the first half to the second half of the financial year ended 31 March 2021.

– 30 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have discussed with the Management and noted that, as the Original 2021 Technology Annual Cap was exceeded in March 2021, being the last month to which the Original 2021 Technology Annual Cap applied, there is no continuing non-compliance for the Company as at the Latest Practicable Date, and the Trademarks and Technology license fees and aftersales services fees paid and payable to Tsugami Japan as at the Latest Practicable Date are still within the annual cap for the current financial year (i.e. the year ending 31 March 2022) for transactions contemplated under the Technology Licence Agreement.

Taking into consideration the above and the reasons for and benefits of revising the Original 2022 and 2023 Annual Caps as further discussed below, we consider that the ratification of the exceeding of the Original 2021 Technology Annual Cap is the only proper remedial action that can be taken by the Board, and is fair and reasonable.

2. Remedial Measures and internal control measures

As set out in the Letter from the Board, in order to improve the Company’s compliance with the applicable Listing Rules requirements going forward, the Company will take steps to further strengthen its internal monitoring procedures to prevent recurrence of similar non-compliance incidents as follows:

(a) the finance manager of the Company will closely monitor the actual transaction amounts incurred pursuant to the continuing connected transactions of the Company on a monthly basis. The senior management of the Company will monitor and double-check these actual transaction amounts. If the actual transaction amount(s) reaches 80% or more of the relevant annual cap(s) at any time, the matter shall promptly be escalated to the executive Directors and the Board, who will decide whether appropriate measure shall be taken, including but not limited to revising the relevant annual cap(s) and seeking approval from the Independent Shareholders in accordance with the requirements of the Listing Rules, if necessary;
(b) the Management will closely monitor the sales performance of the CNC high precision machine tools and regular assessments will be carried out to monitor the projected sales to assess whether an exceeding of the annual cap(s) may occur, having regard to the number of months that are remaining in the given financial year and the amount of annual cap(s) that have been deployed;
(c) the Company will arrange for regular training for its employees, including the business operation, finance and compliance departments, to strengthen their knowledge of the Listing Rules and enhance their awareness of the importance of compliance with the Listing Rules; and
(d) the Company’s internal audit department will monitor the effectiveness and adequacy of the internal monitoring procedures, and will make recommendations and report to the Audit Committee of the Company on a regular basis.

– 31 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We noted that (i) different functions and duties are clearly segregated among different departments and personnel of the Group and that proper checks and scrutinisation are required to monitor the transactions; and (ii) regular trainings will be provided to different departments of the Group. Accordingly, we concur with the Directors’ view that the enhanced internal control measures are appropriate and effective to prevent recurrence of similar non-compliance incidents going forward.

III. Revision of the Original 2022 and 2023 Annual Caps

1. The Technology Licence Agreement

Introduction

Principal terms of the Technology Licence Agreement

Date : 4 September 2017 Parties : (a) the Company (b) Tsugami Japan

Duration : The Technology Licence Agreement shall continue to be effective up to and including 31 March 2023, which may be automatically renewed for successive periods of three years thereafter unless notified by the Company to Tsugami Japan by written notice of not less than 30 days before the expiry of any subsequent successive periods, or otherwise terminated earlier in accordance with the Technology Licence Agreement.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Continuing transactions :

Tsugami Japan agreed to irrevocably grant to the Company:

(a) an exclusive licence to use the Technology necessary for the manufacture of the CNC high precision machine tools of the Company and to provide aftersales services in connection with these products; and
(b) as the sole licensee, the right to use the Trademarks in the PRC, Hong Kong and Taiwan, and a non-exclusive licence to use the Trademarks in any regions (excluding the PRC, Hong Kong and Taiwan).

Pricing guideline

Depending on the models of the Company’s CNC high precision machine tools, the Trademarks and Technology license fees payable to Tsugami Japan shall be calculated based on a royalty rate of 1.0% or 5.0% multiplied by the total sales of such models of CNC high precision machine tools (excluding tax and other miscellaneous costs and charges). The aftersales services fees to be charged by Tsugami Japan will be determined based on the daily rate of approximately JPY46,000 multiplied by the total number of working days of the staff of Tsugami Japan.

2. The Master Sales Agreement

Introduction

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Principal terms of the Master Sales Agreement

Date :

4 September 2017

Parties : (a) the Company (b) Tsugami Japan

Duration :

The Master Sales Agreement shall continue to be effective up to and including 31 March 2023, which may be automatically renewed for successive periods of three years thereafter unless terminated, amongst other matters, by either party with not less than 30 business days’ prior written notice, subject to compliance of the Listing Rules.

Continuing transactions :

The Group agreed to sell its CNC high precision machine tools to the Tsugami Japan Group.

Pricing guideline

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. The Master Purchase Agreement

Introduction

Principal terms of the Master Purchase Agreement

Date : 4 September 2017

Parties : (a) the Company

(b) Tsugami Japan

Duration :

The Master Purchase Agreement shall continue to be effective up to and including 31 March 2023, which may be automatically renewed for successive periods of three years thereafter unless terminated, among other matters, by either party with not less than 30 business days’ prior written notice, subject to the compliance of the Listing Rules.

