Qingling Motors Co. Ltd

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Qingling Motors Co. Ltd, you should at once hand this circular and the accompanying form of proxy to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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(A sino-foreign joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1122)

CONTINUING CONNECTED TRANSACTIONS

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

Hercules Capital Limited

A letter from the board of directors of Qingling Motors Co. Ltd (‘‘the Company’’) is set out on pages 6 to 20 of this circular and a letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on page 21 of this circular. A letter from Hercules Capital Limited containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 22 to 29 of this circular.

A notice convening the extraordinary general meeting of the Company to be held at Conference Hall, 1st Floor of Qingling Motors Co. Ltd Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, The People’s Republic of China on Tuesday, 20 September 2005 at 11: 00 a.m. is set out on pages 33 to 37 of this circular. A form of proxy for use by the Independent Shareholders at the EGM is also enclosed. Whether or not you are able to attend the meeting, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon and return the same as soon as possible and in any event not later than 24 hours before the time for holding the meeting or 24 hours before the time appointed for taking the poll. Completion and return of the proxy form will not preclude you from attending and voting at the meeting, or any adjourned meeting, should you so wish.

3 August 2005

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Background and the Existing Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . .	6
The Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Reasons for the Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Requirements under the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18
Recommendation of the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Letter from Hercules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix — General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	30
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33

— i —

DEFINITIONS

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

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||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|‘‘Announcement’’|the|announcement|of|the|Company|dated|6|July|2005|in|relation|to|the|
|Continuing|Connected|Transactions;|
|‘‘Annual|Caps’’|the|maximum|aggregate|annual|value|of|the|Continuing|Connected|
|Transactions|for|the|period|from|the|date|of|approval|of|the|agreements|
|by|the|Independent|Shareholders|to|31|December|2005,|each|of|the|two|
|years|ending|31|December|2007|and|the|period|from|1|January|2008|to|the|
|expiry|date|of|the|agreements;|
|‘‘Articles|of|Association’’|the|articles|of|association|of|the|Company|as|may|be|amended|from|time|to|
|time;|
|‘‘associate(s)’’|has|the|meaning|ascribed|to|it|in|the|Listing|Rules;|
|‘‘Board’’|the|board|of|directors|of|the|Company;|
|‘‘CGAW’’|Chongqing|General|Auto|Works,|the|predecessor|of|
|Qingling|Group;|
|‘‘Company’’|Qingling|Motors|Co.|Ltd,|a|sino-foreign|joint|stock|limited|company|
|incorporated|in|the|PRC|with|limited|liability|and|listed|on|the|Stock|
|Exchange;|
|‘‘connected|person(s)’’|has|the|meaning|as|ascribed|thereto|under|the|Listing|Rules;|
|‘‘Connected|Persons’’|Qingling|Group,|CQCC,|CQFC,|CQAC,|CQNHK,|CQPC|and|CQACL;|
|‘‘Continuing|Connected|the|continuing|connected|transactions|contemplated|under|the|New|CQACL|
|Transactions’’|Agreement|and|the|New|Parts|Supply|Agreements;|
|‘‘CQAC’’|Chongqing|Qingling|Axle|Co.|Ltd.,|a|sino-foreign|
|joint|venture|company|incorporated|in|the|PRC|with|limited|liability|owned|
|as|to|49.64%,|25%,|10%,|10.36%|and|5%|by|Qingling|Group,|Isuzu,|Isuzu|
|China|and|two|Independent|Third|Parties|respectively;|
|‘‘CQAC|Transactions’’|the|Company|has|been|purchasing|front|and|rear|motor|vehicle|axles|and|
|certain|related|parts|and|components|from|CQAC|since|January|1998|on|
|terms|not|less|favourable|than|those|would|be|agreed|by|Independent|Third|
|Parties|and|at|prices|no|greater|than|the|fair|market|value|of|such|products|
|determined|by|reference|to|the|prices|of|comparable|products;|
|‘‘CQACL’’|Chongqing|Qingling|Aluminium|Casting|Co.|Ltd.,|a|
|sino-foreign|joint|venture|company|incorporated|in|the|PRC|with|limited|
|liability|owned|as|to|58.43%,|25%,|10%,|4.57%|and|2%|by|Qingling|Group,|
|Isuzu,|Isuzu|China|and|two|Independent|Third|Parties|respectively;|
|‘‘CQACL|Transactions’’|the|Company|has|been|purchasing|aluminium|parts|and|components|for|the|
|manufacture|of|motor|vehicles|from|CQACL|since|October|1998|on|terms|
|not less favourable than those would be agreed by Independent Third Parties|
|and|at|prices|determined|on|the|basis|of|costs|plus|12%;|

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— 1 —

DEFINITIONS

‘‘CQCC’’	Chongqing Qingling Casting Company Limited, a
	sino-foreign joint venture company incorporated in the PRC with limited
	liability, owned as to 60.38%, 36.16% and 3.46% by Qingling Group, Isuzu
	and an Independent Third Party respectively;
‘‘CQCC Agreement’’	the parts supply agreement entered into between the Company and CQCC
	and Qingling Group on 15 September 1995, whereby the Company agreed to
	purchase casts of engine blocks, cylinder heads and main bearing covers and
	other components manufactured by CQCC and required by the Company in
‘‘CQFC’’	its production process for a term of 10 years; Chongqing Qingling Forging Co. Ltd., a sino-
	foreign joint venture company incorporated in the PRC with limited liability
	owned as to 55.39%, 28.79%, 14.03% and 1.8% by Qingling Group, Isuzu,
	Isuzu China and an Independent Third Party respectively;
‘‘CQFC Transactions’’	the Company has been purchasing raw casts of engine crankshafts and
	connecting rods and certain related parts and components from CQFC since
	October 1997 on terms not less favourable than those would be agreed by
	Independent Third Parties and at prices determined on the basis of costs plus
‘‘CQNHK’’	a maximum of 12%; Chongqing Qingling NHK Seat Co. Ltd., a sino-
	foreign joint venture company incorporated in the PRC with limited liability
	owned as to 50.80%, 3%, 2%, 30%, 9.2% and 5% by Qingling Group, Isuzu,
	Isuzu China and three Independent Third Parties respectively;
‘‘CQNHK Transactions’’	the Company has been purchasing motor vehicle seats and certain related
	parts and components from CQNHK since April 1998 on terms not less
	favourable than those would be agreed by Independent Third Parties and at
	prices no greater than the fair market value determined by reference to the
‘‘CQPC’’	prices of comparable products; Chongqing Qingling Plastic Co. Ltd., a sino-foreign
	joint venture company incorporated in the PRC with limited liability owned
	as to 53.15%, 25%, 10%, 6% and 5.85% by Qingling Group, Isuzu, Isuzu
	China and two Independent Third Parties respectively;
‘‘CQPC Transactions’’	the Company has been purchasing plastic parts and components for the
	manufacture of motor vehicles from CQPC since April 1998 on terms not
	less favourable than those would be agreed by Independent Third Parties and
	at prices no greater than the fair market value determined by reference to the
	prices of comparable products;
‘‘Directors’’	the directors of the Company;
‘‘Domestic Shares’’	domestic shares of RMB1 each in the share capital of the Company;
‘‘EGM’’	the extraordinary general meeting of the Company to be convened at
	Conference Hall, 1st Floor of Qingling Motors Co. Ltd Office Building, 1
	Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, PRC on
	Tuesday, 20 September 2005 at 11: 00 a.m.;

— 2 —

DEFINITIONS

‘‘Existing Continuing	the existing continuing connected transactions with Qingling Group on the
Connected Transactions’’	same terms of Qingling Group Agreement and under the CQCC Agreement,
	and the CQFC Transactions, the CQAC Transactions, the CQNHK
	Transactions, the CQPC Transactions and the CQACL Transactions;
‘‘Existing Transactions’’	CQFC Transactions, CQAC Transactions, CQNHK Transactions, CQPC
	Transactions and CQACL Transactions;
‘‘Group’’	the Company and its subsidiaries;
‘‘H Shares’’	H share(s) of RMB1 each in the share capital of the Company;
‘‘Hercules’’	Hercules Capital Limited, a licensed corporation incorporated in Hong Kong
	to carry on type 6 regulated activity (advising on corporate finance) under
	the SFO and the independent financial adviser to the Independent Board
	Committee and the Independent Shareholders in respect of the Continuing
	Connected Transactions and the Annual Caps;
‘‘Hong Kong’’	the Hong Kong Special Administrative Region of the PRC;
‘‘Independent Board	an independent board committee of the Company consisting of Mr. Long
Committee’’	Tao, Mr. Song Xiaojiang and Mr. Xu Bingjin who are the independent non-
	executive Directors;
‘‘Independent	in relation to the transactions under the New CQACL Agreement and the
Shareholders’’	New Parts Supply Agreements, shareholders of the Company other than the
	connected person(s) who is/are interested in the relevant transactions;
‘‘Independent Third	Independent third parties which are not connected with the chief executive,
Parties’’	directors and substantial shareholder(s) of the Company or any of its
	subsidiaries and their respective associates;
‘‘Isuzu’’	Isuzu Motors Limited, a Japanese corporation and the manufacturer of motor
	vehicles of the Isuzu brand;
‘‘Isuzu China’’	Isuzu (China) Holding Co., Ltd., a company incorporated in the PRC with
	limited liability and a wholly-owned subsidiary of Isuzu;
‘‘Latest Practicable Date’’	29 July 2005, being the latest practicable date prior to the printing of this
	circular for ascertaining certain information contained in this circular;
‘‘Listing Rules’’	The Rules Governing the Listing of Securities on the Stock Exchange;
‘‘New CQAC Agreement’’	the conditional agreement dated 6 July 2005 entered into between CQAC
	and the Company relating to the supply of certain automobile parts by
	CQAC to the Company, details of which are set out in the section headed
	‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;
‘‘New CQACL Agreement’’	the conditional agreement dated 6 July 2005 entered into between CQACL
	and the Company relating to the supply of certain automobile parts by
	CQACL to the Company, details of which are set out in the section headed
	‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;

