Star Plus Legend Holdings Limited - Proxy Solicitation & Information Statement 2005

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in AviChina Industry & Technology Company Limited, you should at once hand this circular and the enclosed proxy form to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

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

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AviChina Industry & Technology Company Limited*

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

DISCLOSEABLE AND CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

A letter from the Independent Board Committee is set out on page 13 of this circular. A letter from Somerley to the Independent Board Committee and Independent Shareholders is set out on pages 14 to 30 of this circular.

A notice convening an Extraordinary General Meeting of AviChina Industry & Technology Company Limited to be held at 9 a.m. on 22 March 2005 at Beijing Oriental Cultural Hotel, No. 101, Jiao Dao Kou East Street, Dongcheng District, Beijing, the People’s Republic of China is set out on pages 31 to 32 of this circular.

If you intend to attend the Extraordinary General Meeting, please complete and return the enclosed reply slip in accordance with the instructions printed thereon as soon as possible and in any event by 5 p.m. on 2 March 2005.

Whether or not you are able to attend the Extraordinary General Meeting, please complete and return the enclosed proxy form in accordance with the instructions printed thereon as soon as possible and in any event by 9 a.m. on 21 March 2005. Completion and delivery of the proxy form shall not preclude you from attending and voting at the Extraordinary General Meeting or any adjournment thereof should you so wish.

* For identification purposes only

1 February 2005

	Page
Expected timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
First transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Second transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Information on entities involved in the Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Shareholding structure of Dongan Motor and Hafei Auto . . . . . . . . . . . . . . . . . . . . . . . .	8
Reasons for the Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Rights issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Further information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Letter from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31
Appendix I — General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Appendix II — Procedures for demanding a poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	37

— i —

EXPECTED TIMETABLE

Deadline for returning the reply slips for the Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . .5 p.m. on 2 March 2005 Deadline for returning the proxy forms for the Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . .9 a.m. on 21 March 2005 Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 a.m. on 22 March 2005

— ii —

DEFINITIONS

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

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

||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“AVIC|II”|China|Aviation|Industry|Corporation|
|II|
|“Board”|the|board|of|Directors|of|the|Company|
|“CATIC”|China|National|Aero-Technology|
|Import|&|Export|Co.,|Ltd.,|a|state-owned|enterprise|held|50%|
|by|AVIC|II|
|“China|Aero”|China|Aero|(382)|Limited,|which|is|
|ultimately|wholly-owned|by|CATIC|
|“Company”|AviChina|Industry|&|Technology|
|Company|Limited|
|“Directors”|the|directors,|including|the|independent|non-executive|
|directors,|of|the|Company|
|“Dongan|Group”|Harbin|Dongan|Engine|(Group)|
|Co.,|Ltd.,|a|wholly-owned|subsidiary|of|AVIC|II|
|“Dongan|Motor”|Harbin|Dongan|Auto|Engine|
|Co.,|Ltd.,|a|joint|stock|limited|company|whose|shares|are|
|listed|on|the|Shanghai|Stock|Exchange|and|owned|as|to|
|70.01%|by|the|Company|
|“EGM”|or|“Extraordinary|extraordinary|general|meeting|of|the|Company|to|be|held|to|
|General|Meeting”|approve,|inter|alia,|the|Transactions|
|“Group”|the|Company|and|its|subsidiaries|
|“Hafei|Industry|Company”|Harbin|Aircraft|Industry|(Group)|
|Co.,|Ltd.,|a|wholly-owned|subsidiary|of|the|Company|
|“Hafei|Auto”|Hafei|Auto|Co.,|Ltd.|
|“Independent|Board|Committee”|an|independent|board|committee|comprising|independent|
|non-executive|Directors,|namely,|Dr.|The|Hon.|Li|Kwok-Po,|
|David,|Mr.|Guo|Chongqing|and|Mr.|Li|Xianzong|
|“Independent|Shareholders”|Shareholders|of|the|Company|excluding|AVIC|II|and|its|
|associates|
|“Latest|Practicable|Date”|25|January|2005|
|“Listing|Rules”|Rules|Governing|the|Listing|of|Securities|on|the|Stock|
|Exchange|of|Hong|Kong|Limited|

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— 1 —

DEFINITIONS

“Mitsubishi”	Mitsubishi Motor Corporation ( )
“PRC”	People’s Republic of China
“SFO”	the Securities & Futures Ordinance
“Shareholders”	the holder(s) of shares of RMB1.00 each in the capital of the
“Shenhang”	Company Shenzhen Shenhang Avionics Co.,
	Ltd., which is held as to 34% and 33%, respectively by CATIC
	and Hafei Industry Company
“Somerley”	Somerley Limited, a deemed licensed corporation under the
	SFO to conduct types 1 (dealing in securities), 4 (advising on
	securities), 6 (advising on corporate finance) and 9 (asset
	management) regulated activities and the independent
	financial adviser to the Independent Board Committee and the
	Independent Shareholders
“Suzuki”	Suzuki Motor Corporation
“Transactions”	Include the First Transaction and the Second Transaction
“WTO”	The World Trade Organization

All amounts in RMB have been translated into HK$ at the rate of HK$1.00 = RMB1.06 in this circular for illustration purpose.

— 2 —

LETTER FROM THE CHAIRMAN

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AviChina Industry & Technology Company Limited*

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

DISCLOSEABLE AND CONNECTED TRANSACTIONS

Executive Directors:

Mr. Zhang Hongbiao Mr. Wu Xiandong

Non-executive Directors:

Registered Office: No. 16, Hong Da Bei Lu Beijing Economical Technological Development Area Beijing, PRC

Mr. Liang Zhenhe

Mr. Song Jingang Mr. Chen Huaiqiu Mr. Xu Tongxing Mr. Cui Xuewen

Principal Place of Business in

Hong Kong: Unit B, 15/F, United Center Queensway 95, Hong Kong

Mr. Tian Min

Mr. Yang Jinhuai

Ms. Hu Jiarui

Mr. Maurice Savart

Independent Non-executive Directors:

Dr. The Hon. Li Kwok-Po, David

Mr. Guo Chongqing

Mr. Li Xianzong

1 February 2005

To the Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTIONS

Introduction

The purpose of this circular is (i) to provide you with further information on the Transactions as described below; (ii) to set out the opinions and recommendations of the Independent Board

* For identification purposes only

— 3 —

LETTER FROM THE CHAIRMAN

Committee and Somerley in relation to the entering into of the Transactions; and (iii) to give you notice of the EGM at which the resolutions set out therein will be proposed. An EGM will be held on 22 March 2005 for the purpose of, inter alia, obtaining the approval from the Independent Shareholders for the Transactions by way of poll. AVIC II, being the controlling shareholder (as defined in the Listing Rules) and its associates (as defined in the Listing Rules), will abstain from voting in respect of the ordinary resolution at the EGM.

The Board announced that on 30 December 2004, Dongan Motor, a company held as to 70.01% by the Company, entered into an agreement to acquire 74.81% equity interest in Hafei Auto from Hafei Industry Company, a wholly-owned subsidiary of the Company (“the First Transaction”). On 30 December 2004, Dongan Motor also entered into an agreement to acquire the other 25.19% equity interest in Hafei Auto from China Aero, Dongan Group, CATIC and Shenhang (“the Second Transaction”). Upon completion of the Transactions, the Company will hold its interest in Hafei Auto through Dongan Motor, and the Company’s effective equity interest in Hafei Auto will be reduced from 74.81% to 70.01%.

Dongan Motor is a joint stock company listed on the Shanghai Stock Exchange and is principally engaged in the production and sale of vehicle engines. Hafei Auto is principally engaged in the production and sale of mini-sized vehicles and economy sedans. The headquarters and production bases of Dongan Motor and Hafei Auto are located in Harbin, Heilongjiang Province, Northeastern China. Upon completion of the Transactions, steps will be taken to cancel the legal status of Hafei Auto such that upon cancellation, all of its assets, rights and liabilities will be assumed by Dongan Motor.

China Aero, Dongan Group, CATIC and Shenhang are associates of AVIC II which holds 61.06% equity interest in the Company. Except for the profit ratio, which is below 5%, all other applicable ratios under Rule 14.07 of the Listing Rules in each of the Transactions exceed 5% and below 25% and accordingly, constitute discloseable transactions for the Company under Chapter 14 of the Listing Rules. Each of the Transactions also constitutes a connected transaction under Rule 14A.13 for which Independent Shareholders’ approval is required.

On 30 December 2004, the board of directors of Dongan Motor proposed a rights issue of eight rights shares for every 10 existing shares. It is expected that the rights issue will take place in 2005 and the rights issue price will be determined at 10% to 40% discount to the then average closing prices of Dongan Motor’s listed A shares for the last 30 trading days prior to the publication of the rights issue document. The proceeds from the rights issue will principally be used to finance the acquisition of Hafei Auto. On 30 December 2004, the Board resolved that the Company would subscribe for 70.01% of the rights shares in accordance with its current shareholding percentage in Dongan Motor.

Each of the Transactions is subject to the approval of the Independent Shareholders at the EGM. An Independent Board Committee has been set up to advise the Independent Shareholders on the terms and conditions of each of the Transactions. The Company has appointed Somerley as an independent financial adviser to advise the Independent Shareholders and the Independent Board Committee as to whether the terms of the Transactions are fair and reasonable and the Transactions are in the interests of the Company and Shareholders as a whole.