Continuing transactions :

The Group may procure parts and components (including the relevant warranty costs in relation to the CNC system panels procured through Tsugami Japan), production machinery and equipment, and CNC high precision machine tools manufactured by the Tsugami Japan Group.

Pricing guideline

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

4. Reasons for and benefits of revising the Original 2022 and 2023 Annual Caps

As disclosed in the Letter from the Board, in view of the historical transaction amount for the four years ended 31 March 2021, the expected strong demands in the reviving PRC market, the expected improvement in the sales performance for the CNC high precision machine tools in the PRC and in the Other Markets after the challenges caused by COVID-19 epidemic ease, the Board anticipates that the transactions with Tsugami Japan and/or the Tsugami Japan Group pursuant to the Existing Agreements may exceed the original projection for the two years ending 31 March 2023, such that the Original 2022 and 2023 Annual Caps approved by the Independent Shareholders in 2020 will not be sufficient to meet the Company’s requirements for the two years ending 31 March 2023. Accordingly, the Company proposes to revise the Original 2022 and 2023 Annual Caps. Save for the revision of the Original 2022 and 2023 Annual Caps, all terms and conditions of the Existing Agreements remain unchanged.

Taking into account (i) the transactions contemplated under the Existing Agreements are conducted in the ordinary and usual course of business of the Company and on normal commercial terms; (ii) the anticipated transactions with Tsugami Japan and/or the Tsugami Japan Group pursuant to the Existing Agreements may exceed the original projection for the two years ending 31 March 2023; (iii) save for the revision of the Original 2022 and 2023 Annual Caps, all terms and conditions of the Existing Agreements remain unchanged; and (iv) the bases of determining the Revised Annual Caps as further discussed below, the Directors are of the view, and we concur, that the Revised Annual Caps are in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

5. Review of the historical transaction amount

The historical transaction amounts and respective historical annual caps for the transactions under the Existing Agreements for the four years ended 31 March 2021 are set out below:

		Year ended	31 March
	2018	2019	2020	2021
	RMB	RMB	RMB	RMB
	(million)	(million)	(million)	(million)
Technology Licence Agreement
Historical transaction amounts	107.5	128.5	90.4	144.3
Historical annual caps	112.0	161.0	212.0	129.0
Utilisation rates (%)	96.0	79.8	42.6	111.9
Master Sales Agreement
Historical transaction amounts	634.5	822.7	490.1	384.6
Historical annual caps	760.0	957.0	1,153.0	840.0
Utilisation rates (%)	83.5	86.0	42.5	45.8
Master Purchase Agreement
Historical transaction amounts	295.0	236.5	170.0	152.4
Historical annual caps	350.0	503.0	664.0	358.0
Utilisation rates (%)	84.3	47.0	25.6	42.6

As illustrated in the table above, we noted that the historical annual caps were close to full utilisation for the two years ended 31 March 2019 (except the historical annual cap of the Master Purchase Agreement for the year ended 31 March 2019), which implied that the Company had taken a prudent approach in estimating the transaction amounts in the past. Save for the exceeding of the Original 2021 Technology Annual Cap, we noted that the Group recorded comparatively lower utilisation rates for the two years ended 31 March 2021. We have discussed with the Management and reviewed the 2019-2020 Annual Report as well as the 2020-2021 Interim Report, and noted that the low utilisation rates of the historical annual caps were mainly attributable to the decrease in demand for the Group’s products as a result of (i) the evident downward trend of the overall economy since the second half of the year ended 31 March 2019; (ii) a downturn in the automotive industry as a result of the downturn in the national automotive sales market; (iii) the impact of the Sino-US trade frictions; and (iv) the outbreak and spread of COVID-19 epidemic in the PRC since early 2020, as well as the subsequent spread of the pandemic around the world, which was beyond the control of the Group and led to great uncertainties.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

6. Revised Annual Caps

The Original 2022 and 2023 Annual Caps and the Revised Annual Caps for transactions under the Existing Agreements for the two years ending 31 March 2023 are set out below:

	Year ending 31 March	Year ending 31 March
	2022	2023
	RMB	RMB
	(million)	(million)
Technology Licence Agreement
Original 2022 and 2023 Technology Annual Caps	161.0	193.0
Revised Technology Annual Caps	231.0	276.0
Master Sales Agreement
Original 2022 and 2023 Sales Annual Caps	1,050.0	1,260.0
Revised Sales Annual Caps	1,380.0	1,650.0
Master Purchase Agreement
Original 2022 and 2023 Purchase Annual Caps	448.0	538.0
Revised Purchase Annual Caps	607.0	726.0

As disclosed in the Letter from the Board, the Revised Technology Annual Caps were determined with reference to (i) the historical Trademarks and Technology licence fees and aftersales services fees paid to Tsugami Japan for the four years ended 31 March 2021; (ii) the actual orders and agreements on hand for the CNC high precision machine tools of the Group to be produced and delivered for the year ending 31 March 2022; (iii) the royalty rate of 1.0% or 5.0% and the aftersales services fees payable to Tsugami Japan pursuant to the Technology Licence Agreement; (iv) the projected growth for the sales of the CNC high precision machine tools of the Group for the two years ending 31 March 2023, with reference to the total sales of the Company for the year ended 31 March 2021; and (v) the expected increase in market price of or demand for the CNC high precision machine tools of the Group for the two years ending 31 March 2023.

