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

Nov 2, 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)

DISCLOSEABLE AND CONNECTED TRANSACTIONS:

I. ACQUISITION OF AVIATION ASSETS BY CHANGHE AUTO AND DISPOSAL OF AUTOMOBILE ASSETS AND ISSUANCE OF CONSIDERATION SHARES BY CHANGHE AUTO TO AVIC

AND

II. DEEMED DISPOSAL AND MATERIAL DILUTION OF INTEREST IN CHANGHE AUTO BY THE COMPANY

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

A letter from the Independent Board Committee is set out on pages 21 of this circular. A letter from Somerley to the Independent Board Committee and the Independent Shareholders is set out on pages 22 to 48 of this circular.

A notice convening an extraordinary general meeting (“EGM”) of AviChina Industry & Technology Company Limited to be held at 9:00 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 63 to 65 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 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 the EGM and voting in person if you so wish.

*For identification purpose only.

3 November 2008

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Letter from Somerley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix I — General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	49
Appendix II — Procedures for Demanding a Poll . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	53
Appendix III — Valuation Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	54
Notice of Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	63

— i —

DEFINITIONS

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

• “Acquisition”

the acquisition of Aviation Assets by Change Auto from AVIC (upon its establishment after completion of the proposed merger and reorganization) pursuant to the Acquisition Agreement

• “Acquisition Agreement” the agreement entered into between Changhe Auto and AVIC Organizing Unit on 9 October 2008 in relation to the Acquisition and disposal of the Automobile Assets together with the issue of the Consideration Shares by Changhe Auto to AVIC as consideration for the Acquisition

• ‘Automobile Assets’ all the automobile assets (including liabilities) of Changhe Auto to be transferred to AVIC pursuant to the Acquisition Agreement

• ‘Aviation Assets’ 100% equity interest in Shanghai Aviation Electric and Lanzhou Aviation Electrical to be transferred by AVIC, upon its establishment after completion of the proposed merger and reorganization, to Changhe Auto pursuant to the Acquisition Agreement

• “AVIC” Aviation Industry Corporation of China (中國航空工業集團公 司), to be established after completion of the proposed merger and reorganization of AVIC I and AVIC II and thereafter, will become the controlling shareholder of the Company

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

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

• “AVIC Organizing Unit” The organizing unit of Aviation Industry Corporation of China, which was established by the State Council of the PRC for the purpose of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC

“Board”

the board of directors of the Company

— 1 —

DEFINITIONS

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

• “Changhe Shares”

• the A shares of Changhe Auto which are listed on the Shanghai Stock Exchange

• “Changhe Suzuki” Jiangxi Changhe Suzuki Automobile Co., Ltd. (江西昌河鈴木 汽車有限責任公司), a sino-foreign joint venture held as to 41%, 10%, 25.1%, 20.9% and 3% of its interests being held by Changhe Auto, Jiangxi Changhe Aviation Industry Company Limited (a wholly-owned subsidiary of the Company), Suzuki Motor Corporation, Suzuki (China) Investment Co., Ltd. and OKAYA & Co., Ltd, respectively

• “Company”

AviChina Industry & Technology Company Limited

• “Completion” completion of the transactions contemplated under the Acquisition Agreement

• “Consideration” the consideration payable by Changhe Auto to AVIC pursuant to the Acquisition Agreement

• “Consideration Shares”

• no more than 74,625,174 new Changhe Shares to be issued by Changhe Auto to AVIC at the issue price of RMB5.18 (equivalent to approximately HK$5.89) for partial settlement of the Consideration. The number of Consideration Shares and issue price are subject to the relevant PRC authorities such as SASAC approving the valuation of Aviation Assets and Automobile Assets. However, the aggregate value of the Consideration Shares to be issued should be no less than RMB386,558,400 (equivalent to approximately HK$439,475,700)

• “CSRC”

• China Securities Regulatory Commission (中國證券監督管理 委員會)

• “DeveChina”

• DeveChina International Assets Evaluation Co., Ltd., a qualified PRC valuer whose ultimate beneficial owner(s) are third parties independent of the Company and the Company’s connected parties

• “Directors”

• the director(s) of the Company

• “Domestic Shares”

ordinary shares in the share capital of the Company, with a nominal value of RMB1.00 each, which are subscribed for in Renminbi by PRC nationals and/or PRC incorporated entities

— 2 —

DEFINITIONS

“EGM” an extraordinary general meeting of the Company to be held on Monday, 15 December 2008 to consider, ratify, approve and confirm the entering into of the Acquisition Agreement and the transactions contemplated thereunder “Group” the Company and its subsidiaries

“H Shares” overseas listed foreign invested shares of nominal value RMB1.00 each in the ordinary share capital of the Company, which were traded on the Stock Exchange in HK dollars “HK$” or “HK dollars” Hong Kong dollar, the lawful currency of the Hong Kong Special Administrative Region, the PRC

• “Hong Kong” Hong Kong Special Administrative Region, the PRC

“Independent Board Committee” an independent board committee comprising independent non-executive Directors, namely, Mr. Guo Chongqing, Mr. Li Xianzong and Mr. Lau Chung Man, Louis “Independent Shareholders” shareholders (other than AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization) and its associates) of the Company who are not required to abstain from voting on the resolution(s) to be proposed at the EGM to approve the Acquisition Agreement under the Listing Rules “Lanzhou Aviation Electrical” Lanzhou Wanli Aviation Electrical Co., Ltd. (蘭州萬里航空機 電有限責任公司), a wholly-owned subsidiary of AVIC II, and will become a wholly-owned subsidiary of AVIC after completion of the proposed merger and reorganization of AVIC I and AVIC II

• “Latest Practicable Date” 28 October 2008, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (as amended from time to time)

• “Ministry of Commerce” Ministry of Commerce of the PRC “PRC” People’s Republic of China “RMB” Renminbi, the lawful currency of the PRC

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DEFINITIONS

“SASAC”	Stated-owned Assets Supervision and Administration
	Commission of the State Council (國務院國有資產監督管理
	委員會)
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the laws
	of Hong Kong) as amended from time to time
“Shanghai Aviation Electric”	Shanghai Aviation Electric Co., Ltd. (上海航空電器有限
	公司), a wholly-owned subsidiary of AVIC I, and will become
	a wholly-owned subsidiary of AVIC after completion of the
	proposed merger and reorganization of AVIC I and AVIC II
“Shareholders”	holders of Domestic Shares and holders of H Shares
“Somerley”	Somerley Limited, 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, is the
	independent financial adviser to the Independent Board
	Committee and the Independent Shareholders
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Valuation Date”	31 May 2008, being the base date on which the Aviation
	Assets and the Automobile Assets were valued

All amounts in RMB have been translated into HK$ at the rate of HK$1.00 = RMB0.87959 in this circular for illustration purpose.

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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

3 November 2008

To the Shareholders:

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTIONS:

I. ACQUISITION OF AVIATION ASSETS BY CHANGHE AUTO AND DISPOSAL OF AUTOMOBILE ASSETS AND ISSUANCE OF CONSIDERATION SHARES BY CHANGHE AUTO TO AVIC

AND

II. DEEMED DISPOSAL AND MATERIAL DILUTION OF INTEREST IN CHANGHE AUTO BY THE COMPANY

* For identification purpose only.

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LETTER FROM THE BOARD

INRODUCTION

Reference is made to the announcement of the Company dated 13 October 2008.

The purpose of this circular is to provide you with more information relating to, among other things, (1) further details of the transactions contemplated under the Acquisition Agreement including (a) the Acquisition; and (b) the deemed disposal and material dilution of the interest in Changhe Auto by the Company; (2) the letter from the Independent Board Committee; and (3) the recommendation from the independent financial adviser on the connected transactions which will be constituted by the transactions contemplated under the Acquisition Agreement.

BACKGROUND

On 9 October 2008, Changhe Auto, a non-wholly owned subsidiary of the Company, and AVIC Organizing Unit entered into the Acquisition Agreement. Pursuant to the Acquisition Agreement, Changhe Auto conditionally agreed to purchase and AVIC Organizing Unit on behalf of AVIC I and AVIC II (and AVIC, upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) conditionally agreed to sell the Aviation Assets to Changhe Auto.

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 of 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 the Acquisition Agreement with Changhe Auto. Upon the establishment of AVIC, AVIC Organizing Unit will be replaced by AVIC as a party to the subject transaction, and the rights and obligations on the part of AVIC Organizing Unit under the Acquisition Agreement will be automatically transferred to AVIC. The Acquisition Agreement contains a provision to the effect that upon establishment of AVIC, the Acquisition Agreement will be binding on AVIC. The Company has obtained a legal opinion from its PRC legal counsel dated 8 October 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.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, AVIC I and AVIC II are legally bound by the Acquisition Agreement. As AVIC II is a connected person of the Company by virtue of its being the controlling shareholder of the Company prior to completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC, the subject transactions therefore constitute connected transactions of the Company.

As of the Latest Practicable Date, 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 of the Latest Practicable Date, AVIC I mainly focuses on development and manufacture of military aeroplanes.

ACQUISITION AGREEMENT

1. Date:

9 October 2008

1. Parties:

Changhe Auto (Purchaser); and

AVIC Organizing Unit on behalf of AVIC I and AVIC II (and AVIC, upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC) (Vendor)

1. Aviation Assets to be acquired:

100% equity interest in each of Shanghai Aviation Electric and Lanzhou Aviation Electrical currently owned by AVIC I and AVIC II, respectively. After completion of the proposed merger and reorganization of AVIC I and AVIC II, both Shanghai Aviation Electric and Lanzhou Aviation Electrical will be wholly-owned by AVIC. The aggregated net asset value of Shanghai Aviation Electric and Lanzhou Aviation Electrical is RMB793,177,100 (equivalent to approximately HK$901,757,800), comprised as to RMB449,603,400 (equivalent to approximately HK$511,151,100) being the net asset value of Shanghai Aviation Electric and as to RMB343,573,700 (equivalent to approximately HK$390,606,600) being the net asset value of Lanzhou Aviation Electrical.

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LETTER FROM THE BOARD

1. Consideration:

The aggregate Consideration for the acquisition of the Aviation Assets shall be RMB793,177,100 (equivalent to approximately HK$901,757,800), which is determined based on the net asset value of the Aviation Assets at the Valuation Date, as evaluated by DeveChina using asset-based method. Such valuation does not constitute a profit forecast. The Consideration will be satisfied by Changhe Auto:

• (1) transferring to AVIC (upon its establishment after the proposed merger and reorganization of AVIC I and AVIC II) all the Automobile Assets (including liabilities) of Changhe Auto valued at RMB406,618,700 (equivalent to approximately HK$462,282,100); and

• (2) issuing no more than 74,625,174 new Changhe Shares to AVIC (upon its establishment after the proposed merger and reorganization), credited as fully paid, at an issue price of RMB5.18 (equivalent to approximately HK$5.89) per Consideration Share for an aggregate amount of no less than RMB386,558,400 (equivalent to approximately HK$439,475,700), which was determined based on the weighted average price of Changhe Shares for the last 20 trading days on the Shanghai Stock Exchange immediately preceding the date of suspension of trading of Changhe Shares on the Shanghai Stock Exchange on 18 June 2008. The number of Consideration Shares and issue price are subject to the relevant PRC authorities such as SASAC approving the valuation of Aviation Assets and Automobile Assets.

As far as the valuation reports of the Automobile Assets and Aviation Assets are concerned, the Company applied to the Stock Exchange on 13 October 2008 for a waiver from the strict compliance with Rule 14A.59(6) of the Listing Rules for inclusion of the full valuation reports in the circular on the bases, among others, that the valuation reports are prepared by a qualified PRC valuer in Chinese language, it would be costly and overly burdensome for the full valuation reports be translated into English for inclusion in this circular, taking into account the three full valuation reports together have over 2,400 pages including the relevant appendices and attachments. The Stock Exchange considered the waiver application and granted a waiver from strict compliance with Rule 14A.59(6) of the Listing Rules to the Company on 30 October 2008 such that abstracts of the valuation reports in respect of Automobile Assets and Aviation Assets will be included in this circular on the conditions that (i) the full valuation reports in Chinese language will be made available on the Stock Exchange’s website as well as the Company’s website and proper reference to the Stock Exchange’s website will be included in this circular; and (ii) the full valuation reports will also be made available for public inspection.

Abstracts of the full valuation reports, which contain, among other things, key information such as introduction on the valuation undertaken by an independent valuer, namely, DeveChina, the valuation methods adopted by DeveChina, summaries of the assets appraisal results and professional qualification of DeveChina are set out in Appendix III to this circular. The Company is of the view that the information set out in the relevant abstracts will provide the Shareholders with the key information relating to the valuation of the Automobile Assets and the Aviation Assets. As the full

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LETTER FROM THE BOARD

valuation reports in Chinese language will be made available on the Stock Exchange’s website and the Company’s website, and will also be made available for public inspection, the Company is of the view that notwithstanding the full valuation reports are not included in this circular, the Shareholders are still provided with sufficient information relating to the valuation of Automobile Assets and Aviation Assets, which will enable them to assess the impact of the subject transactions and make informed decisions at the EGM. The Company also confirms that the information contained in this circular is accurate and complete in all material aspects, and is not misleading pursuant to Rule 2.13(2) of the Listing Rules.

5. Conditions Precedent

Completion of the Acquisition Agreement is conditional upon, among other things, fulfillment of the following conditions:

• (1) the Acquisition Agreement having been executed by the legal representative or authorized person(s) of the parties;

• (2) the establishment of AVIC in accordance with the relevant laws and regulations of the PRC;

• (3) Changhe Auto having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association, and fully complied with the requirements under the relevant PRC laws and regulations including, without limitation, obtaining the approval(s) by the relevant PRC authorities such as SASAC and CSRC;

• (4) approval by the independent shareholders of Changhe Auto of the transactions contemplated under the Acquisition Agreement;

• (5) the Company having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association and fully complied with the requirements under the Listing Rules;

• (6) AVIC (upon its establishment after completion of the proposed merger and reorganization) having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association or constitutive documents, and fully complied with the requirements under the relevant PRC laws and regulations including, without limitation, obtaining the approval(s) by the relevant PRC authorities such as SASAC and CSRC;

• (7) the valuation reports on the underlying assets of Aviation Assets proposed to be acquired by Changhe Auto and the Automobile Assets of Changhe Auto proposed to be transferred to AVIC (upon its establishment after completion of the proposed merger and reorganization) having been approved by and/or filed with SASAC;

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LETTER FROM THE BOARD

• (8) change in the shareholding of Changhe Suzuki (a joint venture held as to 41% by Changhe Auto), being part of the Automobile Assets to be transferred to AVIC (upon its establishment after completion of the proposed merger and reorganization), having been approved by the Ministry of Commerce;

• (9) the transactions contemplated under the Acquisition Agreement having been reviewed and approved by CSRC; and

• (10) waiver from CSRC in relation to AVIC’s acquisition of new shares in Changhe Auto through general offer having been obtained.

