Star Plus Legend Holdings Limited — Proxy Solicitation & Information Statement 2009

Aug 27, 2009

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 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).

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

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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)

(1) PROPOSED ISSUE OF SHARES BY HONGDU AVIATION;

(2) DISCLOSEABLE AND CONNECTED TRANSACTIONS: (A) SUBSCRIPTION OF HONGDU AVIATION SHARES BY A CONNECTED PERSON; (B) ACQUISITION OF AIRCRAFT BUSINESS ASSETS BY HONGDU AVIATION;

(3) CONNECTED TRANSACTION: PROPOSED CAPITAL CONTRIBUTION TO CHANGJIANG GENERAL AVIATION;

(4) DISCLOSEABLE TRANSACTION:DEEMED DISPOSAL OF INTEREST IN HONGDU AVIATION BY THE COMPANY;

AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

Independent financial adviser to the Independent Board Committee and Independent Shareholders

SOMERLEY LIMITED

A letter from the Independent Board Committee is set out on page 21 of this circular. A letter from Somerley to the Independent Board Committee and the Independent Shareholders is set out on pages 22 to 40 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, 28 September 2009 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 65 to 68 of this circular.

Shareholders who intend to attend the EGM shall complete and return the reply slip in accordance with the instructions printed thereon before Tuesday, 8 September 2009. 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

28 August 2009

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	21
Letter from Somerley. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Appendix I — Valuation Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41
Appendix II — General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	61
Notice of Extraordinary General Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	65

— i —

DEFINITIONS

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

• “Aircraft Business Assets”

the aircraft business in relation to L15 advanced trainer and other related assets of Hongdu Group to be acquired by Hongdu Aviation pursuant to the Assets Acquisition Agreement dated 29 July 2009 entered into between Hongdu Group and Hongdu Aviation

• “Assets Acquisition Agreement”

the assets acquisition agreement entered into between Hongdu Group and Hongdu Aviation on 29 July 2009, as amended by a supplemental agreement dated 18 August 2009 to vary certain terms of Assets Acquisition Agreement

• “AVIC”

China Aviation Industry Corporation, the controlling shareholder of the Company and holding as to 61.06% equity interests in the Company

• “Board”

the board of directors of the Company

• “Changjiang General Aviation”

Changjiang General Aviation Co., Ltd., 江西長江通用航空有 限公司, a limited company established in the PRC, which is held as to 76.19% by Hongdu Aviation and as to the remaining 23.81% by Hongdu Group. Changjiang General Aviation is a connected person of the Company under the Hong Kong Listing Rules by reason of AVIC’s substantial shareholding of 23.81% in Changjiang General Aviation through Hongdu Group

• “Company”

• AviChina Industry & Technology Company Limited

• “Completion”

• completion of the subscriptions by the Company, Hongdu Group and the eight qualified investors contemplated under the proposed Placing

• “CSRC”

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

• “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

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DEFINITIONS

• “EGM” the extraordinary general meeting to be held on Monday, 28 September 2009, to approve, ratify and confirm the entering into of Subscription Agreement I, Subscription Agreement II and the Assets Acquisition Agreement; and the proposed terms and conditions under the agreement(s) of the proposed Placing to be entered into between Hongdu Aviation and not more than 8 other qualified investors

• “Hongdu Aviation” Jiangxi Hongdu Aviation Industry Co., Ltd., a joint stock limited company whose shares are listed on the Shanghai Stock Exchange and owned as to 55.29% by the Company

• “Hongdu Aviation Shares” the shares of Hongdu Aviation which are listed on the Shanghai Stock Exchange

• “Hongdu Group” Jiangxi Hongdu Aviation Industrial Group Corporation, a wholly-owned subsidiary of AVIC

• “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 Hong Kong Stock Exchange in HK dollars

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

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

• “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 and its associates (if any)) who are not required to abstain from voting on the resolutions to be proposed at the EGM of the Company to approve the connected transactions to be constituted by (a) Subscription Agreement II and (b) Assets Acquisition Agreement

• “Latest Practicable Date” 21 August 2009, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

• “Placing” or “proposed Placing” the proposed placing of not more than 106,000,000 new Hongdu Aviation Shares to the Company, Hongdu Group and not more than eight qualified investors by Hongdu Aviation at the Subscription Price

• “PRC” the People’s Republic of China

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DEFINITIONS

“RMB” “SASAC”

Renminbi, the lawful currency of the PRC

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” “Shareholders”

the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) as amended from time to time

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

• “Subscription Agreements”

Subscription Agreement I and Subscription Agreement II

“Subscription Agreement I”

the conditional share subscription agreement entered into between the Company and Hongdu Aviation on 29 July 2009, as amended by a supplemental agreement dated 18 August 2009 to vary certain terms under Subscription Agreement I

“Subscription Agreement II”

the conditional share subscription agreement entered into between Hongdu Group and Hongdu Aviation on 29 July 2009, as amended by a supplemental agreement dated 18 August 2009 to vary certain terms under Subscription Agreement II

“Subscription Price” being not less than RMB23.78 per new Hongdu Aviation Share, which will be finally determined in accordance with the relevant PRC regulations, based on the bidding prices offered by the targeted investors

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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

Non-executive Directors:

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

Registered Office:

8th Floor, Tower 2 No. 5A Rongchang East Street Beijing Economic-Technological Development Area Beijing, PRC

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

28 August 2009

To the Shareholders:

Dear Sir or Madam,

(1) PROPOSED ISSUE OF SHARES BY HONGDU AVIATION;

(2) DISCLOSEABLE AND CONNECTED TRANSACTIONS: (A) SUBSCRIPTION OF HONGDU AVIATION SHARES BY A CONNECTED PERSON; AND (B) ACQUISITION OF AIRCRAFT BUSINESS ASSETS BY HONGDU AVIATION;

• (3) CONNECTED TRANSACTION: PROPOSED CAPITAL CONTRIBUTION TO CHANGJIANG GENERAL AVIATION;

(4) DISCLOSEABLE TRANSACTION: DEEMED DISPOSAL OF INTEREST IN HONGDU AVIATION BY THE COMPANY;

AND

NOTICE OF EXTRAORDINARY GENERAL MEETING

• For identification purpose only.

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LETTER FROM THE BOARD

INTRODUCTION

Reference is made to the announcement of the Company dated 7 August 2009 and the supplemental announcement dated 18 August 2009.

The board of Hongdu Aviation, a non-wholly owned subsidiary of the Company and the A Shares of which are listed on the Shanghai Stock Exchange, resolved on 29 July 2009 to issue not more than 106,000,000 new Hongdu Aviation Shares for subscription by not more than 10 qualified investors including the Company and Hongdu Group, such new Hongdu Aviation Shares will be listed on the Shanghai Stock Exchange. The Subscription Price will be determined in accordance with the bidding process but not less than RMB23.78 for each Hongdu Aviation Share. The total proceeds will be RMB2,500 million, which will be used for acquisition of Aircraft Business Assets, capital contribution to Changjiang General Aviation and other aviation business capital investment. The proposed placing of new Hongdu Aviation Shares is subject to approval by the PRC government authorities such as SASAC, CSRC and the State Administration of Science Technology and Industry for Defence.

On 29 July 2009, Hongdu Aviation entered into three agreements in respect of the proposed issue of new Hongdu Aviation Shares, namely, (1) Subscription Agreement I pursuant to which Hongdu Aviation agrees to issue and the Company agrees to subscribe, subject to conditions and adjustment, for approximately 10,513,036 new Hongdu Aviation Shares at the Subscription Price, which will be paid by the Company using its internal resources; and (2) Subscription Agreement II pursuant to which Hongdu Aviation agrees to issue and Hongdu Group, a wholly-owned subsidiary of AVIC, agrees to subscribe, subject to conditions and adjustment, for approximately 23,128,680 new Hongdu Aviation Shares at the Subscription Price, which will be paid by Hongdu Group using its internal resources; and (3) Assets Acquisition Agreement pursuant to which Hongdu Aviation agrees to acquire the Aircraft Business Assets from Hongdu Group. The consideration will be paid by Hongdu Aviation in cash. Upon Completion, the Company and Hongdu Group will be interested in approximately 44.81% and 5.83%, respectively of the issued share capital of Hongdu Aviation, after the proposed Placing of Hongdu Aviation Shares.

As AVIC is the controlling shareholder of the Company, holding 61.06% equity interests in the Company and Hongdu Group is a wholly-owned subsidiary of AVIC, pursuant to Chapter 14A of the Hong Kong Listing Rules, AVIC is a connected person of the Company and Hongdu Group is an associate of AVIC. Therefore, the subscription of new Hongdu Aviation Shares by Hongdu Group in the proposed Placing and the acquisition of the Aircraft Business Assets by Hongdu Aviation from Hongdu Group will constitute discloseable and connected transactions of the Company under the Hong Kong Listing Rules and will be subject to approval by Independent Shareholders.

Part of the proceeds to be raised by the proposed Placing, amounting to RMB49,960,000, will be contributed as capital by Hongdu Aviation into Changjiang General Aviation, a non-wholly owned subsidiary of Hongdu Aviation, which is owned as to 76.19% by Hongdu Aviation and as to 23.81% by Hongdu Group as at the Latest Practicable Date pursuant to the capital contribution agreement dated 18 August 2009. The proposed capital contribution will also constitute a connected transaction

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LETTER FROM THE BOARD

of the Company under the Hong Kong Listing Rules. As the relevant percentage ratios exceed 0.1% but are less than 2.5%, the connected transaction constituted by the proposed capital contribution is only subject to announcement and reporting requirements but is exempt from the independent shareholders’ approval requirement pursuant to the Hong Kong Listing Rules.

Upon Completion, the aggregate shareholding of Hongdu Aviation held by the Company will be diluted from 55.29% to approximately 44.81%. Such dilution of 10.48% will constitute a deemed disposal of the interest in Hongdu Aviation by the Company pursuant to Rule 14.29 of the Hong Kong Listing Rules as well as a discloseable transaction under Chapter 14 of the Hong Kong Listing Rules. Upon Completion, the interest held by Hongdu Group in Hongdu Aviation will increase from 1.03% to 5.83%. To ensure Hongdu Aviation will continue to remain as a subsidiary of the Company, the Company and Hongdu Group entered into an agreement on 29 July 2009 whereby subsequent to Completion, Hongdu Group undertakes to exercise the right of proposing resolutions and voting held by it in Hongdu Aviation in accordance with the instructions of the Company. Accordingly, upon Completion, Hongdu Aviation will continue to be consolidated in the group accounts of the Company following the Completion.

The purpose of this circular is to provide you with more information relating to, among other things, (1) further details of the proposed Placing including the connected transaction which will be constituted by (a) the subscription of new Hongdu Aviation Shares by Hongdu Group; (b) the acquisition of the Aircraft Business Assets by Hongdu Aviation from Hongdu Group under the Assets Acquisition Agreement; and (c) the capital contribution to Changjiang General Aviation; and (2) the letter from the Independent Board Committee of the Company and the recommendation from the independent financial adviser of the Company on the connected transactions mentioned above.

A. The proposed Placing by Hongdu Aviation

Particulars of the proposed terms of the proposed Placing by Hongdu Aviation are as follows:

1. Nominal value of the new Hongdu Aviation Shares:

RMB1 per Hongdu Aviation Share.

1. Placing Methods:

Private placing of new Hongdu Aviation Shares at an appropriate time within 6 months from the date of approval by CSRC.

1. Number of Hongdu Aviation Shares to be issued:

Not more than 106,000,000 Hongdu Aviation Shares.

1. Placing Targets:

The Company, Hongdu Group and not more than 8 other qualified investors, who shall be independent parties. Hongdu Aviation has entered into Subscription Agreement I and Subscription Agreement II with the Company and Hongdu Group, respectively. No placing agreement has been entered into by Hongdu Aviation with any other qualified investors.

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LETTER FROM THE BOARD

5. Placing Price

Not less than 90% of the average price of the Hongdu Aviation Shares for the last 20 trading days on the Shanghai Stock Exchange immediately preceding the date of suspension of trading of the Hongdu Aviation Shares on the Shanghai Stock Exchange on 23 July 2009, being not less than RMB23.78 for each Hongdu Aviation Share. The placing price per Hongdu Aviation Share for other qualified investors shall be the same as the Subscription Price. It is expected that the placing price will be finally determined on or before 31 December 2009.

6. Pricing Principles

To be determined based on the market price of the Hongdu Aviation Shares, which will be determined by the bidding process.

7. Use of proceeds

The total proceeds, which is estimated to be approximately RMB2,500 million (inclusive of the amount to be paid by the Company and Hongdu Group under the Subscription Agreement I & Subscription Agreement II, respectively) shall be used for the following purposes:

• (a) approximately RMB550 million for the acquisition of the Aircraft Business Assets from Hongdu Group;

• (b) approximately RMB789 million on the reconstruction and upgrading project on the batch productivity of Export Type L15 advanced training planes;

• (c) approximately RMB304 million on the reconstruction and upgrading project on the subcontract production technique for foreign aviation products;

• (d) approximately RMB329 million on the research project on advanced business jet;

• (e) approximately RMB136 million on the reconstruction and upgrading project for the batch productivity of N5B agriculture multi-purpose aircraft;

• (f) approximately RMB50 million on the reconstruction and upgrading project for domestic aviation production technique;

• (g) approximately RMB41 million on the reconstruction and upgrading project for the research and development of new primary training aircraft;

• (h) approximately RMB50 million on the reconstruction and upgrading project for improving the operation ability of Changjiang General Aviation;

• (i) approximately RMB50 million on the supplementary reconstruction and upgrading project for the basic conditions relating to certain special foundation;

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LETTER FROM THE BOARD

• (j) approximately RMB46 million on the supplementary reconstruction and upgrading project for the basic conditions relating to physical and/or chemical computation; and

• (k) the remaining RMB160 million will be used for working capital purposes of Hongdu Aviation.

If the proposed placing to not more than 8 other qualified investors by Hongdu Aviation at the Subscription Price could not proceed because of the then market condition or otherwise, Hongdu Aviation would still proceed with the proposed placing to the Company and Hongdu Group to pursue business projects of a higher priority. Funds raised from the above placings totaling approximately RMB800 million would be applied principally to acquire the Aircraft Business Assets and as working capital for the intended batch production of the export models of the L15 advanced trainers.

8. Lock-up period

The new Hongdu Aviation Shares proposed to be subscribed by the Company and Hongdu Group pursuant to Subscription Agreement I and Subscription Agreement II respectively will be subject to a lock-up period of 36 months commencing from the date upon which completion of the allotment of the relevant Hongdu Aviation Shares takes place. The new Hongdu Aviation Shares proposed to be subscribed by the other qualified investors will be subject to a lock-up period of 12 months commencing from the date upon which completion of the allotment of the relevant Hongdu Aviation Shares takes place.

B. THE SUBSCRIPTION AGREEMENTS

In respect of the proposed Placing, the Company has entered into Subscription Agreement I to undertake to subscribe, subject to conditions and adjustment, for approximately 10,513,036 new Hongdu Aviation Shares and Hongdu Group has entered into Subscription Agreement II to undertake to subscribe, subject to conditions and adjustment, for approximately 23,128,680 new Hongdu Aviation Shares. A summary of the major terms of the two Subscription Agreements are as follows:

B.1 Subscription Agreement I

Date

29 July 2009

Parties

• (1) the Company as the subscriber; and

• (2) Hongdu Aviation as the issuer.

