Sunny Optical Technology (Group) Company Limited — Proxy Solicitation & Information Statement 2003

Apr 16, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Hengan International Group Company Limited , you should at once hand this circular, together with the enclosed form of proxy, to the purchasers or transferees or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchasers or transferees.

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

==> picture [52 x 53] intentionally omitted <==

==> picture [288 x 40] intentionally omitted <==

(Incorporated in the Cayman Islands with limited liability) website: http://www.irasia.com/listco/hk/hengan

DISCLOSEABLE AND CONNECTED TRANSACTION AND ONGOING CONNECTED TRANSACTIONS

Financial Adviser to Hengan International Group Company Limited

Independent Financial Adviser to the Independent Board Committee

A letter from the Independent Board Committee is set out on pages 26 to 27 of this circular. A letter from the independent financial adviser, Watterson Asia Limited, containing its advice to the Independent Board Committee is set out on pages 28 to 36 of this circular.

A notice convening the Extraordinary General Meeting of Hengan International Group Company Limited to be held at the Harcourt Room, Lower Lobby, Conrad International Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 2nd May, 2003 (Friday) at 11:00 a.m. (or immediate after the conclusion or adjournment of the Annual General Meeting) respectively, are set out on page 42 of this circular. Whether or not you are able to attend the Extraordinary General Meeting, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible to the Company’s share registrar, Abacus Share Registrars Limited, at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong in any event not less than 48 hours before the time appointed for holding the Extraordinary General Meeting. Completion and return of the form of proxy will not preclude you from attending and voting at the Extraordinary General Meeting or any adjournment thereof should you so wish.

* For identification only

14th April, 2003

Hengan International Group Company Limited

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
2.	Acquisition agreement dated 25th March, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
3.	Information on the acquiring asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
4.	Reasons for and benefits of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
5.	Particulars of the Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . .	15
6.	Benefits of the Ongoing Connected Transactions . . . . . . . . . . . . . . . . . . . . . . . . . .	20
7.	Disclosure requirements and waiver sought . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
8.	Approval by the Independent Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
9.	Change in the Company’s shareholding structure . . . . . . . . . . . . . . . . . . . . . . . . . .	23
10.	Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
11.	Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
12.	Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		26
Letter from Watterson Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		28
Appendix	— General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	37
**Notice of **	Extraordinary General Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	42

— i —

Hengan International Group Company Limited

DEFINITIONS

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

==> picture [456 x 539] intentionally omitted <==

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

|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Acquisition”|the|transaction|contemplated|under|the|Acquisition|
|Agreement|
|“Acquisition|Agreement”|the|sale|and|purchase|agreement|dated|25th|March,|2003|
|entered|into|between|the|Company|as|the|purchaser|and|the|
|Vendors|in|relation|to|the|entire|issued|share|capital|of|United|
|Wealth|and|the|Shareholders’|Loan|
|“Agency|Agreement”|the|agency|agreement|dated|26th|November,|1998|between|
|the|Company|(as|agent)|and|United|Wealth|(as|principal)|for|
|the|distribution|of|packaged|tissue|paper|products|
|“Annual|General|Meeting”|the|annual|general|meeting|of|the|Company|for|the|year|ended|
|31st|December,|2002|to|be|held|at|the|Harcourt|Room,|Lower|
|Lobby,|Conrad|International|Hong|Kong,|Pacific|Place,|88|
|Queensway,|Hong|Kong|on|2nd|May,|2003|at|10:00|a.m.|
|“associate(s)”|has|the|meaning|ascribed|to|it|under|the|Listing|Rules|
|“Audited|2003|Profit”|the|profit|after|taxation|and|minority|interests|but|before|
|extraordinary|items|for|the|year|ending|31st|December,|2003|
|to|be|shown|in|an|auditor’s|certificate|extracted|from|the|
|consolidated|accounts|of|United|Wealth|prepared|in|
|accordance|with|the|HK|GAAP|
|“Board”|board|of|Directors|
|“Business|Day”|any|day|other|than|a|Saturday,|Sunday|or|a|day|on|which|
|commercial|banking|institutions|in|Hong|Kong|are|authorized|
|or|obligated|by|law|or|executive|order|to|be|closed|
|“Changde|Hengan”|Changde|Hengan|Paper|Products|Co.|Ltd.|
|(|),|a|foreign-invested|joint|stock|
|limited|liability|company|incorporated|in|the|PRC|on|19th|
|February,|1997|with|a|registered|capital|of|RMB334,115,779|
|(equivalent|to|about|HK$315.2|million)|
|“Chongqing|Hengan”|Hengan|(Chongqing)|Paper|Products|Co.|Ltd.|
|(|),|a|sino-foreign|equity|joint|venture|
|incorporated|in|the|PRC|on|16th|October,|1998|with|a|
|registered|capital|of|HK$2.5|million|

----- End of picture text -----

— 1 —

Hengan International Group Company Limited

DEFINITIONS

“Company”	Hengan International Group Company Limited ( ), a company incorporated in the Cayman
	Islands with limited liability, the shares of which are listed on
	the main board of the Stock Exchange
“Completion”	completion of the Acquisition Agreement
“connected person(s)”	has the same meaning ascribed to it in the Listing Rules
“Consideration Shares”	the aggregate of 44,554,455 new Shares, representing about
	4.3% of the entire issued share capital of the Company (as
	enlarged by the issue of the Consideration Shares) as at
	Completion, to be allotted and issued to the Vendors upon
	Completion
“Directors”	the directors of the Company
“Earn-out Payment”	the amount up to HK$41,130,000 payable by the Company to
	the Vendors in cash in the event that Audited 2003 Profit
	exceeds Guaranteed 2003 Profit
“Enlarged Group”	the Company together with its subsidiaries following
	Completion
“Existing Connected	the transactions contemplated under the Supply Agreement
Transactions”	and the Agency Agreement, as described under “Particulars of
	the Existing Connected Transactions”
“Extraordinary General Meeting”	the extraordinary general meeting of the Company to be held
or “EGM”	at the Harcourt Room, Lower Lobby, Conrad International
	Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 2nd
	May, 2003 at 11:00 a.m. (or immediate after the conclusion or
	adjournment of the Annual General Meeting)
“Fushun Hengan”	Fushun Hengan Hearttex Paper Products Co. Ltd. ( ), a sino-foreign equity joint
	venture incorporated in the PRC on 25th May, 1999 with a
	registered capital of US$3 million (equivalent to HK$23.4
	million)
“Gather Wise”	Gather Wise Investments Ltd. ( ), a limited
	liability company incorporated in Samoa on 8th June, 2001,
	the beneficial owners of which are members of the senior
	management of the Hearttex Group and their family members
“Group”	the Company together with its subsidiaries before Completion
	(i.e., before taking into account the assets to be acquired
	under the Acquisition) for the purpose of this circular

— 2 —

Hengan International Group Company Limited

DEFINITIONS

“Guaranteed 2003 Profit”

RMB57,741,000 (equivalent to HK$54,472,000), being the amount of the consolidated profit after tax and minority interests before extraordinary items of United Wealth for the year ending 31st December, 2003, prepared under HK GAAP, as guaranteed by the Vendors jointly and severally in the Acquisition Agreement

“Hearttex Connected the Hearttex Supply Transactions and the Hearttex Transactions” Distribution Transactions, and any of them as the context requires, as described under “Particulars of the Ongoing Connected Transactions”

• “Hearttex Distribution Transactions”

the transactions in relation to the distribution of packaged tissue paper products by Changde Hengan and its subsidiaries within the Hearttex Group from time to time as described under “Particulars of the Ongoing Connected Transactions” and include the Paper Product Distribution Agreement

“Hearttex Group”

Changde Hengan and its subsidiaries from time to time

“Hearttex Supply Agreement”

• the supply agreement to be entered into between Changde Hengan and its subsidiaries within the Hearttex Group from time to time in relation to the supply of tissue paper raw material by Changde Hengan

“Hearttex Supply Transactions”

the transactions in relation to the sale of tissue paper raw material by Changde Hengan to its subsidiaries within the Hearttex Group from time to time as described under “Particulars of the Ongoing Connected Transactions”

“HIIL”

“HK GAAP”

“HK$”

“Hong Kong”

Hengan International Investments Limited, a company incorporated in the British Virgin Islands on 6th May, 1998 Hong Kong Generally Accepted Accounting Principles Hong Kong dollars, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the PRC

“Independent Board Committee”

an independent committee of the Board consisting of Henry Chan, Guan Tao and Wong Ying Kay, Ada to advise the Independent Shareholders in respect of the Acquisition and the Hearttex Connected Transactions

“Independent Shareholder(s)”

the shareholder(s) of the Company other than the Vendors and their respective associates

— 3 —

Hengan International Group Company Limited

DEFINITIONS

==> picture [456 x 610] intentionally omitted <==

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

||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Initial|Consideration”|HK$375,000,000,|the|initial|aggregate|consideration|payable|
|by|the|Company|to|the|Vendors|pursuant|to|the|Acquisition|
|Agreement|
|“Jinjiang|Hengan”|Jinjiang|Hengan|Paper|Products|Co.|Ltd.|
|(|),|a|sino-foreign|equity|joint|
|venture|incorporated|in|the|PRC|on|16th|August,|1998|with|a|
|registered|capital|of|US$12|million|(equivalent|to|HK$93.6|
|million)|
|“Latest|Practicable|Date”|8th|April,|2003,|being|the|latest|practicable|date|before|the|
|printing|of|this|circular|for|ascertaining|certain|information|
|contained|in|this|circular|
|“Listing|Rules”|The|Rules|Governing|the|Listing|of|Securities|on|the|Stock|
|Exchange|
|“Mr.|Hui”|Mr.|Hui|Chi|Lin,|who|is|(a)|one|of|the|Vendors|interested|in|
|a|38%|equity|interest|in|United|Wealth,|(b)|a|Director|and|(c)|
|a|Shareholder|interested|in|about|20.76%|equity|interest|in|
|the|Company|
|“Mr.|Sze”|Mr.|Sze|Man|Bok,|who|is|(a)|one|of|the|Vendors|interested|in|
|a|45%|equity|interest|in|United|Wealth,|(b)|a|Director|and|(c)|
|a|Shareholder|interested|in|about|22.13%|equity|interest|in|
|the|Company|
|“Mr.|Yeung”|Mr.|Yeung|Wing|Chun,|who|is|(a)|one|of|the|Vendors|
|interested|in|a|17%|equity|interest|in|United|Wealth,|(b)|a|
|Director|and|(c)|a|Shareholder|interested|in|about|4.15%|
|equity|interest|in|the|Company|
|“Ongoing|Connected|certain|non-exempt|connected|transactions|of|Changde|
|Transactions”|Hengan,|other|members|of|the|Hearttex|Group,|the|Company|
|and/or|its|subsidiaries,|which|would|constitute|or|continue|to|
|constitute|connected|transactions|to|the|Company|under|the|
|Listing|Rules|after|Completion,|comprising|the|Hearttex|
|Connected|Transactions|and|the|Existing|Connected|
|Transactions|
|“Paper|Product|Distribution|the|paper|product|distribution|agreement|to|be|entered|into|
|Agreement”|between|Changde|Hengan|and|its|subsidiaries|in|relation|to|
|the|distribution|of|packaged|tissue|paper|products|by|Changde|
|Hengan|
|“Paper|Subsidiaries”|Jinjiang|Hengan,|Fushun|Hengan|and|Chongqing|Hengan|

