Television Broadcasts Limited — Proxy Solicitation & Information Statement 2003

Jan 27, 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 a 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 Yew Sang Hong (Holdings) Limited (the “Company”), you should at once hand this circular with the accompanying form of proxy to the purchaser or transferee, or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.

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.

Yew Sang Hong (Holdings) Limited 耀生行（集團）有限公司 [*]

(Incorporated in Cayman Islands with limited liability)

Proposal for the commencement of engaging in investing in securities, termination of existing share option scheme and adoption of new share option scheme

A notice convening the extraordinary general meeting of the Company to be held at Unit 3616, 36th Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong on Wednesday, 12 February 2003 at 11:00 a.m. is set out on pages 36 to 37 of this circular. Whether or not you are able to attend the meeting in person, please complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the Company’s branch registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as practicable and in any event by not later than 48 hours before the time appointed for holding of the meeting. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the meeting should you so wish.

27 January 2003

* For identification purpose only

CONTENTS

	Page
Responsibility Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	ii
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Appendix — Summary of the Principal Terms of the New Scheme. . . . . . . . . . . . . .	29
Notice of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	36

— i —

RESPONSIBILITY STATEMENT

This document includes particulars given in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited for the purpose of giving information with regard to Yew Sang Hong (Holdings) Limited. The directors collectively and individually accept full responsibility for the accuracy of the information contained in this document 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.

— ii —

DEFINITIONS

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

“Acceptance Date”	the date on which the offer to grant any Option is
	accepted by the relevant Eligible Employee pursuant to
	Rule 4 of the rules of the New Scheme
“Approval Date”	12 February 2003 or the date on which the New Scheme
	is adopted by a resolution of the Company, whichever is
	the later
“associates”	has the meaning ascribed to in the Listing Rules
“Board”	the board of Directors
“Company”	Yew Sang Hong (Holdings) Limited, a company
	incorporated in the Cayman Islands with limited liability,
	the shares of which are currently listed on and dealt in
	the Stock Exchange
“Companies Law”	the Companies Law (2000 Revision) of the Cayman
	Islands as amended from time to time
“Companies Ordinance”	the Companies Ordinance, Chapter 32, Laws of Hong Kong
“Connected Person”	shall have the meaning ascribed to it under the Listing
	Rules
“Date of Grant”	the Trading Day on which the Directors resolve to make
	an offer of Option to an Eligible Employee subject as
	provided in Rule 3(B)(2) and Rule 13(C) of the rules of
	the New Scheme
“Director(s)”	the director(s) of the Company
“EGM”	an extraordinary general meeting of the Company to be
	held at Unit 3616, 36th Floor, China Merchants Tower,
	Shun Tak Centre, 168-200 Connaught Road Central,
	Sheung Wan, Hong Kong on Wednesday, 12 February
	2003 at 11:00 a.m. to consider and, if thought fit, to
	approve the Proposal, the termination of the Existing
	Scheme and the adoption of the New Scheme
“Eligible Employee(s)”	any full-time employee(s) (including executive director)
	of any member of the Group

— 1 —

DEFINITIONS

“Existing Scheme”	the share option scheme adopted by the Company
	pursuant to written resolutions passed on 3 April 2001
“Group”	the Company and its subsidiaries
“Hong Kong”	the Hong Kong Special Administrative Region of the
	PRC
“HTH”	Hong Tong Hai Securities Limited, a wholly-owned
	subsidiary of the Company
“Independent Shareholders”	Shareholders other than (i) YSH Investments Limited, a
	company controlled by Mr. Lai Sai Sang, the Chairman
	of the Company; and (ii) Highworth Venture Limited, a
	company wholly owned by Mr. Hon Ming Kong, an
	executive Director and their respective associates
“IPO Proceeds”	the net proceeds raised from the New Listing
“Latest Practicable Date”	24 January 2003, being the latest practicable date for
	ascertaining certain information contained in this circular
“Listing Committee”	the listing committee of the Stock Exchange
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“New Listing”	the initial public offering of the Shares by way of new
	listing on the Stock Exchange
“New Scheme”	the new share option scheme proposed to be adopted by
	the Company at the EGM for the Eligible Employees
“Option”	an option to subscribe for Shares pursuant to the New
	Scheme
“Option Period”	the period commencing from the Acceptance Date of an
	Option and expiring at the close of business on the day
	falling immediately prior to the fifth anniversary of the
	Acceptance Date of such Option (both days inclusive)

— 2 —

DEFINITIONS

“Option Price”

the price per Share payable on the exercise of an Option as determined by the Directors and shall at least be the higher of:

• (1) the nominal value of the Shares;

• (2) the closing price of the Shares as stated in the Stock Exchange’s daily quotations sheet on the Date of Grant, which shall be a Trading Day; and