— 4 —

LETTER FROM THE CHAIRMAN

FIRST TRANSACTION — SALE OF 74.81% INTEREST IN HAFEI AUTO BY HAFEI INDUSTRY COMPANY TO DONGAN MOTOR

Date: 30 December 2004

Purchaser: Dongan Motor, a company held as to 70.01% by the Company Vendor: Hafei Industry Company, a wholly-owned subsidiary of the Company Details: Hafei Industry Company will sell its 74.81% equity interest in Hafei Auto to Dongan Motor. The Company’s effective interest in Hafei Auto will be reduced from 74.81% to 52.37% after the First Transaction, a reduction of 22.44%. Therefore, the effect of the First Transaction is that the Company disposes of its 22.44% interest in Hafei Auto

Consideration: RMB898,947,200, equivalent to approximately HK$848,063,400, to be payable in cash by Dongan Motor within 7 days of the completion of the First Transaction. The consideration is based on the audited net asset value of Hafei Auto as at 30 June 2004 of RMB1,201,643,000 prepared under the PRC accounting standards and the 74.81% equity interest in Hafei Auto to be acquired by Dongan Motor under the First Transaction. Dongan Motor will fund the acquisition with the funds obtained from the rights issue as described below

Conditions: The completion of the First Transaction will be conditional, inter alia, on:

the approvals of the First Transaction by the Independent Shareholders and shareholders of Dongan Motor in their respective shareholders’ meetings
the approvals by the State Assets Supervision and Administration Commission of the State Council of the PRC, the Ministry of Commerce of the PRC and the National Development and Reform Commission for the transfer of equity interest in Hafei Auto to Dongan Motor
conditions of the Second Transaction are satisfied
the completion of the rights issue as described below
any other necessary approval or consent

As at the Latest Practicable Date, none of the above conditions has been fulfilled. In the event that the above conditions are not fulfilled before 31 March 2006, or such other date as agreed by the parties to the agreement, the agreement will lapse. The above conditions may not be waived by any party to the agreement.

— 5 —

LETTER FROM THE CHAIRMAN

SECOND TRANSACTION — ACQUISITION OF 25.19% INTEREST IN HAFEI AUTO

Date: 30 December 2004

Purchaser: Dongan Motor, a company held as to 70.01% by the Company

Vendors: China Aero, Dongan Group, CATIC and Shenhang, all of which are associates of the Company’s controlling shareholder, AVIC II

Details: China Aero, Dongan Group, CATIC and Shenhang hold 25%, 0.1%, 0.06% and 0.03% interests in Haifei Auto, respectively. They will sell their entire equity interests in Hafei Auto, amounting to 25.19% in aggregate, to Dongan Motor. The Company’s effective interest in Hafei Auto will be increased from 52.37% (after the First Transaction) to 70.01% (after the Second Transaction).

Consideration: RMB302,692,800, equivalent to approximately HK$285,559,200, to be payable in cash by Dongan Motor within 7 days of the completion of the Second Transaction. The consideration is based on the audited net asset value of Hafei Auto as at 30 June 2004 of RMB1,201,643,000 prepared under the PRC accounting standards and the 25.19% equity interest in Hafei Auto to be acquired by Dongan Motor under the Second Transaction. There is no excess or deficit of the consideration over or under the proportionate net book value of the assets of Hafei Auto. Dongan Motor will fund the acquisition with the funds obtained from the rights issue as described below

Conditions:

The completion of the Second Transaction will be conditional, inter alia, on:

the approvals of the Second Transaction by the Independent Shareholders and shareholders of Dongan Motor in their respective shareholders’ meetings
the approvals by the State Assets Supervision and Administration Commission of the State Council of the PRC, the Ministry of Commerce of the PRC and the National Development and Reform Commission for the transfer of equity interests in Hafei Auto to Dongan Motor
conditions of the First Transaction are satisfied
the completion of the rights issue as described below
any other necessary approval or consent

— 6 —

LETTER FROM THE CHAIRMAN

INFORMATION ON ENTITIES INVOLVED IN THE TRANSACTIONS

The Company is principally engaged in the research, development, manufacture and sale of vehicles and civilian aircraft and is held as to 61.06% by AVIC II.

Dongan Motor is listed on the Shanghai Stock Exchange and is held as to 70.01% by the Company. Dongan Motor is principally engaged in the development, manufacture and sale of vehicle engines.

Hafei Industry Company is a wholly-owned subsidiary of the Company. The company’s principal business activities include the development, manufacture and sale of aviation products with helicopter as the main product. The company also develops, manufactures and sells vehicles and vehicle parts.

Hafei Auto is principally engaged in the development, manufacture and sale of vehicles. The registered capital of Hafei Auto is RMB1,013,280,000. Hafei Auto is held as to 74.81%, 25%, 0.1%, 0.06% and 0.03% respectively by Hafei Industry Company, China Aero, Dongan Group, CATIC and Shenhang. The original purchase costs of Hafei Auto to China Aero, Dongan Group, CATIC and Shenhang are approximately RMB253.3 million, RMB1.0 million, RMB0.6 million, RMB0.3 million, respectively. Based on international accounting standards, the unaudited total assets and net assets of Hafei Auto as of 30 June 2004 were RMB5,290 million and RMB1,212 million, respectively. The unaudited net profits before and after taxation and extraordinary items for the six months ended 30 June 2004 were RMB58.2 million and RMB58.0 million, respectively. The unaudited net profits before and after taxation and extraordinary items for 2003 were RMB78 million and RMB77 million, respectively. The unaudited net profits before and after taxation and extraordinary items for 2002 were RMB153 million and RMB141 million, respectively.

CATIC is mainly engaged in the import and export of aviation products, mechanical and electrical products technology and equipment machinery. It is held 50% by China Aviation Industry Corporation I and 50% by AVIC II.

China Aero is an investment holding company registered in British Virgin Islands. It is ultimately wholly-owned by CATIC.

Dongan Group is a wholly-owned subsidiary of AVIC II. It is principally engaged in the development, manufacture and sale of aero engines, helicopter transmission systems and automotive engines.

Shenhang is mainly engaged in computer system, electronic instruments and equipment machinery. It is held as to 34% and 33% respectively by CATIC and Hafei Industry Company.

— 7 —

LETTER FROM THE CHAIRMAN

SHAREHOLDING STRUCTURE OF DONGAN MOTOR AND HAFEI AUTO

The following two charts set out the shareholding structure relating to Dongan Motor and Hafei Auto before and after the Transactions:

Current Structure:

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

AVIC II
50% 100% 61.06%
Shenhang [2] CATIC Dongan Group Company
100% [1] 100% 70.01%
China Aero Hafei Industry
Company
25% •• vehiclesaviation Dongan Motor• vehicle engines
0.03% 0.06% 0.1% • machinery
74.81%
Hafei Auto
• mini-sized
vehicles
• economy sedans
----- End of picture text -----

Note 1: Through intermediate wholly-owned subsidiary

Note 2: Shenhang is held as to 34% and 33%, respectively by CATIC and Hafei Industry Company

— 8 —

LETTER FROM THE CHAIRMAN

After the Transactions:

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

AVIC II
61.06%
Company
100% 70.01%
Hafei Industry Dongan Motor
Company • mini-sized vehicles
• aviation • economy sedans
• machinery • vehicle engines
100%
Hafei Auto
• mini-sized vehicles
• economy sedans
----- End of picture text -----

The effective interest of the Company in Hafei Auto will be reduced from 74.81% to 70.01% after the completion of the Transactions. Upon completion of the Transactions, steps will be taken to cancel the legal status of Hafei Auto such that upon cancellation, all of its assets, rights and liabilities will be assumed by Dongan Motor.

REASONS FOR THE TRANSACTIONS

Dongan Motor and Hafei Auto are engaged in the manufacturing of vehicle engines and vehicles, respectively. The headquarters and production bases of Dongan Motor and Hafei Auto are located in Harbin, Heilongjiang Province, Northeastern China. Upon completion of the Transactions, certain management functions of both companies will be combined, thus increasing management efficiency, lowering administrative and general expenses, and improving the profitability of the vehicle business of the Company. It will also shorten the cycle for research and development of new vehicles and lower research and development costs.

The Board believes that the terms of the Transactions are fair and reasonable and in the interests of the Company and Shareholders as a whole.

— 9 —

LETTER FROM THE CHAIRMAN

RIGHTS ISSUE

On 30 December 2004, the board of directors of Dongan Motor proposed a rights issue of eight rights shares for every 10 existing shares of Dongan Motor. The total number of rights issue shares will be 369,664,000 shares. The rights issue is subject to approvals by over two thirds (2/3) of the votes cast at the shareholders’ meeting of Dongan Motor and the relevant PRC authorities. If such approvals are obtained, it is expected that the rights issue will take place in 2005 and the rights issue price will be determined at 10% to 40% discount to the then average closing price of Dongan Motor’s listed A shares for the last 30 trading days prior to the publication of the rights issue document. The average of the closing prices of Dongan Motor’s listed A shares for the last 30 trading days up to the Latest Practicable Date is RMB4.09 per share. Assuming the rights issue price is determined at 10% to 40% discount to RMB4.09 per share, the rights issue will raise approximately RMB907 million to RMB1,361 million. The net proceeds of the rights issue will be used by Dongan Motor to finance the acquisition of Hafei Auto, the total consideration of which amounted to an aggregate of RMB1,202 million. If the net proceeds are more than the total consideration, the excess net proceeds will be used by Dongan Motor to finance the upgrade of the production facilities. If the net proceeds of the rights issue are not sufficient for the total consideration of the Transactions, Dongan Motor will finance the balance of the total consideration by its own resources or debt financing from banks.

On 30 December 2004, the Board resolved that the Company would subscribe for 70.01% of the rights shares in accordance with its current shareholding percentage in Dongan Motor. Assuming the size of the rights issue is approximately RMB907 million to RMB1,361 million, the total subscription price to be paid by the Company will be approximately RMB635 million to RMB953 million. The Company will fund the subscription by its own resources.

