Qingling Motors Co. Ltd - Proxy Solicitation & Information Statement 2018

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 licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

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

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

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

(Stock Code: 1122)

(1) DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTION;

(2) PROPOSED CHANGE OF THE BUSINESS SCOPE OF THE COMPANY;

(3) PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION; AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

Independent financial adviser to the Independent Board Committee and the Independent Shareholders

A letter from the Board is set out on pages 1 to 21 of this circular. A letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 22 to 23 of this circular.

A letter from TC Capital International Limited, the Independent Financial Adviser, containing its recommendations to the Independent Board Committee and the Independent Shareholders is set out on pages 24 to 39 of this circular.

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “ EGM ”) of Qingling Motors Co. Ltd (the “ Company ”) will be held at New Conference Hall, 1st Floor of Company’s Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the People’s Republic of China (the “ PRC ”) on Wednesday, 12 December 2018 at 10:00 a.m. for the purpose of the related matters set out in the notice of EGM. Whether or not you are able to attend the EGM, you are requested to complete and return the enclosed reply slip and proxy form in accordance with the instructions printed thereon. The reply slip should be returned to the legal address of the Company at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC by hand, by post, by cable or by fax (at fax no. (86)23-68830397) on or before Thursday, 22 November 2018. The proxy form should be returned to the legal address of the Company at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC (in the case of proxy form of holders of Domestic Shares) or the Company’s H Share Registrars, Hong Kong Registrars Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (in the case of proxy form of holders of H Shares) in any event not less than 24 hours before the time of the EGM. Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

This circular and the enclosed proxy form of holders of H Shares for use at the EGM and reply slip have been published on the website of The Stock Exchange of Hong Kong Limited (www.hkexnews.hk) and the website of the Company (www.qingling.com.cn).

26 October 2018

CONTENTS

	Pages
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2
I. The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
II. Requirements under the Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
III. Independent Shareholders’ Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
IV. General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
V. Proposed Change of the Business Scope of the Company . . . . . . . . . . . . . . . . . . . . . .	18
VI. Proposed Amendments to the Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
VII. The EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19
VIII. Voting by Poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
IX. Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Letter from the Independent Board Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Letter from the Independent Financial Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Appendix – General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	A-1
Notice of Extraordinary General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

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

“Articles”	the articles of association of the Company as may be amended
	from time to time
“associate(s)”	has the meaning ascribed to it under the Listing Rules
“Board”	the board of Directors of the Company
“Company”	慶鈴汽車股份有限公司(Qingling Motors Co. Ltd), a Sino-foreign
	joint venture joint stock limited company incorporated in the PRC
	with limited liability
“connected person(s)”	has the meaning ascribed to it under the Listing Rules
“controlling shareholder(s)”	has the meaning ascribed to it under the Listing Rules
“Directors”	the director(s) of the Company
“Domestic Share(s)”	domestic share(s) of nominal value of RMB1.00 each in the
	ordinary share capital of the Company
“EGM”	an extraordinary general meeting of the Company to be convened
	to consider, among other things, the ordinary resolutions to be
	proposed to approve the Merger Agreement, the JV Agreement
	and the transactions contemplated thereunder and the special
	resolutions to be proposed to approve the Proposed Change to
	Business Scope
“Group”	the Company and its subsidiaries from time to time
“H Share(s)”	overseas listed foreign shares in the ordinary share capital of the
	Company, with a nominal value of RMB1.00 each, which are
	listed on the Stock Exchange and traded in Hong Kong dollars
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Independent Board Committee”	an independent committee of the Board comprising all the
	independent non-executive Directors (namely, Mr. LONG Tao,
	Mr. SONG Xiaojiang, Mr. LIU Tianni and Mr. LIU Erh Fei)
	established for the purpose of reviewing the Merger Agreement,
	the JV Agreement and the transactions contemplated thereunder

– ii –

DEFINITIONS

“Independent Financial Adviser”
TC Capital International Limited, a licensed corporation under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the Securities and Futures Ordinance, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders in relation to the Merger Agreement, the JV Agreement and the transactions contemplated thereunder
“Independent Shareholders” Shareholders other than the connected person(s) who is or are interested in the Merger Agreement, the JV Agreement and the transactions contemplated thereunder
“Independent Valuer” 重慶天健資產評估土地房地產估價有限公司 ( P a n - C h i n a (Chongqing) Land Real Estate. Appraisal. Co., Ltd)
“IQAC”
五十鈴慶鈴（重慶）汽車零部件有限公司 (I s u z u Q i n g l i n g (Chongqing) Autoparts Co., Ltd), a Sino-foreign joint venture company established in the PRC and owned as to 49% and 51% by Qingling Group and Isuzu, respectively
“IQAC Valuation Report”
the valuation report dated 31 May 2018 prepared by the Independent Valuer in relation to IQAC with 31 December 2017 as the valuation benchmark date
“Isuzu” Isuzu Motors Limited, a company incorporated in Japan and listed on the Tokyo Stock Exchange and a substantial shareholder of the Company
“JV Agreement”

the joint venture agreement entered into among the Company, Qingling Group and Isuzu in relation to QIEC on 2 October 2018

“Latest Practicable Date”
23 October 2018, 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

“Merger” the merger by absorption of IQAC by QIEC

“Merger Agreement” the merger agreement entered into between QIEC and IQAC in relation to the Merger on 2 October 2018

– iii –

DEFINITIONS

“percentage ratios” the percentage ratios under Rule 14.07 of the Listing Rules, other than the equity capital ratio

“PRC” the People’s Republic of China and for the purpose of this circular, excludes Hong Kong, Macau Special Administrative Region of the PRC and Taiwan
“Priority Supply Memorandum” the priority supply memorandum entered into among the Company, Qingling Group and Isuzu in relation to the priority supply by QIEC to the Company on 2 October 2018
“Proposed Change to Business Scope” the proposed change to the business scope of the Company and the relevant amendments to the Articles
“QIEC” 慶鈴五十鈴（重慶）發動機有限公司 (Qingling Isuzu (Chongqing) Engine Co., Ltd.), a Sino-foreign joint venture company established in the PRC and owned as to 50% by each of the Company and Isuzu, respectively
“QIEC Valuation Report” the valuation report dated 31 May 2018 prepared by the Independent Valuer in relation to QIEC with 31 December 2017 as the valuation benchmark date
“Qingling Group” 慶鈴汽車（集團）有限公司 (Qingling Motors (Group) Company Limited), a state-owned limited liability company established in the PRC and a controlling shareholder of the Company
“Share(s)” the Domestic Shares and the H Shares of the Company
“Shareholder(s)” the holder(s) of the shares of the Company
“Stock Exchange” The Stock Exchange of Hong Kong Limited

“substantial shareholder(s)” has the meaning ascribed to it under the Listing Rules “RMB” Renminbi, the lawful currency of the PRC “USD” United States dollars, the lawful currency of the United States of America “%” per cent

– iv –

LETTER FROM THE BOARD

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

(Stock Code: 1122)

Executive Directors:

Mr. LUO Yuguang (Chairman) Mr. Shuichi HAYASHI (Vice Chairman and General Manager) Mr. Keiichiro MAEGAKI Mr. Masanori OTA Mr. LI Juxing Mr. XU Song

Independent Non-executive Directors:

Mr. LONG Tao Mr. SONG Xiaojiang Mr. LIU Tianni Mr. LIU Erh Fei

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

Principal Place of Business in Hong Kong: Office 1601, 16/F, LHT Tower 31 Queen’s Road Central Hong Kong

26 October 2018

To the Shareholders

Dear Sir or Madam,

(1) DISCLOSEABLE TRANSACTION AND

CONNECTED TRANSACTION;

(2) PROPOSED CHANGE OF THE BUSINESS SCOPE OF THE COMPANY;

(3) PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION;

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Reference is made to the announcement of the Company dated 2 October 2018 in respect of the Merger. Pursuant to the requirements under the Listing Rules, the Company will seek the approval of the Independent Shareholders in relation to, inter alia, the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

– 1 –

LETTER FROM THE BOARD

Reference is also made to the announcement of the Company dated 26 October 2018 in relation to the Proposed Change to Business Scope.

The purpose of this circular is to provide you with details of the Merger. The Independent Board Committee has been formed to advise the Independent Shareholders as to whether the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote on the resolutions to be proposed at the EGM, taking into account the recommendations of the Independent Financial Adviser. TC Capital International Limited has been appointed as the independent financial adviser to give recommendations to the Independent Board Committee and the Independent Shareholders as to, among other things, whether the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote on the resolutions to be proposed at the EGM. A letter from the Independent Board Committee is set out on pages 22 to 23 of this circular and a letter from the Independent Financial Adviser is set out on pages 24 to 39 of this circular. The purpose of this circular is also to provide you with all the information regarding the Proposed Change to Business Scope together with the notice of EGM at which resolutions will be proposed to consider and, if thought fit, to approve the Merger Agreement, the JV Agreement and the transactions contemplated thereunder as well as the Proposed Change to Business Scope.

BACKGROUND

The Board is pleased to announce that, on 18 September 2018, the Company convened a Board meeting at which the proposal regarding the Merger was considered and approved. QIEC and IQAC entered into the Merger Agreement on 2 October 2018 (after trading hours), pursuant to which, QIEC will absorb and merge with IQAC, and QIEC will be the surviving company upon completion of the Merger and assume all the assets, liabilities, operations, qualifications, personnel, contracts and all other rights and obligations of IQAC and IQAC will be dissolved and deregistered.

Further, on 2 October 2018 (after trading hours), the Company, Qingling Group and Isuzu also entered into (i) the JV Agreement to set out their respective rights and obligations in QIEC in accordance with the Merger; and (ii) the Priority Supply Memorandum to set out the agreement in relation to the priority supply of goods by QIEC to the Company.

– 2 –

LETTER FROM THE BOARD

I. THE MERGER

The Merger Agreement

Principal terms of the Merger Agreement are set out as follows:

Date: 2 October 2018 (after trading hours)

Parties: (1) QIEC; and

(2) IQAC.

Merger: QIEC shall absorb and merge with IQAC in the way stipulated under the Company Law of the PRC.

