Sunny Optical Technology (Group) Company Limited — Proxy Solicitation & Information Statement 2004

Apr 7, 2004

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 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.

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(Incorporated in the Cayman Islands with limited liability) website: http://www.irasia.com/listco/hk/hengan http://www.hengan.com (Stock code: 1044)

DISCLOSEABLE TRANSACTION

* For identification only

6th April, 2004

CONTENTS

		Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		1
Letter from the Board
1.	Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
2.	Acquisition Agreements dated 23rd March, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . .	5
3.	Information on Changde Hengan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
4.	Change in the Company’s shareholding structure . . . . . . . . . . . . . . . . . . . . . . . . . .	12
5.	Reasons for and benefits of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
6.	Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	13
Appendix	— General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15

— i —

DEFINITIONS

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

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|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
|“Acquisition”|the|transactions|contemplated|under|the|Acquisition|
|Agreements|
|“Acquisition|Agreements”|three|sale|and|purchase|agreements|all|dated|23rd|March,|
|2004|entered|into|between|the|Company|as|the|purchaser|and|
|each|of|the|Vendors|in|relation|to|the|acquisition|of|the|entire|
|issued|share|capital|of|Gather|Wise|and|effectively|an|
|aggregate|of|approximately|10.5%|equity|interest|in|Changde|
|Hengan|
|“Asset|One”|Asset|One|Limited,|a|holding|company|incorporated|in|the|
|British|Virgin|Islands|on|22nd|January,|2004|
|“Board”|board|of|Directors|
|“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|
|“Chongqing|Hengan|Hearttex”|Chongqing|Hengan|Hearttex|Paper|Products|Co.,|Ltd.|
|(|),|a|foreign-invested|enterprise|
|incorporated|in|the|PRC|on|24th April,|2003|with|a|registered|
|capital|of|US$3|million|(equivalent|to|HK$23.4|million)|
|“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|
|“Consideration”|HK$368,093,000,|the|aggregate|consideration|payable|by|the|
|Company|to|the|Vendors|pursuant|to|the|Acquisition|
|Agreements|
|“Consideration|Shares”|the|aggregate|of|40,899,900|new|Shares,|representing|about|
|3.8%|of|the|entire|issued|share|capital|of|the|Company|(as|
|enlarged|by|the|issue|of|such|Shares)|as|at|completion|of|the|
|Acquisition|Agreements,|to|be|allotted|and|issued|to|the|
|relevant|Vendors|upon|the|respective|completion|dates|of|the|
|Acquisition|Agreements|

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— 1 —

DEFINITIONS

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||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|“Directors”|the|directors|of|the|Company|
|“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)|
|“Fushun|Hengan|Tissue”|Fushun|Hengan|Tissue|Co.,|Ltd.|(|),|a|
|foreign-invested|enterprise|incorporated|in|the|PRC|on|8th|
|August,|2003|with|a|registered|capital|of|US$3|million|
|(equivalent|to|HK$23.4|million)|
|“Gather|Wise”|Gather|Wise|Investments|Limited|(|),|a|limited|
|liability|company|incorporated|in|Samoa|on|8th|June,|2001,|
|the|beneficial|owners|of|which|are|members|of|the|senior|
|management|of|Hearttex|Group|and|their|family|members|
|“Group”|the|Company|together|with|its|subsidiaries,|including|the|
|companies|which|will|become|subsidiaries|of|the|Company|
|following|completion|of|the|Acquisition|Agreements|
|“Hearttex|Group”|Changde|Hengan|and|the|Paper|Subsidiaries|
|“Hengan|Household”|Jinjiang|Hengan|Household|Tissue|Product|Co.,|Ltd.|
|(|),|a|foreign-invested|enterprise|
|incorporated|in|the|PRC|on|25th|March,|2003|with|a|
|registered|capital|of|US$12|million|(equivalent|to|HK$93.6|
|million)|
|“HIIL”|Hengan|International|Investments|Limited,|a|company|
|incorporated|in|the|British|Virgin|Islands|on|6th|May,|1998|
|“HK|GAAP”|Hong|Kong|Generally|Accepted|Accounting|Principles|
|“HK$”|Hong|Kong|dollars,|the|lawful|currency|of|Hong|Kong|
|“Hong|Kong”|The|Hong|Kong|Special|Administrative|Region|of|the|PRC|
|“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”|31st|March,|2004,|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|