• (3) the average closing price of the Shares as stated in the Stock Exchange’s daily quotations sheets for the five Trading Days immediately preceding the Date of Grant;

or (where applicable) such price as from time to time adjusted pursuant to the New Scheme

the People’s Republic of China

“PRC” the People’s Republic of China “Proposal” a proposal for the commencement of engaging in investing in securities via HTH, which was established to engage in stockbroking and related securities businesses “Prospectus” the prospectus of the Company dated 11 April 2001 in relation to the New Listing “SFC” The Securities and Futures Commission “Share(s)” share(s) of HK$0.10 each in the share capital of the Company “Shareholders” holders of Shares “Stock Exchange” The Stock Exchange of Hong Kong Limited “Subsidiary” a company which is for the time being and from time to time a subsidiary of the Company within the meaning of the Companies Law or the Companies Ordinance but so that for the purposes thereof a “company” shall be construed as meaning any body corporate whether incorporated in Hong Kong or elsewhere

— 3 —

DEFINITIONS

“Trading Day”	a day on which the Stock Exchange is open for the
	business of dealing in securities
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“RMB”	Renminbi, the lawful currency of the PRC
“%”	per cent.

Notes: For the purpose of this circular, all amounts in Renminbi were translated into Hong Kong dollars at an exchange rate of HK$1:RMB1.06.

— 4 —

LETTER FROM THE BOARD

Yew Sang Hong (Holdings) Limited 耀生行（集團）有限公司 [*]

(Incorporated in Cayman Islands with limited liability)

Executive Directors: Mr. Lai Sai Sang, Chairman Mr. Lee Yu Leung Mr. Hon Ming Kong Mr. Zhang Dachun

Independent non-executive Directors:

Mr. Lam Kwok Cheong Mr. Ip Ying Chuen

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

Head Office and Principal Place of Business:

13/F., Hing Yip Centre 37 Beech Street Tai Kok Tsui Kowloon Hong Kong

27 January 2003

To the Shareholders

Dear Sir or Madam,

Proposal for the commencement of engaging in investing in securities, termination of existing share option scheme and

adoption of new share option scheme

INTRODUCTION

The Directors announced on 13 December 2002 that the Board intends to put forward proposals for (i) the Independent Shareholders to approve the Proposal and (ii) the Shareholders to approve the termination of the Existing Scheme and the adoption of the New Scheme.

* For identification purpose only

— 5 —

LETTER FROM THE BOARD

The purpose of this circular is to give you further information on the Proposal, the termination of the Existing Scheme and the adoption of the New Scheme and to give you the notice of the EGM at which the necessary resolutions will be proposed to consider and, if thought fit, approve the Proposal, the termination of the Existing Scheme and the adoption of the New Scheme.

The Proposal will be subject to the approval of the Independent Shareholders at the EGM. YSH Investments Limited, a company controlled by Mr. Lai Sai Sang, the Chairman of the Company; and Highworth Venture Limited, a company wholly owned by Mr. Hon Ming Kong, an executive Director, and their respective associates, which together are interested in approximately 50.86% of the existing issued share capital of the Company as at the Latest Practicable Date, will abstain from voting in respect of their shareholding interests in the Company in the resolution for the approval of the Proposal at the EGM.

REVIEW AND RECENT DEVELOPMENT OF THE GROUP

Annual results for the year ended 31 March 2002

The audited consolidated turnover of the Group was approximately HK$106,217,000 for the year ended 31 March 2002, representing a decrease of approximately 70% as compared with 2001 financial year of approximately HK$354,444,000. The audited consolidated profit attributable to Shareholders for the year ended 31 March 2002 was approximately HK$885,000, representing a decrease of approximately 98% when compared with 2001 financial year of approximately HK$47,195,000. During the financial year of 2002, the turnover of the Group’s electrical engineering contracting business and trading of electrical equipment and materials were approximately HK$65 million and HK$41 million respectively, or approximately 61% and 39% of the total turnover of the Group respectively. The turnover mix of the Group continued to shift from the electrical engineering contracting business to the trading of electrical equipment and materials due to the large decrease in the turnover of electrical engineering contracting business. This also reflected the difficulties in the industry and the change of government’s housing policies that affected the Group’s core engineering contracting business during the financial year of 2002.

— 6 —

LETTER FROM THE BOARD

Interim results for the six months ended 30 September 2002

As mentioned in the interim results of the Company for the six months ended 30 September 2002 (the “Interim Period”), the unaudited consolidated loss attributable to Shareholders for the Interim Period amounted to approximately HK$10,519,000 whereas profit attributable to Shareholders of approximately HK$1,756,000 was made for the same period in 2001. Turnover was approximately HK$108,659,000, representing an increase of approximately 172.9% compared with last corresponding period.

