Qingling Motors Co. Ltd - Proxy Solicitation & Information Statement 2006

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 4 to 16 of this circular and a letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 17 to 18 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 19 to 33 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 Thursday, 15 June 2006 at 10: 30 a.m. (or as soon as practicable immediately after the conclusion or adjournment of the annual general meeting of the Company convened at the same place and date at 10: 00 a.m.) is set out on pages 37 to 39 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.

21 April 2006

	Page
Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
The Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Reasons for the Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Requirements under the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Procedure to demand a poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Recommendation of the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17
Letter from Hercules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
Appendix — General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	34
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	37

— i —

DEFINITION

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

‘‘100P Series Technology the agreement dated 17 August 1993 entered into between Isuzu and Transfer Agreement’’ the Company relating to the transfer of technology and provision of technical know-how for the production of 100P-N series light vehicles and related parts and components by Isuzu to the Company, details of which are set out under the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’ in the ‘‘Letter from the Board’’;
‘‘Announcement’’ the announcement of the Company dated 30 March 2006 in relation to the Continuing Connected Transactions;
‘‘Annual Caps’’
the maximum aggregate annual value of each of the Continuing Connected Transactions for (in the case of 100P Series Technology Transfer Agreement ) each of the two years ending 31 December 2008; and (in the case of the Company Supply Agreement and the Isuzu Supply Agreement) the period from 24 June 2005 to 31 December 2005 and each of the two years ending 31 December 2007 and the period from 1 January 2008 to 23 June 2008;
‘‘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;
‘‘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;
‘‘Company Supply the conditional agreement dated 28 March 2006 entered into between Agreement’’ Isuzu and the Company relating to the provision of automobile parts and components by the Company to Isuzu, details of which are set out under the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’; in the ‘‘Letter from the Board’’;
‘‘connected person(s)’’ has the meaning as ascribed thereto under the Listing Rules;
‘‘Continuing Connected the non-exempt continuing connected transactions contemplated under Transactions’’ 100P Series Technology Transfer Agreement for the two years ending 31 December 2008, the Isuzu Supply Agreement and the Company Supply Agreement;
‘‘Directors’’ the directors of the Company;
‘‘Domestic Share(s)’’ domestic share(s) of RMB1 each in the share capital of the Company;

— 1 —

DEFINITION

‘‘EGM’’
The extraordinary general meeting of the Company to be convened on Thursday, 15 June 2006 at 10: 30 a.m. (or as soon as practicable immediately after the conclusion or adjournment of the annual general meeting of the Company convened at the same place and date at 10: 00 a.m.) to approve, inter alia, the Continuing Connected Transactions and the Annual Caps;
‘‘F Chassis Technology the agreement dated 20 February 2000 entered into between Isuzu and Transfer Agreement’’ the Company relating to the transfer of technology and provision of technical know-how in relation to the components of F Series Chassis by Isuzu to the Company;
‘‘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;
‘‘Independent Board an independent board committee of the Company consisting of Mr. Committee’’ Long Tao, Mr. Song Xiaojiang and Mr. Xu Bingjin who are the independent non-executive Directors;
‘‘Independent in relation to the Continuing Connected Transactions, shareholders of Shareholders’’ 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 Parties’’ executive, 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, being a substantial shareholder of the Company holding approximately 20% of the issued share capital of the Company after the completion of the Partial Offer in June 2005;
‘‘Isuzu Supply the agreement dated 28 March 2006 entered into between Isuzu and the Agreement’’ Company relating to the provision of automobile parts and components by Isuzu to the Company, details of which are set out under the section headed ‘‘THE CONTINUING CONNECTED TRANSACTIONS’’ in the ‘‘Letter from the Board’’;
‘‘Latest Practicable Date’’ 19 April 2006, being the latest practicable date prior to the printing of this circular for ascertaining certain information referred to in this circular;
‘‘Listing Rules’’

The Rules Governing the Listing of Securities on the Stock Exchange as enforced at the relevant time;

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DEFINITION

‘‘Partial Offer’’	the unconditional cash partial offer by	Isuzu	to	acquire	acquire	up
	324,960,400 H Shares in June 2005;
‘‘PRC’’	The People’s Republic of China;
‘‘Qingling Group’’	Qingling Motors (Group) owned limited liability company established in		Co. the		Ltd, a PRC,	state- being
	controlling shareholder of the Company holding				approximately
	50.10% of the issued share capital of the Company;
‘‘Share(s)’’	the shares of the Company;
‘‘Shareholder(s)’’	the shareholder(s) of the Company;
‘‘SFO’’	Securities and Futures Ordinance (Chapter	571 of	the	Laws of		Hong
	Kong);
‘‘Stock Exchange’’	The Stock Exchange of Hong Kong Limited;
‘‘Technology Transfer	the F Chassis Technology Transfer Agreement and the 100P					Series
Agreements’’	Technology Transfer Agreement;
‘‘%’’	per cent;
‘‘HK$’’	Hong Kong dollars, the lawful currency of	Hong Kong;			and
‘‘RMB’’	Renminbi, the lawful currency of the PRC

— 3 —

LETTER FROM THE BOARD

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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)

Executive Directors: Mr. Wu Yun Mr. Gao Jianmin Mr. Susumu Hosoi Mr. Yoshiyuki Miyatake 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

21 April 2006

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 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement and the Company Supply Agreement. The Independent Board Committee has been formed to advise the Independent Shareholders as to whether the terms of the Continuing Connected Transactions are fair and reasonable and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole. Hercules has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement and the Company Supply Agreement and the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned and the renewal of the 100P Series Technology Transfer Agreement and the entering into of the Isuzu Supply Agreement and the Company Supply Agreement are in the interests of the Company and the Shareholders as a whole and to explain why a period longer than three years for the F

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LETTER FROM THE BOARD

Chassis Technology Transfer Agreement is required. A letter from the Independent Board Committee is set out on pages 17 to 18 of this circular and a letter from Hercules is set out on pages 19 to 33 of this circular.

BACKGROUND

There are certain transactions between the Company and Isuzu existing prior to the Partial Offer which have become continuing connected transactions as a result of Isuzu having become a substantial shareholder of the Company after completion of the Partial Offer.

Since 1984, the Company has operated its business in close association with Isuzu. The Company has been producing vehicles designed by Isuzu, using production techniques developed by Isuzu and production equipment and automotive components supplied by Isuzu. Isuzu has played a major role in assisting the Company in developing its production capabilities. Since 1984, Isuzu has provided substantial technological and managerial assistance in this regard and subsequently, the Company has entered into certain technology transfer agreements with Isuzu prior to the Partial Offer. Such agreements, including the F Chassis Technology Transfer Agreement and the 100P Series Technology Transfer Agreement, are for terms exceeding three years and renewable automatically each year up to 10 years after the initial term and are still valid and subsisting.

The Company has been providing the automobile parts and components and accessories manufactured by it to Isuzu since 2000 whereas Isuzu has been providing automobile parts manufactured by it to the Company since 1994. After the completion of the Partial Offer in June 2005, Isuzu has become a substantial shareholder of the Company holding approximately 20% of the entire issued share capital of the Company and therefore a connected person of the Company pursuant to the Listing Rules. The above transactions between Isuzu and the Company have since become continuing connected transactions under the Listing Rules, the Company is therefore required to enter into written agreements with Isuzu and, where applicable, comply with the reporting, announcement and Independent Shareholders’ approval requirements.

THE CONTINUING CONNECTED TRANSACTIONS

The 100P Series Technology Transfer Agreement has been renewed after the expiry of its initial term in January 2004 and the Company expects to continue to renew the 100P Series Technology Transfer Agreement with Isuzu unless either party terminates the agreement by giving notice to the other party pursuant to the terms of the agreement. The Directors wish to continue to purchase from Isuzu automobile parts and components manufactured by Isuzu and to provide automobile parts and components and accessories manufactured by it to Isuzu on an on-going basis. The Company therefore entered into the Isuzu Supply Agreement and the Company Supply Agreement with Isuzu on 28 March 2006.

(1) The 100P Series Technology Transfer Agreement

Date : 17 August 1993 Parties : (i) Isuzu (ii) The Company

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LETTER FROM THE BOARD

Nature of the Transaction	:	Transfer of technology and provision of technical know-how
		and the permission to use the trademark of Isuzu and the
		emblem by Isuzu to the Company for the production and in
		the sale of 100P-N series light vehicles and related parts and
		components
Term	:	10 years commencing from the date of obtaining approval
		from the relevant PRC government department i.e. 5 January
		1994 and thereafter renewable automatically each year up to
		10 years if neither party notifies the other party in writing to
		terminate the agreement 90 days prior to its expiry
Consideration	:	An initial fee (which has already been fully paid by the
		Company to Isuzu) plus royalties, which is determined by
		reference to the price of the parts and components
		manufactured and sold by the Company pursuant to the
		agreement, staff training fees and technical assistance fees

The Directors have confirmed that the agreement has been renewed automatically each year after the expiry of the initial term of 10 years up to the present and expect to continue to renew the agreement.