----- End of picture text -----

— 4 —

Hengan International Group Company Limited

DEFINITIONS

“PRC”	the People’s Republic of China, for the purpose of this
	circular, excluding Hong Kong, the Macau Special
	Administrative Region and Taiwan
“RMB”	Renminbi, the lawful currency of the PRC
“SFO”	Securities and Futures Ordinance (Chapter 571 of the Laws of
	Hong Kong)
“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of Shares
“Shareholders’ Loan”	a loan in the amount of about HK$221,500,000 provided to
	United Wealth by each of Mr. Sze, Mr. Hui and Mr. Yeung in
	the same proportion as to their respective equity interest in
	United Wealth
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Supply Agreement”	the supply agreement dated 26th November, 1998 between the
	Company (as purchaser) and Changde Hengan (as supplier)
	for the supply of tissue paper raw material
“Takeovers Code”	the Code on Takeovers and Mergers
“United Wealth”	United Wealth International (Holdings) Limited. ( ), a company incorporated in the
	Cayman Islands on 6th January, 1997 with limited liability
“US$”	United States dollars, the lawful currency of the United States
	of America
“Vendors”	Mr. Sze, Mr. Hui and Mr. Yeung
“Watterson Asia”	Watterson Asia Limited, a licensed corporation registered
	under the Securities and Futures Ordinance (Chapter 571 of
	the Laws of Hong Kong) and the independent financial
	adviser to the Independent Board Committee

For illustration purposes, translation of certain currencies is based on the following exchange rates:

HK$1.00 = RMB1.06 US$1.00 = HK$7.80

— 5 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

==> picture [53 x 52] intentionally omitted <==

==> picture [288 x 39] intentionally omitted <==

*

(Incorporated in the Cayman Islands with limited liability)

Executive Directors: Sze Man Bok (Chairman) Hui Chi Lin (Deputy Chairman and Chief Executive Officer) Yeung Wing Chun Zhang Shi Pao Hung Ching Shan Poon Fuk Chuen Xu Da Zuo Xu Chun Man

Registered Office: Ugland House South Church Street P.O. Box 309, George Town Grand Cayman Cayman Islands British West Indies

Head Office:

Hengan Industrial Centre Anhai Town, Jinjiang City Fujian Province PRC

Independent non-executive Directors: Place of business in Hong Kong: Henry Chan Unit 2101D, 21st Floor Chu Cheng Chung Admiralty Centre, Tower 1 Guan Tao 18 Harcourt Road Wong Ying Kay, Ada Hong Kong

14th April, 2003

To the Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION AND ONGOING CONNECTED TRANSACTIONS

1. INTRODUCTION

Pursuant to the Acquisition Agreement dated 25th March, 2003 entered into between the Company and Mr. Sze, Mr. Hui and Mr. Yeung, the Company shall acquire the Shareholders’ Loan and the entire issued share capital of United Wealth, whose principal asset is an approximate 68.9% equity interest in Changde Hengan. Changde Hengan and its subsidiaries are principally engaged in the manufacture and sale of tissue paper products under a well-recognised trademark of “Hearttex” ( ) in the PRC.

— 6 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

The aggregate consideration of up to HK$416,130,000 (subject to adjustments) comprises the Initial Consideration and, if any, the Earn-out Payment. The Initial Consideration (equivalent to HK$375,000,000) will be satisfied as to (i) HK$262,500,000 by cash payment; and (ii) HK$112,500,000 by way of the allotment and issue of 44,554,455 Consideration Shares at an issue price of HK$2.525 per Share. The Earn-out Payment of up to HK$41,130,000, if any, will be made by cash and be determined by reference to the amount that the Audited 2003 Profit exceeds the Guaranteed 2003 Profit.

Pursuant to the Listing Rules, the Acquisition constitutes a discloseable transaction to the Company. As the Vendors are also the Directors and (except Mr. Yeung) substantial shareholders of the Company, the Acquisition also constitutes a connected transaction to the Company and the Vendors and their respective associates will abstain from voting at the EGM. The Hearttex Connected Transactions are subject to the approval by the Independent Shareholders at the EGM and the Vendors, Gather Wise, their respective associates and any Shareholders with interest in the Hearttex Connected Transactions will abstain from voting at the EGM in this regard.

The main purposes of this circular are (i) to provide you with further information relating to the Acquisition and the Ongoing Connected Transactions; (ii) to set out the letter of advice from Watterson Asia to the Independent Board Committee and the recommendation and opinion of the Independent Board Committee as advised by Watterson Asia; and (iii) to seek your approval at the EGM of the ordinary resolutions in relation to the Acquisition and the Hearttex Connected Transactions as set out in the notice of the EGM.

2. ACQUISITION AGREEMENT DATED 25TH MARCH, 2003

Parties:

Purchaser: The Company Vendors: Mr. Sze, Mr. Hui and Mr. Yeung

Assets to be acquired:

The assets to be acquired under the Acquisition Agreement are:

• (i) the entire issued share capital of United Wealth, which is currently owned as to 45%, 38% and 17% by Mr. Sze, Mr. Hui and Mr. Yeung respectively; and

• (ii) the Shareholders’ Loan amounting to about HK$221,500,000 payable to Mr. Sze, Mr. Hui and Mr. Yeung in the same proportion as to their respective equity interest in United Wealth.

The principal asset of United Wealth is an approximate 68.9% equity interest in Changde Hengan. Details of the acquiring assets are set out in the paragraph headed “Information on the acquiring asset” below.

— 7 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

Consideration and payment terms:

The aggregate consideration of up to HK$416,130,000 (subject to adjustments) comprises:

• (i) the Initial Consideration of HK$375,000,000; and

• (ii) the Earn-out Payment of up to HK$41,130,000.

The terms of the Acquisition Agreement were negotiated on an arm’s length basis and the executive Directors consider the terms of the Acquisition Agreement are on normal commercial terms and are fair and reasonable so far as the Shareholders are concerned.

• (a) Initial Consideration and Guaranteed 2003 Profit

Initial Consideration

The Initial Consideration is HK$375,000,000, which will be satisfied on Completion in the following manner:

Manner in which the Initial Consideration will be satisfied (HK$) Cash Consideration Shares Total Memo item: Allocation of Consideration Shares (Shares)	Mr. Sze 118,125,000 50,625,000 168,750,000* 20,049,505	Vendors Mr. Hui Mr. Yeung 99,750,000 44,625,000 42,750,000 19,125,000 142,500,000 63,750,000** 16,930,693 7,574,257	Total 262,500,000 112,500,000
			375,000,000
			44,554,455

• Or his nominee(s)

The Initial Consideration represents a price-earning multiple of 6.884 times of the Guaranteed 2003 Profit (i.e., RMB57,741,000 (equivalent to HK$54,472,000)), with reference to, among others, the price-earning multiples of some listed companies in various countries or regions (other than Hong Kong and the PRC) with businesses similar to that of the Hearttex Group. The Group will satisfy the cash portion of the Initial Consideration from its internal resources.

— 8 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

The issue price of HK$2.525 per Consideration Share represents:

• i. the average closing price per Share as quoted on the Stock Exchange over the ten trading days from 12th March, 2003 to 25th March, 2003; and

• ii. a discount of about 4.7% over the closing price of HK$2.65 per Share as quoted on the Stock Exchange on 25th March, 2003, being the date of the Acquisition Agreement.

The Consideration Shares represents about 4.5% of the existing issued share capital of the Company and about 4.3% of the issued share capital as enlarged by the issuance of the Consideration Shares. The Consideration Shares, once allotted and issued, will be credited as fully paid up and will rank pari passu with all the then issued Shares in all aspects (However, the holders of the Consideration Shares will not have the right to receive the final dividend of the Company proposed by the Board on 25th March, 2003).

Each of Mr. Sze, Mr. Hui and Mr. Yeung has undertaken with the Company that, in the period of 12 months following Completion where upon the Consideration Shares will be allotted and issued, each of them shall not sell, transfer or otherwise dispose of, and shall procure the registered holder of the shares not to sell, transfer of or dispose of, all or any of the Consideration Shares or any indirect interest therein.

Profit Guarantee

Pursuant to the Acquisition Agreement, each of the Vendors has agreed to jointly and severally guarantee to the Company that the Audited 2003 Profit shall not be less than the Guaranteed 2003 Profit (i.e., RMB57,741,000 (equivalent to HK$54,472,000)), which is the expectation of the management of the Hearttex Group after taking into account, among others, the expansion of production capacity of Hearttex Group in late 2002.

The Acquisition Agreement provides that, amongst others, in the event that the Audited 2003 Profit is less than the Guaranteed 2003 Profit, the Vendors shall pay the Company in cash within 14 Business Days after the financial information regarding the Audited 2003 Profit becomes available to the Company an amount that is equal to:

(HK$54,472,000 - Audited 2003 Profit) x 6.884*

• The price-earning multiple represented by the Initial Consideration over the Guaranteed 2003 Profit

The independent Directors shall confirm in the annual report of the Company for the year ending 31st December, 2003 as to whether the Guaranteed 2003 Profit has been met and (if appropriate) whether each of the Vendors has fulfilled their respective payment obligations under the Guaranteed 2003 Profit arrangement. In the event the Guaranteed 2003 Profit is not met, a further announcement will be made as soon as practicable.