— 3 —

DEFINITIONS

‘‘New CQCC Agreement’’
the conditional agreement dated 6 July 2005 entered into between CQCC and the Company relating to the supply of certain automobile parts by CQCC to the Company, details of which are set out in the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;
‘‘New CQFC Agreement’’ the conditional agreement dated 6 July 2005 entered into between CQFC and the Company relating to the supply of certain automobile parts by CQFC to the Company, details of which are set out in the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;
‘‘New CQNHK Agreement’’ the conditional agreement dated 6 July 2005 entered into between CQNHK and the Company relating to the supply of certain automobile parts by CQNHK to the Company, details of which are set out in the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;
‘‘New CQPC Agreement’’ the conditional agreement dated 6 July 2005 entered into between CQPC and the Company relating to the supply of certain automobile parts by CQPC to the Company, details of which are set out in the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;
‘‘New Parts Supply the New Qingling Group Agreement, the New CQCC Agreement, the New Agreements’’ CQFC Agreement, the New CQAC Agreement, the New CQNHK Agreement and the New CQPC Agreement;
‘‘New Qingling Group the conditional agreement dated 6 July 2005 entered into between Qingling Agreement’’ Group and the Company relating to the supply of certain automobile parts by Qingling Group, details of which are set out in the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’;
‘‘Non-exempt Continuing the continuing connected transactions contemplated under the New Parts Connected Transactions’’ Supply Agreements;
‘‘Ordinary Resolutions’’ the ordinary resolutions to be proposed at the EGM to approve the Continuing Connected Transactions and the Annual Caps and to approve and ratify the transactions with each of the Connected Persons for the period from 1 January 2005 up to the date of the EGM, details of which are set out in the notice of the EGM;
‘‘PRC’’ The People’s Republic of China;
‘‘Qingling Group’’ Qingling Motors (Group) Co. Ltd, a state-owned
limited liability company established in the PRC;

‘‘Qingling Group the parts supply agreement entered into between the Company and CGAW Agreement’’ on 2 July 1994 as supplemented by the CQCC Agreement pursuant to which the Company purchases certain automobile parts and components manufactured by Qingling Group and required by the Company in its production process for a term of 10 years;

‘‘Share(s)’’ H Share(s) and Domestic Share(s);

‘‘Shareholder(s)’’ the shareholder(s) of the Company;

— 4 —

DEFINITIONS

‘‘SFO’’	Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong);
‘‘Stock Exchange’’	The Stock Exchange of Hong Kong Limited;
‘‘RMB’’	Renminbi, the lawful currency of the PRC.

— 5 —

LETTER FROM THE BOARD

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Qingling Motors Co. Ltd

(A Sino-foreign joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1122)

Executive Directors:

Mr. Wu Yun Mr. Gao Jianmin

Mr. Yoshito Mochizuki

Mr. Song Zhenyuan Mr. Liu Guangming

Mr. Pan Yong Mr. Yue Huaqiang

Independent Non-executive Directors:

Mr. Long Tao Mr. Song Xiaojiang Mr. Xu Bingjin

Registered Office: 1 Xiexing Cun Zhongliangshan Jiulongpo District Chongqing The People’s Republic of China

Principal Place of Business in Hong Kong: Suite 4901, 49th Floor Office Tower, Convention Plaza 1 Harbour Road Wanchai Hong Kong

3 August 2005

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

Reference is made to the Announcement. Pursuant to the requirements under the Listing Rules, the Company will seek the approval of the Independent Shareholders in relation to the Continuing Connected Transactions and the Annual Caps.

The purpose of this circular is to provide you with further details of the New CQACL Agreement and the New Parts Supply Agreements. The Independent Board Committee has been formed to advise the Independent Shareholders on the terms of the New CQACL Agreement and the New Parts Supply Agreements and the Annual Caps. Hercules has been appointed as the independent financial adviser to the Independent Board Committee and the Independent Shareholders. A letter from the Independent Board Committee is set out on page 21 of this circular and a letter from Hercules is set out on pages 22 to 29 of this circular.

BACKGROUND AND THE EXISTING CONTINUING CONNECTED TRANSACTIONS

— 6 —

LETTER FROM THE BOARD

cylinder heads and main bearing covers and other parts and components. Since 1995, Qingling Group set up various joint ventures, namely CQCC, CQFC, CQAC, CQNHK, CQPC and CQACL. Some of the production lines of Qingling Group have since shifted to those joint ventures. As a result, the automobile parts provided by Qingling Group to the Company have shifted to stamping components, compartments and other parts and components and the Company continues to purchase the same from Qingling Group on the same terms of the Qingling Group Agreement after the expiry of the Qingling Group Agreement on 1 July 2004. A waiver from full disclosure and/or prior independent shareholders’ approval was granted to the Company in respect of the transactions contemplated under the Qingling Group Agreement for an indefinite period subject to certain conditions. All the conditions were satisfied during the waiver period. The relevant waiver lapsed after the implementation of the amended Listing Rules on 31 March 2004 and therefore, compliance with the relevant requirements of the Listing Rules is required thereafter.

On 15 September 1995, the Company entered into the CQCC Agreement with CQCC and Qingling Group pursuant to which the Company purchases cast parts for rear axle and brake assemblies, casts of engine blocks, cylinder heads and main bearing covers and other parts and components from CQCC and the supply of such products by Qingling Group to the Company under the Qingling Group Agreement ceased. A waiver from the requirement of disclosure by press notice has been granted to the Company in respect of such transactions for an indefinite period conditional upon, inter alia, that the aggregate amount of the transactions will not exceed 3% of the book value of the net tangible assets of the Company as disclosed in the latest published audited accounts adjusted to take account of the transactions in the manner described in the then Rule 14.04(6) of the Listing Rules. Such waiver lapsed after the implementation of the amended Listing Rules on 31 March 2004 and therefore, compliance with the relevant requirements of the Listing Rules is required thereafter.

Since the period from October 1997 to October 1998, the Company has been purchasing various automobile parts from CQFC, CQAC, CQNHK, CQPC and CQACL respectively. At the extraordinary general meeting of the Company held on 24 June 1998, the then independent shareholders approved the Company to conduct the Existing Transactions, subject to certain conditions. No written agreements had been entered into in respect of the Existing Transactions. Details of the Existing Transactions were disclosed in the circular of the Company dated 9 May 1998. A waiver has been granted to the Company in respect of each of the Existing Transactions for an indefinite period, conditional upon, inter alia, that the Company will seek Independent Shareholders’ approval if any aggregated value of the Existing Transactions for the relevant period exceeds the value set out below:

CQFC Transactions	4% of the total cost of sales of the Company for the immediate
	preceding year
CQAC Transactions	10% of the total cost of sales of the Company for the immediate
	preceding year
CQNHK Transactions	2% of the total cost of sales of the Company for the immediate
	preceding year
CQPC Transactions	4% of the total cost of sales of the Company for the immediate
	preceding year
CQACL Transactions	1% of the total cost of sales of the Company for the immediate
	preceding year

— 7 —

LETTER FROM THE BOARD

After the implementation of the amended Listing Rules on 31 March 2004, the Company is required to take appropriate steps to comply with the amended Listing Rules as soon as practicable, including entering into a written agreement with each of CQFC, CQAC, CQNHK, CQPC and CQACL for a term not exceeding three years and, where applicable, complying with the reporting, announcement and independent shareholders’ approval requirements.

The Directors confirm that none of the aggregated value of the Existing Continuing Connected Transactions exceeded their respective annual value under the respective waiver previously granted in respect of each of the Existing Continuing Connected Transactions.

THE CONTINUING CONNECTED TRANSACTIONS

The Directors wish to continue to purchase various automobile parts from CQCC after the expiry of the CQCC Agreement and from Qingling Group, CQFC, CQAC, CQNHK, CQPC and CQACL on an ongoing basis. To comply with the relevant provisions of the amended Listing Rules which took effect on 31 March 2004, the Company entered into the New CQACL Agreement and the New Parts Supply Agreements on 6 July 2005.

1. The New CQACL Agreement

Date	:	6 July 2005
Parties	:	(i) CQACL
		(ii) The Company
Condition precedent	:	Conditional upon approval by the Independent
		Shareholders by poll
Term	:	Effective from the date of approval of the agreement by
		the Independent Shareholders and expiring on the third
		anniversary of the date of approval
Products provided by CQACL	:	Automobile parts including but not limited to aluminium
to the Company		parts and other parts and components
Price determination	:	Currently at prices based on actual costs or reasonable
		costs (whichever is lower) incurred plus a profit margin
		of not more than 12% determined in the following order:
		(i) at prices not higher than market prices; or
		(ii) if no comparable market price, at prices based on
		actual costs or reasonable costs (whichever is
		lower) incurred plus a profit margin of not more
		than 12%,
		and in any event, at prices no less favourable than those
		offered by CQACL to Independent Third Parties

— 8 —

LETTER FROM THE BOARD

2.	The New Qingling Group Agreement	The New Qingling Group Agreement	The New Qingling Group Agreement
	Date	:	6 July 2005
	Parties	:	(i) Qingling Group
			(ii) The Company
	Condition precedent	:	Conditional upon approval by the Independent
			Shareholders by poll
	Term	:	Effective from the date of approval of the agreement by
			the Independent Shareholders and expiring on the third
			anniversary of the date of approval
	Products provided by Qingling	:	Automobile parts including but not limited to stamping
	Group to the Company		components, compartments and other parts and
			components
	Price determination	:	Currently at prices based on actual costs or reasonable
			costs (whichever is lower) incurred plus a profit margin
			of not more than 10% determined in the following order:
			(i) at prices not higher than market prices; or
			(ii) if no comparable market price, at prices based on
			actual costs or reasonable costs (whichever is
			lower) incurred plus a profit margin of not more
			than 10%,
			and in any event, at prices no less favourable than those
			offered by Qingling Group to Independent Third Parties
3.	The New CQCC Agreement
	Date	:	6 July 2005
	Parties	:	(i) CQCC
			(ii) The Company
	Condition precedent	:	Conditional upon approval by the Independent
			Shareholders by poll
	Term	:	Effective from the date of approval of the agreement by
			the Independent Shareholders and expiring on the third
			anniversary of the date of approval
	Products provided by CQCC to	:	Automobile parts including but not limited to casts of
	the Company		engine blocks, cylinder heads and main bearing covers
			and other parts and components

— 9 —

LETTER FROM THE BOARD

Price determination : Currently at prices based on actual costs or reasonable costs (whichever is lower) incurred plus a profit margin of not more than 10% determined in the following order: (i) at prices not higher than market prices; or (ii) if no comparable market price, at prices based on actual costs or reasonable costs (whichever is lower) incurred plus a profit margin of not more than 10%, and in any event, at prices no less favourable than those offered by CQCC to Independent Third Parties

The CQCC Agreement will be terminated on the date the New CQCC Agreement takes effect.

