Qingling Motors Co. Ltd — Proxy Solicitation & Information Statement 2008

Aug 25, 2008

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

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A letter from the board of directors of the Company is set out on pages 3 to 7 of this circular and a letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on page 8 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 9 to 14 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 15 October 2008 at 10:00 a.m. is set out on pages 17 to 18 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 or any adjournment thereof, 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.

26 August 2008

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
Continuing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Reasons for and benefits of entering into The Chassis Supply Agreement . . . . . . . . . . . . . . .	5
Information on the Group and Qingling Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Listing Rules Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
EGM and action to be taken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Procedures to demand poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	8
Letter from Hercules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Appendix—General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17

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DEFINITIONS

In this circular, (otherwise than in the notice of the EGM), the following expressions shall have the meanings set out below unless the context requires otherwise:

• “Announcement” the announcement issued by the Company dated 5 August 2008, in relation to, amongst others, the Continuing Connected Transactions and the Annual Caps;

• “Annual Caps” the proposed ceiling for the aggregate annual value receivable by the Group under the Chassis Supply Agreement for each of the three years commencing from 5 August 2008;

• “associate(s)” has the meaning ascribed to it in the Listing Rules; “Board” the board of Directors; “Company” Qingling Motors Co. Ltd, a sino-foreign joint stock limited company incorporated in the PRC with limited liability and listed on the Stock Exchange;

• “connected person(s)” has the meaning as ascribed thereto under the Listing Rules; “Chassis Supply Agreement” the conditional agreement entered into between the Company and Qingling Group on 5 August 2008 relating to the supply of automobile chassis and related components by the Company to Qingling Group for each of the three years commencing from 5 August 2008;

• “Continued Connected the continuing connected transaction as contemplated under the Chassis Supply Transactions” Agreement;

• “controlling shareholder” has the meaning ascribed to it under the Listing Rules; “Director(s)” the director(s) of the Company; “Domestic Share(s)” domestic share(s) of RMB1 each in the share capital of the Company; “EGM” the extraordinary general meeting of the Company to be convened at Conference Hall, 1[st] Floor of Qingling Motors Co. Ltd. Office Building, 1 Xiexing Cun, Zhongliangshan, Jiuongpo District, Chongqing, the PRC on 15 October 2008 at 10:00 a.m.;

• “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. Song Committee” Xiaojiang, Mr. Long Tao, and Mr. Xu Bingjin who are the independent nonexecutive Directors;

• “Independent Shareholders” Shareholders other than Qingling Group and its associates;

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DEFINITIONS

“Isuzu” Isuzu Motors Limited, a Japanese corporation and the manufacturer of motor vehicles of the Isuzu brand; “Latest Practicable Date” 25 August 2008, 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; “PRC” the People’s Republic of China; “Qingling Group” Qingling Motors (Group) Co. Ltd, a state-owned limited liability company established in the PRC; “SFO” Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong); “Share(s)” the Domestic Shares and the H Shares; “Shareholders” the shareholders of the Company; “Stock Exchange” The Stock Exchange of Hong Kong Limited; “%” Percent; “HK$” Hong Kong dollars, the lawful currency of Hong Kong; and “RMB” Renminbi, the lawful currency of the PRC

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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 ( Chairman ) Mr. Gao Jianmin Mr. Naotoshi Tsutsumi Mr. Makoto Tanaka Mr. Liu Guangming Mr. Pan Yong Mr. Yue Huaqiang

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

Independent Non-executive Directors: Mr. Song Xiaojiang Mr. Long Tao Mr. Xu Bingjin

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

26 August 2008

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

1. INTRODUCTION

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

The purpose of this circular is to provide you with details of the Continuing Connected Transactions. The Independent Board Committee has been established to advise the Independent Shareholders as to whether the Continuing Connected Transactions are fair and reasonable and in the interests of the Shareholders as a whole. Hercules has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the terms of the Chassis Supply Agreement and the Annual Caps. A letter from the Independent Board Committee is set out on page 8 of this circular and a letter from Hercules is set out on pages 9 to 14 of this circular.

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LETTER FROM THE BOARD

2. CONTINUING CONNECTED TRANSACTIONS

The Chassis Supply Agreement

Date:

5 August 2008

Parties

• (i) The Company; and

• (ii) Qingling Group

Term

Three years commencing from 5 August 2008, subject to renewal if the parties agree and approved by the Stock Exchange and the Shareholders (if necessary).