— 9 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

(b) Earn-out Payment

The Acquisition Agreement provides that, subject to the fulfillment of the profit guarantee as described above and in the event that the Audited 2003 Profit exceeds the Guaranteed 2003 Profit, the Company shall pay the Vendors the amount up to HK$41,130,000, representing about 11.0% of the Initial Consideration and about 9.9% of the maximum amount of the aggregate consideration, in cash within 14 Business Days after the audited financial information containing the Audited 2003 Profit becomes available to the Company. The actual amount payable is equal to:

(Audited 2003 Profit - Guaranteed 2003 Profit) x 6.884*

• The price-earning multiple represented by the Initial Consideration over the Guaranteed 2003 Profit

The maximum earn-out payment is capped at HK$41,130,000 and the Company is not required to pay the Vendors any additional payment (other than HK$41,130,000) even if the Audited 2003 Profit exceeds RMB64,077,000 (equivalent to HK$60,450,000). As such, the maximum amount of aggregate consideration in connection with the Acquisition is HK$416,130,000. The Group will satisfy the Earn-out Payment, if any, from its internal resources.

The independent Directors shall confirm in the annual report of the Company for the year ending 31st December, 2003 as to whether the Audited 2003 Profit has exceeded the Guaranteed 2003 Profit (if appropriate) and whether the Company has fulfilled its payment obligations under the Earn-out Payment arrangement accordingly.

Conditions:

Completion is conditional upon, amongst other things, the following conditions being fulfilled or waived (if applicable) on or before 23rd May, 2003 or such other date as the parties to the Acquisition Agreement may otherwise agree:

• i. the passing of an ordinary resolution by the Independent Shareholders at the EGM approving the Acquisition;

• ii. the passing of an ordinary resolution by the Independent Shareholders at the EGM approving the Hearttex Connected Transactions;

• iii. the Listing Committee of the Stock Exchange granting listing of and permission to deal in the Consideration Shares (subject to conditions to which neither the Company nor the Vendors may reasonably object);

• iv. satisfactory results of the due diligence review on United Wealth and its subsidiaries (including without limitation to the state of its affairs, assets and liabilities, financial position and business operations) to the Company;

— 10 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

• v. the allotment and issue of the Consideration Shares to each of the Vendors will not give rise to any obligations under the Takeovers Code; and

• vi. all governmental and regulatory authorities consents and approvals for the transactions contemplated under the Acquisition Agreement having been obtained.

3. INFORMATION ON THE ACQUIRING ASSET

Set out below is the corporate structure of the acquiring asset (i.e., United Wealth and its operating subsidiaries) as at the date of the Acquisition Agreement and immediately after Completion:

As at the date of the Acquisition Agreement:

==> picture [421 x 235] intentionally omitted <==

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

Mr. Sze Mr. Hui Mr. Yeung
45% 38% 17%
Three corporate United Wealth Gather Wise [(note 2)]
shareholders [(note 1)]
10.5% 68.9% 20.6%
Changde Hengan
75% 75% 75%
Jinjiang Hengan Chongqing Hengan Fushun Hengan
25% 25% 25%
----- End of picture text -----

Operating companies within the Hearttex Group

— 11 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

Immediately after Completion:

==> picture [405 x 233] intentionally omitted <==

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

Other
Mr. Sze Mr. Hui Mr. Yeung executive HIIL Public
(note 3) (note 4) Directors Shareholders
(note 5)
23.11% 21.50% 4.70% 6.14% 17.97% 26.58%
The Company
68.9%
Hearttex Group
Tissue paper products Sanitary napkins Disposable diapers
----- End of picture text -----

Notes:

1. None of the three corporate shareholders is a connected person of the Company.

2. Gather Wise is a limited liability company incorporated in Samoa on 8th June, 2001 and its beneficial owners are members of the senior management of Hearttex Group and their family members.

3. An about 0.64% interest is held by HIIL on behalf of the spouse of Mr. Hui.

4. An about 0.0044% interest is held by HIIL on behalf of the spouse of Mr. Yeung.

5. An aggregate of about 5.26% interest of certain executive Directors (namely Messrs. Zhang Shi Pao, Xu Da Zuo and Xu Chun Man) is held by HIIL on their behalf.

6. Excluding about 5.26% interest mentioned in Note 5, a total of 186,921,705 Shares, representing about 17.97% shareholding interests in the Company (as enlarged by the issue of the Consideration Shares), is held by HIIL, as trustee of certain senior employees of the Group and their respective family members. Save as disclosed in Notes 3 to 5, the beneficial owners of all the Shares held by HIIL are not connected persons of the Company.

— 12 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

United Wealth is an investment holding company and its principal asset is an approximate 68.9% interest in Changde Hengan, which together with the Paper Subsidiaries forms the Hearttex Group. Apart from the about 68.9% equity interest in Changde Hengan that represents more than 90% of the total assets of United Wealth, the remaining assets are cash and bank balances amounting to about HK$1.6 million and accounts receivable amounting to about HK$18.2 million. Changde Hengan is the principal operating vehicle of the Hearttex Group that commenced its operation in March 1997. Set out below is the background information of Changde Hengan and the Paper Subsidiaries:

	Changde	Jinjiang	Chongqing	Fushun
	Hengan	Hengan	Hengan	Hengan
Year of establishment	1997	1998	1998	1999
Place of operation	Changde,	Quanzhou,	Chongqing	Fushun,
	Hunan	Fujian		Liaoning
Legal status	Foreign-invested	Sino-foreign	Sino-foreign	Sino-foreign
	joint stock limited	equity joint	equity joint	equity joint
	liability company	venture	venture	venture
Paid up registered capital	RMB334,115,779	US$12,000,000	HK$2,500,000	US$3,000,000
Principal business	Manufacture,	Packaging and	Packaging and	Packaging and
	packaging and	sale of	sale of	sale of
	sale of tissue	tissue paper	tissue paper	tissue paper
	paper products	products	products	products

The tissue paper products of the Hearttex Group comprising facial tissue paper and hygiene tissue paper products are sold under a well-recognised trademark of “Hearttex” ( ) throughout the PRC. The trademark of “Hearttex” ( ) is registered under the name of Changde Hengan. At present, Hearttex Group has a well-developed distribution network comprising 48 distribution points covering major provinces and cities in the PRC. According to the industry research conducted by (Chinese National Commercial Information Centre) in the PRC, Hearttex facial tissue paper products and hygiene tissue paper products were ranked No. 1 in terms of market share (about 17%) in 2001.

At present, the Hearttex Group has obtained registration of 16 trademarks in the PRC.

The production capacity of the Hearttex Group has been expanded from 35,000 tonnes to 77,000 tonnes per annum in late 2002. The expansion in production capacity would help improve the production capability and profitability of the Hearttex Group.

At present, the Vendors, who are also the Directors and (except Mr. Yeung) substantial shareholders of the Company, are considering the possibility of an A share listing of the Hearttex Group on a recognised stock exchange in the PRC. After Completion, the executive Directors will continue to explore the feasibility of such proposal. As at the date of this circular, no timetable in connection with the proposed A share listing of the Hearttex Group has been concluded.

— 13 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

The unaudited combined net asset value of United Wealth (excluding the value of the trademark of “Hearttex” ( ) prepared in accordance with the HK GAAP as at 31st December, 2002 was about HK$156,156,000, excluding the Shareholders’ Loan totalling about HK$221,500,000 to be acquired by the Company. The table herebelow sets out a summary of the unaudited pro forma combined results of United Wealth for the two years ended 31st December, 2002 prepared in accordance with the HK GAAP, assuming the current shareholding structure of the Acquiring Assets had been in place and the 68.9% interest in Changde Hengan had been effectively owned by the Vendors throughout the two years ended 31st December, 2002:

	For the year ended	For the year ended
	31st December
	2001	2002
	HK$’million	HK$’million
	(unaudited)	(unaudited)
Turnover	327.5	393.2
Profit before tax and minority interests	47.1	63.2
Profit after tax and minority interests	14.6	27.9

4. REASONS FOR AND BENEFITS OF THE ACQUISITION

The Group is principally engaged in the manufacture, distribution and sale of personal hygiene products, principally comprising sanitary napkins and disposable diapers at present, in the PRC. It is the Group’s objective to achieve a dominant presence in the household and personal care products market in the PRC.

The executive Directors believe that the Acquisition represents an invaluable opportunity for the Group to expand its product range and capture the market potential in the tissue paper industry in the PRC taking into account the following factors:

• i. According to (Directory of Household Paper & Packaging Paper/ Paperboard Industry (China)), per capita consumption of tissue paper in the PRC soared from 0.59kg in 1990 to 2.15kg in 2001, representing a compound annual growth rate of about 13% per annum. The executive Directors believe the prevailing per capita consumption of tissue paper in the PRC is still far below that of the global market of more than 3kg. The executive Directors expect that the integration of the relatively low penetration rate of tissue paper products with huge population size, growing per capita GDP and improving standard of living in the PRC will contribute to strong growth prospects of the PRC tissue paper industry and it is expected that the growth will be more significant in the tissue paper segment which is targeted by the Heattex Group. The executive Directors consider the Acquisition will allow the Group to position itself to capture the growth prospects of the tissue paper industry, which is beneficial to the Group and the Shareholders as a whole.

— 14 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

• ii. The Acquisition enables the Group to acquire the famous trademark of “Hearttex” ( ), which has been well-recognised in the PRC. The executive Directors consider the Group will have the opportunity to carry the Hearttex brand which have a strong presence in the PRC tissue paper product market.

• iii. Following Completion, the Group’s product base will be expanded and the executive Directors expect that this will position the Group as one of the largest domestic comprehensive household and personal care product companies in the PRC.

• iv. The Acquisition allows the Group to integrate raw materials supply business of the Hearttex Group and facilitates the consolidation of the Group’s sanitary products business.

• v. In addition to profit contribution, established marketing and distribution channels of both the existing Group and Hearttex Group will help each other improve further their distribution capability and efficiency by strengthening the foundation for better penetration throughout the PRC market.

Accordingly, the executive Directors consider that the Acquisition is in the interest of the Company and are fair and reasonable so far as the Shareholders are concerned.

5. PARTICULARS OF THE ONGOING CONNECTED TRANSACTIONS

Particulars of the Existing Connected Transactions

• (A) Purchase of tissue paper raw material from Changde Hengan

Transaction Nature

On 26th November, 1998, the Company entered into the Supply Agreement with Changde Hengan for the purchase of tissue paper raw material for the production of sanitary napkins and diapers.

The initial term of the Supply Agreement is three years commencing on 26th November, 1998 and is automatically renewable on the same terms and on a yearly basis unless and until terminated by either party to the agreement by giving not less than six months’ prior written notice. At the date of this circular, the Company has no intention to terminate the Supply Agreement and it expects to continue the arrangement contemplated under the agreement following Completion.