Historical transaction amounts

The historical transaction amounts for royalties, staff training fees and/or technical assistance fees paid by the Company under the 100P Series Technology Transfer Agreement are as follows:

For the year ended 31 December 2003 — RMB16,689,129 For the year ended 31 December 2004 — RMB14,025,812 For the period from 1 January 2005 to 23 June 2005 — RMB 8,143,877

Projected transaction amounts

The Directors estimate or project that the royalties, staff training fees and/or technical assistance fees payable by the Company to Isuzu under the 100P Series Technology Transfer Agreement have not exceeded or will not exceed the amounts set out below:

For the period from 24 June 2005 to 31 December 2005 — RMB 8,044,404 For the year ended 31 December 2006 — RMB35,520,000 For the year ended 31 December 2007 — RMB49,950,000 For the year ended 31 December 2008 — RMB68,820,000

The annual caps under 100P Series Technology Transfer Agreement detailed below are set by reference to the above projected transaction amounts.

Basis of projected transaction amounts

The aforesaid projected transaction amounts for the 100P Series Technology Transfer Agreement are set by the Board by reference to the consideration of the agreement and the anticipated production and sales amounts of the products contemplated under the 100P Series

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LETTER FROM THE BOARD

Technology Transfer Agreement. The Company estimates that in 2006, 2007 and 2008 the sales volume of automobiles will increase each year and since royalties payable pursuant to the agreement are determined by reference to the amount of parts and components sold by the Company, it is therefore anticipated that there is a proportional increase in the transaction amounts.

Compliance with the Listing Rules

The 100P Series Technology Transfer Agreement has already been entered into prior to the transactions contemplated thereunder becoming continuing connected transactions under the Listing Rules as a result of the Partial Offer and therefore, the Company has already complied with the written agreement requirement under the Listing Rules.

The above estimated transaction amounts for the period from 24 June 2005 to 31 December 2005 are based on the unaudited financial statements of the Group. It is further estimated that the transaction amount for the period from 1 January 2006 to the expected date of the EGM will be approximately RMB6,210,000, the applicable percentage ratios (other than the profit ratio) of which calculated in accordance with Chapter 14 are expected to be higher than 0.1% but less than 2.5%. As the applicable percentage ratios (other than the profit ratio) for the two years ending 31 December 2008 calculated in accordance with Chapter 14 of the Listing Rules will be, on annual basis, more than 2.5%, the continuing connected transactions contemplated under the 100P Series Technology Transfer Agreement for the corresponding year will be subject to reporting, announcement and the Independent Shareholders’ approval requirements.

The Company will also seek approval from the Independent Shareholders on renewal of the 100P Series Technology Transfer Agreement for two years from 5 January 2007 up to and including 4 January 2009 and the annual caps for the two years ending 31 December 2008 detailed below, which are set by reference to the above projected transaction amounts.

(2) The Isuzu Supply Agreement

Date	:	28 March 2006
Parties	:	(i) Isuzu
		(ii) The Company
Nature of Transaction	:	Supply of automobile parts and components by Isuzu		to the
		Company
Condition Precedent	:	Conditional upon approval by the Independent Shareholders
		by poll
Term	:	Three years commencing from 24 June 2005
Price Determination	:	Payment will be made on normal commercial terms		or, if
		there is no sufficient comparable transactions	to	judge
		whether they are on normal commercial terms,	on	terms
		fair and reasonable to the Company and no less	favourable
		than terms offered by Isuzu to Independent Third	Parties in
		the market where the Company locates.

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LETTER FROM THE BOARD

The Isuzu Supply Agreement is a master agreement which sets out the principles upon which detailed terms are to be determined between the Company and Isuzu. Pursuant to the Isuzu Supply Agreement, the Company will enter into definitive agreements from time to time to provide for detailed terms of each single transaction in accordance with the principles set out in the Isuzu Supply Agreement. Such detailed terms include, but without limitation, prices, payment and settlement terms, quantities, qualities, delivery and inspection of products and other terms and conditions in relation to the provision of the automobile parts, components and/or accessories. The Company and Isuzu agree that such detailed terms shall be on normal commercial terms or, if there is no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company. Isuzu also undertakes that the terms offered to the Company shall be no less favourable than terms offered to Independent Third Parties in the market where the Company locates.

In the event that a competitor (including a potential competitor) of Isuzu holds Shares of the same number as or more than that held by Isuzu or there is a change in control in Qingling Group; or the transaction contemplated under the Isuzu Supply Agreement ceases to be a continuing connected transaction, Isuzu may terminate the Isuzu Supply Agreement by giving notice to the Company.

(3) The Company Supply Agreement

Date : 28 March 2006 Parties : (i) Isuzu (ii) The Company Nature of Transaction : Supply of accessory sets and other automobile parts and components by the Company to Isuzu Condition Precedent : Conditional upon approval by the Independent Shareholders by poll Term : Three years commencing from 24 June 2005 Price Determination : Payment will be made on normal commercial terms or, if there is no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company and no less favourable than terms offered by Isuzu to Independent Third Parties in the market where Isuzu locates.

The Company Supply Agreement is a master agreement which sets out the principles upon which detailed terms are to be determined between the Company and Isuzu. Pursuant to the Company Supply Agreement, the Company will enter into definitive agreements from time to time to provide for detailed terms of each single transaction in accordance with the principles set out in the Company Supply Agreement. Such detailed terms include, but without limitation, prices, payment and settlement terms, quantities, qualities, delivery and inspection of products and other terms and conditions in relation to the provision of the automobile parts, components and/or accessories. The Company and Isuzu agree that such detailed terms shall be on normal commercial terms or, if there is no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company. Isuzu also undertakes that the terms offered to the Company shall be no less favourable than terms offered to Independent Third Parties in the market where Isuzu locates.

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LETTER FROM THE BOARD

In the event that a competitor (including a potential competitor) of Isuzu holds Shares of the same number as or more than that held by Isuzu or there is a change in control in Qingling Group; or the transaction contemplated under the Company Supply Agreement ceases to be a continuing connected transaction, Isuzu may terminate the Company Supply Agreement by giving notice to the Company.

Historical transaction amounts

The following table (‘‘Table 1’’) sets out the historical transaction amounts between the Company and Isuzu in respect of the purchase and supply of automobile parts and components and/ or accessories:

		Aggregate amount (in	Aggregate amount (in	RMB)
		Year ended	Year ended	The period from
		31 December	31 December	1 January 2005
		2003	2004	to 23 June 2005
(a)	The value of automobile parts and	1,304,020,000	2,030,632,000	663,641,463
	components provided by Isuzu to the
	Company
(b)	The value of accessory sets and	15,901,000	31,430,000	34,733,643
	other automobile parts and
	components provided by the
	Company to Isuzu

Projected transaction amounts

The Directors estimate or project that under the Isuzu Supply Agreement and the Company Supply Agreement, the value of transactions between Isuzu and the Company have not exceeded or will not exceed the amounts set out below:

Aggregate amount (in RMB)

				Period from
	Period from			1 January 2008
	24 June 2005	Year ending	Year ending	to the expiry
	to 31 December	31 December	31 December	date of the
	2005	2006	2007	agreement
The Isuzu Supply	306,040,780	1,288,000,000	1,846,000,000	1,310,032,500
Agreement				(expiry date
				being 23 June
				2008)
The Company	46,610,857	110,000,000	148,800,000	100,446,837
Supply Agreement				(expiry date
				being 23 June
				2008)

The above estimated transaction amounts for the period from 24 June 2005 to 31 December 2005 are based on the unaudited financial statements of the Group.

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LETTER FROM THE BOARD

The respective annual caps under the Isuzu Supply Agreement and the Company Supply Agreement detailed below are set by reference to the above projected transaction amounts.

Basis of projected transaction amounts

The aforesaid projected transaction amounts for the Isuzu Supply Agreement are set by the Board by reference to (i) the historical sales volume; (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; and (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:

(i) Historical sales volume

The historical transaction amounts in respect of the supply of automobile parts and components and/or accessories to the Company by Isuzu are set out in Table 1. The purchases from Isuzu for 2005 and 2006 are estimated to decrease as compared to that for 2004 because the Company commenced activities to reduce costs and implement the localization of parts and components since the first half of 2004 and such localization activities are in place in 2005 and are expected to continue till 2006.

(ii) Projected sales volume

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.

With the enhancement of competitiveness of the Company in its technologies, quality and costs, the Company expects a stable increase in the sale volume of its products in domestic and international markets in 2007 and 2008.

(iii) 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 three years ending 31 December 2008 will be in the range of about 40 to 120.

(iv) Expected expansion of sales network

Currently, the Group sells its products through 90 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 the three years ending 31 December 2008.

