Shanghai Henlius Biotech, Inc. — Proxy Solicitation & Information Statement 2003

Apr 1, 2003

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 a stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountants or other professional adviser.

If you have sold or transferred all your shares in BYD Company Limited, you should at once hand this circular to the purchaser, the transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or the transferee.

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

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BYD COMPANY LIMITED

(a joint stock company incorporated in the PRC with limited liability)

ONGOING CONNECTED TRANSACTIONS

Independent Financial Adviser to the Independent Board Committee

Celestial Capital Limited

A letter from the Board is set out on pages 3 to 8 of this circular and a letter from the Independent Board Committee of the Company is set out on page 9 of this circular. In addition, a letter from Celestial is set out on pages 10 to 16 of this circular.

1st April 2003

BYD Company Limited

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . 3
2. Ongoing connected transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . 4
3. Benefits of the ongoing connected transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . 6
4. Waiver in respect of the ongoing connected transactions . . . . . . . . . . . . . . . . . . . .	. . . 7
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Letter from Celestial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Appendix — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	17

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BYD Company Limited

DEFINITIONS

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

“Acquisition”

the acquisition by the Company of interests in Auto on the terms and subject to the conditions set out in the Acquisition Agreements

“Acquisition Agreement I” the acquisition agreement dated 22nd January, 2003 entered into between the Company and Shaanxi Group in relation to the Acquisition “Acquisition Agreement II” the acquisition agreement dated 22nd January, 2003 entered into between the Company and ZC Machinery in relation to the Acquisition

the acquisition agreement dated 22nd January, 2003 entered into between the Company and Shaanxi Group in relation to the Acquisition

• “Acquisition Agreements” “Associate(s)”

• the Acquisition Agreement I and the Acquisition Agreement II has the meanings ascribed to it under the Listing Rules

• (Xian Qin Chuan Automobile Limited

• Liability Company), a limited liability company incorporated in the PRC

“Auto”

“Board” the board of Directors “Celestial” Celestial Capital Limited, the independent financial adviser to the Independent Board Committee and deemed to be licensed to conduct Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) “CNIC” (China North Industries Corporation) “CNIC Group” CNIC, its subsidiaries and Associates which include, inter alia, ZC Machinery and Qin Chuan Group “Company” BYD Company Limited, a joint stock company incorporated in the PRC with limited liability, the H Shares of which are listed on the Stock Exchange “Connected Transactions the announcement of the Company on connected transactions Announcement” dated 14th March, 2003 “Directors” directors of the Company “Domestic Shares” ordinary shares issued by the Company, with a RMBdenominated par value of RMB1.00 each, which are subscribed for and paid up in RMB “Group” the Company and its subsidiaries (as defined in the Companies Ordinance, Chapter 32 of the Laws of Hong Kong)

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BYD Company Limited

DEFINITIONS

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|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“H|Shares”|overseas|listed|foreign|invested|shares|in|the|share|capital|of|
|the|Company,|with|a|RMB-denominated|par|value|of|
|RMB1.00|each,|and|which|are|subscribed|for|and|traded|in|
|Hong|Kong|dollars|
|“HK$”|Hong|Kong|dollar(s),|the|lawful|currency|of|Hong|Kong|
|“Hong|Kong”|the|Hong|Kong|Special|Administrative|Region|of|the|PRC|
|“Independent|Board|Committee”|the|independent|committee|of|the|Board,|comprising|Mr.|Li|
|Guo-xun|and|Mr.|Kang|Dian,|both|independent|non-executive|
|Directors,|established|to|advise|on|the|Ongoing|Purchases|of|
|Materials|
|“Latest|Practicable|Date”|26th|March,|2003,|being|the|latest|practicable|date|before|the|
|printing|of|this|circular|for|ascertaining|certain|information|
|contained|in|it|
|“Listing|Rules”|the|Rules|Governing|the|Listing|of|Securities|on|the|Stock|
|Exchange|
|“Ongoing|Purchases|of|Materials”|the|ongoing|purchases|of|materials|by|Auto|from|members|of|
|the|CNIC|Group|as|set|out|in|paragraph|2(A)|of|the|“Letter|
|from|the|Board”|in|this|circular|
|“PRC”|the|People’s|Republic|of|China|
|“Qin|Chuan|Group”|(Xian|Qin|Chuan|(Group)|
|Development|Company),|a|state-owned|enterprise|
|incorporated|in|the|PRC|
|“RMB”|Renminbi,|the|lawful|currency|of|the|PRC|
|“SDI|Ordinance”|the|Securities|(Disclosure|of|Interests)|Ordinance|(Chapter|
|396|of|the|Laws|of|Hong|Kong)|as|amended|from|time|to|time|
|“Shaanxi|Group”|(Shaanxi|Province|Investment|Group|
|(Limited)|Company),|a|state|wholly-owned|limited|liability|
|company|incorporated|in|the|PRC|
|“Shareholders”|holders|of|the|H|Shares|of|the|Company|
|“Stock|Exchange”|The|Stock|Exchange|of|Hong|Kong|Limited|
|“Supervisors”|member(s)|of|the|supervisory|committee|of|the|Company|
|“Utilities|Supply|Agreement”|the|agreement|dated|30th|January,|1999|entered|into|between|
|Auto|and|Qin|Chuan|Group|in|relation|to|the|provision|of|
|utilities|by|Qin|Chuan|Group|to|Auto|
|“ZC|Machinery”|(Xian|Northern|Qin|Chuan|
|Machinery|Industries|Company|Limited),|a|state|wholly-|
|owned|limited|liability|company|incorporated|in|the|PRC|

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Note: For information purpose only, the translation of RMB to HK$ in this circular is based on the exchange rate of RMB106:HK$100.