INFORMATION RELATING TO THE AVIATION ASSETS, THE AUTOMOBILE ASSETS AND THE CONSIDERATION SHARES

The aggregate Consideration for the acquisition of the Aviation Assets shall be RMB793,177,100 (equivalent to approximately HK$901,757,800).

The Aviation Assets, which comprise 100% equity interest in each of Shanghai Aviation Electric and Lanzhou Aviation Electrical, have been valued at an aggregate sum of RMB793,177,100 (equivalent to approximately HK$901,757,800), comprised as to approximately RMB449,603,400 (equivalent to approximately HK$511,151,100) being the net asset value of Shanghai Aviation Electric and as to approximately RMB343,573,700 (equivalent to approximately HK$390,606,600) being the net asset value of Lanzhou Aviation Electrical.

The Consideration of RMB793,177,100 (equivalent to approximately HK$901,757,800) will be satisfied by Changhe Auto (1) transferring to AVIC (upon its establishment after completion of the proposed merger and reorganization) all the Automobile Assets (including liabilities) of Changhe Auto, which have been valued at RMB406,618,700 (equivalent to approximately HK$462,282,100) representing the net asset value of Changhe Auto; and (2) issuing no more than 74,625,174 new Changhe Shares to AVIC (upon its establishment after completion of the proposed merger and reorganization), credited as fully paid, at an issue price of RMB5.18 (equivalent to approximately HK$5.89) per Consideration Share for an aggregate amount of no less than RMB386,558,400 (equivalent to approximately HK$439,475,700). The number of Consideration Shares and issue price are subject to the relevant PRC authorities such as SASAC approving the valuation of Aviation Assets and Automobile Assets.

The valuation of both the Aviation Assets and Automobile Assets is subject to the confirmation of SASAC. Should there be any change to these figures, the Company will make an announcement accordingly to report such change.

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LETTER FROM THE BOARD

Further information relating to the Aviation Assets, the Automobile Assets and the Consideration Shares are as follows:

1. Information relating to the Aviation Assets to be acquired by Changhe Auto

Shanghai Aviation Electric

As of the Latest Practicable Date, Shanghai Aviation Electric is a wholly-owned subsidiary of AVIC I and mainly engaged in the manufacture of aviation electrical engineering products and accessories. The assets of Shanghai Aviation Electric mainly comprise production workshops, equipment and machinery for manufacturing of aviation electrical engineering products and accessories. Upon completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC, Shanghai Aviation Electric will become a wholly-owned subsidiary of AVIC.

According to the financial statements of Shanghai Aviation Electric audited by Zhongrui Yuehua CPAs, a qualified PRC auditor, based on the Generally Accepted Accounting Principles in the PRC, as at 31 May 2008, the total assets and net asset value of Shanghai Aviation Electric amounted to RMB389,798,800 (equivalent to approximately HK$443,159,700) and RMB283,531,500 (equivalent to approximately HK$322,345,100), respectively.

As at 31 May 2008, the value of the total assets and the net asset value of Shanghai Aviation Electric, as evaluated by DeveChina, were RMB538,665,300 (equivalent to approximately HK$612,405,000) and RMB449,603,400 (equivalent to approximately HK$511,151,100), respectively.

For the five months ended 31 May 2008, the revenue and net profit of Shanghai Aviation Electric amounted to RMB126,920,700 (equivalent to approximately HK$144,295,300) and RMB27,756,300 (equivalent to approximately HK$31,556,000), respectively.

The profit before tax and net profit of Shanghai Aviation Electric were RMB38,235,200 (equivalent to approximately HK$43,469,300) and RMB30,602,600 (equivalent to approximately HK$34,791,900), respectively as set out in the financial statements of Shanghai Aviation Electric for the financial year ended 31 December 2007 prepared in accordance with the Generally Accepted Accounting Principles in the PRC. The profit before tax and net profit of Shanghai Aviation Electric were RMB19,356,400 (equivalent to approximately HK$22,006,200) and RMB16,318,000 (equivalent to approximately HK$18,551,800), respectively as set out in the financial statements of Shanghai Aviation Electric for the financial year ended 31 December 2006 prepared in accordance with the Generally Accepted Accounting Principles in the PRC.

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LETTER FROM THE BOARD

Lanzhou Aviation Electrical

As of the Latest Practicable Date, Lanzhou Aviation Electrical is a wholly-owned subsidiary of AVIC II and mainly engaged in the manufacture of aviation electrical engineering products and accessories. The assets of Lanzhou Aviation Electrical mainly comprise production workshops, equipment and machinery for manufacturing of aviation electrical engineering products and accessories. Upon completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC, Lanzhou Aviation Electrical will become a wholly-owned subsidiary of AVIC.

According to the financial statements of Lanzhou Aviation Electrical audited by Zhongrui Yuehua CPAs, a qualified PRC auditor, based on the Generally Accepted Accounting Principles in the PRC, as at 31 May 2008, the total assets and net asset value of Lanzhou Aviation Electrical amounted to RMB422,728,400 (equivalent to approximately HK$480,597,100) and RMB281,869,800 (equivalent to approximately HK$320,455,900), respectively.

As at 31 May 2008, the value of the total assets and the net asset value of Lanzhou Aviation Electrical, as evaluated by DeveChina, were RMB484,432,300 (equivalent to approximately HK$550,747,800) and RMB343,573,700 (equivalent to approximately HK$390,606,600), respectively.

For the five months ended 31 May 2008, the revenue and net profit of Lanzhou Aviation Electrical amounted to RMB76,830,900 (equivalent to approximately HK$87,348,500) and RMB19,687,400 (equivalent to approximately HK$22,382,500), respectively.

The profit before tax and net profit of Lanzhou Aviation Electrical were RMB34,348,300 (equivalent to approximately HK$39,050,400) and RMB27,271,700 (equivalent to approximately HK$31,005,000), respectively as set out in the financial statements of Lanzhou Aviation Electrical for the financial year ended 31 December 2007 prepared in accordance with the Generally Accepted Accounting Principles in the PRC. The profit before tax and net profit of Lanzhou Aviation Electrical were RMB24,394,500 (equivalent to approximately HK$27,733,900) and RMB19,386,500 (equivalent to approximately HK$22,040,400), respectively as set out in the financial statements of Lanzhou Aviation Electrical for the financial year ended 31 December 2006 prepared in accordance with the Generally Accepted Accounting Principles in the PRC.

2. Information relating to the Automobile Assets to be transferred to AVIC

The Automobile Assets to be transferred by Changhe Auto to AVIC upon its establishment after the proposed merger and reorganization pursuant to the Acquisition Agreement principally comprise the followings:

• (1) 41% equity interest in Changhe Suzuki, a joint venture established by Changhe Auto and Suzuki Motor Corporation in 1995, which is principally engaged in the manufacture and sale of Liana, Beidouxing and Landy series automobiles;

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LETTER FROM THE BOARD

• (2) 100% equity interest in Hefei Changhe Automobile Co., Ltd., a wholly-owned subsidiary of Changhe Auto incorporated in 2007, which is principally engaged in the manufacture and sale of Ideal and Furuida series automobiles;

• (3) 100% equity interest in Jiangxi Changhe Automobile Import & Export Co., Ltd., a wholly-owned subsidiary of Changhe Auto incorporated in 2007, which is principally engaged in importing parts and components for manufacturing automobile products by Changhe Auto and exporting products manufactured by Changhe Auto;

• (4) 43% equity interest in Sichuan Changhe Lantian Automobile Sales and Services Co. Ltd., which is principally engaged in the sale of vehicles products and provision of related services;

• (5) 35% equity interest in Guangdong Changhe Automobile Sales and Services Co. Ltd., which is principally engaged in the sale of vehicles products and provision of related services; and

• (6) Other assets currently owned by Changhe Auto such as (a) its automobile parts and components processing workshops and machinery and the major assets of its various departments; (b) all the assets of its Hefei branch, which is principally engaged in the sale of automobiles and provision of related services; and (c) all the assets of its Jingdezhen branch, which is principally engaged in the sale of automobiles and provision of related services within Jingdezhen of Jiangxi Province, the PRC.

The Automobile Assets to be transferred to AVIC upon its establishment after the proposed merger and reorganization comprise the entire assets and business operations of Changhe Auto.

According to the financial statements of Changhe Auto audited by Zhongrui Yuehua CPAs, a qualified PRC auditor, based on the Generally Accepted Accounting Principles in the PRC, as at 31 May 2008, the total assets and net asset value of the Automobile Assets to be transferred by Changhe Auto amounted to RMB2,373,038,500 (equivalent to approximately HK$2,697,891,600) and RMB290,624,200 (equivalent to approximately HK$330,408,700), respectively.

Based on the valuation by DeveChina, the net asset value of the Automobile Assets proposed to be transferred by Changhe Auto amounts to RMB406,618,700 (equivalent to approximately HK$462,282,100).

For the five months ended 31 May 2008, the revenue and net loss of Changhe Auto amounted to RMB754,990,600 (equivalent to approximately HK$858,343,800) and RMB160,311,400 (equivalent to approximately HK$182,257,000), respectively.

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LETTER FROM THE BOARD

The loss before tax and net loss of Changhe Auto were RMB580,055,100 (equivalent to approximately HK$659,460,800) and RMB587,597,400 (equivalent to approximately HK$668,035,600), respectively, as set out in the financial statements of Changhe Auto for the financial year ended 31 December 2007. The loss before tax and net loss of Changhe Auto were RMB235,617,100 (equivalent to approximately HK$267,871,500) and RMB240,259,100 (equivalent to approximately HK$273,149,000), respectively, as set out in the financial statements of Changhe Auto for the financial year ended 31 December 2006.

3. Consideration Shares to be issued pursuant to the Acquisition Agreement

Pursuant to the Acquisition Agreement, the Consideration for the Acquisition will be satisfied partly by Changhe Auto issuing no more than 74,625,174 new Changhe Shares to AVIC (upon its establishment after completion of the proposed merger and reorganization), credited as fully paid, at an issue price of RMB5.18 (equivalent to approximately HK$5.89) per Consideration Share for an aggregate amount of no less than RMB386,558,400 (equivalent to approximately HK$439,475,700). The number of Consideration Shares and issue price are subject to the relevant PRC authorities such as SASAC approving the valuation of Aviation Assets and Automobile Assets. The price per Consideration Share of RMB5.18 (equivalent to approximately HK$5.89) was determined based on the weighted average price of Changhe Shares for the last 20 trading days on the Shanghai Stock Exchange immediately preceding the date of suspension of trading of the Changhe Shares on the Shanghai Stock Exchange on 18 June 2008. The Consideration Shares proposed to be issued by Changhe Auto will be listed on the Shanghai Stock Exchange, and will be allotted and issued on completion date of the Acquisition Agreement.

The Consideration Shares to be issued shall rank pari passu in all respects with the Changhe Shares in issue on the date of allotment and issue of such Consideration Shares. The Consideration Shares are subject to a lock-up period of 36 months.

As at the Latest Practicable Date, Changhe Auto has a total of 410,000,000 Changhe Shares in issue. The number of Consideration Shares to be issued under the Acquisition Agreement is 74,625,174, representing approximately 18.20% of the existing issued share capital of Changhe Auto and approximately 15.40% of the issued share capital of Changhe Auto as enlarged by the issue of the Consideration Shares.

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LETTER FROM THE BOARD

EFFECTS OF THE ACQUISITION AND FINANCIAL IMPLICATIONS

The table below sets out the shareholding structure of Changhe Auto before and upon Completion (based on the issue price of RMB5.18 (equivalent to approximately HK$5.89) per Consideration Share):

		Approximate		Approximate
	Number of	% of the	Number of	% of the
	Changhe	issued share	Changhe	issued share
	Shares before	capital before	Shares upon	capital upon
Shareholder of Changhe Auto	Completion	Completion	Completion	Completion
The Company	241,987,957	59.02	241,987,957	49.93
AVIC*	—	—	74,625,174	15.40
Sub-total:	241,987,957	59.02	316,613,131	65.33
Public holders of
Changhe Auto	168,012,043	40.98	168,012,043	34.67
Total	410,000,000	100	484,625,174	100

* To be established

Note:

The above calculation is based on the assumption that 74,625,174 Consideration Shares will be issued to AVIC as part of the Consideration for the acquisition of the Aviation Assets.

Based on the valuation results by DeveChina, upon Completion, the net asset value held by the Group in Changhe Auto will increase by approximately RMB156,047,000 (equivalent to approximately HK$177,408,800). Such increase is calculated with reference to the change in the attributable net asset values of Changhe Auto held by the Company before and after the proposed Acquisition based on the difference between the net asset value of Changhe Auto attributable to the Company before the proposed issuance of Consideration Shares (which is 59.02% � net asset value of Changhe Auto as appraised by DeveChina) and the net asset value of Changhe Auto attributable to the Company after the proposed issuance of Consideration Shares (which is 49.93% � net asset value of Changhe Auto upon Completion as appraised by DeveChina).

Based on the audited net book values attributable to the shareholders of Changhe Auto, Shanghai Aviation Electric and Lanzhou Aviation Electrical as at 31 May 2008 prepared under the Generally Accepted Accounting Principles in the PRC, upon Completion, the net asset value held by the Group in Changhe Auto will increase by approximately RMB 109,000,000 (equivalent to approximately HK$123,921,400), which represents the difference between the net asset value of Changhe Auto attributable to the Company before the Acquisition (which is 59.02% � current net asset value attributable to shareholders of Changhe Auto) and the net asset value of Changhe Auto attributable to the Company after the Acquisition (which is 49.93% � the enlarged net asset value attributable to shareholders of Changhe Auto upon Completion). The exact amount of the increase in net asset value held by the Group in Changhe Auto would be calculated on the basis of the relevant figures as at the date of Completion prepared under the International Financial Reporting Standards, and therefore would be different from the above estimated amount of RMB109,000,000 (equivalent to approximately HK$123,921,400). As mentioned below, merger accounting will be used to account for the Acquisition, and therefore the actual amount of increase in net asset value to be reflected in the financial statements of the Group upon Completion will be calculated on the basis of net book values of the relevant entities as at Completion.