FINANCIAL INFORMATION

The result of the First Transaction is that the Company’s effective interest in Hafei Auto will be reduced by 22.44% from 74.81% to 52.37%. As the consideration is based on the proportionate share of the audited net asset value of Hafei Auto prepared under the PRC accounting standards, there will be no material gain or loss to be recorded by the Group as a result of the First Transaction. There will also be no material effect on the assets and liabilities of the Group as a result of the First Transaction. Proceeds from the sale of 74.81% interest in Hafei Auto will mainly be used by the Group for the development of its business.

Pursuant to the Second Transaction, Dongan Motor will acquire 25.19% interest in Hafei Auto not currently owned by the Group. After the Second Transaction, the Group’s effective interest in Hafei Auto will increase from 52.37% (following the completion of the First Transaction) to 70.01%. As the consideration is based on the proportionate share of the audited net asset value of Hafei Auto prepared under the PRC accounting standards, there will be no material gain or loss being recorded by the Group as a result of the Second Transaction. There will also be no material effect on the assets and liabilities of the Group as a result of the Second Transaction.

— 10 —

LETTER FROM THE CHAIRMAN

GENERAL

China Aero, Dongan Group, CATIC and Shenhang are associates of AVIC II which hold 61.06% interest in the Company. Except for the profit ratio, which is below 5%, all other applicable ratios under Rule 14.07 of the Listing Rules in each of the Transactions exceed 5% and below 25%, and accordingly constitute discloseable transactions for the Company under Chapter 14 of the Listing Rules.

Pursuant to the First Transaction, Dongan Motor, a subsidiary of the Company, will acquire 74.81% equity interest in Hafei Auto from Hafei Industry Company. As Dongan Group, CATIC, China Aero and Shenhang, all being associates of AVIC II (a controller of the Company), are together interested in 25.19% equity interest in Hafei Auto, the First Transaction constitutes a connected transaction under the Listing Rules for which Independent Shareholders’ approval is required.

The Second Transaction is between Dongan Motor, a subsidiary of the Company, and China Aero, Dongan Group, CATIC and Shenhang who are connected persons of the Company (as they are associates of the Company’s controlling shareholder, AVIC II). The Second Transaction therefore constitutes a connected transaction under the Listing Rules for which Independent Shareholders’ approval is required.

EXTRAORDINARY GENERAL MEETING

As the applicable ratios under Rule 14A.10 of the Listing Rules exceed 2.5%, each of the Transactions, which constitutes connected transaction as aforesaid, is subject to the approval of the Independent Shareholders at the EGM. The Independent Board Committee consisting of Dr. The Hon. Li Kwok-Po, David, Mr. Guo Chongqing and Mr. Li Xianzong, all of whom are independent non-executive Directors, has been set up to advise the Independent Shareholders on the terms and conditions of each of the Transactions. The Company has appointed Somerley as an independent financial adviser to advise the Independent Shareholders and the Independent Board Committee as to, inter alia, whether the terms of the Transactions are fair and reasonable and the Transactions are in the interests of the Company and Shareholders as a whole.

An EGM will be convened on 22 March 2005. An ordinary resolution to approve the Transactions will be proposed at the EGM. AVIC II, being the controlling shareholder (as defined in the Listing Rules), and its associates (as defined in the Listing Rules) will abstain from voting in respect of the ordinary resolution at the EGM. The procedures for demanding a poll are set out in Appendix II to this circular. The Company will announce the results of the poll in accordance with the Listing Rules following the EGM.

— 11 —

LETTER FROM THE CHAIRMAN

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 13 of this circular. The Independent Board Committee, having taken into account the advice of Somerley, considers that the terms of the Transactions are fair and reasonable and the Transactions are in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of ordinary resolution to be proposed at the EGM.

FURTHER INFORMATION

The Company will publish further announcement in respect of the rights issue of Dongan Motor in accordance with Rule 13.09 of the Listing Rules as and when required.

Your attention is also drawn to the additional information set out in the Appendices to this circular.

Yours faithfully, By Order of the Board Zhang Hongbiao Chairman

— 12 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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AviChina Industry & Technology Company Limited*

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

1 February 2005

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular (the “Circular”) dated 1 February 2005 despatched to the Shareholders of which this letter forms a part. Unless the context requires otherwise, terms and expressions defined in the Circular shall have the same meanings in this letter.

We have been appointed to advise the Independent Shareholders on whether the terms of the Transactions are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Somerley has been appointed to advise the Independent Board Committee and Independent Shareholders in respect of the terms of the Transactions.

We wish to draw your attention to the letter from the Chairman set out on pages 3 to 12 of the Circular and the letter from Somerley set out on pages 14 to 30 of the Circular.

Having considered the advice given by Somerley, we are of the opinion that the terms of the Agreement and the Transactions are fair and reasonable, and the Transactions are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM.

Yours faithfully,

For and on behalf of the Independent Board Committee

Li Kwok-Po, David

Independent Non-executive Director

Guo Chongqing

Independent Non-executive Director

Li Xianzong

Independent Non-executive Director

* For identification purposes only

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LETTER FROM SOMERLEY

Set out below is a letter from Somerley for the purpose of inclusion into this circular.

Somerley Limited Suite 2201, 22nd Floor Two International Finance Centre 8 Finance Street Central Hong Kong

1 February 2005

To: The Independent Board Committee and the Independent Shareholders

Dear Sirs,

Discloseable and connected transactions

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with a proposal (“Group Reorganisation”) which will result in the acquisition of the entire equity interest of Hafei Auto by Dongan Motor, an approximately 70.01% owned subsidiary of the Company. Hafei Motor is currently held as to approximately 74.81% by the Group and the remaining approximately 25.19% by associates of AVIC II. AVIC II is the approximately 61.06% controlling shareholder of the Company. Details of the Group Reorganisation are contained in the circular to the shareholders of the Company dated 1 February 2005 (the “Circular”), of which this letter forms a part. Unless otherwise defined, terms used in this letter shall have the same meanings as defined in the Circular.

Owing to the shareholding relationship set out above, the transactions involved in the Group Reorganisation constitute connected transactions of the Company under the Listing Rules and require the approval of the Independent Shareholders at the EGM by votes to be taken by poll.

An independent committee of the Board, comprising Dr. The Hon. Li Kwok-Po, David, and Messrs Guo Chongqing and Li Xianzong who are independent non-executive Directors, has been formed to make a recommendation to the Independent Shareholders as regards the terms of the Group Reorganisation. We have been appointed as independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

In formulating our advice and recommendation, we have relied on the information and facts supplied, and the opinions expressed, by the directors and management of the Company, which we have assumed to be true, accurate and complete. We have reviewed, among other things, the agreements relating to the Group Reorganisation, the financial information of the Group and Hafei Auto, including their audited financial statements for the two years ended 31 December 2003 and the unaudited interim results for the six months ended 30 June 2004.

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LETTER FROM SOMERLEY

We have sought and received confirmation from the Directors that all material relevant information has been supplied to us and to the best knowledge of the Directors, no material facts have been omitted which would make any statements made misleading. We consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter and to justify our relying on such information and we have no reason to doubt that the information provided to us is not true and accurate or that any material information has been omitted or withheld. However, we have not conducted any independent investigation into the business and affairs of the Group. We have assumed that all representations contained or referred to in the Circular are true at the date of the Circular and will continue to be true up to the date of the EGM.

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

In arriving at our opinion on the terms of the Group Reorganisation, we have taken into consideration the following principal factors and reasons:

1. The Group

(i) History

As a result of the restructuring of the PRC aviation industry, Aviation Industry of China Corporation (a ministerial level enterprise and the only aviation manufacturer directly governed by the State Council of the PRC) was reorganised into China Aviation Industry Corporation I (“AVIC I”) and China Aviation Industry Corporation II (“AVIC II”). AVIC I mainly focuses on development and manufacture of military aeroplanes, while AVIC II is mainly engaged in development and manufacture of civilian products including helicopters, trainers and general purpose aeroplanes as well as non-aviation products such as vehicles, vehicle engines, parts and components.

Under a group reorganisation prior to the Company’s H-share listing in 2003, AVIC II and the other three promoters injected into the Company, as their capital contributions, assets and equity interests relating to the development and manufacture of civil aviation products, vehicles and vehicle engines.

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LETTER FROM SOMERLEY

(ii) Business and group structure

The Group is principally engaged in the manufacture and sale of two types of civilian products, namely aviation products and automobiles. The automobile segment has been the major contributor to the Group in terms of turnover and operating profit, as illustrated below:

	For the year ended	For the year ended	For the year ended	31 December	31 December	For the six	months	ended 30 June	ended 30 June
	2002			2003		2003		2004
	RMB million		RMB million			RMB million		RMB million
	(Audited)			(Audited)		(Audited)		(Unaudited)
Turnover
Automobile	9,418	(83%)		12,481	(83%)	5,771	(89%)	5,993	(88%)
Aviation	1,891	(17%)		2,585	(17%)	732	(11%)	830	(12%)
	11,309	(100%)		15,066	(100%)	6,503	(100%)	6,823	(100%)
Operating profit
Automobile	607	(73%)		597	(68%)	355	(79%)	259	(91%)
Aviation	220	(27%)		281	(32%)	93	(21%)	26	(9%)
	827	(100%)		878	(100%)	448	(100%)	285	(100%)

The Group was the second largest mini-sized vehicle manufacturer in PRC in terms of sales volume in 2003 and 2004. The Group commenced production of its self-developed branded mini-sized vehicles in 1980. The car manufacturing business is mainly conducted through the Hafei Auto Group (as defined below), which has its production base in the Northeast (Harbin) of PRC, and the Changhe Group (as defined below), which has its production base in the South (Jiangxi and Anhui) of PRC. Dongan Motor Group (as defined below) is the major supplier of vehicle engines to both the Hafei Auto Group and the Changhe Group. Besides mini-sized vehicles, the Group also manufactures and sells economy sedans. The Group has adjusted its car product mix to place more focus on economy sedans in 2003 when the PRC’s mini-sized car market was affected by the implementation of the new safety frontal crash requirements introduced in June 2003. For the year ended 31 December 2003, the ratio, in terms of monetary value, of mini-sized vehicles to economy sedans sold by the Group was approximately 63:37.

