Star Plus Legend Holdings Limited — Proxy Solicitation & Information Statement 2008

Nov 9, 2008

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt about any of the contents of this circular or as to what action to take in relation to this circular, you should consult your licensed securities dealer, 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 and reply slip to the purchaser(s) or the transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

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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中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited*

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

(Stock Code: 2357)

CONTINUING 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 32 of this circular. A letter from Somerley to the Independent Board Committee and the Independent Shareholders is set out on pages 33 to 46 of this circular.

A notice convening an extraordinary general meeting (“EGM”) of AviChina Industry & Technology Company Limited to be held at 10:00 a.m. on Monday, 15 December 2008 at Avic Hotel, No. 10 Yi, Central East Third Ring Road, Chaoyang District, Beijing, the People’s Republic of China is set out on pages 52 to 54 of this circular.

A reply slip and a form of proxy for use at the EGM are enclosed and are also published on the website of the Stock Exchange (www.hkex.com.hk). Shareholders who intend to attend the EGM shall complete and return the reply slip in accordance with the instructions printed thereon before Tuesday, 25 November 2008. Shareholders who intend to appoint a proxy to attend the EGM shall complete and return the enclosed form of proxy in accordance with the instructions printed thereon not less than 24 hours before the time fixed for holding the EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending the EGM and voting in person if you so wish.

*For identification purpose only.

10 November 2008

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	32
Letter from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33
Appendix I — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	47
Appendix II — Procedures for Demanding a poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	51
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	52

— i —

DEFINITIONS

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

• “Agusta Agreement” the Agusta agreement dated 2 June 2005 entered into between Changhe Aviation and Augusta S.p.A.

• “AVIC” 中國航空工業集團公司 (Aviation Industry Corporation of China), which will be established upon completion of the proposed merger and reorganization of AVIC I and AVIC II

• “AVIC Group” AVIC and its subsidiaries and associates (excluding the Group)

• “AVIC Organizing Unit” 中國航空工業集團公司籌備組 the organizing unit of AVIC, which was established by the PRC State Council for the purpose of the proposed merger and reorganization of AVIC I and AVIC II

• “AVIC I” 中國航空工業第一集團公司 (China Aviation Industry Corporation I), the predecessor of AVIC upon its establishment after completion of the proposed merger and reorganization

• “AVIC I Group” AVIC I and its subsidiaries and associates “AVIC II” 中國航空工業第二集團公司 (China Aviation Industry Corporation II), the controlling shareholder of the Company and the predecessor of AVIC upon its establishment after completion of the proposed merger and reorganization

• “AVIC II Group” AVIC II and its subsidiaries and associates (excluding the Group)

• “Board” or “Board of Directors” the board of Directors of the Company “CATIC” China National Aero-Technology Import and Export Corporation, a state-owned enterprise held as to 50% by AVIC I and 50% by AVIC II

• “Changhe Agusta” 江西昌河阿古斯特直升機有限責任公司 (Jiangxi ChangheAgusta Helicopter Co., Ltd.), a sino-foreign joint venture held as to 60% by Changhe Aviation and 40% by Agusta S.p.A.

• “Changhe Auto” 江西昌河汽車股份有限公司 (Jiangxi Changhe Automobile Co., Ltd.), a joint stock limited company whose shares are listed on the Shanghai Stock Exchange with 59.02% of its interest being held by the Company

— 1 —

DEFINITIONS

“Changhe Aviation” 江西昌河航空工業有限公司 (Jiangxi Changhe Aviation Industry Company Limited), a wholly-owned subsidiary of the Company “Changhe Suzuki” 江西昌河鈴木汽車有限責任公司 (Jiangxi Changhe Suzuki Automobile Co., Ltd.), a sino-foreign joint venture held as to 41% by Jiangxi Changhe Automobile Co., Ltd which is a subsidiary of the Company, 10% by Changhe Aviation, 46% by Suzuki and 3% by OKAYA & Co. Ltd. respectively “CKD” completely knock down, the parts and components for manufacturing of vehicles, vehicle engines and gearboxes which were completely knocked down when imported into the PRC “Company” 中國航空科技工業股份有限公司 (AviChina Industry & Technology Company Limited), a joint stock limited company established in the PRC with limited liability on 30 April 2003

• “Comprehensive Services 綜合服務協議 (the comprehensive services agreement) dated Agreement” 2 October 2003 entered into between the Company and AVIC II and the supplemental agreement(s) thereto

• “Continuing Connected the continuing connected transactions of the Company Transaction”

• “Directors” the director(s) of the Company

• “Dongan Engine” 哈爾濱東安汽車發動機製造有限公司 (Harbin Dongan Automotive Engine Manufacturing Co., Ltd.), a sino-foreign joint venture held as to 36% by Dongan Motor, 15% by Harbin Aviation Group, 19% by Dongan Group, 15.3% by Mitsubishi, 9% by MCIC Holdings Sdn. Bhn. and 5.7% by Mitsubishi Corporation

• “Dongan Group” 哈爾濱東安發動機集團有限公司 (Harbin Dongan Engine (Group) Co., Ltd.), a wholly-owned subsidiary of AVIC II

• “Dongan Motor” 哈爾濱東安汽車動力股份有限公司 (Harbin Dongan Auto Engine Co., Ltd.), a joint stock limited company whose shares are listed on the Shanghai Stock Exchange with 58.77% of its interest being held by the Company and the rest are held by the public

• “EGM” extraordinary general meeting of the Company to be held to approve, inter alia, the non-exempt Continuing Connected Transactions and the proposed annual caps for the non-exempt Continuing Connected Transactions

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DEFINITIONS

• “Existing Continuing Connected Transactions”

• “Existing Continuing Connected Transactions Agreements”

• “Group”

• “Hafei Auto”

• “Harbin Automobile Group”

• “Harbin Aviation Group”

• “Independent Board Committee”

• “Independent Shareholders”

• “Land Use Rights Leasing Agreement”

• “Latest Practicable Date”

• “Listing Rules”

• “Mitsubishi”

• the existing continuing connected transactions of the Company

• the agreements relating to the Existing Continuing Connected Transactions, as set out in paragraph 2.3 of this circular

the Company and its subsidiaries

• 哈飛汽車股份有限公司 (Hafei Motor Co., Ltd.), a joint stock limited liability company with foreign investment which is held as to 74.81% by Harbin Automoible Group, 25% by China Aero (382) Limited (an associate of AVIC II within the meaning of the Listing Rules), 0.1% by Dongan Group, 0.06% indirectly by CATIC and 0.03% by Shenzhen Shenhang Avionics Co., Ltd., which is indirectly held as to 34% by CATIC and 33%, by Harbin Aviation Group

哈爾濱哈飛汽車工業集團有限公司 (Harbin Hafei Automobile Industry Group Co., Ltd.), a wholly-owned subsidiary of the Company 哈爾濱航空工業(集團)有限公司 (Harbin Aviation Industry (Group) Co., Ltd.), a wholly-owned subsidiary of the Company an independent board committee comprising independent non-executive Directors, namely, Mr. Guo Chongqing, Mr. Li Xianzong and Mr. Lau Chung Man, Louis

• Shareholders excluding AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization), Mitsubishi, Agusta S.p.A. and their respective associate(s), if any 土地使用權租賃協議 (the land use rights leasing agreement) dated 2 October 2003 entered into between the Company and AVIC II and the supplemental agreement(s) thereto

• means 4 November 2008, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

• the Rules Governing the Listing of Securities on the Stock Exchange (as amended from time to time)

• Mitsubishi Motor Corporation (三菱自動車工業株式會社), a substantial shareholder of Dongan Engine

— 3 —

DEFINITIONS

• “Mitsubishi CKD Agreement”

• CKD 散件供應協議 (the CKD supply agreement) dated 30 June 1999 entered into between Dongan Engine and Mitsubishi

• “Mitsubishi Joint Development Agreement”

三菱聯合開發協議 (the Mitsubishi joint development agreement) dated 8 August 2005 entered into between Hafei Auto and Mitsubishi

• “Mitsubishi Technology Transfer Agreement”

• 三菱技術轉讓協議 (the Mitsubishi technology transfer agreement) dated 30 June 1999 entered into between Dongan Engine and Mitsubishi

• “Mutual Supply Agreement”

• 產品和配套服務互供協議 (the products and ancillary services mutual supply agreement) dated 2 October 2003 entered into between the Company and AVIC II and the supplemental agreement(s) thereto

• “PRC”

• the People’s Republic of China

• “Properties Leasing Agreement”

• 房屋租賃協議 (the properties leasing agreement) dated 2 October 2003 entered into between the Company and AVIC II and the supplemental agreement(s) thereto

• “RMB” or “Renminbi”

Renminbi, the lawful currency of the PRC

• “Shareholders”

• the holder(s) of shares of RMB1.00 each in the capital of the Company

• “Somerley”

Somerley Limited, a corporation licensed under the SFO to conduct type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities and is the independent financial adviser to the Independent Board Committee and the Independent Shareholders

• “Stock Exchange” The Stock Exchange of Hong Kong Limited

• “Supplemental Agreements”

the agreements entered into by the relevant parties on 29 September 2008 to amend and supplement the terms and conditions of certain non-exempt Existing Continuing Connected Transactions Agreements which require Independent Shareholders’ approval, details of which are set out in paragraph 2.5 of this circular

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DEFINITIONS

“Suzuki”	Suzuki Motor Corporation, a joint venture partner of the
	Company which is held as to 46% equity interest of Changhe
	Suzuki
“Technology Cooperation	技術合作框架協議(the technology cooperation framework
Agreement”	agreement) dated 2 October 2003 entered into between the
	Company and AVIC II and the supplemental agreement(s)
	thereto

— 5 —

LETTER FROM THE BOARD

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中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*]

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

(Stock Code: 2357)

Executive Directors:

Mr. Lin Zuoming Mr. Tan Ruisong Mr. Wu Xiandong

Registered Office:

No. 16, Hong Da Bei Lu Beijing Economic Technological Development Area Beijing, PRC

Non-executive Director:

Mr. Gu Huizhong Mr. Xu Zhanbin Mr. Geng Ruguang Mr. Zhang Xinguo Mr. Li Fangyong Mr. Wang Yong Mr. Maurice Savart

Principal place of business in Hong Kong:

Unit B, 15/F, United Centre Queensway 95, Hong Kong

Independent non-executive Directors:

Mr. Guo Chongqing Mr. Li Xianzong Mr. Lau Chung Man, Louis

10 November 2008

To the Shareholders:

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

1. INTRODUCTION

Reference is made to the announcement of the Company dated 29 September 2008 in relation to the Continuing Connected Transactions.

* For identification purpose only.

— 6 —

LETTER FROM THE BOARD

The purpose of this circular is to provide you with more information relating to the Continuing Connected Transactions. Under the Listing Rules, the Company is required to obtain approval of Independent Shareholders for, among other things:

• (1) the entering into of the Supplemental Agreements to the non-exempt Existing Continuing Connected Transactions agreements, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5) and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10) to extend their respective term for a further period of three years ending 31 December 2011; and

• (2) the proposed annual caps for the non-exempt Continuing Connected Transactions which require Independent Shareholders’ approval, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5), the Agusta Agreement (A.9) and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10).

The Land Use Rights Leasing Agreement (A.3), the Properties Leasing Agreement (A.4) and the Mitsubishi Joint Development Agreement (A.8) are subject to reporting and announcement requirements only pursuant to Chapter 14A of the Listing Rules.

For the purpose of the EGM, this circular also sets out (1) a letter from the Independent Board Committee containing its advice to the Independent Shareholders on the terms of the non-exempt Continuing Connected Transactions; and (2) a letter from the independent financial adviser containing its advice to the Independent Board Committee on the terms of the the non-exempt Continuing Connected Transactions and to opine on, among other things, the Land Use Rights Leasing Agreement (A.3) and Properties Leasing Agreement (A.4) which are entered into by the parties for a period exceeding three years, should be for a period longer than three years, as well as to confirm that it is normal business practice for agreements of these types to be of such duration pursuant to Rule 14A.35(1) of the Listing Rules.

Each of the connected persons of the Company, namely, AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization), Mitsubishi and Agusta S.p.A. and their respective associate(s), if any, will abstain from voting on the relevant ordinary resolution(s) relating to it to be proposed at the EGM.

2. BACKGROUND

2.1 The Independent Shareholders’ Approval

At the extraordinary general meeting of the Company held on 19 December 2005, the Independent Shareholders approved, among other things, the continuation of the Existing Continuing Connected Transactions and the annual caps for the Existing Continuing Connected Transactions for the three financial years ended 31 December 2008. Such approval will expire on 31 December 2008.

