Sheng Yuan Holdings Limited - Proxy Solicitation & Information Statement 2011

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about this circular or as to the action to be taken, you should consult a licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Sheng Yuan Holdings Limited, you should at once hand this circular with the enclosed form of proxy to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or the transfer was effected for transmission to the purchaser or 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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(incorporated in Bermuda with limited liability) (Stock Code: 851)

MAJOR TRANSACTION PROPOSED ACQUISITION OF A SECURITIES BROKERAGE AND FINANCIAL SERVICES COMPANY

A notice convening a special general meeting of Sheng Yuan Holdings Limited to be held at Plaza 4, Lower Lobby, Novotel Century Hong Kong Hotel, 238 Jaffe Road, Wanchai, Hong Kong, on Friday, 25 February 2011 at 9:30 a.m. is enclosed. A form of proxy is also enclosed.

Whether or not you are able to attend the special general meeting, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and deliver it to the office of the Company’s Hong Kong branch share registrar, Tricor Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible but in any event not less than 48 hours before the time appointed for holding the special general meeting or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from subsequently attending and voting at the special general meeting or any adjourned meeting should you so wish.

2 February 2011

CONTENTS

			Page
DEFINITIONS	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
LETTER FROM	THE	BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
APPENDIX I	–	FINANCIAL INFORMATION OF THE GROUP . . . . . . . .	14
APPENDIX II	–	FINANCIAL INFORMATION OF THE TARGET . . . . . . .	16
APPENDIX III	–	UNAUDITED PRO FORMA FINANCIAL
		INFORMATION OF THE ENLARGED GROUP . . . . . . .	37
APPENDIX IV	–	GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .	42
NOTICE OF THE SPECIAL GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . .			49

– i –

DEFINITIONS

Unless the context requires otherwise, the capitalized terms used in this circular shall have the following meanings:

“Acquisition”
the proposed acquisition of the Sale Shares by the Purchaser pursuant to the terms of the Acquisition Agreement
“Acquisition Agreement” the conditional sale and purchase agreement dated 17 January 2011 entered into between the Purchaser and the Vendor in relation to the Acquisition
“associate(s)” has the meaning ascribed thereto under the Listing Rules
“Board” the board of Directors
“Business Day”
a day (excluding Saturday, Sunday and any day on which a tropical cyclone warning signal no. 8 or above is hoisted or remains hoisted between 9:00 a.m. and 12:00 noon and is not lowered at or before 12:00 noon or on which a “black” rainstorm warning signal is hoisted or remains in effect between 9:00 a.m. and 12:00 noon and is not discontinued at or before 12:00 noon) on which licensed banks in Hong Kong are open for general business
“BVI”
the British Virgin Islands
“Company”
Sheng Yuan Holdings Limited, a company incorporated in Bermuda with limited liability and the Shares of which are listed on the Main Board of the Stock Exchange with stock code 851
“Completion”
completion of the Acquisition in accordance with the terms and conditions of the Acquisition Agreement
“Consideration”
the cash consideration of HK$17,700,000 payable for the Sale Shares under the Acquisition Agreement
“Director(s)”
director(s) of the Company
“Enlarged Group”
the Group and the Target
“Front Riches”
Front Riches Investments Limited, a controlling Shareholder and a company wholly owned by Mr. Hu

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DEFINITIONS

“FRR”
Securities and Futures (Financial Resources) Rules (Chapter 571N of the Laws of Hong Kong)
“Group” the Company and its subsidiaries
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Latest Practicable Date”
31 January 2011, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“KYHL” Kai Yuan Holdings Limited, a company incorporated in Bermuda with limited liability and the shares of which are listed on the Main Board of the Stock Exchange with stock code 1215
“KYHL Options” the share options granted by KYHL to Mr. Hu, Mr. Hu Jin Xing and Mr. Yip Kar Hang, Raymond under the share option scheme of KYHL with subscription prices ranging from HK$0.205 to HK$0.35 per share of KYHL
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“Mr. Hu”
Mr. Hu Yishi
“PRC”
the People’s Republic of China, excluding Hong Kong, Macau Special Administrative Region and Taiwan for the purpose of this circular
“Purchaser”
Sheng Yuan Financial Services Group Limited, a company incorporated in the BVI with limited liability and a wholly owned subsidiary of the Company
“Sale Shares”
20,000,000 ordinary shares of HK$1.00 each in the share capital of the Target, representing the entire issued share capital thereof as at the date of the Acquisition Agreement
“SFC”
the Securities and Futures Commission of Hong Kong
“SFO”

the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong)

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DEFINITIONS

“SGM” the special general meeting to be convened by the Company at Plaza 4, Lower Lobby, Novotel Century Hong Kong Hotel, 238 Jaffe Road, Wanchai, Hong Kong on Friday, 25 February 2011 at 9:30 a.m. or any adjournment thereof for the Shareholders to consider and, if though fit, to approve the Acquisition Agreement and the transactions contemplated thereunder

“Share(s)” ordinary share(s) of HK$0.10 each in the share capital of the Company

“Shareholder(s)” holder(s) of Share(s)

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“subsidiary(ies)” has the meaning ascribed thereto under the Listing Rules

“Target” Kai Yuan Securities Limited, a company incorporated in Hong Kong and an indirect wholly owned subsidiary of KYHL
“Vendor” Global Strategy International Limited, a company incorporated in the BVI and a wholly owned subsidiary of KYHL
“HK$” Hong Kong dollar, the lawful currency of Hong Kong “%” or “per cent.” percentage or per centum

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LETTER FROM THE BOARD

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(incorporated in Bermuda with limited liability)

(Stock Code: 851)

Executive Directors: Registered office: Ms. Lin Min (Chairman) Clarendon House Mr. Yip Kar Hang, Raymond 2 Church Street Hamilton, HM 11 non-executive Directors: Bermuda

Independent non-executive Directors: Bermuda Mr. Chan Chi On, Derek Mr. Cheung Kwok Keung Principal place of business in Hong Kong: Mr. Lam Kam Tong Unit 803, AXA Centre 151 Gloucester Road Wanchai, Hong Kong

2 February 2011

To the Shareholders,

and for information only, the holder(s) of convertible notes issued by the Company

Dear Sir or Madam,

MAJOR TRANSACTION PROPOSED ACQUISITION OF A SECURITIES BROKERAGE AND FINANCIAL SERVICES COMPANY

INTRODUCTION

On 17 January 2011 (after trading hours), the Vendor and the Purchaser entered into the Acquisition Agreement pursuant to which the Purchaser has conditionally agreed to acquire and the Vendor has conditionally agreed to dispose of the Sale Shares at a cash consideration of HK$17,700,000. The Sale Shares represent the entire issued share capital of the Target as at the date of the Acquisition Agreement.

The Acquisition constitutes a major transaction for the Company under Chapter 14 of the Listing Rules and is therefore subject to, among other things, the approval of the Shareholders by way of poll at the SGM.

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LETTER FROM THE BOARD

The purpose of this circular is to provide you with information, among other things, in respect of the (i) details of the Acquisition Agreement; (ii) financial information of the Group; (iii) accountants’ report of the Target; (iv) unaudited pro forma financial information of the Enlarged Group; and (v) notice of the SGM.

THE ACQUISITION AGREEMENT

Date

17 January 2011

Parties

(i) Purchaser:
Sheng Yuan Financial Services Group Limited, an investment holding company incorporated in the BVI with limited liability and a wholly owned subsidiary of the Company
(ii) Vendor: Global Strategy International Limited

The Vendor is an investment holding company incorporated in the BVI with limited liability and is a wholly owned subsidiary of KYHL, the issued shares of which are listed on the Main Board of the Stock Exchange with stock code 1215. KYHL and its subsidiaries are principally engaged in steel manufacturing and trading investment, heat energy supply and property investment.

As at the Latest Practicable Date, (i) Mr. Hu (being the spouse of Ms. Lin Min (the Chairman of the Company and an executive Director) and (through Front Riches) was beneficially interested in approximately 62.39% of the issued share capital of the Company) and his father, Mr. Hu Jin Xing, were non-executive directors of KYHL, and Mr. Hu was also a director of certain subsidiaries of KYHL; (ii) Mr. Hu and his father held an aggregate of 232,240,000 KYHL Options (conferring rights to subscribe for 232,240,000 shares in, representing approximately 2.43% of the existing issued share capital of, KYHL); and (iii) Mr. Hu was a holder of convertible notes issued by KYHL in the aggregate principal amount of HK$230.1 million (conferring rights to convert into 1,300,000,000 shares in, representing approximately 13.59% of the existing issued share capital of, KYHL at the current conversion price of HK$0.177 per share). In addition, Mr. Yip Kar Hang, Raymond, an executive Director, was a director of the Target and certain subsidiaries of KYHL and a holder of 22,000,000 shares in KYHL, which together with the 50,000,000 KYHL Options (conferring rights to subscribe for 50,000,000 shares in KYHL) held by Mr. Yip, represent approximately 0.75% of the existing issued share capital of KYHL. Save for the aforesaid, to the best of the Directors’ knowledge, information and belief after making reasonable enquiries, the Vendor and its ultimate beneficial owners are third parties independent of and not connected with the Company and its connected persons.