The Group is also the largest helicopter manufacturer in terms of production capacity in PRC and is one of the leading manufacturers of civilian aircraft in the PRC. It is the largest exporter of aviation products in PRC.

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LETTER FROM SOMERLEY

As illustrated in the group chart below, the Group’s business activities are carried out through five main sub-groups. We set out below a brief description of their principal business activities:

==> picture [456 x 265] intentionally omitted <==

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

The Company
100% 100% 70.01% 100% 51%
Jiangxi Changhe
Aviation Industry Jiangxi Hongdu Beijing Wisewell
Hafei Industry Company Limited Dongan Motor Aircraft Industry Avionics Company
Company (“Changhe” and (and together with its Co., Ltd. Limited
together with its subsidiaries the (“Hongdu Industry”
(“Beijing Wisewell”)
subsidiaries, the “Dongan Motor and together with its
• Vehicles
• Aviation “Changhe Group”) Group”) subsidiaries, the • Aviation avionics
• Machinery • Automobile • Vehicle engines “Hongdu Group”) system integration
• Aviation • Aviation • Avionics
• Machinery
74.81%
Hafei Auto (and
together with its
subsidiaries, the
“HafeiAuto Group”)
• Mini-sized vehicles
• Economy sedans
----- End of picture text -----

(iii) Hafei Industry

Hafei Industry Company is engaged in the development and production of helicopters and, through its subsidiaries and associate companies, develops and produces vehicles and other types of civilian aircraft. We set out below a brief description of the businesses conducted by the major members of Hafei Industry Company:

● Hafei Auto

Hafei Auto has its production base in Harbin, PRC and is principally engaged in the development, manufacture and sale of vehicles (mainly mini-sized vans and trucks and economy sedans). Hafei Auto manufactures and sells vehicles bearing its own developed brands of “ Hafei Zhongyi ”, “ Hafei Baili ”, “ Hafei Sigma ”, “ Hafei Lobo ”, “ Hafei Minyi ” and “ Hafei Ruiyi ” which are popular brands in the low-end car market. Hafei Auto is owned as to approximately 74.81% by the Group and the remaining approximately 25.19% by the associates of AVIC II which is the controlling Shareholder. Hafei Auto acquires vehicle engines from the Dongan Motor Group. Please refer to the section headed “Business, results and prospects of Hafei Auto” below for more details regarding the operation and financial position of Hafei Auto.

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LETTER FROM SOMERLEY

Hafei Aviation Industry Co., Ltd. (“Hafei Aviation”)

Hafei Aviation is an approximately 55.73% owned subsidiary of the Company. Hafei Aviation has its A-shares listed on the Shanghai Stock Exchange. Its principal business comprises research, development, design, manufacture and sale of aero products, including parts and components.

Harbin Embraer Aircraft Industry Co., Ltd. (“Harbin Embraer”)

Harbin Embraer is an approximately 38.15% held associate company of Hafei Industry Company. Harbin Embraer is a sino-foreign equity joint venture company established in the PRC and is engaged in the manufacture and sale of regional jets in the PRC.

Others

Other members of this sub-group are principally engaged in supporting functions for this sub-group’s vehicle and aircraft businesses such as moulding, electrical wiring and manufacture of electrical and mechanical products.

(iv) Dongan Motor

Dongan Motor has its A-shares listed on the Shanghai Stock Exchange and is owned as to 70.01% by the Company. Dongan Motor is principally engaged in the development and production of vehicle engines. In addition, it also holds an approximately 36% equity interest in a sino-foreign joint venture company with Mitsubishi. This joint venture company develops and produces vehicle engines using Mitsubishi technology for Hafei Auto’s economy sedans. Hafei Auto, a vehicle manufacturer, purchases all its vehicle engines from Dongan Motor and the joint venture company. Dongan Motor is also a major supplier of vehicle engines to the Changhe Group.

(v) Changhe

Changhe is engaged in the development and production of helicopters. It is also engaged, through its subsidiaries and associate companies, in the manufacture and sale of vehicles. One of its non wholly-owned subsidiaries, Jiangxi Changhe Automobile Co., Ltd. (“Changhe Auto”), has its A-shares listed on the Shanghai Stock Exchange and is principally engaged in the manufacture and sale of mini-sized vehicles and economy sedans bearing its self-developed brands. Changhe has a joint venture company with Suzuki which manufactures and sells cars bearing the “ Changhe Suzuki ” brand. The engines of cars manufactured by the Changhe Group are mostly purchased from the Dongan Motor Group. Changhe Group also purchases around 20% of its vehicle engines from Japan.

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LETTER FROM SOMERLEY

(vi) Hongdu Industry

Hongdu Industry holds an approximately 54.75% equity interest in Hongdu Aviation Industry Co. Ltd.. Hongdu Aviation Industry Co. Ltd. has its A-shares listed on the Shanghai Stock Exchange and is principally engaged in the aviation business.

(vii) Beijing Wisewell

Beijing Wisewell is a 51% owned subsidiary of the Company and is principally engaged in the development, production and sale of avionics and information technology products.

The above description illustrates that the Group’s two main business activities of automobile and civilian aircraft manufacturing are not presently aligned into a clear group structure. This has its own historical background. Many of the enterprises under the Group originate from The Ministry of Aero-Space Industry and were organised into profit-oriented and economically independent business units following the PRC government’s policy to segregate government administration from the management of enterprises. In the process of becoming fully commercial business units, many of these enterprises diversified from manufacture of civilian aircraft into production of automobiles, leveraging on their expertise in aircraft manufacturing.

2. Reasons for the Group Reorganisation

The present group structure may result in some overlapping of management functions among the sub-groups under the Company. It gives rise to connected transactions among members of the Group, which in turn create substantial compliance work on the part of the listed companies within the Group. This is particularly the case for Hafei Auto and Changhe which purchase vehicle engines, a major component of their products, from a fellow subsidiary, Dongan Motor, which is an independently run A-share listed company. According to the PRC audited financial statements of Hafei Auto, the purchase of vehicle engines and material by the Hafei Auto Group from the Dongan Motor Group amounted to approximately RMB1,700 million (approximately HK$1,604 million), representing approximately 23.43% of the total purchases by the Hafei Auto Group in the financial year ended 31 December 2003. Based on the PRC audited consolidated financial statements of Changhe Auto, its purchase of vehicle engines and material from the Dongan Motor Group amounted to approximately RMB929 million (approximately HK$876 million), representing approximately 24.0% of the purchases of Changhe Auto in the financial year ended 31 December 2003.

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LETTER FROM SOMERLEY

In our opinion, the Group Reorganisation would achieve the following objectives:

(i) A normal vertical integration

The combination of a vehicle engine producer and a car assembler represents a normal vertical integration in this industry. In this case, the integration involves Hafei Auto and Dongan Motor because:

(1) the production facilities of Hafei Auto are situated next to Dongan Motor in Harbin. Changhe has its production base in Jiangxi and Anhui. From the operational point of view, it is preferable to merge Dongan Motor with Hafei Auto;
(2) a merger of a private company (Hafei Auto) into Dongan Motor is a more practical alternative. It would be more complex, costly and time consuming to merge the Dongan Motor Group and the Changhe Group, both of which are listed companies. This is also why in this case, a car assembler (Hafei Auto) is being acquired by the engine manufacturer (Dongan Motor).
(ii) Such integration is consistent with China’s recently promulgated automotive industry policy

In May 2004, the National Development and Reform Commission released the 2004 Automotive Industry Development Policy (the “New Policy”) which is China’s second statement of automotive industry policy — the first was issued by the State Council in 1994. The New Policy aims, among other things, to accelerate industry consolidation and boost the overall efficiency of automotive companies. This is necessary to meet competition when the market is fully opened to international automotive groups in 2006 in accordance with the PRC Government’s pledge on WTO entry.

(iii) Synergistic benefits can be obtained, both from operational and compliance aspects

Upon completion of the Group Reorganisation, steps will be taken to cancel the legal status of Hafei Auto and all of Hafei Auto’s assets, rights and liabilities will be assumed by Dongan Motor. Certain management functions of Dongan Motor and Hafei Auto will also be combined, thus increasing management efficiency, lowering administrative and general expenses, and improving the profitability of this line of business of the Group. Connected transactions between Dongan Motor and Hafei Auto will be eliminated, thereby saving compliance work for Dongan Motor and the Company.

The Group Reorganisation should also shorten the cycle for research and development of new vehicle models and lower research and development costs since Dongan Motor will have control over the overall development of new car models and engines. The integration of engine production and car assembly is considered essential for Hafei Auto’s products to maintain competitiveness in the market. Through the integration of the car assembly and vehicle engine production via the Group Reorganisation, the Group would be able to

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LETTER FROM SOMERLEY

establish an integrated production chain for the manufacturing of Hafei Auto’s car models. Such integration is considered critical to the future development of Hafei Auto’s business. Engines are among the most important components of a vehicle and their design and development is normally specific to a particular car model. There will be substantial synergy if a single business entity controls both the design of a new car model and the matching engine.