The Revised Sales Annual Caps were determined with reference to (i) the historical sales amounts for the CNC high precision machine tools of the Group to the Tsugami Japan Group for the four years ended 31 March 2021; (ii) the actual orders and agreements on hand for the CNC high precision machine tools of the Group to be produced and delivered to the Tsugami Japan Group for the year ending 31 March 2022; (iii) the expected demand for the CNC high precision machine tools of the Group from the Tsugami Japan Group for the two years ending 31 March 2023, with reference to the expected increase in total demand for the CNC high precision machine tools of the Group in the Other Markets after challenges caused by COVID-19 epidemic ease; and (iv) the expected increase in market price of the CNC high precision machine tools of the Group for the two years ending 31 March 2023.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Revised Purchase Annual Caps were determined with reference to (i) the historical purchase costs paid to Tsugami Japan for the four years ended 31 March 2021; (ii) the actual orders and agreements on hand for the CNC high precision machine tools of the Group to be produced and delivered for the year ending 31 March 2022; (iii) the projected growth for the sales of the CNC high precision machine tools of the Group for the two years ending 31 March 2023 after the challenges caused by COVID-19 epidemic ease; and (iv) the expected increase in production costs of parts and components leading to an increase in procurement cost to be incurred by the Group.

Furthermore, we have discussed with the Management and noted that the Trademarks and Technology licence fees and procurement costs payable to Tsugami Japan Group were, to certain extent, driven by the overall sales performance of the Group. Hence, in determining the Revised Technology Annual Caps and the Revised Purchase Annual Caps for the two years ending 31 March 2023, the Company made reference to the proportion of respective historical transaction amounts over the total revenue of the Group for the four years ended 31 March 2021 and the sales projections and expected demand for its CNC high precision machine tools both in the PRC and the Other Markets for the two years ending 31 March 2023.

In order to assess the fairness and reasonableness of the Revised Annual Caps, we have discussed with the Management on the bases and assumptions underlying the determination of the Revised Annual Caps as below:

(i) As discussed in the paragraph headed “5. Review of the historical transaction amount” in this letter, the Group recorded comparatively lower utilisation rates of the annual caps (except the Original 2021 Technology Annual Cap) for the two years ended 31 March 2021 mainly attributable to the decrease in demand for the Group’s products as a result of (i) the evident downward trend of the overall economy since the second half of the year ended 31 March 2019; (ii) a downturn in the automotive industry as a result of the downturn trend in the national automotive sales; and (iii) the impact of the Sino-US trade frictions; and (iv) the outbreak and spread of COVID-19 epidemic in the PRC since early 2020, as well as the subsequent spread of the pandemic around the world. Having considered the abovementioned unfavourable circumstances, which were beyond the control of the Group and led to great uncertainties and the comparatively lower utilisation rates of the annual caps (except the Original 2021 Technology Annual Cap) for the two years ended 31 March 2021, we concurred with the Directors’ view that it cannot truly reflect the demand in the Other Markets, any possible strong rebound and the Group’s upward potential in its business and sales performance for the next two years.

We have discussed with the Management and understand that total revenue of the Group and the demand for the CNC precision machine tools are expected to increase in near future taking into account the alleviation of the COVID-19 epidemic in the PRC and the Other Markets. As set out in the Letter from the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Board, the impact of COVID-19 epidemic in the PRC has been getting under control, the domestic manufacturing sector in the PRC has started to recover with the orders of the Group from the Other Markets also improved gradually since the beginning of the fourth quarter of the financial year ended 31 March 2021. Particularly for the Other Markets, the actual orders and agreements on hand for the Group’s CNC high precision machine tools received and signed in the two months ended 31 May 2021 have increased by approximately 135% comparing to the two months ended 31 May 2020. The Company expects that the sales performance in the Other Markets, which has been suppressed by the COVID-19 epidemic, will follow a reviving trend similar to that in the PRC market as the impact of COVID-19 epidemic is under control in the Other Markets.

We have reviewed the positive profit alert announcement published by the Company dated 20 April 2021, and noted that the Group is expected to record an increase of approximately 150% in the profit attributable to the Shareholders for the year ended 31 March 2021 as compared to that for the year ended 31 March 2020. We have also reviewed the annual results announcement of Tsugami Japan for the year ended 31 March 2021 (the “ TJ Annual Results ”) and noted that the markets in Japan and overseas has been in an adjustment phase amid the impact of, among others, outbreak of COVID-19 epidemic. As disclosed in the TJ Annual Results, from the middle of 2020 onwards, Tsugami Japan Group’s orders received are rallying, reflecting a recovery of demand. Taking into account the above, in particular, the rebound in demand in certain industries with the gradual and effective containment of the COVID-19 epidemic, and given that Tsugami Japan Group is now primarily focusing on-sales and marketing products in the Other Markets, we concur with the Directors’ view that there could be anticipated increase in downstream demand for the Group’s products, which could in turn increase the Group’s sales to Tsugami Japan Group for the two years ending 31 March 2023.