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LETTER FROM THE BOARD

• 2.2 Existing connected persons and changes in connected persons

Connected persons at the Company level

AVIC II

On 19 June 2008, the Company reported the proposed merger and reorganization of AVIC I and AVIC II. AVIC II is the existing controlling shareholder of the Company. AVIC Organizing Unit was established by the State Council of the PRC for the purpose of the proposed merger and reorganization. As at the Latest Practicable Date, AVIC, the entity to be established upon completion of the proposed merger and reorganization has not yet been established. During this transitional period, AVIC Organizing Unit is responsible for performing all necessary acts in connection with AVIC I, AVIC II and AVIC upon its establishment.

As AVIC is not yet established, AVIC Organizing Unit has entered into certain Supplemental Agreements to amend and supplement the terms of certain Existing Continuing Connected Transactions Agreements. Upon the establishment of AVIC, AVIC Organizing Unit will be replaced by AVIC as a party to the subject transactions, and the rights and obligations on the part of AVIC Organizing Unit under the supplemental agreements will be automatically transferred to AVIC. Each of these supplemental agreements contains a provision to the effect that upon establishment of AVIC, each supplemental agreement will be binding on AVIC. The Company has obtained a legal opinion from its PRC legal counsel dated 28 September 2008 confirming the legality and validity of the aforesaid arrangement.

Prior to the establishment of AVIC, the controlling shareholder of the Company is AVIC II. It holds 61.06% of the equity interest in the Company and is a connected person of the Company. After completion of the merger and reorganization of AVIC I and AVIC II to form AVIC, AVIC will become the controlling shareholder holding 61.06% equity interest in the Company and a connected person of the Company under the Listing Rules. Save as disclosed herein, there is no connectedness between AVIC Organizing Unit (or AVIC upon its establishment), and the Company and its subsidiaries prior to completion of the proposed merger and reorganization.

AVIC I is not a connected person of the Company by reason of its being directly owned and controlled by the State Council, which is a PRC Governmental Body within the meaning of the Listing Rules.

As at the Latest Practicable Date, AVIC I mainly focused on development and manufacture of military aircrafts. AVIC II mainly focused on development and manufacture of helicopters, trainers and general purpose aircrafts as well as non-aviation products.

AVIC II, and subsequently AVIC upon its establishment, and their respective associates are connected persons of the Company.

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LETTER FROM THE BOARD

Connected persons at the Company’s subsidiary level

Mitsubishi

Mitsubishi has 15.3% equity interest in Dongan Engine, a non-wholly owned subsidiary of the Company. It is a connected person of the Company by virtue of its being a substantial shareholder of a subsidiary of the Company.

Agusta S.p.A.

Agusta S.p.A. has 40% equity interest in Changhe Agusta, which is a non-wholly owned subsidiary of the Company and owned as to 60% equity interest by the Company through Changhe Aviation, a wholly-owned subsidiary of the Company. Agusta S.p.A. is a connected person of the Company by virtue of its being a substantial shareholder of a subsidiary of the Company.

Dongan Engine

Dongan Engine is a non-wholly owned subsidiary of the Company and owned as to 36% and 15% by Dongan Motor and Harbin Aviation Group, respectively. Dongan Motor and Harbin Aviation Group are in turn owned as to 58.77% and 100% by the Company, respectively. Since Dongan Group, one of its shareholders, holding 19% equity interest in Dongan Engine, is a wholly-owned subsidiary of AVIC II, which is the controlling shareholder and a connected person of the Company at the Company level, Dongan Engine is a connected person of the Company pursuant to Rule 14A.11(5) of the Listing Rules.

The principal business of Dongan Engine is to manufacture and assemble vehicle engines, gearboxes and automatic transmission and related parts and components.

Hafei Auto

Hafei Auto is a non-wholly owned subsidiary of the Company. Since China Aero Fund (382) Limited, an associate of AVIC II, has 25% equity interest in Hafei Auto, and since AVIC II is a connected person of the Company at the Company level, Hafei Auto is a connected person of the Company pursuant to Rule 14A.11(5) of the Listing Rules.

Cessation as a connected person

Changhe Suzuki

Since the 2007 interim report of the Company, Changhe Suzuki has become a jointly controlled entity and ceased to be a subsidiary of the Company. By reason of Changhe Suzuki ceasing to be a subsidiary of the Company, Suzuki, a substantial shareholder of Changhe Suzuki, ceases to be a connected person of the Company. Therefore, the transactions between Suzuki and Changhe Suzuki under the Liana Licence Agreement, the New Series Automobile Licence

— 9 —

LETTER FROM THE BOARD

Agreement and the K Series Engine Licence Agreement are no longer classified as continuing connected transactions of the Company pursuant to the Listing Rules. Details of these agreements are set out in the announcement and circular of the Company dated 30 September 2005 and 2 November 2005, respectively.

2.3 Terms and Conditions of the Existing Continuing Connected Transactions

The Existing Continuing Connected Transactions are governed by the respective continuing connected transaction agreements, the major terms and conditions of which have been summarized in the announcement and circular of the Company dated 30 September 2005 and 2 November 2005, respectively, and are repeated herein for ease of reference:

Continuing Connected Transaction Framework Agreements with AVIC II and its associates

A.1 Mutual Supply Agreement Parties: the Company and AVIC II Term: commenced on 2 October 2003 for an initial term of three years, and renewed for another term of three years expiring on 31 December 2008 Scope: Pursuant to the Mutual Supply Agreement, AVIC II Group agrees to (i) supply parts and components for manufacturing of aviation and automobile products; (ii) provide various services including, without limitation, import and export agency services, trial flying services, information technology and quality control services; and (iii) provide loan guarantees and leasing of equipment to the Group.

The Group also agrees to (i) supply parts and components for manufacturing aviation and automobile products; and (ii) provide various services including, without limitation, production power supply services, labour services and comprehensive production management services to AVIC II Group.

Pricing: The products and services are provided according to the following pricing policies:

• (a) the government-prescribed price (if any), if none, then government guidance price (if any);

• (b) if there is neither a government-prescribed price nor a government guidance price, then according to the market price, the market price is defined as the price at which the same type of products or services are provided by independent third parties in their ordinary course of business; and

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LETTER FROM THE BOARD

• (c) where none of the above is applicable, the price is to be agreed between the relevant parties for the provision of the above products or services, which shall be the reasonable cost incurred in providing the same plus not more than 8% profit of such cost (reasonable cost means the cost confirmed by both parties after negotiations and in accordance with the financial accounting standards of the PRC).

The profit margin charged by the Group and the AVIC II Group as per the pricing policy (c) above is determined after arm’s length negotiation between the Group and the AVIC II Group. In determining the profit margin charged by the Group for the provision of the above products and services to the AVIC II Group, the Group has taken into account the profit margin required by the Group in conducting such business. In negotiating the profit margin charged by AVIC II Group for the above mentioned products and services provided by the AVIC II Group, the Group has also taken into account the profit margin of these products and services of the Group after paying such amount of expense to the AVIC II Group and the profit margin required by the AVIC II Group in providing such products and services.

Payment: Specific payment terms are agreed by the parties in each transaction. Generally, in respect of sales of products, payments are made by cash by the relevant party upon delivery of products. In relation to provision of services, payments are made by cash by the relevant party on a regular basis pursuant to the contractual terms and generally with 90 days credit term.

A.2 Comprehensive Services Agreement

Parties: the Company and AVIC II

Term: commenced on 2 October 2003 for an initial term of three years, and renewed for another term of three years expiring on 31 December 2008

Scope: Pursuant to the Comprehensive Services Agreement, AVIC II Group agrees to provide certain social welfare and supporting services to the Group including, without limitation, cultural, educational and hygiene services, staff training and recreational services, withholding and payment for social welfare funds and housing provident funds, management services for retired staff, fire safety, security and greenery services.

Pricing: The services are provided according to the same pricing basis as set out in the Mutual Supply Agreement except where the price is agreed between the parties, such price shall be the reasonable cost incurred in providing the relevant services plus not more than 3% of such cost as profit. Such profit margin is determined after arm’s length negotiation between the parties. In negotiating the profit margin charged by the AVIC II Group for the provision of the above services to the Group, the Group has taken into account the overall profit margin of the Group after paying such amount of expense to the AVIC II Group and the profit margin required by the AVIC II Group in providing such services.

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LETTER FROM THE BOARD

Payment:	Payments are made by the Group to AVIC II Group on an annual basis at
	year-end by cash.
A.3	Land Use Rights Leasing Agreement
Parties:	The Company and AVIC II
Term:	commenced on 30 April 2003 for a term of 20 years expiring on 29 April 2023
Scope:	Pursuant to the Land Use Rights Leasing Agreement, AVIC II Group leases 48
	pieces of land with an aggregate area of approximately 2.9 million square meters
	(“Leased Land”) to the Group.
Pricing:	The current annual rental is approximately RMB37.6 million. The annual rental
	is reviewed every three years and shall not be higher than the prevailing market
	rent as determined by Vigers Appraisal & Consulting Limited, an independent
	valuer of the Company with reference to the market rent of other land situated
	in the same provinces or districts as the subject land.
Payment:	Payments are made by the Group to AVIC II Group by cheque 30 days after the
	first quarter of each financial year.
A.4	Properties Leasing Agreement
Parties:	the Company and AVIC II
Term:	commenced on 30 April 2003 for a term of 10 years expiring on 29 April 2013
Scope:	Pursuant to the Properties Leasing Agreement, AVIC II Group leases certain
	properties with an aggregate gross floor area of 111,000 square meters (“Rented
	Properties”) to the Group at an annual rental of approximately RMB24 million.
	The Group leases certain properties with an aggregate gross floor area of
	approximately 36,000 square meters (“Leased Properties”) to AVIC II Group at
	an annual rental of approximately RMB1.1 million.
Pricing:	The rental is reviewed every three years and shall not be higher than the
	prevailing market rent as determined by Vigers Appraisal & Consulting Limited,
	an independent valuer of the Company with reference to the market rent of other
	properties located in the same provinces or districts as the subject properties.
Payment:	Payments are made by the relevant parties by cheque 30 days after the first
	quarter of each financial year.
A.5	Technology Cooperation Agreement
Parties:	the Company and AVIC II
Term:	commenced on 2 October 2003 for an initial term of three years, and renewed for
	another term of three years expiring on 31 December 2008.

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LETTER FROM THE BOARD

Scope: Pursuant to the Technology Cooperation Agreement, the parties agree, among other things, (i) that the Company will engage AVIC II Group to develop new technologies for the Group; (ii) that AVIC II Group will engage the Group to develop new technologies and (iii) the parties will jointly develop new technologies. Such technologies are mainly in connection with production of aviation products. Pricing: The fees payable are determined based on the actual cost incurred by the party in connection with the projects undertaken pursuant to the Technology Cooperation Agreement. In the case where the Group engages AVIC II Group to develop new technologies for the Group, the Group will pay AVIC II Group such amount of fees which are required for research and development purposes. The ownership of the new technologies developed by AVIC II Group belong to the Group. On the other hand, if AVIC II Group engages the Group to develop new technologies, AVIC II Group will pay the Group such amount of fees which are required for research and development purposes. The ownership of the new technologies developed by the Group belong to AVIC II Group. In the case of joint-development of new technologies, the parties will contribute such amount of fund in proportion to the parties’ agreed percentage of ownership of the new technologies. Payment: Payments are made by the relevant parties by cash upon completion of each transaction.

Continuing Connected Transaction Agreements with connected persons at the Company’s subsidiary level

A.6 Mitsubishi Technology Transfer Agreement The Mitsubishi Technology Transfer Agreement is to regulate the technology cooperation between Mitsubishi and Dongan Engine, a non-wholly owned subsidiary of the Company of which Mitsubishi has a 15.3% equity interest. The principal business of Dongan Engine is to manufacture and assemble vehicle engines, gearboxes and automatic transmission and related parts and components. Parties: Mitsubishi and Dongan Engine Term: commenced on 22 October 1999 for a term of 10 years, expiring on 21 October 2009 Scope: Mitsubishi agrees to (i) grant to Dongan Engine certain industrial properties rights, patent and technology documents; and (ii) provide technical assistance and technical services to Dongan Engine.