Terms of the Group Reorganisation

Hafei Auto is now held as to approximately 74.81% by a wholly owned subsidiary of the Company and the remaining approximately 25.19% by associates of AVIC II which is the controlling shareholder of the Company.

The Group Reorganisation will involve:

(a) the First Transaction, whereby Dongan Motor which is approximately 70.01% held by the Company will acquire the approximately 74.81% interest in Hafei Auto from the Company’s wholly owned subsidiary; and
(b) the Second Transaction whereby Dongan Motor will acquire the remaining approximately 25.19% interest in Hafei Auto from associates of AVIC II, the controlling shareholder of the Company.

The First Transaction and the Second Transaction are inter-conditional. On completion, Hafei Auto will become wholly owned by Dongan Motor which is beneficially held as to approximately 70.01% by the Company. In overall terms therefore, the Group Reorganisation will result in the Company’s interest in Hafei Auto being reduced by 4.8%, from approximately 74.81% to approximately 70.01%.

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LETTER FROM SOMERLEY

The shareholding structure of Dongan Motor and Hafei Auto immediately before and after the completion of the Group Reorganisation may be illustrated as follows:

Before

==> picture [213 x 307] intentionally omitted <==

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

AVIC II
or its associates
61.06%
Company
100% 70.01%
Hafei Industry
Company
Dongan Motor
• vehicles
• aviation • vehicle engines
• machinery
74.81%
Hafei Auto
• mini-sized vehicles
25.19% • economy sedans
----- End of picture text -----

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LETTER FROM SOMERLEY

After

==> picture [201 x 276] intentionally omitted <==

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

AVIC II
61.06%
Company
100% 70.01%
Hafei Industry Dongan Motor
Company
• vehicle engines
• aviation • mini-sized vehicles
• machinery • economy sedans
100%
Hafei Auto (Note)
• mini-sized vehicles
• economy sedans
----- End of picture text -----

Note: the legal status of Hafei Auto will be cancelled after completion of the Group Reorganisation.

4. Funding

In order to finance the acquisition of Hafei Auto, Dongan Motor proposes a 8 for 10 rights issue (the “Rights Issue”). Completion of the Rights Issue is a condition precedent to completion of the Group Reorganisation. The Rights Issue is subject to the approval by a majority in number of the shareholders of Dongan Motor representing not less than two thirds of votes cast at its shareholders’ meeting and the approval by the relevant PRC authorities. The Rights Issue, if it proceeds, will involve an issue of an aggregate of 369,664,000 shares of Dongan Motor (“Rights Shares”). It is expected that the price for the Rights Shares will be set at a 10% to 40% discount to the average closing price of Dongan Motor’s shares on the Shanghai Stock Exchange for the last 30 trading days prior to the publication of the rights issue document.

Based on the average closing price of Dongan Motor’s listed A-shares for the last 30 trading days up to the Latest Practicable Date of RMB4.09 (approximately HK$3.86) and assuming the Rights Issue would be priced at 10% to 40% discount to RMB4.09 (approximately HK$3.86), the Rights Issue is expected to raise approximately RMB907.16 million (approximately HK$855.81 million) to RMB1,360.73 million (approximately HK$1,283.71 million). The net proceeds will be used by Dongan Motor to finance the acquisition of Hafei Auto, the total consideration of which amounts to an aggregate of approximately RMB1,201.64 million (approximately HK$1,133.62 million).If the net proceeds are more than the total consideration, the excess net

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LETTER FROM SOMERLEY

proceeds will be used by Dongan Motor to finance the upgrading of production facilities. If the net proceeds of the Rights Issue are not sufficient to pay the total consideration for the acquisition of Hafei Auto, Dongan Motor will finance the balance of the total consideration by its own resources or debt financing from banks.

The Company will take up 70.01% of the Rights Shares in accordance with its current shareholding percentage in Dongan Motor. Assuming the size of the Rights Issue is approximately RMB907.16 million (approximately HK$855.81 million) to RMB1,360.73 million (approximately HK$1,283.71 million), the Company will subscribe RMB635.10 million (approximately HK$599.15 million) to RMB952.65 million (approximately HK$898.73 million) for the Rights Shares.

Taking into account the proceeds of approximately RMB898.95 million (approximately HK$848.07 million) receivable by the Group pursuant to the First Transaction and the estimated subscription price in the range of approximately RMB635.10 million (approximately HK$599.15 million) to RMB952.65 million (approximately HK$898.73 million) payable by the Company for the Rights Shares, the overall impact on the Group’s cashflow is expected to be broadly neutral.

As the Company will subscribe its Rights Share entitlement in full, it will not suffer any dilution in its shareholding in Dongan Motor as a result of the Rights Issue.

5. Business, results and prospects of Hafei Auto

(i) Business

Hafei Auto is a sino-foreign equity joint venture company established in 2002 in Harbin under the laws of the PRC. It is principally engaged in the development, manufacture and distribution of mini-sized vehicles (such as mini vans and mini trucks) and economy sedans. Hafei Auto currently employs over 6,000 staff members and the size of its production facilities is approximately 1,050,000 sq. m. It handles punching, welding, painting and general assembly as well as other stages in the automobile production process. The current annual production capacity of Hafei Auto is approximately 300,000 units.

Hafei Auto has over seventy different models of sedan and mini-sized vehicles. Some are designed and developed by Hafei Auto in conjunction with overseas vehicle manufacturers and design institutes. For example, “ Hafei Zhongyi ” (mini-sized vehicle) and “ Hafei Lobo ” (sedan) series are jointly developed with Italian manufacturers. “ Hafei Sigma ” (sedan) series is jointly developed with Mitsubishi of Japan. Hafei Auto also develops its own series of mini-sized vehicles and sedan such as “ Hafei Minyi ” (mini-sized vehicle), “ Hafei Ruiyi ” (mini-sized vehicle) and “ Hafei Baili ” (sedan) series. During 2003, Hafei Auto produced and sold approximately 200,000 and 187,000 vehicles respectively.

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LETTER FROM SOMERLEY

During the first half of 2004, the production and sales volume of Hafei Auto reached approximately 110,000 and 103,000 units respectively, on which basis Hafei Auto was ranked the sixth largest automobile manufacturer and the third largest mini-sized vehicle manufacturer in the PRC.

(ii) Financial Results

Based on the audited financial statements of Hafei Auto (prepared under PRC accounting standards) for the year ended 31 December 2003 and the six months ended 30 June 2004, turnover of Hafei Auto amounted to approximately RMB6,573.81 million (approximately HK$6,201.71 million) and approximately RMB3,440.17 million (approximately HK$3,245.44 million) respectively. Sales of sedan and mini-sized vehicles accounted for approximately 31% and 69% respectively of turnover during these periods.

We set out below the key financial information of Hafei Auto based on Hafei Auto’s audited financial statements prepared under PRC accounting standards:

	For the year	For the six
	ended	months ended
	31 December	30 June
	2003	2004
	RMB’ million	RMB’ million
Turnover	6,573.81	3,440.17
Profit before taxation	130.48	46.84
Net profit after taxation and minority interest	130.06	42.47
Net profit margin	1.98%	1.23%
	As at	As at
	31 December	30 June
	2003	2004
	RMB’ million	RMB’ million
Total assets	5,144.83	5,255.76
Total liabilities	(3,963.15)	(4,031.52)
Minority interest	(22.62)	(22.60)
Net assets	1,159.06	1,201.64
Net tangible assets	1,141.19	1,184.93

To meet intense market competition (as discussed below), Hafei Auto has lowered its selling prices to maintain market share. This resulted in a reduction of net profit margin from approximately 1.98% for the year ended 31 December 2003 to approximately 1.23% for the six months ended 30 June 2004, causing the reduction in net profit noted above.

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LETTER FROM SOMERLEY

(iii) Future prospects of automobile industry in the PRC

The automobile industry in the PRC has enjoyed a substantial growth, particularly in the years 2002 and 2003. Production expanded rapidly, automobile sales increased and car manufacturers enjoyed good margins. Although it is expected that there will be further growth in the PRC automobile market, car manufacturers like Hafei Auto are facing numerous challenges which are briefly described as follows:

● Decrease in profitability

The rapid growth in production by car manufacturers has led to rising inventory. As car makers have to rely on volume to achieve economies of scale, they tend to cut prices to maintain sales volume. Tariffs on imported cars will be significantly reduced in 2006. Customers’ anticipation of further price cuts by local car makers may hold back potential purchases in 2005. The sector’s profitability is forecast to decline in the short term, due to the slowdown in demand and pricing pressures.

● Government policy

During the first half of 2004, the Central Government of the PRC implemented macro-economic control measures to cool its overheating economy. This has slowed economic growth. In addition, the PRC government has implemented new rules on auto financing, tightening credit control. Under these new rules, the loan period has been shortened and the maximum percentage of the purchase price permitted to be borrowed by a car buyer has also been reduced.

● Foreign competition

For many years, tariffs and import quotas have effectively functioned as protective measures against the import of automobiles into the PRC. Under the PRC’s agreement to join the WTO, the PRC has eliminated the licence and quota system for the import of automobiles in January 2005. Tariffs on imported automobiles will be significantly reduced in 2006. The entry threshold for foreign manufacturer has therefore been lowered. As a result, domestic car-makers like Hafei Auto face increasing competition.

Despite the above, there are certain encouraging factors in the industry. Increasing personal income (hence the disposable income of PRC households), the relatively low rate of car ownership and the expansion of cities in the PRC are likely to boost car ownership by private individuals. Hafei Auto which mainly targets the low-end consumer market is expected to be less affected by foreign competitors which generally target the high-end market. Hafei Auto would also benefit from the PRC Government policy of encouraging the use of small cars to decrease fuel consumption.