Condition precedent

The Chassis Supply Agreement is subject to and conditional upon the approval by the Independent Shareholders with respect to the Chassis Supply Agreement, the transactions thereunder and the Annual Caps at the EGM to be held in accordance with the requirements of the Listing Rules.

Nature of transaction

The Chassis Supply Agreement is a master agreement which sets out the principles upon which detailed terms in relation to the supply of automobile chassis and related components by the Company to Qingling Group are to be determined.

Pursuant to the Chassis Supply Agreement, the Company will enter into definitive agreements with Qingling Group from time to time to provide for detailed terms of each single transaction in accordance with the principles set out in the Chassis 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 chassis and related components.

The Company and Qingling Group 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. Qingling Group 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 Qingling Group locates.

Basis of consideration

The consideration in respect of the transactions under the Chassis Supply Agreement is determined by reference to the market prices of the chassis and related components.

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LETTER FROM THE BOARD

The Annual Caps

The table below sets out the Annual Caps for the transactions under the Chassis Supply Agreement:-

			Annual Caps	(in RMB)
					Period from
		Year ending	Year ending	Year ending	1 January 2011 to
	31	December 2008	31 December 2009	31 December 2010	4 August 2011
The Chassis Supply Agreement		320,000,000	720,000,000	1,180,000,000	800,000,000

Basis of determining the Annual Caps

The Chassis Supply Agreement is a new agreement and there are no historical figures. The aforesaid projected Annual Caps for the transaction under the Chassis Supply Agreement is set by the Board by reference to the anticipated market demand in relation to the automobile chassis and related components.

3. REASONS FOR AND BENEFITS OF ENTERING INTO THE CHASSIS SUPPLY AGREEMENT

The Company has been selling chassis to manufacturers to produce modified vehicles. With a view to expand its chassis production business in the modified vehicles market and thus increasing its sale volume and market share, the Company entered into the Chassis Supply Agreement with Qingling Group, which has engaged in a new line of business to produce modified vehicles.

The Directors (including the independent non-executive Directors whose views are given subject to the consideration of the independent financial adviser’s recommendation) are of the view that the terms of the Chassis Supply Agreement, as arrived at after arm’s length negotiation between the Company and Qingling Group, are on normal commercial terms, are fair and reasonable and in the interests of the Group and the Shareholders as a whole.

4. INFORMATION ON THE GROUP AND QINGLING GROUP

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

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

There is absence of any non-competition undertaking signed between the Group and Qingling Group up to the Latest Practicable Date. The chassis as supplied by the Company to Qingling Group under the Chassis Supply Agreement are for the production of modified vehicles by Qingling Group, and the Company does not engage in modified vehicles production business as engaged by Qingling Group. Therefore, the Company considers that the entering into the Chassis Supply Agreement would not cause any competition between the Company and Qingling Group.

5. LISTING RULES IMPLICATIONS

As at the Latest Practicable Date, Qingling Group is a controlling shareholder of the Company holding approximately 50.10% of the entire issued share capital of the Company. Therefore, Qingling Group is a connected person of the Company under Chapter 14A of the Listing Rules. The transactions under the Chassis Supply Agreement, which are to be carried out in the ordinary and usual course of business of the Company and expected to continue and extend over a period of time constitute continuing connected transactions of the

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LETTER FROM THE BOARD

Company under the Listing Rules. As the applicable percentage ratios (other than the profit ratios) in respect of the above transactions 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 Chassis Supply Agreement, the transactions thereunder and the Annual Caps will be subject to reporting, announcement and approval by the Independent Shareholders, voting by way of poll, at the EGM under the requirements of the Listing Rules. Qingling Group and any of its associates will abstain from voting in relation to the resolution approving the Chassis Supply Agreement, the transactions thereunder and the Annual Caps at the EGM.

An Independent Board Committee has been established to advise the Independent Shareholders in relation to the terms of the Chassis Supply Agreement and the Annual Caps. Hercules has been appointed by the Company as its independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this respect.