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LETTER FROM THE BOARD

Pricing:

Dongan Engine will pay royalty fees to Mitsubishi, such royalty fees are charged in respect of each vehicle engine and gearbox produced by Dongan Engine using Mitsubishi’s licensed technology. In addition, Dongan Engine will pay Mitsubishi a one-off fee for the licences granted. The amounts of royalty fees and the one-off fee were agreed between the parties after arm’s length negotiation. In negotiating the royalty fee with Mitsubishi, the Directors will take into account various factors including, among others, the following:

• (a) the overall operation and development of the vehicle engines and gearboxes business of the Group;

• (b) the amount of royalty fees currently payable by Dongan Engine to Mitsubishi;

• (c) the fact that the royalty fees are charged in proportion to the production of engines and gearboxes produced by Dongan Engine using Mitsubishi’s technology; and

• (d) that the expected gross profit margins of the engines and gearboxes to be produced by Dongan Engine using Mitsubishi’s technology during commercial production will not be lower than that of other engines and gearboxes produced by the Group even after taking into account the royalty fees payable to Mitsubishi.

Having considered all the above factors, the Directors consider that the royalty fees charged by Mitsubishi are fair and reasonable to the Group as a whole.

Payment: Payments are made by Dongan Engine to Mitsubishi by cash within 30 days upon receipt of invoices issued by Mitsubishi.

A.7 Mitsubishi CKD Agreement

To manufacture and assemble the types of vehicle engines, gearboxes and automatic transmission that are being produced by Dongan Engine, Dongan Engine has to purchase CKD spare parts and components from Mitsubishi and use the related licenses and technology owned by Mitsubishi. Pursuant to the Mitsubishi CKD Agreement, Dongan Engine agrees to purchase CKD spare parts and components from Mitsubishi.

Parties: Mitsubishi and Dongan Engine

Term: commenced on 22 October 1999 for a term of 10 years, expiring on 21 October 2009 Scope: Mitsubishi agrees to supply CKD spare parts and components to Dongan Engine for manufacturing automobile products.

Pricing: The price payable for the CKD spare parts and components are to be fixed after arm’s length negotiation between the parties based on the market price.

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LETTER FROM THE BOARD

Payment: Payments are made by Dongan Engine to Mitsubishi by way of letter of credit within seven days after confirmation of purchase orders by Mitsubishi.

A.8 Mitsubishi Joint Development Agreement

Parties: Mitsubishi and Hafei Auto

Term: commenced on 8 August 2005 for a term of 10 years, expiring on 7 August 2015

Scope: Mitsubishi agrees to (i) assist Hafei Auto to develop certain automobiles using Mitsubishi’s technology; and (ii) grant to Hafei Auto licences to use the technology, information and patents relating to certain automobiles developed by Mitsubishi.

Pricing: Hafei Auto will pay royalty fees to Mitsubishi, such royalty fees are charged in respect of each automobile produced by Hafei Auto using Mitsubishi’s licensed technology. In addition, Hafei Auto will pay Mitsubishi a one-off fee for the licences granted. The amounts of royalty fees and the one-off fee were agreed between the parties after arm’s length negotiation. In negotiating the royalty fee with Mitsubishi, the Directors will take into account various factors including, among others, the following:

• (a) the recent development of the automobiles market in the PRC;

• (b) the overall operation and development of the automobiles business of the Group;

• (c) the amount of royalty fees currently payable by Hafei Auto to Mitsubishi;

• (d) that the licensing of such technologies from Mitsubishi is more cost and time effective to the Group than developing such technologies by the Group itself;

• (e) the fact that the royalty fees are charged in proportion to the production of automobiles produced by Hafei Auto using Mitsubishi’s technology; and

• (f) that the expected gross profit margins of the automobiles to be produced by Hafei Auto using Mitsubishi’s technology during commercial production will not be lower than that of other automobiles produced by the Group even after taking into account the royalty fees payable to Mitsubishi.

Having considered all the above factors, the Directors consider that the royalty fees charged by Mitsubishi are fair and reasonable to the Group as a whole.

Payment:

Payments are made by Hafei Auto to Mitsubishi by cash within 30 days upon receipt of invoices issued by Mitsubishi.

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LETTER FROM THE BOARD

A.9

Agusta Agreement

The Agusta Agreement is to regulate the supply of helicopter parts and components by Agusta S.p.A. to Changhe Agusta, a non-wholly owned subsidiary of the Company. The principal business of Changhe Agusta is to manufacture helicopters using parts and components supplied by Agusta S.p.A. It is part of the arrangement between Agusta and Changhe Agusta at the time of joint venture formation of Changhe Agusta that Changhe Agusta has to purchase the helicopter parts and components from Agusta S.p.A. pursuant to the Agusta Agreement. To manufacture and assemble the helicopter, Changhe Agusta therefore has to purchase the helicopter parts and components from Agusta S.p.A. Parties: Agusta S.p.A. and Changhe Agusta Term: commenced on 2 June 2005 for a term of 20 years, expiring on 1 June 2025 Scope: Agusta S.p.A. agrees to (i) supply parts and components for manufacturing helicopters to Changhe Agusta, a joint venture established between the Group and Agusta S.p.A.; and (ii) provide technical assistance to Changhe Agusta for manufacturing, assembling and sales of helicopters. Pricing: The price payable for the spare parts and components are fixed after arm’s length negotiation between the parties based on the market price. Payment: Payments are made by Changhe Agusta to Agusta S.p.A. by cash or letter of credit within a term contractually agreed by the parties in each transaction. A.10 Products and Services Mutual Supply and Guarantees Provision Agreement (referred to as the “Internal CT Agreement” in the announcement and circular of the Company dated 30 September 2005 and 2 November 2005, respectively) Parties: Dongan Engine, Hafei Auto and the Company Term: commenced on 2 October 2003 for an initial term of three years, and renewed for another term of three years, expiring on 31 December 2008 Scope: Dongan Engine and Hafei Auto agrees to (i) supply raw materials, parts and components; and (ii) provide various technical services to the Company and/or its subsidiaries. The Company and/or its subsidiaries agree to (i) supply raw materials, automobile parts and components; and (ii) provide various technical services to Dongan Engine and Hafei Auto.

The Company and/or its subsidiaries agree to grant guarantees in favor of Hafei Auto and Dongan Engine for their bank loans.

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LETTER FROM THE BOARD

Pricing:

The products and services are provided according to the following pricing policies:

• (a) the government-prescribed price (if any), if none, then government guidance price (if any);

• (b) if there is neither a government-prescribed price nor a government guidance price, then according to the market price, the market price is defined as the price at which the same type of products or services are provided by independent third parties in their ordinary course of business; and

• (c) where none of the above is applicable, the price is to be agreed between the relevant parties for the provision of the above products or services, which shall be the reasonable cost incurred in providing the same plus not more than 8% profit of such cost (reasonable cost means the cost confirmed by both parties after negotiations and in accordance with the financial accounting standards of the PRC).

Such profit margin is determined by the parties after arm’s length negotiation. In determining the profit margin charged by the Group for the provision of the above products and services to Dongan Engine and Hafei Auto, the Group has taken into account the profit margin required by the Group in conducting such business. In negotiating the profit margin charged by Dongan Engine and Hafei Auto for the above mentioned products and services provided by Dongan Engine and Hafei Auto, the Group has also taken into account the profit margin of these products and services of the Group after paying such amount of expense to Dongan Engine and Hafei Auto and the profit margin required by Dongan Engine and Hafei Auto in providing such products and services.

In respect of the guarantees, the Company and/or its subsidiaries have been granting such guarantees in favor of Hafei Auto and Dongan Engine for free since the agreement was entered into by the parties on 2 October 2003. These guarantee arrangements have been carried out based on normal commercial terms and are consistent with the PRC market practice. For these reasons and on the basis that the Company has not provided any security for such guarantees, the Directors consider that the provision of such guarantees for free are fair and reasonable and in the interest of the Company and Shareholders as a whole. Should the Company and/or its subsidiaries intend to charge a fee in respect of provision of guarantees in the future, the amount of fees should be agreed between the parties and should not exceed the amount of fees charged by normal commercial banks and/or financial service institutions in the PRC for provision of similar guarantees.

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LETTER FROM THE BOARD

Payment: Specific payment terms are agreed by the parties in each transaction. Generally, in respect of sales of products, payments are made by cash by the relevant party upon delivery of products. In relation to provision of services, payments are made by cash by the relevant party on a regular basis pursuant to the contractual terms and generally with 90 days credit term.

The Land Use Rights Leasing Agreement (A.3), Properties Leasing Agreement (A.4), Mitsubishi Technology Transfer Agreement (A.6), Mitsubishi CKD Agreement (A.7), Mitsubishi Joint Development Agreement (A.8) and Agusta Agreement (A.9) are entered into by the parties for a period exceeding three years. In 2005, the Company had appointed Somerley, an independent financial adviser to the Company, to opine on the term of these agreements pursuant to Rule 14A.35(1) of the Listing Rules. Somerley had confirmed in its letter dated 2 November 2005 that it is normal business practice for agreements of these types to be of a duration longer than three years. Please refer to the circular of the Company dated 2 November 2005 for further details.

2.4 The historical annual amounts of the Existing Continuing Connected Transactions for the financial years ended 2006, 2007 and the six months ended 30 June 2008

Set out below are the historical annual amounts of the Existing Continuing Connected Transactions for the preceding two financial years ended 31 December 2006 and 2007 and the six months ended 30 June 2008:

		Annual Cap/	Annual Cap/	Annual Cap/
		Annual amount	Annual amount	Amount for the
		for the year	for the year	six months
Item		ended 31	ended 31	ended 30
No.	Agreements	December 2006	December 2007	June 2008	Counter-party
		(RMB million)	(RMB million)	(RMB million)
A. Expenditure
A.1	Mutual Supply	3,000/2,610	3,500/2,570	4,000/1,070	AVIC II
	Agreement
A.2	Comprehensive	180/61	200/132	220/48	AVIC II
	Services Agreement
A.3	Land Use Rights	38/30	38/30	38/10	AVIC II
	Leasing Agreement
A.4	Properties Leasing	24/14	24/14	24/4	AVIC II
	Agreement
A.5	Technology	33/24	36/28	40/14	AVIC II
	Cooperation Agreement
A.6	Mitsubishi Technology	8/31 (Note)	120/33 (Note)	150/12 (Note)	Mitsubishi
	Transfer Agreement
A.7	Mitsubishi CKD	36/186 (Note)	400/131 (Note)	450/60 (Note)	Mitsubishi
	Agreement

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LETTER FROM THE BOARD

		Annual Cap/	Annual Cap/	Annual Cap/
		Annual amount	Annual amount	Amount for the
		for the year	for the year	six months
Item		ended 31	ended 31	ended 30
No.	Agreements	December 2006	December 2007	June 2008	Counter-party
		(RMB million)	(RMB million)	(RMB million)
A.8	Mitsubishi Joint	41/13	38/10	53/5	Mitsubishi
	Development
	Agreement
A.9	Agusta Agreement	78/Nil	117/85	117/20	Agusta S.p.A.
A.10	Products and Services	500/271	550/160	600/85	Dongan Engine and
	Mutual Supply and				Hafei Auto
	Guarantees Provision
	Agreement
B. Revenue
A.1	Mutual Supply	5,400/4,840	7,000/4,830	8,500/1,650	AVIC II
	Agreement
A.4	Properties Leasing	1.1/1	1.1/1	1.1/Nil	AVIC II
	Agreement
A.5	Technology	22/18	24/20	27/8	AVIC II
	Cooperation Agreement
A.10	Products and Services	2,700/2,062	3,200/1,745	3,800/950	Dongan Engine and
	Mutual Supply and				Hafei Auto
	Guarantees Provision
	Agreement
C. Guarantees
A.10	Products and Services	2,000/1,810	2,000/1,820	2,000/1,833	Dongan Engine and
	Mutual Supply and				Hafei Auto
	Guarantees Provision
	Agreement

Note:

The actual value of the transactions under the Mitsubishi Technology Transfer Agreement and the Mitsubishi CKD Agreement for the year ended 31 December 2006 exceeded their respective original caps. On 15 June 2007, the 2006 annual general meeting was held by the Company during which the Independent Shareholders considered, among other matters, the exceeded annual caps and the proposed revised annual caps in respect of the aforesaid two agreements for the years ended 31 December 2007 and 2008. The revised annual caps for the years ended 31 December 2007 and 2008 were approved by the Independent Shareholders at the annual general meeting. For details relating to the exceeded annual caps and the revised annual caps, please refer to the announcement, circular and results of the 2006 annual general meeting announcement of the Company dated 23 April 2007 and 12 May 2007 and 15 June 2007, respectively.