— 15 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

Transaction Value

The following table summarises the Group’s annual purchases of tissue paper raw material from Changde Hengan under the Supply Agreement for each of the two years ended 31st December, 2002:

	Year ended 31st December,	Year ended 31st December,
	2001	2002
Transaction amount (HK$’000)	15,978	12,501
Transaction amount as a percentage of the
Group’s then net tangible assets value (%)	1.0	0.8

Pricing Basis

Pursuant to the Supply Agreement, Changde Hengan has covenanted that it will supply tissue paper raw material to the Group at a purchase price not less favourable than that offered by Changde Hengan to other independent customers in the PRC. In addition, the price of tissue paper raw material that Changde Hengan offers shall not exceed the market price of comparable products which are available to the Group from independent third parties from time to time. The Group is not under any obligation to purchase tissue paper raw material from Changde Hengan and it is free to source tissue paper raw material from other local or international suppliers in the market.

(B) Distribution of packaged tissue paper products for the Hearttex Group

Transaction Nature

The Company entered into the Agency Agreement with United Wealth on 26th November, 1998 for the distribution of packaged tissue paper products (including toilet rolls, paper handkerchiefs and facial tissue paper) manufactured by the Hearttex Group (i.e., Changde Hengan and the Paper Subsidiaries).

Under the Agency Agreement, commission at the rate of 7.5% on the total value of net sales is payable by the Hearttex Group to the Company. Such commission rate was determined and agreed by the parties when they first entered into the Agency Agreement in 1998 by reference to the selling and general administration expenses of the Group principally comprising transportation, travelling and selling commissions and salaries payable to the sales officers employed by the Group.

The Agency Agreement is for an initial term of three years which commenced on 26th November, 1998 and is automatically renewable on the same terms and on a yearly basis unless and until terminated by either party by giving not less than three months’ prior notice. The Company expects that the arrangement contemplated under the agreement will cease to continue by the end of 2004 whereupon packaged tissue paper products of the Hearttex Group will be wholly distributed through Changde Hengan’s own distribution network.

— 16 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

Transaction Value

The following table summarises the total amount of commission received by the Group under the Agency Agreement for each of the two years ended 31st December, 2002 on the basis of a commission rate of 7.5% of the total net sales of packaged tissue paper products:

	Year ended 31st December,	Year ended 31st December,
	2001	2002
Transaction amount (HK$’000)	6,562	15,759
Transaction amount as a percentage of the
Group’s then net tangible assets value (%)	0.4	1.0

Pricing Basis

United Wealth has undertaken to the Company that the terms offered to the Company under the Agency Agreement shall be no less favourable than any terms offered to other agents of United Wealth for the distribution of packaged tissue paper products during the term of the Agency Agreement.

Particulars of the Hearttex Connected Transactions

(A) The Hearttex Supply Transactions

Transaction Nature

At present, Changde Hengan takes up the centralized procurement function in respect of tissue paper raw materials within the Hearttex Group to achieve a better quality control and economies of scale. It is the sole provider of tissue paper raw material to the Paper Subsidiaries for production of packaged tissue paper products.

Following Completion, Changde Hengan will continue to supply tissue paper raw material to the Paper Subsidiaries. In addition, as Changde Hengan and Gather Wise both intend to expand the Hearttex Group by the establishment of further subsidiaries for the production of packaged tissue paper products with, among other things, the shareholding structure same as each of the Paper Subsidiaries, Changde Hengan intends to supply tissue paper raw material to such new members of the Hearttex Group as and when the parties deem appropriate. It is expected that the Hearttex Supply Agreement will be entered into prior to Completion in relation of the supply of tissue paper raw material by Changde Hengan to members of the Hearttex Group (other than Changde Hengan itself). The agreement will be of an initial term of three years and is automatically renewable on the same terms and on a yearly basis unless and until terminated by either party to the agreement by giving not less than 30 days’ prior written notice.

— 17 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

Transaction Value

The following table summarises the sales of tissue paper raw material of Changde Hengan to the Paper Subsidiaries for each of the two years ended 31st December, 2002:

			Year ended 31st December,	Year ended 31st December,
			2001	2002
Transaction	amount	(HK$’000)	133,563	183,449
_Transaction _	_amount _	as a percentage of the
_Enlarged _	_Group’s _	then cost of sales (%)	14.1	19.8

Pricing Basis

According to the proposed term of the Hearttex Supply Agreement, the prices of tissue paper raw material that Changde Hengan offers shall not be lower than the market price of comparable products which are available to such members of the Hearttex Group from independent third parties from time to time. Further, subsidiaries of Changde Hengan, being parties to the Hearttex Supply Agreement, are not under any obligation to purchase tissue paper raw material from Changde Hengan and each of the subsidiaries of Changde Hengan is free to source tissue paper material from other local or international suppliers in the market.

(B) The Hearttex Distribution Transactions

Transaction Nature

At present, (i) Changde Hengan distributes packaged tissue paper products of the Paper Subsidiaries and (ii) the Paper Subsidiaries distribute packaged tissue paper products of Changde Hengan.

(i) Changde Hengan as distributor

On or before Completion, Changde Hengan and its subsidiaries will enter into the Paper Product Distribution Agreement for an initial term of three years and the agreement is automatically renewable on a yearly basis unless and until terminated by either party to the agreement by giving not less than 30 days’ prior written notice. It is intended that new members of the Hearttex Group will also become parties to the Paper Product Distribution Agreement as and when each of them is established. Under the agreement, each member of the Hearttex Group (excluding Changde Hengan) shall sell such volume of tissue paper products to Changde Hengan upon the requests of Changde Hengan as and when the tissue paper products inventory of Changde Hengan is not sufficient to meet the demand at its distribution network.

— 18 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

(ii) The Paper Subsidiaries as distributor

The present arrangements are that certain packaged tissue paper products of Changde Hengan are distributed by each of the Paper Subsidiaries to the regions where they are situated whenever there is shortage of such certain products at the Paper Subsidiaries. It is expected that the present arrangements shall continue and at present there is no intention that an agreement or arrangement similar to the Paper Product Distribution Agreement will be entered into. The reason being is that it is the intention of Changde Hengan that it will continue to develop its distribution network in the PRC and that the distribution network of the Paper Subsidiaries shall be phased out gradually by the end of 2003. Further, new member of the Hearttex Group will not establish their own distribution network and they will rely on Changde Hengan for distribution of their products.

Transaction Value

The following table summarises the total sales of packaged tissue paper products of Changde Hengan to the Paper Subsidiaries and of the Paper Subsidiaries to Changde Hengan for each of the two years ended 31st December, 2002:

Year Transaction amount (HK$’000) - Sale by Changde Hengan to the Paper Subsidiaries - Sale by the Paper Subsidiaries to Changde Hengan Total Transaction amount as a percentage of the Enlarged Group’s then turnover for the year (%)	ended 31st December, 2001 2002 11,611 15,542 35,772 47,396 47,383 62,938 3.1 6.8	ended 31st December, 2001 2002 11,611 15,542 35,772 47,396 47,383 62,938 3.1 6.8
		62,938 6.8

Pricing Basis

At present, Changde Hengan and the Paper Subsidiaries fix the selling price of the packaged tissue paper products by reference to market prices taking into account the costs and expenses for operating the respective distribution networks. This will continue to be the case after Completion and the same basis will apply to all new members of the Hearttex Group.

The Paper Product Distribution Agreement provides that, members of the Hearttex Group (excluding Changde Hengan) shall sell packaged tissue paper products to Changde Hengan at a pre-determined unit price based on the average unit price for the relevant paper product of the preceding year less the relevant distribution costs calculated at a rate of 10% of the pre-determined unit price of the preceding year.

Hengan International Group Company Limited

— 19 —

LETTER FROM THE BOARD

The pre-determined unit price is subject to upward or downward adjustments to be agreed among the parties in the circumstances of any change in market conditions. The distribution costs incurred by Changde Hengan and attributable to the sales of paper products purchased from its subsidiaries within the Hearttex Group shall be calculated based on the proportion of such sales to the total sales of Changde Hengan. The distribution costs shall be adjusted as follows:

• if the actual distribution costs are greater than 10% of the pre-determined unit price, Changde Hengan shall be reimbursed for the full amount incurred up to an amount equivalent to 12% of the pre-determined unit price of the relevant year for the relevant paper product.

• if the actual distribution costs are less than 10% of the pre-determined unit price, Changde Hengan shall refund any excess amount to the relevant subsidiaries.

The net amount of any payable or receivable in relation to the adjustment of distribution costs between Changde Hengan and its subsidiaries shall be calculated and settled on a calendar quarterly basis.

Further, Changde Hengan and its subsidiaries, are not under any obligation to purchase/sell packaged tissue paper products from/to each other.

6. BENEFITS OF THE ONGOING CONNECTED TRANSACTIONS

The Group is engaged in the manufacture, distribution and sale of personal hygiene products, principally comprising sanitary napkins and disposable diapers at present in the PRC. It is the Group’s objective to achieve a dominant presence in the household and personal care products market in the PRC. After Completion, the Enlarged Group’s business scope will also be engaged in the manufacture and sale of tissue paper products.

The Ongoing Connected Transactions will be conducted in the ordinary and usual course of business of the Group. The Existing Connected Transactions and the Hearttex Connected Transactions will be conducted on normal commercial terms (or better) determined on an arm’s length basis so far as the Group as a whole, and the Hearttex Group as a whole, are concerned, respectively.

The executive Directors are of the view that the purchase of tissue paper raw material from Changde Hengan would continue to be beneficial to the Enlarged Group in terms of its savings in the cost of production and the avoidance of possible exchange rate losses. Whilst the distribution of packaged tissue paper products of the Hearttex Group through the distribution networks of the Enlarged Group are in the interests of the Enlarged Group, such an arrangement will facilitate the smooth operations of its business after Completion.

7. DISCLOSURE REQUIREMENTS AND WAIVER SOUGHT

For the purpose of the Listing Rules, the Ongoing Connected Transactions will constitute connected transactions of the Company which normally require disclosure by way of press announcement and/or prior approval of the independent Shareholders in an extraordinary general meeting each time as such transaction occurs.

— 20 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

In relation to each of the transactions comprising the Ongoing Connected Transactions, the executive Directors expect the following:

• (i) the value of the transactions under the Supply Agreement for each year may exceed the higher of HK$1,000,000 or 0.03% of the consolidated net tangible asset value of the Company but would remain below HK$10,000,000 or 3% of the consolidated net tangible assets value of the Company;

• (ii) the value of the transactions under the Agency Agreement for each year may exceed the higher of HK$1,000,000 or 0.03% of the consolidated net tangible asset value of the Company but would remain below HK$10,000,000 or 3% of the consolidated net tangible assets value of the Company;

• (iii) the value of the Hearttex Supply Transactions for each year may exceed the higher of HK$10,000,000 or 3% of the consolidated net tangible asset value of the Company; and

• (iv) the value of the Hearttex Distribution Transactions for each year may exceed the higher of HK$10,000,000 or 3% of the consolidated net tangible asset value of the Company.