6. EGM AND ACTION TO BE TAKEN

A notice convening the EGM is set out on pages 17 to 18 of this circular. The EGM will be held at Conference Hall, 1[st] Floor of Qingling Motors Co. Ltd. Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, PRC on 15 October 2008 at 10:00 a.m. or any adjournment thereof to consider and, if thought fit, approve the Continuing Connected Transactions and the Annual Caps. The voting on the resolutions to be put forward at the EGM will be conducted by way of poll in accordance with the requirements of the Listing Rules.

A proxy form for use in the EGM is enclosed with this circular. Whether or not you intend to attend the EGM or any adjournment thereof, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the legal address of the Company (in the case of proxy form of holder of Domestic Shares of the Company) or to the Company’s H Share Registrars, Hong Kong Registrars Limited at Room 1806 to 1807, 18[th] Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong (in the case of proxy form of holders of H Shares) as soon as possible and in any event not later than 24 hours before the time appointed for taking the poll or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting at the EGM or any adjournment thereof should you so wish.

The Shareholders who intend to attend the EGM 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 EGM 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 EGM and the date and venue of the EGM. The EGM may be convened after such notification has been published.

Shareholders who intend to attend the EGM shall complete and lodge the reply slip for attending the EGM at the Company’s legal address at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC on or before 25 September 2008. The reply slip may be delivered to the Company by hand, by post or by fax (at fax no. (86) 23-68830397).

7. PROCEDURES TO DEMAND POLL

Pursuant to Article 73 of the Articles of Association of the Company, 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;

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LETTER FROM THE BOARD

• (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.

8. RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee set out on page 8 of this circular which contains the recommendation from the Independent Board Committee to the Independent Shareholders; (ii) and letter from Hercules set out on pages 9 to 14 of this circular which contains the recommendation from Hercules to the Independent Board Committee and the Independent Shareholders in relation to the Chassis Supply Agreement and the Annual Caps 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 Chassis Supply Agreement and the transactions thereunder are on normal commercial terms and, together with the Annual Caps, are fair and reasonable and in the interests of the Group and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends that the Independent Shareholders should vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Continuing Connected Transactions and the Annual Caps.

9. GENERAL

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

By Order of the Board Qingling Motors Co. Ltd . 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. Song Xiaojiang Mr. Long Tao Mr. Xu Bingjin

26 August 2008

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the circular of the Company to the Shareholders dated 26 August 2008 (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 Continuing Connected Transactions and the Annual Caps are fair and reasonable so far as the Independent Shareholders are concerned.

We wish to draw your attention to the letter from Hercules, the independent financial adviser appointed, as set out on pages 9 to 14 of the Circular and the letter from the Board as set out on pages 3 to 7 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 Chassis Supply Agreement and the transactions thereunder are on normal commercial terms and, together with the Annual Caps, are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the Continuing Connected Transactions and the Annual Caps.

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

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LETTER FROM HERCULES

The following is the text of a letter of advice in connection with the Continuing Connected Transactions from Hercules to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular.

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1503 Ruttonjee House 11 Duddell Street Central Hong Kong 26 August 2008

To the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Continuing Connected Transactions, details of which are set out in the “Letter from the Board” contained in the circular dated 26 August 2008 to the Shareholders (the “Circular”), of which this letter forms part. Terms used in this letter have the same meanings as defined elsewhere in the Circular unless the context otherwise requires.

On 5 August 2008, the Company and Qingling Group entered into the Chassis Supply Agreement, pursuant to which, the Company agreed to supply certain automobile chassis and related components to Qingling Group in each of the three years commencing from 5 August 2008.

As at the Latest Practicable Date, Qingling Group is a controlling Shareholder holding approximately 50.10% of the issued share capital of the Company. Accordingly, Qingling Group is a connected person of the Company under Chapter 14A of the Listing Rules. The Continuing Connected Transactions, which are to be carried out in the ordinary and usual course of business of the Company and expected to continue and extend over a period of time, constitute continuing connected transactions of the Company under the Listing Rules. As the applicable percentage ratios (other than the profit ratios) calculated in accordance with Chapter 14A of the Listing Rules in respect of the Continuing Connected Transactions will be more than 2.5% and the annual consideration is expected to be higher than HK$10,000,000, the Chassis Supply Agreement, the Continuing Connected Transactions and the Annual Caps will be subject to reporting, announcement and approval by the Independent Shareholders, voting by way of poll, at the EGM under the requirements of the Listing Rules. Qingling Group and its associates will abstain from voting on the resolution approving the Chassis Supply Agreement, the Continuing Connected Transactions and the Annual Caps at the EGM.