The New CQFC Agreement
Date	:	6 July 2005
Parties	:	(i) CQFC
		(ii) The Company
Condition precedent	:	Conditional upon approval by the Independent
		Shareholders by poll
Term	:	Effective from the date of approval of the agreement by
		the Independent Shareholders and expiring on the third
		anniversary of the date of approval
Products provided by CQFC to	:	Automobile parts including but not limited to raw casts
the Company		of engine crankshafts and connecting rods and other
		parts and components
Price determination	:	Currently at prices based on actual costs or reasonable
		costs (whichever is lower) incurred plus a profit margin
		of not more than 12% determined in the following order:
		(i) at prices not higher than market prices; or
		(ii) if no comparable market price, at prices based on
		actual costs or reasonable costs (whichever is
		lower) incurred plus a profit margin of not more
		than 12%,
		and in any event, at prices no less favourable than those
		offered by CQFC to Independent Third Parties

— 10 —

LETTER FROM THE BOARD

5.	The New CQAC Agreement
	Date	:	6 July 2005
	Parties	:	(i) CQAC
			(ii) The Company
	Condition precedent	:	Conditional upon approval by the Independent
			Shareholders by poll
	Term	:	Effective from the date of approval of the agreement by
			the Independent Shareholders and expiring on the third
			anniversary of the date of approval
	Products provided by CQAC to	:	Automobile parts including but not limited to front and
	the Company		rear motor vehicle axles and other parts and components
	Price determination	:	Currently at prices not higher than market prices
			determined in the following order:
			(i) at prices not higher than market prices; or
			(ii) if no comparable market price, at prices based on
			actual costs or reasonable costs (whichever is
			lower) incurred plus a profit margin of not more
			than 10%,
			and in any event, at prices no less favourable than those
			offered by CQAC to Independent Third Parties
6.	The New CQNHK Agreement
	Date	:	6 July 2005
	Parties	:	(i) CQNHK
			(ii) The Company
	Condition precedent	:	Conditional upon approval by the Independent
			Shareholders by poll
	Term	:	Effective from the date of approval of the agreement by
			the Independent Shareholders and expiring on the third
			anniversary of the date of approval
	Products provided by CQNHK	:	Automobile parts including but not limited to motor
	to the Company		vehicle seats and other parts and components
	Price determination	:	Currently at prices not higher than market prices
			determined in the following order:
			(i) at prices not higher than market prices; or
			(ii) if no comparable market price, at prices based on
			actual costs or reasonable costs (whichever is
			lower) incurred plus a profit margin of not more
			than 10%,
			and in any event, at prices no less favourable than those
			offered by CQNHK to Independent Third Parties

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LETTER FROM THE BOARD

The New CQPC Agreement Date : 6 July 2005 Parties : (i) CQPC (ii) The Company Condition precedent : Conditional upon approval by the Independent Shareholders by poll Term : Effective from the date of approval of the agreement by the Independent Shareholders and expiring on the third anniversary of the date of approval Products provided by CQPC to : Automobile parts including but not limited to plastic the Company parts and other parts and components Price determination : Currently at prices not higher than market prices determined in the following order: (i) at prices not higher than market prices; or (ii) if no comparable market price, at prices based on actual costs or reasonable costs (whichever is lower) incurred plus a profit margin of not more than 10%, and in any event, at prices no less favourable than those offered by CQPC to Independent Third Parties

According to 2004 China Automobile Industry Yearbook (2004 ) jointly published by China Automobile Technology Development Centre and China Automobile Industry Association, (i) the total revenue and total profits of automobile parts industry for 2003 in the PRC amounted to approximately RMB150,898,970,000 and approximately RMB14,386,670,000 respectively, representing a profit margin of approximately 10%; (ii) the total revenue and total profit of sino-foreign joint venture of automobile parts industry for 2003 in the PRC amounted to approximately RMB53,513,410,000 and approximately RMB7,956,170,000 respectively, representing a profit margin of approximately 15%. In view of the above, the Company and the Connected Persons have agreed on a profit margin of not more than either 10% or 12% after arm’s length negotiation.

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LETTER FROM THE BOARD

Historical transaction amounts

The following table (‘‘Table 1’’) sets out the historical transaction amounts for each of the Existing Continuing Connected Transactions for the three financial years ended 31 December 2004 and the six months ended 30 June 2005:

Historical transaction amounts (in RMB)

					For the
					period from
					1 January
		Year	ended 31 December		2005 up to
		2002	2003	2004	30 June 2005
(a)	CQACL Transactions	6,440,000	5,875,000	4,508,000	5,330,000
(b)	Qingling Group Agreement	34,535,000	49,708,000	40,924,000	40,530,000
(c)	CQCC Agreement	48,746,000	53,609,000	44,622,000	25,000,000
(d)	CQFC Transactions	30,886,000	39,457,000	32,658,000	23,160,000
(e)	CQAC Transactions	215,222,000	243,421,000	206,699,000	49,640,000
(f)	CQNHK Transactions	31,607,000	36,499,000	21,538,000	21,230,000
(g)	CQPC Transactions	34,835,000	48,304,000	38,297,000	37,280,000

Projected transaction amounts

The Directors project that under each of the New CQACL Agreement and the New Parts Supply Agreements, the value of the automobile parts to be provided by the relevant parties to the Company for the duration of the relevant agreements will not exceed the amounts set out below:

Aggregate amount (in RMB)

			For the period
			from the date of			For the
			approval of the			period from
			agreement by the			1 January
			Independent	For the year	For the year	2008 to the
			Shareholders to	ending 31	ending 31	expiry date
			31 December	December	December	of the
			2005	2006	2007	agreement
(a)	CQACL		2,410,000	10,300,000	13,100,000	12,480,000
(b)	Qingling	Group	30,970,000	107,111,000	154,185,000	164,470,000
(c)	CQCC		12,280,000	56,270,000	78,760,000	81,970,000
(d)	CQFC		8,650,000	47,165,000	63,847,000	64,670,000
(e)	CQAC		236,890,000	443,359,000	638,506,000	679,930,000
(f)	CQNHK		10,070,000	43,700,000	55,200,000	53,010,000
(g)	CQPC		17,620,000	83,748,000	116,710,000	121,530,000

The Company will seek approval from the Independent Shareholders in respect of the Continuing Connected Transactions and the Annual Caps detailed below, which are ascertained by reference to the above projected transaction amounts.

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LETTER FROM THE BOARD

Based on the historical transaction amounts for the period from 1 January 2005 to 30 June 2005 as set out in Table 1 and the estimated transaction amounts for the period from 1 July 2005 to 31 December 2005, the estimated transaction amounts for the continuing connected transactions with each of the Connected Persons for the year ending 31 December 2005 will be as follows:

— (a) CQACL RMB8,700,000 — (b) Qingling Group RMB79,600,000 — (c) CQCC RMB41,500,000 — (d) CQFC RMB36,900,000 — (e) CQAC RMB286,800,000 — (f) CQNHK RMB36,300,000 — (g) CQPC RMB60,700,000

The Company will also seek approval and ratification from the Independent Shareholders in respect of the transactions with each of the Connected Persons for the period from 1 January 2005 up to the date of the EGM.

Basis of projected transaction amounts

The aforesaid projected transaction amounts are ascertained by the Board by reference to (i) the historical transaction amounts for the two financial years ended 31 December 2004; (ii) the projected sales volume for the duration of the relevant agreements, taking into account, inter alia, the overall business environment and specific growth strategies; (iii) the expected increase in the number of new vehicles of new models or different specifications to be launched and made available for sale by the Company; and (iv) the expected expansion of sales network through distributors in the PRC. Such references are more particularly explained below:

(1) Historical transaction amounts

The historical transaction amounts for each of the Existing Continuing Connected Transactions are set out in Table 1.

(2) Projected transaction amounts

With gradual improvement of the market condition in 2005 and the Company’s enhancement in market exploration and development, the projected sales volume for the year ending 2005 is expected to recover to the level as that in 2003, with a moderate increase of approximately 4% as compared to the year 2003. By adopting the following measures, namely:

(i) continuous market exploration;
(ii) continuous adoption of the localization of parts and accessories policy to reduce the costs and enhance the competitiveness of the Group’s products; and
(iii) product quality enhancement by the Company,

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LETTER FROM THE BOARD

the Company expects that the sales volume for the period for the duration of the relevant agreements will increase to a considerable extent and hence increase in the Group’s requirement for automobile parts.

Save and except for the New CQCC Agreement and the New CQFC Agreement, the projected transaction amounts for each of the New Parts Supply Agreements and the New CQACL Agreement for the year ending 31 December 2006 represent an increase over two-folds as compared with the corresponding transaction amounts for the year ended 31 December 2004. The Company acquired extra automobile parts from CQCC and CQFC in 2004 for export to Isuzu. Consequently, the historical transaction amounts for the CQCC Agreement and the CQFC Transactions for the year ended 31 December 2004 are relatively higher. The projected sales volume is determined based on an average of approximately 30% annual increment on the sales volume of the automobile parts of the Connected Persons.

However, when computing the projected transaction amounts for the year ending 31 December 2005 which represent an average of approximately 40% annual increment on the historical transaction amounts for the year ended 31 December 2004, the Company also took into account the historical transaction amounts for the period from 1 January 2005 to 30 June 2005.

(3) Expected increase in the number of new vehicles

The Company currently anticipates that the total number of vehicles of new models or different specifications that may be launched and made available for sale by the Company for the second half of 2005 and the three years ending 31 December 2008 will be in the range of about 40 to 120.

(4) Expected expansion of sales network

Currently, the Group sells its products through 83 distributors in the PRC. The Group anticipates that the number of distributors through which the Group’s products will be sold will increase substantially in the range of about 200 to 360 in the second half of 2005 and the three years ending 31 December 2008.