The executive Directors believe that strict compliance with the disclosure requirements and shareholders’ approval requirement in respect of the Ongoing Connected Transactions would be impractical and unduly onerous on the part of the Group as they are of a regular and continuing nature. As such, the Company will apply to the Stock Exchange for a waiver from the strict compliance with the normal disclosure and shareholders’ approval requirements in connection with the Ongoing Connected Transactions in respect of the financial years up to 31st December, 2005 as required under the Listing Rules on the following conditions:

(a) Types of transactions

• (i) Purchase of tissue paper raw material from Changde Hengan

De minimis

• 3% of the consolidated net tangible asset value of the Company

• (ii) Distribution of packaged tissue paper products for the Hearttex Group

• 3% of the consolidated net tangible asset value of the Company

Types of transactions

• (iii) The Hearttex Supply Transactions

Annual cap

35% of the consolidated cost of sales of the Company of the relevant year

• (iv) The Hearttex Distribution Transactions

14% of the consolidated turnover of the Company for the year ending 31st December, 2003 and 25% of the consolidated turnover of the Company for each of the respective year ending 31st December, 2004 and 2005

— 21 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

• (b) details of the Ongoing Connected Transactions will be disclosed in the Company’s annual report of the relevant year as prescribed by Rule 14.25(1)(A) to (D) of the Listing Rules;

• (c) in respect of each of the financial years up to 31st December, 2005, the independent non-executive Directors shall review the Ongoing Connected Transactions annually and confirm in the relevant annual report of the Company that the Ongoing Connected Transactions have been entered into:

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

• (ii) on normal commercial terms or on terms that are no less favourable than terms available from independent third parties;

• (iii) on terms that are fair and reasonable and in the interests of the Shareholders as a whole;

• (iv) the transactions have been entered into either (i) in accordance with the terms of the agreements governing such transactions; or (ii) where there is no such agreement, on terms no less favourable than terms available to third parties so far as the independent Shareholders are concerned; and

• (v) in any financial year, the respective annual consideration in respect of each of the transactions does not exceed the respective caps as set out in (a) above.

• (d) in respect of each of the financial years up to the 31st December, 2005, the auditors of the Company shall review annually the Ongoing Connected Transactions and shall provide a letter (the “Letter”) to the Board (with a copy to the Stock Exchange) confirming that the Ongoing Connected Transactions:

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

• (ii) have been entered into on terms in accordance with the provisions of the relevant agreement governing the transactions or where there is no such agreement, on terms no less favourable than terms available to (or from, as appropriate) independent third parties; and

• (iii) have not exceeded the relevant cap amounts set out in (a) above.

Where, for whatever reason, the auditors decline to accept the engagement or are unable to provide the Letter, the executive Directors shall inform the Stock Exchange in this regard as soon as practicable.

In the event of any future amendments to the Listing Rules imposing more stringent requirements than those as at the date of the proposed waiver application on transactions

— 22 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

of a similar kind to the Ongoing Connected Transactions, including, but not limited to, a requirement that such transactions be made conditional on approval by the Shareholders, the Company will take immediate steps to ensure compliance with such requirements within a reasonable period of time.

8. APPROVAL BY THE INDEPENDENT SHAREHOLDERS

The Acquisition constitutes a discloseable transaction for the Company under the Listing Rules. As the Vendors are also the Directors and (except Mr. Yeung) substantial shareholders of the Company, the Acquisition also constitutes a connected transaction for the Company. As a result, the Acquisition is subject to, amongst other things, the approval of the Independent Shareholders.

In view of the interests of the Vendors and their respective associates in the Acquisition, the Vendors and their respective associates will abstain from voting at the EGM in connection with the Acquisition. In addition, the Vendors, Gather Wise (which does not own any Shares as at the date of this circular), their respective associates and any Shareholders with interest in the Hearttex Connected Transactions will abstain from voting at the EGM in connection with the Hearttex Connected Transactions. An Independent Board Committee has been appointed to advise the Independent Shareholders as to whether the Acquisition and the Hearttex Connected Transactions are in the interests of the Company and are fair and reasonable so far as the Independent Shareholders are concerned. Watterson Asia has been appointed as the independent financial adviser to advise the Independent Board Committee in respect of the terms of the Acquisition and the Hearttex Connected Transactions.

9. CHANGE IN THE COMPANY’S SHAREHOLDING STRUCTURE

The following table sets out the shareholding structures of the Company as at the date of the Acquisition Agreement and immediately after Completion:

Mr. Sze Mr. Hui Mr. Yeung Other executive Directors HIIL Public Shareholders Total	As at the date of the Acquisition Agreement Shares % 220,286,000 22.13 206,630,224 20.76 41,295,619 4.15 63,817,607 6.41 186,921,705 18.78 276,360,845 27.77 995,312,000 100.00	Immediately after Completion Shares % 240,335,505 23.11 223,560,917 21.50 48,869,876 4.70 63,817,607 6.14 186,921,705 17.97 276,360,845 26.58 1,039,866,455 100.00	Immediately after Completion Shares % 240,335,505 23.11 223,560,917 21.50 48,869,876 4.70 63,817,607 6.14 186,921,705 17.97 276,360,845 26.58 1,039,866,455 100.00
			100.00

— 23 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

10. EXTRAORDINARY GENERAL MEETING

Set out on page 42 of this circular is a notice convening the EGM to be held at the Lower Lobby, Harcourt Room, Conrad International Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 2nd May, 2003 (Friday) at 11:00 a.m. (or immediate after the conclusion or adjournment of the Annual General Meeting). The EGM will be held for the purpose of considering and, if thought fit, approving the Acquisition and the Hearttex Connected Transactions.

A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the EGM in person, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon as soon as possible to the Company’s share registrar, Abacus Share Registrars Limited, at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong but in any event not later than 48 hours before the time appointed for the holding of the EGM. 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 should you so wish.

As at the Latest Practicable Date, the Vendors and their respective associates, who, together own about 47.04% of the issued share capital of the Company, together with Gather Wise (which does not own any Shares as at the date of this circular), their associates and any Shareholders with interests will abstain from voting in respect of the ordinary resolutions to approve the Acquisition and the Hearttex Connected Transactions.

11. RECOMMENDATIONS

Your attention is drawn to (i) the letter from the Independent Board Committee set out on pages 26 to 27 of this circular which contains the recommendation of the Independent Board Committee to the Independent Shareholders concerning the Acquisition and the Hearttex Connected Transactions; and (ii) the letter from Watterson Asia set out on pages 28 to 36 of this circular which contains its recommendations to the Independent Board Committee on the Acquisition and the Hearttex Connected Transactions and the principal factors and reasons considered by Watterson Asia in arriving at its recommendations.

The Independent Board Committee, having taken into account the advice of Watterson Asia and the principal factors and reasons taken into consideration by Watterson Asia, considers that the terms of the Acquisition and the Hearttex Connected Transactions are fair and reasonable so far as the Independent Shareholders are concerned and that the Acquisition and the Hearttex Connected Transactions are in the interests of the Company and the Shareholders as a whole. Accordingly, it unanimously recommends that the Independent Shareholders vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Acquisition and Hearttex Connected Transactions.

— 24 —

Hengan International Group Company Limited

LETTER FROM THE BOARD

12. ADDITIONAL INFORMATION

The Vendors and certain executive Directors (namely Messrs. Hung Ching Shan, Zhang Shi Pao, Xu Da Zuo and Xu Chun Man), who in aggregate hold about 53.45% of the total issued share capital and voting rights of the Company, regard themselves as concert parties under the Takeovers Code. The Company has obtained a ruling from the Securities and Futures Commission that, on the basis that the said persons are indeed concert parties under the Takeovers Code, no mandatory obligation to make a general offer under the Takeovers Code will arise as a result of the allotment and issue of the Consideration Shares upon Completion.

Application has been made to the Stock Exchange for the listing and permission to deal in the Consideration Shares.

Your attention is also drawn to the letter from the Independent Board Committee, the letter of advice from Watterson Asia, and the information set out in the appendix of this circular.

As the proposed A share listing of the Hearttex Group as mentioned in the paragraph headed “Information on the acquiring asset” may or may not proceed, Shareholders and potential investors are advised to exercise caution when dealing in the securities of the Company.

Yours faithfully, By order of the Board Hengan International Group Company Limited Sze Man Bok Chairman

— 25 —

Hengan International Group Company Limited

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [53 x 52] intentionally omitted <==

==> picture [288 x 39] intentionally omitted <==

(Incorporated in the Cayman Islands with limited liability)

Registered Office:

Ugland House, South Church Street P.O. Box 309, George Town Grand Cayman, Cayman Islands British West Indies

Head Office:

Hengan Industrial Centre, Anhai Town Jinjiang City, Fujian Province, PRC

Place of Business in Hong Kong: Unit 2101D, 21st Floor Admiralty Centre, Tower 1 18 Harcount Road, Hong Kong

14th April, 2003

To the Independent Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION AND

ONGOING CONNECTED TRANSACTIONS

We refer to the circular of the Company dated 14th April, 2003 (the “Circular”) of which this letter forms part. Terms defined in this circular shall have the same meanings in this letter unless the context otherwise requires.

As the Independent Board Committee, we have been appointed to advise you in connection with the Acquisition and the Hearttex Connected Transactions, details of which are set out in the letter from the Board contained in this circular. The executive Directors have confirmed to the Independent Board Committee that no material facts have been omitted and have no reasons to suspect material information has been withheld or is misleading.

— 26 —

Hengan International Group Company Limited

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We wish to draw your attention to the letter from Watterson Asia containing its advice regarding the Acquisition and the Hearttex Connected Transactions set out on pages 28 to 36 of this circular. Having considered the advice given by Watterson Asia and the principal factors and reason taken into consideration by it in arriving at its advice, we are of the opinion that the terms of the Acquisition and the Hearttex Connected Transactions are fair and reasonable so far as the Independent Shareholders are concerned and that the Acquisition and the Hearttex Connected Transactions are in the interests of the Company and the Shareholders as a whole. We therefore recommend that you vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Acquisition and the Hearttex Connected Transactions.