QIEC will be the surviving company upon completion of the Merger, and continue to use the name Qingling Isuzu (Chongqing) Engine Co., Ltd. (慶鈴五十鈴（重慶）發動機有限公司) and assume all the assets, liabilities, operations, qualifications, personnel, contracts and all other rights and obligations of IQAC and IQAC will be dissolved and deregistered.

Shareholding

structure:

As at the Latest Practicable Date, QIEC is owned as to 50% by each of the Company and Isuzu and IQAC is owned as to 49% and 51% by Qingling Group and Isuzu. Qingling Group and Isuzu hold approximately 50.10% and 20.00% interests in the Company, respectively.

As at the Latest Practicable Date, the shareholding structure of QIEC and IQAC is as shown in the figure below:

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

51%
Qingling Group Isuzu
49%
50.10% 20.00%
IQAC The Company
50% 50%
QIEC
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– 3 –

LETTER FROM THE BOARD

Upon completion of the Merger, the registered capital of QIEC will be the sum of the registered capital of QIEC and IQAC prior to the Merger, i.e. USD324,260,000. The total investment will be USD486,040,000.

The proportion of the capital contribution by the Company, Qingling Group and Isuzu to QIEC upon completion of the Merger are determined with reference to their respective capital contribution to QIEC and IQAC before the Merger and the net asset values of QIEC and IQAC as valued by the Independent Valuer with 31 December 2017 as the valuation benchmark date.

According to the QIEC Valuation Report, the shareholders’ equity of QIEC as at 31 December 2017 was RMB884,919,700, and the capital contribution of the Company and Isuzu in QIEC was 50% respectively. Therefore each of their shareholder equity was RMB442,459,850.

According to the IQAC Valuation Report, the shareholders’ equity of IQAC as at 31 December 2017 was RMB1,404,035,500, and the capital contribution of Qingling Group and Isuzu in IQAC was 49% and 51% respectively. Therefore each of their shareholder equity was RMB687,977,395 and RMB716,058,105 respectively.

Thus, the capital contribution proportion of each of the parties in QIEC upon the completion of the Merger is as shown in the table below:

	Appraised		Capital
	Shareholders’	Capital	Contribution
	Equity	Contribution	Percentage
	(RMB)	(USD)
Isuzu	1,158,517,955	164,107,986	50.61%
Qingling Group	687,977,395	97,472,556	30.06%
The Company	442,459,850	62,679,458	19.33%
Total	2,288,955,200	324,260,000	100%

– 4 –

LETTER FROM THE BOARD

The shareholding structure of QIEC upon completion of the Merger is as shown in the figure below:

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

50.61%
Qingling Group Isuzu
50.10% 20.00%
30.06%
The Company
19.33%
QIEC
----- End of picture text -----

Prior to the Merger, QIEC is a company jointly controlled by the Company and Isuzu where each of them owns 50% equity interest. The financial results of QIEC is not consolidated into the Company’s consolidated financial statements, and only investment income is recorded. After the Merger, QIEC will be controlled by Isuzu and it remains the case that only investment income will be recorded by the Company. As such there is no change on the accounting treatment.

The Company wishes to emphasize that although the Company’s equity interest in QIEC would decrease after the Merger, its controlling power over it would not materially decrease compared to that before the Merger. In order to protect the interest of the Company, it has been specified in the JV Agreement that certain matters of QIEC require consensus of all directors present at the board meeting including but not limited to approval of the annual final account and accounting report; and the determination of annual profit distribution and loss recovery proposal; issuance of corporate bonds and other methods of financing; and decisions on the transfer and receipt of material assets and provision of financial guarantees. Please refer to the section titled “the JV Agreement” below for details.

Conditions precedent: The completion of the Merger is subject to satisfaction of all the following conditions:

the respective board of directors of QIEC and IQAC having approved the Merger Agreement and the transactions contemplated thereunder;

– 5 –

LETTER FROM THE BOARD

all compliance requirements including creditor notification and announcement procedures having been satisfied;
the Merger Agreement and the transactions contemplated thereunder having been approved by the Independent Shareholders at the general meeting of the Company;
all necessary consents, filings and approvals for the Merger having been obtained from or made with the relevant PRC government agencies or regulators, and there having been no orders, regulations, rules or decisions made, promulgated or adopted by any PRC government agencies or regulators to forbid or restrict the Merger; and
the relevant procedures for the business change in relation to the Merger Agreement and the transactions contemplated thereunder having been completed after fulfilment of the above conditions.

As at the date of dispatch of this circular, conditions precedent 1 and 4 mentioned above have been fulfilled. None of the conditions precedent are waivable.

The assumptions and methods of valuations

According to the QIEC Valuation Report and the IQAC Valuation Report, certain assumptions have been made in valuing QIEC and IQAC, including but not limited to (i) the appraised assets are already in the process of transaction; (ii) there is an open market; (iii) the appraised assets can be continuously used; (iv) there is continuity in the business operation; (v) there is no material change in the government policy, economy, interest rate, exchange rate, tax rate in the PRC; (vi) there is continuity in the adoption of the business scope, management method and the accounting standard; (vii) the Company is capable of repaying its liabilities and will comply with all relevant laws and regulations; and (viii) there is no force majeure and unpredictable factors which may cause material adverse effect to the Company.

According to the QIEC Valuation Report and the IQAC Valuation Report, methods of valuation of general corporate value basically include (a) the income approach; (b) the market approach; and (c) the cost approach (also known as the asset-based approach). When asset valuers carry out their valuation of corporate value, they should analyze the suitability of the income approach, the market approach and the asset-based approach according to the valuation purpose, valuation target, value type and information collection to determine the valuation method.

– 6 –

LETTER FROM THE BOARD

The income approach appraises the value of the target by discounting or capitalizing its expected income. Since the historical revenue of QIEC fluctuated and the majority of the sales and purchases of QIEC were from related parties; while the historical gross profit ratios of IQAC fluctuated and the majority of the sales and purchases of IQAC were from related parties, the Independent Valuer did not adopt the income approach to appraise their value by their future income.

The market approach appraises the value of the target by comparing with comparable listed companies or comparable cases of transactions. Due to the limited comparable transactions and the comparable listed companies having low comparability in terms of revenue and gross profit level, the Independent Valuer considered that it was not appropriate to use the market approach in the valuation of QIEC and IQAC.

The asset-based approach provides an indication of value based on the principle that an informed buyer would pay no more than the cost of producing the same or a substitute asset with equal utility as the subject asset. According to the QIEC Valuation Report and the IQAC Valuation Report, the Company understands that the asset-based approach represents an asset-based method of determining the value of the assessed assets by considering the fair value of QIEC and IQAC by deducting the fair value of liabilities from the fair value of various assets. Since there is sufficient information for the Independent Valuer to value QIEC and IQAC, the Independent Valuer has considered the asset-based approach as the most appropriate valuation approach for the valuations of QIEC and IQAC.

The JV Agreement

Principal terms of the JV Agreement are set out as follows:

Date: 2 October 2018 (after trading hours) Parties: (1) The Company; (2) Qingling Group; and (3) Isuzu. Registered capital, Similar in substance to the terms under the section regarding “Shareholding total investment structure” of the “Merger Agreement” as set forth above. and proportion of capital contribution:

– 7 –

LETTER FROM THE BOARD

Products:

(1) 4Z, 4JB1, 4K, 4H/6H, 6U/6W engines and their parts; and
(2) including the import of 4JZ1 engines in preparation and engines and their parts required in the market in the future.

Business scope:

(1) technological innovation, testing, manufacturing, sale and provision of after-sale services required by the market in respect of auto engines and engineering engines and the parts thereof;
(2) localisation development of engines and the relevant parts thereof;
(3) import and domestic procurement in PRC of engine and auto parts and engine parts;
(4) export of engine and auto parts and engine parts to Isuzu and third parties designated by Isuzu;
(5) export and sale of Isuzu-branded commercial vehicles to Isuzu and third parties designated by Isuzu; and
(6) international freight forwarding agency (excluding international express delivery).

Composition of The board shall consist of seven directors, of which 4, 2 and 1 shall be the board of designated by Isuzu, Qingling Group and the Company, respectively. directors: In principle, Isuzu shall appoint one of its designated directors as the chairman and the position of vice chairman shall be filled by the Company’s designated director. Nonetheless, where Isuzu deems necessary, it can appoint one of the directors designated by Qingling Group or the Company to serve as the chairman and appoint one of its designated directors as the vice chairman.

– 8 –

LETTER FROM THE BOARD

Matters requiring

consensus of all directors present at the board meeting:

(1) amendments to the articles of association;
(2) suspension, termination, dissolution or liquidation;
(3) increase or decrease of registered capital and total investment;
(4) merger and division;
(5) appointment and removal of the general manager and the deputy general manager and the determination of their terms of reference and remuneration;
(6) decisions on investment projects over RMB3 million;
(7) approval of the prices of products to be sold by QIEC to the Company and the prices of parts to be supplied by the Company to QIEC;
(8) approval of the annual final account and accounting report; and the determination of annual profit distribution and loss recovery proposal;
(9) issuance of corporate bonds and other methods of financing; and
(10) decisions on the transfer and receipt of material assets and provision of financial guarantees.

Pre-emptive right:

Where any party proposes to transfer all or part of its shareholding to a third party, it shall give a prior written notice containing transfer terms such as the shareholding to be transferred, the transferee, transfer price and payment terms to all the other parties and obtain their written approval prior to the transfer. The latter are entitled to acquire the shareholding to be transferred pre-emptively based on the transfer terms as set forth in the notice, instead of issuing a written approval; where any party replies not to exercise its preemptive right within 30 days from the date of receipt of the notice or does not reply in 30 days, it shall be deemed to give up the above pre-emptive right and agree on the transfer of the relevant shareholding.