Principal Terms

Pursuant to Subscription Agreement I, Hongdu Aviation will issue and the Company will undertake, subject to conditions and completion, to subscribe for approximately 10,513,036 new

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LETTER FROM THE BOARD

Hongdu Aviation Shares, subject to adjustment, among the 106,000,000 new Hongdu Aviation Shares to be issued by Hongdu Aviation. Upon Completion, the total number of Hongdu Aviation Shares held by the Company will increase from 195,049,638 Hongdu Aviation Shares to 205,562,674 Hongdu Aviation Shares, representing a dilution from approximately 55.29% to approximately 44.81 % of the enlarged issued share capital of Hongdu Aviation.

Consideration

Subject to final determination of the Subscription Price per Hongdu Aviation Share, it is estimated that the total consideration for the subscription by the Company of approximately 10,513,036 new Hongdu Aviation Shares will amount to RMB250 million which will be satisfied by the Company using its internal resources. The consideration of RMB250 million shall be paid by the Company in cash within 45 days after completion of Subscription Agreement I.

Subscription Price

The Subscription Price will be finally determined in accordance with the requirements of the relevant PRC regulations, which will be based on the bidding prices for the new Hongdu Aviation Shares submitted by the targeted investors, subject to the minimum price of not less than RMB23.78 per Hongdu Aviation Share (which is determined based on 90% of the average closing price of the Hongdu Aviation Shares on the Shanghai Stock Exchange for the last 20 trading days immediately preceding the date of suspension of trading of the Hongdu Aviation Shares on the Shanghai Stock Exchange on 23 July 2009). If the Subscription Price so determined is more than RMB23.78 per Hongdu Aviation Share, the number of Hongdu Aviation Shares to be issued to the Company will be adjusted accordingly.

In the event that the proposed placing to not more than 8 other qualified investors by Hongdu Aviation does not proceed, the unit Subscription Price under Subscription Agreement I would be RMB23.78 per Hongdu Aviation Share.

Conditions on which Subscription Agreement I will become effective

Subscription Agreement I is subject to, among other things, the following conditions:-

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

• (2) Hongdu Aviation having convened the board meeting and general meeting to approve the transaction;

• (3) the Company having completed and satisfied all the necessary corporate procedures with the requirements of its articles of association and the listing rules of the place where its securities are listed ;

• (4) Hongdu Group having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association;

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LETTER FROM THE BOARD

• (5) approval of SASAC;

• (6) approval of State Administration of Science Technology and Industry for Defence;

• (7) approval of CSRC; and

• (8) a waiver from CSRC in relation to the general offer obligations of the Company and Hongdu Group and/or AVIC, the controlling shareholder of the Company and Hongdu Group.

Rights of the subscribed new Hongdu Aviation Shares

The new Hongdu Aviation Shares to be subscribed by the Company will on issue rank equally with the existing Hongdu Aviation Shares.

Completion

Completion of Subscription Agreement I will occur within 180 days from the date upon which the conditions set out above have been satisfied (or such other date as may be agreed in writing between the parties).

Upon Completion, the interest held by the Company in Hongdu Aviation will be diluted from 55.29% to 44.81% whereas the interest of Hongdu Group in Hongdu Aviation will increase from 1.03% to 5.83%. To ensure Hongdu Aviation will continue to remain as a subsidiary of the Company, the Company and Hongdu Group entered into an agreement on 29 July 2009 whereby it was agreed that subsequent to Completion, Hongdu Group undertakes to exercise the right of proposing resolutions and voting held by it in Hongdu Aviation in accordance with the instructions of the Company. Accordingly, upon Completion, Hongdu Aviation will continue to be consolidated in the group accounts of the Company following the Completion. The undertaking given by Hongdu Group will remain effective unless and until the occurrence of any of the following events, namely, (i) the Company has, either by way of capital injection in Hongdu Aviation or acquisition of Hongdu Aviation Shares, obtained more than 50% equity interest in Hongdu Aviation; (ii) the Company and Hongdu Group collectively hold less than 50% equity interest in Hongdu Aviation as a result of the Company transferring its equity interest in Hongdu Aviation, either in part or in whole; or (iii) the Company agrees in writing to release Hongdu Group from its obligation pursuant to the undertaking.

The Company does not subscribe the new Hongdu Aviation Shares to the extent that it can maintain its percentage interest in Hongdu Aviation. This is because (1) The Company has other investment opportunities available to it and intends to optimize its available resources; and (2) Arrangements have been made with Hongdu Group so that the position of Hongdu Aviation as a subsidiary will not change after completion of the proposed Placing.

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LETTER FROM THE BOARD

B.2 Subscription Agreement II

Date

29 July 2009

Parties

• (1) Hongdu Group as the subscriber; and

• (2) Hongdu Aviation as the issuer.

Principal Terms

Pursuant to Subscription Agreement II, Hongdu Aviation will issue and Hongdu Group will subscribe, subject to conditions and completion, for approximately 23,128,680 new Hongdu Aviation Shares, subject to adjustment, among the 106,000,000 new Hongdu Aviation Shares to be issued by Hongdu Aviation. Upon Completion, the total number of Hongdu Aviation Shares held by Hongdu Group will increase from 3,630,627 Hongdu Aviation Shares to 26,759,307 Hongdu Aviation Shares, representing an increase from the existing 1.03% to approximately 5.83 % of the enlarged issued share capital of Hongdu Aviation.

Consideration

Subject to the final determination of the Subscription Price per Hongdu Aviation Share, it is estimated that the total consideration for the subscription by Hongdu Group of approximately 23,128,680 new Hongdu Aviation Shares will amount to approximately RMB550 million, which will be satisfied by Hongdu Group using its internal resources. The consideration of RMB550 million shall be paid by Hongdu Group in cash within 45 days after completion of Subscription Agreement II.

Subscription Price

The Subscription Price will be finally determined in accordance with the relevant PRC regulations, which will be based on the bidding prices for the new Hongdu Aviation Shares submitted by the targeted investors, subject to the minimum price of not less than RMB23.78 per Hongdu Aviation Share (which is determined based on 90% of the average closing price of the Hongdu Aviation Shares on the Shanghai Stock Exchange for the last 20 trading days immediately preceding the date of suspension of trading of the Hongdu Aviation Shares on the Shanghai Stock Exchange on 23 July 2009). If the Subscription Price so determined is more than RMB23.78 per Hongdu Aviation Share, the number of Hongdu Aviation Shares to be issued to Hongdu Group will be adjusted accordingly.

In the event that the proposed placing to not more than 8 other qualified investors by Hongdu Aviation does not proceed, the unit Subscription Price under the Subscription Agreement II would be RMB23.78 per Hongdu Aviation Share.

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LETTER FROM THE BOARD

Conditions on which the Subscription Agreement II will become effective

Subscription Agreement II is subject to, among other things, the following conditions:-

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

• (2) Hongdu Aviation having convened the board meeting and general meeting to approve the transaction;

• (3) the Company having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association and the listing rules of the place where its securities are listed;

• (4) Hongdu Group having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association;

• (5) approval of SASAC;

• (6) approval of State Administration of Science Technology and Industry for Defence;

• (7) approval of CSRC; and

• (8) a waiver from CSRC in relation to the general offer obligations of the Company and Hongdu Group and/or AVIC, the controlling shareholder of the Company and Hongdu Group.

Rights of the subscribed new Hongdu Aviation Shares

The new Hongdu Aviation Shares subscribed by Hongdu Group will on issue rank equally with the existing Hongdu Aviation Shares.

Undertaking by Hongdu Group

Hongdu Group undertakes that upon Completion, if the aggregate interest held by AviChina and Hongdu Group is less than 50% of the total issued shares of Hongdu Aviation, it will increase its subscription consideration to the extent that the aggregate interest to be held by AviChina and Hongdu Group in Hongdu Aviation will not be less than 50% of the total issued shares of Hongdu Aviation.

Completion

Completion of Subscription Agreement II will occur within 180 days from the date upon which the conditions set out above have been satisfied (or such other date as may be agreed in writing between the parties).

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LETTER FROM THE BOARD

• B.3 Assets Acquisition Agreement

Date

29 July 2009

Parties

• (1) Hongdu Aviation as the purchaser; and

• (2) Hongdu Group as the vendor.

Principal Terms

The Aircraft Business Assets are assets in relation to the production of Export Type L15 advanced trainer and related assets held by Hongdu Group. Such assets mainly comprise Hongdu Mechanical and Electrical Services Workshop, Hongdu Industrial Assembly and Equipment Workshop, Hongdu Standard Equipment Workshop, aircraft assembly equipment, aircraft flight test facilities, assets of aircraft development and testing, and assets in Changnan industrial area. The original purchase cost of the Aircraft Business Assets amounted to approximately RMB 600 million (excludes intangible assets).

According to the audit report prepared by Zhongrui Yuehua CPAs, a certified PRC auditor and based on the financial report prepared under the Generally Accepted Accounting Principles in the PRC, as at 30 June 2009, the total assets and net assets of Aircraft Business Assets amounted to RMB555,697,980 and RMB550,645,400, respectively.

According to the Assets Valuation Report prepared by the PRC certified valuer, namely, China Assets Appraisal Co., Ltd., using the assets based valuation method, as at 30 June 2009, the total assets and net assets of Aircraft Business Assets amounted to RMB579,286,500 and RMB574,233,900, respectively. The final consideration amount for the acquisition of Aircraft Business Assets is to be determined based on the assets valuation figures filed with SASAC and subject to the final confirmation of SASAC. The Directors do not currently anticipate material changes to the valuation as confirmed by SASAC.

Consideration

The total consideration for the acquisition of Aircraft Business Assets by Hongdu Aviation is subject to confirmation by SASAC, which is expected to be approximately RMB574 million to be paid by Hongdu Aviation using part of the proceeds of the proposed Placing upon completion of the Assets Acquisition Agreement.

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LETTER FROM THE BOARD

Conditions on which the Assets Acquisition Agreement will become effective

The Assets Acquisition Agreement is subject to, among other things, the following conditions:

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

• (2) Hongdu Aviation having convened the board meeting and general meeting to approve the transaction;

• (3) the Company having completed and satisfied all the necessary corporate procedures respectively in accordance with the requirements of its articles of association and the listing rules of the place where its securities are listed;

• (4) Hongdu Group having completed and satisfied all the necessary corporate procedures in accordance with the requirements of its articles of association;

• (5) approval of State Administration of Science Technology and Industry for Defence;

• (6) approval of SASAC;

• (7) the assets valuation be filed with SASAC;

• (8) the proposed Placing being approved by CSRC; and

• (9) a waiver from CSRC in relation to the general offer obligations of the Company and Hongdu Group and/or AVIC, the controlling shareholder of the Company and Hongdu Group.

Completion

Completion of Assets Acquisition Agreement will occur within six(6) months from the date upon which the conditions set out above have been satisfied (or such other date as may be agreed in writing between the parties).

C. CAPITAL CONTRIBUTION TO CHANGJIANG GENERAL AVIATION

Hongdu Aviation, Hongdu Group and Changjiang General Aviation entered into the capital contribution agreement on 18 August 2009. Pursuant to the capital contribution agreement, Hongdu Aviation will use part of its placing proceeds amounting to RMB49,960,000 as capital contribution to Changjiang General Aviation. Upon completion of the proposed capital contribution, the interest in Changjiang General Aviation held by Hongdu Aviation will increase from 76.19% to 95.87% and the remaining 4.13% interest will be held by Hongdu Group.

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LETTER FROM THE BOARD

According to the audit report prepared by Zhongrui Yuehua CPAs, a certified PRC auditor and based on the financial report prepared under the Generally Accepted Accounting Principles in the PRC, as at 30 June 2009, the total assets and net assets of Changjiang General Aviation amounted to RMB3,897,900 and RMB2,519,600, respectively.

According to the Assets Valuation Report prepared by PRC certified valuer, namely, China Assets Appraisal Co., Ltd., using the asset- based valuation method, as at 30 June 2009, the total assets and net assets of Changjiang General Aviation amounted to RMB4,108,400 and RMB2,730,100, respectively. For the six months ended 30 June 2009, the revenue and net profit of Changjiang General Aviation amounted to RMB 1,922,600 and RMB900, respectively. For the year ended 31 December 2008, the revenue and net profit of Changjiang General Aviation amounted to RMB3,232,000 and RMB293,300 respectively.

Changjiang General Aviation is principally engaged in providing general aviation services to villages located in Huadong regions of the PRC, as well as provision of services such as aerial forest protection and seeding, aerial photography, aerial application of chemicals for agricultural purposes, aerial recreational and entertainment performances.

D. INTERCONDITIONALITY OF THE TRANSACTIONS

Subscription Agreement I and Subscription Agreement II are inter-conditional with each other.

Placing to the other 8 qualified investors is conditional on Subscription Agreement I and Subscription Agreement II.

The Assets Acquisition Agreement is conditional upon completion of Subscription Agreement II.

Capital contribution to Changjiang General Aviation is conditional on the Subscription Agreement I and Subscription Agreement II, but is not conditional on the placing to the other 8 qualified investors or the Assets Acquisition Agreement.

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LETTER FROM THE BOARD

E. DEEMED DISPOSAL OF INTEREST IN HONGDU AVIATION, EFFECTS OF THE SUBSCRIPTION AND FINANCIAL IMPLICATIONS

The table below sets out the shareholding structures of Hongdu Aviation before and upon Completion (on the assumption that the Subscription Price per new Hongdu Aviation Share is RMB23.78):

			Approximate
	Number of	Approximate	Number of	Approximate
	Hongdu	% of the	Hongdu	% of the
	Aviation	issued share	Aviation	issued share
	Shares held	capital held	Shares held	capital held
Name of Shareholder of Hongdu	before	before	upon	upon
Aviation	Completion	Completion	Completion	Completion
The Company	195, 049,638	55.29	205,562,674	44.81
Hongdu Group	3,630,627	1.03	26,759,307	5.83
Sub-total:	198,680,265	56.32	232,321,981	50.64
Public shareholders	154,119,735	43.68	226,478,019	49.36
Total	352,800,000	100	458,800,000	100

Note:

The gain/loss (*) on the deemed disposal is calculated by the change in the attributable net asset values of Hongdu Aviation held by the Company before and after the proposed Placing based on the difference between the net asset value of Hongdu Aviation attributable to the Company before the proposed Placing (which is 55.29% x net asset value of Hongdu Aviation) and the net asset value of Hondgu Aviation attributable to the Company after the proposed Placing (which is 44.81% (subject to adjustment) x {net asset value of Hongdu Aviation + RMB 2.5 billion net placement proceeds}) less RMB 0.25 billion placement proceeds contributed directly by the Company. Based on the net asset value of Hongdu Aviation of RMB1.7 billion as at 31 December 2008, the disposal gain is estimated to be approximately RMB0.7 billion. The actual gain or loss cannot be ascertained at this stage because the net asset value of Hongdu Aviation can only be determined upon completion of the proposed Placing.

(*) The gain/loss will be reflected as a credit/debit movement to reserves and will not be included in the consolidated income statement of the Group.