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LETTER FROM THE BOARD

The aforesaid projected transaction amounts for the Company Supply Agreement are set by the Board by reference to the projected sales volume for the duration of the relevant agreements taking into consideration, inter alia, the expected increase in sales volume of Isuzu products in overseas market and hence the increase in needs of parts and components. With the cooperation of Isuzu and much effort by the Company to improve the product quality standard and to reduce costs in 2002 and 2003, the number of parts and components of the Company with competitiveness in quality and costs in the international market has increased in 2004 and 2005 and therefore, the purchases of the Company’s products by Isuzu have largely increased in 2004 and 2005 compared with the preceding year. The Group has, since the completion of the Partial Offer, become the production base of Isuzu and with the enhancement of competitiveness of its products, the Directors expect that Isuzu will increase, to a considerable extent, in the purchase volume of parts and components from the Group in the coming three years and on a relatively stable basis in 2007 and 2008.

Compliance with the Listing Rules

It is further anticipated that the applicable percentage ratios (other than the profit ratio) calculated in accordance with Chapter 14 of the Listing Rules for (i) the estimated transaction amounts in respect of the purchase from Isuzu for the periods (a) from 24 June 2005 to 31 December 2005 and (b) from 1 January 2006 to the expected date of the EGM which is estimated to be RMB63,810,000; and (ii) the estimated transaction amounts in respect of the supply to Isuzu for the period from 24 June 2005 to 31 December 2005 are expected to be higher than 2.5%. As such, the Company should have sought Independent Shareholders’ approval prior to continuing the purchase from Isuzu and the supply to Isuzu in July 2005 and early December 2005 respectively when the applicable percentage ratios reached 2.5%. The Directors consider that the transactions with Isuzu are vital to the Company’s core business operation since its production relies upon Isuzu’s supply of automobile components and Isuzu’s purchase of components from the Company contributes to a substantial portion of the Company’s revenue. If such transactions with Isuzu were to be suspended pending approval of the Independent Shareholders, it is likely to practically bring the business of the Company to a halt and adversely affect the interest of the Company and the Shareholders as a whole.

The Company will seek ratification of and/or approval from the Independent Shareholders in respect of the transactions contemplated under the Isuzu Supply Agreement and the Company Supply Agreement (including but not limited to the transactions carried out for the period from 24 June 2005 up to the date of the EGM) and the relevant annual caps detailed below, which are set by reference to the above projected transaction amounts.

REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

As the vehicles manufactured by the Group are principally under the brand name ‘‘Isuzu’’, the Company needs to purchase automobile parts and components from Isuzu and requires the provision of technology and technical know-how by Isuzu for its business from time to time to meet the standards and requirements of Isuzu for such productions, the parties renewed the 100P Series Technology Transfer Agreement and entered into the Isuzu Supply Agreement. As the product quality standard of the parts and components produced by the Group meets the international standard required by Isuzu and due to the competitiveness of the Group’s products in price, Isuzu wishes to purchase parts and components from the Group and the Company wishes to continue to explore the international market, the parties enter into the Company Supply Agreement.

In addition, the Continuing Connected Transactions are important to the operation of the Group’s business and for its production and the parties to the relevant agreements can make use of each other’s technology and costs advantages.

— 11 —

LETTER FROM THE BOARD

The Directors (including the independent non-executive Directors) believe that each of the 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement and the Company Supply Agreement were 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 Isuzu, and consider that the terms of each of such agreements are fair and reasonable and in the interests of the shareholders of the Company as a whole.

REQUIREMENTS UNDER THE LISTING RULES

As at the Latest Practicable Date, Isuzu is a substantial shareholder of the Company holding approximately 20% of the entire issued share capital of the Company. Therefore, Isuzu is a connected person of the Company under Chapter 14A of the Listing Rules. Since the Continuing Connected Transactions involve the provision of technology, automobile parts and components which shall be carried out on a continuing or recurring basis and are expected to extend over a period of time, those 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 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 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.

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LETTER FROM THE BOARD

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

			Aggregate	amount (in RMB)	amount (in RMB)
					Period from
		Period from			1 January 2008
		24 June 2005 to	Year ending	Year ending	to the expiry	Year ending
		31 December	31 December	31 December	date of the	31 December
		2005	2006	2007	agreement	2008
					(in the case of the	(in the case of the
					Isuzu Supply	100P Series
					Agreement and	Technology
					the Company	Transfer
					Supply	Agreement)
					Agreement)
(1)	The 100P Series	N/A	N/A	49,950,000	N/A	68,820,000
	Technology	(Note)	(Note)
	Transfer Agreement
(2)	The Isuzu Supply	306,041,000	1,288,000,000	1,846,000,000	1,310,033,000
	Agreement				(expiry date being
					23 June 2008)	N/A
(3)	The Company	46,611,000	110,000,000	148,800,000	100,447,000
	Supply Agreement				(expiry date being
					23 June 2008)	N/A

Note: As the applicable percentage ratios (other than the profit ratio) calculated in accordance with Chapter 14 of the Listing Rules will be less than 2.5% the transactions contemplated under the 100P Series Technology Transfer Agreement for the period from 24 June 2005 to 31 December 2005 and the year ending 31 December 2006 will only be subject to the reporting and announcement requirements but exempt from the Independent Shareholders’ approval requirement.

The Annual Caps were set by reference to the projected transaction amounts for the corresponding period and rounded up to the nearest thousands.

If (i) the Annual Caps stated above are exceeded; or (ii) there is a material change to the terms of any of the Isuzu Supply Agreement, the Company Supply Agreement or the 100P Series Technology Transfer Agreement; or (iii) the Isuzu Supply Agreement or the Company Supply Agreement is renewed or the renewal of the 100P Series Technology Transfer Agreement is required to be approved by the Independent Shareholder, the Company will have to comply with the relevant provisions of Chapter 14A of the Listing Rules.

It is proposed that ordinary resolutions will be proposed at the EGM to ratify the transactions carried out pursuant to the Company Supply Agreement and the Isuzu Supply Agreement for the period from 24 June 2005 to the expected date of the EGM; and to approve by way of poll the Continuing Connected Transactions and the Annual Caps. As at the Latest Practicable Date, Isuzu is a substantial shareholder of the Company holding approximately 20% of the entire issued share capital of the Company. Isuzu and its associates will be required to abstain from voting on such ordinary resolutions. The Independent Board Committee has been formed to advise the Independent Shareholders as to whether the terms of the Continuing Connected Transactions are fair and reasonable and the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole. Hercules Capital Limited has been appointed by the Company as its

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LETTER FROM THE BOARD

independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the Isuzu Supply Agreement, the Company Supply Agreement and the 100P Series Technology Transfer Agreement and the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned and the renewal of the 100P Series Technology Transfer Agreement and the entering into of the Isuzu Supply Agreement and the Company Supply Agreement are in the interests of the Company and the Shareholders as a whole and to explain why a period longer than three years for the F Chassis Technology Transfer Agreement is required.

The Technology Transfer Agreements were entered into between the Company and Isuzu prior to Isuzu becoming a connected person of the Company after the Partial Offer in June 2005. Such agreements are for terms exceeding three years and are renewable automatically each year up to 10 years if neither the Company nor Isuzu notifies the other party in writing to terminate the relevant agreement 90 days prior to its expiry. After the Partial Offer during which the Technology Transfer Agreements are still valid and subsisting, the Company have been trying to re-negotiate the term of the agreement with Isuzu to enter into new agreements in place of the existing Technology Transfer Agreements for the purpose of complying the Listing Rules. However, they were unsuccessful because Isuzu considered that such agreements were entered into by the Company and Isuzu prior to the changes of the Listing Rules in March 2004 and are currently remain valid and subsisting. In addition, the entering into of new agreements to replace the existing Technology Transfer Agreements requires re-registration of such agreements with the relevant PRC authority. The Directors consider that the entering into new agreements to replace the existing Technology Transfer Agreements is impractical when the transactions are in the normal course of the Company’s business and occur on a regular basis and could possibly adversely affect the interest of the Company and its shareholders as a whole.

As the applicable percentage ratios (other than the profit ratio) calculated in accordance with Chapter 14 of the Listing Rules under the 100P Series Technology Transfer Agreement for the two years ending 31 December 2008 will, on annual basis, exceed 2.5%, constituting non-exempt continuing connected transactions of the Company under Rule 14A.35(4) of the Listing Rules and are subject to Independent Shareholders’ approval. At the EGM, the Company will seek Independent Shareholders’ approval for the 100P Series Technology Transfer Agreement to be renewed automatically for two years up to 4 January 2009 and the relevant annual caps for the two years ending 31 December 2008. Whilst for every three years thereafter, in order to comply with the applicable reporting, disclosure and Independent Shareholders’ approval requirements pursuant to the Listing Rules, the Company will publish announcement and (if the applicable percentage ratios (other than the profit ratio) of the then annual caps exceed 2.5%) despatch circular to its shareholders providing information in relation to such transactions, and to convene a shareholders’ meeting to obtain Independent Shareholders’ approval for the 100P Series Technology Transfer Agreement to renew automatically in the following three years and the relevant annual caps. In the event that the Company fails to obtain prior approval from the Independent Shareholders, it will notify Isuzu in writing to terminate the agreement.