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LETTER FROM SOMERLEY

6. Consideration

(i) Comparison of consideration with assets

The price for the transfer of 74.81% interest in Hafei Auto from Hafei Industry Company to Dongan Motor, and the price for Dongan Motor’s acquisition of the remaining 25.19% interest in Hafei Auto from associates of the Company’s controlling Shareholder, AVIC II, have been determined on the same basis. Both transactions are priced on the basis of the audited net asset value of Hafei Auto as at 30 June 2004 of approximately RMB1,201.64 million (approximately HK$1,133.62 million) prepared under PRC accounting standards. As a result, there will be no material gain or loss recorded by the Group, including Dongan Motor, as a result of the Group Reorganisation.

We consider the above basis for determining the consideration for acquisition of Hafei Auto to be a broadly appropriate one in the context of the Group Reorganisation. This basis is in any case a normal one in the PRC where the transfer of state assets is involved, as in the case of the sale by the Group and associates of AVIC II of their interests in Hafei Auto to Dongan Motor. It has the merit of ensuring that neither vendors or purchasers suffer any dilution in net asset value. We have also evaluated the consideration against profit, as discussed below.

(ii) Comparison of consideration with net profit

The aggregate consideration of approximately RMB1,201.64 million (approximately HK$1,133.62 million) for the entire equity interests of Hafei Auto represents a multiple of approximately 9.24 times Hafei Auto’s 2003 audited net profits of approximately RMB130.06 million (approximately HK$122.70 million) prepared under the PRC accounting standards. Hafei Auto recorded an audited net profit of approximately RMB42.47 million (aproximately HK$40.07 million) for the six months ended 30 June 2004 (also prepared under the PRC accounting standards), or approximately RMB84.94 million (approximately HK$80.13 million) on an annualised basis. The Group Reorganisation values Hafei Auto at approximately 14.15 times the 2004 annualised profit of Hafei Auto. Management has informed us that Hafei Auto performed less well in 2004, which is in line with the general climate in the industry. Difficult conditions are expected to continue in the short term. Indeed, a number of “A” share car manufacturers including Tianjin Xiali (as defined below) and Changhe Auto have announced losses for the third quarter of 2004. If Hafei Auto’s results show similar deterioration, the price/earnings multiple implied by the Group Reorganisation for 2004 as a whole would have been higher than 14.15 times.

(iii) Comparable companies

In evaluating the considerations for the Group Reorganisation, we have conducted a comparable analysis using price/earnings multiple. We have reviewed the Hong Kong and PRC listed car manufacturers and are able to identify three PRC listed companies (the “Comparable Companies”) which we consider broadly comparable to Hafei Auto. As in the case of Hafei Auto, the Comparable Companies manufacture and sell mini-sized vehicles and economy sedans priced below RMB100,000 (approximately HK$94,000) in PRC.

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LETTER FROM SOMERLEY

Set out below is a comparison of the price/earnings multiple of Hafei Auto with the Comparable Companies.

		Closing price at the Latest		Earnings		Price/earnings multiple Historical Annualised	Price/earnings multiple Historical Annualised
	Listed on	Practicable	2003	2004	3Q 2004	2003	2004
Name	stock market in	Date	(Audited)	(Annualised)	(Unaudited)
		RMB	RMB(’M)	RMB(’M)	RMB(’M)
Chongqing Changan	A-Share market in	5.81	1,450.68	1,597.45	245.95	4.91	5.35
Automobile	Shenzhen, the PRC
Company Limited
(“Changan”)
	B-Share market in	4.03	1,450.68	1,597.45	245.95	3.41	3.71
	Shenzhen, the PRC
Tianjin FAW Xiali	A-Share market in	2.95	289.20	149.77	(43.67)	16.27	31.42
Automobile Co.,	Shenzhen, the PRC
Ltd. (“Tianjin
Xiali”)
Changhe Auto	A-Share market in	3.73	50.72	42.05	(19.68)	30.15	36.37
	Shanghai, the PRC
Hafei Auto (implied			130.06	84.94	not	9.24	14.15
by the Group					published
Reorganisation)

As shown above, the price/earnings multiples for similar companies in the same industry are widely different. The price/earnings multiple of Hafei Auto as implied by the Group Reorganisation is higher than Changan. Changan is low-rated both in the A-Share and B-Share markets, despite being able to achieve higher profit than its peers in the industry, as illustrated in the above table. Hafei Auto’s implied price/earnings ratio is significantly lower than that of Tianjin Xiali and Changhe Auto. However, it is doubtful whether a price/earnings multiple analysis for Tianjin Xiali and Changhe Auto is meaningful as both companies have reported losses in the third quarter of 2004. In particular, Changhe Auto’s high price/earnings multiple is, in our view, unsupported by financial fundamentals. When the car industry experienced significant growth in 2003, Changhe Auto reported a poor financial performance. Changhe Auto’s audited net profit for the financial year ended 31 December 2003 was approximately RMB$50.72 million (approximately HK$47.85 million), representing a drop of 40.21% as compared to its audited net profit of approximately RMB84.83 million (approximately HK$80.03 million) for the previous financial year.

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LETTER FROM SOMERLEY

(iv) Comparable transaction

We have identified one comparable transaction involving a private car maker in the PRC (the “Comparable Transaction”). In November 2004, Shanghai Matsuoka Co., Ltd. , a company listed on the Shanghai Stock Exchange, announced an acquisition of an effective 7.78% interest in Beijing Hyundai Motor Company (“Beijing Hyundai”) at RMB1,100 million (approximately HK$1,037.73 million). Beijing Hyundai is a joint venture formed by Beijing Automobile Investment Company Limited and Hyundai Motor Company and manufactures and sells sedans in PRC. Beijing Hyundai reported a net profit of approximately RMB2,126.51 million (approximately HK$2,006.14 million) in 2003. The Comparable Transaction values Beijing Hyundai at approximately 6.65 times its 2003 net profit. This compares to a 9.24 times price/earnings multiple implied by the Group Reorganisation.

DISCUSSION AND ANALYSIS

The Group Reorganisation achieves the integration of vehicle engine manufacture and vehicle assembly in one entity, Dongan Motor. Previously, Dongan Motor was principally an engine manufacturer and Hafei Auto a vehicle assembler with ownership split between the Company (approximately 74.81%) and its parent, AVIC II (approximately 25.19%). We believe that the proposed structure has considerable benefits from design, manufacture and compliance standpoints and will strengthen the Company’s competitiveness in its chosen markets in future years. 2004 is proving a difficult year for the auto industry in China and measures which can strengthen the Group’s competitiveness are of critical importance. However, it is not possible to quantify the precise financial effects of those benefits at this stage.

The net effect on the Company’s attributable ownership of Hafei Auto is a 4.80% reduction from 74.81% to 70.01%. We do not regard this decrease as material in the context of the organisational benefits noted above. In addition, there is an offsetting factor in that the ownership of Hafei Auto is consolidated at 100% within the Group through Dongan Motor. Previously, the ownership of Hafei Auto was split between the Company (74.81%) and its parent (25.19%).

Funding for the purchase by Dongan Motor of Hafei Auto is by way of rights issue. The Company will take up its entitlement in full which in turn will be substantially financed by the proceeds of sale of Hafei Auto. Accordingly, the rights issue will not have any material effect on the cash position of the Company or on its ownership of Dongan Motor.

— 29 —

LETTER FROM SOMERLEY

The consideration for the Group Reorganisation is based on net asset value. This is a normal basis in the PRC for transfer of state-owned assets. Cross-checking against the implied price earnings ratios of Changan and Beijing Hyundai (as implied by the Comparable Transaction), the basis for the consideration seems to us also within a reasonable range on an earnings basis. The price/earnings multiple of Hafei Auto as implied by the Group Reorganisation appears low as compared to Changhe Auto and Tianjin Xiali. However, we do not consider a price/earnings analysis very significant in circumstances where the relevant companies are announcing losses for the second half of 2004. In any event, as the net effect is a transfer of a 4.80% interest in Hafei Auto, which we regard as relatively small, we consider the pricing basis less significant in this case than the overall benefits to be reaped from the Group Reorganisation.

RECOMMENDATION

Based on the above principal factors and reasons, we consider the First Transaction and the Second Transaction are on normal commercial terms. We also consider that the terms are fair and reasonable to the Independent Shareholders and the entering into the First Transaction and the Second Transaction is in the interests of the Company and the Shareholders as a whole. We therefore advise the Independent Shareholders to vote in favour of the ordinary resolutions in relation to the First Transaction and the Second Transaction to be proposed at the EGM.