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— 2 —

DEFINITIONS

“Paper Subsidiaries”	Jinjiang Hengan, Fushun Hengan, Chongqing Hengan,
	Hengan Household, Chongqing Hengan Hearttex, Fushun
	Hengan Tissue and Shandong Hengan
“PRC”	People’s Republic of China, for the purpose of this circular,
	excluding Hong Kong, The Macau Special Administrative
	Region and Taiwan
“Promise Management”	Promise Management Limited, a holding company
	incorporated in the British Virgin Islands on 2nd January,
	2004
“RMB”	Renminbi, the lawful currency of the PRC
“SFO”	The Securities and Futures Ordinance, Chapter 571 of the
“Shandong Hengan”	Laws of Hong Kong Shandong Hengan Tissue Co., Ltd. ( ), a
	foreign-invested enterprise incorporated in the PRC on 29th
	December, 2003 with a registered capital of US$29.8 million
	(equivalent to HK$232.4 million)
“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“United Wealth”	United Wealth International (Holdings) Limited, a company
	incorporated in the Cayman Islands on 6th January, 1997 with
	limited liability
“US$”	United States dollars, the lawful currency of the United States
	of America
“Vendors”	Xu Lian Chen, Huang Liang Cheng, Wu Xiu Liang, Xu Jian
	Hui, Lin Li Zhu, Chen Cha Zhi, Wu Bi Shan, Xu Jin Zhan, Lui
	Chi Kit and Ng Hoi Ting, Vincent

Note: For information purpose only, the translation of RMB to HK$ or US$ in this circular is based at the rate of RMB1.06 to HK$1.00 or RMB8.28 to US$1.00 respectively.

— 3 —

LETTER FROM THE BOARD

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(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: Henry Chan Chu Cheng Chung Guan Tao Ada Ying Kay Wong

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

6th April, 2004

To the Shareholders

Dear Sir or Madam,

DISCLOSEABLE TRANSACTION

1. INTRODUCTION

On 23rd March, 2004, the Company entered into the Acquisition Agreements, pursuant to which the Company has conditionally agreed to effectively acquire approximately 31.1% interests in Changde Hengan, which at present is held as to approximately 68.9% by the Group and 25.0% interests in each of Fushun Hengan, Jinjiang Hengan and Chongqing Hengan at an aggregate consideration of HK$368,093,000. The aggregate consideration will be satisfied as to about 50% by cash and the remaining about 50% by way of the allotment and issue of an aggregate of 40,899,900 Consideration Shares at an issue price of HK$4.50 per Share.

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LETTER FROM THE BOARD

The Acquisition constitutes a discloseable transaction of the Company under the Listing Rules. The main purpose of this circular is to provide you with further information relating to the Acquisition and other information as required by Listing Rules.

2. ACQUISITION AGREEMENTS DATED 23RD MARCH, 2004

On 23rd March, 2004, the Company, as the purchaser, entered into the Acquisition Agreements, pursuant to which the Company has conditionally agreed to effectively acquire:

• (i) approximately 31.1% interests in Changde Hengan, which at present is held as to approximately 68.9% by the Group; and

• (ii) 25.0% interests in each of Fushun Hengan, Jinjiang Hengan and Chongqing Hengan each of which at present is held as to 75.0% by Changde Hengan

at an aggregate consideration of HK$368,093,000.