– 9 –

LETTER FROM THE BOARD

The Priority Supply Memorandum

Principal terms of the Priority Supply Memorandum are set out as follows:

Date:

2 October 2018 (after trading hours)

Parties: (1) The Company;

(2) Qingling Group; and
(3) Isuzu.
Priority supply: (1) the Company, Qingling Group and Isuzu agreed to initiate the negotiation between QIEC and the Company in relation to the method and terms of the provision of products manufactured by QIEC to the Company after the completion of the Merger, including the terms of the priority supply;
(2) the concrete supply terms as stated above shall be effective after the relevant agreement (“ Priority Supply Formal Agreement ”) is entered into between QIEC and the Company after negotiation and within 90 days after the completion of the Merger; and
(3) prior to the execution of the relevant agreement as stated in (2) above, QIEC shall continue to adopt the existing supply method between QIEC and the Company in terms of the provision of engines by QIEC to the Company.

Upon the completion of the Merger, the supply of engines by QIEC to the Company shall continue to be carried out according to the existing agreement between them. Please refer to the section titled “Existing Continuing Connected Transactions with QIEC and IQAC” below for more details.

The Company expects that the Priority Supply Formal Agreement shall only involve the relevant terms in relation to the priority given to the Company by QIEC, and therefore the Priority Supply Memorandum and the Priority Supply Formal Agreement should not constitute connected transaction or continuing connected transaction of the Company, or constitute material change to the terms of the existing continuing connected transaction.

In the event that any of the agreements entered into between QIEC and the Company constitutes connected transaction in the future, the Company shall comply with the reporting, announcement and independent shareholders’ approval (if applicable) requirements under Chapter 14A of the Listing Rules.

– 10 –

LETTER FROM THE BOARD

EXISTING CONTINUING CONNECTED TRANSACTIONS WITH QIEC AND IQAC

Reference is made to the Company’s announcement dated 22 December 2016 and/or circular dated 10 March 2017 in relation to, among other things, certain agreements with QIEC and/or IQAC respectively, pursuant to which the Group has been conducting continuing connected transactions with QIEC and/or IQAC respectively, which include:

(a) the new supply agreement dated 22 December 2016 entered into between the Company and QIEC relating to the provision of parts of engines and raw materials by the Company to QIEC, and the provision of engines and their parts by QIEC to the Company;
(b) the new equipment lease dated 22 December 2016 entered into between the Company and QIEC relating to the leasing of leased equipment by the Company to QIEC;
(c) the new factory lease dated 22 December 2016 entered into between the Company and QIEC relating to the leasing of leased land and factory premises by the Company to QIEC;
(d) the new consolidated services agreement dated 22 December 2016 entered into between the Company and QIEC relating to the provision of certain services by the Company to QIEC;
(e) the new supply agreement (IQAC) dated 22 December 2016 entered into between the Company and IQAC relating to the provision of parts of engines by IQAC to the Company, and the provision of automobiles, parts of engines and raw materials by the Company to IQAC;
(f) the new consolidated services agreement dated 22 December 2016 entered into between the Company and IQAC relating to the provision of certain services by the Company to IQAC; and
(g) the new testing agreement dated 22 December 2016 entered into by the Company and (among others) QIEC and IQAC relating to the provision of certain testing services by the Company to QIEC and IQAC.

After the completion of Merger, since QIEC will be the surviving company which will assume all the assets, liabilities, operations, qualifications, personnel, contracts and all other rights and obligations of IQAC, all the terms of the above agreements will remain unchanged (apart from the change in the performing party from IQAC to QIEC where applicable) and the continuing connected transactions contemplated thereunder will continue to be conducted by QIEC.

– 11 –

LETTER FROM THE BOARD

ENVIRONMENTAL PROVISIONS AND REQUIREMENTS

Automobiles and engines are strictly controlled products of the PRC, where the emission regulations and requirements updated from time to time must be complied in order to produce and sell the same. Currently, all the engines in the PRC must fulfill the requirements under the national environmental protection five regulations GB17691–2005 titled “Limits and measurement methods for exhaust pollutants from compression ignition and gas fueled positive ignition engines of vehicles (PRC stage III, IV and V)” (《車用壓燃式、氣體燃料點燃式發動機與汽車污染物排放限值及測量方法（中國Ⅲ、Ⅳ、Ⅴ階段)》). Both the vehicles of the Company and the engines provided by QIEC can fulfill such requirements.

However, according to the notice titled “Limits and measurement methods for emissions from lightduty vehicles (PRC stage 6)”(輕型汽車污染物排放限值及測量方法（中國第六階段)》) issued by the Ministry of Ecology and Environment of PRC on 23 December 2016, all on-sale and registered light-duty vehicles should meet the requirements of the emissions standard 6a specified in the notice after 1 July 2020, and meet the requirements of the emission standard 6b specified in the notice after 1 July 2023. The PRC also requires that engines must gradually fulfill the requirements under the national environmental protection six regulations GB17691–2018 titled “Limits and measurement methods for emissions from diesel fuelled heavy-duty vehicles (PRC stage 6)” (《重型柴油車污染物排放限值及測量方法（中國第六階段)》) from 1 July 2019.

As light vehicles take up 80% to 90% of the sales volume and revenue of the Company, if the light vehicles of the Company cannot fulfil the standard 6 requirement, then both light engines and light vehicles cannot be produced and sold which would directly cause the sales volume and revenue of the Company to be reduced drastically by 80% when the standard 6 is implemented.

REASONS FOR CONDUCTING THE MERGER

As the domestic environmental protection provisions and requirements are increasingly stringent in PRC, in order to comply with and conform to the relevant laws and regulations on emissions, the manufacturing of automobile engine currently incurs increasingly high development costs. The implementation of the Merger is beneficial to the engine production integration and the concentration of development resources which are currently scattered in QIEC and IQAC and is also conducive to the introduction of the latest engine products and technologies from Isuzu, cultivation of a team for research and development of engine technologies, and the strengthening of export sales of engines and expansion of the engine industry. Upon completion of the Merger, the Group will purchase engines from QIEC to ensure a stable supply of engine assemblies which are in line with the latest regulations on emission and energy conservation for the automobiles produced, to satisfy market demands.

– 12 –

LETTER FROM THE BOARD

The Merger consists of 3 areas, namely the collaboration of assets, the import of the latest 4JZ standard 6 diesel engines from Isuzu and the realization of the industrialisation of the assembled engines, to expand the market domestically and internationally and develop the Company’s new income generation pillar. These three areas overlap with each other and the collaboration of assets is the requisite of the collaboration of assets and resources.

Based on the abovementioned, the Board has thoroughly considered the loss-making position of IQAC and the capital contribution proportion and shareholding structure of the Company in QIEC upon the completion of the Merger, and considers that (i) the terms of the Merger and the valuation based on the asset-based approach is reasonable and appropriate; (ii) it is based on the consideration of the continuing stable operation of the Company and the confidence in terms of the enhancement of the core technological innovation capability brought forward by the import of the engine technology and the return of the industrialisation of engines; and (iii) it is in the interest of the Company and the Shareholders as a whole. In particular,

The import of 4JZ engines from Isuzu to QIEC is to overcome the standard 6 barrier and avoid the risk of the inability to supply products in order to the maintain the need of continuous stable operation.

As mentioned above, the PRC intends to implement the requirements of the emissions standard 6a from 1 July 2019 and implement the requirements of the emission standard 6b from 1 July 2023, with the anticipation that major cities such as Beijing, Shanghai and Shenzhen may carry out the implementation in advance. The current automobile engines manufacture technology of QIEC origins from Isuzu. According to the current production types of QIEC, the medium and heavy vehicles and engines can fulfill the standard 6 requirement by transforming and upgrading; while light vehicles (including engines), the product that currently takes up 80%–90% of the total sales volume/revenue, belong to products and technologies developed by Isuzu in the 1980s. As they were developed in early years, their technical potential limit has been reached although multiple improvements and upgrades have been made. If the advancement of Isuzu cannot be closely followed, the production operation of the Company may suffer from a huge declining risk in the coming two years.

– 13 –

LETTER FROM THE BOARD

In order to import 4JZ engines of Isuzu, the collaboration of the current engine resources must be conducted first.

Each of the technology standard of the latest 4JZ engines of Isuzu is at a world leading level and has a very high demand towards the enterprise’s manufacturing, quality control and technical innovative development ability. If the relevant technology is to be imported by the current QIEC solely, it would not be able, from the technologies, funds, management and personnel aspect, to sustain. Through the merger by absorption of IQAC by QIEC, not only would the problems of dispersion of resources and management power caused by having two engine enterprises, two organizations, two sets of facilities and two sets of personnel be tackled so as to materialise the effective collaborative usage of resources such as technologies, personnel, management and funds, but also, since QIEC will become the subsidiary of Isuzu whose accounts would be consolidated upon the completion of the Merger, the principle of Isuzu in exporting the whole set of its most competitive engine product (4JZ) will be satisfied which is beneficial for Isuzu to continue the input of its technologies, products and human resources and to stimulate the upgrade of QIEC’s engines and vehicle manufacturing business structure and improve its core enterprise competitiveness and innovative ability.

The implementation of the Merger and the import of 4JZ engines does not only resolve the risk of operational breakage under the standard 6 requirement, but also bring forward a continuous stable income for the Company and the Shareholders as a whole from different aspects.

After completion of the Merger, apart from selling the engine products of QIEC to the Group, they shall also be gradually sold in large volume to other domestic and foreign clients. Through selling abroad, the Company can on one hand directly enjoy the income from its investment in QIEC after the completion of the Merger, on the other hand enjoy economies of scale and increase and activate the comprehensive manufacture chain of the Company from manufacturing basic rough cast to mechanical processing and to assembling. In the meantime, it shall lower the overall cost of engines and further enhance the market competitiveness of the Company in vehicle manufacture products. Though IQAC was still in its early stage since its establishment and has suffered from loss in the past few years, its loss has been reduced and the profitability has been continuously strengthening along with the development of the heavy vehicle market. It is estimated that the 2019 annual sales volume of the Qingling heavy vehicles shall reach the breakeven point and the current assets of IQAC shall gain profit. Also, IQAC currently only produces engine parts and sells them to QIEC for assembling as engines which are sold to the Company. After QIEC absorbs and merges IQAC, the related party transactions between QIEC and IQAC will be reduced which is beneficial to lower the cost of heavy vehicle engine, enhance the market competitiveness of the Company in heavy vehicles, enlarge the sales volume and increase the profitability of the current assets of IQAC.