During the Interim Period, the Group mainly continued its outstanding work in progress brought forward at the beginning of the Interim Period. Rewiring of Lei Cheng Uk Estate and Mass Transit Railway’s Tseung Kwan O Extension in Signaling System Installation were completed during the Interim Period under review. The Group also completed an electrical installation project for a printing factory in Dongguan, Guangdong, the PRC. It is believed to be a stepping stone of the Group to increase its PRC exposure for tendering similar mainland projects in the future. The Group has managed to secure new contracts with total contract value of approximately HK$26.1 million. As at 30 September 2002, the Group’s electrical engineering contracts on hand amounted to approximately HK$184 million in total, comprising approximately HK$139.1 million for public housing contracts, approximately HK$22.8 million for private contracts and approximately HK$22.1 million for maintenance projects.

The performance of the Group’s electrical and component trading division was satisfactory. This reflects the internal vertical integration process in terms of control of material supply and pricing. Currently, the Group possesses distribution rights of a number of products with major brands of electrical equipment and materials.

In November 2002, the housing policy in Hong Kong was revamped in a bid to revive local sluggish property market. The Government has ceased Home Ownership Scheme as well as development projects under Housing Authority and Housing Society. The decline in the volume of new public housing works has lured contractors who previously were active in the public sector to begin competing in the private sector. This will in turn result in a deeper cut in the contract price. As part of the corporate diversification plans, the Group has been diverting its core business towards maintenance activities which will provide a steady stream of revenue. Target segments include property developers, estate management companies, public utilities, hotels, schools and educational institutions. On the other hand, the Group is seeking business ventures in residential building and material supply in the PRC. As a total solution building service provider, the Group has been vertically integrated into distribution of electrical products which are re-exported from the PRC to Australia, Italy and Japan. The Group is looking for opportunities for extension of distribution rights in the PRC.

— 7 —

LETTER FROM THE BOARD

Change in application of the IPO Proceeds

As mentioned in the announcement dated 13 December 2002, the intended use of the IPO Proceeds and the amount applied as at 31 March 2002 were stated in the Prospectus and the annual report of the Company for the year ended 31 March 2002 respectively and were summarized as follows:—

Proposed approximate amount (HK$) Proposed application Potential investments in or 9 million acquisitions of suppliers of electrical equipment and materials Developing other types of building 5 million services installation Potential tendering for electrical 5 million engineering works Developing trading business of electrical 4 million equipment and materials in the PRC Carrying out testing of various 1 million electrical equipment and materials for compliance certification from the Hong Kong Housing Authority General working capital 1 million Total *25 million	Approximate amount applied (HK$) Nil Nil Nil 0.47 million Nil 1 million 1.47 million	Approximate balance unused (HK$) 9 million 5 million 5 million 3.53 million 1 million Nil
		*23.53 million

* As the final figure of the IPO Proceeds was approximately HK$24.2 million, the unused portion of the IPO Proceeds should be approximately HK$22.73 million.

— 8 —

LETTER FROM THE BOARD

The Group is principally engaged in electrical engineering contracting business, electrical and component trading business in Hong Kong and the PRC, corporate and business consultancy, direct investments and securities businesses.

As mentioned in the annual report of the Company for the year ended 31 March 2002, the Group faced much pressure in its opportunity of business under recession of global economy after the “911” incident and the sluggishness of the Hong Kong economy caused by chronic deflation, depressed consumption and record-high unemployment rate. In particular, the changes in the recent housing policies of the Hong Kong government were, as a whole, quite negative to the building services industry. There was also a general shrinkage in the overall volume of building projects put to the market, those offered by the public sector in particular, during the past financial year. Although the Group attempted to seek potential investments regarding acquisitions of suppliers of electrical equipment and materials or other building installation services such as fire service installation and air-conditioning installation, the Group has not been able to identify any target which could meet its investment requirements.

Given the poor economic atmosphere and the present housing policy of the Hong Kong government, the Directors believe that the local building services industry would remain difficult in the coming year. The Directors expect that the volume of new works, offered by the public sector in particular, will be quite limited and tough competition will continue within the industry which, together with the shrinkage in demand, will put pressure on the prices of electrical products. Notwithstanding the poor market condition in the housing industry, the Group will continue to undertake its electrical engineering contracting business and refocus such business in the private sector.

To reduce the Group’s reliance in the building sector of Hong Kong, the Directors have been implementing the corporate strategy of diversification of its business portfolio and exploration of business opportunity in the PRC market. Details of the recent developments of the Group are set out in the section headed “New transactions after the New Listing” below.