Key terms

Set out below is a summary of the basic information of each of the Acquisition Agreements:

Total Agreement I Agreement II Agreement III (if applicable) Vendors Xu Lian Chen, Huang Lui Chi Kit Ng Hoi Ting, Liang Cheng, Wu Xiu Vincent Liang, Xu Jian Hui, Lin Li Zhu, Chen Cha Zhi, Wu Bi Shan, Xu Jin Zhan

— 5 —

LETTER FROM THE BOARD

Agreement I Agreement II Agreement III Assets to be Entire equity interest Entire equity Entire equity acquired (comprising the existing interest in interest in Asset entire equity interest Promise One, whose sole and the then equity Management, asset is interest resulting from whose sole asset approximately capitalisation of the is approximately 3.0% interests in existing shareholder 7.5% interests in Changde Hengan loans) in Gather Wise, Changde Hengan whose principal assets are: 1. 20.6% interests in Changde Hengan; and

Total (if applicable)

	2.	25.0% interests in
		each of Jinjiang
		Hengan, Fushun
		Hengan and
		Chongqing Hengan
Considerations		271,434,000	69,003,000	27,656,000	368,093,000
(HK$)
comprising
- Cash (HK$)		135,714,000	34,501,500	13,827,950	184,043,450
- Consideration		135,720,000	34,501,500	13,828,050	184,049,550
Shares (HK$)
- Number of		30,160,000	7,667,000	3,072,900	40,899,900
Consideration
Shares to be
issued

Each of the Vendors is not connected person (as defined in the Listing Rules) and is independent of and not connected with any of the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries or their respective associates (as defined in the Listing Rules).

Consideration and payment terms

Pursuant to the Acquisition Agreements, the aggregate consideration of HK$368,093,000 will be satisfied as to about 50% by cash from the Group’s internal resources and the remaining about 50% by way of the allotment and issue of an aggregate of 40,899,900 Consideration Shares at an issue price of HK$4.50 per Share. The Directors are of the view that the Acquisition would not have any material adverse impact on the Group’s assets and liabilities.

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LETTER FROM THE BOARD

Pricing basis

Set out below is a table showing the consideration attributable to the respective assets to be effectively acquired by the Company:

Company	Asset	Asset	Pricing basis	Consideration
				(HK$)
1. Gather Wise	-	about 20.6% interests in	a price-earning multiple of	189,277,000
		Changde Hengan	about 9.7 times of the
			unaudited consolidated net
			profit attributable to 20.6%
			interests in Changde Hengan
			in accordance with the HK
			GAAP for the year ended
			31st December, 2003
	-	25.0% interests in each of	a price-earning multiple of	82,157,000
		Jinjiang Hengan, Fushun	about 7.0 times of the
		Hengan and Chongqing	unaudited aggregate
		Hengan	consolidated net profit
			attributable to 25% interests
			in Jinjiang Hengan, Fushun
			Hengan and Chongqing
			Hengan in accordance with
			the HK GAAP for the year
			ended 31st December, 2003
2. Promise	-	about 7.5%	a price-earning multiple of	69,003,000
Management		interests in	about 9.7 times of the
		Changde Hengan	unaudited consolidated net
			profit attributable to 7.5%
			interests in Changde Hengan
			in accordance with the HK
			GAAP for the year ended
			31st December, 2003
3. Asset One	-	about 3.0%	a price-earning multiple of	27,656,000
		interests in	about 9.7 times of the
		Changde Hengan	unaudited consolidated net
			profit attributable to 3.0%
			interests in Changde Hengan
			in accordance with the HK
			GAAP for the year ended
			31st December, 2003
			Aggregate consideration:	368,093,000

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LETTER FROM THE BOARD

Issue price

The issue price of HK$4.50 per Consideration Share represents:

• (i) a discount of about 12.6% over the closing price of HK$5.15 per Share on 23rd March, 2004, being the date of the Acquisition Agreements; and

• (ii) a discount of about 9.4% over the average closing price of HK$4.966 per Share over the 30 trading days from 11th February, 2004 to 23rd March, 2004

as quoted on the Stock Exchange. The Consideration Shares represent about 3.9% of the existing issued share capital of the Company and about 3.8% of the issued share capital of the Company 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. 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 23rd March, 2004. The Consideration Shares will be issued pursuant to general mandate granted to the Directors for the issuance of Shares at the annual general meeting held on 2nd May, 2003.

Payment of Consideration

Pursuant to each of the Acquisition Agreements, the Company will pay to the corresponding Vendors the relevant amounts of the Consideration at completion of the relevant Acquisition Agreements. Terms of each of the Acquisition Agreements were arrived at after arm’s length negotiations between the Company and the relevant Vendors.