– 14 –

LETTER FROM THE BOARD

II. REQUIREMENTS UNDER THE LISTING RULES

As one or more of the applicable percentage ratios in respect of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder is or are more than 5% but less than 25%, the Merger Agreement, the JV Agreement and the transactions contemplated thereunder constitute a discloseable transaction of the Company and is subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules.

As at the Latest Practicable Date, Isuzu is a substantial shareholder of the Company holding approximately 20.00% of the entire issued share capital of the Company and is therefore a connected person of the Company; Qingling Group is a controlling shareholder of the Company holding approximately 50.10% of the entire issued share capital of the Company and is therefore a connected person of the Company. As QIEC is owned as to 50% by each of the Company and Isuzu, respectively, and IQAC is owned as to 49% and 51% by Qingling Group and Isuzu, respectively, both QIEC and IQAC are connected persons of the Company. Accordingly, the Merger Agreement, the JV Agreement and the transactions contemplated thereunder also constitute a connected transaction of the Company under the Listing Rules and are subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules.

None of the Directors has a material interest in the Merger Agreement, the JV Agreement and the transactions contemplated thereunder and therefore none of them are required to abstain from voting on the relevant board resolutions approving the same according to the Listing Rules. However, as Mr. LUO Yuguang, Mr. LI Juxing and Mr. Xu Song are Directors nominated by Qingling Group, while Mr. Shuichi HAYASHI, Mr. Keiichiro MAEGAKI and Mr. Masanori OTA are Directors nominated by Isuzu, these Directors abstained from voting on the relevant board resolutions approving the same.

III. INDEPENDENT SHAREHOLDERS’ APPROVAL

In view of the above, the Company will seek the approval of the Independent Shareholders in relation to the transactions contemplated under the Merger Agreement and the JV Agreement. Ordinary resolutions will be proposed at the EGM to approve by way of poll the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

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. Qingling Group and its associates will be required to abstain from voting on the ordinary resolutions to be proposed at the EGM in respect of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

– 15 –

LETTER FROM THE BOARD

As at the Latest Practicable Date, Isuzu is a substantial shareholder of the Company, holding approximately 20.00% of the entire issued share capital of the Company. Isuzu and its associates will be required to abstain from voting on ordinary resolutions to be proposed at the EGM in respect of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

The Independent Board Committee has been formed to advise the Independent Shareholders as to whether the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote on the resolutions to be proposed at the EGM, taking into account the recommendations of the Independent Financial Adviser.

TC Capital International Limited has been appointed by the Company as its independent financial adviser to give recommendations to the Independent Board Committee and the Independent Shareholders as to, among other things, whether the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote on the resolutions to be proposed at the EGM.

IV. GENERAL

Information on the Parties to the Merger

QIEC

QIEC is principally engaged in the manufacturing and sale of vehicle-used engines and their relevant parts. As at the Latest Practicable Date, QIEC is owned as to 50% by each of the Company and Isuzu, respectively.

The financial information of QIEC for the two years ended 31 December 2017 and 2016 respectively is generally as follows:

	For the year ended	For the year ended
	31 December 2016	31 December 2017
	RMB’000	RMB’000
	(Audited)	(Audited)
Net profit before tax	45,633	52,990
Net profit after tax	38,788	45,304

– 16 –

LETTER FROM THE BOARD

The audited net asset value of QIEC as at 31 December 2017 was approximately RMB881,505,000.

According to the QIEC Valuation Report prepared by the asset-based approach, the total interests of shareholders of QIEC as at 31 December 2017 amounted to RMB884,919,700.

IQAC

IQAC is principally engaged in the manufacturing, procurement and export of 6C engine parts. As at the Latest Practicable Date, IQAC is owned as to 49% and 51% by Qingling Group and Isuzu, respectively.

The financial information of IQAC for the two years ended 31 December 2017 and 2016 respectively is generally as follows:

	For the year ended	For the year ended
	31 December 2016	31 December 2017
	RMB’000	RMB’000
	(Audited)	(Audited)
Net loss before inclusion of non-
operating income and expenses	(17,673)	(41,419)
Net loss after inclusion of non-
operating income and expenses	(17,588)	(41,419)

The audited net asset value of IQAC as at 31 December 2017 was approximately RMB1,400,334,000.

According to the IQAC Valuation Report prepared by the asset-based approach, the total interests of shareholders of IQAC as at 31 December 2017 amounted to RMB1,404,035,500.

The Company

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

Isuzu

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

– 17 –

LETTER FROM THE BOARD

Qingling Group

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

V. PROPOSED CHANGE OF THE BUSINESS SCOPE OF THE COMPANY

The original business scope of the Company includes “The manufacture of Isuzu series automobile, sales, repair and provision of spare parts.” (the “ Original Business Scope ”).

In order to cater for the need of business development of the Company so that the Company can obtain the required road transport operation licences from the relevant business administration department in the PRC, the Board proposes to widen the Original Business Scope to include “general cargo transport” (the “ Amended Business Scope ”), such that the Original Business Scope will be changed to include “The manufacture of Isuzu series automobile, sales, repair, provision of spare parts and general cargo transport.” (the “ New Business Scope ”). The Amended Business Scope shall be subject to any amendments or adjustments as may be requested by the competent industry and commerce authority in the PRC.

Conditions

The Amended Business Scope is subject to the satisfaction of the following conditions:

(i) a special resolution passed by the Shareholders at an EGM to approve the Amended Business Scope; and
(ii) all the necessary approval, authorisation, filing and/or registration obtained from the relevant authorities in the PRC for the Amended Business Scope.

The New Business Scope will take effect after the passing of the relevant special resolution at the EGM and the necessary pre-requisite approval, authorisation, filing and/or registration having been obtained from or filed with the relevant governmental or regulatory authorities of the PRC.

– 18 –

LETTER FROM THE BOARD

VI. PROPOSED AMENDMENTS TO THE ARTICLES

The Board proposes to amend the Articles to reflect the Amended Business Scope and the original article 13 of the Articles will be amended as follows:

“The business scope of the Company is subject to the approval granted by the company registry.

Core Business:

1) The manufacture of Isuzu series automobile, sales, repair, provision of spare parts and general cargo transport.
2) The relevant assembly and spare parts of Isuzu series automobile and the facilities related to manufacture and the import of raw materials, and the relevant assembly and spare parts of domestic manufacture and the facilities related to manufacture and the acquisition of raw materials.”

Such amendments shall be subject to the passing of the relevant special resolution at the EGM and the necessary pre-requisite approval, authorisation, filing and/or registration having been obtained from or filed with the relevant governmental or regulatory authorities of the PRC.

After making the proposed amendments mentioned above, the content of other chapters and articles shall remain unchanged. The English version of the Proposed Change to Business Scope is an unofficial translation of its Chinese version for reference purpose only. In case of discrepancies, the Chinese version shall prevail.

VII. THE EGM

The relevant ordinary resolutions and special resolutions proposed above are set out in the notice of EGM. The proxy form and reply slip are dispatched together with this circular.

The EGM will be held at New Conference Hall, 1st Floor of the Company’s Office Building, 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC on Wednesday, 12 December 2018 at 10:00 a.m..

– 19 –

LETTER FROM THE BOARD

The Articles provide that those Shareholders who intend to attend any Shareholders’ general 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 Shareholders’ 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 EGM, you are urged to complete and return the reply slip to the legal address of the Company at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC by hand, by post, by cable or by fax (at fax no. (86)23-68830397) on or before Thursday, 22 November 2018 whether or not you intend to attend the EGM.

If you do not intend to or are not able to attend the EGM and intend to appoint a proxy to attend and vote on behalf of you, you are requested to complete and return as soon as possible the form of proxy to the legal address of the Company at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC (in the case of proxy form of holder of Domestic Shares), or to the Company’s H Share Registrars, Hong Kong Registrars Limited at 17M 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 fixed for holding the EGM. Completion and return of the proxy form will not preclude you from attending and voting at the EGM.

VIII. VOTING BY POLL

Pursuant to Rule 13.39(4) of the Listing Rules, all votes of the Shareholders at the EGM will be taken by poll except where the chairman, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands and the Company will announce the results of the poll in the manner prescribed under Rule 13.39(5) of the Listing Rules.

IX. RECOMMENDATION

The Directors (including the independent non-executive Directors) are of the view that the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are on normal commercial terms, fair and reasonable and in the interest of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM to approve the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

– 20 –

LETTER FROM THE BOARD

The Independent Board Committee, having taken into account the recommendations from TC Capital International Limited, the Independent Financial Adviser, considers that the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are on normal commercial terms, fair and reasonable and in the best interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

Your attention is drawn to the letter from the Independent Board Committee set out on pages 22 to 23 of this circular and the letter from the Independent Financial Adviser containing its recommendations to the Independent Board Committee and Independent Shareholders in connection with the Merger Agreement, the JV Agreement and the transactions contemplated thereunder and the principal factors and reasons considered by them in arriving such recommendations set out on pages 24 to 39 of this circular.

In respect of the Proposed Change to Business Scope, the Directors (including the independent nonexecutive Directors) are of the view that the (i) Amended Business Scope and (ii) the proposed amendments to the Articles, are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM to approve the Proposed Change to Business Scope.

Yours faithfully,

For and on behalf of the Board of Qingling Motors Co. Ltd LUO Yuguang Chairman

– 21 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [260 x 52] intentionally omitted <==

(a Sino-foreign joint venture 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. Liu Tianni

Mr. Liu Erh Fei

26 October 2018

To the Independent Shareholders,

Dear Sir or Madam,

DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTION

We refer to the circular of the Company to the Shareholders dated 26 October 2018 (the “ Circular ”), of 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 as to whether the terms of the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are fair and reasonable so far as the Independent Shareholders are concerned, such transactions are conducted on normal commercial terms and in the ordinary and usual course of business of the Group, and are in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote on the resolutions to be proposed at the EGM.

– 22 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Having taken into account the recommendations from TC Capital International Limited, the Independent Financial Adviser, and in particular the principal factors set out in the letter from the Independent Financial Adviser, we consider that although the Merger Agreement, the JV Agreement and the transactions contemplated thereunder are not conducted in the ordinary and usual course of business of the Group, their terms are fair and reasonable so far as the Independent Shareholders are concerned, they are conducted on normal commercial terms and are in the best interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Merger Agreement, the JV Agreement and the transactions contemplated thereunder.