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LETTER FROM THE BOARD

Assets to be acquired

Pursuant to the Acquisition Agreement, the Purchaser has conditionally agreed to acquire and the Vendor has conditionally agreed to dispose of the Sale Shares.

The Sale Shares, being 20,000,000 ordinary shares of HK$1.00 in the issued share capital of the Target, represent the entire issued share capital of the Target as at the date of the Acquisition Agreement. For further details of the Target, please refer to the paragraph headed “Information on the Target” below.

Consideration

The consideration for the Sale Shares of HK$17,700,000 shall be payable in cash by the Purchaser to the Vendor upon Completion.

The Consideration was determined after arm’s length negotiations between the Purchaser and the Vendor on normal commercial terms principally with reference to the unaudited net asset value of the Target as at 31 December 2010. The Consideration will be financed by the Group’s internal resources and/or other borrowings. As at 31 January 2011, the Group had approximately HK$19.4 million bank and cash balances.

Conditions precedent

Completion is conditional upon the fulfilment of the following conditions:

(i) the passing by the Shareholders (other than those Shareholders who are required to abstain from voting under the Listing Rules, if applicable) at the special general meeting of the Company of resolutions approving the Acquisition Agreement and the transactions contemplated thereunder or, where appropriate, the issue of written approval by a Shareholder or a group of Shareholders in lieu of such special general meeting pursuant to and in compliance with the Listing Rules;
(ii) the SFC having granted its approval for the Purchaser and its immediate and intermediate holding companies and the ultimate beneficial owner of such holding companies to become substantial shareholders (as such term is defined in schedule 1 to the SFO) of the Target; and
(iii) all necessary approvals, consents, authorizations and licences in relation to the sale and purchase of the Sale Shares contemplated under the Acquisition Agreement having been obtained.

None of the conditions set out in above may be waived by the Vendor or the Purchaser. If any of the above conditions precedent have not been satisfied at or before 4:00 p.m. on 31 May 2011 or such later date as the parties to the Acquisition Agreement may agree in writing, the Acquisition Agreement shall cease and terminate, and neither party shall have any claim against the other for any costs or losses (save in respect of any antecedent breaches of the Acquisition Agreement).

As at the Latest Practicable Date, none of the above conditions were fulfilled.

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LETTER FROM THE BOARD

Completion

Subject to fulfilment of the above conditions precedent, Completion shall take place on the third Business Day after the last outstanding condition precedent set out above has been fulfilled or such other date as may be agreed by the Purchaser and the Vendor in writing.

Upon Completion, the Target will become a wholly owned subsidiary of the Company and the results of the Target will be consolidated into the financial statements of the Group. The Target will be renamed as Sheng Yuan Securities Limited.

INFORMATION ON THE TARGET

The Target is a company incorporated in Hong Kong on 7 July 2010 and has been wholly and beneficially owned by the Vendor since incorporation. The Target is a licensed corporation under the SFO to engage in Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities since 27 October 2010. To the best knowledge, information and belief of the Directors after making reasonable enquiries, up to the Latest Practicable Date, the Target was not in commercial operation after obtaining the requisite licences for carrying on the business of securities brokerage and advisory services. The Target had acquired the necessary trading infrastructure (including the order management and internet trading system, settlement logistics, network installation and other hardware fixings), had retained a team of professional personnel for the provision and operation of the securities brokerage and advisory services and has recently received the relevant regulatory approvals and endorsements in respect of the provision of securities margin financing services and provision of trading services through electronic means. It is expected that the Target will gradually commence the provision of brokerage services and have its internet trading platform launched by March 2011.

According to the financial information of the Target set out in Appendix II to this circular prepared under the Hong Kong Financial Reporting Standards, the audited net losses before and after taxation of the Target for the period from 7 July 2010 (being the date of incorporation) to 31 December 2010 (the “ Relevant Period ”) were approximately HK$2.3 million and HK$2.3 million respectively while the audited net assets value of the Target as at 31 December 2010 was approximately HK$17.7 million comprising mainly fixed asset of approximately HK$4.9 million and bank and cash balances of approximately HK$13.5 million.

REASONS FOR THE ACQUISITION

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LETTER FROM THE BOARD

As stated in the interim report of the Company for the six months ended 31 October 2010, the management of the Group has been seeking ways to strengthen its business portfolio and exploring new business opportunities for the Group with a view to further broadening its business operation and income stream. According to the statistical information on the website of the Stock Exchange, the total turnover value of the securities market, including equities, equity warrants, derivatives warrants, callable bull/bear contracts, debt securities and unit trusts and mutual funds, of the Main Board of the Stock Exchange and Growth Enterprise Market of the Stock Exchange in Hong Kong for the past five years has increased from HK$4,520.4 billion in 2005 to HK$17,210.1 billion in 2010, representing a compound annual growth rate of approximately 30.7% during the period and the average daily turnover has increased from HK$62,310 million in 2009 to HK$69,117 million in 2010, representing an increase of approximately 11% over the year. The Board considers that, given Hong Kong’s well-established status as the region’s financial hub and the vibrant activities in the financial industry in Hong Kong in recent years, the financial services sector provides long-term growth and an attractive area for the Group to develop into.

In this connection, the Group has identified the Target and considered that the Acquisition is a good investment opportunity for the Group to step into the Hong Kong financial services sector in a bid to generate revenue for the Group. The Board considers that the Acquisition would save the Company the effort and process required for setting up a securities brokerage and financial services company at a reasonable cost. Moreover, taking into consideration of the established platform of the Target and the expected growth potential of the securities industry in Hong Kong, the Board considers the investment opportunity through the Acquisition is valuable and it would improve the Group’s results and provide better return to the Shareholders in the absence of unforeseen circumstances.

Nevertheless, the Board considers that the Acquisition may be posed with certain risks associated thereto (details of which are set out under the paragraph headed “Risk factors” below). Having balanced the possible risks associated with the Acquisition and the prospects of the financial services industry in Hong Kong as mentioned above, the Board believes that the Acquisition offers the Group a good opportunity to step into the financial services sector and is of the opinion that the terms of the Acquisition including the Consideration are fair and reasonable and the Acquisition is in the interests of the Company and the Shareholders as a whole.

PROPOSED BUSINESS DEVELOPMENT PLAN

Upon Completion, the Group will, through the Target, expand its business scope into securities brokerage and financial services. During its initial period of operation, the Group will provide stock brokerage and securities advisory services to clients (which will comprise both retail and professional investors). The Group also plans to provide margin financing and internet trading for clients in the near term, through which securities financing income would be generated as part of the income of the Group’s financial services business. To complement this move, the Group is also in the process of establishing its own asset management and investment advisory businesses. In the long run, the Group plans to provide a wide range of financial services so as to capture the

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LETTER FROM THE BOARD

business opportunities of the financial market in Hong Kong. The Company expects that, in the absence of unforeseen circumstances, the estimated cash outlay for the twelve months following the issue of this circular for the operation of the Target’s business will be approximately HK$10 million and the Company would deploy approximately HK$60 million to support the margin financing business and approximately HK$5 million as capital for the asset management business. As announced by the Company on 21 January 2011, the Company proposed to raise not less than approximately HK$141.4 million but not more than approximately HK$143.6 million before expenses by way of a rights issue on the basis of two rights Shares for every five Shares. It is intended that, out of the net proceeds of the rights issue of the Company, approximately HK$80 million will be used for the development and operation of the securities and margin financing businesses, and approximately HK$20 million will be used for the development of the financial services business (other than the securities brokerage and margin financing business) of the Group. Details of the rights issue are set out in the announcement by the Company dated 21 January 2011.

Mr. Yip Kar Hang, Raymond, an executive Director and the chief executive officer of the Company, is responsible for the overall financial and business operations and management of the Group and has extensive experience in financial services field, corporate mergers and acquisitions and company secretarial matters with various listed companies in Hong Kong. He started his career in Deloitte Touche Tohmatsu and has been involved in the audits of a number of financial services companies and financial institutions during the period from 1992 to 1996. He has then joined the compliance department of a financial services company in Hong Kong (which was then a company listed on the Stock Exchange) from 1996 to 1998, during which he has further broadened his knowledge in the operation of a securities brokerage and financial services company. After that and before joining the Company in May 2009, Mr. Yip has worked for several listed companies as a senior management. The Board considers his experience and business connections could benefit the Group’s development in the securities brokerage and financial services business. Mr. Yip is also a director of the Target and upon Completion, he will be responsible for overseeing the strategic planning and development of the securities brokerage and financial services business of the Enlarged Group. Moreover, the senior management of the Target Group will be retained for the operation of the securities brokerage and financial services business of the enlarged Group, which include Mr. Chan Ho Sun, Sunny and Mr. Li Pak Keung who are the co-heads of the brokerage and advisory team of the Target. Both of them are experienced market participants and each of Mr. Chan and Mr. Li has an industry experience of more than 15 years and 20 years respectively. They will lead a team of sales representatives for operation of the Target’s brokerage and advisory business as well as initiate the set-up of the Target’s securities research capability. All of Mr. Yip, Mr. Chan and Mr. Li are licensed persons and the responsible officers of the Target registered with the SFC.