As disclosed in the Announcement, the F Chassis Technology Transfer Agreement is subject only to reporting and disclosure requirements but exempt from the Independent Shareholders’ approval under the Listing Rules. However, as it will only expire in 2012, Hercules has been appointed to explain why a period longer than 3 three years is required pursuant to the Listing Rules, whose explanation is set out in its letter on pages 19 to 33 of this circular.

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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 Thursday, 15 June 2006 at 10: 30 a.m. (or as soon as practicable immediately after the conclusion or adjournment of the annual general meeting of the Company convened at the same place and date at 10: 00 a.m.). The notice of EGM together with a form of proxy and this circular will be sent on or before 21 April 2006 to each of the holders of H Shares. The ordinary resolutions proposed to approve the renewal of the 100P Series Technology Transfer Agreement for two years from 5 January 2007, the Continuing Connected Transactions and the Annual Caps at the EGM are set out on pages 37 to 38 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.

PROCEDURE TO DEMAND A POLL

Pursuant to Article 73 of the Articles of Association, at any Shareholders’ general meeting, a resolution put to vote of the meeting shall be decided on a show of hands unless a poll is taken as may from time to time be expressly required by the Listing Rules or unless a poll is (before or after the vote by the show of hands) demanded:

(a) by the chairman of the meeting;
(b) by at least two Shareholders present in person by proxy for the time being entitled to vote at the meeting; or
(c) by any Shareholder or Shareholders (including proxy) holding individually or holding an aggregate of 10% or more of the shares carrying the right to vote at the meeting.

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LETTER FROM THE BOARD

Pursuant to rule 13.39(4) of the Listing Rules, any vote of shareholders taken at a general meeting to approve connected transactions pursuant to Chapter 14A of the Listing Rules and transactions that are subject to independent shareholders’ approval pursuant to the Listing Rules must be taken on a poll. Accordingly, the chairman of the EGM will demand that the ordinary resolutions to approve the renewal of the 100P Series Technology Transfer Agreement for two years from 5 January 2007 and up to and including 4 January 2009 and the entering into of the Isuzu Supply Agreement and the Company Supply Agreement and the transactions contemplated thereunder and the Annual Caps be decided by poll.

RECOMMENDATION OF THE INDEPENDENT BOARD COMMITTEE

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 17 to 18 of this circular which contains the recommendation from the Independent Board Committee to the Independent Shareholders concerning the 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement, the Company Supply Agreement and the Annual Caps; (ii) the letter from Hercules set out on pages 19 to 33 of this circular which contains the recommendation from Hercules to the Independent Board Committee and the Independent Shareholders in relation to the 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement, the Company Supply Agreement 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 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement, the Company Supply Agreement 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 renewal of the 100P Series Technology Transfer Agreement, and the entering into of the Isuzu Supply Agreement and the Company Supply Agreement are 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 renewal of the 100P Series Technology Transfer Agreement for two years from 5 January 2007 and up to and including 4 January 2009 and the entering into of the Isuzu Supply Agreement and the Company Supply Agreement and the transactions contemplated thereunder and the Annual Caps.

GENERAL

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

Isuzu is principally engaged in the production and sale of commercial vehicles and diesel engines.

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

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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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)

The Independent Board Committee:

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

21 April 2006

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 21 April 2006 (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 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement and the Company Supply Agreement 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 19 to 33 of the Circular and the letter from the Board as set out on pages 4 to 16 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 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement and the Company Supply Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We also consider that renewal of the 100P Series Technology Transfer Agreement and the entering into of the Isuzu Supply Agreement and the Company Supply Agreement are in the interests of the Company and the Shareholders as a whole. Further, we consider 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 renewal of the 100P Series Technology Transfer Agreement for two years from 5 January 2007 up to and including 4 January 2009, the entering into of the Isuzu Supply Agreement and the Company Supply Agreement 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

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LETTER FROM HERCULES

The following is the text of the letter of advice prepared by Hercules 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

21 April 2006

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 relating to the 100P Series Technology Transfer Agreement, the Isuzu Supply Agreement and the Company Supply Agreement, and the Annual Caps. Details of the Continuing Connected Transactions and the Annual Caps are set out in the letter from the Board contained in the circular dated 21 April 2006 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.

Isuzu is a substantial shareholder holding approximately 20% of the entire issued share capital of the Company and is therefore a connected person of the Company under the Listing Rules. As the applicable percentage ratios (other than the profits ratio) calculated in accordance with Chapter 14 of the Listing Rules will, on annual basis, exceed 2.5% and the annual consideration is expected to be higher than HK$10,000,000, the Continuing Connected Transactions constitute non-exempt continuing connected transactions of the Company under Rule 14A.35 of the Listing Rules. The Continuing Connected Transactions and the Annual Caps are subject to approval by the Independent Shareholders, by way of poll, at the EGM. Isuzu and its associates will be required to abstain from voting on the ordinary resolutions to approve the Continuing Connected Transactions and the Annual Caps at the EGM.

The Independent Board Committee, comprising all the independent non-executive Directors, 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 are conducted in the ordinary and usual course of business, on normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole and the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned. Hercules is engaged to advise the Independent Board Committee and the Independent Shareholders in these regards. In addition, as the

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LETTER FROM HERCULES

F Chassis Technology Transfer Agreement and the 100P Series Technology Transfer Agreement have a term exceeding three years. Pursuant to Rule 14A.35(1) of the Listing Rules, we are appointed to explain why a period longer than three years for the Technology Transfer Agreements is required and to confirm that it is normal business practice for contracts of this type to be of such duration. Nevertheless, the F Chassis Technology Transfer Agreement is subject only to reporting and disclosure requirements but exempt from the Independent Shareholders’ approval under the Listing Rules.

In formulating our recommendations, we have assumed that all information, statements and representations contained or referred to in the Circular and the information and representations provided to us by the Directors and management of the Company are true, accurate and complete in all material respects at the time they were made and continued to be so at the date of the Circular, and that they may be relied upon in formulating our opinion. We have been advised by the Directors and management of the Company that, having made all reasonable enquiries and to the best of their knowledge and belief, all material relevant information has been supplied to us and there are no material facts the omission of which would make any statements in the Circular misleading. We consider that we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation as set out in this letter. We have no reason to suspect that any material information has been withheld by the Directors or 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 Continuing Connected Transactions.

PRINCIPAL FACTORS AND REASONS CONSIDERED

The principal factors and reasons that we have taken into consideration in assessing the Continuing Connected Transactions and the reasons for the Technology Transfer Agreements of a term longer than three years and arriving at our opinion are set out as follows:

1. Background to and reasons for the Continuing Connected Transactions

a. The Company and Isuzu

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. The Company became listed on the Stock Exchange since August 1994.

Isuzu is principally engaged in the production and sale of commercial vehicles and diesel engines. Isuzu is listed on the Tokyo Stock Exchange.

Since 1984, the Company has operated its business in close association with Isuzu. The Company has been producing vehicles designed by Isuzu, using production techniques developed by Isuzu and production equipment and automotive components supplied by Isuzu prior to listing. Isuzu has played a major role in assisting the Company in developing its production capabilities. Isuzu has also provided substantial technological and managerial assistance to the Company since 1984. After completion of the Partial Offer in June 2005, Isuzu has become a substantial shareholder of the Company holding approximately 20% of the entire issued share capital of the Company and is therefore a connected person of the Company under the Listing Rules.

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LETTER FROM HERCULES

b. The 100P Series Technology Transfer Agreement

As the vehicles manufactured by the Group are principally under the brand name ‘‘Isuzu’’, the Company requires the provision of technology and technical know-how by Isuzu for its business from time to time to meet the standards and requirements of Isuzu for such productions, the parties entered into the 100P Series Technology Transfer Agreement on 17 August 1993 in respect of the transfer of technology and provision of technical know-how and the permission to use the trademark of Isuzu and the emblem by Isuzu to the Company for the production and sale of 100P-N series light vehicles and related parts and components.

The 100P Series Technology Transfer Agreement took effect from 5 January 1994 (being the date on which the 100P Series Technology Transfer Agreement was approved by the relevant PRC government department) for an initial term of 10 years and thereafter renewable automatically each year up to 10 years unless and until terminated by either party giving to the other party not less than 90 days written notice prior to its expiry.

After the Partial Offer during which the 100P Series Technology Transfer Agreement are still valid and subsisting, the Company tried to re-negotiate with Isuzu to enter into new agreement in place of the existing 100P Series Technology Transfer Agreement for the purpose of complying the Listing Rules. However, they are unsuccessful because:

(i) Isuzu considered that the Technology Transfer Agreements were entered into by the Company and Isuzu prior to the changes of the Listing Rules in March 2004 and is currently remain valid and subsisting; and
(ii) the entering into of new agreements to replace the existing Technology Transfer Agreements requires re-registration of such agreement with the relevant PRC authority.

The Directors also consider that the entering into new agreement to replace the existing Technology Transfer Agreements are impractical given the transactions are conducted in the normal course of the Company’s business and occur on a regular basis and could possibly adversely affect the interests of the Company and its shareholders as a whole.