In view of the uncertainties in respect of the future prospects of the electrical contracting business, the Board has taken a prudent approach that it will not be in the interests of the Company to expand electrical engineering and trading businesses at this stage by applying the full amount of the IPO Proceeds in accordance with the then intended way of usage as stated in the Prospectus. Given the latest development of the Group in other business sectors, the Board considered that it would be more appropriate and is in the best interests of the Company and its shareholders to change the use of the IPO Proceeds and has allocated the unused portion of the IPO Proceeds of (i) approximately HK$1.03 million for developing trading business of electrical equipment and materials in the PRC and (ii) approximately HK$21.7 million for working capital purpose, in particular, for general overheads of the Group.

— 9 —

LETTER FROM THE BOARD

New transactions after the New Listing

Taking the advantage of the expertise and the business network, particularly, in the PRC, of the new Directors, the Group concluded the investments in a variety of businesses in the PRC and established certain wholly-owned subsidiaries with an objective to engage in financial services businesses.

As mentioned in the announcement of the Company dated 3 May 2002, the Company entered into a letter of intent with 深圳市一輝實業有限公司 (Shenzhen Brilliant Industrial Co., Ltd.) relating to the formation of a joint venture in the PRC to engage in consultancy and advisory services in respect of various construction engineering and equipment and materials trading businesses in the PRC. Subsequently, as mentioned in the announcement of the Company dated 20 December 2002, Yew Sang Hong (China) Limited (“YSH (China)”), a wholly-owned subsidiary of the Company, entered into a joint venture agreement dated 19 December 2002 with Shenzhen Brilliant Industrial Co., Ltd. pursuant to which both parties agreed to form a joint venture company, 深圳耀生行建築咨詢服務有限公司 (Shenzhen Yew Sang Hong Construction Consultant Services Limited) (the “JV Company”), in Shenzhen, the PRC. Both the total investment and the registered capital of the JV Company shall be RMB9,800,000 (approximately HK$9,245,000). Shenzhen Brilliant Industrial Co., Ltd. and YSH (China) shall inject into the JV Company RMB4,998,000 (approximately HK$4,715,000), representing 51% of the equity interest of the JV Company, and RMB4,802,000 (approximately HK$4,530,000), representing 49% of the equity interest of the JV Company, respectively. Pursuant to the letter of intent, the Company has paid a deposit of HK$10,000,000 to Shenzhen Brilliant Industrial Co., Ltd. The payment of the deposit was financed by the net proceeds of the placing raised in June 2002. It is expected that upon the granting of the business licence of the JV Company, RMB4,802,000 (approximately HK$4,530,000) will be injected into the JV Company by YSH (China) as registered capital and the remaining balance of HK$5,470,000 together with interest at an interest rate of 1.75% per annum will be refunded to the Company within 14 days from the date of the business licence of the JV Company which is expected to be issued by the end of February 2003.

As mentioned in the announcement of the Company dated 28 June 2002, China Legend International Limited (“China Legend”), an indirectly wholly-owned subsidiary of the Company, has entered into a co-operative agreement, a joint venture agreement and a capital injection agreement dated 27 June 2002 with Dagong International Credit Rating Company Limited (“Dagong International”) relating to the formation of a joint venture company which is expected to be principally engaged in the provision of various kinds of credit information services to local and overseas institutional investors, financial institutions, regulatory authorities, government departments and economic research houses. The registered capital of the joint venture company shall be RMB80,000,000 (approximately HK$75,471,000). Each of China Legend and Dagong International shall inject into the joint venture company RMB40,000,000 (approximately HK$37,736,000) in cash as registered capital within six months from the date of issue of the business licence of the joint venture company. As the Group had yet to

— 10 —

LETTER FROM THE BOARD

commence its securities business at the time of entering into the agreements for the formation of the joint venture company, the Directors intended to utilise a sum of HK$40 million out of the total net proceeds of the placing raised in June 2002 for the formation of the joint venture company with Dagong International. The business licence was granted to the joint venture company in September 2002 and China Legend has injected RMB20,000,000 (approximately HK$18,868,000) into the joint venture company as registered capital.

As mentioned in the announcement of the Company dated 31 July 2002, an indirect whollyowned subsidiary of the Company entered into a sale and purchase agreement dated 18 July 2002 with two independent third parties in relation to the acquisition of 60% of the issued share capital in Cyber Touch Limited, a holding company incorporated in the British Virgin Islands, for an aggregate consideration of HK$18 million, of which HK$13 million was financed by the net proceeds of the placing raised in June 2002 and HK$5 million was financed by the internal funding of the Company. The sale and purchase agreement has been completed in July 2002. The principal asset of the holding company is its 100% interest in 北京易行商盟在線 網絡技術有限公司 (the “Project Company”), a company incorporated in the PRC in June 2000 and has been principally engaged in the manufacture and sale of computer software and network products. The Project Company serves its 16 million members through the website of “www.helptrip.com.cn”. Leveraging on the combined client base, the Project Company will co-operate with Bank of Communication in the PRC to jointly launch a card “太平洋易行聯 名卡 ” in early 2003. Apart from comprehensive financial services, the card also provides hotel reservation, ticket reservation, tour booking and travel insurance services.