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LETTER FROM THE BOARD

In relation to the disposal of Automobile Assets, there is no expected gain or loss to the Group because the Automobile Assets (as revalued by DeveChina), plus the Consideration Shares to be issued, will be replaced with the Aviation Assets of the same value (as revalued by DeveChina).

For the accounting entries, as the assets to be swapped both belong to AVIC I and AVIC II which will be reorganized to form AVIC and therefore using merger accounting, the book carrying values of Automobile Assets and Aviation Assets will be used. Since this is a transaction with shareholder, any differences between the book carrying value of Automobile Assets plus the Consideration Shares and the book carrying value of the Aviation Assets, will be dealt with in the movement to reserves and will not be included in the consolidated income statement of the Group.

The following diagrams set out the relevant shareholding structure before and after the acquisition of Aviation Assets and disposal of the Automobile Assets:

==> picture [449 x 330] intentionally omitted <==

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

Before After
AVIC I AVIC II AVICNote 1
61.06%
100% 100% 61.06%
Shanghai LanzhouAviation The Company
Aviation Electric Electrical The Company
approximately approximately
59.02% Note 2 Note 2
15.40% 49.93%
Changhe Auto
Changhe Auto
100% 100%
Shanghai LanzhouAviation
Aviation Electric Electrical
----- End of picture text -----

Notes:

1. After completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC, Shanghai Aviation Electric and Lanzhou Aviation Electrical will become wholly-owned subsidiaries of AVIC.

2. The percentage of shareholding is determined on the assumption that 74,625,174 new Changhe Shares were issued to AVIC at an issue price of RMB5.18 (equivalent to approximately HK$5.89) per Consideration Share.

In order to ensure management continuity of the existing business of Shanghai Aviation Electric and Lanzhou Aviation Electrical, all the senior management and employees of Shanghai Aviation Electric and Lanzhou Aviation Electrical will remain in their existing work positions upon Completion.

— 16 —

LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE ACQUISITION

As a result of certain adverse factors, such as strong competition in the PRC’s automobile market, the automobile business of Changhe Auto has been suffering severe losses for the preceding two consecutive years, which adversely affected the overall performance and annual results of the Company. In addition, pursuant to the relevant PRC regulatory provisions, Changhe Auto may be delisted from the Shanghai Stock Exchange if it continues to make losses for three consecutive years. Upon Completion, Changhe Auto will have disposed of all its automobile assets and business and become a company specializing in the manufacture of aviation electrical engineering products and accessories. The Directors consider that the transactions contemplated under the Acquisition Agreement can improve the financial situation of Changhe Auto and enhance its profit-making capability so as to increase the investment value of the Company. The Directors also consider that the disposal of Changhe Auto’s Automobile Assets will enable the Group to focus on in its aviation business and thereby strengthen its market position in the PRC aviation industry. The Directors (including the independent non-executive Directors) are of the opinion that the terms of the Acquisition Agreement are fair and reasonable and in the interests of the Company and its shareholders as a whole. Whether the Group will continuously engage in automobile business upon Completion will depend on any future reorganization plan that the Group may have and the automobile market conditions as a whole. As at the Latest Practicable Date, the Group had no such reorganization plan in relation to its automobile business.

As at the Latest Practicable Date, AVIC Organizing Unit (or AVIC, upon its establishment after completion of the proposed merger and reorganization) had no other plan to acquire additional shares in Changhe Auto.

LISTING RULES IMPLICATIONS

Since the applicable percentage ratios in respect of the transactions contemplated under the Acquisition Agreement are more than 5% but less than 25%, pursuant to Chapter 14 of the Listing Rules, the Acquisition Agreement is subject to reporting and announcement requirements.

Prior to the establishment of AVIC, AVIC II is the controlling shareholder of the Company, holding 61.06% 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 of the Company, holding 61.06% equity interest in the Company and a connected person of the Company pursuant to Chapter 14A of the Listing Rules. As Changhe Auto is a non-wholly owned subsidiary of the Company which is owned as to 59.02% by the Company and AVIC will become a connected person of the Company after completion of the proposed merger and reorganization, the transactions contemplated under the Acquisition Agreement will constitute connected transactions of the Company, which will be subject to approval by Independent Shareholders.

Upon Completion, the equity interest held by the Company in Changhe Auto will be diluted from 59.02% to approximately 49.93%, and AVIC (upon its establishment after completion of the proposed merger and reorganization) will directly hold approximately 15.40% equity interest in Changhe Auto. Such dilution will constitute a deemed disposal and a material dilution of the interest in Changhe Auto

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LETTER FROM THE BOARD

held by the Company pursuant to Rules 14.29 and 13.36(1)(a)(ii) of the Listing Rules as well as a discloseable transaction under the Listing Rules. To ensure that Changhe Auto will continue to remain as a subsidiary of the Company after the reorganization of its business operations from automobile business to aviation business, the Company and AVIC Organizing Unit on behalf of AVIC II (and AVIC, upon its establishment after completion of the proposed merger and reorganization) entered into an agreement on 9 October 2008 whereby subsequent to Completion, AVIC (upon its establishment after completion of the proposed merger and reorganization) undertakes to vote the voting rights held by it in Changhe Auto in accordance with the instructions of the Company. Accordingly, upon Completion, Changhe Auto’s accounts will continue to be consolidated in the group accounts of the Company and Changhe Auto will remain to be a subsidiary of the Company. This accounting treatment has been consulted and confirmed with the Company’s auditors.

Save as disclosed herein, there is no prior transaction between the Group and AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization) which requires to be aggregated pursuant to Rules 14.22 and 14A.25 of the Listing Rules.

GENERAL

Information on Parties

Information on the Company

The Company is mainly engaged in the research, development, manufacture and sales of vehicles and aviation products. The Company is held as to 61.06% by AVIC II, being the controlling shareholder of the Company. After completion of the proposed merger and reorganization, the Company will be owned as to 61.06% by AVIC.

Information on Changhe Auto

Changhe Auto is a joint stock limited company whose shares are listed on the Shanghai Stock Exchange. It is mainly engaged in the development, manufacture and sale of automobiles. As at the Latest Practicable Date, Changhe Auto has issued 410,000,000 shares in total. The Company, being the controlling shareholder of Changhe Auto, holds 241,987,957 issued shares in Changhe Auto, accounting for 59.02% of the total issued shares of Changhe Auto. The remaining 40.98% of the total shares issued is held by the public.

Information on AVIC Organizing Unit

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 to form AVIC. Prior to the establishment of AVIC, AVIC Organizing Unit is responsible for performing all necessary acts in connection with AVIC I, AVIC II and AVIC. AVIC Organizing Unit will be replaced by AVIC after completion of the proposed merger and reorganization.

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LETTER FROM THE BOARD

Information on AVIC I

AVIC I is directly owned and controlled by the State Council of the PRC. As of the Latest Practicable Date, AVIC I mainly focuses on development and manufacture of military aeroplanes.

Information on 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. 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. AVIC II is mainly focuses on development and manufacture of helicopters, trainers and general purpose aeroplanes as well as non-aviation products such as vehicle engines, parts and components.

Information on Shanghai Aviation Electric

As of the Latest Practicable Date, Shanghai Aviation Electric is a wholly-owned subsidiary of AVIC I and mainly engaged in the manufacture of aviation electrical engineering products and accessories. Upon completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC, Shanghai Aviation Electric will become a wholly-owned subsidiary of AVIC.

Information on Lanzhou Aviation Electrical

As of the Latest Practicable Date, Lanzhou Aviation Electrical is a wholly-owned subsidiary of AVIC II and mainly engaged in the manufacture of aviation electrical engineering products and accessories. Upon completion of the proposed merger and reorganization of AVIC I and AVIC II to form AVIC, Lanzhou Aviation Electrical will become a wholly-owned subsidiary of AVIC.

EGM

The notice of the EGM to be held at 9:00 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 63 to 65 of this circular, at which an ordinary resolution will be proposed to approve the terms and conditions of the Acquisition Agreeement and the supplemental agreement thereto, which include, among other matters, (i) the acquisition of the Aviation Assets by Changhe Auto from AVIC I and AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) at an aggregate Consideration of RMB793,177,100 (equivalent to approximately HK$901,757,800); (ii) the transfer of the Automobile Assets (including liabilities) by Changehe Auto to AVIC (upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) in satisfaction of part of the Consideration as to RMB406,618,700; and (iii) the issue by Changehe Auto of no more than 74,625,174 new Changhe Shares to AVIC (upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) at an issue price of RMB5.18 per Consideration Share, credited as fully paid, in satisfaction of the remaining portion of the Consideration as to an amount of no less than RMB386,558,400 (equivalent to approximately HK$439,475,700).

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LETTER FROM THE BOARD

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), 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 resolution 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.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee which is set out on page 21 of this circular. The Directors and the Independent Board Committee, having taken into account the advice of Somerley, consider that the terms of the Acquisition Agreement are fair and reasonable and the Acquisition Agreement is in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors and the Independent Board Committee recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM.

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

Yours faithfully, By Order of the Board Lin Zuoming Chairman

— 20 —

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> 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)

3 November 2008

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular (the “Circular”) dated 3 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 whether the terms of the Acquisition Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole. Somerley has been appointed to advise the Independent Board Committee and Independent Shareholders in respect of the terms of the Acquisition Agreement.

We wish to draw your attention to the letter from the Board set out on pages 5 to 20 of the Circular and the letter from Somerley set out on pages 22 to 48 of the Circular.

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

Yours faithfully,

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

* For identification purpose only.

— 21 —

LETTER FROM SOMERLEY

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

3 November 2008

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

THE ACQUISITION AGREEMENT

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with the Acquisition Agreement entered into between Changhe Auto, a subsidiary of the Company, and the AVIC Organizing Unit on 9 October 2008. Details of the Acquisition Agreement are contained in the circular to the Shareholders dated 3 November 2008 (the “Circular”), of which this letter forms a part. Unless the context otherwise requires, capitalized terms used in this letter shall have the same meanings as those defined in the Circular.

The Company is owned as to approximately 61.06% by AVIC II. On 19 June 2008, the Company reported the proposed merger and reorganization (“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 of the date of the Circular, AVIC has not been established. In the meantime, AVIC Organizing Unit is responsible for performing all necessary acts in connection with AVIC I, AVIC II and AVIC upon its establishment.

On 9 October 2008, AVIC Organizing Unit entered into the Acquisition Agreement with Changhe Auto. Upon the establishment of AVIC, AVIC Organizing Unit will be replaced by AVIC as a party to the subject transaction, and the rights and obligations on the part of AVIC Organizing Unit under the Acquisition Agreement will be assumed by AVIC. The transactions contemplated under the Acquisition Agreement between Changhe Auto and AVIC will constitute connected transactions of the Company, and will therefore be subject to approval by Independent Shareholders by way of poll at the EGM pursuant to the Listing Rules.

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 advise the Independent Shareholders in respect of the Acquisition Agreement entered into between Changhe Auto and AVIC Organizing Unit. We, Somerley Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

— 22 —

LETTER FROM SOMERLEY

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 made 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 (including Changhe Auto), AVIC Organizing Unit, AVIC I or AVIC II or their group companies including Shanghai Aviation Electric and Lanzhou Aviation Electrical.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In considering whether the terms of the Acquisition Agreement are fair and reasonable in so far as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons set out below:

1. Principal terms of the Acquisition Agreement

(i) Subject matters and Consideration

Changhe Auto is currently a 59.02% owned subsidiary of the Company and its shares are listed on the Shanghai Stock Exchange. Changhe Auto is engaged in the development, manufacture and sale of automobiles. Changhe Auto suffered severe losses for each of the two consecutive years ended 31 December 2007. On 9 October 2008, Changhe Auto entered into the Acquisition Agreement whereby Changhe Auto agreed to purchase and AVIC Organizing Unit on behalf of AVIC I and AVIC II (and AVIC, upon its establishment after completion of the Proposed Merger) agreed to sell to Changhe Auto the 100% equity interest in Shanghai Aviation Electric and Lanzhou Aviation Electrical, which are both engaged in the manufacturing and sale of aviation electrical engineering products and accessories. The operations of both companies are profitable.

The aggregate Consideration payable by Changhe Auto pursuant to the Acquisition Agreement is expected to be RMB793,177,100 (equivalent to approximately HK$901,757,800). The RMB793,177,100 (the “Aviation Transaction Value”) is equivalent to the valuation of the 100% equity interest of Shanghai Aviation Electric and Lanzhou Aviation Electrical as at 31 May 2008 made by DeveChina. DeveChina is a qualified PRC valuer whose ultimate beneficial owners are third parties independent of the Company and its connected parties. The Consideration shall be satisfied by Changhe Auto in the manners as follows:

• (a) by transferring to AVIC all of its operating assets (including liabilities) which are principally applied for manufacturing automobiles. The Automobile Assets (after netting off liabilities) had a value of RMB406,618,700 (the “Automobile Transaction Value”) (equivalent to approximately HK$462,282,100) as at 31 May 2008 as assessed by DeveChina; and

— 23 —

LETTER FROM SOMERLEY

• (b) the shortfall of RMB386,558,400 shall be satisfied by Changhe Auto issuing 74,625,174 new Changhe Shares to AVIC (upon its establishment after the Proposed Merger), credited as fully paid, at an issue price of RMB5.18 (equivalent to approximately HK$5.89) per Consideration Share.

Both the valuation of the Automobile Assets to be disposed of by Changhe Auto and that of the Aviation Assets to be acquired by Changhe Auto would have to be approved by and/or filed with SASAC. It is therefore possible that their valuation, and therefore the consideration for the Acquisition Agreement, would have to be adjusted as the PRC rules require that transfer of the Aviation Assets and the Automobile Assets which are state assets must be at or above net asset values. Any adjustment to the Consideration will be satisfied by adjusting the number of Consideration Shares to be issued by Changhe Auto. However, the Directors have informed us that it is currently anticipated that there will be no material difference between the respective Aviation Transaction Value and the Automobile Transaction Value (together the “Transaction Values”) and the valuation of the Aviation Assets and the Automobile Assets as approved or accepted by SASAC. As a result, we present our analysis throughout our letter on the basis that there would be no changes to the Transaction Values.

The Consideration Shares proposed to be issued by Changhe Auto to AVIC will be listed on the Shanghai Stock Exchange and in accordance with the relevant PRC rules and regulations, they shall be subject to a lock-up period of 36 months.