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LETTER FROM THE BOARD

RISK FACTORS

Risk relating to the Acquisition

New business sector

The Acquisition will constitute a new business line of the Group. Such new business, coupled with the stringent regulatory environment, may pose significant challenges to the Group, including but not limited to the administrative, financial and operational aspects. If the plan in this new business in which the Company attempts to develop does not progress as planned, the Group’s overall business and financial performance may be adversely affected.

Credit risks in the financing and settlement activities

The business of securities brokerage would involve margin financing and settlement activities. Margin financing is particularly vulnerable to stock price volatility and the liquidity of those securities which are pledged as security for loans. In a volatile market, if stock price declines, client may be required to deposit additional cash or other securities to the collateral portfolio to reduce the credit risk exposure or increase the collateral value. Where the client is unable to meet the demand for additional cash or collaterals, the Target is entitled to sell the relevant pledged securities and use the sale proceeds toward repayment of the loans. As proceeds from forced sale of pledged securities may not result in sufficient proceeds to cover the amount of margin loan outstanding, failure of the client to make up for such a shortfall could adversely affect the Group’s business and financial performance. An appropriate set of risk control policies control and mitigate the relevant risk, which has currently been adopted by the Target, will be implemented by the Enlarged Group. Clients of securities transactions are required to settle transaction before the prescribed period of time. If client fails to do so, the Target will be required to use its own funds to cover the shortfall. If it has insufficient funds to do so, normal operations may be adversely affected.

High level of liquidity requirements

As stipulated under the FRR, a licensed corporation shall at all times maintain liquid capital which is not less than the FRR requirement. For the Target, the required liquid capital is the higher of HK$3 million and 5% of the aggregate of, amongst others, (a) its adjusted liabilities; (b) the aggregate of the initial margin requirements in respect of securities held by it on behalf of its clients; and (c) the aggregate of the amounts of margin required to be deposited in respect of securities held by it on behalf of its clients, to the extent that such balances are not subject to payment of initial margin requirements. In order to comply with the FRR, the Target must maintain a high level of liquidity at all times. There can be no assurance that such liquidity funding will be available on terms attractive to the Enlarged Group, or at all. Furthermore, any additional equity financing may dilute the shareholding interest of the Shareholders. On the other hand, debt financing, if available, may involve restrictive covenants. Failing to meet the capital requirements may cause the SFC to take disciplinary actions against the Target, which may adversely affect the operations and performance of the Enlarged Group.

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LETTER FROM THE BOARD

Risk relating to the financial industry

Operation under highly regulated business environment

The Target is based in Hong Kong and subject to a number of applicable laws, regulations and codes of relevant regulatory authorities in Hong Kong. From time to time, the Hong Kong regulatory regime for the financial services industry, including the SFC and the Stock Exchange, has undergone changes, some of which have resulted in additional costs to or restrictions on the business activities. The Target must comply with such rules and regulations. In addition, the Target may become subject to enquiries and/or investigations by the relevant regulatory bodies, which may result in fines or restrictions on the business activities. Where penalties are substantial or protracted litigation is involved, reputation and financial position of the Enlarged Group may be jeopardised.

Business performance may affect by fluctuation of market conditions

The securities and financial services to be carried out by the Target is dependent upon a number of factors, which include, the performance of the economic conditions and the general financial markets landscape. Hong Kong’s financial market is subject to the direct influence of global economic and socio-political environments. Fluctuations in the global economic and socio-political environments may have adverse effects on business performance of the Target. Severe fluctuations or shifts in market and economic sentiments may adversely affect the business and financial performance of the Target. In addition, fluctuations in stock markets could affect the Target’s investments and financial assets. Poor market conditions would affect the value of the assets while favorable market conditions may not be sustainable.

FINANCIAL EFFECTS OF THE ACQUISITION

Upon Completion, the results, assets and liabilities of the Target will be consolidated into the accounts of the Group. Based on the unaudited pro forma financial information of the Enlarged Group (the “ Pro Forma Financial Information ”) as set out in Appendix III to this circular, if the Acquisition had been completed on 31 October 2010, the total assets of the Enlarged Group would have increased by approximately HK$1.7 million from approximately HK$46.7 million to approximately HK$48.4 million, and the total liabilities of the Enlarged Group would have increased by approximately HK$1.7 million from approximately HK$61.2 million to approximately HK$62.8 million.

As referred to in the paragraph headed “Information on the Target” above, the Target has recorded audited net loss of approximately 2.3 million in the Relevant Period since the Target is yet to be in commercial operation. On this basis, it is expected that the consolidation of the Target into the Group would have a negative impact on the Group’s earnings upon Completion. However, the Board expects that the performance of the Target would improve as the Target would commence business gradually and is expected to enhance the income stream of the Group in the near future.

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LETTER FROM THE BOARD

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

The Group is principally engaged in the business of trading of electrical products and copper concentrate. The principal activities of the Group have been extended to engaging in the trading and procurement of electronic and telecommunication equipment in Shanghai since August 2010. Upon Completion, the Enlarged Group will, through the Target, broaden its business scope into the securities brokerage and financial services.

The Group’s subsidiary engaged in trading and procurement of electronic and telecommunication equipment in Shanghai continues to establish business relationships in the telecommunication services field in recent months and contributes increasing revenues to the Group. With the Group’s operations in trading in Hong Kong remaining stable, the Company is confident that its operations in Shanghai will grow further as business relationships develop, particularly amidst the continually strong economy of the PRC, therefore strengthening the existing business of the Group as a whole.

As mentioned in the paragraph headed “Reasons for the Acquisition” above, the proposed Acquisition provides an opportunity for the Group to step into the Hong Kong financial services sector and will generate a new source of revenue for the Group. Furthermore, with the Group’s plans to provide a wide range of financial services in the long run, including establishing its own asset management and investment advisory businesses, business opportunities in the vibrant Hong Kong financial market shall be captured and it is expected that the Group’s results and return to the Shareholders shall be enhanced as a result.

LISTING RULES IMPLICATIONS

To the best of the Directors’ knowledge and information, and having made all reasonable enquiries, no Shareholders have any material interest in the Acquisition and accordingly, no Shareholder is required to abstain from voting at the SGM.

Front Riches, the controlling Shareholder holding 525,110,572 Shares (representing approximately 62.39% of the issued share capital of the Company) at the Latest Practicable Date, has informed the Company that it and its associates, on a voluntary basis, will not vote at the SGM to approve the Acquisition in order to avoid any potential conflict of interests that may be perceived by the public by reason of the information as mentioned in the sub-paragraph headed “Parties” under the paragraph headed “The Acquisition Agreement” above.

THE SGM

The SGM will be held at Plaza 4, Lower Lobby, Novotel Century Hong Kong Hotel, 238 Jaffe Road, Wanchai, Hong Kong on Friday, 25 February 2011 at 9:30 a.m. to consider and, if thought fit, to pass the ordinary resolution to approve the Acquisition Agreement and the transactions contemplated thereunder. A notice convening the SGM is set out on pages 49-50 of this circular.

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LETTER FROM THE BOARD

Whether or not you are able to attend the meeting in person, you are requested to complete and deliver the accompanying form of proxy to the Company’s share registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the SGM. Completion and delivery of the form of proxy shall not preclude you from attending and voting at the SGM should you so wish.

RECOMMENDATION

The Board considers that the Acquisition Agreement and the transactions contemplated thereunder are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and accordingly recommends that the Shareholders should vote in favour of the ordinary resolution set out in the notice of SGM.

ADDITIONAL INFORMATION

Your attention is drawn to the further information contained in the appendices to this circular.

By Order of the Board Sheng Yuan Holdings Limited Yip Kar Hang, Raymond Executive Director and Chief Executive Officer

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

1. FINANCIAL INFORMATION OF THE GROUP

Financial information of the Group for each of the three years ended 30 April 2008, 2009 and 2010, and the six months ended 31 October 2010 are disclosed in the following documents which have been published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (http://www.shengyuanholdings.com):

annual report of the Company for the year ended 30 April 2010 dated 16 July 2010 published on 28 July 2010 (pages 20-56);
annual report of the Company for the year ended 30 April 2009 dated 10 August 2009 published on 20 August 2009 (pages 17-58);
annual report of the Company for the year ended 30 April 2008 dated 25 August 2008 published on 29 August 2008 (pages 20-88); and
interim report of the Company for the six months ended 31 October 2010 dated 17 December 2010 published on 30 December 2010 (pages 4-15).

2. INDEBTEDNESS STATEMENT

At the close of business on 31 December 2010, being the latest practicable date for the purpose of this statement of indebtedness prior to the printing of this circular, the Enlarged Group had outstanding indebtedness comprising unsecured convertible notes with principal amount of approximately HK$60,018,000 (with a liability component of approximately HK$51,124,000) and obligations under finance leases of approximately HK$181,000 which are pledged by the assets with carrying amount of HK$188,000 as at 31 December 2010.

Save as disclosed above and apart from intra-group liabilities, the Enlarged Group did not have any debt securities issued and outstanding, or authorized or otherwise created but unissued, any term loans (secured, unsecured, guaranteed or not), any other borrowings or indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptances (other than normal trade bills) or acceptance credits or hire purchase commitments (whether secured or unsecured, guaranteed or not) any mortgages or charges, or other material contingent liabilities or guarantee at the close of business on 31 December 2010.

3. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 30 April 2010, the date to which the latest audited consolidated financial statements of the Group were made up.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

4. WORKING CAPITAL STATEMENT

The Directors, after due and careful enquiry, are of the opinion that following the completion of the Acquisition, after taking into account the financial resources available to the Enlarged Group, including internally generated funds and the proceeds to be received by the Group from the proposed rights issue as announced by the Company on 21 January 2011, the Enlarged Group has sufficient working capital for its present requirements for at least the next 12 months from the date of this circular, in the absence of unforeseeable circumstances.

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APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

The following is a text of a report prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong. Terms defined herein apply to this report only.

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2 February 2011

The Directors Sheng Yuan Holdings Limited

Dear Sirs,

We set out below our report on the financial information (the “Financial Information”) regarding Kai Yuan Securities Limited (“KYSL”) for the period from 7 July 2010 (date of incorporation) to 31 December 2010 (the “Relevant Period”) for inclusion in the circular of Sheng Yuan Holdings Limited (“Sheng Yuan”) dated 2 February 2011 (the “Circular”) in connection with the proposed acquisition of the entire share capital of KYSL.

KYSL was incorporated in Hong Kong on 7 July 2010 for engaging the business of provision of securities brokerage and advisory services.

For the purpose of this report, the directors of KYSL have prepared the management account of KYSL for the Relevant Period in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”) (the “Underlying Management Account”). We have performed audit procedures on the Underlying Management Account in accordance with the Hong Kong Standards on Auditing issued by the HKICPA. We have examined the Underlying Management Account in accordance with the Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” as recommended by the HKICPA.

The Financial Information set out in this report has been prepared from the Underlying Management Account. No adjustments were deemed necessary by us to the Underlying Management Account in preparing our report for inclusion in the Circular.

The directors of KYSL are responsible for preparing the Underlying Management Account. The directors of Sheng Yuan are responsible for the contents of the Circular in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Management Account, to form an independent opinion on the Financial Information and to report our opinion to you.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of KYSL as at 31 December 2010, and of the results and cash flows of KYSL for the Relevant Period.

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APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

A. FINANCIAL INFORMATION

Statement of comprehensive income

Notes Other income Administrative expenses Loss before taxation 8 Taxation 9 Loss and total comprehensive expense for the period	7.7.2010 to 31.12.2010 HK$’000 2 (2,314) (2,312) – (2,312)

– 17 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Statement of financial position

Notes
Non-current assets
Property, plant and equipment
12
Trading right
13
Statutory deposits
14
Current assets
Prepayment and other deposit
15
Held for trading investments
16
Bank balances and cash
17
Current liabilities
Accounts payable
18
Other payables and accrual
18
Obligations under finance leases
19
Net current assets
Total assets less current liabilities
Capital and reserve
Share capital
20
Deficit
Total equity
Non-current liabilities
Obligations under finance leases
19

31.12.2010
HK$’000
4,892
500
205
5,597
219
24
13,532
13,775
3
1,500
37
1,540
12,235
17,832
20,000
(2,312)
17,688
144
17,832

– 18 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Statement of changes in equity

Issue of shares at date of incorporation, 7 July 2010 Loss and total comprehensive expense for the period At 31 December 2010	Share capital HK$’000 20,000 – 20,000	Deficit HK$’000 – (2,312) (2,312)	Total HK$’000 20,000 (2,312) 17,688

– 19 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Statement of cash flows

OPERATING ACTIVITIES
Loss before taxation
Adjustment for:
Depreciation of property, plant and equipment
Operating cash flows before movement in working capital
Increase in prepayment and other deposit
Increase in held for trading investments
Increase in accounts payable
Increase in other payables and accrual
NET CASH USED IN OPERATING ACTIVITIES
INVESTING ACTIVITIES
Purchase of trading right
Increase in statutory deposits
Purchase of property, plant and equipment
CASH USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Repayments of obligations under finance leases
Proceeds from issue of shares
NET CASH FROM FINANCING ACTIVITIES
NET INCREASE IN CASH AND CASH EQUIVALENTS AND
BALANCE AT END OF THE PERIOD, REPRESENTED BY
BANK BALANCES AND CASH

7.7.2010 to
31.12.2010
HK$’000
(2,312)
104
(2,208)
(219)
(24)
3
1,500
(948)
(500)
(205)
(4,805)
(5,510)
(10)
20,000
19,990
13,532

– 20 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

NOTES TO THE FINANCIAL INFORMATION

1. GENERAL

KYSL was incorporated and registered in Hong Kong on 7 July 2010. Its ultimate holding company is Kai Yuan Holdings Limited (“Kai Yuan”), a company with its shares listed on The Stock Exchange of Hong Kong Limited (“SEHK”). The registered address and principal place of business of KYSL is Suites 4303-5, 43/F, Tower 1, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong.

KYSL was a licensed corporation under Securities and Futures Commission since 27 October 2010 for engaging the business of provision of securities brokerage and advisory services.

The Financial Information is presented in Hong Kong dollar, which is the functional currency of KYSL.

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”)

KYSL has not early applied the following new and revised Standards and Interpretations that have been issued but are not yet effective.

HKFRSs (Amendments) Improvements to HKFRSs issued in 2010 except for the amendments to HKFRS 3 (as revised in 2008), HKAS 1 and HKAS 28[1] HKFRS 7 (Amendments) Disclosures – Transfers of financial assets[3] HKFRS 9 Financial instruments[4] HKAS 12 (Amendments) Deferred tax: Recovery of underlying assets[5] HKAS 24 (as revised in 2009) Related party disclosures[3] HKAS 32 (Amendments) Classification of rights issues[6] HK (IFRIC) – INT 14 Prepayments of a minimum funding requirement[3] (Amendments) HK (IFRIC) – INT 19 Extinguishing financial liabilities with equity instruments[2]

1 Effective for annual periods beginning on or after 1 July 2010 or 1 January 2011, as appropriate.
2 Effective for annual periods beginning on or after 1 July 2010.
3 Effective for annual periods beginning on or after 1 January 2011.
4 Effective for annual periods beginning on or after 1 January 2013.
5 Effective for annual periods beginning on or after 1 January 2012.
6 Effective for annual periods beginning on or after 1 February 2010.

The directors of KYSL anticipate that the application of these new and revised Standards and Interpretations will have no material impact on the Financial Information.

3. SIGNIFICANT ACCOUNTING POLICIES

The Financial Information has been prepared in accordance with HKFRSs issued by the HKICPA. In addition, the Financial Information includes applicable disclosures required by the Rules Governing the Listing of Securities on the SEHK and by the Hong Kong Companies Ordinance.

The Financial Information has been prepared on the historical cost basis except for certain financial instruments that are measured at fair values, as explained in the accounting policies set out below. Historical cost is generally based on the fair value of the consideration given in exchange for goods.

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APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

The principal accounting policies are set out below.

Property, plant and equipment

Property, plant and equipment are stated at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is recognised so as to write off the cost of items of property, plant and equipment over their estimated useful lives and after taking into account of their estimated residual value, using the straight-line method.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

KYSL as lessee

Assets held under finance leases are recognised as assets of KYSL at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with KYSL’s policy on borrowing costs (see the accounting policy below). Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

Retirement benefit costs

Payments to the Mandatory Provident Fund Scheme are charged as an expense when employees have rendered service entitling them to the contributions.

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the period. Taxable profit differs from profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. KYSL’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

– 22 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the Financial Information and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which KYSL expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity respectively.

Impairment on tangible and intangible asset

At each reporting period, KYSL reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Trading right

Trading right acquired separately and with indefinite useful lives is carried at cost less any subsequent accumulated impairment loss (see accounting policy in respect of impairment loss on tangible and intangible asset above).

Financial instruments

Financial assets and financial liabilities are recognised in the statement of financial position when KYSL becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

KYSL’s financial assets are classified as fair value through profit or loss (“FVTPL”) and loans and receivables. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

– 23 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL, of which interest income is included in net gains or losses.

Financial assets at fair value through profit or loss

Financial assets at FVTPL are financial assets held for trading.

A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling in the near future; or
it is a part of an identified portfolio of financial instruments that KYSL manages together and has a recent actual pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.

Financial assets at FVTPL are measured at fair value, with changes in fair value arising from remeasurement recognised directly in profit or loss in the period in which they arise. The net gain or loss recognised in profit or loss includes any dividend or interest earned on the financial assets.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including statutory deposits, other deposit and bank balances) are carried at amortised cost using the effective interest method, less any identified impairment losses.

Impairment of financial assets – loans and receivables

Loans and receivables are assessed for indicators of impairment at the end of the reporting period. Loans and receivables are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected. Objective evidence of impairment could include:

significant financial difficulty of the issuer or counterparty; or
breach of contract, such as default or delinquency in interest or principal payments; or
it becoming probable that the borrower will enter bankruptcy or financial re-organisation.

– 24 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

The carrying amount of loans and receivables is reduced by the impairment loss directly. If, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity instruments

Financial liabilities and equity instruments issued by KYSL are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of KYSL after deducting all of its liabilities. The accounting policies adopted in respect of financial liabilities and equity instruments are set out below.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Financial liabilities

Financial liabilities including accounts payable, other payables and obligations under finance leases are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by KYSL are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and KYSL has transferred substantially all the risks and rewards of ownership of the financial assets.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss.