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LETTER FROM THE BOARD

2.5 Supplemental Agreements

The Company has entered into the Supplemental Agreements with AVIC Organizing Unit, Dongan Engine and Hafei Auto to amend and supplement the terms and conditions of certain Existing Continuing Connected Transaction Agreements, a summary of which is set out as follow:

Item

Item
No.	Agreements	Counter-party	Term	Other changes
A.1	Mutual Supply	AVIC	Contractual term is	N/A
	Agreement	Organizing Unit	extended for three
			years expiring on
			31 December 2011
A.2	Comprehensive	AVIC	Contractual term is	N/A
	Services	Organizing Unit	extended for three
	Agreement		years expiring on
			31 December 2011
A.3	Land Use Rights	AVIC	N/A	The scope of Leased Land is
	Leasing	Organizing Unit		reduced from 48 pieces of land
	Agreement			with approximately 2.9 million
				square meters to 35 pieces of
				land with approximately 2.5
				million square meters.
				The annual rental for the
				Leased Land is reduced from
				approximately RMB37.6
				million to RMB30 million.
A.4	Properties	AVIC	N/A	The area of the Rented
	Leasing	Organizing Unit		Properties is increased from a
	Agreement			gross floor area of
				approximately of 111,000
				square meters to approximately
				121,123 square meters.
				The annual rental for the
				Rented Properties is reduced
				from approximately RMB24
				million to approximately
				RMB19 million*.

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LETTER FROM THE BOARD

Item
No.	Agreements	Counter-party	Term	Other changes
				The area of the Leased
				Properties is increased from a
				gross floor area of
				approximately of 36,000
				square meters to approximately
				88,249 square meters.
				The annual rental for the
				Leased Properties is increased
				from approximately RMB1.1
				million to approximately
				RMB2 million*.
A.5	Technology	AVIC	Contractual term is	N/A
	Cooperation	Organizing Unit	extended for three
	Agreement		years expiring on
			31 December 2011
A.10	Products and	Dongan Engine	Contractual term is	N/A
	Services Mutual	and Hafei Auto	extended for three
	Supply and		years expiring on
	Guarantees		31 December 2011
	Provision
	Agreement

• Represents the proposed annual caps pursuant to the Properties Leasing Agreement for the three financial years ending 31 December 2011.

2.6 Events leading to possible changes in the Existing Continuing Connected Transactions

a. Merger and reorganization of AVIC I and AVIC II

Prior to the merger and reorganization of AVIC I and AVIC II to form AVIC, AVIC I is not a connected person for the purpose of the Listing Rules as it is directly owned and controlled by the State Council, a PRC Governmental Body as defined in the Listing Rules. Upon completion of the merger and reorganization to form AVIC, any transactions carried out between the Company and AVIC I and/or its associates will become transactions between the Company and AVIC and consequently will constitute connected transactions of the Company. The existing transactions between the Company and AVIC I are in respect of mutual supply of parts and components for manufacturing of aviation products and provision of various services. As a result, upon the establishment of AVIC, there will be an increase in the volume and amounts of transactions and the proposed annual caps for the Mutual Supply Agreement (A.1) for the three financial years ending 31 December 2011. Therefore, the proposed annual caps for the three financial years ending 31 December 2011 have taken into account such possible changes.

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LETTER FROM THE BOARD

b. Proposed acquisition of aviation assets and disposal of automobile assets by Changhe Auto

On 18 July 2008, the Company announced the framework agreement dated 16 July 2008 entered into between Changhe Auto and AVIC Organizing Unit in relation to the proposed acquisition of aviation assets from AVIC I and AVIC II to be satisfied partly by the swap of automobile assets of Changhe Auto and partly by means of share issuance by Changhe Auto. The transactions contemplated under the framework agreement have not been finalized. It is expected that there are possible changes in the Existing Continuing Connected Transactions arising from such transactions In particular, upon completion of the aforesaid transactions, the aviation assets proposed to be acquired by Changhe Auto will supply aviation parts and components back to AVIC I and AVIC II, or upon completion of the proposed merger and reorganization, to AVIC. As a result, it is expected that the transaction volume under the Mutual Supply Agreement (A.1) between the Company and AVIC (or before its establishment, with AVIC I and AVIC II) will increase. It is expected that the transactions contemplated under the framework agreement will be processed by the parties by the first quarter of 2009. Therefore, the proposed annual caps for the three financial years ending 31 December 2011 have taken into account such possible changes.

Should there be any changes to the terms and conditions of the Mutual Supply Agreement (A.1) as a result of the above proposed acquisition and disposal, the Company will make an announcement and comply with the necessary requirements under the Listing Rules accordingly.

3. THE PROPOSED ANNUAL CAPS FOR THE CONTINUING CONNECTED TRANSACTIONS

• 3.1 Proposed annual caps for the Continuing Connected Transactions for the three financial years ending 31 December 2009, 2010 and 2011

The Directors consider that it is in the interest of the Company to continue the Existing Continuing Connected Transactions upon the same terms and conditions as set out in the relevant Existing Continuing Connected Transactions Agreements and/or the supplemental agreements thereto. The Directors have estimated the annual caps of the Continuing Connected Transactions for the forthcoming three financial years ending 31 December 2011 based on, among other factors, the following:

• (1) the Existing Continuing Connected Transactions will be entered into between the Company and the relevant connected persons upon the terms and conditions set out in the relevant Continuing Connected Transaction Agreements;

• (2) such Existing Continuing Connected Transactions will continue to be entered into in the ordinary course of business of the Company and upon normal commercial terms;

• (3) the estimates of the annual caps for the Existing Continuing Connected Transactions are based on the Continuing Connected Transactions for the two financial years ended 31 December 2007 and the six months ended 30 June 2008; and

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LETTER FROM THE BOARD

• (4) the development trend of the PRC aviation and automobile industries, the business plan and forecast of the Group.

Based on the historical amounts of the Existing Continuing Connected Transactions for the two financial years ended 31 December 2006 and 2007 and the six months ended 30 June 2008, the Directors have estimated the annual caps of each of the Continuing Connected Transactions for each of the three financial years ending 31 December 2009, 2010 and 2011. By applying the size tests of the Listing Rules, the Directors have categorized the Continuing Connected Transactions, as set out below, based on the following principles:

• (1) exempt continuing connected transactions if none of the results of the size tests (as provided in the Listing Rules) exceeds 0.1%;

• (2) non-exempt continuing connected transactions which do not require shareholders approval if none of the results of the size tests exceeds 2.5%; and

• (3) non-exempt continuing connected transactions which require shareholders approval if any of the results of the size tests exceeds 2.5%.

	Proposed Estimated Amount
	of Annual Caps for the
Non-exempt Continuing	financial year ending
Connected Transactions	(amount in RMB million)
	2009 2010 2011	Counter-party

Reporting, Announcement and Independent Shareholders’ Approval required (Size Tests ≥ 2.5%)

(Size Tests ≥2.5%)	(Size Tests ≥2.5%)
A. Expenditure
A.1	Mutual Supply Agreement	5,061	5,742	6,545	AVIC Organizing
					Unit
A.2	Comprehensive Services Agreement	155	160	170	AVIC Organizing
					Unit
A.5	Technology Cooperation Agreement	70	86	98	AVIC Organizing
					Unit
A.9	Agusta Agreement	140	350	350	Agusta S.p.A.
A.10	Products and Services Mutual Supply	180	170	155	Dongan Engine and
	and Guarantees Provision Agreement				Hafei Auto
B. Revenue
A.1	Mutual Supply Agreement	7,851	9,513	10,534	AVIC Organizing
					Unit
A.5	Technology Cooperation Agreement	40	52	63	AVIC Organizing
					Unit
A.10	Products and Services Mutual Supply	2,220	2,420	2,870	Dongan Engine and
	and Guarantees Provision Agreement				Hafei Auto

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LETTER FROM THE BOARD

		**Proposed Estimated **	**Proposed Estimated **	Amount	Amount
		of Annual Caps for the
Non-exempt Continuing		financial year ending
Connected Transactions		(amount in RMB million)
		2009	2010	2011		Counter-party
C. Guarantees
A.10	Products and Services Mutual Supply	2,290	1,960	1,850		Dongan Engine and
	and Guarantees Provision Agreement					Hafei Auto
Reporting and Announcement required
**(Size **	Tests ≤2.5%)
A. Expenditure
A.3	Land Use Rights Leasing Agreement	30	30		30	AVIC Organizing
						Unit
A.4	Properties Leasing Agreement	19	19		19	AVIC Organizing
						Unit
A.8	Mitsubishi Joint Development	10	10		10	Mitsubishi
	Agreement
**Exempt **	Continuing Connected Transactions
**(Size **	Tests ≤0.1%)
B. Revenue
A.4	Properties Leasing Agreement	2	2		2	AVIC Organizing
						Unit

Save as disclosed herein, there is no prior transaction between the Group and each of the parties of the Existing Continuing Connected Transactions which require to be aggregated pursuant to Rule 14A.25 of the Listing Rules, nor any of the above-mentioned Continuing Connected Transactions need to be aggregated pursuant to Rule 14A.25 of the Listing Rules.

3.2 Fluctuations in the annual caps for the Existing Continuing Connected Transactions

The following are the reasons for the fluctuations in the annual caps for the Existing Continuing Connected Transactions for the three years ending 31 December 2011:

A.1 Mutual Supply Agreement

Expenditure

The proposed increase in the annual caps for the total expenditure to be incurred by the Group pursuant to the Mutual Supply Agreement is mainly due to the following two reasons: (a) upon completion of the proposed merger and reorganization of AVIC I and AVIC II, there will be more transactions carried out between the Group and AVIC pursuant to the Mutual Supply Agreement. In particular, the provision of goods and/or services by

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LETTER FROM THE BOARD

AVIC I Group to the Group will also be classified as constituting continuing connected transactions of the Company under the Listing Rules; and (b) the Directors expect that there will be an increase in the Group’s sales of aviation products to the AVIC II Group, as it is anticipated that the number of government orders placed with the Group will increase in the forthcoming years. This will require more purchase of aviation parts and components from the AVIC II Group. The transaction volume under the Mutual Supply Agreement will therefore increase. Based on the above reasons, it is estimated that there will be approximately 12 to 15 percent increase in the total expenditure to be incurred by the Group for the three financial years ending 31 December 2011.

Revenue

The proposed increase in the annual caps for the total revenue of the Group arising from the provision of products and services to the AVIC II Group pursuant to the Mutual Supply Agreement is mainly due to the projected growth in revenue derived from these activities in the forthcoming three years. Historically, revenue derived from the transactions carried out pursuant to the Mutual Supply Agreement mainly came from sales of aviation products to AVIC II Group for their fulfillment of government orders or for export overseas. The Directors expect that the production and sales of aviation products will increase in the forthcoming years due to the relatively large increase in purchase orders after the proposed merger and reorganization of AVIC I and AVIC II to form the enlarged AVIC Group. In addition, upon completion of the proposed acquisition of aviation assets by Changhe Auto from AVIC Organizing Unit (or AVIC, upon its establishment after completion of the proposed merger and reorganization) as mentioned in paragraph 2.6(b) of this circular, it is expected that the aviation assets proposed to be acquired by Changhe Auto will supply aviation parts and components to AVIC I Group and AVIC II Group, or to AVIC, upon its establishment after completion of the proposed merger and reorganization. As a result, it is expected that the transaction volume under the Mutual Supply Agreement between the Company and AVIC (or before its establishment, with AVIC I Group and AVIC II Group) will increase.

A.2 Comprehensive Services Agreement

Expenditure

The proposed increase in the annual caps for the total expenditure to be incurred by the Group pursuant to the Comprehensive Services Agreement is mainly due to the inflation in the PRC and the increase in labor cost incurred by the Group as a result of its business expansion.

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LETTER FROM THE BOARD

A.3 Land Use Rights Leasing Agreement

Expenditure

As a result of reorganization of the Group’s assets during the past few years and taking into account the actual business needs of the Group, the scope of land leased by AVIC Organizing Unit (or AVIC, upon its establishment after completion of the proposed merger and reorganization) and/or its associates to the Group pursuant to the Land Use Rights Leasing Agreement will decrease, which results in a reduction in the rental payable by the Group for the Leased Land. The annual rental payable by the Group for the Leased Land will reduce from approximately RMB38 million in 2008 to RMB30 million for the three years ending 31 December 2011. Accordingly, the proposed annual caps for the total expenditure to be incurred by the Group pursuant to the Land Use Rights Leasing Agreement will decrease.