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LETTER FROM THE BOARD

F. REASONS FOR ENTERING INTO THE TRANSACTIONS

Reasons for the Placing and Subscription of new Hongdu Aviation Shares

1. Upon Completion, Hongdu Aviation will make use of the proceeds of Placing to acquire the aircraft business and related assets held by Hongdu Group, and to upgrade the technical and production capabilities of Hongdu Aviation.

2. There are certain connected transactions between Hongdu Aviation and the Aircraft Business Assets of Hongdu Group to be acquired by Hongdu Aviation. Upon completion of the acquisition of the Aircraft Business Assets by Hongdu Aviation from Hongdu Group, the connected transactions between Hongdu Aviation and Hongdu Group would be substantially reduced.

3. The Aircraft Business Assets will provide production and assembly services, such as flight experimentation, to Hongdu Aviation. Upon completion of the acquisition of the Aircraft Business Assets, Hongdu Aviation will further improve its aviation aircraft design and manufacturing chain.

4. The acquisition of the Aircraft Business Assets will improve the production efficiency of Hongdu Aviation and the reconstruction and upgrading projects will improve the technical level of Hongdu Aviation on the relevant aircraft models and other production capabilities. Hongdu Aviation will be able to break through its production capabilities bottlenecks and strengthen its core competitiveness.

Reasons for the capital contribution to Changjiang General Aviation

The capital contribution of Hongdu Aviation to Changjiang General Aviation will provide additional capital to Changjiang General Aviation for purchasing aircrafts and enhance its capabilities for participation in high value-added operation projects, extend its development in the general aviation industry, satisfy the demands of Jiangxi province and the surrounding areas for general aviation projects and promote its market competitiveness.

G. HONG KONG LISTING RULES IMPLICATIONS

As at the Latest Practicable Date, AVIC, through the Company and Hongdu Group, holds an aggregate of 56.32% of the issued share capital of Hongdu Aviation. As AVIC is the controlling shareholder of the Company, holding 61.06% equity interests in the Company and Hongdu Group is a wholly-owned subsidiary of AVIC, pursuant to Chapter 14A of the Hong Kong Listing Rules, AVIC is a connected person of the Company and Hongdu Group is an associate of AVIC. Therefore, the subscription of new Hongdu Aviation Shares by Hongdu Group, the acquisition of Aircraft Business Assets by Hongdu Aviation from Hongdu Group and the proposed capital injection of RMB 49,960,000 by Hongdu Aviation to Changjiang General Aviation, a subsidiary of Hongdu Aviation, which is held as to more than 10% by AVIC through Hongdu Group, will constitute connected transactions of the Company under the Hong Kong Listing Rules.

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LETTER FROM THE BOARD

As the relevant percentage ratios for the connected transactions constituted by (a) the subscription of new Hongdu Aviation Shares by Hongdu Group and the issue of new Hongdu Aviation Shares to Hongdu Group under Subscription Agreement II; and (b) the acquisition of Aircraft Business Assets by Hongdu Aviation from Hongdu Group under the Assets Acquisition Agreement respectively exceed 2.5%, the connected transactions contemplated under the Subscription Agreement II and the Assets Acquisition Agreement will be subject to approval by Independent Shareholders.

As the relevant percentage ratios for the connected transaction constituted by the capital contribution by Hongdu Aviation to Changjiang General Aviation exceed 0.1% but are less than 2.5%, the connected transaction constituted by the proposed capital contribution is only subject to announcement and reporting requirements but is exempt from the independent shareholders’ approval requirement pursuant to the Hong Kong Listing Rules.

Further, upon Completion, the aggregate shareholding of Hongdu Aviation held by the Company will be diluted from 55.29% to approximately 44.81%. Such dilution constitutes a deemed disposal of the interest held by the Company in Hongdu Aviation pursuant to Rule 14.29 of the Hong Kong Listing Rules as well as a discloseable transaction under the Hong Kong Listing Rules. To ensure that Hongdu Aviation will remain as a subsidiary of the Company, the Company and Hongdu Group has entered into an agreement whereby after Completion, Hongdu Group will exercise the right of proposing resolutions and voting in Hongdu Aviation in accordance with the instructions of the Company.

H. GENERAL

Information on the Company

The Company is mainly engaged in research and development, manufacture and sales of vehicles and civilian aircraft. The Company is held as to 61.06% by AVIC as at the Latest Practicable Date.

Information on Hongdu Aviation

Hongdu Aviation is a joint stock limited company whose shares are listed on the Shanghai Stock Exchange and is owned as to 55.29% by the Company as at the Latest Practicable Date. Hongdu Aviation is mainly engaged in research, development, manufacture, sale and maintenance of basic training aircrafts, general civilian aircrafts as well as aviation spare parts. It is also engaged in subcontract manufacturing of aviation products. The net profits before and after tax of Hongdu Aviation were RMB129 million and RMB116 million for the financial year ended 31 December 2007 and RMB114 million and RMB102 million for the year ended 31 December 2008. The net asset value of Hongdu Aviation as at 31 December 2008 was approximately RMB1.7 billion.

Information on Hongdu Group

Hongdu Group is a wholly-owned subsidiary of AVIC and is mainly engaged in manufacture and sale of aviation products.

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LETTER FROM THE BOARD

Information on AVIC

AVIC is held and controlled by the State Council of the PRC, and is mainly engaged in development and manufacture of aviation products and non-aviation products such as automobile engine and parts and components. AVIC is the controlling shareholder of the Company holding 61.06% equity interest in the Company as at the Latest Practicable Date.

I. THE PREVIOUS PROPOSED PLACING

References are made to the announcement, the supplemental announcement and the circular published by the Company on 9 January 2008, on 22 February 2008 and on 25 February 2008, respectively in relation to the proposed placing of not more than 98,000,000 new Hongdu Aviation Shares for subscription by not more than 10 qualified investors including the Company and Hongdu Group. Due to the international financial market crisis, the proposed placing of not more than 98,000,000 new Hongdu Aviation Shares has not been proceeded and will be replaced by the proposed Placing.

EGM

The notice of the EGM to be held at 9:00 a.m. on Monday, 28 September 2009 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 65 to 68 of this circular, at which four ordinary resolutions will be proposed to approve, among other matters, the terms and conditions of the Subscription Agreement I, the Subscription Agreement II, the agreement(s) of the proposed Placing to be entered into with the 8 other qualified investors and the Assets Acquisition Agreement.

A reply slip and a form of proxy for use at the EGM are enclosed herewith. 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 and its associate(s), if any, are connected persons of the Company as defined under the Hong Kong Listing Rules and they will abstain from voting at the EGM in respect of two of the ordinary resolution numbers 2 and 4 to be proposed at the EGM. As at the Latest Practicable Date, AVIC and its associate(s), if any, directly owned 2,835,305,636 shares, representing approximately 61.06% of the total issued share capital of the Company. AVIC was entitled to control all voting rights in respect of such shares. Pursuant to Rule 13.39(4) of the Hong Kong Listing Rules, all votes at the EGM will be taken by poll. The Company will announce the results of the poll in accordance with the Hong Kong 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

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LETTER FROM THE BOARD

account the advice of Somerley, consider that the terms of the Subscription Agreement II and the Assets Acquisition Agreement are fair and reasonable and the transactions contemplated under the Subscription Agreement II and the Assets Acquisition Agreement are 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 numbers 2 and 4 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

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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

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

(Stock Code: 2357)

28 August 2009

To the Independent Shareholders

Dear Sir or Madam,

We refer to the circular (the “Circular”) dated 28 August 2009 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 Subscription Agreement II and the Assets 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 Subscription Agreement II and the Assets Acquisition Agreement.

We wish to draw your attention to the letter from the Board set out on pages 4 to 20 of the Circular and the letter from Somerley set out on pages 22 to 40 of the Circular.

Having considered the advice given by Somerley, we are of the opinion that the Subscription Agreement II and the Assets Acquisition Agreement are 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 Subscription Agreement II and the Assets Acquisition Agreement are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution numbers 2 and 4 to be proposed at the EGM.

Yours faithfully,

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

* For identification purpose only.

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LETTER FROM SOMERLEY

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

28 August 2009

To: the Independent Board Committee and the Independent Shareholders

Dear Sirs,

SUBSCRIPTION OF HONGDU AVIATION SHARES BY A CONNECTED PERSON AND ACQUISITION OF AIRCRAFT BUSINESS ASSETS BY HONGDU AVIATION

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in connection with the proposed issue by a non-wholly owned subsidiary of the Company, namely Hongdu Aviation, of new Hongdu Aviation Shares to Hongdu Group, and the acquisition of Aircraft Business Assets by Hongdu Aviation from Hongdu Group. Details of the above transactions are contained in the circular to the Shareholders dated 28 August 2009 (the “Circular”), of which this letter forms a part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

Hongdu Group is a wholly-owned subsidiary of AVIC which, as at the Latest Practicable Date, had an approximately 61.06% equity interests in the Company. Hongdu Group is therefore a connected person of the Company and the proposed transactions with Hongdu Group pursuant to the Subscription Agreement II and the Assets Acquisition Agreement will constitute connected transactions of the Company. The proposed transactions are subject to approval by Independent Shareholders by way of poll at the EGM pursuant to the Hong Kong 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 Subscription Agreement II and the Assets Acquisition Agreement entered into between Hongdu Aviation and Hongdu Group. We, Somerley Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

In formulating our advice and recommendation, 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 date of the Circular and will remain so up

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LETTER FROM SOMERLEY

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. We have assumed that all representations contained or referred to in the Circular are true as at the date of the Circular or the Latest Practicable Date (as the case may be) and will remain so up to the time of the EGM. However, we have not conducted any independent investigation into the business and affairs of Hongdu Group or the Group including Hongdu Aviation.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In considering whether the terms of the Subscription Agreement II entered into between Hongdu Aviation and Hongdu Group and the acquisition of Aircraft Business Assets by Hongdu Aviation from Hongdu Group pursuant to the Assets 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. Background to and reasons for entering into the proposed transactions with the Hongdu Group and use of proceeds

On 9 January 2008, the Company announced that Hongdu Aviation, a non-wholly owned subsidiary of the Company whose shares are listed on the Shanghai Stock Exchange, proposed to raise gross proceeds of approximately RMB2,500 million through a private placement of 98 million new Hongdu Aviation Shares to ten qualified investors including the Company and Hongdu Group (the “Previous Placing”) at the minimum unit subscription price of RMB25.4 to finance its expansion plans. Due to the international financial crisis, the Previous Placing has not proceeded and will be replaced by the proposed Placing.

It is intended that Hongdu Aviation would issue under the proposed Placing not more than 106 million new Hongdu Aviation Shares for cash to raise gross proceeds of approximately RMB2,500 million to finance capital investment. The proposed Placing is intended to be made to the Company, Hongdu Group and independent placees (“Independent Placees”). The structure as well as pricing basis and mechanism for the proposed Placing largely follow that of the Previous Placing. For example, subscription price for the new Hongdu Aviation Shares to be issued to the Company and Hongdu Group would be the same as the subscription price per new Hongdu Aviation Share for other qualified investors, which is to be determined by a bidding process, subject to a minimum unit price fixed in accordance with the relevant PRC rules and regulations. However, in the case of the proposed Placing, the subscription for new Hongdu Aviation Shares by the Company and Hongdu Group are inter-conditional on each other. Placing to the Independent Placees (“Proposed Independent Placing”) is conditional on the above but not vice versa.

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LETTER FROM SOMERLEY

We are informed that in considering the financing of the approximately RMB2,500 million capital investment, the management of Hongdu Aviation has considered other financing methods generally available to listed companies, such as bank borrowings and rights issue. Having considered the requirements of the relevant PRC rules and regulations, the pricing terms for the different financing methods and impact of interest expenses for a sizeable bank borrowing on the income statement, the management of Hongdu Aviation came to the conclusion that the proposed Placing is the most preferred financing means. Although the proposed Placing will result in a dilution of the Company’s shareholding in Hongdu Aviation, the magnitude of dilution (as illustrated in the section below headed “Shareholding structure”) is acceptable and can be offset by the merits of the proposed Placing, which would avail Hongdu Aviation of the funding to finance capital investment and would result in enhancement of the Group’s net asset value (as discussed in the section below headed “Financial effect”). Based on the above, we agree with the management of Hongdu Aviation that the proposed Placing is in the interest of the Company.

According to the Directors, Hongdu Aviation intends to embark on an expansion plan using funding from the proposed Placing, including the Proposed Independent Placing. Based on preliminary marketing, management of Hongdu Aviation has received a positive market response to the Proposed Independent Placing. However, since the conclusion of the Proposed Independent Placing is subject to market conditions, Hongdu Aviation has negotiated with the Company and Hongdu Group for placings of an aggregate sum of approximately RMB800 million so that Hongdu Aviation would have funding to pursue business projects of a higher priority. We are informed by the Directors that the respective subscription amounts under the Subscription Agreement I and Subscription Agreement II were fixed after arms length negotiation between Hongdu Aviation and the Company or Hongdu Group. In agreeing to the subscription amounts, the Company and Hongdu Group have referred to, among others, their respective financial positions, cash flow requirements and the possibility of continuing to consolidate the results and financial position of Hongdu Aviation into the financial statements of the Group.

According to the management of the Group, funds raised from the above placings totalling approximately RMB800 million would be applied principally to acquire the Aircraft Business Assets and as working capital for the intended batch production of the export models of the L15 advanced trainer (the “L15 Project”). The L15 Project is jointly developed by Hongdu Aviation and Hongdu Group and the majority of the Aircraft Business Assets are used for the L15 Project. The L15 advanced trainer made its maiden flight in 2006 and it is expected that batch production would commence soon. Given this, the management of Hongdu Aviation considers it now the optimum time to take over the L15 Project which has substantially passed its development stage.

The development of the L15 Project was widely reported in the PRC and overseas press. The L15 advanced trainer is a two-seater supersonic trainer which enables student pilots to complete mission flight training and advanced combat training, as well as all basic jet flight training courses. It is able to travel at supersonic speed, with a maximum speed of approximately 1.4 mach. It is considered one of the most advanced trainers domestically produced in the PRC. The L15 advanced trainer is being actively marketed, and it is expected that the models to be produced by Hongdu Aviation would target the international market. It is believed that the export models of the L15 advanced trainers to be produced by Hongdu Aviation can be priced very competitively to similar trainers manufactured by foreign companies and therefore there would be strong global demand for them.

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LETTER FROM SOMERLEY

As mentioned in the Letter from the Board of this Circular, Hongdu Aviation intends to apply approximately RMB789 million and RMB574 million out of the approximately RMB2,500 million proposed Placing for the L15 Project, including the acquisition of the Aircraft Business Assets from Hongdu Group. We are informed by the Directors that in the event that the Proposed Independent Placing of approximately RMB1,700 million does not proceed and Hongdu Aviation could only raise RMB800 million in total from the placings to Hongdu Group and the Company, any additional funding required for the L15 Project would be financed by Hongdu Aviation’s internal resources and other financing alternatives including bank loans or other debt financings. Having considered the financial position of Hongdu Aviation (which is further discussed in the section below headed “Financial effect”), the Directors are of the view that Hongdu Aviation would have sufficient resources to complete the L15 Project.