Yours faithfully, For and on behalf of Independent Board Committee Henry Chan Guan Tao Wong Ying Kay, Ada

— 27 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

The following is the text of a letter from Watterson Asia for the purpose of incorporation in this circular in connection with its advice to the Independent Board Committee in relation to the Acquisition and the Hearttex Connected Transactions:

Watterson Asia Limited

5[th] Floor, 8 Queen’s Road Central, Hong Kong Tel: (852) 2525 1990 Fax: (852) 2526 1990

14 April 2003

The Independent Board Committee Hengan International Group Company Limited Unit 2101D, 21st Floor Admiralty Centre, Tower I 18 Harcourt Road Hong Kong

Dear Sirs,

Acquisition and the Hearttex Connected Transactions

We refer to our engagement as the independent financial adviser to the Company in respect of the Acquisition and the Hearttex Connected Transactions as described in the “Letter from the Board” set out in the circular of the Company dated 14 April 2003 to the Shareholders (the “Circular”) of which this letter forms part. Unless the context requires otherwise, capitalised terms used in this letter shall have the same meanings as defined in the Circular.

We have been appointed by the Company to advise the Independent Board Committee on the terms of the Acquisition, which is a discloseable and connected transaction under the Listing Rules, and the Hearttex Connected Transactions that are expected to take place following the Acquisition, and to give our opinion as to whether the terms therein are fair and reasonable so far as the Independent Shareholders are concerned. Details and reasons of the Acquisition and the Hearttex Connected Transactions have been set out in the “Letter from the Board” in the Circular.

In forming our recommendation, we have relied on the accuracy of the information and representations contained in the Circular, which have been provided by the Directors and have assumed all information and representations made or referred to in the Circular were true at the date of the Circular. In particular, we have been provided with budgets of United Wealth and that of the Group for the three years up to 31 December 2005. The Directors have confirmed to us that the budgets are prepared based on their current best estimates and under Hong Kong GAAP. We have also been advised by the Directors that no material facts have been omitted from the information provided and referred to in the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We have not, however, for the purpose of this exercise conducted any independent investigation into the businesses and affairs of United Wealth or that of the Group.

— 28 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion on the Acquisition and the Hearttex Connected Transactions, we have taken into consideration the following factors and reasons:

In relation to the Acquisition:

Background to the Acquisition

The Group is principally engaged in the manufacture and sale of branded sanitary napkins and disposable diapers in the PRC. It is currently one of the leading sanitary napkins manufacturers in the PRC. Sales of sanitary napkins and disposable diapers for the year ended 31 December 2002 amounted to approximately HK$783.3 million and HK$253.5 million respectively, represented 70.2% and 22.7% of the Group’s total turnover of HK$1,115.4 million respectively. We noted that the Group’s sales of sanitary napkins have been declining during the past three years, from HK$877.2 million in 2000 to HK$783.3 million in 2002. Such decline was mainly due to the fact that PRC’s sanitary napkins market has become relatively matured after years of rapid expansion and that market competition has intensified with the entry of a number of new manufacturers. Intense market competition has also affected the Group’s sales of disposable diapers in 2002, which declined slightly from HK$268.2 million in 2001 to HK$253.6 million in 2002. Industry-wise, based on latest available statistics provided by (China Paper Association), market growth of sanitary napkins in the PRC has slowed to approximately 4.6% per annum in 2001, from 21.4% five years ago. Given this background, the proposed Acquisition enables the Group to diversify its products base from the manufacture of personal hygiene products such as sanitary napkins and disposable diapers to family hygiene paper tissue products.

Started in March 1997, the Hearttex Group is engaged in the manufacture and sale of tissue paper products in the PRC under its own “Hearttex” brand name. At present, the Hearttex Group has an annual production capacity of 77,000 tonnes and a well developed distribution network comprising 48 distribution points covering major provinces and cities in the PRC. And according to industry research conducted by Chinese National Commercial Information Centre, “Hearttex” facial tissue paper products ranked first in terms of market share in the PRC in 2001.

According to statistics from Household Paper & Packaging Paper Industry (China), an independent organization in China, total consumption of tissue paper in the country has increased from 0.7 million tonnes in 1990 to 2.66 million tonnes in 2001, representing an average compound rate of growth of 13.6% per annum during the above period. In terms of per capita consumption of tissue paper in the PRC, this has also increased significantly, from 0.59 kg in 1990 to 2.15 kg in 2001, representing a compound annual growth rate of approximately 13%. The above per capita consumption level in the PRC is still below the world’s average of 3.0 kg. As such, we are of the view that the Hearttex Group is poised to benefit from increasing per capita consumption of tissue paper as the PRC’s economy develops along with improving living standard. Based on the above statistics, we are of the view that the Acquisition is in the Group’s interest as it allows the Group to participate in the higher growth tissue paper market in the PRC.

— 29 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

Terms of the Acquisition

Under the terms of the Acquisition Agreement, the consideration for the Acquisition comprises an Initial Consideration of HK$375 million and an Earn-out Payment of up to HK$41.13 million. The Initial Consideration will be satisfied by cash payment of HK$262.5 million and the issue of a total of 44,554,455 Consideration Shares at HK$2.525 per Share. The Initial Consideration represents a price-earnings multiple of 6.884 times (“PE Multiple”) of the Guaranteed 2003 Profit of HK$54.74 million undertaken by the Vendors.

There is currently no tissue paper manufacturer listed on the Stock Exchange. Companies listed on the Stock Exchange are mainly companies involved in the printing and manufacture of other paper products such as carton boxes and corrugated cartons such as Hung Hing Printing Group Limited, in printing and manufacture of packaging material and paper products such as Starlite Holdings Limited and in other consumable paper products (sanitary napkins and disposable diapers) such as the Company. Unlike the Company, both Hung Hing Printing Group Limited and Starlite Holdings Limited are not engaged in the manufacture and sale of personal hygiene products. As such, we are of the view that the Company is the closest comparable company to which we can use as a benchmark on the terms of the Acquisition. A summary of the current market valuations of these companies (“Hong Kong Comparables”) is as follow:

				2003 Est.
	Market	2002	2002	Profits	2003
	capitalization	Sales	Profits	(note)	P/E
	(HK$m)	(HK$m)	(HK$m)	(HK$m)	(x)
Hengan International (1044)	2,640	1,115	199	213	12.4
Hung Hing Printing (450)	2,760	1,629	257	274	10.1
Starlite Holdings (403)	290	560	39	41	7.1
Average					9.8

Note: Estimated 2003 after-tax profits are based on average earnings estimates by independent securities houses as posted on Bloomberg at the time of the announcement of the Acquisition on 25 March 2003.

Market capitalization was based on closing prices as at 25 March 2003, the date of the Acquisition.

— 30 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

Apart from Hong Kong, we have also considered overseas listed companies engaged in the manufacture and sale of household paper products such as tissue paper, as well as personal hygiene paper products such as sanitary napkins and disposable diapers. A summary of the current market valuations of those companies (“Overseas Comparables”) is as follow:

						2003 Est.
	Listing		Market	2002	2002	Profits	2003
Company name	Place	Capitalization		Sales	Profits	(note)	P/E
			(HK$m)	(HK$m)	(HK$m)	(HK$m)	(x)
Svenska Cellulosa AB	Stockholm		59,460	80,122	5,180	5,630	11.6
Kimberley-Clark	Mexico		20,844	11,657	1,683	2,084	10.0
Carter Holt Harvey Limited	New Zealand		13,220	17,562	587	1,136	11.6
M-Real OYJ	Finland		10,232	55,053	1,752	1,055	9.7
Average							10.7

Note: Estimated 2003 after-tax profits are based on average earnings estimates by independent securities houses as posted on Bloomberg at the time of the announcement of the Acquisition on 25 March 2003.

Market capitalization was based on closing prices as at 25 March 2003, the date of the Acquisition.

From the tables above, the average 2003 price-earnings multiple of listed Hong Kong Comparables is 9.8 and that of Overseas Comparables is 10.7. The PE Multiple of 6.884 under the Acquisition therefore represents discounts of approximately 30% to the average listed price-earnings multiple for Hong Kong Comparables and approximately 35% to the average price-earnings multiple for the Overseas Comparables as mentioned above. Consequently, we are of the opinion that the PE Multiple so derived under the Acquisition Agreement is fair and reasonable so far as the Independent Shareholders are concerned.

Apart from the payment of the Initial Consideration, the Acquisition Agreement also provides for an Earn-out Payment of up to HK$41.13 million in cash to the Vendors in the event that the Audited 2003 Profit of United Wealth exceeds the Guaranteed 2003 Profit. The maximum earn-out payment is capped at HK$41.13 million and the Company is not required to pay the Vendors any additional payment in the event the Audited 2003 Profit exceeds HK$60.45 million. The Earn-out Payment will be calculated based on the same PE Multiple of 6.884 on the difference between the Audited 2003 Profit and the Guaranteed 2003 Profit. We are of the view that the Earn-out Payment represents an incentive to the Vendors to increase the Audited 2003 Profit and is thus fair and reasonable to the Group.

— 31 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

Effect on earnings

The Group’s after-tax earnings for the year ended 31 December 2002 were HK$199.7 million or HK$0.201 per Share. Assuming that the Acquisition had been completed on 1 January 2002, the Group’s pro forma earnings for the year ended 31 December 2002 would have been as follow:

		HK$m	EPS	Note
			(HK$)
2002 after-tax profit of the Group		199.7	0.201	1
Add:	2002 unaudited after-tax profit of United Wealth	27.9
Less:	Amortization of goodwill arising from the Acquisition	(12.3)		2
Pro forma 2002 after-tax profit of the Group		215.3	0.207	3
Note 1:	Earnings per Share calculation based on 995.312 million Shares.
Note 2:	Initial Consideration	375.0
	Less: Unaudited net assets of United Wealth as at 1 January 2002*	(128.2)
	Goodwill on consolidation	246.8
	Annual amortization of goodwill**	12.3

• calculated based on United Wealth’s unaudited net assets of HK$156.1 million as at 31 December 2002 less unaudited profits after tax and minority interests of HK$27.9 million for the year ended 31 December 2002.

• ** Goodwill is to be amortized over a period of 20 years under Hong Kong GAAP.

Note 3: Pro forma earnings per Share calculation is based on 1,039.87 million Shares following the issue of 44,554,455 Consideration Shares pursuant to the Acquisition Agreement.

Based on the above calculation, the Group’s pro forma earnings per Share for the year ended 31 December 2002 would have had registered an increase of approximately 3%, from HK$0.201 to HK$0.207, as a result of the Acquisition. With the benefit of an increase in earnings per Share, the Acquisition is beneficial to the Group.