A.4 Properties Leasing Agreement

Expenditure

Pursuant to the Properties Leasing Agreement, the annual rentals for the Rented Properties are to be adjusted every three years. As a result of adjustment, the annual rental payable by the Group for the Rented Properties will reduce from RMB24 million in 2008 to RMB19 million for the three years ending 31 December 2011. Such adjustment is confirmed by Vigers Appraisal & Consulting Limited, an independent valuer of the Company with reference to the prevailing market rent. Accordingly, the proposed annual caps for the total expenditure to be incurred by the Group pursuant to the Properties Leasing Agreement will decrease.

Revenue

As a result of reorganization of the Group’s assets during the past few years, the scope of properties leased by the Group to AVIC Organizing Unit (or AVIC, upon its establishment) and/or its associates pursuant to the Properties Leasing Agreement will increase, which results in an increase in the rental payable by the AVIC Group for the Leased Properties. The annual rental payable by the AVIC Group to the Company for the Leased Properties pursuant to the Properties Leasing Agreement will increase from RMB1.1 million to RMB 2 million.

A.5 Technology Cooperation Agreement

Expenditure

The proposed increase in the annual caps for the total expenditure to be incurred by the Group pursuant to the Technology Cooperation Agreement is determined taking into account the possible costs involved in various projects undertaken by the Group and the AVIC II Group (or the AVIC Group, upon the establishment of AVIC), such as the existing

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LETTER FROM THE BOARD

and on-going research projects involving the joint development of the advanced utility helicopters, the modified helicopter models and the advance jet trainers. The proposed annual caps are based on the current estimation of the aggregate transaction amounts to be incurred from these research projects. The amount of expenditures to be incurred in each project may deviate from the current estimation depending on the future development of these projects.

Revenue

The proposed increase in the annual caps for the total revenue to be generated by the Group pursuant to the Technology Cooperation Agreement is mainly due to the expected expansion in the types of technology to be developed by the Group for the AVIC II Group (or the AVIC Group, upon the establishment of AVIC) under the Technology Cooperation Agreement. The Group expects that more revenue will be derived from such expansion.

A.8 Mitsubishi Joint Development Agreement

Expenditure

Royalty fees payable to Mitsubishi under the Mitsubishi Joint Development Agreement are determined based on the number of automobiles sold by Hafei Auto using Mitsubishi’s licensed technology. The proposed decrease in the annual caps for the total expenditure to be incurred by the Group pursuant to the Mitsubishi Joint Development Agreement is mainly due to the expected decrease in royalty fees payable by Hafei Auto to Mitsubishi, as the automobiles manufactured by Hafei Auto using Mitsubishi’s technology do not achieve the expected sales volume in the PRC.

A.9 Agusta Agreement

Expenditure

The increase in the annual caps for the total expenditure to be incurred by the Group pursuant to the Agusta Agreement is mainly due to the management’s expectation on the potential demand from various domestic government departments for the helicopters manufactured by Changhe Agusta using the parts and components provided by Agusta S.p.A.. The Directors believe that the market outlook for these products is positive in the forthcoming years.

A.10 Products and Services Mutual Supply and Guarantees Provision Agreement

The total expenditure to be incurred by the Group pursuant to the Products and Services Mutual Supply Agreement and Guarantees Provision Agreement is mainly attributable to the total expenditure spent by Hafei Auto in relation to the purchase of vehicle engines from Dongan

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LETTER FROM THE BOARD

Engine, whereas the total revenue received by the Group pursuant to the Products and Services Mutual Supply and Guarantees Provision Agreement is mainly attributable to the sales of vehicle engines by Dongan Motor to Hafei Auto and the sales of gearboxes and spare parts by Dongan Motor to Dongan Engine.

The increase in the annual caps for the total revenue to be received by the Group pursuant to the Products and Services Mutual Supply and Guarantees Provision Agreement is mainly due to the expected growth in sales of automobiles, in particular, mini-sized vehicles, manufactured by Hafei Auto, which will result in an increased demand by Hafei Auto for vehicle engines and the associated parts and components from Dongan Motor for manufacturing purposes. It is also expected that Dongan Engine’s sales of vehicle engines using engine parts and components produced by Dongan Motor would also increase. Such transactions between Hafei Auto and Dongan Motor as well as Dongan Engine and Dongan Motor have been covered under the Products and Services Mutual Supply and Guarantees Provision Agreement. As the expected sales growth is mainly caused by mini-sized vehicles, the engines of which are mostly purchased from Dongan Motor, the purchase of vehicle engines and gearboxes for other automobile models by Hafei Auto from Dongan Engine will decrease accordingly, which will result in a decrease in the expenditure to be incurred by the Group under the Products and Services Mutual Supply and Guarantees Provision Agreement.

4. INFORMATION RELATING TO THE COMPANY

The Company is mainly engaged in the research, development, manufacture and sale of civil aviation products and automobiles.

5. INFORMATION RELATING TO THE CONNECTED PARTIES

AVIC II

Prior to the establishment of AVIC, the controlling shareholder of the Company is AVIC II. It holds 61.06% of the equity interest in the Company and is a connected person of the Company. AVIC Organizing Unit was established by the State Council of the PRC for the purpose of the proposed merger and reorganization of AVIC I and AVIC II. After completion of the merger and reorganization of AVIC I and AVIC II to form AVIC, AVIC will become the controlling shareholder holding 61.06% equity interest in the Company and a connected person of the Company under the Listing Rules.

Mitsubishi

Mitsubishi, a substantial shareholder of Dongan Engine (a non-wholly owned subsidiary of the Company) holding 15.3% equity interest in Dongan Engine. Mitsubishi is mainly engaged in the manufacture and sale of automobile products such as mini-sedans and mini-cargo cars, small sedans and cargo cars, medium and heavy cargo cars, vans, sport cars, engines and other parts and components.

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LETTER FROM THE BOARD

Agusta S.p.A.

Agusta S.p.A., a substantial shareholder of a subsidiary of the Company, Changhe Agusta. Agusta S.p.A. is a reputable international helicopter manufacturer and is mainly engaged in the manufacture and sale of helicopters for military use, police use and civil use.

Dongan Engine

Dongan Engine., a sino-foreign joint venture held as to 36% by Dongan Motor, 15% by Harbin Aviation Group, 19% by Dongan Group, 15.3% by Mitsubishi, 9% by MCIC Holdings Sdn. Bhn. and 5.7% by Mitsubishi Corporation. Dongan Engine is mainly engaged in the manufacture and sale of automobile engines.

Hafei Auto

Hafei Auto, a joint stock limited liability company with foreign investment which is held as to 74.81% by Harbin Automobile Group, 25% by China Aero Fund (382) Limited (an associate of AVIC II within the meaning of the Listing Rules), 0.1% by Dongan Group, 0.06% indirectly by CATIC and 0.03% by Shenzhen Shenhang Avionics Co., Ltd., which is indirectly held as to 34% by CATIC and 33% by Harbin Aviation Group. Hafei Auto is mainly engaged in the development, manufacture and sale of automobiles and the relevant parts and components.

6. GENERAL

Based on the information described above, the Directors will convene an EGM to obtain the approval of Independent Shareholders for, among other things:

• (1) the entering into of the Supplemental Agreements to the non-exempt Existing Continuing Connected Transactions agreements, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5) and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10) to extend their respective term for a further period of three years ending 31 December 2011; and

• (2) the proposed annual caps for the non-exempt Continuing Connected Transactions which require Independent Shareholders’ approval, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5), the Agusta Agreement (A.9), and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10).

In respect of each of the non-exempt Continuing Connected Transactions which requires the approval of Independent Shareholders, the proposed annual caps represent the maximum aggregate annual value of consideration payable or receivable under the relevant transactions. If any annual cap is exceeded, the Company will be required to re-comply with the applicable continuing connected transactions regulatory requirements under Chapter 14A of the Listing Rules.

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LETTER FROM THE BOARD

7 EGM

The notice of the EGM to be held at 10:00 a.m., on Monday, 15 December 2008 at Avic Hotel, No. 10 Yi, Central East Third Ring Road, Chaoyang District, Beijing, the People’s Republic of China is set out on pages 52 to 54 of this circular, at which ordinary resolutions will be proposed to approve (1) the entering into of the Supplemental Agreements to the non-exempt Existing Continuing Connected Transactions, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5) and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10) to extend their respective term for a further period of three years ending 31 December 2011; and (2) the proposed annual caps for the non-exempt Continuing Connected Transactions which require Independent Shareholders’ approval, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5), the Agusta Agreement (A.9), and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10).

A reply slip and a form of proxy for use at the EGM is enclosed herewith. Shareholders who intend to attend the EGM shall complete and return the reply slip in accordance with the instructions printed thereon before Tuesday, 25 November 2008. Shareholders who intend to appoint a proxy to attend the EGM shall complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible and in any event no later than 24 hours before the time fixed for the holding of EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof (as the case may be) should you wish.

AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization), Mitsubishi, Agusta S.p.A. and their respective associate(s), if any, are connected persons of the Company as defined under the Listing Rules and they will abstain from voting at the EGM in respect of the ordinary resolutions regarding the transactions in which they are respectively interested. 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.

8 RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 32 of this circular. The Directors and the Independent Board Committee, having taken into account the advice of Somerley, considers that the terms of the non-exempt Continuing Connected Transactions and the proposed annual caps for the non-exempt Continuing Connected Transactions are fair and reasonable and the entering into of the Supplemental Agreements to the non-exempt Continuing Connected Transactions Agreements, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5) and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10) is in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors and the Independent Board Committee recommends the Independent Shareholders to vote in favour of ordinary resolutions to be proposed at the EGM.

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LETTER FROM THE BOARD

9 FURTHER INFORMATION

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

Your faithfully, By order of the Board Lin Zuoming Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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中國航空科技工業股份有限公司 AviChina Industry & Technology Company Limited[*] (A joint stock limited company incorporated in the People’s Republic of China with limited liability) (Stock Code: 2357)

10 November 2008

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular (the “Circular”) dated 10 November 2008 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 the fairness and reasonableness of the terms of the non-exempt Continuing Connected Transactions which require approval by the Independent Shareholders, the proposed annual caps of such transactions and the proposed entering into of the Supplemental Agreements for such non-exempt Continuing Connected Transactions. Somerley has been appointed to advise you and us in this regard. Details of its recommendation, together with the principcal factors and reasons it has taken into consideration in arriving at its recommendation are set out in its letter set out on pages 33 to 46 of the Circular.

We wish to draw your attention to the letter from the Board set out on pages 6 to 31 of the Circular and the additional information set out in the Appendices to the Circular.

Having considered the advice given by Somerley, we are of the opinion that the terms of the non-exempt Continuing Connected Transactions, the proposed annual caps of such transactions and the proposed entering into of the Supplemental Agreements for such non-exempt Continuing Connected Transactions are on normal commercial terms and 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 resolutions to be proposed at the EGM.

Yours faithfully,

For and on behalf of the Independent Board Committee AviChina Industry & Technology Company Limited* Guo Chongqing, Li Xianzong, Lau Chung Man, Louis

Independent Non-executive Directors

* For identification purpose only.

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LETTER FROM SOMERLEY

SOMERLEY LIMITED 10th Floor The Hong Kong Club Building 3A Chater Road Central Hong Kong

10 November 2008

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in respect of the non-exempt continuing connected transactions to be entered into by the Group in its ordinary and usual course of business and their annual caps for the three years ending 31 December 2011, details of which are contained in the circular of the Company to the Shareholders dated 10 November 2008 (the “Circular”), of which this letter forms a part. Unless otherwise defined, capitalised terms used in this letter shall have the same meanings as defined in the Circular.

The Independent Board Committee, comprising all the three independent non-executive Directors, namely Mr. Guo Chongqing, Mr. Li Xianzong and Mr. Lau Chung Man, Louis, has been formed to consider the fairness and reasonableness of the non-exempt continuing connected transactions and their annual caps and to make recommendations to the Independent Shareholders as to voting at the EGM. We, Somerley Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

In formulating our advice, we have relied on the information and facts supplied, and the opinions expressed, by the Directors and the management of the Group and have assumed that they are true, accurate and complete at the time they were provided to us and will remain so up to the time of the EGM. We have also sought and received confirmation from the Directors that all material relevant information has been supplied to us and that no material facts have been omitted from the information supplied and opinions expressed to us. We have no reason to doubt the truth or accuracy of the information provided to us, or to believe that any material information has been omitted or withheld. We have relied on such information and 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 reliance on such information. However, we have not conducted any independent investigation into the business and affairs of the Group (which includes, among others, Dongan Engine and Hafei Auto), AVIC I, AVIC II, the AVIC Organising Unit and Agusta S.p.A., nor have we carried out any independent verification of the information supplied.