Besides being used specifically for the L15 Project, the Aircraft Business Assets will also be used by Hongdu Aviation for other manufacturing functions. This would create continuing connected transactions between Hongdu Aviation and Hongdu Group which is an associate (as defined under the Hong Kong Listing Rules) of AVIC. Therefore, the acquisition would also result in a reduction in the volume of continuing connected transactions between the Group and AVIC. The acquisition of the Aircraft Business Assets would also enable Hongdu Aviation to develop into an integrated aviation entity and would improve Hongdu Aviation’s production efficiency.

2. Business and financial information of the Group

The Company is a joint stock limited company whose shares have been listed on the Hong Kong Stock Exchange since 2003. AVIC had, as at the Latest Practicable Date, an approximately 61.06% equity interest in the Company. Prior to the reorganisation (the “Reorganisation”) carried out for the purpose of facilitating the listing of shares of the Company in 2003, the businesses of the Group were carried out by AVIC. As part of the Reorganisation, AVIC, together with three other promoters, established the Company by injecting most of the assets and equity interests relating to the development and manufacturing of civilian aviation products, vehicles and vehicle engines into the Company. AVIC retained enterprises which are primarily engaged in, among other things, the production of military aviation products. Despite this general business delineation, there is cross-provision of materials and services and other continuing connected transactions between the Group and AVIC or its subsidiaries, which is not unusual in our experience for a business which was spun off from a much bigger group. This includes certain continuing connected transactions entered into between the Group and Hongdu Group which is a wholly-owned subsidiary of AVIC and is mainly engaged in the manufacturing and sale of aviation products.

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LETTER FROM SOMERLEY

The business of the Group comprises principally the aviation segment and the automobile segment. Set out below is the condensed segment information of the Group for the three years ended 31 December 2008 as extracted from the Group’s 2008 and 2007 annual reports:

	Aviation	Automobiles	Total
	RMB’000	RMB’000	RMB’000
For the year ended 31 December 2008
(audited)
Turnover	4,596,140	11,788,744	16,384,884
Segment results	248,542	(633,359)	(384,817)
Segment assets	8,809,718	12,266,867	21,076,585
Interests in associates	302,750	27,219	329,969
Segment liabilities	(6,239,889)	(10,099,320)	(16,339,209)
Capital expenditures	177,278	868,458	1,045,736
Depreciation	104,042	1,173,456	1,277,498
Provision/(reversal of provision) for
impairments	23,989	(6,370)	17,619
For the year ended 31 December 2007
(audited)
Turnover	5,327,408	11,213,237	16,540,645
Segment results	306,241	(852,840)	(546,599)
Segment assets	8,855,603	12,812,702	21,668,305
Interests in associates	240,552	57,369	297,921
Segment liabilities	(5,968,467)	(9,499,652)	(15,468,119)
Capital expenditures	217,461	702,851	920,312
Depreciation	89,145	936,147	1,025,292
Provision for impairments	24,549	359,772	384,321
For the year ended 31 December 2006
(audited)
Turnover	4,427,598	12,682,910	17,110,508
Segment results	375,063	(650,755)	(275,692)
Segment assets	7,720,276	15,976,945	23,697,221
Interests in associates	192,339	55,628	247,967
Segment liabilities	(5,119,222)	(11,051,521)	(16,170,743)
Capital expenditures	157,655	1,045,909	1,203,564
Depreciation	70,266	857,847	928,113
Provision for impairments	30,248	75,706	105,954

As shown in the condensed segment analysis above, although sales contributed by the automobile segment represented majority of the total sales of the Group, the automobile segment still made losses for the year ended 31 December 2008. On the other hand, the aviation segment was able to make positive contribution to the results of the Group for the same year.

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LETTER FROM SOMERLEY

Set out below is the condensed consolidated results and financial position of the Group for the three years ended 31 December 2008 as extracted from the Group’s 2008 and 2007 annual reports, prepared in accordance with the International Financial Reporting Standards:

	**Year **	ended 31 December	ended 31 December
	2008	2007	2006
	RMB’000	RMB’000	RMB’000
	(audited)	(audited)	(audited)
Turnover	16,384,884	16,540,645	17,110,508
Loss before tax	(721,899)	(796,709)	(473,263)
Loss after tax	(910,495)	(848,344)	(486,662)
Net assets	5,573,538	6,658,395	8,122,112

Turnover for the year ended 31 December 2007 was approximately RMB16,541 million, which represented an approximately 3.3% decrease when compared to the figure recorded for the year ended 31 December 2006. Such decline mainly resulted from the decrease in turnover contributed by the automobile segment from approximately RMB12,683 million in 2006 to approximately RMB11,213 million in 2007. On the other hand, the aviation segment continued to record increase in turnover, from approximately RMB4,428 million in 2006 to approximately RMB5,327 million in 2007. The loss before tax and loss after tax widened to approximately RMB797 million and approximately RMB848 million respectively in 2007, which were primarily due to the increase in provisions for impairments in the automobile segment, from approximately RMB76 million in 2006 to approximately RMB360 million in 2007.

Turnover for the year ended 31 December 2008 further decreased by approximately 0.9% to approximately RMB16,385 million, which mainly resulted from the decrease in turnover contributed by the aviation segment from approximately RMB5,327 million in 2007 to approximately RMB4,596 million in 2008. This is mainly attributable to a decrease in sales of aviation parts and components as compared to 2007. Although loss before tax in 2008 reduced to approximately RMB722 million, loss after tax in 2008 further increased to approximately RMB910 million, which was due to the increase in income tax expenses from approximately RMB52 million in 2007 to approximately RMB189 million in 2008. Such increase primarily resulted from the amendment of preferential tax treatment available to certain subsidiaries of the Group.

As at 31 December 2008, consolidated net assets (including minority interests) of the Group were approximately RMB5,574 million, representing a decrease of approximately 16.3% from 31 December 2007. The decrease in consolidated net assets of the Group is principally due to continuing net losses recognised by the Group in recent years.

3. Business and financial information of Hongdu Aviation

Hongdu Aviation is a joint stock limited company whose A shares have been listed on the Shanghai Stock Exchange since 2000. The Company currently has an approximately 55% interest in the Hongdu Aviation and its results and assets and liabilities are consolidated into the financial statements of the Group.

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LETTER FROM SOMERLEY

Hongdu Aviation is mainly engaged in research, development, manufacture, sale and maintenance of trainers, general-purpose aircraft as well as aviation spare parts. It also provides subcontracting services in respect of aviation products. According to the management of the Group, Hongdu Aviation commands a leading position in the production and sale of advanced trainers.

The following table summarises the consolidated financial information of Hongdu Aviation for the three years ended 31 December 2008 and for the three months ended 31 March 2009, as extracted from the Hongdu Aviation’s 2008, 2007 annual reports and the 2009 first quarter results announcement, prepared in accordance with the Generally Accepted Accounting Principles in the PRC:

	Three months ended	Three months ended
	31 March		**Year **	ended 31 December
	2009	2008	2008	2007	2006
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	(unaudited)	(unaudited)	(audited)	(audited)	(audited)
Turnover	144,767	395,040	1,590,338	1,783,038	1,153,481
Profit before tax	4,277	61,240	114,037	129,203	81,054
Profit after tax	3,955	47,809	101,529	115,555	82,092
Net assets	1,796,885	1,945,365	1,727,128	1,892,326	1,531,825

Turnover for the year ended 31 December 2007 of approximately RMB1,783 million represented an approximately 54.6% increase when compared to the year ended 31 December 2006. The increase in turnover was primarily due to the completion of a substantial asset and business acquisition by Hongdu Aviation in September 2006. As a result of the increase in turnover and thereby gross profit in 2007, profit before tax and profit after tax of Hongdu Aviation increased by approximately 59.4% and 40.8% respectively, to approximately RMB129 million and RMB116 million respectively.

Turnover for the year ended 31 December 2008 decreased by approximately 10.8% to approximately RMB1,590 million, which was due to the decrease in sales of materials by approximately 36.1% when compared to 2007. Such decrease was principally a result of Hongdu Aviation’s management decision to reduce the procurement services provided to Hongdu Group which had a relatively low gross profit margin. The decrease in turnover and thereby gross profit in 2008 led to the decrease in profit before tax and profit after tax of Hongdu Aviation by approximately 11.7% and 12.1% respectively, to approximately RMB114 million and RMB102 million respectively.

Hongdu Aviation recorded a turnover of approximately RMB145 million for the 3 months ended 31 March 2009, which was less than 10% of the full year turnover in 2008, and represented a significant drop of approximately 63.4% when compared to the same period in 2008. According to the management of the Group, the decrease in turnover in 2009 was primarily due to the delay in delivery of assembled aircraft to customers, which in turn resulted from delay in delivery of parts and components from suppliers. Accordingly, profit before tax and profit after tax of Hongdu Aviation for the 3 months ended 31 March 2009 also decreased significantly to approximately RMB4.3 million and RMB4.0 million respectively.

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LETTER FROM SOMERLEY

Consolidated net assets of Hongdu Aviation increased by approximately RMB361 million in 2007, despite a profit after tax of only approximately RMB82 million. This was principally due to the increase in fair value of Hongdu Aviation’s available-for-sale financial assets during 2007 by approximately RMB273 million (net of tax effect), which was charged to the equity account according to the Generally Accepted Accounting Principles in the PRC. Similarly, Hongdu Aviation recorded a decrease in consolidated net assets by approximately RMB165 million during 2008, despite a profit after tax of approximately RMB102 million. This was principally due to the decrease in fair value of Hongdu Aviation’s available-for-sale securities during 2008 by approximately RMB216 million (net of tax effect) which was charged to the equity account. As at 31 March 2009, consolidated net assets (including minority interests) of Hongdu Aviation were approximately RMB1,797 million, representing a slight increase of approximately 4.0% from 31 December 2008.

4. Principal terms of the Subscription Agreement II between Hongdu Aviation and Hongdu Group

The proposed placing to Hongdu Group of approximately RMB550 million pursuant to the Subscription Agreement II is inter-conditional on the proposed placing to the Company pursuant to the Subscription Agreement I. The terms of the Subscription Agreement II are principally the same as those of Subscription Agreement I, except that the amount to be raised under Subscription Agreement I is approximately RMB250 million.

Apart from the Subscription Agreement I and Subscription Agreement II, Hongdu Aviation intends, if possible, to raise a further approximately RMB1,700 million from the capital market. Except for the number of placing shares involved and the lock-up period, the terms of the Proposed Independent Placing would be the same as the terms of the Subscription Agreement I and the Subscription Agreement II. However, the proposed placings to the Company and Hongdu Group are not conditional upon the proposed placing to the Independent Placees.

Principal terms of the Subscription Agreement II are set out as follows:

1. Nominal value of the new Hongdu Aviation Shares:

RMB1 per Hongdu Aviation Share.

1. Placing method:

Private placing of new Hongdu Aviation Shares at an appropriate time within 6 months from the date of approval by CSRC.

1. Placing price:

The Subscription Price shall be determined by a book-building process under the Proposed Independent Placing, subject to the minimum price of not less than RMB23.78 per Hongdu Aviation Share. The above minimum price is set pursuant to the relevant PRC rules and regulations, and represents 90% of the average price of Hongdu Aviation Share for the last 20 trading days on the Shanghai Stock Exchange up to 22 July 2009 (the “Last Trading Day”), which

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LETTER FROM SOMERLEY

is the last trading day immediately preceding the date of suspension of trading of the Hongdu Aviation Shares on 23 July 2009. In the event that the Proposed Independent Placing does not proceed, the Subscription Price under the Subscription Agreement I and the Subscription Agreement II would be RMB23.78 per Hongdu Aviation Share.

1. Number of Hongdu Aviation Shares to be issued:

Pursuant to the Subscription Agreement II, Hongdu Group shall subscribe approximately RMB550 million for new Hongdu Aviation Shares. The exact numbers of Hongdu Aviation Shares to be issued to Hongdu Group shall be calculated on the basis of the final Subscription Price. Based on the minimum unit subscription price of RMB23.78, it is expected that the Hongdu Aviation Shares to be issued to Hongdu Group pursuant to the Subscription Agreement II shall not exceed 23,128,680 in number.

On 18 August 2009, Hongdu Group entered into a supplemental agreement to Subscription Agreement II with Hongdu Aviation, whereby Hongdu Group undertakes that upon Completion, if the aggregate interest held by the Company and Hongdu Group is less than 50% of the total issued shares of Hongdu Aviation, it will increase its subscription amount to the extent that the aggregate interest to be held by the Company and Hongdu Group in Hongdu Aviation will not be less than 50% of the total issued shares of Hongdu Aviation. However, based on the current shareholding structure of Hongdu Aviation, it is currently envisaged that Hongdu Group will not need to subscribe additional amount of new Hongdu Aviation Shares pursuant to the above undertaking.

1. Lock-up arrangement:

In accordance with the relevant PRC rules and regulations, the Hongdu Aviation Shares to be issued Hongdu Group shall be subject to a lock-up period of 36 months.

The lock-up period as prescribed under the Subscription Agreement I entered into between the Company and Hongdu Aviation is also 36 months, while that for the Proposed Independent Placing is 12 months.

1. Method of payment:

Shall be satisfied in cash.

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LETTER FROM SOMERLEY

5. Shareholding structure

Completion of the proposed Placing will result in a change in percentage of shareholdings in Hongdu Aviation held by the Company, Hongdu Group and public shareholders. Set out below is the shareholding structure of Hongdu Aviation before and after completion of the proposed Placing, assuming the Subscription Price per new Hongdu Aviation Share is RMB23.78. Scenario (i) assumes the Subscription Agreements are completed but the Proposed Independent Placing of approximately RMB1,700 million does not proceed, and scenario (ii) assumes that the entire proposed Placing of approximately RMB2,500 million would be made in full:

Shareholding structure as at the Latest Practicable Date

==> picture [251 x 136] intentionally omitted <==

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

AVIC
100% 61.06%
the Company
Hongdu Group ( Note 1 ) public shareholders
1.03% 55.29% 43.68%
Hongdu Aviation
( Note 2 )
----- End of picture text -----

Scenario (i): Shareholding structure assuming completion of the Subscription Agreements only

==> picture [251 x 138] intentionally omitted <==

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

AVIC
100% 61.06%
the Company
Hongdu Group ( Note 1 ) public shareholders
6.93% 53.19% 39.88%
Hongdu Aviation
( Note 2 )
----- End of picture text -----

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LETTER FROM SOMERLEY

Scenario (ii): Shareholding structure assuming the entire proposed Placing of approximately RMB2,500 million is made in full

==> picture [251 x 136] intentionally omitted <==

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

AVIC
100% 61.06%
Hongdu Group the Company( Note 1 ) other shareholders
5.83% 44.81% 49.36%
Hongdu Aviation
( Note 2 )
----- End of picture text -----

Notes:

• 1 Shares of the Company are listed on the Hong Kong Stock Exchange

• 2 Hongdu Aviation Shares are listed on the Shanghai Stock Exchange

As shown above, assuming that the entire proposed Placing of approximately RMB2,500 million is made in full, the interest held by the Company in Hongdu Aviation will be diluted from approximately 55.29% to approximately 44.81%. The Company has on 29 July 2009 entered into an agreement whereby it was agreed that subsequent to completion of the Subscription Agreements, Hongdu Group undertakes to vote the voting rights held by it in Hongdu Aviation in accordance with the instructions of the Company. On this basis and given that the aggregate interest of the Company and Hongdu Group in Hongdu Aviation will amount to over 50% of the equity interest of Hongdu Aviation, results of Hongdu Aviation will continue to be consolidated into the financial statements of the Group following completion of the proposed Placing.