Yours faithfully, for and on behalf of SOMERLEY LIMITED M.N. Sabine Chairman

— 30 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [252 x 72] intentionally omitted <==

AviChina Industry & Technology Company Limited*

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notice is hereby given that an extraordinary general meeting of AviChina Industry & Technology Company Limited (“Company”) will be held at 9 a.m. on Tuesday, 22 March 2005 at Beijing Oriental Culture Hotel, No. 101, Jiao Dao Kou East Street, Dongcheng District, Beijing, the People’s Republic of China for the purpose of considering and passing the following resolution as ordinary resolution of the Company:

“THAT

(a) the agreement dated 30 December 2004 between Harbin Dongan Auto Engine Co., Ltd. (“Dongan Motor”) and Harbin Aircraft Industry (Group) Co., Ltd., (a copy of which marked “A” is produced to the meeting and signed by the chairman of the meeting for the purpose of identification), in relation to Dongan Motor’s acquisition of the 74.81% equity interest in Hafei Auto Co. Ltd. (“Hafei Auto”) and all transactions contemplated thereby be and the same are hereby approved; and
(b) the agreement dated 30 December 2004 amongst Dongan Motor, China Aero (382) Limited, Harbin Dongan Engine (Group) Co., Ltd., China National Aero-Technology Import & Export Co., Ltd. and Shenzhen Shenhang Avionics Co., Ltd. (a copy of which marked “B” is produced to the meeting and signed by the chairman of the meeting for the purpose of identification), in relation to Dongan Motor’s acquisition of the 25.19% equity interest in Hafei Auto and all transactions contemplated thereby be and the same are hereby approved; and
(c) the directors of the Company or any one of the directors of the Company be and is hereby authorised to do all such further acts and things and sign, seal, execute and deliver all such documents and take all such actions which in their absolute discretion consider necessary, desirable or expedient to implement and/or give effect to the agreements in (a) and (b) above and the transactions contemplated thereunder.”

By order of the Board AviChina Industry & Technology Company Limited Yan Lingxi Company Secretary

Hong Kong, 1 February 2005

For identification purposes only

— 31 —

NOTICE OF EXTRAORDINARY GENERAL MEETING

Notes:

Closure of register of members and eligibility to attend the extraordinary general meeting of the Company (“EGM”)

Pursuant to Article 38 of the Articles of Association of the Company, the H Share register of the Company will be closed between Monday, 21 February 2005 and Tuesday, 22 March 2005 (both days inclusive), during which no transfer of H Shares will be effected. Holders of the Company’s H Shares and Domestic Shares whose names appear on the Company’s Register of Members on Tuesday, 22 March 2005 are entitled to attend the EGM.

In order to attend the EGM, holders of the Company’s H Shares shall lodge all transfers together with the relevant share certificates to Computershare Hong Kong Investor Services Limited, the Company’s H Shares Registrar, not later than 4:00 p.m. on Friday, 18 February 2005 at Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

Registration procedures for attending the EGM
a. The shareholder or its proxies shall produce his identification proof;
b. Holders of H Shares or Domestic Shares who wish to attend the EGM must complete the reply slip to confirm the attendance, and return the same to the correspondence address designated by the Company not later than 20 days before the date of the EGM, i.e. no later than Wednesday, 2 March 2005.
c. Shareholders may deliver the reply slip by post or facsimile to the correspondence address designated by the Company.
Proxies
a. Any shareholder who is entitled to attend and vote at the EGM is entitled to appoint one or more proxies to attend and vote on his behalf at the EGM. A proxy need not be a shareholder of the Company. Any shareholder who wishes to appoint a proxy should first review the form of proxy for use in the EGM.
b. For any shareholder who has appointed more than one proxy, such proxies shall only vote on a poll.
c. Any shareholder shall appoint its proxy in writing. The instrument appointing a proxy must be in writing signed under the hand of the appointor or his attorney duly authorized in writing. If the appointor is a legal person, the instrument shall be signed by its directors or attorneys duly authorized with the seal of the legal person affixed. If the instrument is signed by an attorney of the appointor, the power of attorney authorizing that attorney to sign or other documents of authorization must be notarially certified. In order to be valid, the form of proxy, and a notarially certified copy of the power of attorney or other documents of authorization, where appropriate, must be delivered in the case of holders of domestic shares, to the correspondence address designated by the Company, and in the case of holders of H Shares, to Computershare Hong Kong Investor Services Limited at the address stated in note 1 above not less than 24 hours before the time for holding the EGM and return of a form of proxy will not preclude a shareholder from attending in person and voting at the EGM if he or she so wishes.
The EGM is expected to last for half a day. Shareholders attending the meeting are responsible for their own transportation and accommodation expenses.

Designated address of the P. 0. Box 1655, Beijing, the PRC (Postal code: 100009) Company: Telephone No.: 86-10-64094835 Facsimile No.: 86-10-64094826 Attention: Xu Bin

— 32 —

GENERAL INFORMATION

APPENDIX I

1. RESPONSIBILITY STATEMENT

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

2. DIRECTORS’ DISCLOSURE OF INTERESTS AND SHORT POSITIONS IN SHARES

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

					Approximate
Name of	Name of				percentage of
company or its	Director/		Capacity	Type of	shareholding in
associated	Supervisor/	Number and class	in holding	interests	the same
corporation	chief executive	of securities held	interest	held	securities
AviChina	David Li	2,000,000	Beneficial	Long	0.12%
	Kwok-Po	H Shares	owner	positions
Dongan Motor	Xu Tongxing	5,070 A Shares	Beneficial	Long	0.0011%
			owner	positions

As at the Latest Practicable Date, no option in the securities or debentures of the Company’s share capital had been granted to its Directors, supervisors and senior management or their spouse or children under 18.

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

— 33 —

GENERAL INFORMATION

APPENDIX I

3. SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, so far as is known to any Director or chief executive of the Company, the following persons (not being a Director or Chief Executive of the Company) had an interest or short positions in the Shares and underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of the Divisions 2 and 3 of Part XV of the SFO, or, who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group.

			Approximate	Approximate	Approximate
			percentage of		percentage of
			shareholdings		shareholdings
Name of	Class of	Number of	to the same		to share capital	Nature of
shareholders	shares	shares	class of shares		in issue	shares held
AVIC II	Domestic	2,835,305,636		95.66%	61.06%	Long positions
	shares
European Aeronautic
Defence and Space
Company
EADS N.V.	H Shares	232,180,425		13.82%	5%	Long positions
Morgan Stanley	H Shares	84,575,414		5.03%	1.82%	Long positions
		24,939,000		1.48%	0.54%	Short positions
J.P. Morgan	H Shares	111,591,600		7.14%	2.40%	Long positions
Chase & Co.		68,732,000		4.40%	1.48%	Short positions

4. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had a service contract with the Company or any of its subsidiaries which was not determinable by the Group within one year without payment of compensation, other than statutory compensation.

5. MATERIAL LITIGATION

As at the Latest Practicable Date, so far as known to the Directors, there is no litigation or claim of material importance pending or threatened against any member of the Group.

— 34 —

GENERAL INFORMATION

APPENDIX I

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

As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any asset which had been, since 31 December 2003, being the date to which the latest published audited accounts of the Company were made up, acquired or disposed of by or leased to any member of the Group or were proposed to be acquired or disposed of by or leased to any member of the Group.

As at the Latest Practicable Date, none of the Directors was materially interested in any contract entered into by any member of the Group which was subsisting as at the Latest Practicable Date and which was significant in relation to the business of the Group taken as a whole.

7. DISCLOSURE OF INTEREST, CONSENT AND QUALIFICATION OF EXPERT

Somerley has given its opinion in this circular and whose name is included in this circular, is a deemed licensed corporation for types 1, 4, 6 and 9 regulated activities under the SFO.

As at the Latest Practicable Date, Somerley did not have any shareholding interest in any member of the Group nor any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Somerley did not have any direct or indirect interest in any asset which has been, since 31 December 2003, being the date to which the latest audited accounts of the Company were made up, acquired or disposed of by or leased to, or were proposed to be acquired or disposed of by or leased to, any member of the Group.

Somerley has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and the references to its name included in this circular in the form and context in which they respectively included.

8. COMPETING INTERESTS

None of the Directors and their respective associates have any interest in a business which competes or may compete with the business of the Group.

9. NO MATERIAL ADVERSE CHANGE

Since 31 December 2003, being the date to which the latest audited accounts were made up, there have been no material adverse changes in the financial and trading position of the Group.

— 35 —

GENERAL INFORMATION

APPENDIX I

10. MISCELLANEOUS

(a) Mr. Yan Lingxi and Mr. Ip Kun Wan, Kiril are the company secretaries of the Company.
(b) The registered office of the Company is situated at No. 16, Hong Da Bei Lu, Beijing Economic — Technological Development Area, Beijing, PRC. The branch registrar of the Company is Room 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
(c) The principal place of business of the Company in Hong Kong is at Unit B, 15/F, United Center, Queensway 95, Hong Kong.
(d) The English text of this circular and the proxy form shall prevail over their respective Chinese text in the case of inconsistency.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company up to and including 22 March 2005:

(a) the articles of association of the Company;
(b) the written consent referred to in the paragraph headed “Disclosure of Interests, Consent and Qualification of Expert” in this appendix;
(c) the letter dated 1 February 2005 from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 13 of this circular;
(d) the letter of advice dated 1 February 2005 from Somerley to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 14 to 30 of this circular;
(e) The agreement entered into on 30 December 2004 between Dongan Motor and Haifei Industry Company; and
(f) the agreement entered into on 30 December 2004, among Dongan Motor, China Aero, Dongan Group, CATIC and Shenhang.

— 36 —

APPENDIX II

PROCEDURES FOR DEMANDING A POLL

According to Article 66 of the Articles and subject to the rules prescribed by the Stock Exchange or any relevant stock exchange from time to time, at any shareholders’ general meeting a resolution shall be decided on a show of hands unless a poll is (before or after any vote by show of hands) demanded: (i) by the chairman of the meeting; (ii) by at least two shareholders or proxies entitled to vote; or (iii) by one or more shareholders (including proxy of shareholder) alone or jointly representing 10 percent or more (inclusive) of all Shares carrying the right to vote at such meeting.

Unless a poll is demanded otherwise, the declaration of the results on a show of hands by the chairman of the meeting on the approval of the resolution proposed and recorded in the minutes of the meeting will be final, without inclusion of evidences on the votes as to the proportion for or against the resolution proposed in such meeting. The demand for a poll may be withdrawn by the party who has made such demand.