The letter from the Independent Financial Adviser containing its recommendations to us and the Independent Shareholders, and the principal factors and reasons taken into account by the Independent Financial Adviser in arriving at such recommendations is set out on pages 24 to 39 of the Circular.

Yours faithfully,

The Independent Board Committee of

Qingling Motors Co. Ltd Mr. Long Tao, Mr. Song Xiaojiang, Mr. Liu Tianni, Mr. Liu Erh Fei Independent non-executive Directors

– 23 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the Merger Agreement, the JV Agreement and the transactions contemplated thereunder, which has been prepared for the purpose of inclusion in this circular.

==> picture [177 x 49] intentionally omitted <==

26 October 2018

The Independent Board Committee and the Independent Shareholders Qingling Motors Co. Ltd

Dear Sirs,

DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Merger Agreement, the JV Agreement and the transactions contemplated thereunder, the details of which are set out in the letter from the Board (the “ Letter from the Board ”) in the circular of Qingling Motors Co. Ltd (the “ Company ”) to the Shareholders dated 26 October 2018 (the “ Circular ”), of which this letter forms part. Capitalized terms used in this letter have the same meanings as those defined in the Circular unless the context otherwise requires.

On 18 September 2018, the Company convened a Board meting at which the proposal regarding the Merger was considered and approved. QIEC and IQAC entered into the Merger Agreement on 2 October 2018, pursuant to which QIEC will absorb and merge with IQAC and QIEC will be the surviving company upon completion of the Merger and assume all the assets, liabilities, operations, qualifications, personnel, contracts and all other rights and obligations of IQAC and IQAC will be dissolved and deregistered. Further, on 2 October 2018, the Company, Qingling Group and Isuzu also entered into the JV Agreement to set out their respective rights and obligations in QIEC in accordance with the Merger.

– 24 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Listing Rules’ Implication

As at the Latest Practicable Date, Isuzu is a substantial shareholder of the Company holding approximately 20.00% of the entire issued share capital of the Company and is therefore a connected person of the Company; Qingling Group is a controlling shareholder of the Company holding approximately 50.10% of the entire issued share capital of the Company and is therefore a connected person of the Company. As QIEC is owned as to 50% by each of the Company and Isuzu, respectively, and IQAC is owned as to 49% and 51% by Qingling Group and Isuzu, respectively, both QIEC and IQAC are connected persons of the Company. Accordingly, the Merger Agreement, the JV Agreement and the transactions contemplated thereunder also constitute a connected transaction of the Company under the Listing Rules and are subject to the reporting, announcement and independent shareholder’s approval requirements under Chapter 14A of the Listing Rules.

We have been appointed by the Company to advise the Independent Board Committee and the Independent Shareholders as to (i) whether the Merger Agreement and the JV Agreement are entered in the ordinary and usual course of business of the Company and the terms of the Merger Agreement and the JV Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the Merger and the JV Agreement are in the interests of the Company and the Shareholders as a whole; and (iii) how the Independent Shareholders should vote in respect of the relevant resolutions to approve the Merger Agreement, the JV Agreement and the transaction contemplated thereunder.

OUR INDEPENDENCE

As at the Latest Practicable Date, we do not have any relationship with, or have any interest in, the Company or any other parties that could reasonably be regarded as relevant to our independence. In the past 2 years preceding from the Latest Practicable Date, we did not provide any other services to the Company save as acting as the independent financial adviser to the Company for this transaction.

– 25 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

BASIS OF OUR OPINION

In putting forth our recommendation, we have relied on all the relevant information, opinions and facts supplied and representations made to us by the Directors and the representatives of the Company. We have reviewed, among other things, (i) the Merger Agreement and the JV Agreement; (ii) the annual report of the Company for the year ended 31 December 2017 (the “ 2017 Annual Report ”) and the interim report of the Company for the six months ended 30 June 2018 (the “ 2018 Interim Report ”); (iii) the audited reports of QIEC for the three years ended 31 December 2017; (iv) the audited reports of IQAC for the three years ended 31 December 2017; (v) the QIEC Valuation Report and the IQAC Valuation Report (collectively, the “ Valuation Reports ”); (vi) the relevant market data and information available from public sources; and (vii) the other information as set out in the Circualr.

We have assumed that all such information, opinions, facts and representations, which have been provided to us by the Directors and/or the representatives of the Company and for which they are fully responsible, are true, accurate and complete in all respects. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and/or the representatives of the Company. The Company has also confirmed to us that no material facts have been omitted from the information supplied and we have no reason to suspect that any material information has been withheld by the Company or is misleading.

We consider that we have sufficient information currently available to reach an informed view and to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information provided by the Directors and/or the representatives of the Company, nor have we conducted any independent investigation into the business, affairs, operations, financial position or future prospects of each of the Group, QIEC and IQAC and any of their respective subsidiaries and associates. We have not made any independent evaluation or appraisal of the assets and liabilities of QIEC and IQAC, and we have not been furnished with any such evaluation or appraisal, save as and except for the Valuation Reports. The Valuation Reports were prepared by the Independent Valuer. Since we are not experts in the valuation of businesses or companies, we have relied solely upon the Valuation Reports for the appraised values of the QIEC and IQAC as at 31 December 2017.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion in respect of the Merger, the JV Agreement and the transactions contemplated thereunder, we have taken into account the following principal factors and reasons:

– 26 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1. Information on the Company, QIEC, IQAC, Qingling Group and Isuzu

1.1 Information on the Company

As stated in the Letter from the Board, the Company is principally engaged in the production and sale of Isuzu trucks, multi-purposes vehicles, pick-up trucks, other vehicles and automobile parts and accessories.

As stated in the Letter from the Board, the original business scope of the Company includes “The manufacture of Isuzu series automobile, sales, repair and provision of spare parts.” (the “ Original Business Scope ”). In order to cater for the need of business development of the Company so that the Company can obtain the required road transport operation licences from the relevant business administration department in the PRC, the Board proposes to widen the Original Business Scope to include “general cargo transport” (the “ Amended Business Scope ”), such that the Original Business Scope will be changed to include “The manufacture of Isuzu series automobile, sales, repair, provision of spare parts and general cargo transport.” (the “ New Business Scope ”). The Amended Business Scope shall be subject to any amendments or adjustments as may be requested by the competent industry and commerce authority in the PRC.

1.2 Information on QIEC

As disclosed in the Letter from the Board, QIEC is principally engaged in manufacturing and sale of vehicle-used engines and their parts. As at the Latest Practicable Date, the shareholding structure of QIEC was as follows:

Name of Shareholders The Company Isuzu Total	Percentage of equity interest (%) 50.0 50.0 100.0

– 27 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Based on the audited reports of QIEC prepared in accordance with the PRC GAAP, certain financial information of QIEC for the three years ended 31 December 2015 (“ FY2015 ”), 2016 (“ FY2016 ”) and 2017 (“ FY2017 ”) was extracted as follows:

Turnover Net profit Net asset value	For the year ended 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 1,335,065 1,083,425 1,196,978 41,413 38,788 45,035 As at 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 822,579 838,721 881,505	For the year ended 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 1,335,065 1,083,425 1,196,978 41,413 38,788 45,035 As at 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 822,579 838,721 881,505

		45,035

		2017 (audited) (RMB’000) 881,505

From the table above, we note that the turnover of QIEC slightly decreased from approximately RMB1,335,065,000 for FY2015 to approximately RMB1,083,425,000 for FY2016, which was mainly due to decrease in the sales resulting from less market demand. The turnover of QIEC increased to approximately RMB1,196,978,000 for FY2017 mainly due to the increase in the sales resulting from more market demand. While net profit of QIEC slightly decreased from approximately RMB41,413,000 for FY2015 to approximately RMB38,788,000 for FY2016, which was mainly due to the decrease in the turnover. Net profit of QIEC increased to approximately RMB45,035,000 for FY2017 mainly due to the increase in the turnover.

The audited net asset value of QIEC increased from approximately RMB822,579,000 as at 31 December 2015 to approximately RMB838,721,000 as at 31 December 2016 and further increased to approximately RMB881,505,000 as at 31 December 2017 mainly due to QIEC recorded profit for the corresponding year.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1.3 Information on IQAC

As disclosed in the Letter from the Board, IQAC is principally engaged in manufacturing, procurement and export of 6C engine parts. As at the Latest Practicable Date, the shareholding structure of IQAC was as follows:

Name of Shareholders Qingling Group Isuzu Total	Percentage of equity interest (%) 49.0 51.0
	100.0

Based on the audited reports of IQAC prepared in accordance with the PRC GAAP, certain financial information of IQAC for the three years ended 31 December 2017 was extracted as follows:

Turnover Net loss Net asset value	For the year ended 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 71,549 105,489 167,632 29,970 17,588 41,419 As at 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 1,459,341 1,441,753 1,400,334	For the year ended 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 71,549 105,489 167,632 29,970 17,588 41,419 As at 31 December 2015 2016 2017 (audited) (audited) (audited) (RMB’000) (RMB’000) (RMB’000) 1,459,341 1,441,753 1,400,334

		41,419

		2017 (audited) (RMB’000) 1,400,334

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

From the table above, we note that the turnover of IQAC increased from approximately RMB71,549,000 for FY2015 to approximately RMB105,489,000 for FY2016 and further increased to approximately RMB167,632,000 for FY2017 mainly due to the increasing sales resulting from increasing market demand. IQAC recorded loss for FY2015, FY2016 and FY2017. Net loss of IQAC decreased from approximately RMB29,970,000 for FY2015 to approximately RMB17,588,000 for FY2016 due to the set up cost of IQAC. Net loss then increased to approximately RMB41,419,000 for FY2017 mainly due to the depreciation of US$ arising from the US$ reserve.

The audited net asset value of IQAC decreased from approximately RMB1,459,341,000 as at 31 December 2015 to approximately RMB1,441,753,000 as at 31 December 2016. The audited net asset value of IQAC was then further slightly decreased to approximately RMB1,400,334,000 as at 31 December 2017 mainly due to IQAC incurred loss for the corresponding year.