The Company however has not taken into account the following factors, which effectively affected the actual sales volume of automobile parts of the Connected Persons for the two financial years ended 31 December 2004, in calculating the projected transaction amounts for simplicity and prudence:

the Company’s excess inventories;
tailor-made orders to clients special requirements, e.g. some clients requested for vehicles with no driving compartments, which would lead to a decrease in requirements for automobile parts from certain Connected Persons;
replacements of worn automobile parts by old vehicles; and
certain Connected Persons were subject to equipment overhaul and had to stop operations for a certain period of time, the Company therefore acquired excess automobile parts as reserves.

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LETTER FROM THE BOARD

Based on the estimated value of the automobile parts provided by each of the Connected Persons to the Group for the period from 1 January 2005 up to the expected date of the EGM, none of the applicable percentage ratios (other than the profit ratio) calculated in accordance with Chapter 14 of the Listing Rules will exceed 2.5% on individual basis. If the Continuing Connected Transactions are to be aggregated, the applicable percentage ratios (other than the profit ratio) will exceed 2.5%.

The projected transaction amounts for the period from the expected date of approval of the New CQAC Agreement by the Independent Shareholders to 31 December 2005 in respect of the transactions contemplated under the New CQAC Agreement is relatively high because the Company has set a limit on purchases of motor vehicle axles from CQAC so that none of the applicable percentage ratios (other than the profit ratio) for the transactions with CQAC calculated in accordance with Chapter 14 of the Listing Rules will exceed 2.5% prior to approval by the Independent Shareholders in the EGM. The Group has been applying its stocks and inventory of motor axles for its production of motor vehicles since the beginning of this year and will continue to do so until the New CQAC Agreement has been approved by the Independent Shareholders in the EGM so that it would be able to maintain its purchases within the limit so as to comply with the Listing Rules on an individual basis. The Company intends to increase its purchases of motor vehicle axles from CQAC in accordance with the terms of the New CQAC Agreement substantially after the New CQAC Agreement becomes unconditional upon approval by the Independent Shareholders so as to replenish its stock level. However, the Stock Exchange has indicated that all the Continuing Connected Transactions should be aggregated pursuant to the relevant Listing Rules.

REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

As the Company needs to purchase (i) stamping components, compartments and other parts and components; (ii) casts of engine blocks, cylinder heads and main bearing covers and other parts and components; (iii) raw casts of crankshafts and connecting rods and other parts and components; (iv) front and rear motor vehicle axles and other parts and components; (v) motor vehicle seats and other parts and components; (vi) plastic parts and other parts and components; and (vii) aluminium parts and other parts and components, for its business from time to time and the principal businesses of Qingling Group, CQCC, CQFC, CQAC, CQNHK, CQPC and CQACL include the production and sale of the products referred to in items (i) to (vii) above respectively and in view of the good quality of such products produced by Qingling Group, CQCC, CQFC, CQAC, CQNHK, CQPC and CQACL and their willingness to manufacture their respective products in accordance with the Company’s specifications, the Company therefore purchases such products from Qingling Group, CQCC, CQFC, CQAC, CQNHK, CQPC and CQACL (as the case may be). Since the vehicles manufactured by the Group are principally under the brand name ‘‘Isuzu’’, the Company’s specification is that all the relevant parts must meet the ‘‘Isuzu’’ standard. Each Connected Person has obtained the technology know-how and specific equipment from Isuzu and therefore has the ability to manufacture automobile parts in accordance with the Isuzu requirements. As other suppliers do not possess such technology know-how or specific equipment of Isuzu, the Directors believe that even though other suppliers may be capable of manufacturing parts with the same specifications. The quality of such products will not meet the requirements of Isuzu. Therefore, the Group has not sought and does not think it is appropriate to seek alternate sources in respect of the automobile parts currently supplied by the Connected Persons.

The Continuing Connected Transactions are continuation of the existing arrangements with the Connected Persons mentioned above. To comply with Chapter 14A of the Listing Rules, the Company entered into the New CQACL Agreement and the New Parts Supply Agreements.

Back in April/May 2004, the Company was already reviewing all its continuing connected transactions. Thereafter, the Company had commenced negotiations with the various Connected Persons for the purpose of renewing such transactions so as to comply with the current Listing Rules. During the

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LETTER FROM THE BOARD

negotiation with the relevant Connected Persons, the Company tried to negotiate the best terms for the Company. In fact, a submission was made by the Company to the Stock Exchange in September 2004 whether the waivers in relation to various continuing connection transactions were still valid, but in the light of the Stock Exchange News Release dated 30 January 2004, where it was provided that if a waiver has been granted for an indefinite period, the Company will have to take appropriate steps to ensure compliance with the new Listing Rules as soon as practicable after the implementation of the amended Listing Rules on 31 March 2004, such submission was rejected.

After the above efforts by the Company, it is now able to finalize the various agreements with relevant Connected Persons so as to comply with the current Listing Rules. They have therefore reached the New CQACL Agreement and the New Parts Supply Agreements.

The Directors believe that each of the New CQACL Agreement and the New Parts Supply Agreements are entered into in the ordinary and usual course of business of the Company, on normal commercial terms and negotiated on an arm’s length basis between the Company and the Connected Persons. The Directors consider that the terms of each of the New CQACL Agreement and the New Parts Supply Agreements are fair and reasonable and in the interests of the Shareholders as a whole.

REQUIREMENTS UNDER THE LISTING RULES

The Listing Rules were substantially amended as from 31 March 2004. On 30 January 2004, the Stock Exchange issued a press release relating to the amended Listing Rules. Such press release provides that, amongst other matters, ‘‘where a waiver has been granted to a listed issuer for an indefinite period, the listed issuer will have to take appropriate steps to ensure compliance with the new Listing Rules as soon as practicable after implementation of the new Listing Rules’’. Therefore, the Company entered into the transactions contemplated herein for the purpose of ensuring compliance with the new Listing Rules.

As at the Latest Practicable Date, Qingling Group is a substantial shareholder of the Company holding approximately 50.10% of the entire issued share capital of the Company and CQCC, CQFC, CQAC, CQNHK, CQPC and CQACL are owned as to 60.38%, 55.39%, 49.64%, 50.80%, 53.15% and 58.43% respectively by Qingling Group and are associates of Qingling Group. Therefore, Qingling Group, CQCC, CQFC, CQAC, CQNHK, CQPC and CQACL are all connected persons of the Company under Chapter 14A of the Listing Rules. Since the transactions under each of the New CQACL Agreement and the New Parts Supply Agreements involve the provision of automobile parts which shall be carried out on a continuing or recurring basis and are expected to extend over a period of time, the Continuing Connected Transactions will constitute continuing connected transactions under the Listing Rules.

As the applicable percentage ratios (other than the profit ratio) calculated in accordance with Chapter 14 of the Listing Rules, both in aggregate and on individual basis, will not be, on annual basis, less than 2.5% and the annual consideration is expected to be higher than HK$10,000,000.00, the Non-exempt Continuing Connected Transactions constitute non-exempt continuing connected transactions of the Company under Rule 14A.35 of the Listing Rules and therefore, will be subject to the reporting, announcement and the Independent Shareholders’ approval requirements. The applicable percentage ratios (other than the profit ratio) calculated in accordance with Chapter 14 of the Listing Rules for the continuing connected transactions contemplated under the CQACL Agreement on individual basis will be, on annual basis, more than 0.1% but less than 2.5%. Therefore, such transactions constitute continuing connected transactions under Rule 14A.34 of the Listing Rules and will normally be subject to the reporting and announcement requirements only and will be exempt from the Independent Shareholders’ approval. However, the Stock Exchange has indicated that all the Continuing Connected Transactions should be aggregated pursuant to the relevant Listing Rules for the following reasons: (i) all the Continuing Connected Transactions have been entered into by the Company with the parties connected or associated with one

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LETTER FROM THE BOARD

another, namely Qingling Group and other Connected Persons of which Qingling Group is the controlling shareholder (as defined in the Listing Rules); and (ii) all the Continuing Connected Transactions involve the supply and purchase of automobile parts in general.

In view of the above, the Company will seek the approval of the Independent Shareholders in relation to the Continuing Connected Transactions and the Annual Caps set out below:

			Proposed Annual	Proposed Annual	Caps (in RMB)
			For the period
			from the date of
			approval of the
			agreement by the			For the period
			Independent	For the year	For the year	from 1 January
			Shareholders to	ending 31	ending 31	2008 to the
			31 December	December	December	expiry date of
			2005	2006	2007	the agreement
(a)	CQACL		2,500,000	10,300,000	13,100,000	12,500,000
(b)	Qingling	Group	31,000,000	107,200,000	154,200,000	164,500,000
(c)	CQCC		12,300,000	56,300,000	78,800,000	82,000,000
(d)	CQFC		8,700,000	47,200,000	63,900,000	64,700,000
(e)	CQAC		236,900,000	443,400,000	638,600,000	680,000,000
(f)	CQNHK		10,100,000	43,700,000	55,200,000	53,100,000
(g)	CQPC		18,000,000	83,800,000	116,800,000	121,600,000

If the Annual Caps stated above are exceeded or if there is a material change to the terms of the New CQACL Agreement or any of the New Parts Supply Agreements or the New CQACL Agreement or any of the New Parts Supply Agreements is renewed, the Company will have to comply with the relevant provisions of Chapter 14A of the Listing Rules.

Ordinary Resolutions nos. 1 to 7 will be proposed at the EGM to approve by way of poll the Continuing Connected Transactions and the Annual Caps and Ordinary Resolution no. 8 will be proposed at the EGM to approve and ratify by way of poll the transactions with each of the Connected Persons for the period from 1 January 2005 up to the date of the EGM. Qingling Group and Isuzu, which hold approximately 50.10% and 20% of the entire share capital of the Company respectively, are substantial shareholders of the Company. Qingling Group, Isuzu and their respective associates will be required to abstain from voting on the Ordinary Resolutions. The Independent Board Committee has been formed to advise the Independent Shareholders as to whether the Continuing Connected Transactions and the Annual Caps are fair and reasonable and in the interests of the shareholders of the Company as a whole. The Company has confirmed that neither member of the Independent Board Committee has any material interest in any of the Continuing Connected Transactions. Hercules has been appointed by the Company as its independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of the New CQACL Agreement, the New Parts Supply Agreements and the Annual Caps.