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BYD Company Limited

LETTER FROM THE BOARD

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BYD COMPANY LIMITED

(a joint stock company incorporated in the PRC with limited liability)

Executive Directors: Wang Chuan-fu Xia Zuo-quan Non-executive Director: Lu Xiang-yang

Registered Address: Yan An Road Kuichong Longgang District Shenzhen Guangdong Province The PRC

Independent non-executive Directors:

Li Guo-xun Kang Dian

1st April, 2003

To the Shareholders of the Company

ONGOING CONNECTED TRANSACTIONS

1. INTRODUCTION

The Board announced on 22nd January, 2003 that the Company entered into the Acquisition Agreements with each of Shaanxi Group and ZC Machinery, pursuant to which the Company has effectively acquired an aggregate of 77% equity interest in Auto for an aggregate consideration of RMB269,500,000 (about HK$254 million). The Acquisition constitutes a discloseable transaction for the Company under the Listing Rules in respect of which a circular dated 12th February, 2003 was despatched to the Shareholders of the Company. Completion of the Acquisition Agreement I and the Acquisition Agreement II took place on 17th March, 2003 and 31st March, 2003, respectively.

The Group is principally engaged in the research, development, manufacturing and sale of Li-ion batteries, NiCd batteries and NiMH batteries. Auto is now owned as to 77% by the Company and therefore is its non-wholly owned subsidiary. Reference is made to the Connected Transactions Announcement of the Company dated 14th March, 2003. As disclosed therein and set out in paragraph 2 below, a number of existing transactions entered into between Auto and ZC Machinery, a substantial shareholder of Auto holding 13% equity interest and/or its Associates, which constitute ongoing connected transactions for the Company under Chapter 14 of the Listing Rules.

In respect of the ongoing connected transactions as set out in paragraph 2 below, the Company has applied for and obtained a waiver from the Stock Exchange from strict compliance with the applicable requirements set out in Chapter 14 of the Listing Rules subject to certain conditions.

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BYD Company Limited

LETTER FROM THE BOARD

In addition, in accordance with the Listing Rules, the Ongoing Purchases of Materials require the approval of independent Shareholders of the Company. Messrs. Wang Chuan-fu, Lu Xiang-yang, Xia Zuo-quan and Guangzhou Rongjie Investment Company Limited, as a group of closely allied shareholders collectively holding an aggregate of approximately 53.9% of the issued share capital of the Company who are independent of the connected persons as set out in the Connected Transactions Announcement, have given a written certificate approving the connected transactions, including the Ongoing Purchases of Materials. The Stock Exchange has granted a waiver from the requirement of holding a physical Shareholders’ meeting of the Shareholders for approving the Ongoing Purchases of Materials.

An Independent Board Committee has been established to consider the Ongoing Purchases of Materials. Celestial has been appointed as the independent financial adviser to the Independent Board Committee in respect of the Ongoing Purchases of Materials.

The principal purpose of this circular is to provide you with information relating to the Ongoing Purchases of Materials.

Your attention is also drawn to the letter from the Independent Board Committee, the letter from Celestial, and the information set out in the appendix of this circular.

2. ONGOING CONNECTED TRANSACTIONS

(A) Purchases of materials from the CNIC Group

Transaction Nature

Auto has been purchasing various materials for the manufacturing of mini-cars sold under the “Flyer ( )” brand from members of the CNIC Group. As at the date of this circular, there is no long term supply agreement between Auto and suppliers of these materials. Purchase orders are placed on a monthly basis. Auto will continue to procure the supply of the following materials from members of the CNIC Group:

• (i) car seats;

• (ii) car carpets;

• (iii) various parts and accessories; and

• (iv) car engines.

Connected Persons

CNIC is the holding company of ZC Machinery and by virtue of its controlling interest in ZC Machinery, constitutes a substantial shareholder of Auto. Accordingly, members of the CNIC Group, being Associates of CNIC, are also considered as connected persons of the Company.

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BYD Company Limited

LETTER FROM THE BOARD

Purchasing Policy

The purchasing decisions of Auto were largely based on comparisons of prices payable to the members of the CNIC Group and those payable to independent third party suppliers. The purchasing policy of Auto has been and will continue to be that the prices payable to members of the CNIC Group shall not exceed the prices charged by independent third party suppliers who are not connected with the CNIC Group. Auto will obtain at least two quotations annually from independent third party suppliers of comparable size and standard to ensure that the prices charged by these connected party suppliers shall not exceed those charged by independent third parties. The executive Directors are of the view that the said two quotations should be able to provide Auto with a reasonable basis for comparison. Should there be any significant fluctuation in the prices of the materials during the relevant year after the said two quotations have been obtained, another quotation will be obtained by Auto from an independent third party supplier.