(ii) Conditions precedent

Completion of the Acquisition Agreement is conditional upon, among other things, fulfillment of the following conditions:

• (1) the Acquisition Agreement having been executed by the legal representative or authorized person(s) of the parties;

• (2) the establishment of AVIC in accordance with the relevant laws and regulations of the PRC;

• (3) Changhe Auto having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association, and fully complied with the requirements under the relevant PRC laws and regulations including, but not limited to, obtaining the approval(s) by the relevant PRC authorities such as SASAC and CSRC;

• (4) approval by the independent shareholders of Changhe Auto of the transactions under the Acquisition Agreement;

• (5) the Company having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association and fully complied with the requirements under the Listing Rules;

• (6) AVIC (upon its establishment after completion of the Proposed Merger) having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association or constitutional documents, and fully complied with the requirements under the relevant PRC laws and regulations including, without limitation, obtaining the approval(s) by the relevant PRC authorities such as SASAC and CSRC;

— 24 —

LETTER FROM SOMERLEY

• (7) the valuation reports on the underlying assets of Aviation Assets proposed to be acquired by Changhe Auto and the Automobile Assets of Changhe Auto proposed to be transferred to AVIC (upon its establishment after completion of the Proposed Merger) having been approved by and/or filed with SASAC;

• (8) the change in the shareholding of Changhe Suzuki (a joint venture held as to 41% by Changhe Auto), being part of the Automobile Assets to be transferred to AVIC (upon its establishment after completion of the Proposed Merger), having been approved by the Ministry of Commerce;

• (9) the transactions contemplated under the Acquisition Agreement having been reviewed and approved by CSRC; and

• (10) a waiver from CSRC in relation to AVIC’s acquisition of new shares in Changhe Auto through general offer having been obtained, so that Changhe Auto may issue the Consideration Shares to AVIC without making a general offer for all the Changhe Shares not already owned or agreed to be subscribed by AVIC, which obligation would otherwise arise as a result of the Completion.

2. Reasons and benefits from entering into the Acquisition Agreement

As a result of strong competition in the PRC automobile market and the increase in raw material and energy costs, the automobile business of Changhe Auto suffered severe losses for each of the two consecutive years ended 31 December 2007, which in turn adversely affected the overall performance and annual results of the Group.

On 9 October 2008, Changhe Auto entered into the Acquisition Agreement with AVIC, whereby Changhe Auto will sell all of its existing loss-making operations, and become engaging in, through Shanghai Aviation Electric and Lanzhou Aviation Electrical, manufacturing of aviation electrical engineering products and accessories which is profitable. Completion of the Acquisition Agreement would therefore significantly improve the operating and financial position of Changhe Auto.

Pursuant to the PRC rules and regulations, if Changhe Auto announced net losses again in its 2008 full year results, which will have to be published latest by April 2009, trading in Changhe Shares on the Shanghai Stock Exchange would be suspended, and Changhe Auto would be delisted if its 2009 published full year results, to be announced latest by April 2010, do not report a profit. It is currently expected that completion of the Acquisition Agreement would not take place in 2008 and Changhe Shares would be suspended from trading if Changhe Auto’s automobile business performance for the year of 2008 continues to report a loss. On the other hand, operations of Shanghai Aviation Electric and Lanzhou Aviation Electrical are currently profitable. If Changhe Auto is able to achieve a profit in 2009, Changhe Shares would resume trading after release of the 2009 full year results in around April 2010. Completion of the Acquisition Agreement would therefore benefit Changhe Auto by avoiding the delisting risk that Changhe Auto would likely face in the absence of the proposed asset swap to be implemented through the Acquisition.

— 25 —

LETTER FROM SOMERLEY

With regard to the Group, disposal of Changhe Auto’s Automobile Assets will enable it to focus on aviation business and thereby strengthen its market position in the PRC aviation industry. The Group is currently engaged in two segments, being the aviation and the automobile industries. As discussed in the section below headed “Business and financial information of the Group”, the aviation segment continuously contributes positively to the results of the Group; but on the other hand the automobile segment is still making losses.

3. Changes in shareholding structure of Changhe Auto

Completion of the Acquisition Agreement will result in a change in percentage of shareholdings in Changhe Auto held by the Company, AVIC (upon its establishment after completion of the Proposed Merger) and public shareholders. Set out below is the shareholding structure of Changhe Auto before and after the Completion, which is prepared on the basis that 74,625,174 new Changhe Shares would be issued to AVIC upon completion of the Acquisition Agreement:

Before Completion and the Proposed Merger

==> picture [439 x 247] intentionally omitted <==

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

AVIC II AVIC I
61.06% 100% 100%
Other The Company Lanzhou Aviation Shanghai Aviation
shareholders (note 1) Electrical Electric
40.98% 59.02%
Changhe Auto Aviation Assets
(note 2)
Automobile Assets
----- End of picture text -----

— 26 —

LETTER FROM SOMERLEY

After Completion and the Proposed Merger

==> picture [448 x 254] intentionally omitted <==

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

AVIC
61.06%
The Company
Other shareholders Automobile Assets
(note 1)
34.67% 49.93% 15.40%
Changhe Auto
(note 2)
100% 100%
Aviation Assets
Lanzhou Aviation Shanghai Aviation
Electrical Electric
----- End of picture text -----

Notes: (1) shares of the Company are listed on the Stock Exchange

(2) shares of Changhe Auto are listed on the Shanghai Stock Exchange

Upon Completion, the interest held by the Company in Changhe Auto will be reduced from approximately 59.02% to approximately 49.93%, as a result of the issue of the Consideration Shares by Changhe Auto. The Company has on 9 October 2008 entered into an agreement with AVIC Organizing Unit on behalf of AVIC I and AVIC II (and AVIC, upon its establishment after completion of the Proposed Merger) whereby AVIC (upon its establishment after completion of the Proposed Merger) undertakes that, subsequent to Completion, it will exercise the voting rights held by it in Changhe Auto in accordance with the instructions of the Company, and will procure that any persons acquiring shares of Changhe Auto from AVIC shall vote in accordance with the instructions of the Company. On this basis and given that the aggregate interest of the Company and AVIC in Changhe Auto will amount to over 50% of the equity interest of Changhe Auto, the results of Changhe Auto will continue to be consolidated into the accounts of the Group following the Completion. This accounting treatment has been confirmed by the Company’s auditor.

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LETTER FROM SOMERLEY

4. Business and financial information of the Group

The Company is a joint stock limited company incorporated in the PRC whose shares have been listing on the Stock Exchange since 2003. The Company is principally engaged in the development, manufacture and sales of aviation and automobile products and related components, with most of its turnovers coming from the PRC market. AVIC II currently has an approximately 61% equity interest in the Company. Following the completion of the Proposed Merger, the controlling interest in the Company currently held by AVIC II will be assumed by AVIC.

The businesses of the Group comprise principally the aviation segment and the automobile segment. Set out below is the condensed segment information of the Group for each of the two years ended 31 December 2007 and for the six months ended 30 June 2008 as extracted from the Group’s 2007 annual report and 2008 interim report:

Aviation Automobiles RMB’000 RMB’000 For the six months ended 30 June 2008 (unaudited) Operating results Turnover 1,573,262 6,505,471 Segment results 34,468 (1,468) Loss for the period Assets and liabilities Segment assets 9,015,785 12,560,859 Interests in associates 228,566 55,607 Segment liabilities (6,452,467) (9,553,694) Unallocated assets less liabilities Net assets Other segment information Capital expenditures 58,637 481,305 Depreciation 49,109 455,275 (Reversal of provision)/provision for impairment (3,253) 39,566

Total RMB’000 8,078,733 33,000 (132,838) 21,576,644 284,173 (16,006,161) 402,067 6,256,723 539,942 504,384 36,313

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LETTER FROM SOMERLEY

Aviation Automobiles RMB’000 RMB’000 For the year ended 31 December 2007 (audited) Operating results Turnover 5,327,408 11,213,237 Segment results 306,241 (852,840) Loss for the year Assets and liabilities Segment assets 8,855,603 12,812,702 Interests in associates 240,552 57,369 Segment liabilities (6,107,254) (9,517,197) Unallocated assets less liabilities Net assets Other segment information Capital expenditures 217,461 702,851 Depreciation 89,145 936,147 Provision for impairment 24,549 359,772 For the year ended 31 December 2006 (audited) Operating results Turnover 4,427,598 12,682,910 Segment results 375,063 (650,755) Loss for the year Assets and liabilities Segment assets 7,720,276 15,976,945 Interests in associates 192,339 55,628 Segment liabilities (5,119,222) (11,051,521) Unallocated assets less liabilities Net assets Other segment information Capital expenditures 157,655 1,045,909 Depreciation 70,266 857,847 Provision for impairment 30,248 75,706

Total RMB’000 16,540,645 (546,599) (848,344) 21,668,305 297,921 (15,624,451) 316,620 6,658,395 920,312 1,025,292 384,321 17,110,508 (275,692) (486,662) 23,697,221 247,967 (16,170,743) 347,667 8,122,112 1,203,564 928,113 105,954

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LETTER FROM SOMERLEY

As at 31 December 2007, the Group had audited consolidated net assets of approximately RMB6,658 million. Changhe Auto is not a material subsidiary of the Group in terms of asset size. As at 31 December 2007, Changhe Auto had audited consolidated net assets of approximately RMB451 million only. Please refer to the section below headed “Business and financial information of Changhe Auto” for further details.

As shown in the condensed segment analysis above, although sales contributed by the automobile segment represent a majority of the total sales of the Group, the automobile segment made losses for the two years ended 31 December 2007 and the six months ended 30 June 2008. On the other hand, the aviation segment was able to make a positive contribution to the results of the Group during the same period. For the two years ended 31 December 2007, the losses of the automobile segment amounted to approximately RMB651 million and RMB853 million respectively. These results were significantly affected by the Changhe Auto’s results, which recorded audited consolidated net losses amounting to approximately RMB240 million and RMB588 million respectively for the two years ended 31 December 2007.

As shown in the above table, the requirement for capital expenditures, the charge for depreciation and the provisions for impairment related to the automobile segment are significantly higher than that for the aviation segment.

5. Business and financial information of Changhe Auto

Changhe Auto has been listing on the Shanghai Stock Exchange since 2001. The Company currently has an approximately 59% equity interest in the Changhe Auto and its results and assets and liabilities are consolidated into the financial statements of the Group.

Changhe Auto is currently engaged in the development, manufacture and sale of automobiles in the PRC. Products of Changhe Auto include family cars, multi-purpose vehicles and minivans, which are traded under a number of brand names. One of the major investments of Changhe Auto is the 41% equity interests in Changhe Suzuki. Changhe Suzuki is a joint venture between Changhe Auto, Jiangxi Changhe Aviation Industry Company Limited (a wholly-owned subsidiary of the Company), Suzuki Motor Corporation and Okaya & Co., Ltd. Following the change of the accounting standard as regards criteria for consolidation of subsidiaries in the PRC which became effective on 1 January 2007, results and net assets of Changhe Suzuki ceased to be consolidated into the accounts of Changhe Auto. The 41% equity interests held by Changhe Auto in Changhe Suzuki is now equity accounted for in the financial statements of Changhe Auto.

The following table summarises the consolidated financial information of Changhe Auto, prepared in accordance with the Generally Accepted Accounting Principles in the PRC, for the nine months ended 30 September 2008, the five months ended 31 May 2008 and for the years ended 31 December 2007 and 2006 respectively, as extracted from the financial statements of Changhe Auto for the nine months ended 30 September 2008 and for the five months ended 31 May 2008, and the 2007 annual report. As mentioned above, the results and assets and liabilities of Changhe Suzuki ceased to be consolidated into the financial statements of Changhe Auto for the year of 2007, and retrospective

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adjustments have also been made to the 2006 comparative figures. The results and financial position of Changhe Auto for the years of 2006 and 2007 as shown below were extracted from the 2007 annual report of Changhe Suzuki, which were prepared on a de-consolidated basis.

Profit and loss

	Nine months	Five months
	ended	ended
	30 September	31 May	Year ended 31 December
	2008	2008	2007	2006
	RMB’000	RMB’000	RMB’000	RMB’000
	(unaudited)	(audited)	(audited)	(audited)
Turnover	1,321,085	754,991	1,245,983	2,337,870
Gross profit	50,696	16,288	12,506	134,509
	3.8%	2.2%	1.0%	5.8%
Provision for impairment	(6,211)	(6,938)	(71,555)	(29,409)
Operating loss	(264,023)	(161,235)	(635,631)	(268,813)
Loss before tax	(235,992)	(161,311)	(580,055)	(235,617)
Loss after tax	(235,992)	(161,311)	(587,597)	(240,259)

Changhe Auto suffered two consecutive years of losses in 2006 and 2007, as a result of intensifying competition in the PRC automobile market, which led to general price cuts within the industry and hence reduced revenue and profitability. At the same time, increases in raw material costs and energy cost in recent years pushed up the direct cost for Changhe Auto. The combination of the above two factors significantly affected the operating results of Changhe Auto during the period under review.

For the year ended 31 December 2007, turnover decreased significantly by approximately 46.7%, from approximately RMB2,338 million in 2006 to approximately RMB1,246 million in 2007. This was primarily due to increased competition in the PRC market, which contributed to more than 80% of Changhe Auto’s total sales. The decrease in sales volume resulted in an erosion of Changhe Auto’s gross profit margin, which reduced from approximately 5.8% in 2006 to 1.0% in 2007, as fixed production costs did not drop in proportion to the decrease in sales volume.

The lower gross profit in 2007, combined with a higher loss from equity investment in Changhe Suzuki of approximately RMB319 million (loss of RMB120 million in 2006); and impairment losses on inventories, fixed assets, doubtful debts and long-term investments totalling approximately RMB72 million (as compared to loss of RMB29 million recorded in 2006), resulted in an approximately 136% increase in operating loss when compared to 2006. Accordingly, loss after tax also increased from approximately RMB240 million in 2006 to approximately RMB588 million in 2007.

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LETTER FROM SOMERLEY

For the five months ended 31 May 2008, turnover and gross profit margin of Changhe Auto were approximately RMB755 million and approximately RMB16 million respectively. Gross profit margin improved to 2.2% when compared to 1.0% in 2007, due to more stringent cost control measures having been imposed. However, Changhe Auto still suffered a loss after tax for the five months ended 31 May 2008, which amounted to approximately RMB161 million.

For the nine months ended 30 September 2008, Changhe Auto recorded turnover and gross profit margin of approximately RMB1,321 million and RMB51 million respectively. Gross profit margin of Changhe Auto further improved to 3.8%. Loss after tax for the nine months ended 30 September 2008 was approximately RMB236 million.