On derecognition of a financial asset other than in its entirety (e.g. when KYSL retains an option to repurchase part of a transferred asset or retains a residual interest that does not result in the retention of substantially all the risks and rewards of ownership and KYSL retains control), KYSL allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.

– 25 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

4. CAPITAL RISK MANAGEMENT

KYSL manages its capital to ensure KYSL will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.

The capital structure of KYSL consists of cash and cash equivalents and equity attributable to owners of KYSL, comprising issued share capital and deficit.

The management of KYSL review the capital structure on a continuous basis taking into account the cost of capital and the risk associated with the capital. KYSL will balance its overall capital structure through new share issues and the issue of new debt.

5. FINANCIAL INSTRUMENTS

Categories of financial instruments Financial assets Loans and receivables (including cash and cash equivalents) Held for trading investments Financial liabilities Amortised cost	31.12.2010 HK$’000 13,914 24
	13,938

	1,481

Financial risk management objectives and policies

KYSL’s major financial instruments include statutory deposits, other deposit, held for trading investments, bank balances and cash, accounts payable, other payables and obligations under finance leases. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments and the polices on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Market risks

Interest rate risk

KYSL is exposed to fair value interest rate risk in relation to bank balances due to the fluctuation of the prevailing market interest rate on bank balances.

KYSL currently does not have interest rate hedging policy. However, the management monitors interest rate exposure and will consider hedging significant interest rate exposure should the need arise. As interest rate risk relates primarily to financial assets with short maturities, the management consider that the sensitivity of KYSL’s exposure towards the change in interest rate is insignificant as the bank interest income is insignificant for KYSL.

– 26 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Other price risk

KYSL is exposed to equity price risk through its investments in listed equity securities. KYSL has appointed a special team to monitor the price risk and will consider hedging the risk exposure should the need arise. As held for trading investments are minimal at the end of the reporting period, the management consider that the result of sensitivity analysis of KYSL’s exposure towards the change in price is insignificant.

Credit risk

KYSL’s credit risk are primarily attributable to bank balances. KYSL’s bank balances and cash are deposited with banks in Hong Kong and KYSL has limited the exposure to any single financial institution. The credit risk on liquid funds is limited because the counterparties are banks with good credit-rating.

Liquidity risk

In the management of the liquidity risk, KYSL monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance KYSL’s operations and mitigate the effects of fluctuations in cash flows.

The following table details KYSL’s remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which KYSL can be required to pay. The table includes both interest and principal cash flows.

Weighted average interest rate % per annum Accounts payable – Other payables – Obligations under finance leases 0.7%	Less than 6 months HK$’000 3 1,297 19 1,319	6 months to 1 year HK$’000 – – 19 19	1-2 years HK$’000 – – 38 38	2-5 years Total undiscounted cash flows HK$’000 HK$’000 – 3 – 1,297 108 184 108 1,484	Total carrying amounts at 31.12.2010 HK$’000 3 1,297 181
					1,481

Fair value

The fair value of financial assets and financial liabilities are determined as follows:

the fair value of financial assets and financial liabilities with standard terms and conditions and traded in active liquid markets are determined with reference to quoted market bid prices and ask prices respectively; and
the fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the Financial Information approximate to their fair values at the end of the reporting period.

– 27 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

Fair value measurements recognised in the statement of financial position

Held for trading investments of HK$24,000 as at 31 December 2010 are measured subsequent to initial recognition at fair value grouped into Level 1 that the fair value measurements are derived from quoted prices (unadjusted) in active market for identical assets.

6. SEGMENT INFORMATION

KYSL is principally engaged in the provision of securities brokerage and advisory services. During the Relevant Period, KYSL was not in commercial operation. Accordingly, no analysis by business and geographical segments is presented.

7. DIRECTORS’ EMOLUMENTS AND EMPLOYEES’ EMOLUMENTS

Directors’ emoluments

The emoluments paid or payable to each of directors during the Relevant Period were as follows:

For the period from 7 July 2010 (date of incorporation) to 31 December 2010

Fees Other emoluments Salaries and other benefits Contribution to retirement benefits schemes	Yip Kar Hang, Raymond HK$’000 – – – –	Kwong Wai Man, Karina HK$’000 – – – –	Chan Ho Sun, Sunny HK$’000 – 392 5 397	Hu Yishi HK$’000 (Note) – – – –	Total HK$’000 – 392 5
					397

Note: Mr. Hu Yishi resigned as director of KYSL on 9 November 2010.

No director waived any emoluments during the Relevant Period.

Employees’ emoluments

Of the five individuals with the highest emoluments in KYSL, one was director of KYSL for the Relevant Period whose emoluments are included in the disclosures as above. The emoluments of the remaining four individuals are as follows:

Salaries and allowances Retirement benefits scheme contribution	7.7.2010 to 31.12.2010 HK$’000 256 5
	261

Their emoluments were within HK$1,000,000.

– 28 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

During the Relevant Period, no emoluments were paid by KYSL to the above-mentioned individuals as an inducement to join KYSL or as compensation for loss of office.

8. LOSS BEFORE TAXATION

Loss before taxation has been arrived at after charging (crediting): Auditor’s remuneration Depreciation of property, plant and equipment Directors’ remuneration Other staff costs: Salaries and allowance Retirement benefits scheme contribution Total staff costs Operating lease rentals Fair value change on held for trading investment		7.7.2010 to 31.12.2010 HK$’000 200 104 397 256 5 658 260 (2)

9. TAXATION

No provision for Hong Kong Profits Tax has been made as KYSL incurred tax loss for the Relevant Period.

The taxation for the Relevant Period can be reconciled to the loss before taxation per the statement of comprehensive income as follows:

Loss before taxation Tax at the Hong Kong Profits Tax rate of 16.5% Tax effect of expense not deductible for tax purpose Tax effect of tax losses not recognised Taxation for the period	7.7.2010 to 31.12.2010 HK$’000 (2,312)

	(381) 15 366
	–

10. DIVIDEND

No dividend was paid or proposed during the Relevant Period.

11. LOSS PER SHARE

Loss per share is not presented herein as the directors of KYSL do not consider such information to be meaningful in the context of the Financial Information.

– 29 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

12. PROPERTY, PLANT AND EQUIPMENT

Leasehold improvements HK$’000 COST At 7 July 2010 – Additions 1,756 At 31 December 2010 1,756 ACCUMULATED DEPRECIATION At 7 July 2010 – Provided for the period 53 At 31 December 2010 53 CARRYING VALUE At 31 December 2010 1,703	Computer equipment HK$’000 – 2,656	Office equipment HK$’000 – 584	Total HK$’000 – 4,996
1,756 – 53 53	2,656 – 44 44	584 – 7 7	4,996
			– 104
			104
1,703	2,612	577	4,892

The above items of property, plant and equipment are depreciated on a straight-line basis at the following rates per annum:

Leasehold improvements	Over the lease term
Computer equipment	20%
Office equipment	15%

The carrying value of office equipment of HK$577,000 includes an amount of HK$188,000 in respect of assets held under finance leases.

13. TRADING RIGHT

Amount represents the right to trade on or through the SEHK. As the trading right has indefinite live, the amount is carried at cost less any subsequent accumulated impairment loss, if any.

14. STATUTORY DEPOSITS

Amounts represent the statutory deposits placed in SEHK.

15. PREPAYMENT AND OTHER DEPOSIT

Prepayment and other deposit at the end of the reporting period comprise mainly prepayment and deposit from third parties. Amounts are unsecured and interest-free.

16. HELD FOR TRADING INVESTMENTS

Amounts represent the equity securities listed in Hong Kong, carried at fair value.

17. BANK BALANCES AND CASH

Bank balances and cash comprise cash on hand and balances in saving and current accounts.

Balance in saving account carried effective interest at market rate of 0.001% per annum as at 31 December 2010.

– 30 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

KYSL keeps trust bank accounts that will receive and hold money deposited by clients in the course of the regulated activities. There was NIL balance for the trust bank accounts as at 31 December 2010.

18. OTHER FINANCIAL LIABILITIES

Accounts payable represent the amounts payable to Hong Kong Securities Clearing Company Limited arising from the dealing in securities. The settlement term is two days after the trade date. In the opinion of the directors, the ageing analysis does not give additional value in view of the nature of business of securities brokerage.

Other payables principally comprise the payables to third parties. Amounts are unsecured and interest-free.

19. OBLIGATIONS UNDER FINANCE LEASES

Analysed for reporting purposes as: Current liabilities Non-current liabilities	31.12.2010 HK$’000 37 144
	181

KYSL has leased certain of its office equipment under finance leases. The lease term is 5 years. Interest rates underlying all obligations under finance leases are fixed at respective contract dates at 0.7% per annum.

Amounts payable under finance leases Within one year In more than one year but not more than two years In more than two years but not more than five years Less: Future finance charges Less: Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months	31.12.2010 Minimum lease payments Present value of minimum lease payments HK$’000 HK$’000 38 37 38 37 108 107	31.12.2010 Minimum lease payments Present value of minimum lease payments HK$’000 HK$’000 38 37 38 37 108 107
	184 (3)	181 N/A
	181	181
		(37
		144

KYSL’s obligations under finance leases are secured by the lessor’s charge over the leased assets.