In addition to the price differences, the executive Directors are of the view that purchasing materials from members of the CNIC Group is and would continue to be beneficial to the Group on the basis that these suppliers have been supplying materials to Auto for the manufacturing of mini-cars and understand the specifications and quality requirements of Auto. As such, there is quality assurance in respect of the materials supplied by members of the CNIC Group.

(B) Utilities Supply Agreement

Transaction Nature

Under the Utilities Supply Agreement, Qin Chuan Group has agreed to supply electricity, water, steam, hot water, compressed air and purified water to Auto. It has further covenanted, inter alia, that it will (i) ensure normal supply of the aforesaid utilities; and (ii) conduct regular maintenance of Auto’s equipment. At present, Auto no longer obtains the supply of utilities other than electricity under the Utilities Supply Agreement. Auto will continue to procure the supply of electricity for Auto’s daily operation. Such electricity supply is now currently provided by Xian Qin Chuan Power Engineering Company Limited ( ), which is under the control of ZC Machinery.

The Utilities Supply Agreement shall remain in force until the expiry of Auto’s term of operation. The business licence of Auto did not state Auto’s operating term. According to the articles of association of Auto, Auto may operate for an indefinite period until its operation has to be terminated in accordance with applicable laws.

Connected Person

Qin Chuan Group is regarded as a connected person of the Company under the Listing Rules on the basis that Qin Chuan Group is controlled by and under the supervision of CNIC. CNIC is the holding company of ZC Machinery and by virtue of its controlling interest in ZC Machinery, constitutes a substantial shareholder of Auto. Qin Chuan Group therefore constitutes an Associate of ZC Machinery and a connected person of the Company.

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BYD Company Limited

LETTER FROM THE BOARD

Pricing Basis

Charges for the electricity supplied to Auto is based on the rate stipulated in the Utilities Supply Agreement which is determined by reference to the electricity rates and charges payable by Qin Chuan Group to the relevant electricity supply bureau in Xian. If Auto is to directly obtain the supply of electricity from the relevant electricity supply bureau in Xian rather than through Qin Chuan Group, Auto would have to incur a large sum of capital investments of approximately RMB10,000,000 for the infrastructure and also ongoing expenses such as maintenance expenses. Taking into account the aforesaid, the total amount of electricity charges payable by Auto are and shall continue to be below the aggregate amount that Auto would otherwise have to pay for obtaining the electricity supply directly from the electricity supply bureau.

The following is a summary of the transaction values of the Ongoing Purchases of Materials and the Utilities Supply Agreement for the two years ended 31st December, 2002:

		Period from	Period from
		1st January, 2001 to	1st January, 2002 to
		31st December, 2001	31st December, 2002
		(RMB’000)	(RMB’000)
(A)	Purchases of materials from	63,147	167,230
	the CNIC Group
(B)	Utilities Supply Agreement	4,132	4,836

For each of the two years ended 31st December, 2002, the total annual purchase of materials by Auto represented approximately 19.98% and 7.33% respectively of the book value of the combined net tangible assets of the Company (including Auto on a pro-forma basis for the relevant financial year).

During the year ended 31st December, 2002, a total of approximately 17,000 units of cars were produced and sold by Auto. It is expected that the total units of car to be produced and sold by Auto will be increased by about 100% to about 35,000 units of car for the year ending 31st December, 2003 on the basis that sales orders for about 32,000 units of car, representing approximately 91% of the estimated total production and sales for the year ending 31st December, 2003, have already been received by Auto as at the Latest Practicable Date.

3. BENEFITS OF THE ONGOING CONNECTED TRANSACTIONS

The above connected transactions will be conducted, as applicable, in the ordinary and usual course of business of the Group, and on normal commercial terms (or better) determined on an arm’s length basis and are fair and reasonable so far as the shareholders of the Company, taken as a whole, are concerned. The executive Directors consider it to be in the interests of the Company to engage in the connected transactions as these transactions will facilitate the smooth operations of the Group’s business.

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BYD Company Limited

LETTER FROM THE BOARD

4. WAIVER IN RESPECT OF THE ONGOING CONNECTED TRANSACTIONS

The executive Directors expected that the total annual purchase amount of materials in respect of the Ongoing Purchases of Materials as described in paragraph 2(A) may exceed the higher of HK$10,000,000 or 3% of the book value of the consolidated net tangible assets of the Company, whilst the annual aggregate amount payable under the Utilities Supply Agreement as described in paragraph 2(B) may exceed the higher of HK$1,000,000 or 0.03% of the consolidated net tangible asset value of the Company but below the higher of HK$10,000,000 or 3% of the book value of the consolidated net tangible assets of the Company, for any financial year during the three years period ending 31st December, 2005 (or such shorter period as may be the case where any of those transactions are to be terminated before 31st December, 2005).