— 18 —

LETTER FROM THE BOARD

EGM

The EGM will be held at Conference Hall, 1st Floor of Qingling Motors Co. Ltd Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, PRC on Tuesday, 20 September 2005 at 11: 00 a.m.. The notice of EGM together with a form of proxy and this circular will be sent on or before 3 August 2005 to each of the holders of H Shares. The Ordinary Resolutions are set out on pages 33 to 36 of this circular.

Whether or not you intend to attend the EGM, you are requested to complete and return the form of proxy to the legal address of the Company (in the case of proxy form of holder of Domestic Shares) or to the Company’s H Share Registrars, Hong Kong Registrars Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong (in the case of proxy form of holders of H Shares) in accordance with the instructions printed thereon, to be received not later than 24 hours before the time for the holding of the EGM or 24 hours before the time appointed for taking the poll.

The Articles of Association provide that those Shareholders who intend to attend any shareholders’ meeting of the Company shall send a written reply to the Company 20 days before the date of the meeting. In the case the written replies received from the Shareholders indicating that they intend to attend the general meeting represent holders of not more than one half of the total number of Shares with voting rights, the Company shall within 5 days inform its Shareholders again in the form of a public notice the proposed matters for consideration at the meeting and the date and venue of the meeting. The general meeting may be convened after such notification has been published.

In view of the above requirements in respect of the EGM convened by the notice of the EGM, you are urged to complete and return the form of proxy and the reply slip, whether or not you intend to attend the EGM. Completion and deposit of a form of proxy will not preclude you from attending and voting at the EGM, if you so wish.

RECOMMENDATION OF THE INDEPENDENT BOARD COMMITTEE

Your attention is drawn to (i) letter from the Independent Board Committee set out on page 21 of this circular which contains the recommendation from the Independent Board Committee to the Independent Shareholders concerning the New CQACL Agreement, the New Parts Supply Agreements and the Annual Caps; (ii) the letter from Hercules set out on pages 22 to 29 of this circular which contains the recommendation from Hercules to the Independent Board Committee and the Independent Shareholders in relation to the New CQACL Agreement, the New Parts Supply Agreements and the principal factors considered by Hercules in arriving at its recommendation.

Having taken into account the advice from Hercules and in particular the principal factors set out in the letter from Hercules, the Independent Board Committee considers that the Continuing Connected Transactions are in the ordinary and usual course of business of the Group and that the terms of the New CQACL Agreement and the New Parts Supply Agreements are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned. The Independent Board Committee also considers that the entering into of the New CQACL Agreement and the New Parts Supply Agreements is in the interests of the Company and the Shareholders as a whole. Further, the Independent Board Committee considers that the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends that the Independent Shareholders should vote in favour of the ordinary resolutions to be proposed at the EGM to approve the New CQACL Agreement, the New Parts Supply Agreements and the transactions contemplated thereunder and the Annual Caps.

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LETTER FROM THE BOARD

GENERAL

The Group is principally engaged in the production and sale of Isuzu light-duty trucks, multi-purposes vehicles, pick-up trucks, heavy-duty trucks, other vehicles and automobile parts and accessories.

Qingling Group is principally engaged in the manufacturing and sales of and the development of new products in relation to motor vehicles and their spare parts and accessories, and the provision of technical advisory services.

CQCC is principally engaged in the manufacturing and sales of automobile parts and components and cast parts.

CQFC is principally engaged in the manufacturing and sales of automobile parts and components and forging parts.

CQAC is principally engaged in the manufacturing and sales of motor vehicle axles and other parts and components.

CQNHK is principally engaged in the manufacturing and sales of motor vehicle seats, interior accessories and other seats.

CQPC is principally engaged in the manufacturing and sales of plastic automobile parts and other plastic parts and components.

CQACL is principally engaged in the manufacturing and sales of aluminium automobile parts and other aluminium parts and components.

Your attention is drawn to the general information set out in the appendix to this circular.

By Order of the Board Wu Nianqing Company Secretary

— 20 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [50 x 53] intentionally omitted <==

Qingling Motors Co. Ltd

(A Sino-foreign joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1122)

The Independent Board Committee:

Mr. Long Tao Mr. Song Xiaojiang Mr. Xu Bingjin

3 August 2005

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 3 August 2005 (the ‘‘Circular’’), in which this letter forms part. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as given to them in the section headed ‘‘Definitions’’ of the Circular.

We have been appointed by the Board as the Independent Board Committee to advise the Independent Shareholders on whether the terms of the New CQACL Agreement, the New Parts Supply Agreements and the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned.

We wish to draw your attention to the letter from Hercules, the independent financial adviser appointed, as set out on pages 22 to 29 of the Circular and the letter from the Board as set out on pages 6 to 20 of the Circular.

Having taken into account the advice from Hercules and in particular the principal factors set out in the letter from Hercules, we consider that the Continuing Connected Transactions are in the ordinary and usual course of business of the Group and the terms of the New CQACL Agreement and the New Parts Supply Agreements are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned. We also consider that the entering into of the New CQACL Agreement and the New Parts Supply Agreements is in the interests of the Company and the Shareholders as a whole. Further, the Independent Board Committee considers that the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the New CQACL Agreement, the New Parts Supply Agreements and the transactions contemplated thereunder and the Annual Caps.

Yours faithfully, The Independent Board Committee of Qingling Motors Co. Ltd Long Tao, Song Xiaojiang Xu Bingjin

Independent non-executive Directors

— 21 —

LETTER FROM HERCULES

The following is the text of the letter of advice prepared by Hercules Capital Limited to the Independent Board Committee and the Independent Shareholders in respect of the Continuing Connected Transactions for incorporation in this Circular:

Hercules Capital Limited

1503 Ruttonjee House 11 Duddell Street Central Hong Kong

3 August 2005

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders with respect to the Continuing Connected Transactions, details of which are set out in the ‘‘Letter from the Board’’ contained in the circular dated 3 August 2005 to the Shareholders (the ‘‘Circular’’) of which this letter forms part. Terms used in this letter have the same meanings as defined elsewhere in the Circular unless the context otherwise requires.

On 6 July 2005, the Company, CQACL, Qingling Group, CQCC, CQFC, CQAC, CQNHK and CQPC entered into the New CQACL Agreement and the New Parts Supply Agreements relating to purchase of various automobile parts by the Group. Qingling Group is a substantial Shareholder holding approximately 50.10% of the entire issued share capital of the Company, and CQACL, CQCC, CQFC, CQAC, CQNHK and CQPC are owned as to approximately 58.43%, 60.38%, 55.39%, 49.64%, 50.80% and 53.15% respectively by Qingling Group and are therefore associates of Qingling Group. Qingling Group, CQACL, CQCC, CQFC, CQAC, CQNHK and CQPC are all connected persons of the Company under Chapter 14A of the Listing Rules. Accordingly, the entering into of the New CQACL Agreement and the New Parts Supply Agreements will constitute continuing connected transactions and non-exempt continuing connected transactions respectively for the Company. As all the Continuing Connected Transactions should be aggregated pursuant to the Listing Rules, the New CQACL Agreement and the New Parts Supply Agreements (and the proposed Annual Caps) will be subject to approval by the Independent Shareholders at the EGM. Qingling Group, Isuzu (which holds approximately 20% of the entire issued share capital of the Company) and their respective associates are required to abstain from voting on the Ordinary Resolutions proposed to approve the Continuing Connected Transactions.

The Independent Board Committee, comprising all the independent non-executive Directors with no material interest in the Continuing Connected Transactions, namely Mr. Long Tao, Mr. Song Xiaojiang and Mr. Xu Bingjin, has been formed to advise the Independent Shareholders on whether the Continuing Connected Transactions and the proposed Annual Caps are fair and reasonable and in the interests of the Company and its shareholders as a whole.

— 22 —

LETTER FROM HERCULES

Hercules is engaged to advise the Independent Board Committee and the Independent Shareholders as to whether (i) the Continuing Connected Transactions are conducted in the ordinary and usual course of business of the Company and on normal commercial terms; (ii) the terms of the Continuing Connected Transactions (and the proposed Annual Caps) are fair and reasonable and in the interests of the Company and its shareholders as a whole; and (iii) the Independent Shareholders should vote in favor of the resolutions to approve the Continuing Connected Transactions at the EGM.

In formulating our recommendations, we have relied on the information and representations supplied, and the opinions expressed, by the Directors and management of the Company and have also assumed that all statements and representations contained or referred to in the Circular and the information and representations provided to us by the Directors and the management of the Company are true and accurate at the time they were made and as at the date of the Circular. We have been advised by the Directors and management of the Company that all material relevant information has been supplied to us and no material facts have been omitted from the information and representations supplied and opinions expressed. We consider that we have reviewed sufficient information to reach an informed view as set out in this letter. We have no reason to suspect that any material information has been withheld by the Directors or the management of the Company, or is misleading, untrue or inaccurate. We have not, however, for the purpose of this exercise, conducted an independent investigation or audit into the businesses or affairs of the Group and the related subjects of and parties to the New CQACL Agreement and the New Parts Supply Agreements.

PRINCIPAL FACTORS AND REASONS CONSIDERED

The principal factors and reasons that we have taken into consideration in assessing the Continuing Connected Transactions and arriving at our opinion are set out as follows:

(I) Background

The Company entered into the Qingling Group Agreement with CGAW, the predecessor of Qingling Group, on 2 July 1994 whereby the Company agreed to purchase from Qingling Group automobile parts including but not limited to front axles, cast parts for rear axle and brake assemblies, casts of engine blocks, cylinder heads and main bearing covers and other parts and components. Since 1995, Qingling Group set up various joint ventures, namely CQACL, CQCC, CQFC, CQAC, CQNHK and CQPC. Some of the production lines of Qingling Group have since shifted to those joint ventures. As a result, the automobile parts provided by Qingling Group to the Company have shifted to stamping components, compartments and other parts and components and the Company continues to purchase the same from Qingling Group on the same terms as the Qingling Group Agreement after it expired on 1 July 2004. A waiver from full disclosure and/or prior independent shareholders’ approval was granted to the Company by the Stock Exchange in respect of the transactions contemplated under the Qingling Group Agreement for an indefinite period subject to certain conditions. All the conditions were satisfied during the waiver period. The relevant waiver lapsed after the implementation of the amended Listing Rules on 31 March 2004 and, therefore, compliance with the relevant requirements of the Listing Rules would be required thereafter.