Financial position

As at 30 September 2008 RMB’000 (unaudited) Non-current assets 909,502 Current assets 1,557,590 Non-current liabilities — Current liabilities (2,252,149) Net assets 214,943	As at 31 May 2008 RMB’000 (audited) 1,039,243 1,333,795 — (2,082,414) 290,624	As at 31 December 2007 2006 RMB’000 RMB’000 (audited) (audited) 1,124,517 1,442,224 1,365,350 1,533,869 — — (2,038,931) (1,937,560) 450,936 1,038,533

Non-current assets of Changhe Auto includes mainly long-term investments (principally comprise investment in Changhe Suzuki) and fixed assets (mainly plant and equipments for development and manufacturing of automobile products), with carrying values of approximately RMB472 million and RMB409 million respectively as at 30 September 2008. Current assets as at 30 September 2008 comprised principally accounts receivable of approximately RMB811 million, cash balances of approximately RMB284 million, and inventories of approximately RMB278 million. Current liabilities of Changhe Auto included mainly accounts payable of approximately RMB1,265 million and short-term borrowings of RMB630 million as at 30 September 2008.

Gearing ratio of Changhe Auto as at 30 September 2008 (calculated as total borrowings divided by total assets) was approximately 25.5%, as compared to the gearing ratio of approximately 27.0% as at 31 December 2007.

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LETTER FROM SOMERLEY

As shown in the above table, net assets of Changhe Auto decreased from approximately RMB1,039 million as 31 December 2006 to approximately RMB451 million as at 31 December 2007, and further down to approximately RMB215 million as at 30 September 2008. This was mainly attributable to the continuing net losses having been suffered by Changhe Auto since 2006. In addition, for the financial years and periods under review, Changhe Auto was in net current liability position. As at 30 September 2008, Changhe Auto had net current liabilities of approximately RMB695 million.

Cash flow

	Nine months	Five months
	ended	ended
	30 September	31 May	Year ended 31 December
	2008	2008	2007	2006
	RMB’000	RMB’000	RMB’000	RMB’000
	(unaudited)	(audited)	(audited)	(audited)
Net cash (used in)/generated
from operating activities	(45,163)	(34,041)	(45,215)	225,735
Net cash used in investing
activities	(17,631)	(13,106)	(153,045)	(96,911)
Net cash (used in)/generated
from financing activities	(67,279)	10,383	172,717	24,065
Exchange adjustments	—	—	79	—
Net (decrease)/increase in cash
and cash equivalents	(130,073)	(36,764)	(25,464)	152,889

As shown above, except for 2006, Changhe Auto generated negative cash flows from operating activities and therefore recorded net decreases in cash and cash equivalents. Most of the cash generated from financing activities came from borrowings. This explains the upward trend of Changhe Auto’s gearing ratio.

6. Business and financial information of Shanghai Aviation Electric

The entire equity interests of Shanghai Aviation Electric and Lanzhou Aviation Electrical are proposed to be acquired by Changhe Auto. We set out below information on the two target companies.

Business of Shanghai Aviation Electric

Shanghai Aviation Electric is principally engaged in the manufacture of aviation electrical engineering products and accessories. Its products include principally internal and external lighting system for aircrafts, in-flight warning systems, components of flight instrument panel and other aviation spare parts and components. Products of Shanghai Aviation Electric are mainly sold to aircraft manufacturers and aircraft component manufacturers in the PRC. The sales of Shanghai

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LETTER FROM SOMERLEY

Aviation Electric for the five months ended 31 May 2008 and each of the two years ended 31 December 2007 and 2006 amounted to approximately RMB127 million, RMB251 million and RMB214 million respectively, of which approximately RMB77 million, RMB111 million and RMB97 million respectively represented sales to the Group and other group companies of AVIC I and AVIC II.

Shanghai Aviation Electric is currently a wholly owned subsidiary of AVIC I. AVIC I was as at the Latest Practicable Date directly owned and controlled by the State Council of the PRC and hence does not fall under the definition of a connected person of the Company under the Listing Rules. Upon Completion, Shanghai Aviation Electric will become a member of the Group and any future transactions between Shanghai Aviation Electric and the Group or other group companies of AVIC would constitute continuing connected transactions for the Company under the Listing Rules. The Directors has confirmed that full compliance with the applicable Listing Rule requirements would be made and those transactions would be conducted on normal commercial terms.

In order to ensure management continuity of the existing business of Shanghai Aviation Electric, the Directors have informed us that all the senior management and employees of Shanghai Aviation Electric will remain in their existing work positions in Shanghai Aviation Electric upon Completion.

Financial information of Shanghai Aviation Electric

The following table summarises the consolidated financial information of Shanghai Aviation Electric, prepared in accordance with the Generally Accepted Accounting Principles in the PRC, for the five months ended 31 May 2008 and for each of the two years ended 31 December 2007 and 2006 respectively:

Profit and loss

	Five months
	ended 31 May	Year ended 31 December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Turnover	126,921	251,313	214,389
Gross profit	42,734	75,303	52,177
	33.7%	30.0%	24.3%
Gain on investments	5,202	589	22
Operating profit	39,423	37,047	18,224
Profit before tax	39,747	38,235	19,356
Profit after tax	27,756	30,603	16,318

For the year ended 31 December 2007, Shanghai Aviation Electric recorded an approximately 17.2% increase in turnover due to increased orders, from approximately RMB214 million in 2006 to approximately RMB251 million in 2007. Improvement in gross profit margin was also observed, from approximately 24.3% in 2006 to approximately 30.0% in 2007, as a result of increase in product sales price and better cost control imposed by Shanghai Aviation Electric.

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As the percentage increase in major expenses, such as administrative expenses, did not rise as much as the turnover and gross profit, operating profit and profit before tax of Shanghai Aviation Electric increased significantly by approximately 103.3% and 97.5% respectively, to approximately RMB37 million and RMB38 million respectively in 2007. Profit after tax also increased by approximately 87.5%, from approximately RMB16 million in 2006 to approximately RMB31 million in 2007.

For the five months ended 31 May 2008, the turnover of approximately RMB127 million was approximately half of that the figure recorded in the 2007 full year audited accounts. Continuous improvement was shown in gross profit percentage, which further increased to approximately 33.7% for the five months ended 31 May 2008. This was also due to the increase in product sales price and better cost control. As a result of reduced administrative expenses and a gain on an investment fund of approximately RMB5 million recorded for the five months ended 31 May 2008 (2007 full year: approximately RMB0.6 million), operating profit and profit before tax of Shanghai Aviation Electric amounted to approximately RMB39 million and RMB40 million respectively, which approximate the full year figures recorded in 2007.

Financial position

	As at
	31 May	**As at 31 **	December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Non-current assets	121,282	147,250	145,962
Current assets	268,516	219,772	212,354
Non-current liabilities	(24,150)	(26,385)	(36,937)
Current liabilities	(82,117)	(76,512)	(88,544)
Net assets	283,531	264,125	232,835

As at 31 May 2008, non-current assets of Shanghai Aviation Electric largely comprised fixed assets (approximately RMB93 million) and land use rights (approximately RMB14 million). Its current assets as at 31 May 2008 comprised principally cash balances of approximately RMB138 million and accounts receivable of approximately RMB102 million.

Non-current liabilities as at 31 May 2008 include a special purpose payable of approximately RMB13 million and other non-current payables and liabilities of approximately RMB11 million. The special purpose payable represented prepaid subsidies from government bodies in respect of certain research project being undertaken by Shanghai Aviation Electric. Current liabilities mainly comprised accounts payable and tax payable, which amounted to approximately RMB34 million and RMB23 million respectively as at 31 May 2008.

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LETTER FROM SOMERLEY

Gearing ratio of Shanghai Aviation Electric remained at low level throughout the period under review, and amounted to approximately 0.9% and 1.0% as at 31 May 2008 and 31 December 2007 respectively.

Cash flow

	Five months
	ended 31 May	Year ended 31 December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Net cash (used in)/generated from operating
activities	(4,869)	14,263	53,735
Net cash generated from/(used in) investing
activities	15,630	(5,454)	603
Net cash (used in)/generated from financing
activities	(5,800)	(3,357)	270
Exchange adjustments	4	67	31
Net increase in cash and cash equivalents	4,965	5,519	54,639

Shanghai Aviation Electric generated positive net cash from its operating activities and had positive cash and cash equivalents as at 31 December 2006 and 31 December 2007. However, Shanghai Aviation Electric recorded negative net cash flow from operating activities for the five months ended 31 May 2008, principally due to a lower level of cash settlement from sales during the period. Borrowings of Shanghai Aviation Electric are relatively low and its operations were largely financed by internal resources.

7. Business and financial information of Lanzhou Aviation Electrical

Business of Lanzhou Aviation Electrical

Lanzhou Aviation Electrical is principally engaged in the manufacture of aviation electrical and mechanical engineering products. Its product includes various mechanical devices and fittings, components of aviation motors, and other spare parts and components for production of aircrafts. Similar to Shanghai Aviation Electric, products of Lanzhou Aviation Electrical are mainly sold to aircraft manufacturers and aircraft component manufacturers in the PRC. Sales of Lanzhou Aviation Electrical for the five months ended 31 May 2008 and each of the two years ended 31 December 2007 and 2006 amounted to RMB77 million, RMB142 million and RMB149 million respectively, of which approximately RMB41 million, RMB85 million and RMB94 million represented sales to the Group and other group companies of AVIC I and AVIC II.

Lanzhou Aviation Electrical is a wholly owned subsidiary of AVIC II which is the controlling shareholder of the Company. Therefore, Lanzhou Aviation Electrical is a connected person of the Company, and the existing transactions between Lanzhou Aviation Electrical and the Group constitutes

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continuing connected transactions of the Company under the Listing Rules. Upon Completion, any future transactions between Lanzhou Aviation Electrical and the Group, as well as those between Lanzhou Aviation Electrical and other group companies of AVIC, would continue to constitute continuing connected transactions for the Company under the Listing Rules. The Directors has confirmed that full compliance with the applicable Listing Rule requirements would continue to be made and those transactions would be conducted on normal commercial terms.

In order to ensure management continuity of the existing business of Lanzhou Aviation Electrical, the Directors have informed us that all the senior management and employees of Lanzhou Aviation Electrical will remain in their existing work positions in Lanzhou Aviation Electrical upon Completion.

Financial information of Lanzhou Aviation Electrical

The following table summarises the consolidated financial information of Lanzhou Aviation Electrical, prepared in accordance with the Generally Accepted Accounting Principles in the PRC, for the five months ended 31 May 2008 and for the two years ended 31 December 2007 and 2006 respectively:

Profit and loss

	Five months
	ended 31 May	Year ended 31 December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Turnover	76,831	142,233	148,960
Gross profit	48,972	82,272	69,024
	63.7%	57.8%	46.3%
Operating profit	22,216	33,928	23,393
Profit before tax	23,148	34,348	24,395
Profit after tax	19,687	27,272	19,387

For the year ended 31 December 2007, Lanzhou Aviation Electrical recorded a slight drop in turnover by approximately 4.5% to approximately RMB142 million, which was mainly due to a drop in sales of spare parts. However, its gross profit still increased from approximately RMB69 million in 2006 to approximately RMB82 million in 2007, with gross profit margins increasing from approximately 46.3% in 2006 to approximately 57.8% in 2007. Such increase was principally due to increase in product sales price and better cost control imposed by Lanzhou Aviation Electrical.

Despite the increase in selling expenses and administrative expenses, operating profit and profit before tax of Lanzhou Aviation Electrical recorded significant increases by approximately 45.0% and

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40.8% respectively, to approximately RMB34 million and RMB34 million respectively, which was principally resulted from the increase in gross profit in 2007. Profit after tax increased accordingly by approximately 40.7%, from approximately RMB19 million in 2006 to approximately RMB27 million in 2007.

For the five months ended 31 May 2008, Lanzhou Aviation Electrical recorded a turnover of approximately RMB77 million. Continuous improvement was shown in gross profit percentage, which further increased to approximately 63.7% for the five months ended 31 May 2008. Such increase was also due to the increase in product sales price and better cost control. Operating profit and profit after tax of Lanzhou Aviation Electric for the five months ended 31 May 2008 was approximately RMB22 million and RMB20 million respectively, which was mainly resulted from the higher gross profit margin.

Financial position

	As at
	31 May	**As at 31 **	December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Non-current assets	204,977	203,267	196,707
Current assets	217,752	208,659	179,682
Non-current liabilities	(28,682)	(36,989)	(59,009)
Current liabilities	(112,177)	(113,608)	(108,352)
Net assets	281,870	261,329	209,028

Same as Shanghai Aviation Electric, non-current assets of Lanzhou Aviation Electrical as at 31 May 2008 represented mainly fixed assets (approximately RMB99 million) and land use rights (approximately RMB101 million) for production purpose. Current assets comprised mainly inventories, cash balances and accounts receivable, which amounted to approximately RMB110 million, RMB50 million and RMB30 million as at 31 May 2008.

Non-current liabilities of Lanzhou Aviation Electrical included long-term borrowings and a special purpose payable, which amounted to approximately RMB15 million and RMB14 million respectively as at 31 May 2008. Similar to Shanghai Aviation Electric, the special purpose payable represented prepaid subsidies from governmental bodies in respect of certain research project being undertaken by Lanzhou Aviation Electrical. Current liabilities as at 31 May 2008 represented mainly accounts payable of approximately RMB24 million, short-term borrowings of approximately RMB16 million and salary payables of approximately RMB13 million.

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LETTER FROM SOMERLEY

Gearing ratio of Lanzhou Aviation Electrical as at 31 May 2008 (calculated as total borrowings divided by total assets) was approximately 7.3%, representing a decrease when compared to the gearing ratio of approximately 10.0% as at 31 December 2007.

Cash flow

	Five months
	ended 31 May	Year ended 31 December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Net cash generated from operating activities	22,959	26,427	40,079
Net cash used in investing activities	(8,073)	(15,071)	(23,519)
Net cash used in financing activities	(10,942)	(4,956)	(4,565)
Exchange adjustments	—	—	—
Net increase in cash and cash equivalents	3,944	6,400	11,995

Lanzhou Aviation Electrical has been generating positive cash flow from its operating activities, and its cash balances has been increasing throughout the financial years or period under review.