Conditions

Each of the Acquisition Agreements is independent of each other and they are not interconditional. Completion of each of the Acquisition Agreements is conditional upon, amongst other things,

• (i) the Listing Committee of the Stock Exchange granting listing of and permission to deal in the Consideration Shares; and

• (ii) applicable to Acquisition Agreements II and III, all governmental and regulatory authorisations consents, and approvals for the transactions contemplated under the Acquisition Agreements having been obtained.

The long stop date for the fulfillment or waiver (if applicable) of all of the conditions is 22nd June, 2004 (in the case of Agreement I) and 22nd September, 2004 (in all the other cases) or such other date as the relevant parties to the relevant agreement may otherwise agree.

It is expected that completion of the Acquisition will take place by no later than the end of September, 2004.

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LETTER FROM THE BOARD

3. INFORMATION ON CHANGDE HENGAN

Shareholding structure of Changde Hengan

Set out below are the simplified shareholding structure of Changde Hengan immediately before and after completion of the Acquisition:

Immediately before completion of any of the Acquisition Agreements

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The Company
Promise
Gather Wise Asset One United Wealth
Management
20.6% 7.5% 3.0% 68.9% 25%
Changde Hengan
75% 75% 75% 100% 100% 100% 75%
Jinjiang Chongqing Fushun Hengan Chongqing Fushun Shandong
Hengan Hengan Hengan Household HearttexHengan Hengan Tissue Hengan
25% 25% 25%
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Immediately after completion of all the Acquisition Agreements

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The Company
Promise
Gather Wise Asset One United Wealth
Management
20.6% 7.5% 3.0% 68.9% 25%
Changde Hengan
75% 75% 75% 100% 100% 100% 75%
Jinjiang Chongqing Fushun Hengan Chongqing Fushun Shandong
Hengan Hengan Hengan Household HearttexHengan Hengan Tissue Hengan
25% 25% 25%
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LETTER FROM THE BOARD

Information on Changde Hengan

Changde Hengan, together with the Paper Subsidiaries forms the Hearttex Group. Changde Hengan is the principal operating vehicle of the Hearttex Group that commenced its operation in March 1997. The corporate information of Changde Hengan and the Paper Subsidiaries is set out below:

						Chongqing	Fushun
	Changde	Jinjiang	Chongqing	Fushun	Hengan	Hengan	Hengan	Shandong
	Hengan	Hengan	Hengan	Hengan	Household	Hearttex	Tissue	Hengan
Year of	1997	1998	1998	1999	2003	2003	2003	2003
establishment
Place of	Changde,	Jinjiang,	Chongqing	Fushun,	Jinjiang,	Chongqing	Fushun,	Weifang,
operation	Hunan	Fujian		Liaoning	Fujian		Liaoning	Shandong
in the PRC
Registered	RMB	US$12,000,000	HK$2,500,000	US$3,000,000	US$12,000,000	US$3,000,000	US$3,000,000	US$29,800,000
capital	334,115,779	(Note 1)	(Note 1)	(Note 1)	(Note 2)	(Note 2)	(Note 2)	(Note 2)
	(Note 1)
Principal	Manufacture,	Packaging	Packaging	Packaging	Manufacture	Manufacture	Manufacture	Manufacture
business	packaging	and sale of	and sale of	and sale of	and sale of	and sale of	and sale of	and sale of
	and sale of	tissue paper	tissue paper	tissue paper	high grade	high grade	high grade	high grade
	tissue paper	products	products	products	tissue paper	tissue paper	tissue paper	tissue paper
	products				products	products	products	products
Beneficial	N/A	75%	75%	75%	100%	100%	100%	75%
interests held
by Changde
Hengan

Notes:

1. The registered capital of Changde Hengan, Jinjiang Hengan, Chongqing Hengan, Fushun Hengan and Chongqing Hengan Hearttex has been fully paid up respectively.