As such, the term of the 100P Series Technology Transfer Agreement exceeds the three year term as set out in Rule 14A.35(1) of the Listing Rules. The reasons for and our view on the Technology Transfer Agreements of a term longer than three years are set out in the section headed ‘‘5. Reasons for the Technology Transfer Agreements of a term longer than three years’’ below.

As the applicable percentage ratios (other than the profits ratio) calculated in accordance with Chapter 14 of the Listing Rules under the 100P Series Technology Transfer Agreement for the two years ending 31 December 2008 will, on annual basis, exceed 2.5%, the continuing connected transactions contemplated by the 100P Series Technology Transfer Agreement for the corresponding years are subject to Independent Shareholders’ approval. At the EGM, the Company will seek Independent Shareholders’ approval for the 100P Series Technology Transfer Agreement to be renewed automatically for two years from 5 January 2007 up to and including 4 January 2009 and the relevant annual caps for the two years ending 31 December 2008. Whilst for every three years

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LETTER FROM HERCULES

thereafter, in order to comply with the applicable reporting, disclosure and Independent Shareholders’ approval requirements pursuant to the Listing Rules, the Company will publish announcement and despatch circular to its shareholders providing information in relation to such transactions, and to convene a shareholders’ meeting to obtain Independent Shareholders’ approval (if the then annual caps exceed 2.5%) for the 100P Series Technology Transfer Agreement to renew automatically in the following three years and the relevant annual caps. In the event that the Company fails to obtain prior approval from the Independent Shareholders, it will notify Isuzu in writing to terminate the agreement.

c. The Isuzu Supply Agreement

Isuzu has been providing automobile parts manufactured by it to the Company since 1994. As the vehicles manufactured by the Group are principally under the brand name ‘‘Isuzu’’, the Company needs to purchase automobile parts and components from Isuzu for its business from time to time. The Directors wish to purchase from Isuzu automobile parts manufactured by it on an on-going basis. To comply with the written agreement requirement under Rule 14A.35 of the Listing Rules, the Company entered into the Isuzu Supply Agreement with Isuzu on 28 March 2006.

d. The Company Supply Agreement

The Company has been providing automobile parts and components and accessories manufactured by it to Isuzu since 2000. As the product quality standard of the parts and components produced by the Group meets the international standard required by Isuzu and due to the competitiveness of the Group’s products in price, Isuzu wishes to purchase parts and components from the Group. The Directors wish to provide automobile parts and components and accessories manufactured by it to Isuzu on an on-going basis in order to continue to explore the international market. To comply with the written agreement requirement under Rule 14A.35 of the Listing Rules, the Company entered into the Company Supply Agreement with Isuzu on 28 March 2006.

We have been advised by the Directors that the Continuing Connected Transactions are important to the operation of the Group’s business and for its production. In addition, both the Company and Isuzu can make use of each other’s technology and costs advantages. In view of the foregoing, and having considered the principal businesses of the Company and Isuzu as detailed in the section headed ‘‘1.a. The Company and Isuzu’’ above, 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.

2. Terms of the Continuing Connected Transactions

a. The 100P Series Technology Transfer Agreement

Pursuant to the 100P Series Technology Transfer Agreement, the Company has agreed to pay Isuzu an initial fee (which has been fully paid by the Company to Isuzu) plus royalties, which is determined by reference to the price of the parts and components manufactured and sold by the Company pursuant to the agreement, staff training fees and technical assistance fees.

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LETTER FROM HERCULES

We note that the 100P Series Technology Transfer Agreement was entered into between the parties prior to the listing of the Shares on the Stock Exchange in August 1994. From our discussion with management of the Company, we understand that Isuzu has in place stringent requirements on the product quality of the Company and the Company has been relying on the technology and technical know-how provided by Isuzu to manufacture the 100P-N series light vehicles and related parts and components. We have reviewed the 100P Series Technology Transfer Agreement and note that the technology and technical know-how provided by Isuzu to the Company pursuant to the 100P Series Technology Transfer Agreement are updated on a timely basis and are essential for the Company to operate its business. Also, the royalty fees payable by the Company are calculated by reference to the actual sales amount of the relevant parts and components manufactured and sold by the Company.

We have conducted research on other companies that are engaged in the manufacturing and sale of automobile vehicles with other companies’ technology, technical know-how and trademark in China which we deemed comparable to the Company. We notice that the technical transfer agreements are concluded on a case-bycase basis. As no detailed information as to the exact scope of technology provided by different technology providers is publicly available, it would be impracticable to compare whether the initial fee, royalties, staff training fees and/or technical assistance fees paid by the Company under the 100P Series Technology Transfer Agreement with those of other companies. Furthermore, we have been advised by the Directors that there are currently no other manufacturers in China which has been transferred the same technology specified in the 100P Series Technology Transfer Agreement so far as they are aware. We agree with the view of the Directors as we did not come across any such technology transfer in our research. However, the Directors have confirmed that the terms of the 100P Series Technology Transfer Agreement were negotiated at an arm’s length basis on normal commercial terms and are consistent with the pricing mechanism of other existing technology transfer agreements with Isuzu.

While the Company has the alternative to develop the technology and technical know-how and trademarks for its products, we have been advised by the Company that the costs involved in technological development and in creating its own brand would be significantly greater than the consideration payable under the 100P Series Technology Transfer Agreement. There is also the risk that the Company may not be successful in such development. By utilizing Isuzu’s technology and technical know-how and trademark, this risk is effectively removed and the Company can focus its human and financial resources on production of vehicles which meet international standard and not on research and development.

Based on the above, and having considered (i) the Company has established longterm relationship with Isuzu for more than 20 years, the vehicles manufactured by the Group are principally sold under the brand name ‘‘Isuzu’’ and the transactions contemplated by the 100P Series Technology Transfer Agreement are vital to the Company’s core business operation; (ii) the terms set out in the 100P Series Technology Transfer Agreement, including the pricing mechanism and the duration of longer than three year, are similar to the existing the existing technology transfer agreement with Isuzu, and (iii) the Directors has confirmed that there has been no change in the calculation mechanism of the royalties and the staff training fees and technical assistance fees payable by the Company pursuant to 100P Series Technology Transfer Agreement before and after the Partial Offer; we are of the view that the terms and conditions of the

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LETTER FROM HERCULES

100P Series Technology Transfer Agreement are fair and reasonable and the 100P Series Technology Transfer Agreement is in the interests of the Company and the Shareholders as a whole.

b. The Isuzu Supply Agreement

Pursuant to the Isuzu Supply Agreement, Isuzu agrees to supply automobile parts and components to the Company for a term of three years commencing from 24 June 2005. The Isuzu Supply Agreement is a master agreement which sets out the principles upon which detailed terms are to be determined between the Company and Isuzu. Pursuant to the Isuzu Supply Agreement, the Company will enter into definitive agreements from time to time to provide for detailed terms of each single transaction in accordance with the principles set out in the Isuzu Supply Agreement. Such detailed terms include, but without limitation, prices, payment and settlement terms, quantities, qualities, delivery and inspection of products and other terms and conditions in relation to the provision of the automobile parts, components and/or accessories.

As advised by management of the Company, there are no independent third parties who supply to the Company the automobile parts and components currently supplied by Isuzu because Isuzu’s automobile parts and components incorporate Isuzu’s sophisticated technologies and are of specific specifications which are not available from independent third parties. As such, we are unable to compare the terms of these transactions with those of the independent suppliers. However, we note that the Company and Isuzu agree that such detailed terms shall be on normal commercial terms or, if there is no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company. Isuzu has also undertaken to the Company that the terms offered to the Company shall be no less favourable to those that would be obtained from independent suppliers in the market where the Company locates. On this basis, and having considered the automobile parts and components currently supplied by Isuzu are vital for the operation of the Group’s business and for its production and are not otherwise available from independent third parties, we consider that the entering into of the Isuzu Supply Agreement is in the interests of the Company and the Shareholders as a whole and the terms of the Isuzu Supply Agreement fair and reasonable so far as the Independent Shareholders are concerned.

c. The Company Supply Agreement

Pursuant to the Company Supply Agreement, the Company agrees to supply accessory sets and other automobile parts and components to Isuzu for a term of three years commencing from 24 June 2005. The Company Supply Agreement is a master agreement which sets out the principles upon which detailed terms are to be determined between the Company and Isuzu. Pursuant to the Company Supply Agreement, the Company will enter into definitive agreements from time to time to provide for detailed terms of each single transaction in accordance with the principles set out in the Company Supply Agreement. Such detailed terms include, but without limitation, prices, payment and settlement terms, quantities, qualities, delivery and inspection of products and other

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LETTER FROM HERCULES

terms and conditions in relation to the provision of the automobile parts, components and/ or accessories. The Company and Isuzu agree that such detailed terms shall be on normal commercial terms or, if there is no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company. Isuzu also undertakes that the terms offered to the Company shall be no less favourable than terms offered to independent third parties in the market where Isuzu locates.