On 15 September 1995, the Company entered into the CQCC Agreement with CQCC and Qingling Group pursuant to which the Company would purchase cast parts for rear axle and brake assemblies, casts of engine blocks, cylinder heads and main bearing covers and other parts and components from CQCC and the supply of such products by Qingling Group to the Company under the Qingling Group Agreement ceased. A waiver from the requirement of disclosure by press notice has been granted to the Company by the Stock Exchange in respect of such transactions for an indefinite period conditional upon, inter alia, the aggregate amount of the transactions will not exceed

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LETTER FROM HERCULES

3% of the book value of the net tangible assets of the Company as disclosed in the latest published audited accounts adjusted to take account of the transactions in the manner described in the then Rule 14.04(6) of the Listing Rules. Such waiver lapsed after the implementation of the amended Listing Rules on 31 March 2004 and, therefore, compliance with the relevant requirements of the Listing Rules would be required thereafter.

During the period from October 1997 to October 1998, the Company purchased various automobile parts from CQACL, CQFC, CQAC, CQNHK and CQPC respectively. At the extraordinary general meeting of the Company held on 24 June 1998, the then independent shareholders approved the Company to conduct the Existing Transactions, subject to certain conditions. No written agreements had been entered into in respect of the Existing Transactions. Details of the Existing Transactions were disclosed in the circular of the Company dated 9 May 1998. A waiver was granted to the Company in respect of each of the Existing Transactions for an indefinite period subject to the caps for each of these transactions set out in the ‘‘Letter from the Board’’.

Under the Listing Rules in effect since 31 March 2004, such purchases of automobile parts from Qingling Group, CQACL, CQFC, CQAC, CQNHK and CQPC by the Company constitute continuing connected transactions subject to a written agreement for a term not exceeding three years approved by the Independent Shareholders. The Directors wish to continue to purchase various automobile parts from CQCC after the expiry of the CQCC Agreement and from CQACL, Qingling Group, CQFC, CQAC, CQNHK and CQPC on an on-going basis, and as such, the Company entered into the New CQACL Agreement and the New Parts Supply Agreements on 6 July 2005. The New CQACL Agreement and the New Parts Supply Agreements will take effect from the date of approval of the transactions contemplated thereunder and expiring on the third anniversary of the date of the approval. Details of the New CQACL Agreement and the New Parts Supply Agreements are set out in the ‘‘Letter from the Board’’.

(II) Reasons for the Non-exempt Continuing Connected Transactions

In considering whether the decision to continue to purchase various automobile parts from the Connected Persons is fair and reasonable so far as the Group is concerned, we have considered that:

(i) the principal business of the Group is the production and sale of Isuzu light-duty trucks, multi-purposes vehicles, pick-up trucks, heavy-duty trucks, other vehicles and automobile parts and accessories;
(ii) the Company needs to purchase various automobile parts specified under the New CQACL Agreement and the New Parts Supply Agreements for its business from time to time;
(iii) the principal businesses of CQACL, Qingling Group, CQCC, CQFC, CQAC, CQNHK and CQPC include the production and sale of the automobile parts as specified under the New CQACL Agreement and the New Parts Supply Agreements; and
(iv) each of the Connected Persons has obtained the technology know-how and specific equipment from Isuzu and therefore are capable of manufacturing high quality automobile parts in accordance with the Isuzu requirements and the Company’s exact specifications.

Therefore, we consider the Continuing Connected Transactions to be commercial transactions for the Group conducted in the ordinary and usual course of business of the Group.

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LETTER FROM HERCULES

(III) Terms of the Continuing Connected Transactions

Pursuant to the New CQACL Agreement and the New Parts Supply Agreements, the Connected Persons will provide the Company with the following automobile parts:

(i) aluminium parts and other parts and components by CQACL;
(ii) stamping components, compartments and other parts and components by Qingling Group;
(iii) casts of engine blocks, cylinder heads and main bearing covers and other parts and components by CQCC;
(iv) raw casts of engine crankshafts and connecting rods and other parts and components by CQFC;
(v) front and rear motor vehicle axles and other parts and components by CQAC;
(vi) motor vehicle seats and other parts and components by CQNHK; and
(vii) plastic parts and other parts and components by CQPC.

As regards transactions (v), (vi) and (vii) above, we obtained from the Company price quotations issued by independent suppliers for five comparable automobile parts (in terms of nature and quality) currently provided by each of CQAC, CQNHK and CQPC, and the corresponding invoices issued by CQAC, CQNHK and CQPC. We have reviewed and compared the material terms, in particular the price of the respective automobile parts charged by CQAC, CQNHK and CQPC, with the quotations for the similar products obtained from independent suppliers of the Group. Based on our review, we are satisfied that the material terms, including payment terms and purchase price charged by CQAC, CQNHK and CQPC are in general no less favorable to the Company than those quoted by other independent suppliers. We have confirmed with the Directors that the aforesaid automobile parts will be provided by CQAC, CQNHK and CQPC under similar terms under the New CQAC Agreement, the New CQNHK Agreement and the New CQPC Agreement respectively. As such, we consider the terms of transactions (v), (vi) and (vii) fair and reasonable so far the Independent Shareholders are concerned.

As regards transactions (i), (ii), (iii) and (iv), we note that the purchase prices are determined by CQACL, Qingling Group, CQCC and CQFC based on their respective actual or reasonable costs (whichever is lower) for the automobile parts plus a mark-up of not more than 10% or 12% (as the case may be). As advised by the management of the Company, these automobile parts are tailored made by each of CQACL, Qingling Group, CQCC and CQFC for the Group in accordance with its specifications and not generally available from independent suppliers. The mark-ups are negotiated between the parties at arm’s length, having regard to the profit margins of (i) the PRC automobile parts industry for 2003 of approximately 10%; and (ii) sino-foreign joint venture of the PRC automobile parts industry for 2003 of approximately 15%. Such profit margins were calculated based on the information quoted by the China Automobile Industry Yearbook 2004 (2004 ) jointly published by China Automobile Technology Development Centre and China Automobile Industry Association. Having reviewed the relevant information provided by the Company, we consider such information to be relevant and proper to be used as a benchmark. As such, we consider the terms of transactions (i), (ii), (iii) and (iv) fair and reasonable so far the Independent Shareholders are concerned.

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LETTER FROM HERCULES

(IV) Bases of the Annual Caps

For the purpose of Rule 14A.35(2) of the Listing Rules, the Annual Caps in respect of the supply of automobile parts by each of the Connected Persons under the New CQACL Agreement and the New Parts Supply Agreements for the duration of the relevant agreements are set out below:

Table 1: Annual Caps

		For the period
		from the date of
		approval of the			For the period
		agreement by the	For the	For the	from 1 January
		Independent	year ending	year ending	2008 to the expiry
		Shareholders to	31 December	31 December	date of the
		31 December 2005	2006	2007	agreement
		(RMB)	(RMB)	(RMB)	(RMB)
CQACL		2,500,000	10,300,000	13,100,000	12,500,000
Qingling	Group	31,000,000	107,200,000	154,200,000	164,500,000
CQCC		12,300,000	56,300,000	78,800,000	82,000,000
CQFC		8,700,000	47,200,000	63,900,000	64,700,000
CQAC		236,900,000	443,400,000	638,600,000	680,000,000
CQNHK		10,100,000	43,700,000	55,200,000	53,100,000
CQPC		18,000,000	83,800,000	116,800,000	121,600,000

As discussed with the Directors and management of the Group, the Annual Caps have been determined with reference to (i) the historical transaction amounts for the two financial years ended 31 December 2004; (ii) the projected sales volume for the duration of the relevant agreements, taking into account, inter alia, the overall business environment and specific growth strategies. To assess whether the basis of the caps are fair and reasonable, we have reviewed the following factors:

(a) The historical sales volume and transaction amounts of the automobile parts

We have reviewed the actual volume of automobile parts provided by each of the Connected Persons for the two years ended 31 December 2004 and the historical transaction amounts for each of the Existing Continuing Connected Transactions for the three financial years ended 31 December 2004 and the six months ended 30 June 2005 (please refer to the ‘‘Letter from the Board’’ for details). We note that the Annual Caps are calculated as follows:

the Company’s expected number of average selling price of projected sales automobile parts each type of automobile volume for each x required from each of x parts provided by the series of vehicles the Connected Persons Connected Persons in according to the design 2004 of the relevant series of vehicles

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LETTER FROM HERCULES

The Company has not taken into account the following factors, which effectively affected the actual sales volume of automobile parts of the Connected Persons for the two financial years ended 31 December 2004, in calculating the Annual Caps for simplicity and prudence:

the Company’s excess inventories;
tailor-made orders to clients’ special requirements, e.g. some clients requested for vehicles with no driving compartments, which would lead to a decrease in requirements for automobile parts from certain Connected Persons;
replacements of worn automobile parts by old vehicles; and
certain Connected Persons were subject to equipment overhaul and had to stop operations for a certain period of time, the Company therefore acquired excess automobiles parts as reserves.

In addition, the Directors have advised us that the proposed annual cap for the period from the expected date of approval of the New CQAC Agreement by the Independent Shareholders to 31 December 2005 in respect of the transactions contemplated under the New CQAC Agreement is relatively high because the Company has set a limit on purchases of motor vehicle axles from CQAC so that none of the applicable percentage ratios (other than the profits ratio) for the transactions with CQAC calculated in accordance with Chapter 14 of the Listing Rules will exceed 2.5% prior to approval by the Independent Shareholders in the EGM. The Group has been applying its stocks and inventory of motor axles for its production of motor vehicles since the beginning of this year and will continue to do so until the New CQAC Agreement has been approved by the Independent Shareholders in the EGM so that it would be able to maintain its purchases within the limit so as to comply with the Listing Rules on an individual basis. The Company intends to increase its purchases of motor vehicle axles from CQAC in accordance with the terms of the New CQAC Agreement substantially after the New CQAC Agreement becomes unconditional upon approval by the Independent Shareholders so as to replenish its stock level. We note that save for the New CQCC Agreement and the New CQFC Agreement, the projected transaction amounts for each of the New Parts Supply Agreements and the New CQACL Agreement for the year ending 31 December 2006 represent an increase over two-folds as compared with the corresponding transaction amounts for the year ended 31 December 2004. As advised by the management of the Company, the Company acquired extra automobile parts from CQCC and CQFC in 2004 for export to Isuzu. Consequently, the historical transaction amounts for the CQCC Agreement and the CQFC Transactions for the year ended 31 December 2004 are relatively higher. We have discussed with the management of the Company and note that the proposed Annual Caps are determined based on an average 30% annual increment on the sales volume of the automobile parts of the Connected Persons.