2. The registered capital of Hengan Household, Fushun Hengan Tissue and Shandong Hengan has been partially paid up as to US$2,449,378.31, US$1,957,400 and US$4,500,294 respectively.

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.

The annual capacity of Hearttex Group has been expanded during 2003 from 37,000 tonnes to 77,000 tonnes per annum. The expansion in production capacity would serve as a platform to enhance the market leadership position and profitability of the Hearttex Group.

— 10 —

LETTER FROM THE BOARD

The consolidated net tangible asset value of Changde Hengan as at 31st December, 2003 was about HK$326,171,000. The table here below sets out a summary of the unaudited consolidated results of Changde Hengan in accordance with the HK GAAP for the two financial years ended 31st December, 2003:

	For the year ended	For the year ended
	31st December,
	2002	2003
	HK$’million	HK$’million
	(unaudited)	(unaudited)
Turnover	393	634
Profit before tax and minority interests	63	115
Profit after tax and minority interests	41	94
Net profit attributable to
- approximately 31.1% interests
held by the Vendors	13	29

Information on Gather Wise

Gather Wise is an investment holding company and its principal asset is an about 20.6% equity interests in Changde Hengan and 25.0% interests in each of Jinjiang Hengan, Fushun Hengan and Chongqing Hengan.

The consolidated net tangible asset value of Gather Wise as at 31st December, 2003 was about HK$132,712,010 (as adjusted for capitalisation of the shareholders’ loan amounting to about HK$97,464,639 prior to completion). Here below sets out a summary of the unaudited consolidated results of Gather Wise in accordance with the HK GAAP for the two financial years ended 31st December, 2003:

		**For the **	year ended
		31st December
		2002	2003
		HK$’000	HK$’000
		(unaudited)	(unaudited)
Other	revenue (Note)	11	1
Profit	before tax and minority interests	19,183	37,007
Profit	after tax and minority interests	17,121	33,352

Note: Gather Wise is engaged in investment holding and revenue recognised during the two years ended 31st December, 2003 was interest income.

— 11 —

LETTER FROM THE BOARD

Information on Promise Management and Asset One

Promise Management and Asset One are investment holding companies whose sole assets at completion of the relevant Acquisition Agreements will be about 7.5% and about 3.0% equity interests in Changde Hengan respectively.

4. CHANGE IN THE COMPANY’S SHAREHOLDING STRUCTURE

Set out below are the shareholding structure of the Company as at the date of the Acquisition Agreements and as at the date immediately after completion of all the Acquisition Agreements:

	Name of Shareholders Mr. Sze Man Bok Mr. Hui Chi Lin Mr. Yeung Wing Chun Other Directors HIIL	As at the date of the Acquisition Agreements Number of shares held Percentage of shareholding Shares % 220,335,505 21.19 208,560,917 20.06 43,869,876 4.22 63,817,607 6.14 195,945,161 18.84 — — — — — — 307,337,389 29.55 307,337,389 29.55 1,039,866,455 100.00	As at the date of the Acquisition Agreements Number of shares held Percentage of shareholding Shares % 220,335,505 21.19 208,560,917 20.06 43,869,876 4.22 63,817,607 6.14 195,945,161 18.84 — — — — — — 307,337,389 29.55 307,337,389 29.55 1,039,866,455 100.00
	Existing shareholders of Gather Wise (Note) Mr. Lui Chi Kit (Note) Mr. Ng Hoi Ting, Vincent (Note) Present public Shareholders	— — — 307,337,389	30,160,000 7,667,000 3,072,900 307,337,389
	Public Total	307,337,389 1,039,866,455	348,237,289 1,080,766,355

Note: Each of them is not connected person and, therefore is treated as public shareholder.

As a result of completion of all the Acquisition Agreements,

• (i) the total number of issued Shares will be 1,080,766,355, all fully paid or credited as fully paid;

• (ii) the authorised share capital will remain to be HK$300,000,000 divided into 3,000,000,000 Shares; and

• (iii) there will not be any new substantial shareholder arisen.