In the event that a competitor (including a potential competitor) of Isuzu holds Shares of the same number as or more than that held by Isuzu or there is a change in control in Qingling Group, Isuzu may terminate the Company Supply Agreement by giving notice to the Company.

As advised by the management of the Company, the Company has not supplied similar accessory sets and automobile parts and components to independent third parties because the accessory sets, automobile parts and components currently supplied to Isuzu under the Company Supply Agreement are only suitable for assembling Isuzu’s vehicles. We have also been advised by the Company that all the accessory sets and automobile parts and components supplied by the Company to Isuzu are used for production purposes and not for resale. As the accessory sets and automobile parts and components supplied by the Company are manufactured with Isuzu’s technology and know-how which are not otherwise available from independent third parties, we are unable to compare the terms of these transactions with those of the independent suppliers. However, we note that the Company and Isuzu agree that such detailed terms shall be on normal commercial terms or, if there is no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company. Isuzu has also undertaken to the Company that the terms for the Company’s supply of accessory sets and other automobile parts and components to Isuzu would be no less favourable to those that would be obtained from independent customers in the market where Isuzu locates. We have been advised by management of the Company that with the Company Supply Agreement, (i) the Company’s per-unit fixed cost could be reduced as a result of the increase in the number of output units over which fixed costs are allocated, therefore, enhancing the competitiveness of the Company’s product; and (ii) the Company would be able to explore the international market as the accessory sets and automobile parts and components sold to Isuzu will form part of the vehicles sold by Isuzu to the international market. Based on the above, we consider that the entering into of the Company Supply Agreement is in the interests of the Company and the Shareholders as a whole and the terms of the Company Supply Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM HERCULES

3. Basis of the Annual Caps

The Annual Caps in respect of each of the Continuing Connected Transactions are set out below:

				Period from 1
				January 2008
				to the expiry
				date of the
				agreement (in	Year ending 31
				the case of the	December 2008
				Isuzu Supply	(in the case of
	Period from 24			Agreement and	the 100P Series
	June 2005 to			the Company	Technology
	31 December	Year ending 31	Year ending 31	Supply	Transfer
	2005	December 2006	December 2007	Agreement)	Agreement)
	(RMB)	(RMB)	(RMB)	(RMB)	(RMB)
The 100P Series	N/A	N/A	49,950,000	N/A	68,820,000
Technology Transfer	(Note)	(Note)
Agreement
The Isuzu Supply	306,041,000	1,288,000,000	1,846,000,000	1,310,033,000	N/A
Agreement				(expiry date
				being 23 June
				2008)
The Company Supply	46,611,000	110,000,000	148,800,000	100,447,000	N/A
Agreement				(expiry date
				being 23 June
				2008)

Note: As the applicable percentage ratios (other than the profits ratio) calculated in accordance with Chapter 14 of the Listing Rules will be less than 2.5%, the transactions contemplated under the 100P Series Technology Transfer Agreement for the period from 24 June 2005 to 31 December 2005 and the year ending 31 December 2006 will only by subject to the reporting and announcement requirements but exempt from Independent Shareholders’ approval requirement.

a. The 100P Series Technology Transfer Agreement

According to management of the Company, the projected annual caps of the royalties, staff training fees and/or technical assistance fees payable by the Company to Isuzu under the 100P Series Technology Transfer Agreement have been determined with reference to the consideration of the agreement and the anticipated production and sales amounts of the products contemplated under the 100P Series Technology Transfer Agreement. Based on our review of the historical transaction amounts for royalties, staff training fees and/or technical assistance fees paid by the Company under the 100P Series Technology Transfer Agreement for the three years ended 31 December 2005 and the projected amounts for the three years ended 31 December 2008, we note that the annual caps of the royalties, staff training fees and/or technical assistance fees payable by the Company to Isuzu under the 100P Series Technology Transfer Agreement are calculated as follows:

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LETTER FROM HERCULES

The Company’s projected production and sales amounts of the products contemplated under the 100P Series Technology Transfer Agreement

The average royalties, staff training fees and/or technical assistance fees
paid by the Company under the 100P
x Series Technology Transfer Agreement per unit for the period from 24 June
2005 to 31 December 2005 (‘‘Item A’’)

In addition, we have discussed with management of the Company and note that Item A is calculated based on, inter alia, a predetermined royalty rate, which is a constant for the six years ended 31 December 2008, and the annual caps of the royalties, staff training fees and/or technical assistance fees payable by the Company to Isuzu under the 100P Series Technology Transfer Agreement are determined based on an anticipated 39% average increment (being the average of the year-on-year increases of 40.6% and 37.8% in 2007 and 2008 respectively) in the production and sales amounts of the products contemplated under the 100P Series Technology Transfer Agreement in 2007 and 2008. Since royalties payable pursuant to the agreement are determined by reference to the amount of parts and components sold by the Company and, it is therefore anticipated that there is a proportional increase in the transaction amounts.

In assessing whether the basis of the annual caps are fair and reasonable, we have reviewed the following factors:

(i) Outlook of the automobile market in China

According to the China Association of Automobile Manufacturers, China’s auto production and sales volume reached 5.71 million units and 5.76 million units, up 12.56% and 13.54% year-on-year respectively. The China Automotive Industry Association expects that the auto market will still maintain a 10% to 15% growth with auto sales reaching between 6.4 and 6.6 million units in 2006. We note from the statistics released by China Association of Automobile Manufacturers quoted in an article by China Daily on 4 January 2006 that the number of domestic vehicle sales are expected to surge as high as 9 million by the end of 2010. The article also states that only 8 in every 1,000 Chinese own a car compared with 900 out of 1,000 Americans. As cited in an article by China Daily on 26 December 2005, over the period of China’s 11th Five-Year Plan (2006–2010), the Chinese Government targets to retain an average annual economic growth rate of approximately 8%. By 2010, China’s gross domestic product (GDP) will rise above RMB21.5 trillion. In addition, domestic consumption has become the focus of the continued and sustainable development of China’s economy. The rapid growth in GDP is reflected in the rising standard of living in China and in growing demand among the Chinese population for consumer and durable goods, including automobiles. As a result of the continuing economic growth and the relatively low car ownership ratio in China, we believe there is good potential for continuing strong growth of the automobile market in China.

(ii) Expected expansion of sales network

As stated in the letter from the Board and discussed in the letter from Hercules contained in the Company’s circular dated 3 August 2005 (please refer to page 28 of such circular for details), the Group currently sells its products through 90

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LETTER FROM HERCULES

distributors in the PRC and 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 for the three years ended 31 December 2008. In other words, the Company’s sales network will be expanded by more than a double, or even triple, by end of 2008. Consequently, the Company anticipates that the sales volume of the Company’s product (including the 100P-N series light vehicles) will surge significantly for the three years ended 31 December 2008 which would result in proportional increases in the amount of royalties, staff training fees and/or technical assistance fees payable by the Company to Isuzu.

Having considered the foregoing, we consider the anticipated 39% average increment in the production and sales amounts of the products contemplated under the 100P Series Technology Transfer Agreement in 2007 and 2008 is fair and reasonable an hence the annual caps for the 100P Series Technology Transfer Agreement for each of the two years ending 31 December 2008 are fair and reasonable.

b. The Isuzu Supply Agreement

As stated in the letter from the Board, the projected annual caps for the Isuzu Supply Agreement have been determined with reference to (i) the historical sales volume; (ii) the projected sales volume, taking into account, inter alia, the overall business environment and specific growth strategies; and (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. In assessing whether the basis of the annual caps are fair and reasonable, we have reviewed the following factors:

(i) The historical and projected sales volume and transaction amounts of the automobile parts and components

We have reviewed the historical transaction amount between the Company and Isuzu in respect of supply of automobile parts and components by Isuzu to the Company for the two years ended 31 December 2004 and for the period from 1 January 2005 to 23 June 2005 (please refer to the letter from the Board for details). We understand that the annual cap for the period from 24 June 2005 to 31 December 2005 are based on the unaudited financial statements of the Group and is expected to be higher than 2.5% under the Listing Rules. Also, the transaction amounts from 1 January 2006 to the expected date of the EGM will be RMB63,810,000, which is expected to be higher than 2.5% under the Listing Rules. As such, the Company should have sought Independent Shareholders’ approval prior to continuing the purchase from Isuzu in July 2005 and early December 2005 respectively when the applicable percentage ratios reached 2.5%. However, the transactions with Isuzu are vital to the Company’s core business operation since its production relies upon Isuzu’s supply of automobile components. If such transactions with Isuzu were to be suspended pending approval of the Independent Shareholders, it is likely to practically bring the business of the Company to a halt and adversely affect the interest of the Company and the Shareholders as a whole. The Company will therefore seek ratification of and/or approval from the Independent Shareholders in

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LETTER FROM HERCULES

respect of the transactions contemplated under the Isuzu Supply Agreement (including the transactions carried out prior to the Independent Shareholders’ approval) and the relevant Annual Caps, which are calculated as follows:

average purchase price of automobile The Company’s projected sales parts and components supplied by x volume for each series of vehicles Isuzu used in the production of each series of vehicles in 2005 In addition, we note that the projected transaction amounts for 2006 represented an increase of 32.8% over 2005 and that for 2007 represented an increase of 43.3% over 2006. We have discussed with management of the Company and note that these increases are determined based on a 33% annual increment on the supply of automobile parts and components by Isuzu to the Company.