(b) The Group’s growth strategies

The Group recorded turnover of approximately RMB2.9 billion for financial year 2004 as compared to approximately RMB3.6 billion in 2003, representing a decrease of approximately 17.5%. We note from the annual report of the Company that number of vehicles sold decreased by 22.8% from 34,531 units in 2003 to 26,645 units in 2004. As advised by the Directors, such decrease was attributable to (i) macro-economic control implemented by the Chinese government in 2004, including increase in bank interest rates to slow down the pace of development of the automobile market; (ii) imitation of the Company’s products by certain operators/manufacturers; and (iii) skyrocketing oil prices. With gradual improvement of the

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LETTER FROM HERCULES

market condition in 2005 and the Company’s enhancement in market exploration and development, the Directors expect the Company’s projected sales volume for the year ending 2005 to recover to the level as that in 2003, with a moderate increase of approximately 4% as compared to the year 2003. A brief analysis of the current business environment of the Group and certain of its growth strategies developed and implemented in 2005 in the face of increasing competitive market are set out in pages 9 and 26 of the document dated 10 June 2005 issued by the Company in accordance with the provisions of the Hong Kong Code on Takeovers and Mergers. By adopting the following measures, the Company expects that its sales volume for the duration of the relevant agreements will increase to a considerable extent and hence increase in the Group’s requirements for automobile parts:

(i) continuous market exploration;
(ii) continuous adoption of the localisation of parts and accessories policy to reduce the costs and enhance the competitiveness of the Group’s products; and
(iii) product quality enhancement by the Company.

As stated in the ‘‘Letter from the Board’’, the Company currently anticipates that the total number of vehicles of new models or different specifications that may be launched and made available for sale by the Company for the second half of 2005 and the three years ending 31 December 2008 will be in the range of about 40 to 120.

We note the automobile market in China has transformed rapidly from an underdeveloped market with limited brand/model choice to a mature market with intensifying competition. Continual development of the Company’s products allow it to differentiate its products in the marketplace and thus provides the Company with critical competitive advantage. It is expected that continuous market exploration and product quality enhancement will help the Company to prevent imitation and secure market share.

As advised by the Directors, the Group currently sells its products through 83 distributors in the PRC. The Group anticipates that the number of distributors through which the Group’s products will be sold will increase substantially in the range of about 200 to 360 in the second half of 2005 and the three years ending 31 December 2008.

The Directors have advised us that the new distributors will scatter around both existing markets with growing customer base and regions with no current coverage. The Company’s sales network will be expanded by more than a double, or even triple, by end of 2008. We believe the expanded sales network and the introduction of new models will be the major growth drivers for the Company.

China Daily on 13 July 2005 quoted the statistics released by the China Association of Automobile Manufacturers on 12 July 2005 that sales of local vehicles amounted to 2.79 million units in the first half of the year, representing a 9.35% rise on the same period last year. Thanks to stable prices, consumer confidence soars in 2005. In 2004, consumers consistently delayed in making car purchases due to strong expectations that further price cuts would occur in 2005 in light of fierce competition. The total vehicle demand in China is widely predicted to grow by 12% to 5.6 million units in 2005. We have reviewed the online survey conducted by ACNielsen amongst consumers in 28 countries to measure current and future car ownership intentions. We

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LETTER FROM HERCULES

note that China is the most ‘‘aspiring’’ country although potential car buyers still represent a small portion of the population with the aspiration index exceeding 60%. Shenzhen Daily on 15 June 2005 quoted an analyst who covers China’s automobile industry stating that car ownership in China remains very low, where there are five cars for every 1,000 people. According to the article ‘‘An Analysis of China’s Economic Growth Prospect for 2005–2020’’ contained in ‘‘China Development Review Volume 7’’ dated 2 May 2005 published by The Development Research Center of the State Council (DRC), China’s annual GDP growth rate will be approximately 8.1% for 2005–2020. As a result of the continuing economic growth and the relatively low car ownership ratio in the PRC, we believe there is good potential for further growth of the automobile market.

Having discussed with management of the Company the sales volume for the six months ended 30 June 2005, contracts with dealerships in hand and economic environment as anticipated by the Directors, and considered the Group’s growth strategies and the continuing economic growth in the PRC, we are of the view that the expected average annual growth in sales volume of automobile parts from the Connected Persons for the next three years of approximately 30%, which are mainly results of the increase in sales consequential to its growth strategies are fair and reasonable.

Based on the above reasons, we consider that the Annual Caps proposed by the Directors are fair and reasonable and in the interests of the Company and its shareholders as a whole.

(V) Conditions of the Non-Exempt Continuing Connected Transactions

If (i) the proposed Annual Caps are exceeded; or (ii) there is a material change to the terms of the New CQACL Agreement or any of the New Parts Supply Agreements; or (iii) the New CQACL Agreement or any of the New Parts Supply Agreements is renewed, the Company will have to comply with the relevant provisions of Chapter 14A of the Listing Rules. On this basis, we are of the view that the interests of the Shareholders will be properly safeguarded.

RECOMMENDATION

Having considered the abovementioned principal factors and reasons, we consider that (i) the Continuing Connected Transactions are conducted in the ordinary and usual course of business and on normal commercial terms; and (ii) the terms of the Continuing Connected Transactions (and the proposed Annual Caps thereunder) are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and its shareholders as a whole. We therefore 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 approve the Continuing Connected Transactions at the upcoming EGM.

Yours faithfully, For and on behalf of

Hercules Capital Limited Louis Koo Managing Director

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GENERAL INFORMATION

APPENDIX

RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other matters the omission of which would make any statement in this circular misleading.

1. Disclosure of interests

(a) Directors’ interests and short positions in the securities of the Company and its associated corporations

As at the Latest Practicable Date, none of the Directors, supervisors or the chief executive of the Company had or was deemed to have any interests or short positions in the Shares, underlying Shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which (i) were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required to be entered in the register maintained by the Company pursuant to section 352 of the SFO; or (iii) were required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers as contained in the Listing Rules.

(b) Persons or corporations who have an interest or short position which is discloseable under Divisions 2 and 3 of Part XV of the SFO and substantial Shareholders

So far as is known to each Director or the chief executive of the Company, as at the Latest Practicable Date, the following persons or corporations had an interest or short position in the Shares and underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who/which was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group and the amount of each of such person’s/ corporate’s interest in such securities, together with particulars of any options in respect of such capital, were as follows:

Long positions in the shares of the Company:

					% of share
Name of	Class of	No. of	Nature of		capital of the	% of entire
Shareholders	Shares	Shares	Interest	Capacity	relevant class	share capital
Qingling Group	Domestic	1,243,616,403	Beneficial	Beneficial	100%	50.10%
	Shares		Interest	owner
Isuzu	H Shares	496,453,654	Beneficial	Beneficial	40.08%	20%
			Interest	owner

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, nor the chief executive of the Company was aware of any other person or corporation who had an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who/which was, directly or indirectly,

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GENERAL INFORMATION

APPENDIX

interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group, or any options in respect of such capital.

3. Service contracts

As at the Latest Practicable Date, none of the Directors has entered, or proposed to enter, into a service contract with any member of the Group which does not expire or is not determinable by the relevant member of the Group within one year without compensation, other than statutory compensation.

4. Competing interest

As at the Latest Practicable Date, none of the Directors and his/her associates had any interests which competed or was likely to compete, either directly or indirectly, with the Company’s business.

5. Litigation

As at the Latest Practicable Date, no member of the Group is engaged in any litigation or arbitration proceedings of material importance and there is no litigation or claim of material importance known to the Directors to be pending or threatened by or against the Company or any member of the Group.

6. Material adverse change

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial and trading position of the Company since 31 December 2004, being the date to which the latest published audited accounts of the Company were made up.

7. Interests in assets and/or contracts and other interests

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2004, being the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to, or are proposed to be acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group.

As at the Latest Practicable Date, none of the Directors is materially interested in any contract or arrangement which is significant in relation to the business of the Company.

8. Expert

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

Name

Qualification

Hercules Capital Limited

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

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GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, Hercules was not interested in any Shares or share in any member of the Group nor does it have any right or option (whether legally enforceable or not) to subscribe for or nominate persons to subscribe for any Share or share in any member of the Group.

As at the Latest Practicable Date, Hercules did not have any direct or indirect interest in any asset which had been, since 31 December 2004, being the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to, or are proposed to be acquired or disposed of by or leased to any member of the Group.

Hercules has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter dated 3 August 2005 and reference to its name in the form and context in which they respectively appear.

9. General

(a) The Company’s H Share Registrars is Hong Kong Registrars Limited at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(b) In the event of inconsistency, the English text of this circular shall prevail over the Chinese text.

10. Documents available for inspection

Copies of the following documents will be available for inspection at the offices of Messrs. Woo, Kwan, Lee & Lo at 27th Floor, Jardine House, 1 Connaught Place, Central, Hong Kong during normal business hours up to and including 17 August 2005:

(a) New CQACL Agreement;
(b) each of the New Parts Supply Agreements;
(c) the letter from Hercules, the text of which is set out in this circular; and
(d) the consent letter of Hercules referred to in the paragraph headed ‘‘Expert’’ in this appendix.

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NOTICE OF EGM

==> picture [50 x 53] intentionally omitted <==

Qingling Motors Co. Ltd

(A sino-foreign joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1122)

NOTICE OF EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Qingling Motors Co. Ltd (the ‘‘Company’’) will be held at Conference Hall, 1st Floor of Qingling Motors Co. Ltd Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, PRC on Tuesday, 20 September 2005 at 11: 00 a.m. for the purpose of considering and, if thought fit, passing with or without modifications, the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

1. ‘‘THAT:

(a) the conditional agreement dated 6 July 2005 entered into between the Company and Chongqing Qingling Aluminium Casting Co. Ltd. (‘‘CQACL’’) in
respect of the supply of automobile parts by CQACL to the Company (the ‘‘New CQACL Agreement’’), a copy of which marked ‘‘A’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and
(b) the proposed annual caps in relation to the transactions contemplated under the New CQACL Agreement for the period from the date of approval of the New CQACL Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New CQACL Agreement being RMB2,500,000, RMB10,300,000, RMB13,100,000 and RMB12,500,000 respectively be and are hereby approved,

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New CQACL Agreement and the annual caps and the transactions thereby contemplated.’’