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LETTER FROM SOMERLEY

EXECUTIVE SUMMARY

The Group has been carrying out various non-exempt continuing connected transactions in its ordinary and usual course of business, subject to the annual caps and the terms of the respective master contracts. At the extraordinary general meeting of the Company held on 19 December 2005, the then independent shareholders of the Company approved the continuation of the Existing Continuing Connected Transactions and their annual caps for the three financial years ending 31 December 2008. To ensure that the Group’s business may continue smoothly after 31 December 2008, the Company has on 29 September 2008 entered into a new master contract or supplemental agreements (as the case may be) to renew those master contracts which will otherwise expire on 31 December 2008. The Company therefore proposes to obtain approval from the Independent Shareholders at the EGM of the following:

• (1) the entering into by the Group of the supplemental agreements to the Mutual Supply Agreement, the Comprehensive Services Agreement and the Technology Cooperation Agreement so as to extend their respective terms for a further three years ending 31 December 2011. All the other terms and conditions of the original agreements shall remain unchanged;

• (2) the entering into by the Group of the Products and Services Mutual Supply and Guarantees Provision Agreement (which, together with the agreements listed in paragraph (1) above are hereinafter collectively referred to as the “Non-exempt Continuing Connected Transactions”), which shall, commencing from 1 January 2009, substitute the existing Internal Connected Transactions Agreement and the relevant supplemental agreement which will expire after 31 December 2008 (“Internal CT Agreement”). The Products and Services Mutual Supply and Guarantees Provision Agreement shall have a 3-year term expiring on 31 December 2011 and would govern the conduct of intra-group transactions. The Products and Services Mutual Supply and Guarantees Provision Agreement follows the principal terms, such as pricing, as now contained in the Internal CT Agreement, with inclusion of more detailed provisions on, for example, the range of products and scope of services;

• (3) the proposed annual caps for the Non-exempt Continuing Connected Transactions, as well as the annual caps (hereinafter collectively referred to as the “New Caps”) for the Agusta Agreement which is still subsisting and shall expire on 1 June 2025; and

• (4) the entering into by the Group of the supplemental agreements to the Land Use Rights Leasing Agreement and the Properties Leasing Agreement, so as to revise the size of the leased or rented properties and their annual rentals. The annual transaction amounts for the above transactions are below the applicable ratios under the size tests as calculated pursuant to Listing Rule 14A.34 and therefore are not required to be subject to approval by the Independent Shareholders. However, we are required to give an opinion on whether it is normal business practice for agreements of this type to be of a term longer than three years pursuant to the Listing Rule 14A.35(1).

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LETTER FROM SOMERLEY

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion on the Non-exempt Continuing Connected Transactions and the New Caps, we have taken into consideration the following principal factors and reasons:

1. Nature and counterparty to the Non-exempt Continuing Connected Transactions

The Non-exempt Continuing Connected Transactions will be conducted with the following three categories of connected persons of the Company:

(i) AVIC

Prior to the reorganisation (the “Reorganisation”) carried out for the purpose of facilitating listing of the Company’s shares on the Stock Exchange (the “Listing”) in October 2003, the businesses of the Group were carried out by AVIC II Group. As part of the Reorganisation, AVIC II, together with three other promoters, established the Company by injecting most of the assets and equity interests relating to the development and manufacturing of civilian aviation products, vehicles and vehicle engines into the Company. After the Reorganisation, there is cross-provision of materials, services, land and properties between the Group and the AVIC II which is not uncommon for a business which was spun off from a much bigger group. On 19 June 2008, the Company reported the proposed merger and reorganisation (“Proposed Merger”) of AVIC I and AVIC II into AVIC. AVIC Organizing Unit was established by the State Council of the PRC for the purpose of the Proposed Merger. As at the Latest Practicable Date, AVIC has not been established. During this transitional period, AVIC Organizing Unit is responsible for performing all necessary acts in connection with AVIC I, AVIC II and AVIC upon its establishment.

Transactions between the Group and AVIC would be carried out pursuant to the Mutual Supply Agreement, the Comprehensive Services Agreement and the Technology Cooperation Agreement.

Mutual Supply Agreement

Pursuant to the Mutual Supply Agreement, AVIC agrees to (i) supply parts and components for manufacturing of aviation and automobile products; (ii) provide various services including, but not limited to, import and export agency services, trial flying services, information technology and quality control services; and (iii) provide loan guarantees and leasing of equipments to the Group. The Group also agrees to (i) supply parts and components for manufacturing aviation and automobile products; and (ii) provide various services including, but not limited to, production power supply services, labour services and comprehensive production management services to AVIC.

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LETTER FROM SOMERLEY

The current automobile transactions covered by the Mutual Supply Agreement represent, among others, transactions between Changhe Auto, a subsidiary of the Company, and AVIC. Changhe Auto is currently engaging in manufacturing of automobiles which is making losses. Changhe Auto has entered into an agreement with AVIC Organising Unit whereby Changhe Auto would acquire the entire equity interests of Shanghai Aviation Electric Co., Ltd. (“Shanghai Aviation Electric”) and Lanzhou Wanli Aviation Electrical Co., Ltd. (“Lanzhou Aviation Electrical”) from AVIC. Such acquisition would partly be satisfied by Changhe Auto transferring all of its automobile assets to AVIC (the “Asset Swap”). The above transactions constitute discloseable and connected transactions of the Company and are subject to independent shareholders’ approval at an extraordinary general meeting of the Company to be held on 15 December 2008. Shareholders shall refer to the circular of the Company dated 3 November 2008 for details of the proposed acquisitions and our letter of advice in respect of the same.

It is expected that after completion of the Asset Swap, the automobile transactions to be conducted under the Mutual Supply Agreement would be insignificant, and therefore the Mutual Supply Agreement would principally comprise transactions in respects of aviation products.

Comprehensive Services Agreement

Pursuant to the Comprehensive Services Agreement, AVIC Group agrees to provide certain social welfare and supporting services to the Group including, but not limited to, cultural, educational and hygiene services, staff training and recreational services, withholding and payment for social welfare funds and housing provident funds, management services for retired staff, fire safety, security and greenery services.

Technology Cooperation Agreement

Pursuant to the Technology Cooperation Agreement, the parties agree, among other things, (i) that the Company will engage AVIC to develop new technologies for the Group; (ii) that AVIC will engage the Group to develop new technologies and (iii) the parties will jointly develop new technologies. Such development projects are mainly related to aviation products.

(ii) intra-group transactions

This refers to transactions conducted among members of the Group. They are now conducted pursuant to the terms of the Internal CT Agreement and shall, effective from 1 January 2009, be governed by the Products and Services Mutual Supply and Guarantees Provision Agreement. These transactions are expected to comprise:

• (1) supply of principally vehicle engines and the associated parts and components by Dongan Engine to Hafei Auto;

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LETTER FROM SOMERLEY

• (2) supply of principally vehicle engines and the associated parts and components by Dongan Motor to Hafei Auto; and

• (3) supply of principally parts and components for manufacturing vehicle engines by Dongan Motor to Dongan Engine.

Dongan Engine, Hafei Auto and Dongan Motor are all non-wholly owned subsidiaries of the Company. Since AVIC II has a more than 10% interest in each of Dongan Engine and Hafei Auto, Dongan Engine and Hafei Auto are both connected persons of the Company as defined under the Listing Rules. Dongan Motor is, however, not a connected person of the Company under the Listing Rules, because AVIC II has no direct interest in Dongan Motor. Shares of Dongan Motor are listed on the Shanghai Stock Exchange.

Apart from provision of vehicle engines and the associated parts and components, the Group also agrees, under the Products and Services Mutual Supply and Guarantees Provision Agreement, to grant guarantees in favour of Hafei Auto and Dongan Engine for their bank loans.

(iii) with a joint venture partner

Besides developing its own technology, the Group also develops products using technology developed by international market players. Usually a joint venture is formed between the Group and such technology provider, which becomes a connected person of the Company under certain circumstances. The Agusta Agreement falls under that category. The Agusta Agreement was entered into between Agusta S.p.A. and Changhe Agusta, which is a joint venture established between the Group and Agusta S.p.A. on 2 June 2005. Pursuant to the Agusta Agreement, Agusta S.p.A. agrees to supply helicopter parts and components, as well as technical assistance, to Change Agusta. The principal business of Changhe Agusta is to manufacture helicopters using parts and components supplied by Agusta S.p.A.

Pricing basis of the Non-exempt Continuing Connected Transactions

• (I) Mutual Supply Agreement, Comprehensive Services Agreement and Products and Services Mutual Supply and Guarantees Provision Agreement

Transactions conducted under the Mutual Supply Agreement, the Comprehensive Services Agreement and the Products and Services Mutual Supply and Guarantees Provision Agreement would be charged on the following bases:

• (i) at the government-prescribed price (if any); if none, then at the government guidance price (if any);

• (ii) if there is neither a government-prescribed price nor a government guidance price, then at the market price, which is defined as the price at which the same type of products or services are provided by independent third parties in their ordinary course of business; and

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LETTER FROM SOMERLEY

• (iii) where none of the above is applicable, the price is to be agreed between the relevant parties for the provision of the above products or services, which shall be the reasonable cost incurred in providing the same plus not more than 8% (in the case of the Mutual Supply Agreement and the Products and Services Mutual Supply and Guarantees Provision Agreement) or 3% (in the case of the Comprehensive Services Agreement) over such cost. Reasonable cost is defined as the cost confirmed by both parties after negotiations and is arrived at in accordance with the financial accounting standards of the PRC.

The 3% or 8% profit margins were determined after arm’s length negotiations between the Group and the AVIC or among members of the Group. A lower ceiling of 3% margin is agreed for the Comprehensive Services Agreement which involves provision of social welfare and supporting services by AVIC which are cost items to the Group. On the other hand, a higher ceiling of 8% margin is agreed for the Mutual Supply Agreement and the Products and Services Mutual Supply and Guarantees Provision Agreement which involves cross-provision of materials and services between the Group and AVIC or among members of the Group and both parties are charged on a reciprocal basis which we consider fair.

In respect of the guarantees, the Group is currently providing guarantees in favour of Hafei Auto for the latter’s bank loans and it is expected that the Group would provide guarantees in favour of Dongan Engine in respect of the latter’s bank loans in the years of 2009 to 2011. The Group currently is not charging Hafei Auto for the provision of guarantees. The Directors have informed us that Hafei Auto has been servicing the bank debts and interest payments in a timely manner so that we have confidence that the loans will be kept current. Under the current PRC market practice, no fee is charged in respect of guarantees provided to members of a group. No security has been provided by the Group for such guarantees. Taking the above factors as a whole into account, we are of the view that such arrangement is justified.

• (II) Technology Cooperation Agreement

The pricing policy of the Technology Cooperation Agreement is as follows:

• (a) in the case of jointly developed projects, funding will be contributed in proportion to the two parties’ agreed percentage of ownership of the new technology;

• (b) if the Group appoints AVIC to develop new technologies for the Group’s business, the Group will provide the funding for the development; and

• (c) if the Group is appointed by AVIC to develop new technologies, AVIC will provide funding for such development.

As illustrated above, the pricing policy is cost based and applies reciprocally.

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LETTER FROM SOMERLEY

2. The New Caps

The following is a summary of the historical transaction amounts for each type of the Non-exempt Continuing Connected Transactions for each of the two financial years ended 31 December 2007 and 6 months ended 30 June 2008 as well as the respective proposed annual caps for each of the three financial years ending 31 December 2011:

		Historical figures	Historical figures		Estimated amount	Estimated amount
		(in RMB million)			(in RMB million)
				For the
			**6 **	months
		For the financial year		ended	**For the financial **		year
		ended 31 December		30 June	ending 31 December
Agreements		2006	2007	2008	2009	2010	2011
1	Mutual Supply
	Agreement
	(a) Annual
	expenditure	2,610	2,570	1,070	5,061	5,742	6,545
	(b) Annual revenue	4,840	4,830	1,650	7,851	9,513	10,534
2	Comprehensive
	Services Agreement
	Annual expenditure	61	132	48	155	160	170
3	Technology
	Cooperation
	Agreement
	(a) Annual
	expenditure	24	28	14	70	86	98
	(b) Annual revenue	18	20	8	40	52	63
4	Agusta Agreement
	Annual expenditure	—	85	20	140	350	350
5	Products and Services
	Mutual Supply and
	Guarantees Provision
	Agreement
	(a) Annual
	expenditure	271	160	85	180	170	155
	(b) Annual revenue	2,062	1,745	950	2,220	2,420	2,870
	(c) Annual amount of
	guarantees	1,810	1,820	1,833	2,290	1,960	1,850

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LETTER FROM SOMERLEY

The New Caps are in general estimated with reference to the projected sales and productions of the Group for the three financial years ending 31 December 2011. Set out below is the key contributing factors in setting the New Caps for individual agreements:

(I) Mutual Supply Agreement

As mentioned above, the Non-exempt Continuing Connected Transactions to be made under the Mutual Supply Agreement in the years of 2009 to 2011 is principally related to the Group’s aviation businesses.