(ii) We have discussed with the Management and noted that the target sales for the two years ending 2023 are generally in line with the bases and assumptions adopted in computing the historical annual caps, which were close to full utilisation for the two years ended 31 March 2019. As such, we concurred with the Directors’ view that, the sales performance in the Other Markets, which has been suppressed by the COVID-19 epidemic, will follow a reviving trend similar to that in the PRC market as the impact of the COVID-19 epidemic was under control, and we consider that the Company has taken a reasonable approach in estimating the Revised Annual Caps.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Moreover, we noted that the historical transaction amounts in respect of the transactions contemplated under the Master Sales Agreement for the two months ended 31 May 2021 amounted to approximately RMB85.9 million, representing approximately 6.2% of the Revised Sales Annual Cap for the year ending 31 March 2022. We further noted that the average monthly sales in respect of the transactions contemplated under the Master Sales Agreement for the two months ended 31 May 2021 represented an increase of approximately 16.1% as compared to that for the three months ended 31 March 2021. In addition, we were advised by the Management that, as at 31 May 2021, the Group received confirmed orders (the “ Confirmed Sales ”) in respect of the transactions contemplated under the Master Sales Agreement, with total contract value of approximately RMB396.9 million which are scheduled to be delivered up to March 2022, representing approximately 28.8% of the Revised Sales Annual Cap for the year ending 31 March 2022. Out of the Confirmed Sales, approximately RMB153.9 million were received during the two months ended 31 May 2021 (the “ New Orders ”) and approximately RMB243.0 million were received during the year ended 31 March 2021 (the “ Previous Orders ”).

Further, we noted that the annualised amount of the New Orders for the year ending 31 March 2022, which is calculated based on the New Orders of approximately RMB153.9 million, during which the orders received were more representative of the Group’s relatively normal level of sales in Other Market due to alleviation of COVID-19 epidemic, amounted to approximately RMB923.2 million (the “ Annualised New Orders ”). Having considered that (i) the Annualised New Orders and the Previous Orders amounted to approximately RMB1,166.2 million in aggregate, representing approximately 84.5% of the Revised Sales Annual Cap for the year ending 31 March 2022; and (ii) it is expected that the sales performance in the Other Markets, which has been suppressed by the COVID-19 epidemic, will follow a reviving trend similar to that in the PRC market after the alleviation of the COVID-19 epidemic, we consider that the Revised Annual Caps are justifiable and not excessive.

We have also reviewed the documents provided by the Company, including, among others, (i) historical transaction amounts for each of the five months ended 31 May 2021; (ii) ten randomly selected samples of sales agreements and/or purchase orders in respect of the transactions contemplated under the Master Sales Agreement, with total contract value of approximately RMB20.7 million which are scheduled to be delivered up to March 2022; (iii) ten randomly selected samples of sales agreements and/or purchase orders in respect of the transactions contemplated under the Master Purchase Agreement, with total contract value of approximately RMB7.3 million which are scheduled to be delivered up to March 2022; and (iv) ten randomly selected samples of sales agreements and/or purchase orders entered into between the Group and other customers, with total contract value of approximately

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RMB37.8 million which are scheduled to be delivered up to March 2022 and noted that the revenue of the Group or demand for the CNC high precision machine tools of the Company have been gradually improved and recovered from the downturn since 2021.

In view of the recent upward trend in the market demand for the Group’s CNC high precision machine tools and the corresponding growing sales and order trend of the Group, the Management is of the view that the Group’s sales projections for the two years ending 31 March 2023 should be upward adjusted to better reflect the Group’s growth potential in its business and sales performance. We concur with the Directors’ view that it is in the interest of the Company and its Shareholders that the Management be allowed to adjust its sales targets and projections upward, and correspondingly revise the Original 2022 and 2023 Annual Caps, to allow the Management with the flexibility to realise the business potential that the Management believes the Group will be able to capture.

(iii) In July 2015, the “Made in China 2025” strategy, a roadmap released by the State Council of the PRC in 2015 to guide the country’s advanced industrial manufacturing, has pictured a steady progress in industrial capability, smart manufacturing, innovation, as well as product quality and branding. Sectors that boost manufacturing innovation, including the Internet of Things, smart appliances and high-end consumer electronics, are the major priority for funding, according to the Ministry of Industry and Information Technology of the PRC. It is specifically stated that in high-end digital control machine tools sector, the PRC government will focus and provide support on (a) developing precision machine tools which are capable of high speed, high efficiency and functional flexibility, and developing manufacturing equipment and integrated manufacturing systems; (b) accelerating research of frontier technologies and equipment like high-end digital control machine tools and additive manufacturing; (c) reliability, stability and precision of major parts like high-end numerical systems, servomotors, bearings and grating to realize industrialisation; and (d) improving user process certification.