— 32 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

Effect on net assets

As at 31 December 2002, the Group’s audited net assets were approximately HK$1,690.7 million, or HK$1.70 per Share (based on 995.312 million shares in issue). Had the Acquisition been completed as at 1 January 2002, the Group’s pro forma net assets would have been as follow:

	HK$m
Audited net assets as at 31 December 2002	1,690.7
	(HK$1.70 per Share)
Add: Issue of 44,554,455 Consideration Shares at HK$2.525 per
Share as part of the Consideration	112.5
Unaudited combined after-tax profit of United Wealth in 2002	27.9
Pro forma net assets as at 31 December 2002	1,831.1
	(HK$1.76 per Share)

The above calculation shows that the Group’s pro forma net assets per Share as at 31 December 2002 would have registered an increase of approximately 3.5% as a result of the Acquisition. Consequently, the Acquisition is beneficial to the Group, from the perspective of its net assets. For the purpose of the above comparison, we have not used net tangible assets due to the fact that under Hong Kong GAAP, goodwill arising from the Acquisition can not be written off through reserves and has to be amortized during the estimated useful life of the business acquired; in this case, within 20 years. In addition, the Acquisition relates to a business and not a property asset. That being the case, we are of the opinion that it will be more appropriate to use net assets for the above comparison purpose.

Effect on the Group’s financial position

As at 31 December 2002, the Group had bank balances of HK$709.8 million and no bank borrowings. The Group’s cash balance is more than sufficient to satisfy the partial cash payment of HK$262.5 million under the Initial Consideration. As such, the Acquisition will not bring about any adverse financial effect to the Group.

In relation to the Hearttex Connected Transactions

Following the Acquisition, the Company and Changde Hengan will continue to be engaged in the Existing Connected Transactions, comprising the Supply Agreement and the Agency Agreement, and that Changde Hengan and the Paper Subsidiaries will continue to be parties to the Hearttex Connected Transactions, comprising the Hearttex Supply Transactions and the Hearttex Distribution Transactions. For the purpose of the Hearttex Connected Transactions, the Company has applied for a waiver to the Stock Exchange from strict compliance with disclosure and shareholders’ approval requirements under the Listing Rules (“Waiver”) conditional upon, among other things, the approval of the Hearttex Connected Transactions by Independent Shareholders.

— 33 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

Terms of the Hearttex Supply Transactions

Currently, Changde Hengan is the sole provider of tissue paper raw material to the Paper Subsidiaries for the production of packaged tissue paper products. The reason for doing so is to enable Changde Hengan to control the quality of its tissue paper raw material and to achieve better sourcing terms for the Hearttex Group so far as such raw material is concerned.

Following Completion, Changde Hengan will continue to supply such raw material to the Paper Subsidiaries. In addition, Changde Hengan intends to expand the Hearttex Group by the establishment of further subsidiaries, in which Gather Wise, a connected person under the Listing Rules, may have interest, for the production of packaged tissue paper products. Following such establishment, Changde Hengan intends to supply tissue paper raw material to such new members of the Hearttex Group. Consequently, Changde Hengan will, prior to Completion, enter into the Hearttex Supply Agreement with its subsidaries with a view to continue to supply such subsidiaries with tissue paper raw material.

Although Changde Hengan can supply tissue paper raw material to other independent third parties, we understand priority will be given by Changde Hengan to its subsidiaries for such purchases. Under the proposed Hearttex Supply Agreement, raw material prices sold by Changde Hengan to its subsidiaries shall be not lower than prices offered by independent third parties of raw material with similar quality. We are of the view that the above undertaking ensures that the supply of such raw material from Changde Hengan to its subsidiaries will be on market terms and as such is fair and reasonable so far as the Independent Shareholders are concerned. With this undertaking and the fact it enables the Enlarged Group (including Changde Hengan) to control the quality of its tissue paper raw material supplied to subsidiaries of Changde Hengan, we are also of the opinion that the Hearttex Supply Agreement is in the interest of the Group.

For the two years ended 31 December 2002, aggregate value of the Hearttex Supply Transactions amounted to HK$133.6 million and HK$183.4 million respectively and represents approximately 14.1% and 19.8% of the pro-forma Enlarged Group’s cost of sales for their respective years. Based on budgets prepared by the Enlarged Group, subsidiaries of Changde Hengan are expected to purchase tissue paper raw material from Changde Hengan for an aggregate amount of HK$313.9 million, HK$336.5 million and HK$355.1 million for the three years ending 31 December 2005 respectively. Budgeted purchases by such subsidiaries from Changde Hengan beginning in 2003 are expected to increase significantly from HK$183.4 million in 2002 to HK$313.9 million in 2003. This was mainly due to the fact that the annual production capacity of Changde Hengan more than doubled, from 35,000 tonnes to 77,000 tonnes, as a result of an increase in manufacturing facilities in late 2002. As such, Changde Hengan is in a position to supply additional tissue paper raw material to its paper subsidiaries beginning in 2003. Such budgeted purchases from Changde Hengan are expected to amount to approximately 28.7%, 30.1% and 31.1% of the Enlarged Group’s total costs of sales for the three years to 31 December 2005 respectively.

One of the conditions of the Waiver is that the aggregate cost of tissue paper raw material purchased by the subsidiaries of Changde Hengan from Changde Hengan shall not exceed 35% of the Company’s consolidated total costs of sales for the three financial years ending 31 December 2005 respectively. Based on budgeted purchase amounts by the subsidiaries of Changde Hengan for the three years to 31 December 2005, the above yearly percentage limits carry buffers of 6.3%, 4.9% and

— 34 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

3.9%. These buffers are mainly designed to cater for the possibility of increased purchases of tissue paper raw material as a result of increased production needs for such subsidiaries, compared to budgeted amounts. The above buffers represent 22.0%, 16.3% and 12.5% of budgeted amounts in their respective years. We understand that the buffer of 22.2% in respect of the current year ending 31 December 2003 was set higher, compared to the next two years, to cater for higher than expected raw material supplies to the subsidiaries following the expansion of Changde Hengan’s tissue paper raw material production capacity at end 2002. As budgeted purchases are bound to vary from actual purchases and that the buffers are set in accordance with budgeted purchases, we are of the opinion that the current percentage limits set for the Hearttex Supply Transactions are fair and reasonable so far as the Independent Shareholders are concerned.

Terms of the Hearttex Distribution Transactions

Changde Hengan currently distributes packaged tissue paper products produced by the Paper Subsidiaries and that the Paper Subsidiaries also distribute packaged tissue paper products produced by Changde Hengan. It is expected that Changde Hengan will enter into the Paper Product Distribution Agreement with its subsidiaries on or before Completion but there is no intention to enter into a similar distribution agreement in relation to the distribution of packaged tissue paper products of Changde Hengan by its subsidiaries. It is understood that the reason for this is that the Group aims to consolidate all sales and distribution of tissue paper products under Changde Hengan in the future whereas the distribution network of each of its existing paper subsidiary will be phased out gradually by end of 2003. The centralization of the Group’s distribution network of packaged tissue paper products under Changde Hengan enables the Group to better implement its sales policy and to better monitor sales and distribution of such products in the PRC. As such, we believe that the Paper Product Distribution Agreement is necessary and is in the Group’s interest. It is our understanding that the subsidiaries of Changde Hengan will principally focus on the production of packaged tissue paper products after the phasing out of their respective distribution networks by end of 2003.

Currently, Changde Hengan and its subsidiaries fix the selling price of packaged tissue paper products by reference to retail prices taking into account the costs and expenses for operating the respective distribution networks. This mode of operation will continue after the Completion with the exception that its subsidiaries shall cease to distribute packaged tissue paper products by end 2003. Under the proposed Paper Product Distribution Agreement, Changde Hengan will continue to be responsible for sales and distribution, promotion and advertising expenditure as well as collection and monitoring of receivables of its subsidiaries but shall exclude other direct selling expenses such as transportation and commissions payable to other sales agents. In return, Changde Hengan will charge its subsidiaries distribution commissions on a cost recovery basis but subject to a cap of 12% of the pre-determined unit price of the finished products sold by Changde Hengan on behalf of such subsidiaries.

The above arrangement enables Changde Hengan to consolidate the sales and distribution network of the Hearttex Group, more effective promotion of the “Hearttex” brand and to recover all distribution costs associated with the sales of the finished products by its subsidiaries. We have compared the 12% cap under the Paper Product Distribution Agreement with distribution expenses of the Group and noted that comparable distribution expenses in relation to the sales of sanitary napkins and diapers accounted for approximately 11.5% of the Group’s total turnover for the year ended 31

— 35 —

Hengan International Group Company Limited

LETTER FROM WATTERSON ASIA

December 2002. Based on the above, we are of the opinion that the above sales arrangement and the 12% cap to be imposed under the Paper Product Distribution Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

For the two years ended 31 December 2002, aggregate value of the Hearttex Distribution Transactions amounted to HK$47.3 million and HK$62.9 million respectively, representing approximately 3.1% and 4.2% of the pro-forma Enlarged Group’s turnover for the respective years. Based on budgets prepared by Changde Hengan, it is currently forecasted that the aggregate amount of the Hearttex Distribution Transactions for the three years ending 31 December 2005 will increase to approximately HK$215.4 million, HK$386.6 million and HK$408.1 million respectively, representing approximately 12.2%, 21.4% and 22.1% of the Enlarged Group’s projected total turnover for the three years to 31 December 2005 respectively. The increase in budgeted amounts starting from 2003, from HK$62.9 million in 2002, was mainly attributable to the fact that the Enlarged Group aims to consolidate all sales and distribution of tissue paper products under Changde Hengan beginning in 2003 and to phase out individual distribution activities of existing paper subsidiaries by end 2003.

One of the conditions of the Waiver is that the aggregate sales amount under the Hearttex Distribution Transactions for each of the three financial years to 31 December 2005 shall not exceed 14%, 25% and 25% of the Company’s consolidated turnover respectively. Based on the above budgeted sales by the subsidiaries of Changde Hengan for the three years to 31 December 2005, the above yearly percentage limits carry buffers of 1.8%, 3.6% and 2.9%. We understand the above buffers are mainly designed to cater for the possibility of increased sales of packaged tissue paper products by the subsidiaries to Changde Hengan, compared to budgeted amounts. As budgeted sales are bound to vary from actual sales amounts and that the above buffers represent only 14.8%, 16.8% and 13.1% of budgeted amounts in their respective years, we are of the opinion that the current percentage limits imposed with regard to the Hearttex Distribution Transactions for the three years to 31 December 2005 is fair and reasonable to the Independent Shareholders.