– 31 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

20. SHARE CAPITAL

Authorised: At date of incorporation Increased during the period At 31 December 2010 Issued and fully paid: At date of incorporation and 31 December 2010	Number of ordinary shares of HK$1 each 20,000,000 480,000,000 500,000,000 20,000,000	Nominal value HK$’000 20,000 480,000
		500,000

		20,000

KYSL was incorporated with an authorised share capital of HK$20,000,000. At the time of incorporation, 20,000,000 shares of HK$1 each were issued at par to the subscriber to provide initial capital to KYSL.

21. DEFERRED TAXATION

The following are the major deferred tax liability and asset recognised and movements thereon during the Relevant Period:

At 7 July 2010 Change (credit) to profit on loss At 31 December 2010	Accelerated tax depreciation HK$’000 – 498 498	Tax losses HK$’000 – (498) (498)	Total HK$’000 – –
			–

At the end of the reporting period, KYSL has unused tax losses of approximately HK$5,237,000 available for offset against future profits. A deferred tax asset has been recognised in respect of HK$3,019,000 of such losses. No deferred tax asset has been recognised in respect of the remaining HK$2,218,000 due to the unpredictability of future profit streams.

– 32 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

22. MAJOR NON-CASH TRANSACTION

During the Relevant Period, KYSL entered into finance lease arrangements in respect of assets with a total capital value at the inception of the leases of HK$191,000.

23. OTHER COMMITMENTS

At the end of the reporting period, KYSL had commitments for future service payments under non-cancelable service agreement which fall due as follows:

Within one year In the second to fifth years inclusive	31.12.2010 HK$’000 177 322
	499

24. SHARE OPTION SCHEMES

KYSL’s ultimate holding company, Kai Yuan, has an share option scheme (the “Scheme”). The Scheme was adopted pursuant to a resolution passed on 17 April 2002 for the primary purpose of providing incentives to directors and eligible employees of Kai Yuan and its subsidiaries, and will expire on 17 April 2012. Under the Scheme, the board of directors of Kai Yuan may grant options to eligible employees, including directors of Kai Yuan and its subsidiaries, to subscribe for shares in Kai Yuan.

Pursuant to the Scheme, the total number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Scheme shall not exceed 10% of the issued share capital of Kai Yuan from time to time. The maximum number of shares in respect of which option might be granted to a participant, when aggregated with the total number of shares issued and issuable under the Scheme, must not exceed 25% of the aggregate number of shares issued and issuable under the Scheme from time to time. The offer of a grant of options may be accepted within 28 days from the date of the offer with signed acceptance letter together with consideration of HK$1.00 received by Kai Yuan. The exercise period of the share options granted and the subscription price for the shares in respect of which options are granted is determinable by the directors of Kai Yuan, but in any case the subscription price must be the highest of (i) the closing price of the Kai Yuan’s shares as stated in the Stock Exchange’s daily quotations sheet on the date of the grant; (ii) the average closing price of the Kai Yuan’s shares as stated in the SEHK’s daily quotations sheets for the five business days immediately preceding the date of grant; and (iii) the nominal value of Kai Yuan’s shares.

– 33 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

The following table discloses details of the share options of Kai Yuan held by directors of KYSL and movements in such.

Name of directors Exercise price per share HK$ Yip Kar Hang, Raymond 0.350 Kwong Wai Man, Karina 0.165 0.350 Hu Yishi (Note) 0.205 0.350 0.330	Outstanding at 7.7.2010 ’000 50,000 10,000 10,000 20,000 43,720 50,000 44,260 137,980 207,980	Exercised during the period ’000 – (10,000) – (10,000) (43,720) – – (43,720) (53,720)	Outstanding at 31.12.2010 ’000 50,000
			– 10,000
			10,000
			– 50,000 44,260
			94,260
			154,260

Note: Mr. Hu Yishi resigned as director of KYSL on 9 November 2010.

It is not practicable to allocate the directors’ entitlements between their services to KYSL and its ultimate holding company. No charge is recognised in the statement of comprehensive income in respect of the value of options for directors of KYSL.

25. RELATED PARTY TRANSACTIONS

During the Relevant Period, KYSL paid operating lease rentals of HK$260,000 to its fellow subsidiary.

The remuneration of directors are set out in note 7.

B. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of KYSL have been prepared in respect of any period subsequent to 31 December 2010.

Yours faithfully, Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong

– 34 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

C. MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET

(a) Business review

The Target is a company incorporated in Hong Kong on 7 July 2010. The Target has been wholly and beneficially owned by the Vendor, a company incorporated in the BVI and a wholly owned subsidiary of KYHL, since incorporation. The Target is a licensed corporation under the SFO to engage in Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities since 27 October 2010.

(b) Financial result, financial position and capital structure

As at 31 December 2010, the Target was not yet in commercial operation. Accordingly, no brokerage revenue was recorded for the Relevant Period and net losses before and after taxation of the Target were approximately HK$2.3 million and HK$2.3 million respectively for the Relevant Period, which was mainly attributable to the operating expenses incurred during the Relevant Period.

As at 31 December 2010, the Target had non-current assets of approximately HK$5.6 million, mainly comprising of the necessary trading infrastructure including the order management and internet trading system, settlement logistics, network installation and other hardware and furniture fixings. Current assets were approximately HK$13.8 million, which were largely represented by cash and bank balances maintained by the Target of approximately HK$13.5 million. As of the same date, current liabilities amounted to approximately HK$ 1.5 million, mainly attributable to other payables and accruals incurred during the set-up of the Target. Current ratio (current assets over current liabilities) as at 31 December 2010 was therefore 894.5%. The Target has no bank borrowings as at 31 December 2010. Non-current liabilities as at the same date were approximately HK$0.14 million. The gearing of the Group, measured as total debts to total assets, was 8.7% as at 31 December 2010. Net asset value of the Target as at the same date was approximately HK$ 17.7 million.

(c) Employment and remuneration policy

As at 31 December 2010, the Target employed eight employees. The remuneration policy and package of the Group’s employees are maintained at market level and are reviewed annually by management. Apart from basic remuneration, the Target also provides other employee benefits including medical scheme and provident fund schemes.

– 35 –

APPENDIX II

FINANCIAL INFORMATION OF THE TARGET

(d) Pledge of assets

As at 31 December 2010, the obligations under finance leases of approximately HK$181,000 were pledged by the assets with carrying amount of HK$188,000.

(e) Foreign exchange exposure

The Targets’s transactions are mainly denominated in Hong Kong dollars and there was no foreign exchange exposure during the Relevant Period.

As at the Latest Practicable Date, the Target did not have a foreign currency hedging policy.

(f) Acquisition/disposal of subsidiary

The Target did not enter into any material acquisition and disposal of subsidiaries and associated companies during the Relevant Period.

(g) Contingent liabilities and capital commitment

As at 31 December 2010, the Target did not have any material contingent liabilities and capital commitment.

– 36 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The information set out below is for illustrative purpose only and does not form part of the accountants’ report on the financial information of the Target prepared by the reporting accountants of Sheng Yuan Holdings Limited, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong, as set out in Appendix II to this circular.

(A) BASIS OF PREPARATION OF THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The unaudited pro forma financial information (“Unaudited Pro Forma Financial Information”) of the Enlarged Group has been prepared to illustrate the effect of the Acquisition from the Vendor.

The unaudited pro forma consolidated statement of financial position of the Enlarged Group is prepared based on the unaudited condensed consolidated statement of financial position of the Group as at 31 October 2010 as extracted from the interim report of the Company issued on 17 December 2010 and the audited statement of financial position of the Target as at 31 December 2010 as extracted from the accountants’ report set out in Appendix II to this circular, after making pro forma adjustments relating to the Acquisition, as if the Acquisition had been completed on 31 October 2010.

The Unaudited Pro Forma Financial Information is based on the aforesaid historical data after giving effect to the pro forma adjustments described in the accompanying notes. A narrative description of the pro forma adjustments of the Acquisition that are (i) directly attributable to the transactions and (ii) factually supportable, is summarised in the accompanying notes.

The Unaudited Pro Forma Financial Information of the Enlarged Group has been prepared by the directors of the Company for illustrative purposes only and is based on a number of assumptions, estimates, uncertainties and currently available information. Accordingly, and because of its nature, the Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to predict what the financial position of the Enlarged Group will be on completion of the Acquisition.

– 37 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(B) UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF THE ENLARGED GROUP

The Group as at 31 October 2010 HK$’000 (Note 1) 2,301 8,747 – –	The Target as at 31 December 2010 HK$’000 (Note 2) 4,892 – 500 205	Pro forma adjustments HK$’000 (Note 3) 12	The Enlarged Group HK$’000 7,193 8,747 512 205
11,048 19,617 – 214 15,803 35,634 10,629 14 – 10,643 24,991	5,597 219 24 – 13,532 13,775 1,503 – 37 1,540 12,235	12 (17,700) (17,700) (17,700)	16,657
			19,836 24 214 11,635
			31,709
			12,132 14 37
			12,183
			19,526
36,039	17,832	(17,688)	36,183

84,172 (98,644) (14,472) 50,511 – 50,511	20,000 (2,312) 17,688 – 144 144	(20,000) 2,312 (17,688)	84,172 (98,644
			(14,472
			50,511 144
			50,655
36,039	17,832	(17,688)	36,183

– 38 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes to unaudited pro forma consolidated statement of financial position of the Enlarged Group.