Pursuant to the Listing Rules, the ongoing connected transactions as set out above would normally require disclosure and subject to the nature and value of the transaction approval by independent shareholders of the Company. Given the ongoing nature of the above connected transactions, the executive Directors are of the view that it would not be practicable to make disclosure of and obtain shareholders’ approval (if necessary) on each and every occasion as they arise. The Company has, therefore, in respect of the above-mentioned ongoing connected transactions applied for and obtained a waiver from the Stock Exchange from strict compliance with the requirements set out in Chapter 14 of the Listing Rules regarding the transactions in respect of each and every occasion as they arise during the three financial years ending 31st December, 2005 (or such shorter period as may be the case where any of those transactions are to be terminated before 31st December, 2005) subject to the following conditions:

1. details of the connected transactions shall be disclosed in the Company’s annual report for each relevant financial year during the three financial years ending 31st December, 2005 (or such shorter period as may be the case where any of those transactions are to be terminated before 31st December, 2005) as set out in Rules 14.25(1)(A) to (D) of the Listing Rules;

2. the independent non-executive Directors shall review annually any continuing connected transactions and confirm in the Company’s annual report of the relevant year that:

3. (a) the transactions have been entered into by the relevant member of the Group in the ordinary and usual course of its business;

4. (b) the transactions have been entered into on an arm’s length basis and on normal commercial terms;

5. (c) the transactions are on terms that are fair and reasonable so far as the independent shareholders of the Company are concerned;

6. (d) the transactions have been entered into either (i) in accordance with the terms of the agreements governing such transactions; or (ii) where there is no such agreement, on terms no less favourable than terms available from third parties so far as the independent shareholders of the Company are concerned; and

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BYD Company Limited

LETTER FROM THE BOARD

• (e) in any financial year, the annual consideration in respect of (i) the Ongoing Purchases of Materials does not exceed 12% of the Group’s total turnover for each relevant financial year; and (ii) the Utilities Supply Agreement does not exceed 2% of the Group’s net tangible asset value as at the end of each relevant financial year.

• the auditors of the Company shall review annually the transactions and write to the Board (with a copy of the letter provided to the Stock Exchange) stating that:

• (a) the transactions have received the approval of the Board;

• (b) the transactions have been entered into in accordance with the terms of the agreement relating to the transactions or, where there is no such agreement, on terms no less favourable than terms available to (or from, as appropriate) independent third parties; and

• (c) the transactions have not exceeded the respective caps referred to in sub-paragraph 2(e) above.

Where, for whatever reason, the auditors decline to accept the engagement or are unable to confirm the above, the Directors shall inform the Stock Exchange immediately; and

1. the Company’s annual report and accountants’ report for each relevant financial year during the three financial years ending 31st December, 2005 (or such shorter period as may be the case where any of those transactions are to be terminated before 31st December, 2005) shall contain a statement that, in the opinion of the Directors, the arrangement has been entered into in the manner as stated in sub-paragraph 2(a) to (e) above.

In the event that there is any amendment to the Listing Rules imposing more stringent compliance requirements in respect of the connected transactions set out in this circular, the Company will comply with the applicable requirements.

By order of the Board BYD Company Limited Wang Chuan-fu Chairman

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BYD Company Limited

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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BYD COMPANY LIMITED

(a joint stock company incorporated in the PRC with limited liability)

1st April, 2003

To the Shareholders of the Company

Dear Sirs or Madams,

ONGOING CONNECTED TRANSACTIONS

We have been appointed as members of the Independent Board Committee to advise the Shareholders in respect of the Ongoing Purchases of Materials, details of which are set out in the letter from the Board in the circular dated 1st April, 2003 (the “Circular”) to the Shareholders. Unless the context otherwise requires, terms defined in the Circular shall have the same meanings when used in this letter.

Celestial has been appointed to advise us regarding the Ongoing Purchases of Materials. We wish to draw your attention to the letter from Celestial which contains advice to us in relation to the Ongoing Purchases of Materials, together with the principal factors and reasons taken into consideration in arriving at such advice. Your attention is also drawn to the letter from the Board and the additional information set out in the appendix to the Circular.

Having taken into account the advice of, and the principal factors and reasons considered by Celestial in relation thereto as stated in its letter, we consider the terms and conditions of the Ongoing Purchases of Materials to be fair and reasonable so far as the interests of the Shareholders are concerned. We therefore recommend you in support of the Ongoing Purchases of Materials.

Yours faithfully, Li Guo-xun and Kang Dian Independent Board Committee

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BYD Company Limited

LETTER FROM CELESTIAL

The following is the full text of the letter prepared for the purpose of incorporation in this circular, received from Celestial, the independent financial adviser to the Independent Board Committee.

Celestial Capital Limited

21/F., Low Block, Grand Millennium Plaza 181 Queen’s Road Central

Hong Kong

1st April, 2003

The Independent Board Committee

BYD Company Limited Yan An Road Kuichong Longgang District Shenzhen Guangdong Province The People’s Republic of China

Dear Sirs

ONGOING CONNECTED TRANSACTION: PURCHASES OF MATERIALS BY AUTO FROM MEMBERS OF THE CNIC GROUP

INTRODUCTION

We refer to our engagement as the independent financial adviser to advise the Independent Board Committee in respect of the purchases of car engines, car seats, car carpets, and various parts and accessories (altogether the “Materials”) by Auto, a non-wholly owned subsidiary of the Company upon completion of the Acquisition Agreement I and the Acquisition Agreement II in March 2003 (the “Completion”) from certain members of the CNIC Group (the “CNIC Suppliers”). Details of the purchases of Materials that may be made by Auto from the CNIC Suppliers (the “Materials Purchases”) are set out in the letter from the Board (the “Letter from the Board”) as contained in the circular of the Company dated 1st April, 2003 (the “Circular”), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless otherwise specified.