As mentioned in the announcement of the Company dated 6 August 2002, Jetasia Enterprises Limited, an indirectly wholly-owned subsidiary of the Company, entered into a letter of intent dated 5 August 2002 with寧波市金港信托投資有限責任公司 (the “PRC Company”) relating to an investment in not more than 24.9% of the enlarged equity interest of the PRC Company which is expected to be engaged in a variety of investment management services including, inter alia, fund and asset management services, trust services and financial advisory services. The PRC Company and its beneficial owners are independent third parties not connected with the Company, directors, chief executive, substantial shareholders of the Company or its subsidiaries or their respective associates. Pursuant to the letter of intent, the Group paid a deposit of HK$12,000,000 to the escrow account of an overseas representative of the PRC Company. The payment of the deposit was financed by the internal funding of the Company. As the Company is still studying the feasibility of the proposed investment, no agreement has been entered into.

In Hong Kong, the Company also established certain companies (including Hong Tong Hai Consultants Limited and HTH) to engage in corporate and business consultancy, direct investments and securities businesses in April 2002. Details of the business of HTH are set out in the section headed “Information on HTH” below.

— 11 —

LETTER FROM THE BOARD

As mentioned in the interim results announcement of the Company dated 31 December 2002, during the Interim Period, the Group has invested in two companies which are engaged in mobile phone trading business in the PRC and trading of pharmaceutical products respectively. Total investment in the two companies amounted to approximately HK$7 million which was financed by the internal funding of the Company. New mobile phone models are manufactured in Korea with special features supporting colour display up to 65,000 pixels. First patch of over 9,000 sets were delivered before December 2002 for testing and processing, which will then be sold in the PRC market. In December 2002, an indirect wholly-owned subsidiary of the Company acquired 4.04% effective interest in a property development project known as Zhong Du Building, located at the Northeastern corner of Xin Xing Flyover Interchanges, Xicheng District, Beijing, the PRC from Central China Enterprises Limited, an independent third party and a listed company in Hong Kong, for a consideration of HK$10,700,000. The payment of the consideration was financed by the net proceeds of the placing raised in June 2002.

Placing activity after the New Listing

As mentioned in the announcement of the Company dated 21 May 2002, the Company entered into a conditional placing and underwriting agreement dated 21 May 2002 with two independent placing agents for the placing of 23,800,000 new Shares at a placing price of HK$5.13 per placing share to independent investors. The net proceeds of the placing were amounted to approximately HK$118 million, of which up to approximately HK$50 million has been retained for the business operation of a new joint venture company to be established with Shenzhen Brilliant Industrial Co., Ltd. in the PRC and the remaining balance of approximately HK$68 million has been retained for the future operation of a new securities firm to be established by the Company in Hong Kong. The placing has been completed on 19 June 2002.

As mentioned in the announcement of the Company dated 28 June 2002, the Group had yet to commence its securities business. Accordingly, the Directors intended to utilise a sum of HK$40 million out of the total net proceeds of the placing for the formation of the joint venture company with Dagong International.

As mentioned in the announcement of the Company dated 20 December 2002, given that the registered capital of the JV Company shall be RMB9,800,000 (approximately HK$9,245,000), the contribution of the Company for 49% of the equity interest of the JV Company shall only be RMB4,802,000 (approximately HK$4,530,000). Accordingly, the unused portion of the net proceeds of approximately HK$45,470,000 which have been earmarked for the business operation of the JV Company will be retained for funding future investments when the appropriate opportunity arises.

— 12 —

LETTER FROM THE BOARD

THE PROPOSAL

The Board resolved to put forward the Proposal for the approval of the Independent Shareholders at the EGM. Under the Proposal, the Company will commence to engage in investing in securities via HTH which has been established for engaging in stockbroking and related securities businesses.

Information on HTH

HTH was incorporated in Hong Kong with limited liability on 15 April 2002. The registered capital of HTH of HK$15 million was financed by the net proceeds for the placing of new Shares in June 2002. HTH purchased a Stock Exchange trading right and obtained a dealer licence in August 2002 and commenced the stockbroking business in September 2002. Based on the unaudited management accounts of HTH for the period from 15 April 2002 (date of incorporation) to 30 November 2002, the unaudited operational loss for the period was approximately HK$822,000. Based on the unaudited balance sheet of HTH as at 30 November 2002, the net assets value was approximately HK$14,178,000.