We have reviewed the 2019-2020 Annual Report and noted that, in recent years, the growth in product capacity of the Chinese manufacturing industry has transformed from quantitative to qualitative. From being labor-intensive to technology-intensive, transformation and upgrading have gradually become the mainstream phenomenon across the industry, and the standard required for automation, numerical control and precision of manufacturing equipment are getting higher. Moreover, the National Bureau of Statistics of the PRC recently announced that the PRC’s GDP grew by a record of 18.3% in the first quarter of 2021 in comparison to the same period of last year. Furthermore, the manufacturing Purchasing Managers’ Index (the “ PMI ”), an indication of each month of economic activities in the PRC manufacturing sector, was only 35.7

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

in February 2020. After recorded the lowest PMI in 2020, the PMI surpassed the threshold 50 for consecutive 12 months, being the period from March 2020 to February 2021, and reached 51.9 in March 2021. The PMI trend indicates the PRC manufacturers’ operations are resuming gradually. Both economic parameters demonstrated that the PRC’s overall economy and manufacturing industry is roaring back to pre-pandemic levels. In light of the foregoing, the Directors are of the view, and we concur, that there is potential for the demand for high-end manufacturing equipment to grow.

(iv) The Group primarily manufactures all its CNC high precision machine tools at its Pinghu Production Plants located in Pinghu, Zhejiang Province, the PRC, which consists of four major production plants. We have discussed with the Management and noted that, in order to cater for the future sales and demand growth, the Group has commenced the construction of the first of two phases of the production plants (the “ Bowang Plants ”) in Bowang District, Ma’anshan, Anhui Province, the PRC in April 2019, which was completed and put into use in March 2021. The Bowang Plants started to produce parts and components of CNC high precision machine tools, and it is expected to contribute approximately 30% of the parts and components needed for the Group in production of the CNC high precision machine tools and the Group also planned to produce the CNC high precision machine tools in the Bowang Plants before 2022 which is expected to contribute approximately 10% to 25% in addition to the overall production capacity of the Group. We further noted that, given the gradually increasing market demand and the sales and orders of the Group, and having adjusted its sales projections upward to better reflect the growth potential of the Group’s business and sales performance, the Group already has plans to implement strategies such as (i) increasing the number of production staff, especially for assembling and precision adjustment and testing; (ii) extending the operating hours per day and number of working days per month; (iii) adding additional production machineries and equipment to further expand its production capacity; and (iv) engaging additional subcontracting partners for machining and metal processing and focus more internal resources on key production processes, for example, assembling and precision adjustment and testing. As and when circumstances require, the Group will also consider and implement additional means to further increase its production capacity. Having considered the additional measures to further increase the Group’s production capacity and the newly established Bowang Plants, we consider that it is fair and reasonable for the Group to adjust the Original 2022 and 2023 Annual Caps upward to correspond to its upward adjusted sales projections.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(v) We have discussed with the Management and noted that the Company also expects there will be an upward adjustment to the selling prices of its CNC high precision machine tools in view of the general increasing cost of production (including but not limited to labour and raw material costs). For our due diligence purpose, we have obtained and reviewed the salary expense records of the Group for the three years ended 31 March 2021 and noted that the salary was growing steadily and recorded a compound annual growth rate of approximately 13.6%. We have also obtained and reviewed six sample notices of confirmation of increasing the procurement price of the raw materials which issued by the Group to its suppliers and noted that the price of raw materials was increasing in recent months. In view of the above, we consider that it is fair and reasonable for the Group to adjust the Original 2022 and 2023 Annual Caps upward to correspond to the potential increase in the selling price of its CNC high precision machine tools.
(vi) We have discussed with the Management and noted that the Revised Annual Caps was determined after applying additional buffer to cater for unexpected business growth, inflation and currency fluctuations and on the principal assumptions that, during the projected period, there will not be any adverse change or disruption in market conditions, operation and business environment or government policies which may materially affect the businesses of the Group. As mentioned above, there was a significant increase in the revenue for year ended 31 March 2021 compared with the last year. As such, the Directors are of the view, and we concur, that the additional buffer provides the Group with flexibility to ensure stable and smooth operations of the Group.

Taking to consideration that (i) the reasons for and benefits of revising the Original 2022 and 2023 Annual Caps as discussed above; (ii) the expected growth in demand for the Group’s product as a result of the rebound in demand in certain industries with the gradual and effective containment of the COVID-19 epidemic; (iii) the bases and assumptions of the Revised Annual Caps are generally in line with those adopted in computing the historical annual caps; (iv) the anticipated industry growth; (v) the existing scale of operation of the Group including the newly established Bowang Plants and the additional measures to further increase the Group’s production capacity; (vi) the expected upward trend of the selling price of CNC high precision machine tools; and (vii) the additional buffer provides the Group with flexibility to ensure stable and smooth operations of the Group, we are of the view that the Revised Annual Caps and the major factors considered as the bases of determining the Revised Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

However, the Shareholders should note that as the Revised Annual Caps are determined based on various factors relating to future events and assumptions which may or may not remain valid for the entire period up to 31 March 2023, and they do not represent any forecasts or estimations of the Group’s financial performance. Consequently, we express no opinion as to how closely the actual future transaction amounts of the continuing connected transactions will correspond with the relevant Revised Annual Caps.