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BYD Company Limited

LETTER FROM CELESTIAL

Auto is a 77% owned subsidiary of the Company upon the Completion. ZC Machinery is a substantial shareholder of Auto and it holds 13% equity interest in Auto following the Completion. CNIC is the holding company of ZC Machinery and by virtue of its controlling interest in ZC Machinery, is regarded as a substantial shareholder of Auto. Accordingly, members of the CNIC Group (including the CNIC Suppliers), being Associates of CNIC, are considered as connected persons of the Company.

Auto is a mini-car producer in the PRC. Auto has been purchasing the Materials from the CNIC Suppliers, and it will continue to procure the supply of the Materials from the CNIC Suppliers following the Completion. As the CNIC Suppliers are connected persons of the Company, the Materials Purchases would constitute ongoing connected transactions for the Company under Chapter 14 of the Listing Rules. The Company has applied for a waiver from strict compliance with the requirements set out in Chapter 14 of the Listing Rules regarding, inter alia, the transactions under the Materials Purchases in respect of each and every occasion as such transactions arise during the three financial years ending 31st December, 2005 (or such shorter period as may be the case if the Materials Purchases are terminated before 31st December, 2005) subject to certain conditions (please refer to the paragraph headed “Waiver in respect of the ongoing connected transactions” of the Letter from the Board and the sub-paragraph headed “Monitoring procedures” of this letter for details of these conditions).

Our role as the independent financial adviser to the Independent Board Committee is to give our opinion as to whether the Materials Purchases and the waiver regarding the Materials Purchases are fair and reasonable and are in the interests of the Group and the shareholders of the Company as a whole.

In formulating our advice and recommendation, we have relied on the information, opinions, representations and facts contained or referred to in the Circular, and the information and representation separately provided to us by the Directors (altogether the “Information”), for which they are wholly responsible. We have sought and received confirmation from the Directors that no material facts have been omitted from the Information, and that the Information are true, accurate, complete and not misleading at the time it is made available and continue to be so at the date of the Circular. We consider that we have received sufficient information to form a reasonable basis for our advice and recommendation as set out in this letter. We have no reason to suspect that any relevant information has been withheld, nor are we aware of any facts or circumstances which would render the Information untrue, inaccurate, incomplete or misleading. The Directors have further confirmed, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts or representations, the omission of which would make any statement in the Circular, including this letter, misleading. We have not, however, carried out any independent verification of the Information nor have we conducted any form of in-depth investigation into the businesses and affairs of the Group.

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BYD Company Limited

LETTER FROM CELESTIAL

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation in relation to the Materials Purchases and the wavier regarding the Materials Purchases, we have considered the following principal factors and reasons:

I. Nature of business of Auto

As set out in the circular of the Company dated 12th February, 2003, Auto is a mini-car producer in the PRC, the principal activities of which are the development, production and sale of mini-cars. Accordingly, Auto needs to purchase materials, including the Materials, to produce mini-cars. We are therefore of the view that the Materials Purchases are in the ordinary and normal course of business of Auto to develop, produce and sell mini-cars.

II. Constant and reliable supply of the Materials

As set out in the Circular and advised by the Directors, Materials with total values of about RMB63 million and RMB167 million were purchased by Auto from the CNIC Suppliers during the years ended 31st December, 2001 and 2002, respectively, representing about 19.98% and 7.33% of the book value of the combined net tangible assets of the Company during the years ended 31st December, 2001 and 2002, respectively (including Auto on a pro-forma basis for the relevant financial year).

The Directors have advised that Auto has purchased the Materials from the CNIC Suppliers for more than 2 years. The Directors are of the opinion that the CNIC Suppliers are the major and reliable suppliers of Auto as they have been supplying the Materials to Auto for the manufacturing of mini-cars for more than 2 years, and the Materials supplied by them always met the specifications and quality requirements of Auto. In addition, we have been further advised by the Directors that no complaint was made by Auto in relation to its purchases of the Materials from the CNIC Suppliers in the past and Auto has been satisfied with the products and services of the CNIC Group. On the basis as set out in this paragraph, we are of the view that the continuation of sourcing of the Materials from the CNIC Suppliers, being the major and reliable suppliers of Auto, will help to secure a stable supply of Materials of satisfactory quality and will benefit the ordinary course of business of Auto; hence, the Materials Purchases will be in the interest of the Group and the shareholders of the Company as a whole.