Notes:

Figures extracted from the unaudited condensed consolidated financial statements of the Group as set out in interim report of the Group issued on 17 December 2010.
Figures extracted from the Accountants’ Report of the Target as set out in Appendix II to the Circular, after reclassification of certain accounts to align the presentation with that of the Group.
The adjustments in connection with the acquisition of the entire share capital of the Target, represent:
(i) cash consideration of HK$17,700,000;
(ii) Elimination of share capital and pre-acquisition reserve of the Target amounting to HK$17,688,000 as at 31 December 2010; and
(iii) the excess of the Consideration over the carrying amounts of the assets and liabilities of the Target as at 31 December 2010 is adjusted to the carrying value of trading right, as the purpose of the acquisition is to obtain the trading right.

The Consideration will be financed by the Group’s internal resources and/or other borrowings. As at 31 January 2011, the Group had approximately HK$19.4 million bank balances and cash. For the purpose of the pro forma financial information, the cash consideration is fully deducted from the bank balances and cash of the Group and the Target.

– 39 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(C) ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, Deloitte Touche Tohmatsu, Certified Public Accountants, Hong Kong.

==> picture [85 x 65] intentionally omitted <==

ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION To the Directors of Sheng Yuan Holdings Limited

We report on the unaudited pro forma financial information (the “Unaudited Pro Forma Financial Information”) of Sheng Yuan Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) and Kai Yuan Securities Limited (the “Target”) (together with the Group hereinafter referred to as the “Enlarged Group”) set out in Appendix III to the circular dated 2 February 2011 (the “Circular”), which has been prepared by the directors of the Company for illustrative purposes only, to provide information about how the proposed acquisition of entire share capital of the Target might have affected the financial information presented. The basis of preparation of the Unaudited Pro Forma Financial Information is set out in Section A of Appendix III to the Circular.

Respective responsibilities of directors of the Company and reporting accountants

It is the responsibility solely of the directors of the Company to prepare the unaudited pro forma financial information in accordance with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of the Listing Rules, on the unaudited pro forma financial information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the unaudited pro forma financial information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

– 40 –

APPENDIX III

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purpose of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

The Unaudited Pro Forma Financial Information is for illustrative purpose only, based on the judgements and assumptions of the directors of the Company and, because of its hypothetical nature, does not provide any assurance or indication that any event will take place in future and may not be indicative of the financial position of the Group as at 31 October 2010 or any future date.

Opinion

In our opinion:

(a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;
(b) such basis is consistent with the accounting policies of the Group so far as such policies related to the transactions; and
(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.

Deloitte Touche Tohmatsu

Certified Public Accountants Hong Kong 2 February 2011

– 41 –

APPENDIX IV

GENERAL INFORMATION

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 in this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Director’s Interests

As at the Latest Practicable Date, the interests of the Directors and chief executives in the shares, underlying shares or debentures of the Company or any of our associated corporations (within the meaning of Part XV of the SFO), which were required (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as contained in Appendix 10 to the Listing Rules, were as follows:

Long positions in the Shares

			Percentage
			of the issued
			share capital
		Number of	of the
Name of Director	Capacity	Shares held	Company
Ms. Lin Min	Interest of spouse	525,110,572	62.39%
		(Note)

Note: Ms. Lin Min, the spouse of Mr. Hu, is deemed under the SFO to be interested in the 525,110,572 Shares which Mr. Hu is deemed to be interested.

– 42 –

APPENDIX IV

GENERAL INFORMATION

Long positions in the underlying shares by virtue of the share options

			Number of
		Number of	underlying
Name of Directors	Capacity	options held	Shares
Ms. Lin Min	Beneficial owner	2,700,000	2,700,000
Mr. Yip Kar Hang,	Beneficial owner	6,900,000	6,900,000
Raymond
Mr. Cheung Kwok	Beneficial owner	600,000	600,000
Keung

Long positions in the underlying shares by virtue of the convertible notes

		Description	Number of
		of equity	underlying
Name of Director	Capacity	derivatives	Shares
Ms. Lin Min	Interest of spouse	5 year 5%	130,000,000
		convertible notes
		(Note a) (Note b)
		2% coupon	241,400,000
		convertible notes
		(Note a) (Note c)

Notes:

(a) Ms. Lin Min, the spouse of Mr. Hu, is deemed under the SFO to be interested in the convertible notes which Mr. Hu is deemed to be interested.
(b) The 5 years 5% convertible notes with an outstanding principal amount of HK$15,600,000 as at the Latest Practicable Date issued by the company on 17 July 2007 and due on 17 July 2012 are convertible into Shares at a conversion price of HK$0.12 per Share (subject to adjustment).
(c) The Company issued 2% coupon convertible notes at principal amounts of HK$5,152,000 and HK$39,265,600 on 17 November 2009 and 29 April 2010 with maturity dates of 17 November 2012 and 29 April 2013 respectively. The 2% coupon convertible notes with total outstanding principal amount of HK$44,417,600 as at the Latest Practicable Date were convertible into Shares at a conversion price of HK$0.184 per Share (subject to adjustment).

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executives of the Company had any beneficial or deemed 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 (a) to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies as contained in Appendix 10 to the Listing Rules.

– 43 –

APPENDIX IV

GENERAL INFORMATION

(b) Substantial Shareholders’ interests

Save as disclosed below, the Directors and the chief executive of the Company were not aware that there was any person who, as at the Latest Practicable Date, had an interest or short position 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 would fall to be disclosed under provisions of Division 2 and 3 of Part XV of the SFO, or who, as at the Latest Practicable Date, was directly and indirectly interested in ten per cent or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Group.

Long position in the Shares

			Percentage
			of the issued
			share capital
Name of		Number of	of the
shareholder	Capacity	Shares held	Company
Front Riches	Beneficial owner	525,110,572	62.39%
(Note a)

Long positions in the underlying shares by virtue of the convertible notes

		Description	Number of
Name of		of equity	underlying
shareholder	Capacity	derivatives	Shares
Front Riches	Beneficial owner	5 year 5%	130,000,000
(Note a)		convertible notes
		(Note b)
		2% coupon	241,400,000
		convertible notes
		(Note c)

Notes:

(a) Front Riches is a corporation controlled by Mr. Hu, whose spouse, Ms. Lin Min, is an executive Director and Chairman of the Company.
(b) The 5 years 5% convertible notes with an outstanding principal amount of HK$15,600,000 as at the Latest Practicable Date issued by the company on 17 July 2007 and due on 17 July 2012 were convertible into Shares at a conversion price of HK$0.12 per Share (subject to adjustment).
(c) The Company issued 2% coupon convertible notes at principal amounts of HK$5,152,000 and HK$39,265,600 on 17 November 2009 and 29 April 2010 with maturity dates of 17 November 2012 and 29 April 2013 respectively. The 2% coupon convertible notes with total outstanding principal amount of HK$44,417,600 as at the Latest Practicable Date were convertible into Shares at a conversion price of HK$0.184 per Share (subject to adjustment).

– 44 –

APPENDIX IV

GENERAL INFORMATION

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any other person who had an interest or short position in the shares or underlying shares of the Company or any of its associated corporation as recorded in the register required to be kept by the Company pursuant to Section 336 of the SFO.

3. DIRECTORS’ INTERESTS IN COMPETING BUSINESSES

As at the Latest Practicable Date, none of the Directors and their respective associates were considered to have interests in businesses apart from the Group’s businesses which compete, or are likely to compete, either directly or indirectly, with the businesses of the Group pursuant to Rule 8.10 of the Listing Rules if each of them were a controlling shareholder of the Company.

4. DIRECTORS’ INTERESTS IN CONTRACTS AND ASSETS

As at the Latest Practicable Date, there was no contract or arrangement subsisting in which any Director was materially interested and which was significant in relation to any business of the Enlarged Group (save for the underwriting agreement (being a material contract referred to in (6) in the paragraph headed “Material Contracts” of this Appendix) for which Ms. Lin Min is considered to be interested in by virtue of the fact that Front Riches, the underwriter of the rights issue, is a corporation controlled by Ms. Lin Min’s spouse).

As at the Latest Practicable Date, save for the information set out in the sub-paragraph headed “Parties” under the paragraph headed “The Acquisition Agreement” in the Letter from the Board contained in this circular, none of the Directors had any direct or indirect interest in any assets which have been, since 30 April 2010 (being the date up to which the latest published audited accounts of the Group were made up), (i) acquired or disposed of by; or (ii) leased to; or (iii) proposed to be acquired or disposed of by; or (iv) proposed to be leased to, any member of the Enlarged Group.

5. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group which does not expire or is not terminable by such member of the Group within one year without payment of compensation (other than statutory compensation).

6. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any material litigation or claims and, so far as the Directors were aware, no material litigation or claims were pending or threatened by or against any companies of the Enlarged Group.