(ii) The Company’s localisation of parts and components policy and product quality control

Having reviewed the Company’s 2004 annual report and discussed with management of the Company, we note that the Company commenced activities to reduce costs and implement the localisation of parts and components since the first half of 2004 and such localisation activities are in place in 2005 and are expected to continue till 2006. The purpose of localisation of parts and components policy is to reduce production costs and to increase the competitiveness of the Company’s product and its market share. Therefore, the purchase amount from Isuzu for the existing models from 2005 onwards is expected to decrease as compared to that for 2004.

(iii) The Company’s new product development strategy

We note in the Company’s 2004 annual report and 2005 interim report that the Company continues to maintain a leading role on product development. It has developed new products such as the 4 tons commercial vehicle 600P of N Series, which was co-launched by the Company and Isuzu, Light-duty trucks series 600P tippers and wide-bodied logistics vehicles which was co-launched by the Company and Isuzu. We have been advised by the management of the Company that the Company anticipates it will increase the production and sale of new models of vehicles starting from 2007. 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 three years ended 31 December 2008 will be in the range of about 40 to 120. Since the production of these new models of vehicles will require new types of automobile parts and components which can only be obtained from Isuzu, the Company therefore expects significant increase in the supply of new types of automobile parts and components from Isuzu in 2007 and 2008 despite the Company’s localisation of parts and components policy.

Having considered the foregoing and the expected significant increase in the sales volume of vehicles due to (i) the expected increase in market share following the cost-reduction strategy from the localisation of parts and components and increase in sales network as discussed in the sub-section headed ‘‘3(a)(ii) Expected expansion of sales network’’; and (ii) the potential for continuing strong growth in

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LETTER FROM HERCULES

the automobile market in China as discussed in the sub-section headed ‘‘3(a)(i) Outlook of the automobile market in China’’; we are of the view that the expected significant increase in the purchases of automobile parts and components from Isuzu and the projected transaction amounts for the year ended 31 December 2007 and for the period from 1 January 2008 to 23 June 2008 (being the expiry date of the agreement) are fair and reasonable. Overall, we consider that the Annual Caps for the Isuzu Supply Agreement fair and reasonable.

c. The Company Supply Agreement

As stated in the letter from the Board, the projected annual caps for the Company Supply Agreement have been determined with reference to the projected sales volume for the duration of the relevant agreements, taking into account, inter alia, the expected increase in sales volume of Isuzu products in overseas market and hence the increase in needs of parts and components.

In assessing whether the basis of the annual caps are fair and reasonable, we have reviewed the following factors:

(i) The historical and projected sales volume and transaction amounts of the accessory sets and other automobile parts and components

We have reviewed the historical transaction amount between the Company and Isuzu in respect of supply of accessory sets and other automobile parts and components by the Company to Isuzu for the two years ended 31 December 2004 and for the period from 1 January 2005 to 23 June 2005 (please refer to the letter from the Board for details). We understand that the Annual Cap for the period from 24 June 2005 to 31 December 2005 are based on the unaudited financial statements of the Group and is expected to be higher than 2.5% under the Listing Rules. Also, the transaction amounts from 1 January 2006 to the expected date of the EGM will be RMB23,630,000, which is expected to be higher than 0.1% but less than 2.5%. Pursuant to the Listing Rules, the Company should have sought Independent Shareholders’ approval prior to continuing the purchase from Isuzu in July 2005 and early December 2005 respectively when the applicable percentage ratios reached 2.5%. However, since Isuzu’s purchase of components from the Company contributes to a substantial portion of the Company’s revenue the transactions with Isuzu are vital to the Company’s core business operation. If such transactions with Isuzu were to be suspended pending approval of the Independent Shareholders, it is likely to practically bring the business of the Company to a halt and adversely affect the interest of the Company and the Shareholders as a whole. The Company will therefore seek ratification of and/or approval from the Independent Shareholders in respect of the transactions contemplated under the Company Supply Agreement (including the transactions carried out prior to the Independent Shareholders’ approval) and the relevant Annual Caps, which are calculated as follows:

Expected sales volume of accessory selling price of the respective accessory sets and other automobile parts and x sets and other automobile parts and components components in 2005

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LETTER FROM HERCULES

In addition, we note that the projected transaction amounts for 2006 and 2007 represented year-on-year increases of approximately 35%. We have discussed with management of the Company and note that these increases are determined based on a 35% annual increment on the supply of accessory sets and other automobile parts and components by the Company to Isuzu as a result of (i) the Group has, since the completion of the Partial Offer, become the production base of Isuzu; an (ii) the expected increase in sales volume of Isuzu’s products. (Please refer to the section headed ‘‘3.c.(ii) The expected increase in sales volume of Isuzu’s product’’ below for details.)

(ii) The expected increase in sales volume of Isuzu’s products

As stated in the letter from the Board, with the cooperation of Isuzu and much effort by the Company to improve the product quality standard and to reduce costs in 2002 and 2003, the number of parts and components of the Company with competitiveness in quality and costs in the international market has increased in 2004 and 2005. Therefore, the purchases of the Company’s products by Isuzu have increased significantly in 2004 and 2005 compared with the preceding year. The Group has, since the completion of the Partial Offer, become the production base of Isuzu and with the enhancement of competitiveness of its products, the Directors expect that Isuzu will increase, to a considerable extent, in the purchase volume of parts and components from the Group in the coming three years and on a relatively stable basis in 2007 and 2008.

We note from the annual reports of Isuzu that Isuzu’s consolidated sales increased by approximately 6.0% and 4.4% in 2004 and 2005 respectively and worldwide vehicle unit sales also increased by approximately 0.9% and 20.9% in 2004 and 2005 respectively. Asia (ex-Japan) remains the major overseas market for Isuzu where sales jumped 59.6% and 11.3% in 2004 and 2005 respectively. In addition, Isuzu has started the Isuzu Mid-term Business Plan (April 2005 – March 2008) in which Isuzu plans to expand commercial vehicle sales volume overseas by a double from the current 150,000 vehicles per year to 300,000 vehicles per year in the fiscal year ended 31 March 2008 and to increase the annual light commercial vehicle production volume in ASEAN by 1.5 times from the current 200,000 units to 300,000 units in the fiscal year ended 31 March 2008.

Having considered the expected increase in sales volume of Isuzu’s products and that the Group has, since the completion of the Partial Offer, become the production base of Isuzu, we are of the view that the 35% annual increment on the supply of accessory sets and other automobile parts and components by the Company to Isuzu is fair and reasonable and hence the projected annual caps under the Company Supply Agreement for the period from 24 June 2005 to 31 December 2005, for the two years ended 31 December 2007 and for the period from 1 January 2008 to 23 June 2008 (being the expiry date of the agreement) are fair and reasonable.

4. Conditions of the Continuing Connected Transactions

It is stated in the letter from the Board that if (i) the proposed Annual Caps are exceeded; or (ii) there is a material change to the terms of any of the Isuzu Supply Agreement, the Company Supply Agreement or the 100P Series Technology Transfer Agreement; or (iii) the Isuzu Supply Agreement or the Company Supply Agreement is renewed or renewal of the 100P

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LETTER FROM HERCULES

Series Technology Transfer Agreement is required to be approved by the Independent Shareholders, 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.

5. Reasons for the Technology Transfer Agreements of a term longer than three years

Apart from the 100P Series Technology Transfer Agreement, the Company also entered into the F Chassis Technology Transfer Agreement with Isuzu prior to the Partial Offer. The Technology Transfer Agreements are of a term exceeding three years and renewable automatically each year up to 10 years after the initial term and are still valid and subsisting. As stated in the letter from the Board and discussed in the subsection headed ‘‘1.b. The 100P Series Technology Transfer Agreement’’, the Company tried to re-negotiate with Isuzu to enter into new agreement in place of the existing Technology Transfer Agreements for the purpose of complying with the Listing Rules without much success.

a. The F Chassis Technology Transfer Agreement

The Company and Isuzu entered into the F Chassis Technology Transfer Agreement on 20 February 2000 in respect of the transfer of technical know-how and the permission to use the trademark of Isuzu and the emblem by Isuzu to the Company for the production and sale of the F Series Chassis and related parts and components.

The F Chassis Technology Transfer Agreement took effect from 21 February 2000 (being the date on which the F Chassis Technology Transfer Agreement was approved by the relevant PRC government department) and ending in 2012 and thereafter renewable automatically each year up to 10 years unless and until terminated by either party giving to the other party not less than 90 days written notice prior to its expiry.