Business

Up to date, HTH has been engaged in the execution of trades on behalf of its clients in securities listed on the Stock Exchange and in the provision of margin financing to its clients. No investment in securities has been made by HTH. Currently, turnover of HTH comprises commission, fee income and interest income derived from stockbroking business and interest income derived from margin financing. Subject to the approval from the Independent Shareholders, a portion of HTH’s earnings will be derived from underwriting and placing commission. It is the intention of HTH not to engage in active proprietary trading activities in securities. Accordingly, no specific investment objective has been defined by HTH. HTH will only make investment in securities for long-term investment purposes with the prior approval of the board of directors of HTH after careful evaluation of the underlying companies’ fundamentals, price performance and liquidity of the securities. HTH has no intention to engage in investing in futures and equity-linked notes at this stage.

Directors and Staffs

The board of directors of HTH comprises Mr. Zhang Dachun and Mr. Wan Ka Cheong. Mr. Zhang Dachun, Managing Director of HTH, is responsible for business development of HTH. Mr. Wan Ka Cheong, the Dealing Director of HTH, is in charge of the overall operation of the securities business of HTH. Mr. Wan has more than 10 years’ experience in the investment services industry. Mr. Wan was the settlement and dealing assistant during the period from June 1990 to August 1992 and the dealing clerk and central buyer during the period from November 1992 to February 1995. Mr. Wan was registered as dealer’s representative and dealing director since June 1997 and July 2000 respectively. Mr. Wan joined HTH in May 2002.

— 13 —

LETTER FROM THE BOARD

The credit committee comprises Mr. Zhang Dachun, Mr. Wan Ka Cheong, the credit officer and a designated person authorized by the Company.

As at the Latest Practicable Date, HTH had a total of 11 full time employees. The following table sets out the number of employees by principal functions:

	Number of employees
Marketing and sales	3
Dealing	3
Settlement and accounting	3
Credit and compliance	2
	11

Sales and marketing

HTH has a sales and marketing team comprising three staff members who are responsible for generating business for HTH. All the sales managers have more than five years’ experience in stockbroking industry and are duly registered with the SFC and the Stock Exchange to provide stockbroking services to the clients. Each account executive is responsible for a portfolio of clients to whom he or she provides a personalized service and keeping them abreast of market development.

Regulations, licences and trading rights

The SFC and the Stock Exchange are the primary regulators of HTH’s businesses in Hong Kong. HTH’s businesses are subject to, among other things, certain legislation and regulations (as may be amended from time to time). HTH is also required to be registered with the SFC and to admit as participant of the Stock Exchange in order to carry on its businesses. Currently, HTH held a dealer licence under the Securities Ordinance, the Stock Exchange Participant certificate and the Stock Exchange Trading Right certificate.

All registered persons with the SFC are required to comply with on-going obligations to satisfy the SFC that they remain fit and proper to be registered. As such, HTH is required to comply with the relevant codes and regulations from time to time. In particular, such codes and regulations include the “Code of Conduct of Persons Registered with the SFC” and the “Management, Supervision and Internal Control Guidelines” issued by the SFC.

— 14 —

LETTER FROM THE BOARD

Internal control procedures

HTH’s internal control procedures as contained in the operational procedures manual are broadly set out under the various headings below:

Segregation of duties and functions

HTH’s operational functions, including sales, dealing, settlement, accounting and personnel, are effectively segregated with direct reporting lines.

Account opening and closing

There are cash account and margin account available for individual and corporate clients. For each client, HTH requires comprehensive information including identity of the client, telephone numbers, address proof, income proof etc. For corporate accounts, HTH additionally requires personal guarantee from the beneficial owners and statutory document of the corporate clients. All new account opening applications must be approved by the authorized officers.

Dealing procedures

Dealing Operation Procedure

As HTH adopts the Brokers Supplied System (the “BSS”), account executives are encouraged to execute client’s trading order by inputting the order details into the BSS trade stations directly. In such case, account executives will be assigned with a password and a trading limit for himself and his clients in order to protect HTH’s interest and minimise the risk of over-trading. In addition, before execution, the BSS trade station requires the inputting of client’s account number and full order details and then it will automatically record the exact time of the order inputted, prompt and fair allocation of executed transaction are effectively and efficiently enhanced.

For those account executives who prefer to place orders to dealing room for execution, the following procedures will be followed. Upon receipt of a trading order from client and before placing such order to the dealer, account executives shall immediately identify the client’s identity and shall check, either in the computer system or the computer report, (a) any margin call; (b) trading limit/margin limit; and (c) for sale order, client has sufficient stock in the account. Account executives shall record the trading orders on blotter chronologically and stamp the ticket with time-clock immediately before placing the orders to dealer for execution. All clients’ trading orders shall be handled in the order in which they are received and on the terms which are the best available. No client shall trade exceeding the trading limit/margin limit except with the special approval by the Dealing Director.