RECOMMENDATIONS

Having considered the principal factors and reasons described above, we are of the opinion that (i) the ratification of the exceeding of the Original 2021 Technology Annual Cap is fair and reasonable; (ii) the transactions contemplated under the Existing Agreements are conducted in the ordinary and usual course of business of the Company and on normal commercial terms; and (iii) the Revised Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

Given that there will be no change, amendment or revision to the Existing Agreements and on the basis of our review on the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps, we recommend the Independent Shareholders, as well as the Independent Board Committee to advise the Independent Shareholders, to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the ratification of the exceeding of the Original 2021 Technology Annual Cap and the Revised Annual Caps.

Yours faithfully, For and on behalf of

Lego Corporate Finance Limited Kristie Ho Managing Director

Ms. Kristie Ho is a licensed person registered with the Securities and Futures Commission and a responsible officer of Lego Corporate Finance Limited to carry out Type 6 (advising on corporate finance) regulated activity under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong). She has over 16 years of experience in the securities and investment banking industries.

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GENERAL INFORMATION

APPENDIX

(1) RESPONSIBILITY STATEMENT

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

(2) DISCLOSURE OF INTERESTS OF THE DIRECTORS AND CHIEF EXECUTIVE OF THE COMPANY IN THE SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executive of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which will have to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions in which they are taken or deemed to have under such provisions of the SFO), or which will be required, pursuant to section 352 of the SFO, to be recorded in the register maintained by the Company referred to therein, or which will be required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as set out in Appendix 10 to the Listing Rules (the “ Model Code ”), to be notified to the Company and the Stock Exchange, were as follows:

Long position in the shares and the underlying shares of the Company

						Percentage of
				Number of		shareholding
		Long/short		shares held in		in the
Name	Position	positions	Capacity	the Company	Note	Company
Tang Donglei	Chief executive	Long	Beneficial	150,000	1	0.03%
	officer and	position	owner
	executive
	Director

Note:

This represents the shares beneficially held by Dr. Tang Donglei in his personal capacity.

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GENERAL INFORMATION

APPENDIX

Long position in the shares and the underlying shares of the associated corporation of the Company (within the meaning of Part XV of the SFO) – Tsugami Japan

						Percentage of
				Number of		shareholding
		Long/short		shares held in		in the
Name	Position	positions	Capacity	the Company	Note	Company
Takao	Chairman and	Long	Beneficial	10,000	1	0.02%
Nishijima	non-executive	position	owner
	Director

Note:

This represents the shares beneficially held by Mr. Takao Nishijima in his personal capacity.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors and chief executive of the Company had any interests or short positions in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) (i) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO to be entered in the register referred to therein; or (iii) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code.

(3) SUBSTANTIAL SHAREHOLDER

Substantial shareholder’s interests or short positions in the shares and underlying shares of the Company

As at the Latest Practicable Date, so far as any of the Directors or chief executive of the Company are aware, the following entity had, or was deemed to have, interests or short positions in the shares or underlying shares of the Company which will have to be notified to the Company and the Stock Exchange pursuant to provisions of Divisions 2 and 3 of Part XV of the SFO or which ought to be recorded in the register of the Company required to be kept under section 336 of the SFO:

Name of

Name of
substantial	Long/short		Number of		Percentage of
shareholder	positions	Capacity	shares	Note	issued shares
Tsugami Japan	Long position	Beneficial owner	270,000,000	1	70.90%

Note:

The 270,000,000 shares were beneficially owned by Tsugami Japan.

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GENERAL INFORMATION

APPENDIX

Save as disclosed above, the Company has not been notified of any other relevant interests or short positions in the issued share capital of the Company as at the Latest Practicable Date.

(4) INTEREST OF DIRECTORS IN COMPETING BUSINESS

As at the Latest Practicable Date, the Directors are not aware that any of them or any of their associates had interests in any business which competes or is likely to compete, either directly or indirectly, with the business of the Group which would fall to be discloseable under the Listing Rules.

(5) DIRECTORS’ INTEREST IN ASSETS AND CONTRACTS OF THE GROUP

As at the Latest Practicable Date, none of the Directors had (i) any direct or indirect interests in any assets which have been since 31 March 2021 (being the date to which the latest published audited consolidated financial statements of the Group were made up) acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group; and (ii) any material interest in any contract or arrangement at the Latest Practicable Date which is significant in relation to the business of the Group.

(6) DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group which does not expire or is not determinable by such member of the Group within one year without payment of compensation (other than statutory compensation).

(7) MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading positions of the Group since 31 March 2021, the date to which the latest published audited consolidated financial statements of the Group were made up.

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GENERAL INFORMATION

APPENDIX

(8) EXPERT AND CONSENT

The following is the qualification of the expert who has given opinion or advice for inclusion in this circular:

Independent Financial Adviser

Qualification

Lego Corporate Finance Limited

a corporation licensed to carry out Type 6 (advising on corporate finance) regulated activity under the SFO

Lego Corporate Finance Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter of advice and references to its name in the form and context in which they respectively appear.