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LETTER FROM SOMERLEY

6. Assessment of the Subscription Price

Share price performance

Set out below is the daily closing price of Hongdu Aviation Shares during a period starting from 1 July 2007 (approximately two years preceding the date of the Subscription Agreements) up to and including the Latest Practicable Date:

==> picture [415 x 242] intentionally omitted <==

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

50
Period over which the minimum Period over which the 7000
subscription price of RMB25.40 per minimum Subscription Price
45 Announcement Hongdu Aviation Share for the of RMB23.78 per Hongdu
of 2007 interim Previous Placing is determined Aviation Share is determined
results 6000
Announcement of
40 2007 annual results
35 Announcement 5000
Announcementof 2008 first of 2008 thirdquarter results Announcementof 2009 first
30 quarter results quarter results
Announcement
of 2008 interim 4000
25 results
20 Announcement 3000
of the Previous
Placing
15 Announcement
Announcement of the proposed 2000
of 2007 third Placing
10 quarter results Announcement
of 2008 annual
results 1000
5 Minimum subscription
price of RMB23.78 per Price of Hongdu Aviation Share
Hongdu Aviation Share Shanghai AShare Index
0 0
7/2/20078/6/20079/10/200710/15/200711/19/200712/24/20071/28/20083/3/20084/7/20085/12/20086/16/20087/21/20088/25/20089/29/200811/3/200812/8/20081/12/20092/16/20093/23/20094/27/20096/1/20097/6/20098/10/2009
Shanghai AShare Index
Price of Hongdu Aviation Share (RMB)
----- End of picture text -----

Source: Bloomberg

Note: Hongdu Aviation announced a 4 for 10 bonus issue to shareholders of Hongdu Aviation on 13 February 2008, which became effective on 1 April 2008. For illustration purpose, prices of Hongdu Aviation Shares for the period from 1 July 2007 to 31 March 2008 in the above chart were adjusted assuming that the 4 for 10 bonus issue became effective on 1 July 2007. Cash dividends to the shareholders of Hongdu Aviation were not adjusted for in the above chart.

As shown in the above chart, the closing prices of Hongdu Aviation Shares surged from the lowest of RMB24.19 on 10 July 2007 to a high of RMB31.93 on 28 August 2007, when Hongdu Aviation announced the establishment of a joint venture with a subsidiary of Airbus S.A.S. and other investors to provide research, development, design and consultancy services. Also on 28 August 2007, Hongdu Aviation announced a drop in 2007 interim net profit by approximately 51.2% principally due to decline in gross profit margin. Since then, prices of Hongdu Aviation Shares started to drop. On 26 September 2007, Hongdu Aviation announced an acquisition from Hongdu Group of the remaining property rights of an office building which is being used by Hongdu Aviation. Prices of Hongdu Aviation Shares dropped during mid-October 2007, and surged again from RMB20.76 on 26 October 2007 to RMB27.28 on 1 November 2007. Trading in the Hongdu Aviation Shares was suspended on 2 November 2007 pending the release of the announcement as regards the Previous Placing, which was subsequently released on 3 January 2008. After the release of the announcement as regards the Previous Placing, prices of Hongdu Aviation Shares surged during the next few days from RMB27.28 to a high of RMB37.86 on 16 January 2008.

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LETTER FROM SOMERLEY

Hongdu Aviation announced on 13 February 2008 its 2007 annual results, which showed an increase in net profit in 2007 by approximately 40.8% when compared to 2006. Prices of Hongdu Aviation Shares remained steady between RMB33.27 and RMB35.85 during the rest of February 2008. Since March 2008, prices of Hongdu Aviation Shares started to drop from a high of RMB35.36 on 3 March 2008 to a low of RMB19.74 on 2 April 2008, representing an approximately 44.2% decline and in a greater extent than the drop of Shanghai A Share Index during the same period. On 3 April 2008, Hongdu Aviation announced an expected increase in its net profit for the first quarter of 2008. On 18 April 2008, Hongdu Aviation announced the 2008 first quarter net profit of approximately RMB48 million, as compared to a net loss of approximately RMB2 million during the same period in 2007. Since the announcement of the expected increase in 2008 first quarter net profit, prices of Hongdu Aviation Shares rebounded to a high of RMB27.92 on 8 May 2008, but subsequently declined. The global economy started to worsen in late 2008, which had an adverse impact on the PRC stock market. The Shanghai A Share Index dropped from a high of 5,771 on 14 January 2008 to a low of 1,793 on 4 November 2008. During the same period, although Hongdu Aviation announced on 26 August 2008 an increase in its 2008 interim net profit by 2.27 times when compared to the same period in 2007, the closing prices of the Hongdu Aviation Shares still dropped from a high of RMB53.00 on 16 January 2008 to a low of RMB9.26 on 5 November 2008.

During the period from November 2008 to June 2009, prices of the Hongdu Aviation Shares started to increase along with the Shanghai A Share Index. Prices of the Hongdu Aviation Shares surged from RMB21.77 on 7 July 2009 to RMB33.68 on 22 July 2009, which is the last trading day immediately preceding the date of suspension of trading of the Hongdu Aviation Shares on 23 July 2009 pending announcement of the proposed Placing.

After the release of the announcement as regards the proposed Placing, prices of the Hongdu Aviation Shares dropped to a low of RMB25.28 on 12 August 2009, then rebounded to a high of RMB28.30 on 21 August 2009. As at the Latest Practicable Date, the Hongdu Aviation Shares closed at RMB28.30.

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LETTER FROM SOMERLEY

Liquidity

The following table sets out (i) the total number of Hongdu Aviation Shares traded per month; (ii) the percentage of the monthly trading volume to the issued share capital of Hongdu Aviation; and (iii) the percentage of the monthly trading volume to tradable Hongdu Aviation Shares respectively for each full month from July 2007 to July 2009; and from 1 August 2009 to the Latest Practicable Date:

		Shares traded	Shares traded
		during the	during the
		month as a	month as a
	Number of the	percentage of	percentage of
	Hongdu Aviation	the issued share	tradable Hongdu
	Shares traded per	capital of	Aviation Shares
Month	month (million)	Hongdu Aviation	(Note)
July 2007	81.6	32.4%	75.6%
August 2007	97.6	38.7%	90.4%
September 2007	72.2	28.6%	57.6%
October 2007	51.3	20.4%	41.0%
November 2007	17.2	6.8%	13.8%
December 2007	17.2	6.8%	13.8%
January 2008	63.7	25.3%	50.8%
February 2008	21.0	8.3%	16.8%
March 2008	30.1	11.9%	24.0%
April 2008	66.4	18.8%	37.9%
May 2008	142.9	40.5%	74.0%
June 2008	76.1	21.6%	39.4%
July 2008	103.3	29.3%	53.5%
August 2008	37.4	10.6%	19.4%
September 2008	53.7	15.2%	27.8%
October 2008	34.4	9.7%	17.8%
November 2008	86.3	24.5%	44.7%
December 2008	136.6	38.7%	70.8%
January 2009	99.6	28.2%	51.6%
February 2009	183.6	52.0%	95.1%
March 2009	137.7	39.0%	71.3%
April 2009	247.3	70.1%	128.1%
May 2009	77.2	21.9%	40.0%
June 2009	108.2	30.7%	56.0%
July 2009	187.8	53.2%	97.3%
Average	89.2	27.3%	52.3%
From 1 August 2009 up to the
Latest Practicable Date	128.0	36.3%	66.3%

Source: Bloomberg and the Company

Note: As at the Latest Practicable Date, all the Hongdu Aviation Shares are tradable except for the 159,769,638 shares held by the Company, which are not allowed to be traded in the market until September 2010.

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LETTER FROM SOMERLEY

The volume of the Hongdu Aviation Shares traded from July 2007 to July 2009 represented between approximately 6.8% and approximately 70.1% of the total Hongdu Aviation Shares in issue and between approximately 13.8% and approximately 128.1% of tradable Hongdu Aviation Shares. The number of Hongdu Aviation Shares traded from 1 August 2009 up to the Latest Practicable Date represented approximately 36.3% and approximately 66.3% of total Hongdu Aviation Shares in issue and tradable Hongdu Aviation Shares respectively. Based on the above, the Hongdu Aviation Shares were in general actively traded on the Shanghai Stock Exchange during the period under review.

Subscription Price

The final Subscription Price for the placings to Hongdu Group and the Company is intended to be the same as the price at which the new Hongdu Aviation Shares are issued to the Independent Placees, which will be established through a book-building process. Based on preliminary marketing, the management of Hongdu Aviation has received a positive market response to the Proposed Independent Placing. The bidding process would enable Hongdu Aviation to obtain the optimum price for raising the targeted amount of proceeds. We consider it fair and reasonable and in the interest of the Company to establish the common pricing for the entire RMB2,500 million through a bidding process. The subscription price for the Subscription Agreement II which is entered into with a connected person will be the same as the price for the Proposed Independent Placing (if any), which is fair and reasonable to the Company and the Independent Shareholders.

In the event that the Proposed Independent Placing does not proceed, the Subscription Price would equal the minimum Subscription Price of RMB23.78 per Hongdu Aviation Share.

The minimum Subscription Price under the Subscription Agreement II of RMB23.78 represents:

• (a) 90% of the average price of the Hongdu Aviation Shares for the last 20 trading days on the Shanghai Stock Exchange up to and including the Last Trading Day;

• (b) a discount of approximately 0.7% to the average closing price of approximately RMB23.95 per Hongdu Aviation Share on the Shanghai Stock Exchange over the 30 trading days up to and including the Last Trading Day;

• (c) a discount of approximately 16.0% to the average closing price of approximately RMB28.32 per Hongdu Aviation Share on the Shanghai Stock Exchange over the ten trading days up to and including the Last Trading Day;

• (d) a discount of approximately 22.9% to the average closing price of approximately RMB30.86 per Hongdu Aviation Share on the Shanghai Stock Exchange over the five trading days up to and including the Last Trading Day;

• (e) a discount of approximately 29.4% to the closing price of RMB33.68 per Hongdu Aviation Share on the Shanghai Stock Exchange on the Last Trading Day;

• (f) a discount of approximately 16.0% to the closing price of RMB28.30 per Hongdu Aviation Share on the Shanghai Stock Exchange as at the Latest Practicable Date;

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LETTER FROM SOMERLEY

• (g) a price to earning (“P/E”) ratio of approximately 82.0 times, based on the latest published audited consolidated profit attributable to equity holders of Hongdu Aviation of RMB0.29 per Hongdu Aviation Share for the year ended 31 December 2008; and

• (h) a price to book (“P/B”) ratio of approximately 4.9 times, based on the latest published audited net asset value per Hongdu Aviation Share of RMB4.89 as at 31 December 2008.

The minimum Subscription Price is set with reference to market prices in accordance with the relevant PRC rules and regulations. We also consider it fair to establish the common price for the intended placings to Hongdu Group and the Company by reference to the trading prices of Hongdu Aviation Shares. In coming to this view, we note that the Hongdu Aviation Shares have been trading actively on the Shanghai Stock Exchange and their market prices do not appear to have been unduly influenced by speculative trading on the market.

The minimum Subscription Price of RMB23.78 represents a P/E ratio of approximately 82.0 times and P/B ratio of approximately 4.9 times, based on Hongdu Aviation’s 2008 full year financial statements. These ratios are relatively high as compared to the P/E ratio and P/B ratio of the Shanghai A Share Index. We have compared the Hongdu Aviation’s ratios against those of other PRC listed companies engaging in similar business. The followings are the companies listed in the Shenzhen Stock Exchange or Shanghai Stock Exchange with principal businesses being production of aircraft in the PRC that we were able to identify from the websites of Shenzhen Stock Exchange and Shanghai Stock Exchange as at the Latest Practicable Date:

			Net asset
	Closing		value per
	price as	Basic	share as
	at Latest	earnings	at 31
	Practicable	per share	December
	Date	for 2008	2008
Name of companies	(RMB)	(RMB)	(RMB)	P/E ratio	P/B ratio
	(A)	(B)	(C)	(A)/(B)	(A)/(C)
Hafei Aviation Industry Co., Ltd.	15.34	0.29	3.84	52.9	4.0
(stock code: 600038.CH)
(“Hafei Aviation”)
Xi’an Aircraft International	13.90	0.16	3.56	86.9	3.9
Corporation (stock code:		(Note)	(Note)
000768.CH) (“Xi’an Aircraft”)
		Average:		69.9	4.0
Subscription Price				82.0	4.9

Source: Websites of Shenzhen Stock Exchange and Shanghai Stock Exchange, Bloomberg and the 2008 annual reports of the respective companies

Note: Xi’an Aircraft completed a transfer of capital reserve to share capital in May 2009 whereby 12 new shares of Xi’an Aircraft were issued for the then 10 issued shares of Xi’an Aircraft. Following completion of the transfer,

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LETTER FROM SOMERLEY

issued share capital of Xi’an Aircraft increased from 1,126,190,200 shares to 2,477,618,440 shares. The basic earnings per share of Xi’an Aircraft for 2008 as shown above was adjusted accordingly from RMB0.36 per share to RMB0.16 per share, and the net asset value per share of Xi’an Aircraft as at 31 December 2008 as shown above was adjusted from RMB7.82 per share to RMB3.56 per share.

The above two companies have not announced any private placement since 1 July 2007. Hafei Aviation is a subsidiary of the Company and the Company’s management does not regard it as a direct comparable to Hongdu Aviation on the basis that Hafei Aviation is principally engaged in the production of helicopters and related parts and components, while Hongdu Aviation is principally engaged in the production of trainers, general-purpose aircraft as well as aviation spare parts. Xi’an Aircraft is regarded by the management of the Group as a closer comparable to Hongdu Aviation. Both companies are engaged in the production of fixed wing aircraft and their shares are trading at P/E ratios of over 80 times.

Having considered the above, we are of the view that the pricing mechanism and the minimum Subscription Price are fair and reasonable to the Company and the Independent Shareholders.

7. Assessment of the consideration for the acquisition of Aircraft Business Assets by Hongdu Aviation

Hongdu Aviation intends to acquire the Aircraft Business Assets from Hongdu Group at a consideration which would equal to the final asset valuation filed with SASAC. The completion of the Assets Acquisition Agreement is conditional on the completion of the Subscription Agreement II. The Aircraft Business Assets are assets principally used for the L15 Project, and mainly include Hongdu Mechanical and Electrical Services Workshop, Hongdu Industrial Assembly and Equipment Workshop, Hongdu Standard Equipment Workshop, aircraft assembly equipment, aircraft flight test facilities, testing equipment for aircraft development and assets in Changnan industrial area.

The original purchase cost of the Aircraft Business Assets amounted to approximately RMB600 million (excluding intangible assets). The audited net asset value of the Aircraft Business Assets as at 30 June 2009 was approximately RMB551 million. The appraised value of the Aircraft Business Assets (after netting off their attributable liabilities) was approximately RMB574 million as at 30 June 2009, which is subject to confirmation by SASAC. The Directors do not currently anticipate any material changes to the Valuation as confirmed by SASAC.