1.4 Information on Qingling Group

As disclosed in the Letter from the Board, Qingling Group is principally engaged in the manufacturing, sale and development of new products in relation to motor vehicles and their relevant parts and accessories, and the provision of technical consultancy services.

1.5 Information on Isuzu

As disclosed in the Letter from the Board, Isuzu is principally engaged in the production and sale of commercial vehicles and diesel engines.

2. Reasons for and benefits of the Merger Agreement

As stated in the Letter from the Board, as the domestic environmental protection provisions and requirements are increasingly stringent in the PRC, in order to comply with and conform to the relevant laws and regulations on emissions, the manufacturing of automobile engine currently incurs increasingly high development costs. The implementation of the Merger is beneficial to the engine production integration and the concentration of development resources which are currently scattered in QIEC and IQAC and is also conducive to the introduction of the latest engine products and technologies from Isuzu, cultivation of a team for research and development of engine technologies, and the strengthening of export sales of engines and expansion of the engine industry. Upon completion of the Merger, the Group will purchase engines from a new engine company to ensure a stable supply of engine assemblies which are in line with the latest regulations on emission and energy conservation for the automobiles produced, to satisfy market demands. Please refer to the paragraphs headed “Reasons for conducting the Merger” and “Environmental provisions and requirements” in the Letter from the Board for the details.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

According to a notice titled “Limits and measurement methods for emissions from light-duty vehicles (CHINA 6)” (《輕型汽車污染物排放限值及測量方法（中國第六階段)》) (the “ Notice ”) issued by the Ministry of Ecology and Environment of PRC (“ MEEPRC ”) on 23 December 2016, all on-sale and registered light-duty vehicles should meet the requirements of the emissions standard 6a specified in the Notice after 1 July 2020, and meet the requirements of the emission standard 6b specified in the Notice after 1 July 2023. As discussed with the representatives of the Company, the technology on engine production of QIEC was stable for the past few years and the development on the new engine was also limited as QIEC relied on engaging Isuzu for new technology and enhancement on existing engines. Furthermore, over 90% of the revenue of QIEC was from the sale of the light-duty vehicle engine and the current standard of the engine produced by QIEC can not meet the standards specified in the Notice. By considering the future sale of QIEC which will be affected by the implementation of the Notice, QIEC needs to have new technology to enhance the existing engine and produce new type of engine in order to reach the aforementioned standards. Therefore, the Group proposes to incorporate new technology from Isuzu by the Merger and QIEC can expand their business to oversea as the technology of QIEC will be improved after the completion of the Merger.

As stated in the paragraph headed “Existing Continuing Connected Transactions with QIEC and IQAC” in the Letter from the Board, after the completion of the Merger, since QIEC will be the surviving company which will assume all the assets, liabilities, operations, qualifications, personnel, contracts and all other rights and obligations of IQAC, all the terms of the existing agreements with QIEC and/or IQAC will remain unchanged (apart from the change in the performing party from IQAC to QIEC where applicable) and the continuing connected transactions contemplated thereunder will continue to be conducted by QIEC. The Company, Qingling Group and Isuzu have entered into the Priority Supply Memorandum on preferential supply of goods. The Company and QIEC will further negotiate within 90 days after the date of the establishment of the new QIEC (the representatives of the Company advised that it means the date of obtaining the new business license by QIEC in relation to the Merger) and enter into further agreement regarding the productivity of QIEC shall, in principle, be first used to satisfy the engine demands of the Group. As discussed with the representatives of the Company, since the future sale of the Group also relied on the engines which satisfied the standard, the above arrangement can satisfy their future production of the vehicles with qualified engines.

Taking into account that (i) the Merger can satisfy the requirement of standards specified in the Notice and QIEC can expand the business on the sale of engines to overseas market when the technology of QIEC is improvided; and (ii) the Merger satisfies the demand of the Group for qualified engines, upon the completion of the Merger, we concur with the Company that the Merger is beneficial to the engine production of the Group and the Group can comply with and conform to the relevant laws and regulations on emission in the PRC. Thus we are of the view that the Merger is reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Independents Shareholders as a whole although it is not in the ordinary and usual course of business of the Company.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. Principal terms of the Merger Agreement and the JV Agreement

The principal terms of the Merger Agreement have been set out in the Letter from the Board. Set out below is the principal terms of the Merger Agreement.

3.1 Parties to the Merger Agreement

QIEC and IQAC

3.2 Subject Matters

QIEC shall absorb and merge with IQAC in the way stipulated under the Company Law of the PRC. QIEC will be the surviving company upon the completion of the Merger and continue to use the name Qingling Isuzu (Chongqing) Engine Co., Ltd. (慶鈴五十鈴（重慶）發動機有限公司) and assume all the assets, liabilities, operations, qualifications, personnel, contracts and all other rights and obligations of IQAC and IQAC will be dissolved and deregistered.

3.3 Shareholding Structure

As stated in the Letter from the Board, the proportion of the capital contribution by the Company, Qingling Group and Isuzu to QIEC upon completion of the Merger are determined with reference to their respective capital contribution to QIEC and IQAC before the Merger and the net asset values of QIEC and IQAC as valued by the Independent Valuer with 31 December 2017 as the valuation benchmark date. According to the QIEC Valuation Report, the shareholders’ equity of QIEC as at 31 December 2017 was RMB884,919,700 and the capital contributioln of the Company and Isuzu in QIEC was 50% respectively. Therefore each of their shareholders’ equity was RMB442,459,850. According to the IQAC Valuation Report, the shareholders’ equity of IQAC as at 31 December 2017 was RMB1,404,035,500, and the capital contribution of Qingling Group and Isuzu in IQAC was 49% and 51% respectively. Therefore each of their shareholders’ equity was RMB687,977,395 and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

RMB716,058,105 respectively. Thus, the capital contribution proportion of each of the parties in QIEC upon the completion of the Merger is as shown in the table below:

Name of shareholders Isuzu Qingling Group The Company Total	Appraised shareholders’ equity (RMB) 1,158,517,955 687,977,395 442,459,850 2,288,955,200	Amount of capital contribution (USD) 164,107,986 97,472,556 62,679,458 324,260,000	Proportion of capital contribution (%) 50.61% 30.06% 19.33% 100.00%

3.4 Basis of determining the shareholding structure

3.4.1 Independent Valuer’s expertise

We have discussed with the Independent Valuer regarding the Independent Valuer’s qualification, experience and independence in relation to the preparation of the Valuation Reports. The Independent Valuer obtained the evaluation qualification for asset evaluation approved by the Chongqing Finance Bureau. The Independent Valuer has been established in 1983 and it has years of experience in the business of valuation. The Independent Valuer confirmed that it is independent from the Company and the other parties involved in the Merger. In addition, we have also reviewed the terms of the engagement of the valuation and noted that the scope of work is appropriate to the opinion required to be given and we are not aware of any limitation on the scope of work which might have an adverse impact on the degree of assurance given by the Independent Valuer. Based on the above, we are of the view that the scope of work of the Independent Valuer is appropriate and the Independent Valuer is qualified for valuing QIEC and IQAC.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3.4.2 Selection of valuation methodology

We have reviewed the Valuation Reports prepared by the Independent Valuer. We have also discussed with the Independent Valuer and understand that the valuation could be conducted by three different generally accepted valuation methods, namely the market approach, the cost approach and the income approach in arriving the market value of the entire equity interests in QIEC and IQAC.

The income approach provides an indication of value based on the principle that an informed buyer would pay no more than the present value of anticipated future economic benefits generated by the subject asset. The Independent Valuer did not consider income approach in the valuation of QIEC since the historical revenue of QIEC were fluctuated and the majority of the revenue and cost of QIEC were from connected parties. Thus it was not reasonable to predict the future revenue of QIEC to assess the valuation of QIEC. While the Independent Valuer did not consider income approach in the valuation of IQAC since the historical gross profit ratios of IQAC were fluctuated and had negative values and the majority of the revenue and cost of IQAC were from connected parties.

The market approach provides an indication of value by comparing the subject asset/ transaction to similar assets that have been sold in the market/transaction, with appropriate adjustments for the differences between the subject asset/transaction and the assets/transaction that are considered to be comparable. Due to the limited comparable transactions and the comparable listed companies having low comparability in terms of revenue and gross profit level, the Independent Valuer considered that it is not appropriate to use market approach in the valuations of QIEC and IQAC.

The asset-based approach provides an indication of value based on the principle that an informed buyer would pay no more that the cost of producing the same or a substitute asset with equal utility as the subject asset. According to the Valuation Reports, we understood that the asset-based approach represents an asset-based method of determining the value of the assessed assets by considering the fair value of QIEC and IQAC by deducting the fair value of liabilities from the fair value of various assets. Since there is sufficient information for the Independent Valuer to appraise QIEC and IQAC, the Independent Valuer has considered the asset-based approach as the most appropriate valuation approach for the valuations of QIEC and IQAC and adopted the asset-based approach in arriving at the valuation results of QIEC and IQAC.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3.4.3 Valuation assumptions

According to the Valuation Reports, certain assumptions have been made in valuing QIEC and IQAC, including but not limited to that (i) the appraised assets are already in the process of transaction; (ii) there is an open market; (iii) the appraised assets can be continuously used; (iv) there is the continuity of business operation; (v) there is no material change in government policy, economy, interest rate, exchange rate, tax rate in the PRC; (vi) there is the continuity of adoption of the business scope, management method and the accounting standard; (vii) the company is capable to repay its liabilities and will comply with all relevant laws and regulations; and (viii) there is no force majeure and unpredictable factors which cause material adverse effect on the company. The Independent Valuer confirmed that the above assumptions are common assumptions in valuation of an equity interest in a company. During the course of our discussion with the Independent Valuer, we have not identified any major factors which would lead us to cast doubt on the fairness and reasonableness of the assumptions in the Valuation Reports.

3.4.4 The valuation approaches in the Asset-based approach

According to the Valuation Reports, the Independent Valuer considered, among others, the below in the valuations of QIEC and IQAC.