— 12 —

LETTER FROM THE BOARD

5. 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, disposable diapers and tissue paper products 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 Board considers that the Acquisition is in line with the Company’s objective and in the interest of the Company for the following reasons:

• i. Due to the rapid growing per capita GDP and improving standard of living in the PRC, the PRC tissue paper product industry has seen significant growth and is expected to continue in the coming years. The Company acquired approximately 68.9% effective equity interest in Changde Hengan on 16th May, 2003 and as the Directors believe that the PRC tissue paper market will still have huge growth potential in the future, the Directors consider that the Acquisition represents a good opportunity for the Company to further invest in this high growth business.

• ii. Upon completion of the Acquisition, the Hearttex Group will become wholly-owned by the Company. The Directors are therefore of the view that the Acquisition represents an invaluable opportunity to further consolidate the Group’s earning base, taking into account the increase in profit resulting from the inclusion of 100% profit from the Hearttex Group. In addition, upon the Company becoming the sole shareholder of the Hearttex Group, the operation efficiency and control in the Hearttex Group could be further enhanced.

• iii. The Acquisition will eliminate all of the existing connected transactions between the Company and Hearttex Group and will further rationalise the operations of the Group.

6. ADDITIONAL INFORMATION

The Hearttex Group has been pursuing the feasibility study of an A share listing on a recognised stock exchange in the PRC. Upon completion of the Acquisition, the Directors intend not to proceed with such feasibility study since the Hearttex Group will become wholly-owned by the Company and such shareholding structure is inappropriate to apply for a listing in the PRC. Being wholly-owned by the Company, the Hearttex Group will be able to tap the Group’s internal resources and the Directors believe such shareholding structure is more appropriate for the rapid development of the Group’s tissue paper business to capture the market potential and strengthen its market leadership.

The Acquisition constitutes a discloseable transaction of the Company under the Listing Rules.

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LETTER FROM THE BOARD

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 information set out in the appendix of this circular.

As the Acquisition may or may not proceed (depending on the fulfillment of the conditions of the Acquisition Agreements), 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

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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 and short positions of the Directors and chief executive of the Company in the 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, underlying shares and debentures

		**Number of ordinary **	**Number of ordinary **	Shares
	Personal	Family	Corporate	Other
Name	interests	interests	interests	interests	Total
			(Unit: Shares)
Mr. Sze Man Bok	220,335,505	—	—	—	220,335,505
Mr. Hui Chi Lin	201,930,693	6,630,224	—	—	208,560,917
		(Note)
Mr. Yeung Wing Chun	43,824,257	45,619	—	—	43,869,876
		(Note)
Mr. Zhang Shi Pao	14,404,027	—	—	—	14,404,027
	(Note)
Mr. Xu Da Zuo	20,270,135	—	—	—	20,270,135
	(Note)
Mr. Xu Chun Man	19,783,445	—	—	—	19,783,445
	(Note)
Mr. Hung Ching Shan	9,120,000	—	—	—	9,120,000

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

— 15 —

GENERAL INFORMATION

APPENDIX

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, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV 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 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 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 Group or which are proposed to be acquired or disposed of by or leased to any member of the Group since 31st December, 2003 (being the date to which the latest published audited accounts of the Company were made up).

(B) Substantial Shareholders’ interests

The register of interests in shares and short positions maintained under section 336 of the SFO shows that as at the Latest Practicable Date, the Company had been notified of the following interests:

			Percentage of
			issued share
Name	Long position	Capacity	capital
J.P. Morgan Chase & Co.	50,632,000	Investment manager	4.87%
	21,436,000	Custodian/Approved	2.06%
		lending agent
	72,068,000		6.93%
FMR Corp.	52,054,000	Investment manager	5%

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 and of that also 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 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.

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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 Group:

==> picture [432 x 310] intentionally omitted <==

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

||||||||||
|---|---|---|---|---|---|---|---|---|
|Approximate|
|percentage|of|
|Member|of|the|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|
|Hengan|Pharmacare|Co.,|Ltd.|Smart|Team|Group|Limited|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 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 or 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 Group.

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GENERAL INFORMATION

APPENDIX

5. 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, 2003, being the date to which the latest published audited financial statements of the Group were made up.

6. 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.

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

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