2. ‘‘THAT:

(a) the conditional agreement dated 6 July 2005 entered into between the Company and Qingling Motors (Group) Co. Ltd. (‘‘Qingling Group’’) in
respect of the supply of automobile parts by Qingling Group to the Company (the ‘‘New Qingling Group Agreement’’), a copy of which marked ‘‘B’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and

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NOTICE OF EGM

(b) the proposed annual caps in relation to the transactions contemplated under the New Qingling Group Agreement for the period from the date of approval of the New Qingling Group Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New Qingling Group Agreement being RMB31,000,000, RMB107,200,000, RMB154,200,000 and RMB164,500,000 respectively be and are hereby approved,

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New Qingling Group Agreement and the annual caps and the transactions thereby contemplated.’’

3. ‘‘THAT:

(a) the conditional agreement dated 6 July 2005 entered into between the Company and Chongqing Qingling Casting Company Limited (‘‘CQCC’’) in
respect of the supply of automobile parts by CQCC to the Company (the ‘‘New CQCC Agreement’’), a copy of which marked ‘‘C’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and
(b) the proposed annual caps in relation to the transactions contemplated under the New CQCC Agreement for the period from the date of approval of the New CQCC Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New CQCC Agreement being RMB12,300,000, RMB56,300,000, RMB78,800,000 and RMB82,000,000 respectively be and are hereby approved,

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New CQCC Agreement and the annual caps and the transactions thereby contemplated.’’

4. ‘‘THAT:

(a) the conditional agreement dated 6 July 2005 entered into between the Company and Chongqing Qingling Plastic Co. Ltd. (‘‘CQPC’’) in respect of the
supply of automobile parts by CQPC to the Company (the ‘‘New CQPC Agreement’’), a copy of which marked ‘‘D’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and
(b) the proposed annual caps in relation to the transactions contemplated under the New CQPC Agreement for the period from the date of approval of the New CQPC Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New CQPC Agreement being RMB18,000,000, RMB83,800,000, RMB116,800,000 and RMB121,600,000 respectively be and are hereby approved,

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NOTICE OF EGM

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New CQPC Agreement and the annual caps and the transactions thereby contemplated.’’

5. ‘‘THAT:

(a) the conditional agreement dated 6 July 2005 entered into between the Company and Chongqing Qingling Forging Co. Ltd., (‘‘CQFC’’) in respect of the
supply of automobile parts by CQFC to the Company (the ‘‘New CQFC Agreement’’), a copy of which marked ‘‘E’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and
(b) the proposed annual caps in relation to the transactions contemplated under the New CQFC Agreement for the period from the date of approval of the New CQFC Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New CQFC Agreement being RMB8,700,000, RMB47,200,000, RMB63,900,000 and RMB64,700,000 respectively be and are hereby approved,

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New CQFC Agreement and the annual caps and the transactions thereby contemplated.’’

6. ‘‘THAT:

(a) the conditional agreement dated 6 July 2005 entered into between the Company and Chongqing Qingling Axle Co. Ltd. (‘‘CQAC’’) in respect of the
supply of automobile parts by CQAC to the Company (the ‘‘New CQAC Agreement’’), a copy of which marked ‘‘F’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and
(b) the proposed annual caps in relation to the transactions contemplated under the New CQAC Agreement for the period from the date of approval of the New CQAC Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New CQAC Agreement being RMB236,900,000, RMB443,400,000, RMB638,600,000 and RMB680,000,000 respectively be and are hereby approved,

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New CQAC Agreement and the annual caps and the transactions thereby contemplated.’’

— 35 —

NOTICE OF EGM

‘‘THAT:
(a) the conditional agreement dated 6 July 2005 entered into between the Company and Chongqing Qingling NHK Seat Co. Ltd. (‘‘CQNHK’’) in
respect of the supply of automobile parts by CQNHK to the Company (the ‘‘New CQNHK Agreement’’), a copy of which marked ‘‘G’’ has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder be and are hereby approved, ratified and/or confirmed; and
(b) the proposed annual caps in relation to the transactions contemplated under the New CQNHK Agreement for the period from the date of approval of the New CQNHK Agreement by the independent shareholders of the Company to 31 December 2005, each of the two years ending 31 December 2007 and the period from 1 January 2008 to the expiry date of the New CQNHK Agreement being RMB10,100,000, RMB43,700,000, RMB55,200,000 and RMB53,100,000 respectively be and are hereby approved,

and the directors of the Company be and are hereby authorized on behalf of the Company to sign, seal, execute, perfect, deliver and do all such documents, deeds, acts, matters and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the New CQNHK Agreement and the annual caps and the transactions thereby contemplated.’’

‘‘THAT the transactions entered into between the Company and CQCC, Qingling Group, CQAC, CQACL, CQFC, CQNHK and CQPC respectively in respect of the supply of automobile parts by CQCC, Qingling Group, CQAC, CQACL, CQFC, CQNHK and CQPC respectively to the Company during the period from 1 January 2005 up to the date of the extraordinary general meeting of the Company to be held on 20 September 2005 be and are hereby approved and ratified and/or confirmed.’’

By Order of the Board Wu Nianqing Company Secretary

Chongqing, PRC, 3 August 2005

Notes:

Any shareholder entitled to attend and vote at the meeting mentioned above is entitled to appoint one or more proxies to attend and vote at the meeting on his/her behalf in accordance with the Articles of Association. A proxy need not be a shareholder of the Company.
In order to be valid, the proxy form and, if such proxy form is signed by a person under a power of attorney or other authority on behalf of the appointer, a notarially certified copy of the power of attorney or authority shall be deposited at the legal address of the Company (in the case of proxy form of holder of Domestic Shares) or the Company’s H Share Registrars, Hong Kong Registrars Limited, at 46th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong (in the case of proxy form of holders of H Shares) not less than 24 hours before the time for holding of the meeting or 24 hours before the time appointed for taking the poll.
Shareholders or their proxies shall produce their identity documents when attending the meeting.

— 36 —

NOTICE OF EGM

The register of shareholders of the Company will be closed from Sunday, 21 August 2005 to Tuesday, 20 September 2005 (both days inclusive), during which period no transfer of shares will be registered.
Shareholders whose names appear in the register of shareholders on Sunday, 21 August 2005 are entitled to attend and vote at the meeting.
Shareholders who intend to attend the meeting shall complete and lodge the reply slip for attending the meeting at the Company’s legal address at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the People’s Republic of China on or before Wednesday, 31 August 2005. The reply slip may be delivered to the Company by hand, by post, by cable or by fax (at fax no.: (86) 23-68830397).
In order to determine the identity of the holders of H shares who are entitled to attend and vote at the meeting, holders of H shares whose transfers have not been registered shall deposit the transfers together with the relevant share certificates, at Hong Kong Registrars Limited, the Company’s H Share Registrars at Shops 1712–6, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, not later than 4: 00 p.m. on Friday, 19 August 2005.
The extraordinary general meeting is not expected to take more than half a day. Shareholders or their proxies attending the extraordinary general meeting shall be responsible for their own travel and accommodation expenses.
As at the date of this notice, the board of directors of the Company comprises 10 Directors, of which Mr. WU Yun, Mr. GAO Jianmin, Mr. Yoshito MOCHIZUKI, Mr. SONG Zhenyuan, Mr. LIU Guangming, Mr. PAN Yong, Mr. YUE Huaqiang are executive directors of the Company and Mr. LONG Tao, Mr. SONG Xiaojiang and Mr. XU Bingjin are independent non-executive directors of the Company.

— 37 —

AI assistant

Qingling Motors Co. Ltd — Proxy Solicitation & Information Statement 2005

49705_rns_2005-08-03_f7ba7bd2-2426-4831-b394-5425df7121b6.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

Qingling Motors Co. Ltd

CONTINUING CONNECTED TRANSACTIONS

Hercules Capital Limited

CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

Qingling Motors Co. Ltd

To the Shareholders

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

BACKGROUND AND THE EXISTING CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

LETTER FROM THE BOARD

THE CONTINUING CONNECTED TRANSACTIONS

1. The New CQACL Agreement

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Historical transaction amounts

Historical transaction amounts (in RMB)

Projected transaction amounts

Aggregate amount (in RMB)

LETTER FROM THE BOARD

Basis of projected transaction amounts

LETTER FROM THE BOARD

LETTER FROM THE BOARD

REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

REQUIREMENTS UNDER THE LISTING RULES

LETTER FROM THE BOARD

LETTER FROM THE BOARD

EGM

RECOMMENDATION OF THE INDEPENDENT BOARD COMMITTEE

LETTER FROM THE BOARD

GENERAL

Qingling Motors Co. Ltd

CONTINUING CONNECTED TRANSACTIONS

LETTER FROM HERCULES

Hercules Capital Limited

CONTINUING CONNECTED TRANSACTIONS

LETTER FROM HERCULES

PRINCIPAL FACTORS AND REASONS CONSIDERED

(I) Background

LETTER FROM HERCULES

(II) Reasons for the Non-exempt Continuing Connected Transactions

LETTER FROM HERCULES

(III) Terms of the Continuing Connected Transactions

LETTER FROM HERCULES

(IV) Bases of the Annual Caps

(a) The historical sales volume and transaction amounts of the automobile parts

LETTER FROM HERCULES

(b) The Group’s growth strategies

LETTER FROM HERCULES

LETTER FROM HERCULES

(V) Conditions of the Non-Exempt Continuing Connected Transactions

RECOMMENDATION

Hercules Capital Limited Louis Koo Managing Director

RESPONSIBILITY STATEMENT

1. Disclosure of interests

3. Service contracts

4. Competing interest

5. Litigation

6. Material adverse change

7. Interests in assets and/or contracts and other interests

8. Expert

Name

Qualification

APPENDIX

9. General

10. Documents available for inspection

Qingling Motors Co. Ltd Proxy Solicitation & Information Statement 2005