8. Comparison between Automobile Assets and Aviation Assets

Set out below is a summary table comparing key financial statistics between Changhe Auto (which comprises the Automobile Assets as its operating assets) and the Aviation Assets which include Shanghai Aviation Electric and Lanzhou Aviation Electrical (i.e. the Aviation Assets):

Scale of operations Turnover (Loss)/profit after tax Total assets Net assets Net cash (used in)/generated from operating activities Financial ratios Profit margin Gearing ratio (note)	Changhe Auto As at 31 May 2008 As at 31 December 2007 RMB’000 RMB’000 754,991 1,245,983 (161,311) (587,597) 2,373,038 2,489,867 290,624 450,936 (34,041) (45,215) % % N/A N/A 29.4 27.0	Shanghai Aviation Electric As at 31 May 2008 As at 31 December 2007 RMB’000 RMB’000 126,921 251,313 27,756 30,603 389,798 367,022 283,531 264,125 (4,869) 14,263 % % 21.9 12.2 0.9 1.0	Lanzhou Aviation Electrical
			As at 31 May 2008 As at 31 December 2007 RMB’000 RMB’000 76,831 142,233 19,687 27,272 422,729 411,926 281,870 261,329 22,959 26,427 % % 25.6 19.2 7.3 10.0

Note: Gearing ratio is defined as total borrowings divided by total assets.

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LETTER FROM SOMERLEY

Although the scale of operation of Changhe Auto is notably larger than that of Shanghai Aviation Electric and Lanzhou Aviation Electrical, Changhe Auto suffered continuous losses after tax since 2006, which also led to a significant reduction of its net assets from approximately RMB1,039 million as at 31 December 2006 to approximately RMB291 million as at 31 May 2008.

On the other hand, Shanghai Aviation Electric and Lanzhou Aviation Electrical were both profitable for the two years ended 31 December 2007 and for the five months ended 31 May 2008. The two companies have lower gearing ratios as compared to Changhe Auto. Except for the five months ended 31 May 2008, Shanghai Aviation Electric and Lanzhou Aviation Electrical generated positive cash flows from operating activities, while Changhe Auto had to fund its operating activities which generate negative cash flows.

9. Evaluation of the Consideration

(i) as against the net assets values

Consideration for the Aviation Assets is fixed on the basis of those assets’ independent valuation made by DeveChina as at 31 May 2008 of approximately RMB793 million. Approximately half of the Consideration, being approximately RMB407 million, will be satisfied by transfer of Changhe Auto’s Automobile Assets, which were also priced on the basis of DeveChina’s independent valuation as at 31 May 2008.

The Aviation Transaction Value and the Automobile Transaction Value are both higher than their respective audited net book values, as illustrated in the following:

	Valuation of	Audited	Ratio of
	net assets by	net book	valuation
	DeveChina as at	value as at	over audited
	31 May 2008	31 May 2008	net book value
	RMB	RMB
	(A)	(B)	(A)/(B)
Aviation Assets	793,177,100	565,401,300	1.40
Automobile Assets	406,618,700	290,624,200	1.40

The Automobile Assets and the Aviation Assets have been valued by DeveChina, a qualified PRC valuer and an independent third party. An extract of the valuation report is contained in Appendix III of the Circular. As referred to in paragraph 11 of Appendix I to the Circular (of which our letter of advice forms part), the full report is available for review at the Company’s principal place of business in Hong Kong, the Company’s website and the Stock Exchange’s website.

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LETTER FROM SOMERLEY

According to DeveChina, the Automobile Assets and Aviation Assets were principally valued at the costs of replacing them with comparable material and quality at current market prices. DeveChina has also performed work to verify the existence and amount of the assets and liabilities attributable to the Automobile Assets and Aviation Assets. We have reviewed and discussed with DeveChina the basis and assumptions adopted for the valuations of the Aviation Assets and the Automobile Assets. We consider that the assumptions adopted by DeveChina are fair and reasonable and the basis used is a normal one for valuing assets. We have also performed work as required under note (1)(d) to the Listing Rule 13.80 in relation to DeveChina and its work as regards the valuation of the Aviation Assets and the Automobile Assets.

The valuation of Aviation Assets and Automobile Assets, which amounted to approximately RMB793 million and RMB407 million respectively, are higher than their respective audited book values of RMB565 million and RMB291 million. Such surpluses were mainly attributable to the following:

• Valuation of manufacturing plants are based on current costs of construction which has incorporated the inflation factor, while the book values of the manufacturing plants are carried at historical costs less depreciation over their useful lives in the accounts;

• Land use rights currently included in the Aviation Assets and Automobile Assets are booked at historical costs less amortization over the land lease terms, while they are included at market values in the valuation report prepared by DeveChina; and

• Inventories which are carried at cost in the books are valued by DeveChina at their current market values.

We consider it fair and reasonable for Changhe Auto to acquire the Aviation Assets and dispose of the Automobile Assets at appraised net asset values. This pricing method is in accordance with the relevant PRC rules and regulations which require that any transfer of state assets be at or above net asset value. AVIC I and AVIC II are state-owned enterprises, and the appraised values of the Automobile Assets and Aviation Assets are subject to confirmation by SASAC.

(ii) as against earnings

The Automobile Assets have been making losses since 2006. We therefore do not consider that an analysis on the price to earnings (“P/E”) ratio is practicable.

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LETTER FROM SOMERLEY

As for the Aviation Assets, the following illustrates the P/E ratio as implied by the Aviation Transaction Value:

Valuation of net assets by DeveChina as at 31 May 2008 (RMB) (A) Shanghai Aviation Electric 449,603,400 Lanzhou Aviation Electrical 343,573,700 Total 793,177,100	Audited net profits in 2007 (RMB) (B) 30,603,000 27,272,000 57,875,000	Implied P/E ratio (A)/(B) 14.69 12.60
		13.71

We have assessed the above implied P/E ratio against that of the following companies (the “Comparable Companies”). Listed out below are all PRC listed companies engaging principally in the aviation business that we are able to identify from the websites of Shenzhen Stock Exchange and Shanghai Stock Exchange as at the Latest Practicable Date:

	Closing price	Basic
	as at Latest	earnings
	Practicable	per share
Name of Comparable Companies	Date	for 2007	P/E ratio
	(RMB)	(RMB)
	(A)	(B)	(A)/(B)
China Aviation Optical-Electrical Technology Co., Ltd.
(stock code: 002179.CH)	7.40	1.04	7.12
China Dongfanghong Spacesat Co., Ltd.
(stock code: 600118.CH)	12.04	0.39	30.87
Hafei Aviation Industry Co., Ltd.
(stock code: 600038.CH)	7.58	0.29	26.14
Jiangxi Hongdu Aviation Industry Co., Ltd.
(stock code: 600316.CH)	10.79	0.46	23.46
Long March Launch Vehicle Technology Co., Ltd.
(stock code: 600879.CH)	6.75	0.54	12.50
Sichuan Chengfa Aero-science & Technology Co., Ltd.
(stock code: 600391.CH)	8.18	0.50	16.36
Sichuan Haite High-tech Co., Ltd.
(stock code: 002023.CH)	3.47	0.32	10.84
Xi’an Aircraft International Corporation
(stock code: 000768.CH)	10.33	0.15	68.87
		Average:	24.52
		Median:	19.91
The Aviation Assets			13.71

Source: Bloomberg and the 2007 annual reports of the respective companies

— 42 —

LETTER FROM SOMERLEY

As illustrated above, the Comparable Companies have average and median P/E ratios of approximately 24.52 times and 19.91 times respectively, which is higher than the P/E ratio of the Aviation Assets of approximately 13.71 times as implied by the terms of the Acquisition Agreement. On this basis, we consider the Aviation Transaction Value fair and reasonable.

10. Share price performance and comparison of the issue price of the Consideration Shares

(i) Share price

Set out below is the daily closing market prices of Changhe Shares during a period starting from 1 October 2007 (approximately one year preceding the date of the Acquisition Agreement) up to and including the Latest Practicable Date:

==> picture [446 x 244] intentionally omitted <==

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

12
Announcement of 2007
Clarification annual results and special
announcement as treatment under the listing
regards rules of Shanghai Stock
10 operations of a Exchange due to Announcement of
subsidiary in continuous net losses for
entering into the
Hefei, PRC two years
framework agreement
with China Aviation
Group Organizing Unit Announcement
8 Clarification of 2008 3rd
announcement as quarter results
regards newspaper
rumours on possible
acquisition by an
6 automobile
manufacturer
Announcement Issue price of
4 of 2008 interim RMB5.18 per
Announcement of results Changhe Share
expected full year
loss for 2007 and
announcement of Announcement of 2008
2 2007 3rd quarterresults Clarificationannouncement denying1st quarter results Announcement
possible merger with of the
another automobile Acquisition
manufacturer
0
1/10/200715/10/200729/10/200712/11/200726/11/200710/12/200724/12/20077/1/200821/1/20084/2/200818/2/20083/3/200817/3/200831/3/200814/4/200828/4/200812/5/200826/5/20089/6/200823/6/20087/7/200821/7/20084/8/200818/8/20081/9/200815/9/200829/9/200813/10/200827/10/2008
Share price (RMB)
----- End of picture text -----

Source: Bloomberg

As shown in the above chart, the closing prices of the Changhe Shares during October and early November 2007 dropped from the highest of RMB8.40 on 9 October 2007 to the lowest of RMB5.45 on 2 November 2007. During this period, there were media reporting as regards the suspension of production of a subsidiary of Changhe Auto based in Hefei, PRC. An announcement was issued by Changhe Auto on 17 October 2007, clarifying that Changhe Auto was in the process of phasing out old products, but apart from that, production remained normal. On 21 October 2007, Changhe Auto announced that a loss was expected for the 2007 full year results. On the same day, Changhe Auto also announced its 2007 third quarter results, reporting a loss after tax totalling approximately RMB349 million, which represented an approximately 133.9% increase when compared to the same period in 2006.

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LETTER FROM SOMERLEY

After announcement of the 2007 third quarter results, prices of the Changhe Shares performed poorly and reached the lowest of RMB5.45 on 2 November 2007. After then, prices of the Changhe Shares gradually rose to the highest of RMB10.61 on 9 January 2008. From 9 January 2008 to 5 March 2008, the market prices of the Changhe Shares fluctuated within a range from RMB8.28 to RMB10.61. On 5 March 2008, Changhe Auto published an announcement clarifying that Changhe Auto was not aware of any discussion as regards the acquisition of Changhe Auto by 北京汽車工業控股有限責任公 司, an automobile manufacturer in the PRC, which was reported in the media on the previous day. Since then, prices of the Changhe Shares dropped to a low of RMB5.16 on 2 April 2008. On 14 April 2008, Changhe Auto announced its 2007 annual results, which reported a loss after tax of approximately RMB588 million, representing an approximately 144.6% increase compared to that of 2006. Changhe Auto also issued an announcement on the same day disclosing that since Changhe Auto had reported net losses for two consecutive years, trading of Changhe Shares became subject to special treatment pursuant to the listing rules of the Shanghai Stock Exchange, and might be suspended if the 2008 full year accounts reflect a net loss. On the following day, Changhe Auto further issued an announcement denying any discussion on possible merger with Changan Group, which is also engaged in automobile manufacturing in the PRC.

Following the announcement of the 2007 annual results and the clarification announcement as regards the above merger, the prices of the Changhe Shares further dropped to a low of RMB4.04 on 22 April 2008. On 26 April 2008, Changhe Auto announced its 2008 first quarter results, reporting a loss after tax totalling approximately RMB89 million, which represented an approximately 76.0% increase when compared to the same period in 2007. Since then, prices of Changhe Shares fluctuated within a range from RMB4.48 to RMB5.69.

Trading in the Changhe Shares was suspended from 18 June 2008, pending the announcement of the Acquisition. After publication of the announcement on 18 July 2008 as regards the entering into of the framework agreement in relation to the Acquisition (the “First Announcement”), the prices of Changhe Shares rose from RMB5.38 to the highest of RMB7.75 on 1 August 2008. On 26 August 2008, Changhe Auto announced its 2008 interim results, reporting a loss after tax totalling approximately RMB147 million, which represented an approximately 2.6% increase when compared to the same period in 2007. After the announcement of the 2008 interim results, the prices of Changhe Shares dropped back to RMB4.20 on 10 October 2008, which was the last trading day immediately before the announcement of the entering into of the Acquisition Agreement between Changhe Auto and AVIC Organizing Unit (the “Second Announcement”).

Following the Second Announcement, price of Changhe Share fluctuated within a range of RMB3.64 to RMB4.62. On 28 October 2008, the Latest Practicable Date, Changhe Auto announced its results for the nine months ended 30 September 2008, reporting a loss after tax totalling approximately RMB236 million, which represented an approximately 22.3% decrease when compared to the same period in 2007. On the same day, the Changhe Shares closed at RMB3.48.

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LETTER FROM SOMERLEY

(ii) Comparison of the issue price (“Issue Price”) of the Consideration Shares

Issue price of the Consideration Shares was fixed at RMB5.18 per Consideration Share, which represents:

• (a) the weighted average price of the Changhe Shares for the last 20 trading days on the Shanghai Stock Exchange up to and including 17 June 2008, the day (the “Last Trading Day”) preceding the suspension of trading of the Changhe Shares on 18 June 2008 pending release of the First Announcement. This was the agreed basis for setting the Issue Price;

• (b) a premium of approximately 5.1% over the weighted average closing price of approximately RMB4.93 per Changhe Share on the Shanghai Stock Exchange for the period from 15 April 2008, the first trading day after the announcement of the 2007 annual results by Changhe Auto, up to and including the Last Trading Day;

• (c) a discount of approximately 2.3% to the weighted average closing price of approximately RMB5.30 per Changhe Share on the Shanghai Stock Exchange over the ten trading days up to and including the Last Trading Day;

• (d) a premium of approximately 0.6% over the weighted average closing price of approximately RMB5.15 per Changhe Share on the Shanghai Stock Exchange over the five trading days up to and including the Last Trading Day;

• (e) a discount of approximately 3.7% to the closing price of RMB5.38 per Changhe Share on the Shanghai Stock Exchange on the Last Trading Day;

• (f) a premium of approximately 48.9% over the closing price of RMB3.48 per Changhe Share on the Shanghai Stock Exchange as at the Latest Practicable Date;

• (g) a premium of approximately 370.9% over the audited net asset value per Changhe Share of approximately RMB1.10 as at 31 December 2007;

• (h) a premium of approximately 629.6% over the audited net asset value per Changhe Share of approximately RMB0.71 as at 31 May 2008; and

• (i) a premium of approximately 896.2% over the unaudited net asset value per Changhe Share of approximately RMB0.52 as at 30 September 2008.