Current assets

In determining the valuation of the current assets other than inventories and other receivables of QIEC, the Independent Valuer has adopted their book values as at 31 December 2017 as their fair value since there exist no material difference between the book values and the fair values of those assets. In assessing other receivables of QIEC, the Independent Valuer checked actual situation of other receivables and noted that certain receivables of QIEC were received and should be zero.

The inventories of QIEC mainly comprised the raw materials and work-in-process while the inventories of IQAC mainly comprised the raw materials, work-inprocess, raw materials-in-transit, goods-in-transit products and finished goods. The Independent Valuer has adopted replacement cost method to value the raw materials, the book value method to value the work-in-process product and goods-in-transit product, raw materials-in-transit and the market method to value the finished goods.

Fixed Assets

The fixed assets mainly comprised buildings and equipment.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

According to the Valuation Reports, the Independent Valuer has considered replacement cost approach to ascertain the values of the buildings. The replacement cost of buildings is determined by costs of constructing the same buildings including but not limited to the materials, labour and capital (if any) costs and the residue ratio of the value of the buildings which is determined by years of usage and expected life of the buildings after the physical observation by the Independent Valuer.

According to the Valuation Reports, the Independent Valuer used the replacement cost approach to ascertain the cost of the equipments. The residue ratio of the value of the equipment is determined according to the characteristics and usage of the equipment after considering the economic life and technical life.

Construction-in progress (for IQAC only)

According to the IQAC Valuation Report, the Independent Valuer used the cost approach to ascertain the value of construction-in-progress. The Independent Valuer has used book value as the fair value of construction-in-progress as there was no material fluctuation in cost for the period from the construction to the date of the valuation.

Intangible Assets (for QIEC only)

According to the QIEC Valuation Report, the Independent Valuer used the net book value to ascertain the value of the research and development cost of QIEC and no impairment should be considered as the technology are still using and will be used.

Other non-current assets

The other non-current assets of QIEC is deferred tax while the other non-current assets of IQAC is deferred assets and value-added tax.

In determining the other non-current assets, the Independent Valuer used the book value as the fair value of those assets as their book value are correctly stated after checking the relevant contracts and those assets are impaired according to the company’s policy if necessary.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Current liabilities

In determining the fair value of current liabilities, the Independent Valuer used the book value as the fair value of current liabilities of QIEC and IQAC, save as the accruals in staff education fee of QIEC which is no longer to pay and the fair value is nil, as their book value are correctly stated after checking the relevant contracts and assessing whether those liabilities should be borne.

We are advised by the Independent Valuer that the valuation approaches as adopted for valuing each type of assets and liabilities of QIEC and IQAC as specified above are common methodologies used in establishing the valuation of the assets and liabilities under asset-based approach and complied with the relevant professional standard for valuation in the PRC.

3.4.5 Conclusion

As stated in the paragraph headed “Selection of valuation methodology” above, the Independent Valuer has considered the financial situation of QIEC and ICAC in selecting the valuation methodology. Given (i) the historical revenue of QIEC were fluctuated and the majority of the revenue and cost of QIEC were from connected parties; and (ii) the historical gross profit ratios of IQAC were fluctuated and had negative values and the majority of the revenue and cost of IQAC were from connected parties, the income approach was not considered by the Independent Valuer. Moreover, since (i) there are limited comparable transactions in the market approach and the comparable listed companies have low comparability in terms of revenue and gross profit level; and (ii) there is sufficient information for the Independent Valuer to appraise QIEC and IQAC in using the asset-based approach, the Independent Valuer has considered the asset-based approach is the most appropriate valuation approach for the valuations of QIEC and IQAC and adopted the asset-based approach in arriving at the valuation results of QIEC and IQAC.

During the course of discussion with the Independent Valuer and our review on the Valuation Reports and having considered that (i) the methodologies being applied in the Valuation Reports; (ii) the principle bases and assumptions used in arriving at the valuations; and (iii) the qualification, expertise and experiences of the Independent Valuer, we consider that nothing unusual matter has come to our attention that would lead us not to believe that each of the valuations of QIEC and IQAC was prepared on a reasonable basis. We are of the view that the methodology and assumptions which had been adopted were arrived at after due and careful consideration and the Valuation Reports are fair and reasonable so far as the Independent Shareholders are concerned.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As the Valuation Reports are fair and reasonable so far as the Independent Shareholders are concerned, we concurred with the Board’s view that the shareholding structure of QIEC upon completion of the Merger, as determined with reference to the Valuation Reports, is on normal commercial terms and fair and reasonable.

3.5 The JV Agreement

To stipulate their respective rights and obligations in QIEC following the completion of the Merger, the Company, Qingling Group and Isuzu entered into the JV Agreement on the same date. Details of the JV Agreement are set out in the Letter from the Board. The representatives of the Company advised that the products, business scope and matters requiring consensus of all directors present at the board meeting as stipulated in the JV Agreement are determined with reference to the existing situation and practices of QIEC and IQAC. The registered capital, total investment and proportion of capital contribution as stipulated in the JV Agreement are similar in substance to the terms set out in the Merger Agreements. The representatives of the Company also advised that the composition of the board of directors of QIEC following the completion of the Merger is according to the proportion of capital contribution of the parties to the Merger Agreements. Based on the above, we consider that the JV Agreement is fair and reasonable and in the interest of the Company and the Shareholders as a whole although the entering into the JV Agreement is not in the ordinary and usual course of business of the Group.

4. Financial effects of the Merger

According to the 2017 Annual Report and as advised by the representatives of the Company, the Group recorded the equity interest in QIEC as investment in associate using equity method for the year ended 31 December 2017. As stated in the Letter from the Board, prior to the Merger, QIEC is a company jointly controlled by the Company and Isuzu where each of them owns 50% equity interest. The financial results of QIEC is not consolidated into the Company’s consolidated financial statements, and only investment income is recorded. Upon completion of the Merger, the Company, which is originally interested in 50% of the equity interest in QIEC, will be interested in approximately 19.33% in QIEC and the Group will remain the same treatment for the record the equity interest in QIEC as investment in associate using equity method. After the Merger, QIEC will be controlled by Isuzu and it remains the case that only investment income will be recorded by the Company. As such there is no change on the accounting treatment.

The representatives of the Company advised that upon completion of the Merger, it is estimated that the Group will recognize a gain before taxation attributable to the Shareholders of approximately RMB1,703,000 from the Merger, which is calculated based on the difference between (i) the fair values of the investment in QIEC of the approximately RMB442,455,000 based on the sum of the QIEC Valuation Report and the IQAC Valuation Report and the shareholding of the Company in

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

QIEC upon completion of the Merger; and (ii) the carrying amount of the net asset value of QIEC attributable to the shareholders of the Company and the shareholding of the Company in QIEC prior to the completion of the Merger of approximately RMB440,752,000, which was included in the consolidated financial statements of the Group as at 31 December 2017.

Shareholders should note that the aforementioned analyses are for illustrative purpose only and do not purport to represent how the financial position of the Group will be upon completion of the Merger.

RECOMMENDATION

Having considered the above principal factors and reasons, including but not limited to (i) the Merger is beneficial to the engine production of the Group and the Group can comply with and conform to the relevant laws and regulations on emission in the PRC as stated in the paragraph headed “Reasons for and benefits of the Merger Agreement” above; (ii) the shareholding structure of QIEC upon completion of the Merger, as determined with reference to the Valuation Reports, is on normal commercial terms and fair and reasonable as stated in the paragraph headed “Principal terms of the Merger Agreement and the JV Agreement” above; (iii) the JV Agreement is fair and reasonable and in the interest of the Company and the Shareholders as a whole as mentioned in the paragraph headed “the JV Agreement” above; and (iv) the Group will recognize a gain before taxation attributable to the Shareholders of approximately RMB1,703,000 from the Merger upon completion of the Merger as mentioned in the paragraph headed “Financial effects of the Merger” above, we consider that the terms of the Merger Agreement and the JV Agreement are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned, and the Merger is in the interests of the Company and the Shareholders as a whole although the entering into the Merger Agreement and the JV Agreement is not in the ordinary and usual course of business of the Group. Accordingly, we would recommend (i) the Independent Board Committee to advise the Independent Shareholders; and (ii) the Independent Shareholders, to vote in favour of the ordinary resolutions in this regard.

Yours faithfully, For and on behalf of

TC Capital International Limited Edward Wu

Chairman

Note: Mr. Edward Wu has been a responsible officer of Type 6 (advising on corporate finance) regulated activities under the Securities and Futures Ordinance since 2005. He has participated in and completed various advisory transactions in respect of connected transactions of listed companies in Hong Kong

– 39 –

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

(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 entered 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.

Mr. Luo Yuguang is a director, the general manager and the deputy secretary of the Party Committee of Qingling Group, Mr. XU Song is a deputy general manager and a member of the Party Committee of Qingling Group, Mr. LI Juxing is the deputy general manager and a member of the Party Committee of Qingling Group. Mr. Keiichiro MAEGAKI is a managing executive officer of Isuzu and Mr. Mansanori OTA is a managing executive officer of Isuzu.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors was a director or employee of a company that 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.

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GENERAL INFORMATION

APPENDIX

(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
				capital of	%
				the	of entire
Name of	Class of			relevant	share
Shareholders	Shares	No. of Shares	Capacity	class	capital
Qingling Group	Domestic Shares	1,243,616,403	Beneficial Owner	100%	50.10%
Isuzu	H Shares	496,453,654	Beneficial Owner	40.08%	20.00%
Allianz SE	H Shares	102,122,000 (Note)	Interest of controlled	8.24%	4.11%
			corporation
Edgbaston Investment	H Shares	68,655,000	Investment Manager	5.54%	2.77%
Partners LLP

Note:

The following is a breakdown of the interests in the Shares held by Allianz SE:

			Total interests	in shares
Name of	Name of	%	Direct	Indirect
controlled corporation	controlling shareholders	controlled	interests	interests
Allianz Asset Management AG	Allianz SE	100%	–	102,122,000
Allianz Global Investors GmbH	Allianz Asset Management AG	100%	–	101,600,000
RCM Asia Pacific Ltd.	Allianz Global Investors GmbH	100%	98,240,000	–
Allianz Global Investors Taiwan
Ltd.	Allianz Global Investors GmbH	100%	3,360,000	–
Allianz Asset Management of
America Holdings Inc	Allianz Asset Management AG	100%	–	522,000
Allianz Asset Management of	Allianz Asset Management of
America L.P.	America Holdings Inc.	100%	–	522,000
Allianz Global Investors U.S.	Allianz Asset Management of
Holdings LLC	America L.P.	100%	–	522,000
Allianz Global Investors Fund	Allianz Global Investors U.S.
Management LLC	Holdings LLC	100%	522,000	–

– A-2 –

GENERAL INFORMATION

APPENDIX

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 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 had 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).