The Independent Board Committee, comprising all the independent non-executive Directors, namely Mr. Song Xiaojiang, Mr. Xu Bingjin and Mr. Long Tao, has been established to advise the Independent Shareholders as to whether the Continuing Connected Transactions are conducted in the ordinary and usual course of business and the terms of which and the Annual Caps are on normal commercial terms, fair and reasonable and in the interests of the Company and its Shareholders as a whole. We, Hercules Capital Limited,

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LETTER FROM HERCULES

have been appointed to advise the Independent Board Committee and the Independent Shareholders in connection with the Continuing Connected Transactions, in particular as to whether they are conducted in the ordinary and usual course of business and the terms of which and the Annual Caps are on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and its Shareholders as a whole.

BASIS OF OUR OPINION

In formulating our opinion and recommendation, we have relied on the information and representations supplied, and the opinions expressed, by the Directors and management of the Company and have assumed that such information and statements, and representations made to us or referred to in the Circular are true, accurate and complete in all material respects as of the date hereof and will continue as such at the date of the EGM. The Directors have jointly and severally accepted full responsibility for the accuracy of the information contained in the Circular. We have no reasons to suspect that any material information has been withheld by the Directors or the management of the Company, or is misleading, untrue or inaccurate, and consider that they may be relied upon in formulating our opinion. The Directors confirmed that, having made all reasonable enquiries and to the best of their knowledge and belief, opinions expressed in the Circular have been arrived at after due and careful consideration and there are no material facts not contained in the Circular the omission of which would make any statement 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. We have not, however, for the purpose of this exercise, conducted any independent investigation or audit into the businesses or affairs or future prospects of the Group and the related subject of and party to the agreement of the Continuing Connected Transactions. Our opinion is necessarily based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date.

PRINCIPAL FACTORS AND REASONS CONSIDERED

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

(I) Background and reasons for the Continuing Connected Transactions

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

Qingling Group, a controlling Shareholder holding approximately 50.10% of the issued share capital of the Company, is principally engaged in the manufacturing and sale of and the development of new products in relation to motor vehicles and their spare parts and accessories, and the provision of technical advisory services.

The Company has been selling chassis to manufacturers of modified vehicles and Qingling Group has recently engaged in a new line of business to produce modified vehicles. In order to further expand its chassis production business in the modified vehicle market and to increase its sales volume and market share, the Company entered into the Chassis Supply Agreement with Qingling Group to supply chassis to Qingling Group.

The chassis to be supplied by the Company to Qingling Group under the Chassis Supply Agreement are for production of modified vehicles by Qingling Group and the Company is not engage in modified vehicle production business as engaged by Qingling Group. Therefore, the Directors consider that the entering into of the Chassis Supply Agreement will not cause any competition between the Group and Qingling Group and no non-competition undertakings have been signed between the Group and Qingling Group as at the Latest Practicable Date. Given that the Company is specialized in the production and sale of chassis and vehicles and

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LETTER FROM HERCULES

the supply of chassis to Qingling Group can increase the Company’s sales volume on automobile chassis and related components and its market share, we consider that it is reasonable for the Company to supply the chassis and related components to Qingling Group and the Continuing Connected Transactions are normal commercial transactions for the Group to be conducted in the ordinary and usual course of business.

(II) Terms of the Continuing Connected Transactions

Pursuant to the Chassis Supply Agreement, the Company agreed to supply certain automobile chassis and related components to Qingling Group with a term of three years, commencing from 5 August 2008. The Chassis Supply Agreement is renewable subject to agreement by the contracting parties and approval by the Stock Exchange and the Shareholders, if necessary.