RECOMMENDATION

Having considered the above principal factors and reasons, we are of the view that the Acquisition is in the interest of the Company and that the terms are fair and reasonable so far as the Independent Shareholders are concerned. In addition, we are of the opinion that the Hearttex Connected Transactions are in the interest of the Group and that their terms are fair and reasonable so far as the Independent Shareholders are concerned. Consequently, we would advise the Independent Board Committee to recommend to the Independent Shareholders to vote in favor of the ordinary resolutions to be proposed at the upcoming general meeting to approve the Acquisition and the Hearttex Connected Transactions.

Yours faithfully, For and on behalf of

Watterson Asia Limited David Tsang

Managing Director

— 36 —

Hengan International Group Company Limited

GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. 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 herein misleading.

2. DISCLOSURE OF INTERESTS

(A) DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests of the Directors and chief executive of the Company in the shares, unissued shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which have been notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which the Directors or the chief executive of the Company are deemed or taken to have under such provisions of the SFO) or which are required to be and are recorded in the register required to be kept pursuant to Section 352 of the SFO or as otherwise required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Companies (the “Model Code”) contained in the Listing Rules, were as follows:

Interests in the Company’s issued, unissued shares, underlying shares and debentures

		**Number **	**of ordinary **	Shares
	Personal	Family	Corporate	Other	Total number
Name	interests	interests	interests	interests	of Shares
Sze Man Bok	240,335,505	—	—	—	240,335,505
	(Note 1)
Hui Chi Lin	216,930,693	6,630,224	—	—	223,560,917
	(Note 2)	(Note 4)
Yeung Wing Chun	48,824,257	45,619	—	—	48,869,876
	(Note 3)	(Note 4)
Zhang Shi Pao	14,644,027	—	—	—	14,644,027
	(Note 4)
Xu Da Zuo	20,270,135	—	—	—	20,270,135
	(Note 4)
Xu Chun Man	19,783,445	—	—	—	19,783,445
	(Note 4)
Hung Ching Shan	9,120,000	—	—	—	9,120,000

— 37 —

Hengan International Group Company Limited

GENERAL INFORMATION

APPENDIX

Notes:

1. Including 20,049,505 Shares to be allotted and issued to Mr. Sze upon Completion.

2. Including 16,930,693 Shares to be allotted and issued to Mr. Hui upon Completion.

3. Including 7,574,257 Shares to be allotted and issued to Mr. Yeung upon Completion.

4. These Shares are held by HIIL as trustee for and on behalf of the relevant Directors and their respective associates.

Save as disclosed above, to the knowledge of the Company, none of the Directors, the chief executive of the Company or their respective associates had any personal, family, corporate or other interests in the shares, unissued shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of the SFO) which are required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they are taken or deemed to have under such provisions of the SFO) or which are required to be recorded by and as recorded in the register as at the Latest Practicable Date kept by the Company under Section 352 of the SFO or which are required to be to be notified to the Company and the Stock Exchange pursuant to the Model Code.

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors is materially interested in any contract or arrangement entered into by any member of the Enlarged Group subsisting at the date of this circular which is significant in relation to the business of the Group. Save as disclosed herein, none of the Directors has or has had any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any member of the Enlarged Group or which are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group since 31st December, 2002 (being the date to which the latest published audited accounts of the Company were made up).

(B) SUBSTANTIAL SHAREHOLDERS’ INTERESTS

As at the Latest Practicable Date, so far as is known to any Director or chief executive of the Company, other than the interests and short positions of the Directors or chief executive of the Company as disclosed above, none of the Company, the Directors or the chief executive of the Company is aware of any other interests or short positions in the shares, unissued shares and underlying shares of the Company of any persons which would fall to be disclosed under the provisions of Divisions 2 and 3 of Part XV of the SFO.

— 38 —

Hengan International Group Company Limited

GENERAL INFORMATION

APPENDIX

As at the Latest Practicable Date, the following companies are 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 the following members of the Enlarged Group:

==> picture [432 x 294] intentionally omitted <==

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

||||||||||
|---|---|---|---|---|---|---|---|---|
|Approximate|
|percentage|of|
|Member|of|the|Enlarged|Group|Name|of|shareholder|shareholding|
|(%)|
|Gather|Wise|20.6|
|(Changde|Hengan|Paper|Products|
|Co.,|Ltd.)|
|Gather|Wise|25|
|(Hengan|(Chongqing)|Paper|Products|
|Co.,|Ltd.)|
|Gather|Wise|25|
|(Fushun|Hengan|Hearttex|Paper|Products|
|Co.,|Ltd.)|
|Gather|Wise|25|
|(Jinjiang|Hengan|Hearttex|Paper|Products|
|Co.,|Ltd.)|
|30|
|(Hengan|Li|Ren|Tang|(Jian)|Cosmetics|
|Co.,|Ltd.)|
|30|

----- End of picture text -----

Save as disclosed above, so far as is known to the Directors, there is no other person who is 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 member of the Enlarged Group.

3. SERVICE CONTRACT

As at the Latest Practicable Date, none of the Directors has any service contracts with the Company or any of its subsidiaries excluding contracts expiring/determinable by the employer within one year without payment of compensation (other than statutory compensation).

4. LITIGATION

So far as is known to the Directors, there is no litigation nor any claims of material importance pending or threatened against any member of the Enlarged Group.

— 39 —

Hengan International Group Company Limited

GENERAL INFORMATION

APPENDIX

5. QUALIFICATION OF EXPERT

The following are the qualifications of the expert who has given opinion or advice, which are contained or referred to in this circular:

Name Qualification Watterson Asia Limited Licensed under the SFO for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) as defined under the SFO

As at the Latest Practicable Date, Watterson Asia has no shareholding interest in any member of the Enlarged Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any member of the Enlarged Group.

As at the Latest Practicable Date, Watterson Asia does not have any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any member of the Enlarged Group or which are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group since 31st December, 2002 (being the date to which the latest published audited accounts of the Company were made up).

6. CONSENT

Watterson Asia has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter dated 14th April, 2003 reference to its name in the form and context in which they respectively appear.

7. MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31st December, 2002, being the date to which the latest published audited financial statements of the Group were made up.

8. GENERAL

• (a) The company secretary of the Company is Mr. Poon Fuk Chuen, an associate member of the Hong Kong Society of Accountants.

• (b) The registered office of the Company is at Ugland House, South Church Street, P.O. Box 309, George Town, Grand Cayman, Cayman Islands, British West Indies.

• (c) The head office of the Company is located at Hengan Industrial City, Anhai Town, Jinjiang City, Fujian Province, the PRC whilst the share registrar and transfer office of the Company in Hong Kong is Abacus Share Registrars Limited of G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wan Chai, Hong Kong.

— 40 —

Hengan International Group Company Limited

GENERAL INFORMATION

APPENDIX

The English text of this circular and form of proxy shall prevail over the Chinese text for the purpose of interpretation.

9. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection during normal business hours at Richards Butler, 20th Floor, Alexandra House, 16-20 Chater Road, Central, Hong Kong up to and including 2nd May, 2003:

• (a) the Acquisition Agreement;

• (b) the Agency Agreement;

• (c) the Supply Agreement;

• (d) draft of the Hearttex Supply Agreement (subject to amendments);

• (e) draft of the Paper Product Distribution Agreement (subject to amendments);

• (f) the letter from the Independent Board Committee as set out in pages 26 to 27 of this circular;

• (g) the letter from Watterson Asia as set out in pages 28 to 36 of this circular;

• (h) the written consent referred to in this appendix.

— 41 —

Hengan International Group Company Limited

NOTICE OF EXTRAORDINARY GENERAL MEETING

==> picture [53 x 52] intentionally omitted <==

==> picture [288 x 39] intentionally omitted <==

(Incorporated in the Cayman Islands with limited liability)

==> picture [9 x 8] intentionally omitted <==

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


----- End of picture text -----*

NOTICE IS HEREBY GIVEN that the Extraordinary General Meeting of shareholders of the Company will be held at the Harcourt Room, Lower Lobby, Conrad International Hong Kong, Pacific Place, 88 Queensway, Hong Kong on 2nd May, 2003 (Friday) at 11:00 a.m. (or immediate after the conclusion or adjournment of the annual general meeting of the Company to be held on the same date) for the purposes of considering and, if thought fit, passing with or without amendments, the following resolutions as Ordinary Resolutions:

1. “ THAT the sale and purchase agreement (the “Acquisition Agreement”) dated 25th March, 2003 entered into between the Company, as the purchaser, and Mr. Sze Man Bok, Mr. Hui Chi Lin and Mr. Yeung Wing Chun, as the vendors, a copy of which marked “A” is produced to the meeting signed by the Chairman for the purpose of identification, in relation to the acquisition from the vendors the entire issued share capital of United Wealth International (Holdings) Limited and the loan in the amount of about HK$221,500,000 provided to United Wealth International (Holdings) Limited at an aggregate consideration of up to HK$416,130,000 comprising an initial consideration of HK$375,000,000 to be satisfied by a cash payment of HK$262,500,000 and the allotment by the Company to the vendors a total of 44,554,455 new shares of HK$0.10 each at an issue price of HK$2.525 per new share, credited as fully paid and will rank pari passu in all aspects with all of the existing shares of HK$0.10 each in the share capital of the Company and an earn-out payment of up to HK$41,130,000 (subject to adjustments), be and are hereby generally and unconditionally approved, ratified and confirmed.”

2. “ THAT , subject to and conditional upon Ordinary Resolution No. 1 being passed, the Hearttex Connected Transactions between Changde Hengan and its subsidiaries as described in the announcement dated 10th April, 2003 and in the paragraph headed “Particulars of the Ongoing Connected Transactions” under the section “Letter from the Board” of the circular dated 14th April, 2003, be and are hereby generally approved subject to the conditions set out in the said announcement and circular.”

By order of the Board Hengan International Group Company Limited Sze Man Bok Chairman

Hong Kong, 14th April, 2003

Notes:

• (i) A member entitled to attend and vote at the above meeting is entitled to appoint one or more proxies (who must be an individual or individuals) to attend and vote instead of him. A proxy does not need to be a member of the Company.

• (ii) The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of such power of attorney of authority, must be lodged with the Company’s share registrar, Abacus Share Registrars Limited, at Ground Floor, Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong for registration not less than 48 hours before the time appointed for holding the meeting and any adjourned meeting.

• (iii) The register of members of the Company will be closed during 28th April, 2003 to 2nd May, 2003, both days inclusive, during which period no transfer of shares can be registered. To qualify for attending the EGM, shareholders must ensure that all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s share registrar, Abacus Share Registrars Limited at G/F., Bank of East Asia Harbour View Centre, 56 Gloucester Road, Wanchai, Hong Kong for registration not later than 4:00 p.m. on 25th April, 2003.

— 42 —

Hengan International Group Company Limited