4. COMPETING INTEREST

As at the Latest Practicable Date, so far as the Directors are aware of, none of the Directors nor their respective close 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 Group since 31 December 2017, 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 2017, 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 Group.

– A-3 –

GENERAL INFORMATION

APPENDIX

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

TC Capital International Limited

A licensed corporation under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities

重慶天健資產評估土地房地產估價有限公司 Independent valuer (Pan-China (Chongqing) Land Real Estate. Appraisal. Co., Ltd)

As at the Latest Practicable Date, each of TC Capital International Limited and Pan-China (Chongqing) Land Real Estate. Appraisal. Co., Ltd was not interested beneficially or nonbeneficially 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, each of TC Capital International Limited and Pan-China (Chongqing) Land Real Estate. Appraisal. Co., Ltd did not have any direct or indirect interest in any asset which had been, since 31 December 2017, 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.

TC Capital International Limited has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter dated 26 October 2018 and reference to its name in the form and context in which they respectively appear.

Pan-China (Chongqing) Land Real Estate. Appraisal. Co., Ltd has given and has not withdrawn its written consent to the issue of this circular with reference to the content of the IQAC Valuation Report and QIEC Valuation Report dated 31 May 2018 and its name in the form and context in which they respectively appear.

– A-4 –

GENERAL INFORMATION

APPENDIX

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the offices Tung & Co. at Office 1601, 16/F, LHT Tower, 31 Queen’s Road Central, Hong Kong during normal business hours up to and including the date of the EGM:

(a) the Merger Agreement;
(b) the JV Agreement; and
(c) the Priority Supply Memorandum.

9. GENERAL

Save as otherwise stated in this circular, the English text of this circular shall prevail over the Chinese text in the event of inconsistency.

– A-5 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

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

(Stock Code: 1122)

NOTICE OF EXTRAORDINARY GENERAL MEETING

ORDINARY RESOLUTIONS

“ THAT :
(a) the merger agreement dated 2 October 2018 (the “ Merger 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) entered into between 慶鈴五十鈴（重慶）發動機有限公司 (Qingling Isuzu (Chongqing) Engine Co., Ltd.) (“ QIEC ”) and 五十鈴慶鈴（重慶）汽車零部件有限公司(Isuzu Qingling (Chongqing) Autoparts Co., Ltd.) (“ IQAC ”) in respect of the merger by absorption of IQAC by QIEC (the “ Merger ”) and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified; and
(b) any one of the directors of the Company (the “ Directors ”) be and is hereby authorised on behalf of the Company to sign, seal and execute all such other documents and agreements and to do all such acts and things as he may in his discretion consider necessary or desirable or expedient to implement and/or to give effect to the Merger Agreement and the transactions contemplated thereunder.”

– EGM-1 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

“ THAT :
(a) the joint venture agreement dated 2 October 2018 (the “ JV Agreement ”, a copy of which marked “ B ” has been produced to the meeting and signed by the chairman of the meeting for the purpose of identification) entered into between the Company, 慶鈴汽車（集團）有限公司(Qingling Motors (Group) Company Limited) and Isuzu Motors Limited (which sets out their respective rights and obligations in QIEC in accordance with the Merger) and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified; and
(b) any one of the Directors be and is hereby authorised on behalf of the Company to sign, seal and execute all such other documents and agreements and to do all such acts and things as he may in his discretion consider necessary or desirable or expedient to implement and/or to give effect to the JV Agreement and the transactions contemplated thereunder.”

SPECIAL RESOLUTIONS

“ THAT the proposed amendments to the business scope of the Company (details of which are set out in the circular of the Company dated 26 October 2018 (the “ Circular ”)) be and are hereby considered and approved, and any one of the Directors be and is hereby authorised to do all such acts and things and to sign all documents and to take any steps which in his absolute discretion consider to be necessary, desirable or expedient for the purpose of implementing and/or giving effect to the amendments to the business scope of the Company.”
“ THAT the proposed amendments to the articles of association of the Company (the “ Articles ”) (details of which are set out in the Circular) be and are hereby considered and approved, and any one of the Directors be and is hereby authorised to do all such acts and things including obtaining all the necessary approval, authorisation, filing and/or registration from the relevant governmental or regulatory authorities and to sign all documents and to take any steps which in his absolute discretion consider to be necessary, desirable or expedient for the purpose of giving effect to the proposed amendments to the Articles.”

By Order of the Board Qingling Motors Co. Ltd LUO Yuguang

Chairman

Chongqing, the PRC, 26 October 2018

– EGM-2 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

(1) Any shareholder entitled to attend and vote at the EGM 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. 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 that power of attorney or authority shall be deposited at the legal address of the Company at 1 Xiexing Cun, Zhongliangshan, Jiulongpo District, Chongqing, the PRC (in the case of proxy form of holders of domestic shares) or at the Company’s H Share Registrars, Hong Kong Registrars Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (in the case of proxy form of holders of H Shares) not less than 24 hours before the time for holding the EGM or 24 hours before the time appointed for taking the poll or any adjournment thereof.
(3) Shareholders or their proxies shall produce their identity documents when attending the EGM.
(4) To ascertain the shareholders’ entitlement to attend and vote at the EGM, the register of shareholders of the Company will be closed from Monday, 12 November 2018 to Wednesday, 12 December 2018 (both dates inclusive), during which period no transfer of shares will be registered. All duly completed transfer forms accompanied by the relevant share certificates must be lodged with the Company’s H Share Registrars, Hong Kong Registrars Limited, at Shops 1712–1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong not later than 4:30 p.m. on Friday, 9 November 2018.
(5) Shareholders whose names appear on the register of shareholders of the Company on Monday, 12 November 2018 are entitled to attend and vote at the EGM.
(6) 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 Thursday, 22 November 2018. 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 EGM is not expected to take more than half a day. Shareholders or their proxies attending the EGM shall be responsible for their own travel and accommodation expenses.
(8) Pursuant to rule 13.39(4) of the Rules Governing the Listing of Securities (“ Listing Rules ”) on The Stock Exchange of Hong Kong Limited, all votes of the shareholders at the meeting will be taken by poll except where the chairman, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands and the Company will announce the results of the poll in the manner prescribed under rule 13.39(5) of the Listing Rules.
(9) As at the date of this notice, the board of Directors comprises 10 Directors, of which Mr. LUO Yuguang, Mr. Shuichi HAYASHI, Mr. Keiichiro MAEGAKI, Mr. Masanori OTA, Mr. LI Juxing and Mr. XU Song are executive Directors and Mr. LONG Tao, Mr. SONG Xiaojiang, Mr. LIU Tianni and Mr. LIU Erh Fei are independent non-executive Directors.

– EGM-3 –

AI assistant

Qingling Motors Co. Ltd — Proxy Solicitation & Information Statement 2018

49705_rns_2018-10-25_5b46b703-667a-47a0-a52b-7ba52dd3e65b.pdf

(Stock Code: 1122)

(1) DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTION;

(2) PROPOSED CHANGE OF THE BUSINESS SCOPE OF THE COMPANY;

(3) PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION; AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

DEFINITIONS

DEFINITIONS

(Stock Code: 1122)

(1) DISCLOSEABLE TRANSACTION AND

CONNECTED TRANSACTION;

(2) PROPOSED CHANGE OF THE BUSINESS SCOPE OF THE COMPANY;

(3) PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION;

AND

(4) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

LETTER FROM THE BOARD

BACKGROUND

I. THE MERGER

The Merger Agreement

LETTER FROM THE BOARD

The assumptions and methods of valuations

LETTER FROM THE BOARD

The JV Agreement

The Priority Supply Memorandum

EXISTING CONTINUING CONNECTED TRANSACTIONS WITH QIEC AND IQAC

ENVIRONMENTAL PROVISIONS AND REQUIREMENTS

REASONS FOR CONDUCTING THE MERGER

LETTER FROM THE BOARD

II. REQUIREMENTS UNDER THE LISTING RULES

III. INDEPENDENT SHAREHOLDERS’ APPROVAL

LETTER FROM THE BOARD

IV. GENERAL

Information on the Parties to the Merger

QIEC

IQAC

The Company

Isuzu

Qingling Group

V. PROPOSED CHANGE OF THE BUSINESS SCOPE OF THE COMPANY

Conditions

VI. PROPOSED AMENDMENTS TO THE ARTICLES

VII. THE EGM

LETTER FROM THE BOARD

VIII. VOTING BY POLL

IX. RECOMMENDATION

(Stock Code: 1122)

DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTION

Yours faithfully,

DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTION

INTRODUCTION

Listing Rules’ Implication

OUR INDEPENDENCE

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Information on the Company, QIEC, IQAC, Qingling Group and Isuzu

1.1 Information on the Company

1.2 Information on QIEC

1.3 Information on IQAC

1.4 Information on Qingling Group

1.5 Information on Isuzu

2. Reasons for and benefits of the Merger Agreement

3. Principal terms of the Merger Agreement and the JV Agreement

3.1 Parties to the Merger Agreement

3.2 Subject Matters

3.3 Shareholding Structure

3.4 Basis of determining the shareholding structure

3.4.1 Independent Valuer’s expertise

3.4.2 Selection of valuation methodology

3.4.3 Valuation assumptions

3.4.4 The valuation approaches in the Asset-based approach

Current assets

Fixed Assets

Construction-in progress (for IQAC only)

Intangible Assets (for QIEC only)

Other non-current assets

Current liabilities

3.4.5 Conclusion

Qingling Motors Co. Ltd Proxy Solicitation & Information Statement 2018