– 45 –

APPENDIX IV

GENERAL INFORMATION

7. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Enlarged Group within the two years immediately preceding the date of this circular and ending on the Latest Practicable Date and is or may be material:

the placing and subscription agreement dated 26 February 2009 entered into between the Company, Prime Sun Group Limited, and Kingston Securities Limited (as placing agent), pursuant to which Prime Sun Group Limited placed out a total of 25,000,000 Shares to independent placees at a price of HK$0.125 per Share;
the conditional subscription agreement dated 13 April 2009 (as supplemented and amended by the supplemental agreement dated 22 April 2009) entered into between the Company and Front Riches in respect of the subscription and issue of the convertible notes in the aggregate principal amount of HK$44,417,600;
the acquisition agreement dated 31 August 2010 entered into between 順盈貿易（上海）有限公司 (for identification purposes, Sun Profit Trading (Shanghai) Co. Ltd.) (“ Sun Profit ”), an indirect wholly-owned subsidiary of the Company established in the PRC with limited liability, and 池萬浪 and 劉美釵 (for identification purposes, Chi Wan Lang and Liu Mei Chai respectively), pursuant to which Chi Wan Lang and Liu Mei Chai agreed to sell and Sun Profit agreed to acquire the property located at Unit 1604, Jing An China Tower, 1701 Beijing West Road, Shanghai, the PRC at a consideration of RMB4,356,160;
the acquisition agreement dated 31 August 2010 entered into between Sun Profit and 孫琪 (for identification purposes, Sun Qi) pursuant to which Sun Qi agreed to sell and Sun Profit agreed to acquire the property located at Unit 609, Jing An China Tower, 1701 Beijing West Road, Shanghai, the PRC at a consideration of RMB4,770,520;
the Acquisition Agreement; and
the underwriting agreement dated 21 January 2011 entered into between the Company and Front Riches in respect of the rights issue by way of two new rights Shares for every five Shares held on 1 March 2011 at the subscription price of HK$0.42 per new Share.

Save as disclosed above, there are no other contracts (not being contracts in the ordinary course of business) being entered into by the members of the Enlarged Group within the two years immediately preceding the date of this circular and ending on the Latest Practicable Date, which are or may be material.

– 46 –

APPENDIX IV

GENERAL INFORMATION

8. 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 Deloitte Touche Tohmatsu Certified Public Accountants

Deloitte Touche Tohmatsu has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and report and reference to its name in the form and context in which it appears.

As at the Latest Practicable Date, Deloitte Touche Tohmatsu did not have any direct or indirect shareholding in any member of the Enlarged Group or any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for any securities in any member of the Enlarged Group.

As at the Latest Practicable Date, Deloitte Touche Tohmatsu did not have any direct or indirect interest in any assets which have been, since 30 April 2010 (the date to which the latest published audited consolidated accounts of the Group were made up), acquired or disposed of by, or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by, or leased to any member of the Enlarged Group.

9. GENERAL INFORMATION

(a) The address of the registered office of the Company is Clarendon House, 2 Church Street, Hamilton, HM II, Bermuda.
(b) The address of the head office and principal place of business of the Company in Hong Kong is Unit 803, AXA Centre, 151 Gloucester Road, Wanchai, Hong Kong.
(c) The share registrar and transfer office of the Company in Hong Kong is Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.
(d) The company secretary of the Company is Mr. Or Wing Keung, who is a member of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants.
(e) This circular is prepared in both English and Chinese. In the event of inconsistency, the English text shall prevail.

– 47 –

APPENDIX IV

GENERAL INFORMATION

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours from 9:00 a.m. to 6:00 p.m. (except Saturdays and public holidays) at the head office and principal place of business of the Company in Hong Kong at Unit 803, AXA Centre, 151 Gloucester Road, Wanchai, Hong Kong, from the date of this circular up to and including the date of the SGM:

(a) the bye-laws of the Company;
(b) the material contracts referred to under the paragraph headed “Material contracts” in this Appendix;
(c) the Company’s annual reports for the financial year ended 30 April 2009 and 2010 and the Company’s interim reports for six months ended 31 October 2010;
(d) the accountant’s report on the audited financial information on the Target as set out in Appendix II to this circular;
(e) the accountant’s report on the unaudited pro-forma financial information on the Enlarged Group as set out in Appendix III to this circular;
(f) the letter of consent from Deloitte Touche Tohmatsu referred to under “Expert and consent” in this Appendix; and
(g) this circular.

– 48 –

NOTICE OF THE SPECIAL GENERAL MEETING

==> picture [195 x 31] intentionally omitted <==

(incorporated in Bermuda with limited liability)

(Stock Code: 851)

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting (the “ SGM ”) of Sheng Yuan Holdings Limited (the “ Company ”) will be held on Friday, 25 February 2011 at 9:30 a.m. at Plaza 4, Lower Lobby, Novotel Century Hong Kong Hotel, 238 Jaffe Road, Wanchai, Hong Kong for the purpose of considering and, if thought fit, passing with or without modifications, the following resolution of the Company:

ORDINARY RESOLUTION

“ THAT the sale and purchase agreement (the “ Acquisition Agreement ”) entered into between Sheng Yuan Financial Services Group Limited, a wholly owned subsidiary of the Company, and Global Strategy International Limited on 17 January 2011 in relation to the acquisition of the entire issued share capital of Kai Yuan Securities Limited by Sheng Yuan Financial Services Group Limited (a copy of which has been produced at the SGM and initialed by the chairman of the SGM for identification purpose) be and is hereby approved, ratified and confirmed, that all the transactions contemplated thereunder be and the same are hereby approved and that any one of the directors of the Company be and is hereby authorised to implement all transactions contemplated under the Acquisition Agreement for and on behalf of the Company.”

By Order of the Board Sheng Yuan Holdings Limited Yip Kar Hang, Raymond

Executive Director and Chief Executive Officer

Hong Kong, 2 February 2011

Notes:

Any member entitled to attend and vote at the SGM shall be entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares of the Company (the “ Share(s) ”) may appoint more than one proxy to represent him and vote on his behalf at the SGM. A proxy need not be a member of the Company.

Where there are joint holders of any Shares any one of such joint holder may vote, either in person or by proxy, in respect of such Share as if he were solely entitled thereto, but if more than one of such joint holders be present at the SGM the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding.

– 49 –

NOTICE OF THE SPECIAL GENERAL MEETING

The form of proxy and (if required by the board of directors of the Company) the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power of attorney, shall be delivered to the Company’s branch registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong, not less than 48 hours before the time appointed for holding the SGM or adjourned meeting at which the person named in the form of proxy proposes to vote.
The form of proxy for use at the SGM is enclosed herewith.

– 50 –

AI assistant

Sheng Yuan Holdings Limited — Proxy Solicitation & Information Statement 2011

49510_rns_2011-02-01_01dac874-dfdb-471f-80b8-be4dff00d3fd.pdf

MAJOR TRANSACTION PROPOSED ACQUISITION OF A SECURITIES BROKERAGE AND FINANCIAL SERVICES COMPANY

DEFINITIONS

(Stock Code: 851)

MAJOR TRANSACTION PROPOSED ACQUISITION OF A SECURITIES BROKERAGE AND FINANCIAL SERVICES COMPANY

INTRODUCTION

THE ACQUISITION AGREEMENT

Date

Parties

Assets to be acquired

Consideration

Conditions precedent

Completion

INFORMATION ON THE TARGET

REASONS FOR THE ACQUISITION

PROPOSED BUSINESS DEVELOPMENT PLAN

RISK FACTORS

Risk relating to the Acquisition

New business sector

Credit risks in the financing and settlement activities

High level of liquidity requirements

Risk relating to the financial industry

Operation under highly regulated business environment

Business performance may affect by fluctuation of market conditions

FINANCIAL EFFECTS OF THE ACQUISITION

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

LISTING RULES IMPLICATIONS

THE SGM

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMATION

1. FINANCIAL INFORMATION OF THE GROUP

2. INDEBTEDNESS STATEMENT

3. MATERIAL ADVERSE CHANGE

4. WORKING CAPITAL STATEMENT

A. FINANCIAL INFORMATION

Statement of comprehensive income

Statement of financial position

Statement of changes in equity

Statement of cash flows

NOTES TO THE FINANCIAL INFORMATION

1. GENERAL

2. APPLICATION OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS (“HKFRSs”)

3. SIGNIFICANT ACCOUNTING POLICIES

Property, plant and equipment

Leasing

KYSL as lessee

Retirement benefit costs

Taxation

Impairment on tangible and intangible asset

Trading right

Financial instruments

Financial assets

Effective interest method

Financial assets at fair value through profit or loss

Loans and receivables

Financial liabilities and equity instruments

Effective interest method

Financial liabilities

Equity instruments

Derecognition

4. CAPITAL RISK MANAGEMENT

5. FINANCIAL INSTRUMENTS

Financial risk management objectives and policies

Market risks

Other price risk

Credit risk

Liquidity risk

Fair value

Fair value measurements recognised in the statement of financial position

6. SEGMENT INFORMATION

7. DIRECTORS’ EMOLUMENTS AND EMPLOYEES’ EMOLUMENTS

Directors’ emoluments

Employees’ emoluments

8. LOSS BEFORE TAXATION

9. TAXATION

10. DIVIDEND

11. LOSS PER SHARE

Sheng Yuan Holdings Limited Proxy Solicitation & Information Statement 2011