The Chassis Supply Agreement is a master agreement which sets out the principles upon which detailed terms in relation to the supply of automobile chassis and related components are to be determined between the Company and Qingling Group. Under the Chassis Supply Agreement, the parties shall enter into definitive agreements from time to time for detailed terms of each single transaction in accordance with the principles set out in the Chassis Supply Agreement. Such detailed terms include, but not limited to, 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 chassis and related components. The Company and Qingling Group agreed that such detailed terms shall be on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms fair and reasonable to the Company. Qingling Group has also undertaken that the terms offered to the Company shall be no less favorable than terms offered to any independent third party in the market where Qingling Group locates. In the event that Qingling Group ceased to be a connected person of the Company, and the transactions thereunder ceased to be connected transactions under the Listing Rules, Qingling Group may terminate the Chassis Supply Agreement by giving written notice to the Company.

As advised by the management of the Company, the selling prices of the automobile chassis and related components for Qingling Group will be the same as those for other third party customers of the Group. Up to the Latest Practicable Date, the Company has not sold any automobile chassis or related components to Qingling Group yet and thus we are unable to compare the terms of the proposed Continuing Connected Transactions with those of the independent customers. However, we have reviewed the calculation basis of the Annual Caps and noted that the projected selling prices of chassis for Qingling Group are the same as those for the independent third parties. Having considered that both the Company and Qingling Group have agreed that the actual selling price of the products to be supplied shall be on normal commercial terms and the terms of the Continuing Connected Transactions shall be no less favorable to those for any other independent third party in the market where Qingling Group locates, we consider that the terms of the Chassis Supply Agreement are in normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned.

(III) Annual Caps for the Continuing Connected Transactions

The Annual Caps in respect of the Chassis Supply Agreement are set out below:

	Annual Caps
	(RMB’ million)
For the period from 5 August 2008 to 31 December 2008	320
For the year ending 31 December 2009	720
For the year ending 31 December 2010	1,180
For the period from 1 January 2011 to 4 August 2011	800
Compound annual growth rate Note	19.9%

Note: Calculated based on annualized figures for 2008 and 2011.

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LETTER FROM HERCULES

As discussed with the management of the Company, the Annual Caps of the Chassis Supply Agreement were determined by the Company with reference to the anticipated market demand of automobile chassis and related components in the market for the four years ending 31 December 2011.

To assess whether the basis of the Annual Caps are fair and reasonable, we have considered the following factors:

(i) Outlook of automobile market in the PRC

Based on the statistics released by the National Bureau of Statistics of China, the gross domestic product (“GDP”) of the PRC for the 3 months ended 31 March 2008 was approximately RMB6,149.1 billion, representing an increase of approximately 10.6% over the same period of last year. For the three months ended 31 March 2008, the per capita disposable income of urban population was approximately RMB4,385.59, representing an increase of 11.5% over the same period of the previous year. According to the OECD Economic Outlook 82 issued in December 2007, the Organization for Economic Cooperation and Development predicted that the growth rate of the real GDP of the PRC would be 10.7% in 2008 and 10.1% in 2009. The rapid growth in GDP is reflected in the rising standard of living in the PRC and in the increasing demand among the Chinese population for consumer and durable goods, including automobiles.

According to the China Association of Automobile Manufacturers, the auto production in the PRC has grown continuously from 2 million units in 2000 to 8.88 million units in 2007, representing an average annual growth rate of over 20%. The growth rate of 2007 even reached 22% as compared to that of 2006. The auto sales volume in the PRC also reported an increase of 22% from 7.22 million units in 2006 to 8.79 million units in 2007. However, due to the high inflation rate and austerity measures implemented by the PRC Government, rise in material costs and the severe snow disaster in the PRC in early 2008, the market generally expects the growth in the production and sales of automobile in the PRC will slow down slightly in 2008 with an annual growth rate of approximately 12.6%, which is approximately 7%-10% lower than that of 2007. Based on the latest information released by the China Association of Automobile Manufacturers, the auto production and sales volume was 5.20 million units and 5.18 million units for the six month ended 30 June 2008 respectively, representing an increase of 16.7% and 18.5% respectively as compared to the last corresponding period. Despite a lower growth rate, the market maintains a positive view on the development of auto industry in the PRC and expects the number of auto production to reach 10 million units in 2008 and 11 million units by end of 2010.