The F Chassis Technology Transfer Agreement is subject only to reporting and disclosure requirements but exempt from the Independent Shareholders’ approval under the Listing Rules.

b. Reasons for the agreement term in excess of three years

We note that the Technology Transfer Agreements is of a duration longer than three years as set out in Rule 14A.35(1) of the Listing Rules. However, as Isuzu technologies and know-hows are critical in the production of the Company’s vehicles and without which the Company may not be able to sustain and grow its business, we consider it commercially desirable and essential for the Company to have longer agreement term; hence, having considered (i) the vehicles manufactured by the Group are principally sold under the brand name ‘‘Isuzu’’; (ii) the transactions contemplated thereunder are vital to the Company’s core business operation; (iii) the Technology Transfer Agreements provide the Company with a long-term binding contractual relationship with Isuzu; and (iv) the purpose of entering into the Technology Transfer Agreements is to facilitate the development, production and marketing by the Company of the relevant vehicles and the Company requires the provision of technical know-how by Isuzu for its business from time to time to meet the standards and requirements of Isuzu for the production and sale of vehicles; we concur with the view of the Directors that the entering into new agreements to replace the existing Technology Transfer Agreements that limiting the term of the Technology Transfer Agreements to three years could possibly adversely affect the

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LETTER FROM HERCULES

interests of the Company and its shareholders as a whole. We have also conducted research from e-finet.com, enorth.com.cn and chinainfobank.com on publicly disclosed information on the terms of agreements similar to the Technology Transfer Agreements executed in the last five years, and we found three companies in China which are engaged in the manufacture and sale of automobile vehicles that had executed similar technology transfer agreements from 2002 to 2005 and we note that it is normal business practice for contracts of this type to be of a term from eight to ten years.

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 the Continuing Connected Transactions are 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, the Annual Caps and the ratification of the transactions carried out pursuant to the Company Supply Agreement and the Isuzu Supply Agreement for the period from 24 June 2005 to the expected date of EGM 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
					share
					capital	% of
					of the	entire
Name of	Class of		Nature of		relevant	share
Shareholders	Shares	No. of Shares	Interest	Capacity	class	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

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APPENDIX

GENERAL INFORMATION

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, 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.

2. 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.

3. Competing Interest

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

4. 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.

5. 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.

6. 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.

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APPENDIX

GENERAL INFORMATION

7. 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)

As at the Latest Practicable Date, Hercules was not interested in any Share 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 21 April 2006 and reference to its name in the form and context in which they respectively appear.

8. 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.

9. 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 8 May 2006:

(a) the 100P Series Technology Transfer Agreement;
(b) the Isuzu Supply Agreement;
(c) the Company Supply Agreement;
(d) the letter from Hercules, the text of which is set out in this circular; and
(e) the consent letter of Hercules referred to in the paragraph headed ‘‘Expert’’ in this appendix.

— 36 —

NOTICE OF EGM

==> picture [326 x 65] intentionally omitted <==

(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 Thursday, 15 June 2006 at 10: 30 a.m. (or as soon as practicable immediately after the conclusion or adjournment of the annual general meeting of the Company convened at the same place and date at 10: 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

‘‘THAT:
(a) the technology transfer agreement dated 17 August 1993 entered into by the Company and Isuzu Motors Limited (‘‘Isuzu’’) in respect of the transfer of technology and provision of technical know-how and the permission to use the trademark of Isuzu and the emblem by Isuzu to the Company for the production and in the sale of 100P-N series light vehicles and related parts and components (the ‘‘100P Series Technology Transfer 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 for the two years ended 31 December 2008 be and are hereby approved;
(b) the renewal of the 100P Series Technology Transfer Agreement for two years from 5 January 2007 up to and including 4 January 2009 be and is hereby approved;
(c) the relevant annual caps for the two years ending 31 December 2008 contemplated under the 100P Series Technology Transfer Agreement being RMB49,950,000 and RMB68,820,000 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 100P Series Technology Transfer Agreement and the annual caps and the transactions thereby contemplated.’’

‘‘THAT:
(a) the conditional agreement dated 28 March 2006 entered into by the Company and Isuzu in respect of the supply of automobile parts and components by Isuzu to the Company (the ‘‘Isuzu Supply Agreement’’), a copy of which marked ‘‘B’’ has been

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NOTICE OF EGM

produced to the meeting and signed by the Chairman of the meeting for the purpose of identification, and the transactions contemplated thereunder (including but not limited to the transactions carried out for the period from 24 June 2005 up to the date of this meeting) be and are hereby confirmed, ratified and/or approved; and

(b) the relevant annual caps in relation to the transactions carried out pursuant to or contemplated under the Isuzu Supply Agreement for the period from 24 June 2005 to 31 December 2005, for the two years ending 31 December 2007 and for the period from 1 January 2008 to 23 June 2008 (being the expiry date of the Isuzu Supply Agreement), being RMB306,041,000, RMB1,288,000,000, RMB1,846,000,000 and RMB1,310,033,000 respectively, be and are hereby confirmed, ratified and/or 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 Isuzu Supply Agreement and the annual caps and the transactions thereby contemplated.’’

3. ‘‘THAT:

(a) the conditional agreement dated 28 March 2006 entered into by the Company and Isuzu in respect of the supply of accessory sets and other automobile parts and components by the Company to Isuzu (the ‘‘Company Supply 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 (including but not limited to the transactions carried out for the period from 24 June 2005 up to the date of this meeting) be and are hereby confirmed, ratified and/or approved; and;
(b) the relevant annual caps in relation to the transactions carried out pursuant to or contemplated under the Company Supply Agreement for the period from 24 June 2005 to 31 December 2005, for the two years ending on 31 December 2007 and for the period from 1 January 2008 to 23 June 2008 (being the expiry date of the Company Supply Agreement), being RMB46,611,000, RMB110,000,000, RMB148,800,000 and RMB100,447,000 respectively, be and are hereby confirmed, ratified and/or 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 Company Supply Agreement and the annual caps and the transactions thereby contemplated.’’

By Order of the Board Wu Nianqing Company Secretary

Chongqing, PRC, 21 April 2006

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NOTICE OF EGM

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.
The register of shareholders of the Company will be closed from Tuesday, 16 May 2006 to Thursday, 15 June 2006 (both days inclusive), during which period no transfer of shares will be registered.
Shareholders whose names appear in the register of shareholders on Tuesday, 16 May 2006 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 Friday, 26 May 2006. 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 Monday, 15 May 2006.
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. Susumu Hosoi, Mr. Yoshiyuki Miyatake, 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.

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AI assistant

Qingling Motors Co. Ltd — Proxy Solicitation & Information Statement 2006

49705_rns_2006-04-25_6bb21ca0-9dc0-4073-822e-52213e35bf1b.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CONTINUING CONNECTED TRANSACTIONS

Hercules Capital Limited

CONTENTS

DEFINITION

DEFINITION

DEFINITION

To the Shareholders

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

LETTER FROM THE BOARD

BACKGROUND

THE CONTINUING CONNECTED TRANSACTIONS

(1) The 100P Series Technology Transfer Agreement

LETTER FROM THE BOARD

Historical transaction amounts

Projected transaction amounts

Basis of projected transaction amounts

LETTER FROM THE BOARD

Compliance with the Listing Rules

(2) The Isuzu Supply Agreement

LETTER FROM THE BOARD

(3) The Company Supply Agreement

LETTER FROM THE BOARD

Historical transaction amounts

Projected transaction amounts

Aggregate amount (in RMB)

LETTER FROM THE BOARD

Basis of projected transaction amounts

(iii) Expected increase in the number of new vehicles

LETTER FROM THE BOARD

Compliance with the Listing Rules

REASONS FOR THE CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE BOARD

REQUIREMENTS UNDER THE LISTING RULES

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

EGM

PROCEDURE TO DEMAND A POLL

LETTER FROM THE BOARD

RECOMMENDATION OF THE INDEPENDENT BOARD COMMITTEE

GENERAL

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

21 April 2006

CONTINUING CONNECTED TRANSACTIONS

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

LETTER FROM HERCULES

Hercules Capital Limited

CONTINUING CONNECTED TRANSACTIONS

LETTER FROM HERCULES

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background to and reasons for the Continuing Connected Transactions

LETTER FROM HERCULES

LETTER FROM HERCULES

c. The Isuzu Supply Agreement

d. The Company Supply Agreement

2. Terms of the Continuing Connected Transactions

LETTER FROM HERCULES

LETTER FROM HERCULES

b. The Isuzu Supply Agreement

c. The Company Supply Agreement

LETTER FROM HERCULES

LETTER FROM HERCULES

3. Basis of the Annual Caps

a. The 100P Series Technology Transfer Agreement

LETTER FROM HERCULES

LETTER FROM HERCULES

b. The Isuzu Supply Agreement

LETTER FROM HERCULES

(iii) The Company’s new product development strategy

LETTER FROM HERCULES

c. The Company Supply Agreement

LETTER FROM HERCULES

(ii) The expected increase in sales volume of Isuzu’s products

4. Conditions of the Continuing Connected Transactions

LETTER FROM HERCULES

Qingling Motors Co. Ltd Proxy Solicitation & Information Statement 2006