The valuation of the Aircraft Business Assets (the “Valuation”) was performed by China Assets Appraisal Co., Ltd. (the “Valuer”), which is a qualified Assets Valuation Company for securities-related businesses as recognised by both the National State-owned Assets Management Bureau and the PRC Securities Supervision and Management Committee. The valuation report is contained in Appendix I of the Circular. The Valuer has valued the Aircraft Business Assets using asset-based valuation method, which refers to the cost of replacement based on comparable material and quality at current market prices. The Valuer has also performed work to verify the existence and amount of the liabilities attributable to the Aircraft Business Assets.

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LETTER FROM SOMERLEY

The Aircraft Business Assets include a buildings valued at approximately RMB23 million for which the building ownership certificate is yet to be obtained. The Valuer has performed the valuation on the above property on the basis that the relevant building ownership certificate can be obtained. Based on legal advice, the Directors are confident that there would be no legal or regulatory impediment to obtaining the relevant building ownership certificate.

The Aircraft Business Assets, after netting off liabilities, were valued at RMB574 million as at 30 June 2009, which did not differ materially from their audited net asset value of RMB551 million as at the same date. We have discussed with the Valuer the basis and assumptions used by it in valuing the Aircraft Business Assets and their attributable liabilities and consider that those assumptions are fair and reasonable and the basis used is a normal one for valuing operating assets.

We also consider it fair and reasonable for Hongdu Aviation to acquire the Aircraft Business Assets at appraised net asset value. 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. Hongdu Group is a state-owned enterprise.

8. Financial effect

Overall accounting presentation

Hongdu Aviation is currently accounted for as a subsidiary of the Company. Assuming the proposed Placing of approximately RMB2,500 million would be made in full, the interest held by the Company in Hongdu Aviation will be diluted from approximately 55.29% to approximately 44.81%. If the Subscription Agreements are completed but the Proposed Independent Placing of approximately RMB1,700 million does not proceed, the interest held by the Company in Hongdu Aviation will be diluted to approximately 53.19%. Even if the interest of the Company in Hongdu Aviation is diluted to 44.81%, Hongdu Group undertakes to vote the voting rights held by it in Hongdu Aviation in accordance with the instructions of the Company, the aggregate interest of the Company and Hongdu Group in Hongdu Aviation will amount to over 50% of the equity interest of Hongdu Aviation. On this basis, it is expected that the results and financial position of Hongdu Aviation would continue to be consolidated into the financial statements of the Group.

Net assets

Completion of the proposed Placing would result in an increase in the Group’s net assets, which is in the interest of the Company. The magnitude of the increase would be calculated by deducting the RMB250 million subscription money payable by the Company to Hongdu Aviation from the net proceeds from the proposed Placing.

Since the new Hongdu Aviation Shares would be issued at a P/B ratio of over 1, the proposed Placing would result in an enhancement to the Company’s net asset value per Share and a gain on deemed disposal of the Company’s interest in Hongdu Aviation by (i) approximately 10.48% from approximately 55.29% to approximately 44.81% in the event that the proposed Placing of

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LETTER FROM SOMERLEY

approximately RMB2,500 million would be made in full; or (ii) approximately 2.10% from approximately 55.29% to approximately 53.19% in the event that only the Subscription Agreements are completed and approximately RMB800 million is raised. The gain will be credited to reserves and will not be included in the consolidated income statement of the Group.

Cash flow

Completion of the placings to Hongdu Group and the Company would result in a cash inflow of approximately RMB800 million, which would be applied principally to acquire the Aircraft Business Assets and as working capital for the L15 Project.

As mentioned above, it is estimated that Hongdu Aviation would need approximately RMB789 million and RMB574 million out of the approximately RMB2,500 million proposed Placing for the L15 Project, including the acquisition of the Aircraft Business Assets from Hongdu Group. We are informed by the Directors that in the event that the Proposed Independent Placing of approximately RMB1,700 million does not proceed, the additional funding required for the L15 Project would be financed by Hongdu Aviation’s internal resources and other financing alternatives including bank loans or other debt financing. As at 31 December 2008, Hongdu Aviation had cash and bank balance of approximately RMB681 million, bank loans of approximately RMB90 million, and total assets and total equity of approximately RMB3,217 million and RMB1,797 million respectively. Given its strong balance sheet and the good prospects of the L15 Project, it is believed that Hongdu Aviation would have sufficient resources to complete the L15 Project.

RECOMMENDATION

Having taken into account the above principal factors and reasons, we consider that the Subscription Agreement II and the Assets Acquisition Agreement are on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned. We therefore advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Subscription Agreement II and the Assets Acquisition Agreement.

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

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VALUATION REPORT

APPENDIX I

APPRAISAL REPORT ON ASSETS PROPOSED TO BE SOLD BY JIANGXI HONGDU AVIATION INDUSTRY GROUP CORPORATION (Body)

Zhongzi Ping Bao Zi [2009] No. 140

Jiangxi Hongdu Aviation Industry Group Corporation:

Jiangxi Hongdu Aviation Industry Co., Ltd.:

Entrusted by the companies, China Assets Appraisal Co., Ltd. has appraised the market value as at 30 June 2009 of the relevant assets and liabilities in relation to aircraft business that are proposed to be sold to Jiangxi Hongdu Aviation Industry Group Corporation. The appraisal is conducted according to the relevant laws, regulations, standards on asset appraisal and principles for asset appraisal, using asset-based approach and applying necessary appraisal procedures. The results of appraisal is reported as follows:

• I. Consigner, the entity and business being appraised and other users of the appraisal report as agreed in the engagement letter

This appraisal is for the purpose of selling assets. The consigners are Jiangxi Hongdu Aviation Industry Group Corporation. and Jiangxi Hongdu Aviation Industry Co., Ltd.. Jiangxi Hongdu Aviation Industry Group Corporation is the owner of properties and the assessed entity. Users other than the consigners are parties in relation to this sale and those prescribed by laws and regulations.

• (I) Information on Consigner

• Registration

Company name: Jiangxi Hongdu Aviation Industry Co., Ltd.

Registered address: Nanfei Point, Hi-Tech Industry Development Zone, Nanchang City

Registered capital: RMB352,800,000

Legal representative: Wu Fanghui

Type of company: stock limited company (listed, state controlled)

Stock code: 600316

(II) Information on Consigner and the Assessed Entity

1. Registration

Company name: Jiangxi Hongdu Aviation Industry Group Corporation (hereinafter referred to as “Hongdu Company”)

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VALUATION REPORT

APPENDIX I

Registration address: Xinxi Bridge, Nanchang City

Registerd capital: RMB704,720,000

Legal representative: Wu Fanghui

Type of company: limited company (wholly state-owned)

2. Business scope

Manufacturing and sale of air vehicles, motorcycles and engines; domestic and international trade, testing, design, manufacturing, processing, repair, installation, loading and unloading, transportation, services, engineering design, construction and decoration; planting; estate management; estate agent; production of oxygen and helium (only by branches); leasing place. (above excluding those regulated by the government’s specific rules)

3. Shareholding structure on the base day

Aviation Industry Corporation of China holds 100% equity interests in Jiangxi Hongdu Aviation Industry Group Corporation.

II.

Purpose of the appraisal

Pursuant to “Application for Appraisal of assets in relation to aircraft business that are proposed to be sold by AVIC Jiangxi Hongdu Aviation Industry Group Corporation” (Si Gu Zi [2009] No. 372), AVIC Jiangxi Hongdu Aviation Industry Group Corporation intends to sell certain assets and liabilities in relation to aircraft business to Jiangxi Hongdu Aviation Industry Co., Ltd., therefore, the assets and liabilities of Jiangxi Hongdu Aviation Industry Group Corporation involved in the sale are required to be appraised, which will be provided as a reference to the sale.

III. Targets and scope of the appraisal

The targets of the appraisal are the net value of assets as at the valuation base date proposed to be sold by Hongdu Company. The appraisal covers the assets and liabilities of the aircraft business proposed to be sold.

Item	Book value (RMB10,000)
Current assets	29,453.67
Non-current assets	26,116.13
Among which: available-for-sale financial assets	—
Investments held to maturity	—
Long-term receivables	—
Long-term investments in equities	—
Investment properties	—

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APPENDIX I

VALUATION REPORT

Fixed assets Construction in progress Engineering materials Disposal of fixed assets Biological assets for production Fuel and gas assets Intangible assets Development expenses Goodwill Long-term expenses to be amortized Deferred income tax assets Other non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets (equity attributable to owners)	26,116.13 — — — — — — — — — — — 55,569.80
	505.26
	—
	505.26
	55,064.54

The targets and scope of the appraisal entrusted are same to those involved in this transaction.

The book values used in this appraisal are based on the audited financial statements and assets appraisal declaration form provided by RSM China Certified Public Accountants and verified by the appraiser.

The leasing of land in relation to the real estate properties in this transaction are the lease agreement of land-use rights signed by Hongdu Group and Hongdu Aviation.

IV. Type of value and its definition

According to the features of the purpose and targets of the appraisal, results of the appraisal report are defined as market value. Its definition is as follows: under the situation that the buyer and the vendor are acting voluntarily, reasonably and without any coercion, the estimated amount is the value of fair and normal transaction carried out by the targets of appraisal on the valuation base date.

V. Valuation base date

According to the plan of the program implementation and the working schedule, the valuation base date of this program is 30 June 2009.

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VALUATION REPORT

APPENDIX I

VI. Evaluation basis

The appraisal is conducted according to following basis:

(I)

Action basis

1. “Application on Appraisal of assets in relation to aircraft business that are proposed to be sold by AVIC Jiangxi Hongdu Aviation Industry Group Corporation” (Si Gu Zi [2009] No. 372);

2. Engagement Agreements on this assets appraisal.

(II) Laws and regulation basis

1. “Company Law of People’s Republic of China” (amended on 27 October 2005);

2. “Rules of Administration on Evaluation of State-Owned Assets”, Order 91, issued by the State Council on 16 November 1991;

3. “Detailed Implementation Rules of Administration on Evaluation of State-Owned Assets” (Guo Zi Ban Fa No.[1992]36) issued by the former State-Owned Assets Administration Bureau;

4. “Provisional Rules on Supervision and Administration of Enterprises’ State-Owned Assets”, Order 378, issued by the State Council in 2003;

5. “Provisional Rules of Administration on Transferring Enterprises’ State-Owned Properties”, Order 3 issued by the State-Owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance;

6. “Provisional Rules of Administration on Evaluation of Enterprises’ State-Owned Assets”, Order 12 issued by the State-Owned Assets Supervision and Administration Commission of the State Council;

7. “Notice on Questions in relation to Strengthening Administration on Evaluation of Enterprises’ State-Owned Assets” (Guo Zi Wei Chanquan [2006]274) issued by the State-Owned Assets Supervision and Administration Commission of the State Council;

8. “Notice on Transmitting the Trial Operational Standards Advice for Assets Evaluation” (Guo Zi Ban Fa [1996]23) issued by former State-Owned Assets Administration Bureau;

9. Policies, laws and regulations on finance of enterprise, accounting, taxation and assets administration issued by the Ministry of Finance, the People’s Bank of China, the State Administration of Taxation and former State-Owned Assets Administration Bureau;

10. Other relevant laws, regulations, notices and documents.

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VALUATION REPORT

APPENDIX I

(III) Standards basis

1. “Notice on Publication of ‘Assets Evaluation Standards-Basic Standards’ and ‘Assets Evaluation Professional Ethics Standards-Basic Standards’” (Cai Qi [2004]20) issued by the Ministry of Finance.

2. “Notice on ‘Assets Evaluation Standards-Appraisal Report’ and Seven Assets Evaluation Standards” (Zhong Ping Xie [2007]189) issued on 28 November 2007.

3. “Guide on Enterprise State-Owned Assets Appraisal Report” (Zhong Ping Xie [2008]218) issued on 28 November 2008.

4. “Enterprise Accounting Standards-Basic Standards”, Order 33, issued by the Ministry of Finance in 2006.

(IV) Property basis

1. Business Licenses for the consigners and the assessed entity;

2. Property Ownership Registration Certificates for State-Owned Assets;

3. Estates Ownership Certificates;

4. Vehicle Travel Licenses;

5. Receipts of purchase of equipments and other documentary proof of property ownership;

6. Detailed list of evaluation and declaration in relation to various types of assets provided by the assessed entity;

7. Other documentary proof of property ownership.

(V) Basis for determination of prices

1. “Standards on Evaluation of Damage Level of Estate” issued by the Ministry of Housing and Urban-Rural Development;

2. “Rules on Administration of Engineering Investigation and Design Charges” (Ji Jia Ge [2002]10) issued by the former State Planning Commission and the Ministry of Housing and Urban-Rural Development;

3. Supplementary Notice in relation to the Rules on Administration of Engineering Investigation and Design Charges (Ji Ban Jia Ge [2002]1153) issued by the Administration Department of the former State Planning Commission and the Administration Department of the Ministry of Housing and Urban-Rural Development;

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VALUATION REPORT

APPENDIX I

1. “Rules on Construction Supervision and Related Services Charges” (Fa Gai Jia Ge [2007]670);

2. “Fixed Consumption Amounts in Construction and Unified Basic Price List for Jiangxi Province” issued in 2004;

3. “Fixed Consumption Amounts in Decoration and Unified Basic Price List for Jiangxi Province” issued in 2004;

4. “Fixed Charges of Building Installation for Jiangxi Province” issued in 2004;

5. “Construction Costs in Nanchang City” (6th issue in 2009);

6. Relevant engineering drawings and construction final accounts for main buildings provided by the consigners;

7. Records and other information made and possessed by the appraisers during site inspection on houses;

8. Market prices obtained by the appraisers through inquiring and from the enquiry materials from main equipment manufacturers;

9. “Price Handbook for Mechanical and Electrical Products in 2009” prepared by the Science and Information Technology Research Institute of the Ministry of Machinery;

10. “HC360 Business Information”-automobile market in the country, household appliances market in the country, and office automation market (June 2009);

11. “Measures on Preparing Rough Estimates on Engineering Design and Standards on Rough Estimates of Related Expenses” (HBJ14-97);

12. “Notice on the Publication of Standards for Scraping Automobiles” (Guo Jingmao Jing [1997]456), Notice on Certain Regulations of the Adjustments of Standards for Scrap Automobiles” (Guo Jingmao Ziyuan [2000]1202), and “Notice on Adjustments of Standards for Scrap Light Trucks” (Guo Jing Mao [1998]407);

13. Other materials collected and possessed by the valuator.

(VI) Other basis

1. Audit report, accounting statements and assets appraisal declaration in relation to this transaction provided by the assessed entity;

2. Financial materials, such as comprehensive accounts, detailed accounts and accounting documents, provided by the assessed entity;

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VALUATION REPORT

APPENDIX I

1. Historic operation materials and plan on future development of the enterprise provided by the assessed entity;

2. Other relevant materials provided by the assessed entity.

VII. Evaluation method

(I) Selection and determination of method

As the targets under the appraisal are all the assets and liabilities of Hongdu Company proposed to be sold, the asset-based approach is applied in the appraisal.