The following sets out the principal factors contributing to the determination of the New Caps for the Mutual Supply Agreement:

• (a) indicative purchase orders for aircrafts and helicopters from the PRC Government

AVIC may purchase aircrafts and helicopters from the Group for fulfilment of some of the PRC Government orders for aircrafts and helicopters. The estimated amounts of this type of sales to AVIC are reflected in the revenue amounts of the New Caps for the Mutual Supply Agreement for the three years ending 31 December 2011. These sales would in turn necessitate purchases of aviation parts and components by the Group from AVIC. Such estimated purchases are reflected in the expenditure amounts of the New Caps for the Mutual Supply Agreement for the three years ending 31 December 2011. Expected increase in PRC Government orders for aircrafts and helicopters is indeed the principal factor contributing to the increase in the New Caps relative to the existing annual caps under the Mutual Supply Agreement.

• (b) transactions previously conducted between the Group and AVIC I

AVIC I is principally engaged in the development and manufacturing of aircrafts. There are sales and purchases of aviation products between the Group and AVIC I. AVIC I is currently not a connected person of the Company pursuant to the Listing Rules. However, AVIC I is being merged with AVIC II to form AVIC and therefore transactions currently being conducted between the Group and AVIC I would become Non-exempt Continuing Connected Transactions. This is another factor contributing to the increase in New Caps for the Mutual Supply Agreement.

• (c) transactions between Lanzhou Aviation Electrical and the Group

Lanzhou Aviation Electrical supplies aviation products to the Group, AVIC I and AVIC II. Now that Lanzhou Aviation Electrical is a wholly owned subsidiary of AVIC II, transactions between the Group and Lanzhou Aviation Electrical constitute Non-exempt Continuing Connected Transactions and are conducted under the Mutual Supply Agreement. After completion of the Asset Swap, transactions between the Group and Lanzhou Aviation Electrical (which by then would be a subsidiary of the Company) would cease to be governed by the Mutual Supply Agreement, but instead transactions between Lanzhou Aviation Electrical and AVIC (which comprise AVIC I and AVIC II) would become governed by the Mutual Supply Agreement. Based on the

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LETTER FROM SOMERLEY

sales projection of Lanzhou Aviation Electrical for the three years ending 31 December 2011, the aggregate value of transactions conducted between Lanzhou Aviation Electrical and AVIC is higher than that of transactions conducted between Lanzhou Aviation Electrical and the Group and therefore the Asset Swap would result in an increase in the revenue amount of the New Caps for the Mutual Supply Agreement.

(II) Comprehensive Services Agreement

The New Caps for the social welfare and supporting services to be provided under the Comprehensive Services Agreement are determined based on the expected inflation rate in the PRC and the increase in labour costs to be incurred by the Group as a result of business development.

(III) Technology Cooperation Agreement

The New Caps for the Technology Cooperation Agreement are determined based on the estimated expenditure and revenue to be generated from the existing and expected future projects being or to be undertaken by the Group and AVIC which include, for example, the on-going research projects involving developments of the advanced utility helicopters, the modified helicopter models and the advanced trainer jets.

(IV) The Agusta Agreement

The increase in the New Caps on the expenditures to be incurred by the Group pursuant to the Agusta Agreement is mainly determined on the basis of the indicative purchase orders directly received from customers for the helicopters manufactured by Changhe Agusta using the parts and components provided by Agusta S.p.A.

(V) Products and Services Mutual Supply and Guarantees Provision Agreement

As mentioned in the above paragraph headed “Nature and counterparty to the Non-exempt Continuing Connected Transactions”, this agreement is expected to cover transactions as regards purchases of vehicles engines and associated parts and components by Hafei Auto from Dongan Motor and Dongan Engine; and purchases of vehicle engine parts and components by Dongan Engine from Dongan Motor. For the purpose of determining the New Caps, purchases by Hafei Auto from Dongan Engine are counted as revenues from the perspective of Dongan Engine (sales to Hafei Auto) and counted as expenditures from the perspective of Hafei Auto (purchases from Dongan Engine). Purchases from Dongan Motors by either Hafei Auto or Dongan Engine are all counted as revenues under the historical transaction amounts and the proposed New Caps.

The New Caps for the transactions under this agreement is principally determined with reference to the estimated sales and product mix of Hafei Auto and Dongan Engine, which in turn lead to the corresponding purchases of vehicle engines and associated parts and components (in the case of Hafei Auto), or vehicle engines parts and components (in the case of Dongan Engine). It is expected that Hafei Auto’s sales of vehicle models using engines produced by Dongan Motor

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LETTER FROM SOMERLEY

(which are principally mini-size vehicles) and Dongan Engine’s sales of vehicle engines using engine parts and components produced by Dongan Motor would increase, while sales of vehicle models using vehicle engines produced by Dongan Engine would decrease. This explains the decreasing trend of the expenditure amount of the New Caps for the Products and Services Mutual Supply and Guarantees Provision Agreement, which reflects the estimated purchases by Hafei Auto from Dongan Engine. The same factor also contributed to the increasing trend of the revenue amount of the New Caps for the Products and Services Mutual Supply and Guarantees Provision Agreement, which principally reflects the estimated purchases by Hafei Auto from Dongan Motor.

The New Caps for the provision of guarantees under the Products and Services Mutual Supply and Guarantees Provision Agreement are estimated to be RMB1,850 million for the three years ending 31 December 2011 in respect of guarantee to be provided in favour of Hafei Auto, and RMB440 million, RMB110 million and RMB nil for the years ending 31 December 2009, 2010 and 2011 respectively for the expected guarantees to be provided in favour of Dongan Engine. The New Caps for guarantee amounts for Hafei Auto are estimated with reference to the outstanding guarantees granted to Hafei Auto totalling RMB1,833 million as at 30 June 2008. Based on our discussion with the management of the Group, the New Caps for guarantee amounts for Dongan Engine are estimated with reference to the future business requirement in respect of the redevelopment of certain production facilities of Dongan Engine in 2009 to be financed by bank loans. As such funding requirement for redevelopment is expected to be gradually reduced using internal resources by Dongan Engine, the relevant bank loans balance and thus the guarantees to be provided by the Group is expected to decrease accordingly.

The above illustrates that the New Caps are principally derived from the Group’s sales and production projection for the years of 2009 to 2011. The Group’s principal businesses comprise the aviation segment and the automobile segment. The sales and production projection in respect of the aviation segment is largely driven by the PRC government’s indicative orders. The New Caps for the automobile segment are principally derived from the estimated production projection of Hafei Auto and Dongan Engine which are mainly engaged in manufacturing of vehicles or their engines. In preparing the projection for 2009 to 2011, Hafei Auto and Dongan Engine have not commissioned an independent market research and they have developed the projection principally with reference to the management’s knowledge of the sales trend of their product types and models, as well as the possible rise in production cost due to factors such as inflation.

In assessing the reasonableness of the New Caps, we have reviewed the sales and production projection for the years of 2009 to 2011 and discussed with the management of the Group the basis and assumptions of such projection, which we consider reasonable. In coming to our view, we have not been assisted by any independent market research consultants. Based on the above analysis, we are of the view that the New Caps for each of the Non-exempt Continuing Connected Transactions have been determined by the Board with due care and are fair and reasonable and approval of the same is in the interests of the Company and the Shareholders as a whole. Generally speaking, in our opinion, it is in the interest of the Group for the New Caps to be as accommodating to the Group as possible (within reason). Provided that the pricing for the Non-exempt Continuing Connected Transactions is fair and reasonable and the conduct of those transactions would be subject to annual review by the independent non-executive Directors and auditors of the Company (as discussed below) as required

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under the Listing Rules, the Group would have flexibility in conducting its businesses if the New Caps are tailored to future business growth. This is particularly so for transactions conducted with AVIC, which involve aviation products as it is unlikely that the Group can secure purchase orders of this type directly from the government of the PRC.

Shareholders should note that the New Caps should not be construed as an assurance or forecast by the Company of the future revenues of the Group.

1. Reasons for terms of the Land Use Rights Leasing Agreement and the Properties Leasing Agreement being in excess of three years

At the time of the Reorganisation, certain land and properties used by the Group were not injected into the Group because title transfer would require payment of significant fees and taxes by the Group under the applicable PRC law and regulations and State policy. As a result, the Land Use Rights Leasing Agreement (which involved leasing of AVIC’s properties to the Group) and the Properties Leasing Agreement (which involved leasing of properties between the Group and AVIC) were entered into between the Group and the AVIC II Group before the Listing so that both parties could have continued use of the areas that they had been occupying prior to the Reorganisation. The Land Use Rights Leasing Agreement was entered into by the Group on 30 April 2003 and has a term of 20 years expiring on 29 April 2023, while the Properties Leasing Agreement was dated 30 April 2003 and has a term of 10 years expiring on 29 April 2013.

Rentals for the land and buildings leased by the Group to or from AVIC are revised every three years with reference to market rentals as assessed by an independent valuer. The annual rentals for the years of 2009 to 2011 were determined on the basis of the market rentals as determined by Vigers Appraisal & Consulting Ltd. which is independent of the Company and its connected persons. It is, in our opinion, in the mutual interest of the Group and AVIC that both parties may have long-term use of the properties and land to ensure smooth operation of their businesses.

The following is a list of the long-term leasing agreements for land and properties entered into by Hong Kong listed companies with their parent companies that we have reviewed, which covers the period commencing from 1 January 2007 up to and including the Latest Practicable Date:

					Date of prospectus/
					circulars/
Parties	Nature of transaction		Term		announcements
New World Development	➣	Lease of properties	➣	15 years	16 September 2008
Company Limited
(stock code: 17)
SJM Holdings Limited	➣	Lease of properties	➣	11 years and	26 June 2008
(stock code: 880)				9 months
Shandong Chenming Paper	➣	Lease of land	➣	46-50 years	4 June 2008
Holdings Limited (stock code: 1812)	➣	Lease of properties	➣	10-46 years

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LETTER FROM SOMERLEY

					Date of prospectus/
					circulars/
Parties	Nature of transaction		Term		announcements
Maoye International	➣	Lease of properties	➣	12 years	21 April 2008
Holdings Limited
(stock code: 848)
China Railway	➣	Lease of land	➣	20 years	29 February 2008
Construction Corporation Ltd (stock code: 1186)	➣	Lease of properties	➣	10 years
PCCW Limited	➣	Lease of properties	➣	15 years	4 January 2008
(stock code: 8)
EYANG Holdings (Group)	➣	Lease of land	➣	9 years and	11 December 2007
Co., Limited				8 months
(stock code: 117)
China National Materials	➣	Lease of land	➣	3-40 years	7 December 2007
Co., Ltd
(stock code: 1893)	➣	Lease of buildings	➣	1-20 years
Ming Fai International	➣	Lease of land and	➣	20 years	22 October 2007
Holdings Limited		properties
(stock code: 3828)
Bosideng International	➣	Lease of properties	➣	20 years	27 September 2007
Holdings Ltd
(stock code: 3998)
Hidili Industry	➣	Lease of properties	➣	5 years	10 September 2007
International
Development Limited
(stock code: 1393)
New World Department	➣	Lease of properties	➣	2-20 years	28 June 2007
Store China Limited
(stock code: 825)
Beijing Jingkelong	➣	Lease of properties	➣	10-20 years	29 June 2007
Company Limited
(stock code: 814)
Jiahua Stores Holdings	➣	Lease of properties	➣	15 years	8 May 2007
Limited
(stock code: 602)
China CITIC Bank	➣	Lease of properties	➣	2 months-	16 April 2007
Corporation Limited				14 years
(stock code: 998)
China Huiyuan Juice	➣	Lease of properties	➣	5 years	8 February 2007
Group Limited
(stock code: 1886)

Sources: The announcements, prospectus and circulars of the respective companies from the website of the Stock Exchange.