— 15 —

LETTER FROM THE BOARD

Procedure for Handling Dealing Error

Upon discovery of a dealing error, dealer shall immediately inform the Dealing Director. The Dealing Director shall give instructions for taking immediate remedial action within trading hours on the same day. If the error caused short selling and the remedial action cannot be completed within trading hours on the same day, due to late discovery of error or other reasons, then the Dealing Director shall instruct the compliance manager to notify the Stock Exchange of the dealing error as early as possible on the next day and apply for exemption of compulsory buy-in by the Central Clearing and Settlement Systems established and operated by Hong Kong Securities Clearing Company Limited on the third trading day from the transaction day.

The respective dealer/account executives shall prepare a dealing error report which includes (a) parties responsible for the error; (b) details and reason of the error; and (c) recommendation as to absorb/not to absorb the error to the house account. The responsible party must also sign on the report and send the same to the Dealing Director for approval as soon as possible. For any error trading involving a transaction amount over HK$500,000 or a deficit over HK$10,000, the Dealing Director shall seek Managing Director’s approval.

Rules of Dealing with Staff Accounts

Cash or margin account will be opened for staff and approval must be obtained from the Dealing Director. Staff account’s trading orders must be executed by the Dealing Director. Staff who wants to open trading account with other broking firm must obtain consent from HTH. Staff who has already maintained securities trading accounts with other broking firm before joining HTH is required to disclose their securities positions upon the joining. Staff must disclose every subsequent trading transaction to the Dealing Director who shall examine the same to ensure that the trading volume is within the staff’s financial ability and without conflict with clients. Settlement arrangement shall be the same as other clients and staff are required to settle all trades on due date. Except account executives’ own accounts, the commission generated from other staff accounts will be credited to the house commission account. The Dealing Director shall examine and review the statement of all staff accounts from time to time.

House Trading

Subject to the approval from the Independent Shareholders, all proprietary trading orders must be executed by the Dealing Director according to the instruction of the board of directors of HTH. Trading orders of clients shall have priority over the proprietary trading orders and the Dealing Director shall always avoid conflict of interest with clients. The board of directors of HTH shall examine and review HTH’s stockholding position from time to time and present a written report to the credit committee.

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LETTER FROM THE BOARD

Except the proprietary trading, the house account is also used for absorbing error trading. Only with the approval from the Dealing Director and the Managing Director (if applicable), the error trading can be put into such account. At each month end, the Dealing Director shall examine and review the monthly statement of house account and report to the board of directors of HTH.

Margin Finance Policy

Client will be granted a trading limit/margin limit amounting to two times clients’ annual gross income or net asset value, whichever is higher. In case that client makes cash deposit to HTH as his financial proof, a trading limit/margin limit equal to two times of client’s deposit will also be granted. For any exceptional case not followed this policy, approval must be obtained from the credit committee.

HTH will in general charge interest on debit balance of margin accounts at a rate not less than 3% per annum above the best lending rate quoted by The Hongkong and Shanghai Banking Corporation Limited from time to time. For cash accounts, a debit interest rate shall be not less than 5% per annum above the said best lending rate. Such interest shall be calculated on the outstanding account balance on a daily basis and will be debited to clients’ accounts on the last day of each calendar month. Any variations from the normal interest rate must be approved by the credit committee.

Commission rate for all accounts shall not be less than 0.25% before the repealing of minimum commission rate requirement on 1 April 2003.

If the outstanding debit balance in the margin account is greater than the margin value of the securities collateral acceptable to HTH, margin call will be triggered. In the case of clients’ outstanding debit balance exceeds the approved margin limit but is still within the margin value of securities collateral acceptable to HTH, no margin call is needed but adhoc approval for the excess has to be obtained from the Dealing Director. Account executive should contact the client in the morning preferably before the market open, to request client either to (a) deposit the call amount into the account; or (b) sell stock so as to eliminate the margin call; or (c) deposit additional stock with certain margin value so as to eliminate the margin call, and then revert to the credit officer of client’s response.

Under normal circumstances, if clients fail to meet the margin call within the deadline specified, the credit officer shall prepare a list of those accounts for the Dealing Director to initiate partial or total liquidation of the client’s securities collateral. Any exception to this policy requires the approval by the credit committee. Selection of securities collateral for liquidation should be done by the Dealing Director and in any event, the liquidation of the portfolio of the client shall be to the extent that all the amount of outstanding margin is eliminated.

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LETTER FROM THE BOARD

Credit control and risk management

HTH has implemented various procedures for credit control and risk management. For opening accounts, a trading limit will be set to a client with cash account and a margin limit will be set to a client with margin account. Assessment and evaluation must be conducted before setting such limit. HTH shall assess and evaluate client’ credit standing with reference to the client’s financial background, employment status/nature of business, investment history and trading frequency and types of securities collateral. Annual review shall be carried out for all cash and margin accounts according to clients’ updated information and current financial status and the performance of the client’s trading account and settlement record.