The issue price of the Consideration Shares is set in accordance with the relevant PRC rules and regulations which require that any transfer of state assets be at or above net asset values, and at a price that is not lower than the weighted average closing share price on the Shanghai Stock Exchange for the last 20 trading days immediately preceding the First Announcement. As shown above, the Issue Price is at an approximately 5.1% premium over the weighted average closing price of approximately RMB4.93 per Changhe Share on the Shanghai Stock Exchange for the period from 15 April 2008, the

— 45 —

LETTER FROM SOMERLEY

first trading day after the announcement of the 2007 annual results by Changhe Auto, up to and including the Last Trading Day. Such Issue Price also represents a significant premium over the net asset value per Changhe Share as at 31 December 2007, 31 May 2008 and 30 September 2008. Based on the above, we consider the Issue Price fair and reasonable.

11. Financial effects on the Group

(i) Earnings

Changhe Auto is currently accounted for as a subsidiary of the Company and would remain so after completion of the Acquisition Agreement.

Following Completion, the Aviation Assets will be wholly owned by Changhe Auto and their results will be consolidated into the accounts of the Group. On the other hand, the results of the Automobile Assets will be de-consolidated. It is expected that there will be a decrease in turnover of the Group following the Completion, as the turnover of Changhe Auto is higher than the aggregate turnover of Shanghai Aviation Electric and Lanzhou Aviation Electrical. However, earnings would be significantly enhanced as a result of consolidation of results of the profit-making Aviation Assets and de-consolidation of results of the loss-making Automobile Assets.

In relation to the disposal of Automobile Assets, there is no expected gain or loss to the Group because the Automobile Assets (as revalued by DeveChina), plus the Consideration Shares to be issued, will be replaced with the Aviation Assets of the same value (as revalued by DeveChina).

(ii) Net asset value

Since Shanghai Aviation Electric, Lanzhou Aviation Electrical and Changhe Auto are all under the control of AVIC I or AVIC II (which will be merged to form AVIC), merger accounting would therefore be applied and the acquisition of the Aviation Assets and disposal of the Automobile Assets would be accounted for at their respective book values. The Consideration Shares would be booked at the aggregate value of RMB387 million, which equals to 74,625,174 Consideration Shares times the unit issue price of RMB5.18. The difference between the net book value of (i) the Aviation Assets in the sum of RMB565 million and (ii) RMB678 million, which represents the aggregate of the net book value of the Automobile Assets (i.e. RMB291 million) and the total issue price for the Consideration Shares (i.e. RMB387 million) would be debited to the reserve accounts.

As at 31 May 2008, the Aviation Assets (to be acquired) and the Automobile Assets (to be sold) had net book values of approximately RMB565 million and RMB291 million respectively. Upon Completion, the net asset value held by the Group in Changhe Auto will increase because the Aviation Assets to be acquired by Changhe Auto is bigger than the Automobile Assets to be disposed of by Changhe Auto. Such increase in net assets value is estimated to amount to approximately RMB109 million, which represents the difference between the net asset value of Changhe Auto attributable to the Company before the Acquisition (which is 59.02% � current net asset value attributable to shareholders of Changhe Auto) and the net asset value of Changhe Auto attributable to the Company after the Acquisition (which is 49.93% � the enlarged net asset value attributable to shareholders of Changhe Auto upon Completion). The above estimation was made on the basis of the audited net book

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LETTER FROM SOMERLEY

values attributable to shareholders of Changhe Auto, Shanghai Aviation Electric and Lanzhou Aviation Electrical as at 31 May 2008 prepared under the Generally Accepted Accounting Principles in the PRC. The exact amount of the increase in net asset value held by the Group in Changhe Auto would be calculated on the basis of the relevant figures as at the date of Completion prepared under the International Financial Reporting Standards, and therefore would be different from the above estimated amount of RMB109 million.

(iii) Gearing ratio

The gearing ratio of Changhe Auto was approximately 29.4% as at 31 May 2008, which was higher than that of Shanghai Aviation Electric and Lanzhou Aviation Electrical. Accordingly, the gearing ratio of the Group would be lower following Completion.

(iv) Working capital

The Consideration for the acquisition of the Aviation Assets under the Acquisition Agreement would be satisfied by disposing the Automobile Assets currently owned by Changhe Auto and by the issue of Consideration Shares. Therefore, the above transactions are not expected to have cash flow impact, save for the professional fees and other costs incurred in relation thereto.

On an ongoing basis, as discussed under the above section headed “Comparison between Automobile Assets and Aviation Assets” on page 39, Changhe Auto has been generating negative cash flows from its operating activities since 2007, while Shanghai Aviation Electric and Lanzhou Aviation Electrical are largely cash flows positive. Therefore the Group’s working capital is expected to improve following Completion.

DISCUSSION AND ANALYSIS

The Group is principally engaged in the automobile segment and the aviation segment. The automobile segment, though contributing a majority of the Group’s turnover, is making losses, while the aviation segment is profitable. One of the Group’s major investments in the automobile segment is its majority interest in Changhe Auto, which has been suffering net losses since 2006. This in turn adversely affected the results of the Group’s automobile segment. Given the consecutive years of losses, Changhe Shares may face delisting if Changhe Auto is not able to turnaround in the coming years.

Changhe Auto therefore urgently needs to turnaround its businesses. The Acquisition Agreement was entered into between Changhe Auto and AVIC Organizing Unit whereby Changhe Auto would swap its loss-making Automobile Assets for the Aviation Assets which are currently profitable.

The asset values are priced on the basis of independent valuation made by DeveChina, a qualified PRC valuer, in accordance with the relevant PRC rules and regulations, which we consider fair.

The Aviation Assets to be acquired have a higher asset value than the Automobile Assets which form part of the Consideration. The shortfall will be satisfied by Changhe Auto issuing 74,625,174 new Changhe Shares to AVIC (upon its establishment after the Proposed Merger) at an issue price of

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LETTER FROM SOMERLEY

RMB5.18 per Consideration Shares in accordance with the relevant PRC rules and regulations. RMB5.18 equals to the weighted average price of the Changhe Shares for the last 20 trading days on the Shanghai Stock Exchange up to and including the day preceding Changhe Auto’s first announcement of the Acquisition. This pricing basis is adopted pursuant to the relevant PRC rules and regulations. This issue price is also comparable to the market prices of Changhe Shares following the announcement of its 2007 annual results, which we consider fair and reasonable.

Following the Completion, Changhe Auto will shift its business from the automobile segment to the aviation segment. From our financial analyses above, the profitability and cash flow position of Changhe Auto are expected to improve following the Completion, which is in the interest of the Group. Although the Group’s attributable equity interest in Changhe Auto will be diluted from approximately 59.02% to approximately 49.93% following the Completion, on the basis that AVIC will exercise its voting right in accordance with the instructions of the Company and their combined voting rights will amount to over 50% of the voting rights of Changhe Auto, Changhe Auto would continue to be accounted for as a subsidiary of the Group, and we consider the merits of the Acquisition as mentioned above outweigh the dilution of the Group’s economic interest in Changhe Auto.

Overall, we agree with the Directors that it is in the interest of the Company to effect the asset swap on the terms proposed in order to strengthen Changhe Auto’s financial position and profitability, and to avoid the delisting risk that Changhe Auto would likely face in the absence of a turnaround proposal.

RECOMMENDATION

Having taken into account the above principal factors, we consider that the Acquisition Agreement is on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned. We also consider the entering into of the Acquisition Agreement is in the interests of the Company and its Shareholders as a whole. We therefore advise the Independent Board Committee to recommend, and ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve, among others, the entering into of the Acquisition Agreement.

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

— 48 —

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, CHIEF EXECUTIVE AND SUPERVISORS IN THE SECURITIES OF THE COMPANY

As at the Latest Practicable Date, none of the Directors, chief executive and supervisors 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 Hong Kong Listing Rules to be notified to the Company and the Stock Exchange.

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

As at the Latest Practicable Date, none of the Directors, chief executive and supervisors 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 Hong Kong 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, chief executive or supervisors 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 EXPERTS

The following are the qualifications of the professional advisers who have 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. DeveChina A qualified PRC valuer licensed to undertake assets valuation business by Finance Bureau of Beijing and is recognized by SASAC and CSRC

As at the Latest Practicable Date, each of Somerley and DeveChina did not have 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, each of Somerley and DeveChina 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.

Each of Somerley and DeveChina has given and has not withdrawn its written consent 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. MATERIAL LITIGATION

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

10. 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.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at the principal place of business of the Company up to and including 15 December 2008:

• (a) the Acquisition Agreement;

• (b) the letter dated 3 November 2008 from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 21 of this circular;

• (c) the letter of advice dated 3 November 2008 from Somerley to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 22 to 48 of this circular;

• (d) the full valuation reports prepared by DeveChina in Chinese language in respect of the Automobile Assets and the Aviation Assets; and

• (e) the written consent of each of Somerley and DeveChina referred to in paragraph 6 of this Appendix.

— 52 —

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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VALUATION REPORTS

APPENDIX III

Appraisal Project on the Entire Equity Interest in Shanghai Aviation Electric Co., Ltd. (“Shanghai Aviation Electric”) Involved in the Proposed Assets Replacement and Acquisition of Privately Issued Shares by Assets by Aviation Industry Corporation of China (“AVIC”) and Jiangxi Changhe Automobile Co., Ltd. (“Changhe Auto”)

ABSTRACT OF ASSETS APPRAISAL REPORT

Zhongfa Ping Bao Zi [2008] No. 187

Attention

The following contents are extracted from the full Assets Appraisal Report (“Report”). Users of the Report, who would like to understand the full-scale situation of the project under evaluation as well as the assumptions and conditions for concluding the evaluation result, should make a careful study on the entire contents of the Report.

Pursuant to the Announcement on the Board Decision published by Changhe Auto on 18 July 2008, Aviation Industry Corporation of China intends to use its equity interest in Shanghai Aviation Electric (the “Assets Owner”), a subsidiary of the former China Aviation Industry Corporation I, to replace certain assets of Changhe Auto and acquire certain privately issued shares by assets. As instructed by AVIC (the “Assignor”), we, DeveChina International Assets Evaluation Co., Ltd. (“DeveChina”), according to the relevant PRC laws and regulations on assets appraisal, have conducted a fair appraisal on the value of all the equity interests involved in the above economic activities as of the Basic Appraisal Date (31 May 2008), based on the principles of independence, objectiveness and fairness, as well as legal or fair methods and procedures in assets appraisal and other procedures we considered as necessary.

This appraisal is based on the preconditions of continuous utilization and an open market. Upon completion of the proposed assets replacement between Shanghai Aviation Electric and Changhe Auto, the assets under evaluation will maintain their former employment, being used continuously and making profits. Considering the actual condition of the evaluated objects and various influential factors, we select the results calculated by asset-based method as the final results of the appraisal.

During the appraisal process, DeveChina undertook necessary surveys and verification work on the relevant assets and liabilities covered by the appraisal and conducted verification, investigation, estimation, analysis, adjustment and other necessary assets appraisal procedures on the legal documents and financial records provided by the Assignor and the assets owner so as to reach the value of all the assets and relevant liabilities under appraisal.

Based on the appraisal work mentioned above and by asset-based method, it is concluded that: as of the Basic Appraisal Date (31 May 2008), before appraisal, Shanghai Aviation Electric had assets totaled to RMB366,588,500, liabilities totaled to RMB89,061,900 and net assets totaled to RMB277,526,600; after adjustment, the assets totaled to RMB366,588,500, liabilities totaled to

— 54 —

VALUATION REPORTS

APPENDIX III

RMB89,061,900 and net assets totaled to RMB277,526,600; after appraisal, the assets totaled to RMB538,665,300, liabilities totaled to RMB89,061,900 and net assets totaled to RMB449,603,400. The appraised value of net assets increased by RMB172,076,800, or 62.00%, over that after the adjustment. The appraisal results are set out as follows:

Summary of Assets Appraisal Results

Name of the assets owner: Shanghai Aviation Electric

Unit: RMB10,000

		Book	Adjusted	Appraised	Appreciation/	Appreciation/
Items		value	book value	value	Impairment	Impairment %
		A	B	C	D=C-B	E=D/B�100%
Current assets	1	23,827.18	23,827.18	23,924.69	97.51	0.41
Non-current assets	2	12,831.67	12,831.67	29,941.84	17,110.17	133.34
Long-term investments	3	1,970.72	1,970.72	15,312.67	13,341.95	677.01
Fixed assets	4	9,274.46	9,274.46	11,347.12	2,072.66	22.35
Including:
Construction-in-progress	5	122.63	122.63	122.63	0.00	0.00
Buildings	6	4,397.99	4,397.99	5,525.37	1,127.38	25.63
Equipment	7	4,752.45	4,752.45	5,698.98	946.53	19.92
Intangible assets	8	1,405.98	1,405.98	3,101.54	1,695.56	120.60
Including:
Land use rights	9	1,405.98	1,405.98	3,101.54	1,695.56	120.60
Other assets	10	180.51	180.51	180.51	0.00	0.00
Total assets	11	36,658.85	36,658.85	53,866.53	17,207.68	46.94
Current liabilities	12	6,491.19	6,491.19	6,491.19	0.00	0.00
Non-current liabilities	13	2,415.00	2,415.00	2,415.00	0.00	0.00
Total liabilities	14	8,906.19	8,906.19	8,906.19	0.00	0.00
Net assets	15	27,752.66	27,752.66	44,960.34	17,207.68	62.00

The Report is valid for a period of one year, commencing from the Basic Appraisal Date of 31 May 2008 and ending on 30 May 2009.

The Report has been prepared specifically for the Assignor and the purpose stated in the Report as well as for submission to and review by the State-owned Assets Supervision and Administration Commission of the State Council, China Securities Regulatory Commission and the relevant authorities. The right to use the Report resides with the Assignor. In the absence of the written consent of the Assignor and DeveChina, no one shall provide the Report, or any part thereof, to any other persons, nor publish the Report. Unless required by law, the Report, or any part thereof, should not be publicized via any public media means.

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VALUATION REPORTS

APPENDIX III

Professional qualification of DeveChina International Assets Evaluation Co., Ltd.

DeveChina International Assets Evaluation Co., Ltd. (“DeveChina”) was established on 17 February 1993 (Business License Reg. no. 110000005010482). It is a qualified assets valuation company for securities-related business as recognized by both the State-owned Assets Supervision and Administration Commission of the State Council and China Securities Regulatory Commission since 9 April 1993 (Cert. no. 0000001 ). DeveChina is licensed to undertake assets valuation business by Beijing Finance Bureau commencing 17 February 1993 (Cert. no. 11020017).