— 37 —

==> picture [266 x 78] intentionally omitted <==

AviChina Industry & Technology Company Limited*

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

Proxy Form for use in the Extraordinary General Meeting

Number of H Shares related to this proxy form [(note][1)]

I/We [(note][2)] , (note 1)

(note 1) H Shares/Domestic Shares in AviChina Industry & Technology

am/are the registered holder(s) of

Company Limited (the “Company”), hereby appoint the chairman of the Extraordinary General Meeting or [(note][3)]

of

as my/our proxy/proxies to attend the extraordinary general meeting of the Company to be held at 9 a.m. on 22 March 2005 at Beijing Oriental Culture Hotel, No. 101, Jiao Dao Kou East Street, Dongcheng District, Beijing, the People’s Republic of China (the “PRC”) or at any adjournment thereof and vote on the resolutions to be presented at the meeting and any adjournment thereof as hereunder indicated for, or if no such indication is given, as my/our proxy/proxies thinks fit.

		RESOLUTION
To	approve and confirm:
i)	the agreement	dated 30 December 2004 between Harbin Dongan Auto Engine Co., Ltd.
	(“Dongan Motor”) and Harbin Aircraft Industry (Group) Co., Ltd., in relation to
	Dongan Motor’s acquisition of the 74.81% equity interest in Hafei Auto Co. Ltd.
	(“Hafei Auto”) and all transactions contemplated thereunder;
ii)	the agreement	dated 30 December 2004 amongst Dongan Motor, China Aero (382)
	Limited, Harbin Dongan Engine (Group) Co., Ltd., China National Aero-Technology
	Import & Export Co., Ltd. and Shenzhen Shenhang Avionics Co., Ltd., in relation to
	Dongan Motor’s acquisition of the 25.19% equity interest in Hafei Auto and all
	transactions contemplated thereunder;
iii)	the authorisation of directors of the Company or any one of the directors of the
	Company be and is hereby authorised to do all such further acts and things and sign,
	seal, execute and deliver all such documents and take all such		actions which in their
	absolute discretion consider necessary, desirable or expedient to		implement and/or give
	effect to the agreements in (i) and (ii) above.

Date:

2005 Signature:

Notes:

Please insert the number of shares registered in your name(s) and related to this proxy form. If no number is inserted, this proxy form will be deemed to relate to all the shares of the Company registered in your name(s).
Full name(s) and address(es) are to be inserted in Block Letters as set out in the register of members of the Company.
Please strike out the inappropriate one.
If you wish to appoint any person other than the Chairman of the Extraordinary General Meeting as your proxy, please delete the words “the chairman of the Extraordinary General Meeting or” and insert the name and address of the person to be appointed as your proxy in the space provided. If no name is inserted, the chairman of the extraordinary general meeting will become your proxy accordingly. Each shareholder is entitled to appoint one or more proxies to attend and vote on his behalf at the meeting. A proxy need not be a member of the Company but should attend the meeting in person. Any alteration to this form shall be initialised by the person who sign this form. In the case of joint holders of Shares, any one of such holders may vote at the Extraordinary General Meeting, either personally or by proxy, in respect of such Share as if he was solely entitled thereto, but if more than one of such joint holders are present at the Extraordinary General Meeting personally or by proxy, that one of the said persons so present whose name stands first on the register of members of the Company in respect of such Shares, either personally or by proxy, shall alone and not others be entitled to vote in respect thereof.
If you wish to vote for any of the resolutions set out above, please tick in the box marked “For”. If you wish to vote against any of the resolutions set out above, please tick in the box marked “Against”. If no such indication is given, my/our proxy is/are entitled to vote as it/they thinks fit.
This proxy form must be signed under your hand or your attorney duly authorised in writing (and for such purpose, the authorisation must be notarially certified), or you are a body corporate or an entity, the instrument shall be signed under the hand of the chairman of the board or attorneys duly authorized in writing with the seal of the body corporate or entity affixed, provided that the way to sign this proxy form complies with the method as prescribed in the articles of association of such company or entity.
In order to be valid, holder of the domestic shares shall deliver the form of proxy, and a notarially certified copy of the power of attorney or other documents of authorisation, if any, under which it is signed by an attorney duly authorised or other persons being authorised to the Company not less than 24 hours before the time for holding the meeting. The postal address of the Company is P.O. Box 1655, Beijing, the PRC (Postal code: 100009). The reply slip shall be delivered to the Company by post or by facsimile (Facsimile No.: 86-10-64094826). Holders of H Shares shall deliver the relevant documents to Computershare Hong Kong Investor Services Limited at Rooms 1712-1716, 17 Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong by post or by facsimile (Facsimile No.: 852-2865 0990).
Any proxy/proxies who attend the Extraordinary General Meeting on behalf of any shareholder shall bring along this proxy form as completed and signed together with identification proof of the proxy/proxies.
This proxy form shall be completed in two copies. One copy shall be delivered to the Company in accordance with notes 6 or 7. The other copy shall be produced at the time attending the Extraordinary General Meeting by the proxy/proxies in accordance with note 8.

* For identification purposes only

==> picture [266 x 79] intentionally omitted <==

AviChina Industry & Technology Company Limited*

(A joint stock limited company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 2357)

Reply Slip for the Extraordinary General Meeting

To: AviChina Industry & Technology Company Limited (the “Company”)

I/We [(note][1)]

being the registered holder(s) of [(note][2)] H Shares/Domestic Shares [[(note]][[3)]] of AviChina Industry & Technology Company Limited (“the Company”), hereby inform the Company that I/we intend to attend (in person or by proxy) the extraordinary general meeting of the Company to be held at 9 a.m. on 22 March 2005 at Beijing Oriental Culture Hotel, No. 101, Jiao Dao Kou East Street, Dongcheng District, Beijing, the People’s Republic of China (the “PRC”) or any adjournment thereof.

H Shares/Domestic Shares [[(note]][[3)]]

Date:

2005

Signature:

Notes:

Please insert the full name(s) and registered address(es) as shown in the register of members in block letters.
Please insert the number of shares as registered in your name(s).
Please strike out the inappropriate one.
Please attach with a copy of your identify card/passport.
Please attach with copies of your title documents evidencing your shareholding.
In order to be valid, this reply slip as completed and signed shall be delivered to the Company before Wednesday, 2 March 2005. The postal address of the Company is P.O. Box 1655, Beijing, the PRC (Postal code: 100009). This reply slip may be returned by post or by facsimile (Facsimile No.: 86-10-64094826).

* For identification purposes only

AI assistant

Star Plus Legend Holdings Limited — Proxy Solicitation & Information Statement 2005

51032_rns_2005-02-07_9632eeb1-623c-439d-aed6-6084d891a629.pdf

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

AviChina Industry & Technology Company Limited*

DISCLOSEABLE AND CONNECTED TRANSACTIONS

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

TABLE OF CONTENTS

EXPECTED TIMETABLE

DEFINITIONS

DEFINITIONS

AviChina Industry & Technology Company Limited*

DISCLOSEABLE AND CONNECTED TRANSACTIONS

Independent Non-executive Directors:

To the Shareholders

DISCLOSEABLE AND CONNECTED TRANSACTIONS

Introduction

LETTER FROM THE CHAIRMAN

FIRST TRANSACTION — SALE OF 74.81% INTEREST IN HAFEI AUTO BY HAFEI INDUSTRY COMPANY TO DONGAN MOTOR

SECOND TRANSACTION — ACQUISITION OF 25.19% INTEREST IN HAFEI AUTO

INFORMATION ON ENTITIES INVOLVED IN THE TRANSACTIONS

SHAREHOLDING STRUCTURE OF DONGAN MOTOR AND HAFEI AUTO

Current Structure:

After the Transactions:

REASONS FOR THE TRANSACTIONS

RIGHTS ISSUE

FINANCIAL INFORMATION

GENERAL

EXTRAORDINARY GENERAL MEETING

RECOMMENDATION

FURTHER INFORMATION

AviChina Industry & Technology Company Limited*

To the Independent Shareholders

Dear Sir or Madam,

Li Kwok-Po, David

Guo Chongqing

Li Xianzong

Discloseable and connected transactions

INTRODUCTION

LETTER FROM SOMERLEY

PRINCIPAL FACTORS AND REASONS TAKEN INTO ACCOUNT

1. The Group

LETTER FROM SOMERLEY

(ii) Business and group structure

LETTER FROM SOMERLEY

(iii) Hafei Industry

● Hafei Auto

(iv) Dongan Motor

(v) Changhe

(vi) Hongdu Industry

(vii) Beijing Wisewell

2. Reasons for the Group Reorganisation

LETTER FROM SOMERLEY

Before

After

4. Funding

5. Business, results and prospects of Hafei Auto

LETTER FROM SOMERLEY

(ii) Financial Results

(iii) Future prospects of automobile industry in the PRC

● Decrease in profitability

● Government policy

● Foreign competition

6. Consideration

(iii) Comparable companies

LETTER FROM SOMERLEY

LETTER FROM SOMERLEY

DISCUSSION AND ANALYSIS

LETTER FROM SOMERLEY

RECOMMENDATION

AviChina Industry & Technology Company Limited*

(Stock Code: 2357)

NOTICE OF EXTRAORDINARY GENERAL MEETING

“THAT

Notes:

1. RESPONSIBILITY STATEMENT

2. DIRECTORS’ DISCLOSURE OF INTERESTS AND SHORT POSITIONS IN SHARES

3. SUBSTANTIAL SHAREHOLDERS

4. SERVICE CONTRACTS

Star Plus Legend Holdings Limited Proxy Solicitation & Information Statement 2005