(II) Use of the method

Asset-based approach

• ➣ Current assets

• Monetary assets

Checked cash inventory. Predicted and confirmed the accuracy of book value as at the valuation base date in accordance with the results of inventory and records on cash inflow and outflow. The evaluation is determined based on the confirmed figure.

As to bank deposits, after checking the balance in bank statements, adjustment on bank balance and reply regarding bank account, the evaluation is determined based on the confirmed figure.

1. Accounts receivable, prepayments and other receivables

Through confirming the original documentary proofs, comprehending the content and the timing of receivables and prepayments, checked balances in the book value, analyzed aging of accounts and adjudged the possibility of realization. Based on the results of the classification of receivables and the aging analysis of accounts, and comprehending the repayment of debts, financial situation and credit of the opposing party, the accountant made bad debts provision through combining the aging analysis of accounts and specific identifications. The appraisers, through external confirmations and discussing with relevant persons of the enterprise, opine that the bad debts provision made by the accountant reasonably reflects the actual accounts receivable of the enterprise. Therefore, the bad debts are deducted from the accounts receivable, and the balance would be the evaluated value of accounts receivable.

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VALUATION REPORT

APPENDIX I

3. Inventories

Inventories are materials or supplies available for sale, under production or to be consumed in services during ordinary production and in the course of operation. Inventories include raw materials, purchase of materials (materials in transit), materials commissioned for processing, products in progress (half-manufactured) and low-value consumption goods in use. The appraiser conducted the evaluation based on costs or prevailing market prices according to characteristics of each inventory and the operation situation of the enterprise.

3.1 Raw materials

As to raw materials purchased and consumed for ordinary use, their turnover term is short, therefore, the market price as at the base day is almost the same as the book value. Their evaluated value is their checked book value. As to materials whose prices fluctuate significantly, the evaluated price is determined by the purchasing price as at the base day plus necessary expenses during the purchase, and the evaluated value equals to the actual quantity as at the base day multiply by the evaluated price. As to defective, inferior, unpopular and non-salable raw materials, their evaluated value are determined based on the net realizable value as at the base day.

3.2 Purchase of materials (materials in transit)

Costs of purchase constitute the actual costs paid for purchase. As the costs of purchase in book are close to the market sales costs as at the base day, the evaluated value is the confirmed book value.

• 3.3 Commissioned and processed materials

As to normally commissioned materials, the turnover term is short, therefore, the market price as at base day is almost the same as the book price. The evaluated value is the confirmed book value.

3.4 Product-in-progress (half-manufactured)

The appraiser verifies the reasonableness and accuracy of cost accumulation based on the company’s cost accumulating procedure. The appraisers checks the accounts and statements, inspects and audits the product-in-progress, reviews cost transfer and records inventory in-out of product-in-progress from the base day to the day of inventory. To verify if the result of inventory matches the declaration. The book value is normal cost of product-in-progress, and the evaluated value is confirmed book value.

• 3.5 Low-value consumption goods in use

Apply replacement cost method. The appraiser makes a random inspection on original manufacturing clearing documents and a site inventory on the quantity and usage of physical assets. The cost for re-manufacturing as at the base day is regarded as the replacement cost. The depreciation rate is determined by the straight-line method, then determine the evaluated value.

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VALUATION REPORT

APPENDIX I

Low-value consumption goods in use = replacement price x actual quantity x depreciation rate.

• ➣ Non-current assets

• Estate assets

Houses and buildings that are self-constructed and for own use are evaluated through replacement cost method.

• 1.1 Replacement cost method

Replaced total price = expenses on construction and installation + other expenses in construction + capital cost

Evaluated value = replace total price x depreciation rate

Based on the materials for the houses and buildings under evaluation, the appraiser conducts site inspections and measures the houses and buildings. The appraiser also measures and records the structural characteristics, which affect the building’s construction cost, and makes technical assessment on main factors that may affect the depreciation rate, such as intact rates of foundations, bearings, decorations, equipment and instruments.

• 1.1.1 Determination of replacement total price

First, the appraiser classifies the evaluated buildings according to their structural characteristics. The significant buildings and representative and typical buildings are evaluated by recomposed budget method and analogy method.

• 1.1.1.1 Significant building are evaluated by recomposed budget method

Based on materials, drawings, budgets and final accounts of the completion of construction of the evaluated building and the results of site inspection, the appraiser recomposes a resilience detailed list and calculates the construction costs of each significant building and representative building as at the base day based on the prevailing fixed construction budget and charging standards. Additionally, the appraiser adds other prevailing charges as at the base day on the construction program as required by the state or local rules, and calculates capital cost based on a reasonable construction period, finally obtains the replacement total price.

• 1.1.1.2 Ordinary buildings are evaluated by analogy method. The appraiser selects a building with completed final accounts and calculates the construction cost and the replacement cost by final accounts adjustment method. Then, calculates the construction cost per square meter as reference, which is compared with the evaluated buildings to calculate their construction cost after adjusting the differences. The construction cost plus other expenses incurred during construction and capital cost calculated based on a reasonable construction term is the replacement total price of the evaluated building.

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VALUATION REPORT

APPENDIX I

• 1.1.2 Determination of depreciation rate

Depreciation rates are determined based on the rate of completeness and usage life method, and their weight value will be regarded as the depreciation rate of a house.

Significant houses are measured by two ways, the inspected depreciation rate and the theoretic depreciation rate, and the weighted average value of the rates will be regarded as the comprehensive depreciation rate of the house. To measure the inspected depreciation rate, the appraiser firstly classifies factors which affect the depreciation of a house, then determines standard points of each factor in buildings of different structure according to the proportion accounted by the factors in construction cost of a house. Combining building’s actual condition through site inspection, the appraiser determines the points of completeness for each classification, and fixes inspected depreciation based on those points.

Comprehensive depreciation rate (%) = inspected depreciation rate x 60% + theoretic depreciation rate x 40%

Among which: inspected depreciation rate (%) = (points of completeness/standard points) x 100%

Theoretic depreciation rate (%) = (1-used years/life time) x 100%

• 1.1.3 Determination of evaluated value

Evaluated value = replacement total price x comprehensive depreciation rate

1. Equipment assets

Machineries

Use replacement cost method to determine evaluated value of machineries, transportation vehicles and electrical instruments. The formula is as follows:

Evaluated value = replacement total price x depreciation rate

• 2.1 Determination of the full price of the replacement of machinery equipments

The total replacement price of machineries comprises purchase fee, installation fee, other expenses and capital cost.

The formula:

Replacement total price = cost of purchase + installation fee + other expenses + capital cost

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VALUATION REPORT

APPENDIX I

• 2.1.1 Determination of cost of purchase

According to relevant regulations, the cost of purchase comprises the original price and transportation expenses.

2.1.1.1 Original price of equipment

To ensure the quality of evalution as a whole, the appraiser categorised machinery equipments into four groups: significant equipments of more than RMB1 million per set, major equipments of RMB300,000 to RMB1 million per set, ordinary equipments of less than RMB300,000 per set and self-manufactured non-standard equipments. The original price of each type will be determined by different methods according to the condition of the equipments.

As to significant equipments of more than RMB1 million per set and certain main equipments of RMB300,000 to RMB1 million per set, their original prices are determined by comparing price information obtained from several channels of enquiries and combining recent quotation booklets and information.

As to certain major equipments of RMB300,000 to RMB1 million per set, their original prices are mainly determined through enquiries and referring to recent price booklets.

As to ordinary equipments of less than RMB300,000 per set, their original prices are determined by reviewing recent price booklets.

As to self-manufactured non-standard equipments, their original prices are determined by cost per unit (yuan/ton or yuan/kilogram), which comprises material costs, transportation costs, labor costs and machinery costs etc., times the total weight of the equipments.

2.1.1.2 Transportation fee

Equipment transportation fee = original price x transportation fee rate = original price x (railway, waterway transportation fee rate + road transportation fee rate)

Transportation fee rate for local manufactured equipments is 0.2-0.5% (or estimated according to kilometers)

Railway, waterway and road transportation fee rates for equipments manufactured in China other than the local place are measured based on sections of distance of transport: railway, waterway transportation fee rate is 1.5% for 100km; for distance over 100km, the rate will increase 0.25% per 100km; if distance is less than 100km, the rate will be the same as the rate for 100km. Road transportation fee rate is 1.06% for 50km; for distance over 50km the rate will increase 0.5% per 50km; if distance is less than 50km, the rate will be determined as the same as 50km.

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VALUATION REPORT

APPENDIX I

Transportation fee of imported equipments is 20-30% of the abovementioned equipments manufactured in China other than the local place.

If the order contract stipulates that supplier is responsible for transportation (transportation fee is included in the purchase price), the transportation fee will not be included.

2.1.2 Determination of installation fee

The installation fee is measured according to Part IV “Estimated Calculation Standards on Installation of Domestic Equipments” of “Various Estimated Calculation Standards and Estimated Calculation Methods for Machinery Industry Construction”.

2.1.3 Determination of equipment foundation fee

The equipment foundation fee is measured according to Part V “Estimated Calculation Standards on Foundation Fee of Domestic Equipments” of “Various Estimated Calculation Standards and Estimated Calculation Methods for Machinery Industry Construction”.

2.1.4 Determination of other expenses

According to Part VIII, “Estimated Calculation Standards on Other Expenses in Engineering Construction” of “Various Estimated Calculation Standards and Estimated Calculation Methods for Machinery Industry Construction”, the rates of other expenses are determined as follows:

No.	Expenses	Rate	Basis
	Other expenses in total	5.80%	“Various	Estimated		Calculation
			Standards	and	Estimated	Calculation
			Methods	for	Machinery Industry
			Construction”
1	Administration fee incurred by the	1.00%	“Various	Estimated		Calculation
	constructor		Standards	and	Estimated	Calculation
			Methods	for	Machinery Industry
			Construction”
2	Fee for supervision of construction	1.20%	“Various	Estimated		Calculation
			Standards	and	Estimated	Calculation
			Methods	for	Machinery Industry
			Construction”
3	Fee for consultation of impact on	0.14%	“Various	Estimated		Calculation
	environment		Standards	and	Estimated	Calculation
			Methods	for	Machinery Industry
			Construction”
4	Fee for Inspection and design	3.30%	“Various	Estimated		Calculation
			Standards	and	Estimated	Calculation
			Methods	for	Machinery Industry
			Construction”
5	Bidding agent service fee	0.16%	“Various	Estimated		Calculation
			Standards	and	Estimated	Calculation
			Methods	for	Machinery Industry
			Construction”

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VALUATION REPORT

APPENDIX I

• 2.1.5 Determination of capital cost

Capital cost is determined based on reasonable construction term fixed in accordance with related regulations and actual circumstances of construction, bank loan interest rate and capital as at the base day. The formula is:

Capital cost = (purchase fee + installation fee + other expenses) x reasonable construction term x loan interest rate x 1/2

This construction has a reasonable term of one year; bank loan interest rate for a term of one to three years (three years inclusive) is 5.40%. As the capital invested is well-proportioned for the construction term, the capital cost determined is 2.70%.

• 2.1.6 Determination of the total price of replacement of transportation vehicle

The total price of replacement of transportation vehicles comprises three parts: purchase price, purchase tax and cost of new license. The formula is:

Replacement total price = purchase price + purchase tax + production cost of new license

Among which:

Purchase price: referring to the latest market price of same type of vehicle.

Purchase tax: according to the “People’s Republic of China Provisional Rules on Automobile Purchase Tax”, Order 294 issued by the State Council in 2001, purchase tax = purchase price �(1+17%) x 10%.

Production cost of new license, including: cost of license, examination fee and procedural cost, is determined according to charging standards published by local automobile administration department.

• 2.2 Determination of depreciation rate

• 2.2.1 Significant equipments of more than RMB1 million per set and certain main equipments of RMB300,000 to RMB1 million per set

Comprehensive depreciation rate is measured by weighted average of service life depreciation rate (0.4) and inspected depreciation rate (0.6) or service life depreciation rate plus modified coefficient.

• 2.2.1.1 Service life depreciation

The appraiser reviews related materials to decide the used life, economic life and usable years after exceeding economic life of a machinery to measure its service life depreciation rate.

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VALUATION REPORT

APPENDIX I

Equipment within its economic life:

Service life depreciation rate: No = (1-used years/economic life) x 100%

Equipment exceeded its economic life:

Service life depreciation rate: No = [available years/(used years + available years)] x 100%

• 2.2.1.2 Site inspected depreciation rate

Through site inspecting of the condition of equipment and reviewing related materials and files regarding operation and administration to decide its site inspected depreciation rate.

2.2.1.3 Comprehensive depreciation rate

Comprehensive depreciation rate = service life depreciation rate x 40% + inspected depreciation rate x 60%

• 2.2.2 Certain main equipments of RMB300,000 to RMB1 million per set

Depreciation rate is decided by service life.

The appraiser reviews relevant materials to decide the used life, economic life and usable years after exceeding economic life of a machinery to measure its service life depreciation rate.

Equipment within its economic life:

Service life depreciation rate: No = (1-used years/economic life) x 100%

Equipment exceeded its economic life:

Service life depreciation rate: No = [available years/(used years + available years)] x 100%

• 2.2.3 Automobile depreciation rate

The document Guo Jin Mao Jin numbered [1997] 456 issued jointly by the six ministries of the state on 5 July 1997 and the document Guo Jin Mao Jin numbered [2002] 202 set out the method for calculating useful life and scrap mileage. The theoretical automobile depreciation rate is calculated by reference to usage life and accumulated mileage, respectively, and the automobile depreciation rate is determined at the lower of the two values. Other factors relevant for adjustment of the automobile depreciation rate include: on site inspection of the automobile, structure of the vehilce, structure of the vehicle engine, electric circuit, brake performance, fume exhaustion perfomance.

Service life depreciation rate = (1-used years/economic life) x 100%

Mileage depreciation rate = (1-accumulated mileage/planned mileage) x 100%

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VALUATION REPORT

APPENDIX I

• 2.3 Determination of evaluated value

Evaluated value = total price x depreciation rate

• ➣ Current liabilities and non-current liabilities

• Current liabilities includes payables, advanced payments, payable remunerations, payable taxes and other payables. Based on audited amounts, the appraiser audits each liabilities and determine evaluated value through payable liabilities as at the base day.

VIII. Evaluation assumption

(I) Special assumptions

1. The business is operating as a going-concern and no significant changes to current business scope and direction;

2. The assessed assets will be used following current purposes, methods, scale, frequency and environment;

3. The enterprise could maintain its operation and profit-making ability through continuing renewal and compensation;

4. Accounting policies and methods of accounting of the enterprise will not change significantly;

5. Revenues from future’s business could be obtained as planned, and there will be no significant bad debts.

(II) Normal assumptions

1. Regarding the legal description or legal items (whether their limitation of rights or liabilities) of the evaluated assets, the appraiser conducts normal inspection on the assessed assets. Apart from those disclosed in the report, the property ownership is in good condition, tradable and has no other encumbrances.

2. The conclusion on the evaluation of all or part of the values is based on materials provided by the assessed entity and other entities, and we consider those materials are reliable and appropriate.

3. All certificates, licenses, consents and other legal or administrative authorisation documents required for those assessed assets are valid as at the base day, used in compliance with the rules and could be renewed or updated if they expire (eg. business licence, certification of high-technology enterprise).