The China Association of Automobile Manufacturers also reported that the production volume and sales volume of automobile chassis for modified vehicles for the year ended 31 December 2007 were approximately 460,000 units and 450,000 units respectively, representing an increase of 32.8% and 32.0% respectively as compared to the previous year. It is expected that both the production and sales volume of chassis for modified vehicles would have a 20% increase in 2008 and reach the level of approximately 550,000 units. Given the continuous economic growth of the PRC, the management of the Company expects and we concur with its view that, in the absence of any unforeseeable adverse factors that may have a substantial negative impact on the economy of the PRC, the demand for automobiles as well as automobile components in the PRC will continue to increase and the market outlook of the automobile industry in the PRC shall remain positive in the foreseeable future.

(ii) Projected sales volume

We have reviewed and discussed with the management of the Company in relation to the basis and assumptions made in determining the Annual Caps and noted that the compound annual growth rate of the projected sales volume is approximately 18.2%, which is in line with the historical growth rate and the market expectation on the chassis for modified vehicles of approximately 20% as outlined in the previous section.

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LETTER FROM HERCULES

We also noted that the annual cap for 2009 is 6% lower than the annualized annual cap of 2008 and there is a 64% growth in the annual cap of 2010 as compared with that of 2009. We enquired the management of the Company about the reasons for such fluctuation in the Annual Caps and were advised that the demand of chassis for modified vehicles is normally higher in the second half of the year and lower in the first half of the year. Therefore, the annualized figure for 2008 is relatively high. Accordingly, there will be a negative growth rate in annual cap in 2009 when compared with the annualized figure for 2008. In addition, Qingling Group expects its modified vehicle business to grow substantially in 2010 after one year’s development in the market. Therefore, the demand on chassis is expected to grow substantially in line with the anticipated growth in Qingling Group’s sales of modified vehicles.

In view of the above and having considered the general market outlook of the automobile industry, in particular the market of chassis for modified vehicles, that supports the anticipated increase in demand of automobile chassis and related components, we consider that the Annual Caps proposed by the Directors are fair and reasonable and in the interests of the Company and its Shareholders as a whole.

(IV) Annual review of the Continuing Connected Transactions

The Company will comply with Rule 14A.37 to Rule 14A.41 of the Listing Rules during the term of the Chassis Supply Agreement, in particular:

• (a) the Annual Caps for the Continuing Connected Transactions shall not be exceeded;

• (b) each year the independent non-executive Directors will review the Continuing Connected Transactions and confirm in the annual report of the Company that such transactions have been entered into:

• (i) in the ordinary and usual course of business of the Company;

• (ii) either on normal commercial terms or, if there are no sufficient comparable transactions to judge whether they are on normal commercial terms, on terms no less favourable to the Company than terms available to or from independent third parties; and

• (iii) in accordance with the relevant agreement governing them on terms;

• (c) each year the auditors of the Company must provide a letter to the Board (with a copy of which provided to the Stock Exchange at least 10 business days prior to the bulk printing of the Company’s annual report), confirming that the Continuing Connected Transactions:

• (i) have received the approval of the Board;

• (ii) have been entered into in accordance with the pricing policy of the Group;

• (iii) have been entered into in accordance with the terms of the Chassis Supply Agreement; and

• (iv) have not exceeded the Annual Caps as disclosed;

• (d) the Board must state in the annual report of the Company whether its auditors have confirmed the matters as referred to in paragraph in (c) above; and

• (e) upon any variation or renewal of the Chassis Supply Agreement, the Company will comply in full with all applicable reporting, disclosure and independent shareholders’ approval requirements of Chapter 14A of the Listing Rules.

Given the above, we are of the view that the interests of the Company and the Shareholders under the Continuing Connected Transactions will be properly safeguarded.

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LETTER FROM HERCULES

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 Annual Caps thereunder) are fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and its Shareholders as a whole. We therefore recommend the Independent Board Committee to advise the Independent Shareholders, as well as the Independent Shareholders, to vote in favour of the resolution to approve the Continuing Connected Transactions at the upcoming EGM.

Yours faithfully,

For and on behalf of

Hercules Capital Limited

Louis Koo Amilia Tsang Managing Director Director

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the 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 facts the omission of which would make any statement in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Directors’ interests and short positions in the Shares

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

(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 chief executive of the Company, as at the Latest Practicable Date, the following persons or corporations have 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 is, 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:

Long positions in the Shares:

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

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, nor the chief executive of the Company is aware of any other person or corporation who has 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 is, 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.

3. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors has entered, or proposed to enter, into any 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).

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GENERAL INFORMATION

APPENDIX

4. COMPETING INTEREST

As at the Latest Practicable Date, so far as the Directors are aware of, none of the Directors nor their respective associates had any interests which competed or may compete with the Company’s business.

5. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are of the view that there was no material adverse change in the financial and trading position of the Company since 31 December 2007, being the date to which the latest published audited consolidated financial statements of the Group were made up.

6. INTERESTS IN ASSETS AND/OR CONTRACTS AND OTHER INTERESTS

As at the Latest Practicable Date, none of the Directors has any direct or indirect interest in any asset which have been acquired or disposed of by or leased to, or which are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2007, being the date to which the latest published audited consolidated financial statements of the Group were made up.

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.

7. EXPERT AND CONSENT

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 beneficially or non-beneficially in any Shares or shares 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 does not have any direct or indirect interest in any asset which had been, since 31 December 2007, 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 26 August 2008 and reference to its name in the form and context in which they respectively appear.

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copy of the Chassis Supply Agreement will be available for inspection at the offices of Messrs. Woo Kwan Lee & Lo at 26[th] Floor, Jardine House, 1 Connaught Place, Central, Hong Kong during normal business hours up to and including 15 October 2008:

9. GENERAL

The English text of this circular shall prevail over the Chinese text in the event of inconsistency.

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NOTICE OF EGM

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

(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, 1[st] Floor of Qingling Motors Co. Ltd. Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the People’s Republic of China on 15 October 2008 at 10:00 a.m. for the purpose of considering and, if thought fit, passing (with or without modifications) the following resolution of the Company as ordinary resolution:

ORDINARY RESOLUTION

“ THAT :-

• (a) the conditional agreement dated 5 August 2008 entered into between Qingling Group and the Company relating to the supply of automobile chassis and related components by the Company to Qingling Group (the “ Chassis Supply Agreement ”, a copy of which marked “A” has been produced to the meeting and signed by the Chairman of the meeting for the purpose of identification) and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified; and

• (b) the relevant annual caps for each of the three years ending 31 December 2010 and the period from 1 January 2011 to 4 August 2011 be and are hereby approved;

and the directors of the Company (the “Directors”) be and are hereby authorised on behalf of the Company to sign, seal, execute, all such other documents and agreements and to do all such acts and things as they may in their discretion consider necessary or desirable or expedient to implement and/or to give effect to the Chassis Supply Agreement, the annual caps and the transactions thereby contemplated. ”

By Order of the Board Qingling Motors Co. Ltd. Wu Nianqing Company Secretary

Chongqing, PRC, 26 August 2008

Legal Address: 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, The People’s Republic of China

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

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NOTICE OF EGM

Notes:

• (1) 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.

• (2) 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 authority 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 Rooms 1806-1807, 18[th] 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.

• (3) The register of shareholders of the Company will be closed from 16 September 2008 to 15 October 2008 (both days inclusive), during which period no transfer of shares will be registered. In order to determine the identity of the shareholders whose are entitled to attend and vote the extraordinary general meeting, holders of H Shares whose transfers have not been registered shall deposit the transfer documents together with the relevant share certificates, at the Company’s H Share Registrars, Hong Kong Registrars Limited, at Shops 1712-16, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, not later than 4:30 p.m. on Friday, 12 September 2008.

• (4) Shareholders whose names appear on the register of shareholders of the Company on 15 October 2008 are entitled to attend and vote at the meeting.

• (5) Shareholders or their proxies shall produce their identity documents when attending the meeting.

• (6) Shareholders who intend to attend the meeting shall complete and lodge the reply slip for attending the meeting at the legal address of the Company at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, The People’s Republic of China on or before 25 September 2008. The reply slip may be delivered to the Company by hand, by post, by cable or by fax (at fax no.: (86) 23-68830397).

• (7) 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.

• (8) The ordinary resolution as set out above will be determined by way of poll.

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. Makoto Tanaka, Mr. Naotoshi Tsutsumi, Mr. Liu Guangming, Mr. Pan Yong, Mr. Yue Huaqiang are executive directors of the Company and Mr. Song Xiaojiang, Mr. Long Tao, and Mr. Xu Bingjin are independent non-executive directors of the Company.

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