Valuers participated in the said valuation, who are registered valuers as approved by and registered with the National Assets Valuation Association are as follows:

Name	Cert./Reg. no.	Certificate issuance date	Registered since
Chen Si	11020142	28 March 2007	23 August 2002
Niu Zhigang	64030002	7 March 2007	11 July 2003

DeveChina International Assets Evaluation Co., Ltd. 11 September 2008

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VALUATION REPORTS

APPENDIX III

Appraisal Project on the Entire Equity Interest in Lanzhou Wanli Aviation Electrical Co., Ltd. (“Lanzhou Aviation Electrical”) Involved in the Proposed Assets Replacement and Acquisition of Privately Issued Shares by Assets by Aviation Industry Corporation of China (“AVIC”) and Jiangxi Changhe Automobile Co., Ltd. (“Changhe Auto”)

ABSTRACT OF ASSETS APPRAISAL REPORT

Zhongfa Ping Bao Zi [2008] No. 188

Attention

The following contents are extracted from the full Assets Appraisal Report (“Report”). Users of the Report, who would like to understand the full-scale situation of the project under evaluation as well as the assumptions and conditions for concluding the evaluation result, should make a careful study on the entire contents of the Report.

Pursuant to the Announcement on the Board Decision published by Changhe Auto on 18 July 2008, AVIC intends to use its equity interest in Lanzhou Aviation Electrical (the “Assets Owner”), a subsidiary of the former China Aviation Industry Corporation II, to replace certain assets of Changhe Auto and acquire certain privately issued shares by assets. As instructed by AVIC (the “Assignor”), we, DeveChina International Assets Evaluation Co., Ltd. (“DeveChina”), according to the relevant PRC laws and regulations on assets appraisal, have conducted a fair appraisal on the values of all the assets and liabilities involved in the above economic activities as of the Basic Appraisal Date (31 May 2008), based on the principles of independence, objectiveness and fairness, as well as legal or fair methods and procedures in assets appraisal and other procedures we considered as necessary.

This appraisal is based on the preconditions of continuous utilization and an open market. Upon completion of the proposed assets replacement between Lanzhou Aviation Electrical and Changhe Auto, the assets under evaluation will maintain their former employment, being used continuously and making profits. Considering the actual condition of the evaluated objects and various influential factors, we select the results calculated by asset-based method as the final results of the appraisal.

During the appraisal process, DeveChina undertook necessary surveys and verification work on the relevant assets and liabilities covered by the appraisal and conducted verification, investigation, estimation, analysis, adjustment and other necessary assets appraisal procedures on the legal documents and financial records provided by the Assignor and the assets owner so as to reach the value of all the assets and relevant liabilities under appraisal.

Based on the appraisal work mentioned above and by asset-based method, it is concluded that: as of the Basic Appraisal Date (31 May 2008), before appraisal, Lanzhou Aviation Electrical had assets totaled to RMB422,728,400, liabilities totaled to RMB140,858,700 and net assets totaled to RMB281,869,800; after adjustment, the assets totaled to RMB422,728,400, liabilities totaled to

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APPENDIX III

VALUATION REPORTS

RMB140,858,700 and net assets totaled to RMB281,869,800; after appraisal, the assets totaled to RMB484,432,300, liabilities totaled to RMB140,858,700 and net assets totaled to RMB343,573,700. The appraised value of net assets increased by RMB61,703,900, or 21.89%, over that after the adjustment. The appraisal results are set out as follows:

Summary of Assets Appraisal Results

Name of the assets owner: Lanzhou Aviation Electrical

Unit: RMB10,000

		Book	Adjusted	Appraised	Appreciation/	Appreciation/
Items		value	book value	value	Impairment	Impairment %
		A	B	C	D=C-B	E=D/B�100%
Current assets	1	21,775.17	21,775.17	25,258.29	3,483.13	16.00
Non-current assets	2	20,497.68	20,497.68	23,184.94	2,687.27	13.11
Long-term investments	3	103.49	103.49	78.43	-25.06	-24.21
Fixed assets	4	10,182.33	10,182.33	12,133.87	1,951.54	19.17
Including:
Construction-in-progress	5	312.29	312.29	1.00	-311.29	-99.68
Buildings	6	2,546.51	2,546.51	4,106.06	1,559.56	61.24
Equipment	7	7,323.53	7,323.53	8,026.80	703.27	9.60
Intangible assets	8	10,130.97	10,130.97	10,891.75	760.79	7.51
Including:
Land use rights	9	9,961.17	9,961.17	10,721.95	760.79	7.64
Other assets	10	80.89	80.89	80.89	—	—
Total assets	11	42,272.84	42,272.84	48,443.23	6,170.39	14.60
Current liabilities	12	11,217.66	11,217.66	11,217.66	—	—
Non-current liabilities	13	2,868.21	2,868.21	2,868.21	—	—
Total liabilities	14	14,085.87	14,085.87	14,085.87	—	—
Net assets	15	28,186.98	28,186.98	34,357.37	6,170.39	21.89

The Report is valid for a period of one year, commencing from the Basic Appraisal Date of 31 May 2008 and ending on 30 May 2009.

The Report has been prepared specifically for the Assignor and the purpose stated in the Report as well as for submission to and review by the State-owned Assets Supervision and Administration Commission of the State Council, China Securities Regulatory Commission and the relevant authorities. The right to use the Report resides with the Assignor. In the absence of the written consent of the Assignor and DeveChina, no one shall not provide the Report, or any part thereof, to any other persons, nor publish the Report. Unless required by law, the Report, or any part thereof, should not be publicized via any public media means.

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APPENDIX III

VALUATION REPORTS

DeveChina International Assets Evaluation Co., Ltd. (“DeveChina”) was established on 17 February 1993 (Business License Reg. no. 110000005010482). It is a qualified assets valuation company for securities-related business as recognized by both the State-owned Assets Supervision and Administration Commission of the State Council and China Securities Regulatory Commission since 9 April 1993 (Cert. no. 0000001). DeveChina is licensed to undertake assets valuation business by Beijing Finance Bureau commencing 17 February 1993 (Cert. no. 11020017).

Valuers participated in the said valuation, who are registered valuers as approved by and registered with the National Assets Valuation Association are as follows:

Name	Cert./Reg. no.	Certificate issuance date	Registered since
Chen Si	11020142	28 March 2007	23 August 2002
Niu Zhigang	64030002	7 March 2007	11 July 2003

DeveChina International Assets Evaluation Co., Ltd. 11 September 2008

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VALUATION REPORTS

APPENDIX III

Jiangxi Changhe Automobile Co., Ltd. (“Changhe Auto”) Assets and Liabilities Proposed to be sold

ABSTRACT OF ASSETS APPRAISAL REPORT

Zhongfa Ping Bao Zi [2008] No. 189

Attention

The following contents are extracted from the full Assets Appraisal Report (“Report”). Users of the Report, who would like to understand the full-scale situation of the project under evaluation as well as the assumptions and conditions for concluding the evaluation result, should make a careful study on the entire contents of the Report.

Pursuant to the “Proposal on Changhe Auto Assets Replacement and Issuance of Shares for Acquiring Assets as well as Connected Transactions” approved at the fifth board meeting of Changhe Auto in 2008, Changhe Auto (the “Assets Owner”) intends to sell all its assets and liabilities to the Organization Unit of Aviation Industry Corporation of China (“Organization Unit”) or any third party designated by the Organization Unit. For this purpose, all assets and liabilities proposed to be sold should be appraised accordingly. As instructed by Aviation Industry Corporation of China (the “Assignor”), we, DeveChina International Assets Evaluation Co., Ltd. (“DeveChina”), according to the relevant PRC laws and regulations on assets appraisal, have conducted a fair appraisal on the values of all the assets and liabilities involved in the above economic activities as of the Basic Appraisal Date (31 May 2008), based on the principles of independence, objectiveness and fairness, as well as legal or fair methods and procedures in assets appraisal and other procedures we considered as necessary.

This appraisal is based on the preconditions of continuous utilization and an open market, and all assets and relevant liabilities proposed to be sold were appraised by the cost method.

During the appraisal process, DeveChina undertook necessary surveys and verification work on the relevant assets and liabilities covered by the appraisal and conducted verification, investigation, estimation, analysis, adjustment and other necessary assets appraisal procedures on the legal documents and financial records provided by the Assignor and the assets owner so as to reach the value of all the assets and relevant liabilities under appraisal.

Based on the appraisal work mentioned above, the appraisal results are concluded as follows: as of the Basic Appraisal Date (31 May 2008), the assets proposed to be sold by Changhe Auto totaled to RMB1,766,577,700 before appraisal, RMB1,766,577,700 after adjustment and RMB1,853,597,400 after appraisal, the appraised value represented an increase of RMB87,019,700, or 4.93%, over that

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APPENDIX III

VALUATION REPORTS

after the adjustment; liabilities totaled to RMB1,447,322,100, RMB1,447,322,100 after the adjustment and RMB1,446,978,700 after appraisal. The appraised value represented a decrease of RMB343,400, or 0.02%, from that after the adjustment. The appraisal results are set out as follows:

Summary of Assets Appraisal Results

Name of the assets owner: Changhe Auto

Unit: RMB10,000

		Book	Adjusted	Appraised	Appreciation/	Appreciation/
		value	book value	value	Impairment	Impairment %
Items		A	B	C	D=C-B	E=D/B�100%
1. Current assets	1	100,437.55	100,437.55	102,970.12	2,532.57	2.52
2. Non-current assets in
total	2	76,220.22	76,220.22	82,389.62	6,169.40	8.09
Long-term investments	3	60,574.64	60,574.64	62,111.25	1,536.61	2.54
Fixed assets	4	14,398.87	14,398.87	19,046.63	4,647.76	32.28
Including:
Buildings	5	4,012.39	4,012.39	5,015.82	1,003.43	25.00
Equipment	6	3,077.21	3,077.21	3,287.23	210.02	6.83
Construction-in-progress	7	165.35	165.35	141.30	-24.05	-14.54
Intangible assets	8	1,081.36	1,081.36	1,090.45	9.09	0.84
Including:
Land use rights	9	1,081.36	1,081.36	1,090.45	9.09	0.84
Other assets	10	0.00	0.00	0.00	0.00	0.00
3. Total assets	11	176,657.77	176,657.77	185,359.74	8,701.97	4.93
4. Current liabilities	12	144,732.21	144,732.21	144,697.87	-34.34	-0.02
5. Non-current liabilities	13	0.00	0.00	0.00	0.00	0.00
6. Total liabilities	14	144,732.21	144,732.21	144,697.87	-34.34	-0.02
7. Net assets	15	31,925.56	31,925.56	40,661.87	8,736.31	27.36

Note: the fixed assets value of the Moulds and Clamps Branch which has been sold is directly included in the fixed assets value, therefore, the aggregate value of buildings, equipment and construction-in-progress is different from the value of fixed assets.

The Report is valid for a period of one year, commencing from the Basic Appraisal Date of 31 May 2008 and ending on 30 May 2009.

The Report has been prepared specifically for the Assignor and the purpose stated in the Report as well as for submission to and review by the State-owned Assets Supervision and Administration Commission of the State Council, China Securities Regulatory Commission and the relevant authorities. The right to use the Report resides with the Assignor. In the absence of the written consent of the Assignor and DeveChina, no one shall provide the Report, or any part thereof, to any other persons, nor publish the Report. Unless required by law, the Report, or any part thereof, should not be publicized via any public media means.

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APPENDIX III

VALUATION REPORTS

DeveChina International Assets Evaluation Co., Ltd. (“DeveChina”) was established on 17 February 1993 (Business License Reg. no. 110000005010482). It is a qualified assets valuation company for securities-related business as recognized by both the State-owned Assets Supervision and Administration Commission of the State Council and China Securities Regulatory Commission since 9 April 1993 (Cert. no. 0000001). DeveChina is licensed to undertake assets valuation business by Beijing Finance Bureau commencing 17 February 1993 (Cert. no. 11020017).

Valuers participated in the said valuation, who are registered valuers as approved by and registered with the National Assets Valuation Association are as follows:

Name	Cert./Reg. no.	Certificate issuance date	Registered since
Chen Si	11020142	28 March 2007	23 August 2002
Niu Zhigang	64030002	7 March 2007	11 July 2003

DeveChina International Assets Evaluation Co., Ltd. 11 September 2008

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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 9:00 a.m. on 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, approve, ratify and confirm the following resolution. Unless otherwise indicated, capitalized terms used in this notice and the following resolution shall have the same meanings as those defined in the circular of the Company dated 3 November 2008:

ORDINARY RESOLUTION

1. “ THAT :

2. (a) the terms and conditions of the Acquisition Agreement and the supplemental agreement thereto (copies of which have been produced to this meeting marked “A” and initialed by the Chairman of the meeting), which provide, among other matters,

3. (i) the acquisition of the Aviation Assets by Changhe Auto from AVIC I and AVIC II (or AVIC, upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) at an aggregate Consideration of RMB793,177,100 (equivalent to approximately HK$901,757,800);

4. (ii) the transfer of the Automobile Assets (including liabilities) by Changehe Auto to AVIC (upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) in satisfaction of part of the Consideration as to RMB406,618,700; and

5. (iii) the issue by Changhe Auto of no more than 74,625,174 new Changhe Shares to AVIC (upon its establishment after completion of the proposed merger and reorganization of AVIC I and AVIC II) at an issue price of RMB5.18 per Consideration Share, credited as fully paid, in satisfaction of the remaining portion of the Consideration as to an amount of no less than RMB386,558,400 (equivalent to approximately HK$439,475,700);

be and is hereby approved, ratified and confirmed; and

* For identification purpose only.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

• (b) the Directors (or any one of them) be and are hereby authorized to implement and take all steps and to do all acts and things as may be necessary or desirable to give effect and/or to complete or in connection with the transactions contemplated under the Acquisition Agreement, and to sign and execute such further documents or to do any other matters incidental thereto and/or as contemplated thereunder and to make changes or amendments to the Acquisition Agreement and the supplemental agreement thereto as the Directors (or any one of them) may in their absolute discretion deem fit.”

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

Hong Kong, 3 November 2008

Notes:

• (1) Closure of register of members and eligibility to attend the 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 names appear on the Company’s Register of Members before the close of business hours on 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 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 the attendance, and return the same to the correspondence address designated by the Company not later than 20 days before the date of the EGM, i.e. before 25 November 2008.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

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

• (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 wishes to appoint a proxy should first review the form of proxy for use in the EGM.

• (b) For any shareholder who has appointed more than one proxy, such proxies shall only vote on a poll. 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 resolution 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 Fangyang, 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.

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