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VALUATION REPORT

APPENDIX I

1. Except as disclosed in this report, the enterprise has complied with all related laws and regulations.

2. Assume all improvements to the assessed assets are made in compliance with related laws, regulations and rules.

3. Assume the enterprise has responsibly fulfilled all duties to the assets and conduct effective administration.

4. The evaluation is based on purchasing power of local currency as at 30 June 2009.

5. Assume all significant or potential factors which may affect the value analysis have been disclosed to us, the consigners and the assessed entity.

6. No significant change of the prevailing exchange rates, interests rates and tax policies recently.

7. No significant change of the prevailing laws, regulations and policies. There is no deterioration of the macro-economy of the country.

8. No significant change of the political, economic and social environment in the locations where the parties reside.

9. There is no other unexpected factors or force majeure that may make significant negative effects.

10. No consideration of inflation.

11. We take no responsibility to changes in market, and have no duty to amend the report caused by events after the base day.

12. Analysis on assessed assets is only applicable to the prescribed use as stated in this report. The individual value of any parts of assets is not applicable for any other purpose and cannot be combined with other reports.

13. The report is only for the use of the user defined in this report, and could not be used or relied by any third parties. We will not be responsible for any liabilities arising from any violation of this term.

14. The report is for the defined purpose and could not be used for any other purpose. All or any part of the report could not be transferred to any third party without our written approval.

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VALUATION REPORT

APPENDIX I

IX. Evaluation Results

After implementing the above assets evaluation procedures and methods, based on continuing operation, the net asset value of Hongdu Company as at 30 June 2009, the base day is:

Before the evaluation, book value of the total assets, total liabilities and net assets were RMB555,698,000, RMB5,052,600 and RMB550,645,400, respectively. After the evaluation, the total assets, total liabilities and net assets were RMB579,286,500, RMB5,052,600 and RMB574,233,900, respectively, representing an appreciation of RMB23,588,500 or 4.28%. Details are set out as follows:

Unit: RMB10,000

	Book	Evaluated		Changes
Item	value	value	Changes	(%)
Current assets	29,453.67	32,491.24	3,037.57	10.31
Non-current assets	26,116.13	25,437.41	-678.72	-2.60
Among which: available-for-sale
financial assets	—	—	—	—
Investments held to maturity	—	—	—	—
Long-term receivables	—	—	—	—
Long-term investments in equities	—	—	—	—
Investment properties	—	—	—	—
Fixed assets	26,116.13	25,437.41	-678.72	-2.60
Construction in progress	—	—	—	—
Engineering materials	—	—	—	—
Disposal of fixed assets	—	—	—	—
Biological assets for production	—	—	—	—
Fuel and gas assets	—	—	—	—
Intangible assets	—	—	—	—
Development expenses	—	—	—	—
Goodwill	—	—	—	—
Long-term expenses to be amortized	—	—	—	—
Deferred income tax assets	—	—	—	—
Other non-current assets	—	—	—	—
Total assets	55,569.80	57,928.65	2,358.85	4.24
Current liabilities	505.26	505.26	—	—
Non-current liabilities	—	—	—	—
Total liabilities	505.26	505.26	—	—
Net assets (equity attributable to
owners)	55,064.54	57,423.39	2,358.85	4.28

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VALUATION REPORT

APPENDIX I

X. Special explanations

1. We will not be responsible for any flaws that may affect the evaluation, which the consigners did not explain nor could the appraiser discover through the evaluation procedures.

2. The evaluation is made under the principles of independence, fairness, objectivity and science. Neither the appraisal organization nor the appraiser has interests in the assessed entity, or has personal interests with the consigners or involved persons, or has prejudice to the consigners or involved persons. The appraisers have complied with professional ethics and regulations and have tried their best efforts. The results are provided by China Assets Appraisal Co., Ltd., which may be affected by professional level and capability of the appraisers.

3. The report is based on the economic documents, business licenses, property ownership documents, financial statements, accounting documents, detailed list of assets and other materials provided by the consigners, the assessed entity and other parties involved. They will be responsible for the truthfulness, legality and completeness of those documents.

4. The report reflects prevailing fair market value, without considering mortgages and guarantees that the assessed subjects may be subject to in the future; nor additional price may be paid because of special transactions; nor taxation owed by the assets; nor taxation and other expenses which may be arising from selling those assets. We do not make any taxation adjustment to the assets in light of appreciation of the appraised value. We neither consider effects which may be arising from the changes in macro-economy of the country, the natural force nor other force majeure.

5. Adjustments to the assessed assets and related liabilities are only for the purpose of objectively reflecting their evaluation values. We have no intention to request the assessed entity to deal its accounts in accordance with our results or presentation. Whether or not accounting treatments should be made is a decision to be made by the senior officer of the accounting department of the assets owner. The accounting treatment should comply with the accounting standards of the state.

6. Certified assets evaluator has paid necessary attention to legal ownership status of the assessed subject and disclosed their verification findings, but they will make no guarantee, nor be responsible for the truthfulness, legality and completeness for the rights of the assessed.

7. After the base day but during the period of validity of the report, when the quantity and pricing standards of the subject assets changed significantly, except for the assets evaluated by asset-based method, the consigner should appoint an evaluation organization to re-evaluate the subject assets. As to the assets evaluated by asset-based method, experienced consigners could make appropriate adjustments to the results according to actual quantity and price differences.

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VALUATION REPORT

APPENDIX I

1. Flaws

2. (1) Hongdu Aviation Industry Zone Joint Workshops have not obtained the property ownership certificate as at the base day. The building area is 20200 square meters, the original book value is RMB19,020,000 and net value is RMB17,530,000. The above building area is calculated based on site inspection of a similar unit. After obtaining property ownership certificate, the area will be adjusted according to the legal figure.

3. (2) One sedan, GanM02792, owner on the travel license is Jiangxi Hongdu Fenglong Motor Co., Ltd., has not changed the name of owner in register. 12 vehicles are on business trip, therefore could not provide copies of travel licenses. Their numbers are GanA22161, GanAL2870, GanA3910, GanA19210, GanA/33915, GanM89150, GanAA9665, GanAC6121, GanAJ2330, GanOL150, GanAI0517 and GanAV3232. 12 vehicles have expired their vehicle examination dates. Their numbers are GanA21259, GanA22874, GanA21883, GanA24093, GanA23861, GanA36624, GanAC3678, GanAD1745, GanAM6312, GanAA8853, GanM92816 and GanA20863.

Attention of the users of the report is drawn to the economic effects of the abovementioned matters.

XI. Limitation on the use of the report

1. The report is only for the defined purpose and use.

2. The report could only be used by users defined in the report.

3. Approval and review of the evaluation organization should be obtained for any copy, quotation or public disclosure of the whole or any part of the report, except for requirements of laws, regulations and agreements between parties involved.

4. The report will be valid upon signature and sealing of the evaluation organization.

5. The report should be filed with the state assets administration departments, and could only be used formally after obtaining approvals.

6. The certified appraisers are responsible for evaluation of the assessed entity and providing professional advice, and is not responsible for decision-making. The evaluation results should not be regarded as a guarantee to the realizable value of the assessed subject.

7. The validity period of the report is one year, commencing from the base day. A new evaluation on the assessed subject should be conducted for use execeeding one year from the base day.

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VALUATION REPORT

APPENDIX I

XII. Date of the valuation report

The date of the valuation report is the day on which the certified appraisers come to their professional opinions. The date of the valuation report day is 16 August 2009.

XIII. Professional qualification of China Assets Appraisal Company Limited

China Assets Appraisal Company Limited is a qualified Assets Valuation Company for securities-related businesses as recognized by both the National State-owned Assets Management Bureau and the PRC Securities Supervision and Management Committee since 5 October 1993 (Cert. no. 0000057). China Assets Appraisal Company Limited is authorized to undertake assets valuation businesses by Beijing Finance Bureau commencing 28 April 2007 (Cert. no. 11020017). It was established on 12 December 1992 (Business Licence Reg. no. 110000001427461).

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

		Cert./	Certificate	Registered
Name	Company	Reg. No.	Issuance Date	since
Mr. Wu Jiang	China Assets	23020047	15 September 2006	28 November 2002
	Appraisal
	Company
	Limited
Ms. Di Xueyun	China Assets	11000182	14 December 2006	31 December 1997
	Appraisal
	Company
	Limited

China Assets Appraisal Co., Ltd.

16 August 2009 Beijing China

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GENERAL INFORMATION

APPENDIX II

1. RESPONSIBILITY STATEMENT

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

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

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

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

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

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GENERAL INFORMATION

APPENDIX II

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

As at the Latest Practicable Date, so far as is known to any Directors, Supervisors or chief executive of the Company, the following persons (not being a Director, a Supervisor or chief executive 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
Name of			Number of		class of	capital in	Nature of
Shareholders	Class of shares	Capacity	shares		shares	issue	shares held
AVIC	Domestic shares	Beneficial owner	2,835,305,636		95.66%	61.06%	Long position
European	H Shares	Interests of a party	232,180,425		13.82%	5%	Long position
Aeronautic		to an agreement to
Defence and		acquire interests in
Space Company		a listed corporation
— EADS N.V.		under s.317(1)(a)
		and s.318
The Hamon	H Shares	Investment	164,278,000		9.78%	3.54%	Long position
Investment		manager	(Note)
Group Pte
Limited
The Dreyfus	H Shares	Investment	105,226,000		6.26%	2.27%	Long position
Corporation		Manager

Note: These shares are held directly by various controlled corporations of The Hamon Investment Group Pte Limited, of which 35,572,000 shares were held by Hamon Asset Management Limited, 101,690,000 shares were held by Hamon U.S. Investment Advisors Limited and 27,016,000 shares were held by Hamon Investment Management Limited.

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 II

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 2008, 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

China Assets Appraisal Company PRC qualified valuers Limited

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

As at the Latest Practicable Date, each of China Assets Appraisal Company Limited and Somerley 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 China Assets Appraisal Company Limited and Somerley did not have any direct or indirect interest in any assets which has been, since 31 December 2008, 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 China Assets Appraisal Company Limited and Somerley 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 II

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

The Directors are of the opinion that since 31 December 2008, being the date to which the latest published audited accounts of the Group have been made up, there have been no material adverse changes in the financial or trading position of the Group.

9. 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 28 September 2009:

• (a) Subscription Agreement I;

• (b) Subscription Agreement II;

• (c) Assets Acquisition Agreement;

• (d) the capital contribution agreement dated 18 August 2009 entered into between Changjiang General Aviation, Hongdu Group and Hongdu Aviation;

• (e) the letter dated 28 August 2009 from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 21 of this circular;

• (f) the letter of advice dated 28 August 2009 from Somerley to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 22 to 40 of this circular;

• (g) the full valuation report prepared by China Assets Appraisal Company Limited in respect of the Aircraft Business Assets; and

• (h) the written consent of each of China Assets Appraisal Company Limited and Somerley referred to in paragraph 6 of this Appendix.

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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 OF EXTRAORDINARY GENERAL MEETING

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 Monday, 28 September 2009, at Avic Hotel, No. 10 Yi, Central East Third Ring Road, Chaoyang District, Beijing, the People’s Republic of China to consider, approve and ratify the following resolutions. Unless otherwise indicated, capitalized terms used in this notice and the following resolutions shall have the same meanings as those defined in the circular of the Company dated 28 August 2009:

ORDINARY RESOLUTIONS

To approve, confirm and ratify the proposed issue of not more than 106,000,000 new Hongdu Aviation Shares for subscription by not more than 10 qualified investors including the Company, Hongdu Group and 8 other qualified investors at the Subscription Price:

1. “ THAT

2. (a) inter-conditional with resolution number 2 below having been approved by the Independent Shareholders, the terms and conditions under Subscription Agreement I entered into between Hongdu Aviation and the Company in relation to the subscription by the Company of approximately 10,513,036 new Hongdu Aviation Shares, subject to adjustment, at the Subscription Price, amounting to approximately RMB250 million, a copy of which is produced to the meeting marked “A” and signed by the Chairman of the meeting for the purpose of identification be and are hereby approved, confirmed and ratified; and

3. (b) the Directors (or any one of them) be and is hereby authorised 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 the transactions contemplated under Subscription Agreement I, 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 Subscription Agreement I as the Directors (or any one of them) may in their absolute discretion deem fit.”

4. For identification purpose only.

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NOTICE OF EXTRAORDINARY GENERAL MEETING

1. “ THAT

2. (a) inter-conditional with resolution number 1 above having been approved by the Shareholders, the terms and conditions under Subscription Agreement II entered into between Hongdu Group and Hongdu Aviation in relation to the subscription by Hongdu Group of approximately 23,128,680 new Hongdu Aviation Shares, subject to adjustment, at the Subscription Price, amounting to approximately RMB550 million, a copy of which is produced to the meeting marked “B” and signed by the Chairman of the meeting for the purpose of identification be and are hereby approved, confirmed and ratified; and

3. (b) the Directors (or any one of them) be and is hereby authorised 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 the transactions contemplated under Subscription Agreement II, 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 Subscription Agreement II as the Directors (or any one of them) may in their absolute discretion deem fit.”

4. “ THAT

5. (a) conditional upon resolution number 1 above having been approved by the Shareholders and resolution number 2 above having been approved by the Independent Shareholders, the proposed terms and conditions under the agreement(s) of the proposed Placing to be entered into between Hongdu Aviation and not more than 8 other qualified investors, who shall be independent parties, in relation to the private placing by Hongdu Aviation of new Hongdu Aviation Shares, the number of which is subject to adjustment, at the Subscription Price be and are hereby approved, confirmed and ratified; and

6. (b) the Directors (or any one of them) be and is hereby authorised 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 the transactions contemplated under the agreement(s) of the proposed Placing to be entered with the 8 other qualified investors, 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 such agreement(s) as the Directors (or any one of them) may in their absolute discretion deem fit.”

7. “ THAT

8. (a) conditional upon resolution number 2 above having been approved by the Independent Shareholders, the terms and conditions under the Assets Acquisition Agreement entered into between Hongdu Group and Hongdu Aviation in relation to the acquisition by Hongdu Aviation of the Aircraft Business Assets from Hongdu Group for a consideration of approximately RMB574 million, subject to the final assets valuation filed with SASAC, and the satisfaction of consideration by way of using part of the proceeds raised under the proposed Placing upon completion of Subscription Agreement II. A copy of the Assets Acquisition Agreement is produced to the meeting marked “C” and signed by the Chairman of the meeting for the purpose of identification be and are hereby approved, confirmed and ratified; and

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NOTICE OF EXTRAORDINARY GENERAL MEETING

• (b) the Directors (or any one of them) be and is hereby authorised 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 the transactions contemplated under Assets 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 Assets Acquisition Agreement 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, 28 August 2009

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 Tuesday, 8 September 2009 to Monday, 28 September 2009 (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 on 28 September 2009 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 Monday, 7 September 2009 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 Tuesday, 8 September 2009.

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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) 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 Company:

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

• (5) Ordinary resolution numbers 2 and 4 will be voted by poll by the Independent Shareholders.

As at the date of this notice, the Board 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. Gao Jianshe, Mr. Li Fangyong, Mr. Chen Yuanxian, 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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