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LETTER FROM SOMERLEY

Based on the above table, we are of the view that it is normal business practice for such land and properties leasing arrangements to be of a duration longer than three years.

4. Annual review of the Continuing Connected Transactions

The procedures to be put in place for the annual review of the Non-exempt Continuing Connected Transactions as set out in the Listing Rules are as follows:

• (i) the independent non-executive Directors will review the Non-exempt Continuing Connected Transactions and confirm in the annual report and accounts that the Non-exempt Continuing Connected Transactions have been entered into:

• (a) in the ordinary and usual course of business of the Group;

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

• (c) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interests of the Shareholders as a whole;

• (ii) the auditors will review the Non-exempt Continuing Connected Transactions and issue a letter to the board confirming that the Non-exempt Continuing Connected Transactions:

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

• (b) are conducted in accordance with the pricing policies of the Group in respect of transactions involving provision of goods and services by the Group;

• (c) have been entered into in accordance with the relevant agreements governing the transactions; and

• (d) have not exceeded the relevant annual caps;

the Board must state in the annual report whether the auditors have made such confirmation in relation to the Non-exempt Continuing Connected Transactions; and

• (iii) the Company will promptly notify the Stock Exchange and publish an announcement if it believes that the independent non-executive Directors and/or the auditors will not be able to issue the aforesaid confirmation.

The independent non-executive Directors and the auditors of the Company have reviewed the continuing connected transactions of the Group conducted during the two years ended 31 December

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LETTER FROM SOMERLEY

2007 and have provided the above confirmations as required under the Listing Rules, details of which are contained in the Company’s annual reports for the years of 2006 and 2007. The required confirmations in respect of the Non-exempt Continuing Connected Transactions conducted during the financial year of 2008 would be included in the Company’s 2008 annual report.

As the value of the Non-exempt Continuing Connected Transactions would be restricted by way of the New Caps and the conduct of those transactions would be reviewed by the independent non-executive Directors and auditors of the Company as mentioned above, we are of the view that there exist appropriate measures to govern the future execution of the Non-exempt Continuing Connected Transactions and to safeguard the interests of the Independent Shareholders.

RECOMMENDATION

Based on the above principal factors and reasons, we consider the terms of the Non-exempt Continuing Connected Transactions and the New Caps fair and reasonable to the Independent Shareholders. It is also justified for the Land Use Rights Leasing Agreement and the Properties Leasing Agreement to be of a duration in excess of three years. We also consider that the Non-exempt Continuing Connected Transactions would be entered into on normal commercial terms, in the ordinary and usual course of business and in the interests of the Company and the Shareholders as a whole. We therefore advise the Independent Board Committee to recommend the Independent Shareholders, and we ourselves advise the Independent Shareholders, to vote in favour of the resolutions in relation to the above to be proposed at the EGM.

Yours faithfully, for and on behalf of SOMERLEY LIMITED Sylvia Leung Director

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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. (a) THE INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE IN THE SECURITIES OF THE COMPANY

As at the Latest Practicable Date, none of the Directors, supervisors and chief executive of the Company has any interests and short positions in the Shares, underlying Shares and debentures of the Company (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 kept by the Company, 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.

(b) THE INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE IN THE SECURITIES OF THE COMPANY’S ASSOCIATED CORPORATIONS

As at the Latest Practicable Date, none of the Directors, supervisors and chief executive of the Company has any interests and short positions in the Shares, underlying Shares and debentures of any associated corporations of the Company (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 kept by the Company, 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.

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GENERAL INFORMATION

APPENDIX I

3. THE INTERESTS OF SUBSTANTIAL SHAREHOLDERS IN THE SECURITIES OF THE COMPANY

As at the Latest Practicable Date, so far as is known to any Directors, supervisors or chief executive of the Company, the following persons (not being a Director, chief executive or a supervisor of the Company) had interests 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
				to the same		to share	Nature of
Name of	Class of		Number of		class of	capital in	shares
Shareholders	shares	Capacity	shares		shares	issue	held
AVIC II	Domestic	Beneficial owner	2,835,305,636		95.66%	61.06%	Long
	shares						position
European Aeronautic	H shares	Interests of a party	232,180,425		13.82%	5%	Long
Defence and		to an agreement to					position
Space Company		acquire interests in
— EADS N.V.		a listed corporation
		under S.317(1)(a)
		and S.318
The Hamon	H shares	Investment	204,580,000		12.18%	4.41%	Long
Investment Group		manager					position
Pte Limited
The Bank of New	H shares	Interests of	101,412,000		6.04%	2.18%	Long
York Mellon		controlled					position
Corporation		corporations
Montpelier Asset	H shares	Investment	90,420,000		5.38%	1.95%	Long
Management		manager					position
Limited
Mellon Financial	H shares	Interests of	85,706,000		5.10%	1.85%	Long
Corporation		controlled					position
		corporations

Save as disclosed above, as at the Latest Practicable Date, the Company had not been notified of any interests and short positions in 5% or more than 5% of shares and underlying shares of the Company which had been recorded in the register kept by the Company under section 336 of the SFO.

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GENERAL INFORMATION

APPENDIX I

4. DIRECTORS’ SERVICE CONTRACTS

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

5. 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 2007, being the date to which the latest published 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.

As at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement 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.

6. CONSENT AND QUALIFICATION OF EXPERT

The following are the qualifications of the professional adviser who has given the Company an opinion or provided advice referred to or contained in this circular:

Name Qualifications Somerley A corporation licensed to carry out type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO.

As at the Latest Practicable Date, Somerley has no shareholding interest in any member of the Group or any right 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 assets which has been, since 31 December 2007, being the date to which the latest published 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 consents to the issue of this circular with the inclusion of its letter, report and references to its name included in this circular in the form and context in which it is included.

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GENERAL INFORMATION

APPENDIX I

7. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and their respective associates have any interests in a business which competes or may compete with the business of the Group.

8. NO MATERIAL ADVERSE CHANGE

Since 31 December 2007, being the date to which the latest published audited accounts of the Company have been made up, there have been no material adverse changes in the financial and trading position of the Group.

9. MISCELLANEOUS

• (a) Mr. Yan Lingxi and Mr. Ip Kun Wan, Kiril are the company secretaries of the Company. Mr. Ip Kun Wan, Kiril is a solicitor of the High Court of Hong Kong.

• (b) The registered address of the Company is situated at No. 16 Hong Da Bei Lu, Beijing Economic-Technological Development Area, Beijing, PRC. The registrar of the Company is Computershare Hong Kong Investor Services Limited, whose address is at 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.

10. 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 in Hong Kong up to and including Monday, 15 December 2008:

• (a) the agreements governing the Continuing Connected Transactions;

• (b) the letter dated 10 November 2008 from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 32 of this circular;

• (c) the letter of advice dated 10 November 2008 from Somerley to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 33 to 46 of this circular; and

• (d) the written consent of Somerley referred to in paragraph 6 of this Appendix.

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APPENDIX II

PROCEDURES FOR DEMANDING A POLL

According to Article 66 of the Articles of Association of the Company and subject to the rules prescribed by the Stock Exchange or any relevant stock exchange from time to time, at a general meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or after the voting by a show of hands) a poll is demanded by the chairman of the meeting; or at least two shareholders present in person or by proxies entitled to vote; or any shareholder or shareholders present (including by proxy) representing alone or in aggregate not less than one-tenth of the total voting rights at the meeting.

Unless a poll is demanded, a declaration by the chairman of the meeting that a resolution has been carried on a show of hands, and an entry to that effect in the minutes of the meeting shall be conclusive evidence of that fact without proof of the number or proportion of the votes recorded in favour of or against the resolutions carried at the meeting. The demand for a poll may be withdrawn by the party who has made such demand.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [172 x 55] intentionally omitted <==

中國航空科技工業股份有限公司 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 IS HEREBY GIVEN that an Extraordinary General Meeting (“EGM”) of AviChina Industry & Technology Company Limited (the “Company”) will be held at 10:00 a.m. on Monday, 15 December 2008, at Avic Hotel, No. 10 Yi, Central East Third Ring Road, Chaoyang District, Beijing, the People’s Republic of China to consider and approve the following resolutions. Unless otherwise indicated, capitalized terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 10 November 2008 (the “Circular”):

ORDINARY RESOLUTIONS

1. “ THAT

• (a) The entering into of the Supplemental Agreements to the non-exempt Existing Continuing Connected Transactions agreements, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreement (A.2), the Technology Cooperation Agreement (A.5) and the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10) to extend their respective term for a further period of three years ending 31 December 2011 be and are hereby approved; and

• (b) the board of directors of the Company be and is hereby authorized to do all such further acts and things and execute such further documents and take all such steps which in its opinion may be necessary, desirable and expedient to implement and/or give effect to the non-exempt Existing Continuing Connected transactions.”

• “ THAT

• (a) the continuation of the non-exempt Continuing Connected Transactins (as defined in the Circular) which required approval by the Independent Shareholders under the Listing Rules, namely, the Mutual Supply Agreement (A.1), the Comprehensive Services Agreeemnt (A.2), the Technology Cooperation Agreement (A.5), the Agusta Agreement (A.9), the Products and Services Mutual Supply and Guarantees Provision Agreement (A.10), and the proposed annual caps for such continuing connected transactions in respect thereof for each of the three financial years ending 31 December 2011 be and are hereby approved; and

• For identification purposes only

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NOTICE OF EXTRAORDINARY GENERAL MEETING

• (b) the board of directors of the Company be and is hereby authorized to do all such further acts and things and execute such further documents and take all such steps which in its opinion may be necessary, desirable and expedient to implement and/or give effect to the non-exempt Continuing Connected transactions.”

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

Hong Kong, 10 November 2008

Notes:

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

Pursuant to Article 38 of the Articles of Association of the Company, the H Share register of the Company will be closed from Saturday, 15 November 2008 to Monday, 15 December 2008 (both days inclusive) during which period no transfer of H shares will be effected. Holders of the Company’s H Shares and Domestic Shares whose name appear on the Company’s Register of Members on Monday, 15 December 2008 are entitled to attend the EGM and to vote in the EGM.

In order to qualify to attend and vote in 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 4:30 p.m. on Friday, 14 November 2008 at Rooms 1712-1716, 17th Floor, Hopewell Centre, 183 Queens’ Road East, Wanchai, Hong Kong.

• (2) Registration procedures for attending the EGM

• (a) The shareholder or its proxies shall produce his identification proof. If a corporation shareholder’s legal representative or any other person authorized by the board of directors or other governing body of such corporate shareholder attends the EGM, such legal representative or other person shall produce his proof of identity, and proof of designation as legal representative and the valid authorization document of the board of directors or other governing body of such corporate shareholder (as the case may be) to prove the identity and authorisation of that legal representative or other person.

• (b) Holders of H Shares or Domestic Shares who wish to attend the EGM must complete the reply slip to confirm 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 Tuesday, 25 November 2008.

• (c) Shareholders may deliver the reply slip by post or facsimile to the correspondence address designated by the Company.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

• (3) 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 wish 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. Whether or not the voting is conducted by way of a show of hands or by way of a poll, the results of the voting shall be calculated on the basis of number of shares relevant.

• (c) Any shareholder shall appoint its proxy in writing. The instrument appointing a proxy must be in writing signed under the hand of the appointer or his attorney duly authorized in writing. If the appointer is a body corporate, the instrument shall be affixed with the seal of the body corporate or shall be signed by the directors of the board of the body corporate or by attorneys duly authorized. If the instrument is signed by an attorney of the appointer, the power of attorney authorizing the 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.

• (4) 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.O. Box 1655, Beijing, the PRC (Postal code: 100009) Company: Telephone No.: 86-10-64094835/06 Facsimile No.: 86-10-64094826 Attention: Mr. Xu Bin/Mr. Wang Yongzhi

• (5) The ordinary resolutions will be voted by poll by the Independent Shareholders.

As at the date of this notice, the Board of the Company comprises executive directors Mr. Lin Zuoming, Mr. Tan Ruisong and Mr. Wu Xiandong, and non-executive directors Mr. Gu Huizhong, Mr. Xu Zhanbin, Mr. Geng Ruguang, Mr. Zhang Xinguo, Mr. Li Fangyong, Mr. Wang Yong, Mr. Maurice Savart as well as independent non-executive directors Mr. Guo Chongqing, Mr. Li Xianzong and Mr. Lau Chung Man, Louis.

— 54 —