III. Purchasing policy of Auto

It was set out in the Letter from the Board that the purchasing decisions of Auto have been largely based on comparisons of prices payable to the CNIC Suppliers and those payable to independent third party suppliers, and such purchasing policy will continue. Auto will obtain at least two quotations annually from independent third party suppliers which are not connected with the CNIC Group and which are suppliers of comparable size and standard for the purpose of making such comparisons so as to ensure that the prices charged by the CNIC Suppliers shall not exceed those offered by the independent third party suppliers. Under such mechanism, the executive Directors consider that Auto will obtain two independent and quality quotations which are sufficient for comparison purpose. On such basis, the executive Directors are of the view that the said two quotations should be able to provide Auto with a reasonable basis for comparison. We concur with

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BYD Company Limited

LETTER FROM CELESTIAL

such view of the Directors and are of the view that two independent and quality quotations should be able to provide Auto with a reasonable basis for comparison. The Directors have also confirmed that should there be any significant fluctuation in the prices of the Materials during the relevant year after the said two quotations have been obtained, another one quotation will be obtained by Auto from independent third party suppliers. Having considered the purchasing policy of Auto that prices payable to the CNIC Suppliers shall not exceed those payable to the independent third party suppliers and on the basis that Auto will obtain at least two quotations annually from independent third party suppliers which are not connected with the CNIC Group and which are suppliers of comparable size and standard for the purpose of making such comparison to ensure that the prices charged by the CNIC Suppliers shall not exceed those offered by the independent third party suppliers (and, if there is any significant fluctuation in the prices of the Materials, one additional quotation will be obtained by Auto from independent third party suppliers), we are of the opinion that the Materials Purchases are fair and reasonable as they shall be made at prices no less favourable than those offered by the independent third parties, and they shall be in the interests of the Group and the shareholders of the Company as a whole.

IV. Reasons of application for waiver in relation to the Materials Purchases and the relevant annual limit

It was set out in the Letter from the Board that the total amount of the Materials to be purchased from the CNIC Suppliers in each financial year may exceed the higher of HK$10,000,000 or 3% of the book value of the consolidated net tangible assets of the Company for any financial year during the three years ending 31st December, 2005 (or such shorter period as may be the case if the Materials Purchases are terminated before 31st December, 2005). Pursuant to the Listing Rules, the Materials Purchases may require disclosure and approval by the independent shareholders of the Company, depending on the annual amount of the Material Purchases. Given the ongoing nature of the Materials Purchases, the executive Directors are of the view that it would not be practicable to make disclosure or, if necessary, obtain independent shareholders’ approval of the Materials Purchases on each and every occasion as the transactions made under the Materials Purchases arise. The Company has therefore, in respect of, inter alia, the Materials Purchases, applied to the Stock Exchange for a waiver from strict compliance with the requirements set out in Chapter 14 of the Listing Rules regarding, inter alia, the transactions under the Materials Purchases in respect of each and every occasion as they arise during the three financial years ending 31st December, 2005 (or such shorter period as may be the case if the Materials Purchases are terminated before 31st December, 2005), subject to the conditions set out in the paragraph headed “Waiver in respect of the ongoing connected transactions” of the Letter from the Board and the sub-paragraph headed “Monitoring procedures” below. One of such conditions is that the aggregate annual transaction amount of the Materials Purchases for each of the financial year ending 31st December, 2005 will not exceed 12% of the Group’s total turnover for each relevant financial year (the “Annual Limit”).

During the year ended 31st December, 2002, Materials with a total value of about RMB167 million were purchased by Auto from the CNIC Suppliers. Such amount represented about 6% of the pro forma consolidated turnover of the Group of about RMB2,913 (on the basis of (i) the audited consolidated turnover of the Group of about RMB2,291 million for the year ended 31st December, 2002, and (ii) the unaudited consolidated turnover of Auto of about RMB622 million for the year ended 31st December, 2002 (which was arrived in accordance with the PRC GAAP) as set out in the circular of the Company dated 12th February, 2003).

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BYD Company Limited

LETTER FROM CELESTIAL

As set out in the Letter from the Board and as advised by the Directors, (i) during the year ended 31st December, 2002, a total of about 17,000 units of cars were produced and sold by Auto, and (ii) it is expected by the Directors that the total units of cars to be produced and sold by Auto will be increased by about 100% to about 35,000 units of cars during the year ending 31st December, 2003, out of which sales orders in relation to about 32,000 units of cars, representing approximately 91% of the said estimated sales orders of 35,000 units, have been received by Auto. On that basis, the Directors are of the opinion that the Materials to be purchased by Auto from the CNIC Suppliers will increase accordingly.

Having taken into account the ongoing nature of the Materials Purchases, we consider that it is reasonable for the Company to apply for the waiver regarding the Materials Purchases as such waiver, subject to the proper implementation of the monitoring procedures as set out in the paragraph headed “Waiver in respect of the ongoing connected transactions” of the Letter from the Board and the following sub-paragraph headed “Monitoring procedures”, will provide the Group with flexibility, within the Annual Limit, in relation to, inter alia, the purchases of the Materials by Auto from the CNIC Suppliers. In addition, having considered and reviewed the information provided by the Directors, in particular, the increased estimated sales orders to be received by Auto for the year ending 31st December, 2003, and that approximately 91% of the estimated sales orders have been received by Auto, we are of the view that the Annual Limit is reasonable.