As at the Latest Practicable Date, Lego Corporate Finance Limited (i) did not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group and (ii) had no direct or indirect interests in any assets which has been acquired or disposed of by or leased to any member of the Group, or was proposed to be acquired, disposed of by or leased to any member of the Group, since 31 March 2021 (the date to which the latest published audited consolidated financial statements of the Company were made up).

(9) GENERAL

(a) The Company’s registered office is at PO Box 309, Ugland House, Grand Cayman, KY 1-1104, Cayman Islands.
(b) The company secretary of the Company is Ms. Wong Wai Yee Ella. Ms. Wong is a Chartered Secretary, a Chartered Governance Professional and a fellow of both the The Hong Kong Institute of Chartered Secretaries and The Chartered Governance Institute (formerly ‘The Institute of Chartered Secretaries and Administrators’).
(c) The branch share registrar and transfer office of the Company in Hong Kong is Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(d) The English texts of this circular and the accompanying proxy form shall prevail over the Chinese texts.

– 49 –

GENERAL INFORMATION

APPENDIX

(10) DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the Company’s principal place of business in Hong Kong at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong from the date of this circular up to and including the date of the EGM:

(a) the Technology Licence Agreement;
(b) the Master Sales Agreement;
(c) the Master Purchaser Agreement;
(d) the letter from the Independent Board Committee, the text of which is set out on pages 24 to 25 of this circular;
(e) the letter from Lego Corporate Finance Limited, the text of which is set out on pages 26 to 45 of this circular; and
(f) the letter of consent from Lego Corporate Finance Limited referred to in the paragraph headed “(8) EXPERT AND CONSENT” in this appendix.

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NOTICE OF EGM

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 1651)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “ EGM ”) of Precision Tsugami (China) Corporation Limited (the “ Company ”) will be held at 24/F, Admiralty Centre 1, 18 Harcourt Road, Hong Kong on Monday, 16 August 2021 at 10:30 a.m. or after the conclusion of the 2021 annual general meeting (whichever is the earlier) for the purpose of considering and, if thought fit, with or without amendment, passing the following resolutions:

ORDINARY RESOLUTIONS

“ THAT :

(i) the exceeding of the original annual cap amount for the year ended 31 March 2021 in respect of the technology licence agreement (the “ Technology Licence Agreement ”) dated 4 September 2017 entered into between the Company and Tsugami Corporation (株式會社ツガミ) (“ Tsugami Japan ”) and renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023 be and is hereby approved, confirmed and ratified;
(ii) the proposed annual cap amounts in respect of the transactions contemplated under the Technology Licence Agreement for the two years ending 31 March 2023 (the “ Revised Technology Annual Caps ”) as set out in the Company’s circular dated 30 June 2021 (the “ Circular ”) be and are hereby approved and confirmed;
(iii) the proposed annual cap amounts in respect of the transactions contemplated under the master sales agreement (the “ Master Sales Agreement ”) dated 4 September 2017 entered into between the Company and Tsugami Corporation (株式會社ツガミ) (“ Tsugami Japan ”) and renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023 for the two years ending 31 March 2023 (the “ Revised Sales Annual Caps ”) as set out in the Circular be and are hereby approved and confirmed;
(iv) the proposed annual cap amounts in respect of the transactions contemplated under the master purchase agreement (the “ Master Purchase Agreement ”) dated 4 September 2017 entered into between the Company and Tsugami Corporation (株式會社ツガミ) (“ Tsugami Japan ”) and renewed upon its expiry of its initial term on 31 March 2020 for a further term of three years, i.e. up to and including 31 March 2023 for the two years ending 31 March 2022 and 2023 (the “ Revised Purchase Annual Caps ”) as set out in the Circular be and are hereby approved and confirmed;

(the Revised Technology Annual Caps, the Revised Sales Annual Caps, and the Revised Purchase Annual Caps, collectively, the “ Revised Annual Caps ”);

– 51 –

NOTICE OF EGM

(v) any one director of the Company be and is hereby authorised to do all acts and things, take such necessary actions and to approve, execute and deliver all deeds, agreements and documents in relation to the ratification of the exceeding of the original annual cap amount for the year ended 31 March 2021 in respect of the Technology License Agreement and the Revised Annual Caps on behalf of the Company which he/she (or his/her properly appointed attorney) may consider necessary.”

By order of the Board Precision Tsugami (China) Corporation Limited Dr. Tang Donglei Chief Executive Officer and Executive Director

Hong Kong, 30 June 2021

– 52 –

NOTICE OF EGM

Notes:

The register of members of the Company will be closed from Wednesday, 11 August 2021 to Monday, 16 August 2021 (both days inclusive) during which period no transfer of Share(s) will be effected. In order to determine the entitlement to attend and vote at the EGM, all transfers of Share(s), accompanied by the relevant share certificate(s) with the properly completed transfer form(s) either overleaf or separately, must be lodged with the branch share registrar of the Company in Hong Kong, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong for registration not later than 4:30 p.m. on Tuesday, 10 August 2021. Shareholders whose names appear on the register of members of the Company on Wednesday, 11 August 2021 will be entitled to attend and vote at the EGM.
A form of proxy for use at the EGM is enclosed in the circular of the Company dated 30 June 2021.
The instrument appointing a proxy shall be in writing under the hand of the appointor or of his/her attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of any officer, attorney or other person authorised to sign the same.
A shareholder entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more than one proxies to attend and vote in his or her stead. A proxy need not be a shareholder of the Company. If more than one proxy is so appointed, the appointment shall specify the number of shares in respect of which each such proxy is so appointed.
In order to be valid, the form of proxy must be deposited at the Company’s Hong Kong branch share registrar, Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong, together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority, not less than 48 hours before the time for holding the meeting or adjourned meeting.
Completion and return of the form of proxy will not preclude shareholders from attending and voting in person at the meeting convened by the above notice or at any adjourned meeting thereof (as the case may be) should they so wish, and in such event, the form of proxy shall be deemed to be revoked.
As of the date of this notice, the executive directors of the Company are Dr. Tang Donglei and Dr. Li Zequn; the non-executive directors of the Company are Mr. Takao Nishijima, Ms. Mami Matsushita and Mr. Kenji Yoneyama; and the independent non-executive directors of the Company are Dr. Eiichi Koda, Dr. Huang Ping and Mr. Tam Kin Bor.

– 53 –

NOTICE OF EGM

PRECAUTIONARY MEASURES FOR THE EGM

Compulsory body temperature check will be conducted for every Shareholder or proxy at the entrance of the venue. Any person with a body temperature of over 37.3 degrees Celsius will not be admitted to the venue.
Every Shareholder or proxy is required to wear surgical mask throughout the meeting.
Every Shareholder or proxy is required to complete a health declaration form before entering the venue.
No entry to the venue is allowed for any person who has shown any symptom of COVID-19 or is subject to quarantine order by the Government of the Hong Kong Special Administrative Region (the “ Hong Kong Government ”).
Appropriate distancing and spacing in compliance with the guidances from the Hong Kong Government will be observed and as such, the Company reserves the right to limit the number of the attendees at the EGM as may be necessary to avoid over-crowding.
No refreshments will be served and no corporate gifts will be distributed.

Shareholders, particularly those who are subject to quarantine in relation to COVID-19, are reminded that they may appoint any person or the chairman of the EGM as a proxy to attend and vote at the EGM, instead of attending and voting in person. A form of proxy for use at the EGM is enclosed with this circular and such form of proxy is also published on the websites of Hong Kong Exchanges and Clearing Limited (www.hkexnews.hk) and the Company (www.tsugami.com.cn).

– 54 –

AI assistant

Precision Tsugami (China) Corporation Limited — Proxy Solicitation & Information Statement 2021

50065_rns_2021-06-29_b09caae9-250b-4b41-ac33-ca963b936b29.pdf

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

PRECAUTIONARY MEASURES FOR THE EGM

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP

AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

INTRODUCTION

EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP

Reasons for exceeding the Original 2021 Technology Annual Cap

Remedial measures and internal control measures

The Board’s View

REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

(A) The Technology Licence Agreement

Pricing guideline

Historical transaction amounts

Revision of annual caps

Basis for the Revised Technology Annual Caps

(B) The Master Sales Agreement

Pricing guideline

LETTER FROM THE BOARD

Historical transaction amounts

Revision of annual caps

Basis for the Revised Sales Annual Caps

LETTER FROM THE BOARD

(C) The Master Purchase Agreement

Pricing guideline

Historical transaction amounts

Revision of annual caps

Basis for the Revised Purchase Annual Caps

REASONS FOR AND BENEFITS OF REVISING THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

INFORMATION OF THE COMPANY

INFORMATION OF TSUGAMI JAPAN

LISTING RULES IMPLICATIONS

GENERAL

LETTER FROM THE BOARD

CLOSURE OF REGISTER OF MEMBERS OF THE COMPANY

RECOMMENDATIONS

ADDITIONAL INFORMATION

By order of the Board Precision Tsugami (China) Corporation Limited Dr. Tang Donglei

Precision Tsugami (China) Corporation Limited 津上精密機床 (中國 )有限公司

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

Dr. Eiichi Koda

CONTINUING CONNECTED TRANSACTIONS

(1) EXCEEDED THE ORIGINAL 2021 TECHNOLOGY ANNUAL CAP AND

(2) PROPOSED REVISION OF THE ORIGINAL 2022 AND 2023 ANNUAL CAPS

INTRODUCTION

OUR INDEPENDENCE

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

I. Background information of the Group and Tsugami Japan

1. The Group

For the year ended 31 March 2019 and 2020

For the six months ended 30 September 2019 and 2020

2. Tsugami Japan

II. Exceeding of the Original 2021 Technology Annual Cap and the ratification

1. Reasons for exceeding the Original 2021 Technology Annual Cap

2. Remedial Measures and internal control measures

III. Revision of the Original 2022 and 2023 Annual Caps

1. The Technology Licence Agreement

Introduction

Principal terms of the Technology Licence Agreement

Pricing guideline

2. The Master Sales Agreement

Introduction

Pricing guideline

3. The Master Purchase Agreement

Precision Tsugami (China) Corporation Limited Proxy Solicitation & Information Statement 2021