V. Monitoring procedures

As set out in the paragraph headed “Waiver in respect of the ongoing connected transactions” of the Letter from the Board and for the purpose of corporate governance and as the conditions of the waiver relating to, inter alia, the Materials Purchases, the Group will apply the following procedures in respect of any connected transactions under the Materials Purchases during the three financial years ending 31st December, 2005 (or such shorter period as may be the case if the Materials Purchases are terminated before 31st December, 2005):

1. details of the connected transactions shall be disclosed in the Company’s annual report for each relevant financial year during the three financial years ending 31st December, 2005 (or such shorter period as may be the case if the Materials Purchases are terminated before 31st December, 2005) as set out in Rules 14.25(1)(A) to (D) of the Listing Rules;

2. the independent non-executive Directors shall review annually any connected transactions and confirm in the Company’s annual report of the relevant year that:

3. (a) the transactions have been entered into by the relevant member of the Group in the ordinary and usual course of its business;

4. (b) the transactions have been entered into on an arm’s length basis and on normal commercial terms;

5. (c) the transactions are on terms that are fair and reasonable so far as the independent shareholders of the Company are concerned;

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BYD Company Limited

LETTER FROM CELESTIAL

• (d) the transactions have been entered into either (i) in accordance with the terms of the agreement governing such transactions; or (ii) where there is no such agreement, on terms no less favourable than terms available from third parties so far as the independent shareholders of the Company are concerned; and

• (e) in any financial year, the annual consideration in respect of the Materials Purchases does not exceed 12% of the Group’s total turnover for each relevant financial year (i.e. the Annual Limit).

• the auditors of the Company shall review annually the transactions and write to the Board (with a copy of the letter provided to the Stock Exchange) stating that:

• (a) the transactions have received the approval of the Board;

• (b) the transactions have been entered into in accordance with the terms of the agreement relating to the transactions or, where there is no such agreement, on terms no less favourable than terms available to (or from, as appropriate) independent third parties; and

• (c) the transactions have not exceeded the cap as set out in sub-paragraph 2(e) above.

Where, for whatever reason, the auditors decline to accept the engagement or are unable to confirm the above, the Directors shall inform the Stock Exchange immediately; and

1. the Company’s annual report and accountants’ report for each relevant financial year during the three financial years ending 31st December, 2005 (or such shorter period as may be the case if the Materials Purchases are terminated before 31st December, 2005) shall contain a statement that, in the opinion of the Directors, the arrangement has been entered into in the manner as stated in sub-paragraphs (2)(a) to (e) above.

In the event that there is any amendment to the Listing Rules imposing more stringent compliance requirements in respect of the Materials Purchases, the Company will comply with the applicable requirements.

The above monitoring procedures substantially depend on the reviews to be conducted by the independent non-executive Directors and the auditors of the Company. We have no reason to doubt the respective independence of the independent non-executive Directors and the auditors of the Company. On such basis, we consider that the monitoring procedures set out in this paragraph serve to monitor the Materials Purchases so that any purchases of Materials from the CNIC Group will be conducted on fair and reasonable terms and the interests of the Group as well as the interests of the shareholders of the Company as a whole will be properly safeguarded.

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BYD Company Limited

LETTER FROM CELESTIAL

RECOMMENDATION

Having taken into consideration of the above principal factors and reasons, we consider that the Materials Purchases and the wavier in relation thereto are fair and reasonable, and are in the interests of the Group and the shareholders of the Company as a whole.

Your faithfully,

For and on behalf of

CELESTIAL CAPITAL LIMITED Benson Chan

Assistant Managing Director

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BYD Company Limited

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

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

2. DISCLOSURE OF INTERESTS

• (a) As at the Latest Practicable Date, the Directors and the Supervisors had the following interests in the share capital of the Company or any of its associated corporations (within the meaning of the SDI Ordinance) which were required to be notified to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including interests which they were taken or deemed to have under Section 31 of or Part I of the Schedule to the SDI Ordinance) or which were required to be kept by the Company in the register referred to in Section 29 of the SDI Ordinance or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by directors of listed companies:

Name of	Corporate	Personal	Family	Other	Total
Director/Supervisor	Interests	Interests	Interests	Interests	Interests
	(%)	(%)	(%)	(%)	(%)
	(Note 1)	(Note 1)	(Note 1)	(Note 1)	(Note 1)
Mr. Wang Chuan-fu	N/A	27.835	N/A	N/A	27.835
Mr. Lu Xiang-yang	8.304	11.669	N/A	N/A	19.973
	(Note 2)
Mr. Xia Zuo-quan	N/A	6.096	N/A	N/A	6.096

Notes:

1. The above percentages are calculated on the basis of the total issued share capital of the Company as at the Latest Practicable Date, which is RMB539,500,000 divided into 390,000,000 Domestic Shares and 149,500,000 H Shares.

2. The 8.304% equity interest in the Company is held by Guangzhou Rongjie Investment Company Limited, a company owned as to 84% by Mr. Lu Xiang-yang.

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BYD Company Limited

GENERAL INFORMATION

APPENDIX

• (b) Save as disclosed herein, as at the Latest Practicable Date, no Director or Supervisor of the Company was interested beneficially in the share capital of the Company or any associated corporations (within the meaning of the SDI Ordinance) which are required to be notified to the Company and the Stock Exchange pursuant to Section 28 of the SDI Ordinance (including interests which he is taken or deemed to have under Section 31 of or Part I of the Schedule to the SDI Ordinance) or which are required, pursuant to Section 29 of the SDI Ordinance, to be entered in the register referred to therein or which are required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by directors of listed companies.

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date so far as is known to, or can be ascertained after reasonable enquiry by, the Directors, the following persons were directly or indirectly interested in 10% or more of the nominal value of Domestic Shares carrying rights to vote at general meetings of the Company and the amount of each of such person’s interest in such securities was:

		Approximate	Approximate
		percentage of	percentage of
		holding relative	holding relative
	Number of	to the total	to the total issued
	Domestic	number of issued	share capital of
Name	Shares held	Domestic Shares	the Company
		(%)	(%)
		(Note 1)	(Note 2)
Mr. Wang Chuan-fu	150,169,100	38.505	27.835
Mr. Lu Xiang-yang	107,755,600	27.630	19.973
	(Note 3)

Notes:

1. The total number of Domestic Shares issued as at the Latest Practicable Date is 390,000,000.

2. The total issued share capital of the Company as at the Latest Practicable Date is RMB539,500,000, divided into 390,000,000 Domestic Shares and 149,500,000 H Shares, all fully paid up.

3. Mr. Lu Xiang-yang is deemed, pursuant to the SDI Ordinance, to be interested in 44,800,700 Domestic Shares representing about 11.487% and about 8.304% of, respectively, the total number of issued Domestic Shares and the then issued share capital of the Company. Such number of Domestic Shares are held by Guangzhou Rongjie Investment Company Limited, a company owned as to 84% by Mr. Lu Xiang-yang.

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BYD Company Limited

APPENDIX

GENERAL INFORMATION

As at the Latest Practicable Date so far as is known to, or can be ascertained after reasonable enquiry by, the Directors, the following persons were directly or indirectly interested in 10% or more of the nominal value of H Shares carrying rights to vote at general meetings of the Company and the amount of each of such person’s interest in such securities was:

			Approximate
		Approximate	percentage of
		percentage of	holding relative
		holding relative to	to the total issued
	Number of	the total number of	share capital of
Name	H Shares held	issued H Shares	the Company
		(%)	(%)
			(Note)
The Capital Group
Companies, Inc.	25,895,500	17.321	4.800

Note: The total issued share capital of the Company as at the Latest Practicable Date is RMB539,500,000, divided into 390,000,000 Domestic Shares and 149,500,000 H Shares, all fully paid up.

Save as disclosed herein, as at the Latest Practicable Date, so far as is known to the Directors, no other person were interested, either directly or indirectly, in 10% or more of the nominal value of any class of the share capital attaching rights to vote at general meetings of any member of the Group.

4. ARRANGEMENT AFFECTING DIRECTORS

• (a) None of the Directors is interested, directly or indirectly, in any assets which have, since the date to which the latest published audited accounts of the Company were made up, been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

• (b) None of the Directors is materially interested in any contract or arrangement subsisting at the Latest Practicable Date as entered into by any member of the Group and which is significant in relation to the business of the Group.

• (c) No service contract (excluding contract expiring or determinable by the Company within one year without payment of compensation (other than statutory compensation)) is entered into between the Directors, the Supervisors, and the Company or any of its subsidiaries.

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BYD Company Limited

GENERAL INFORMATION

APPENDIX

5. EXPERT

• (a) Celestial is deemed to be licensed to conduct Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong).

• (b) As at the Latest Practicable Date, Celestial had no direct or indirect shareholding in any member of the Group nor any right to subscribe for or to nominate persons to subscribe for securities in any member of the Group nor did it have any interest, either direct or indirect, in any assets which have, since the date to which the latest published audited accounts of the Company were made up, been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

• (c) Celestial has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter dated 1st April, 2003 and references to its name in the form and context in which they appear.

6. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the Group’s financial and trading position since 31st December, 2002, the date to which the latest published audited consolidated accounts of the Group were made up.

7. GENERAL

• (a) The joint company secretaries of the Company are Wu Jing-sheng, who has obtained qualifications as a lawyer and a registered accountant in the PRC, and Mr Deng Guo-rui, who has a master degree in management from Qing Hua University.

• (b) The registered address of the Company is at Yan An Road, Kuichong, Longgang District, Shenzhen, Guangdong Province, the PRC.

• (c) The H Share registrar and transfer office of the Company in Hong Kong is Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

• (d) The English text of this circular shall prevail over the Chinese text in case of any inconsistency.

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BYD Company Limited

GENERAL INFORMATION

APPENDIX

8. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours on any weekday (except public holidays) at the office of Richards Butler situated at 20th Floor, Alexandra House, 16-20 Chater Road, Central, Hong Kong up to and including 15th April, 2003:

• (a) the memorandum of association and bye-laws of the Company;

• (b) the Acquisition Agreements;

• (c) the Utilities Supply Agreement;

• (d) the letter from Celestial to the Independent Board Committee, the text of which is set out on pages 10 to 16 of this circular;

• (e) the written consent from Celestial referred to in the section headed “Expert” in this appendix;

• (f) the circular to the Shareholders on the Acquisition as a discloseable transaction dated 12th February, 2003;

• (g) the audited accounts of the Company for the two years ended 31st December, 2002; and

• (h) the letter from the Independent Board Committee, the text of which is set out on page 9 of this circular.

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BYD Company Limited