All margin financing loan extended to clients are secured by the pledge of Hong Kong listed equity securities and other collaterals acceptable to HTH. Securities required by HTH as collateral must be among those on a list prepared by the compliance officer and approved by the board of HTH. The approved list will be closely reviewed and updated in line with the bank offerings and existing market practice and conditions.

The margin limit granted to any client or the margin receivable due from any client, and/or the aggregate amounts receivable from a group of related margin clients, should not exceed 10% of the aggregate amounts receivable from all of HTH’s margin clients. The collateral value of a particular security and its related securities should not exceed 10% of the total market value of all collateral received from all margin clients. Any variation to the general practice requires the approval of the credit committee. The Dealing Director and credit officer shall review the margin client report and the margin call report daily and are primarily responsible for monitoring all active margin accounts and making sure that all the accounts and/or related parties’ accounts are operated within an adequate margin level. Credit officer should also monitor all securities collateral that HTH is holding and make sure that the collateral is in compliance with the margin ratio and monitoring of changes in concentrated collateral positions.

The credit committee shall regularly review the proprietary position in order to avoid overtrading and any stock concentration risk. In case the net market value of any securities and its related securities held by HTH equals 25% or more of HTH’s required liquid capital, the accounting manager shall include in its ranking liabilities the prescribed percentage of the net market value according to the Financial Resources Rules.

Competition

The financial services industry in Hong Kong is highly competitive. Other local and international companies in the industry may need to invest heavily in both human resources and technology to remain competitive. HTH now competes with small to medium sized securities houses. It is expected that HTH has competitive edge over some of the market players given (i) the financial and operational support from the the Company; (ii) the experience and expertise of HTH’s directors and staffs; and (iii) the business connection of the Directors.

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LETTER FROM THE BOARD

Securities investment in the track record period for the New Listing

As mentioned in the Prospectus, during the three financial years ended 31 March 2000 and the six months ended 30 September 2000, being the track record period for the New Listing, the Group was engaged in investing in securities, comprising equity-linked notes and equity securities listed in Hong Kong and overseas in an effort to generate additional funding for working capital of the Group. Equity-linked note is an equity-linked debt security which offers fixed interest income in exchange of an exposure to the underlying security. The principal amount of the equity-linked note is not guaranteed. The payout of the equity-linked note depends on the closing price of the underlying security on the redemption calculation date. If the closing price is greater than the strike price of the equity-linked note, 100% of nominal amount of the equity-linked note will be redeemed. If the closing price is smaller than or equal to the strike price of the equity-linked note, maximum round lots of underlying security calculated by nominal amount divided by the strike price will be delivered, with the remaining shares redeemed in cash equivalent based on the closing price. The cash outflow in relation to purchase of securities during each of the three financial years ended 31 March 2000 and the six months ended 30 September 2000 was approximately HK$8.8 million, HK$37.5 million, HK$207.6 million and HK$60.8 million respectively, which represents approximately 3.7%, 11.7%, 45% and 25% respectively of the Group’s turnover, for the same period. The cash inflow in relation to sale of securities during each of the three financial years ended 31 March 2000 and the six months ended 30 September 2000 was HK$5.9 million, HK$20.9 million, HK$189.8 million and HK$93.5 million respectively, which represents 2.5%, 6.6%, 41% and 38.6% respectively of the Group’s turnover for the same period. The aggregate value of the securities held by the Group as at the end of each of the three financial years ended 31 March 2000 and the six months ended 30 September 2000 was approximately HK$2.4 million, HK$17.8 million, HK$40.4 million and HK$8 million respectively. The maximum value of securities held by the Group during the Track Record Period was approximately HK$40.4 million. In connection with its securities investment activities, the Group realized gains of approximately HK$14,000 for the financial year ended 31 March 1998 and approximately HK$5.1 million and HK$1.3 million for the financial year ended 31 March 2000 and the six months ended 30 September 2000 respectively. The Group incurred a realized loss of approximately HK$1 million for the year ended 31 March 1999. The Group also incurred unrealized losses of approximately HK$0.6 million, HK$19,000, HK$0.4 million and HK$1 million respectively for each of the three financial years ended 31 March 2000 and the six months ended 30 September 2000.

According to the then directors of the Company, the securities investment activities were carried out by the Group during the track record period for the New Listing with the authority of Mr. Lai Sai Sang, the Chairman of the Company. The Group adopted the following internal control procedures in relation to such activities:

i) the Group only invested in securities that have a low level of risk exposure e.g. “bluechip” stocks;

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LETTER FROM THE BOARD

• ii) the funding of securities investment must be generated from internal financial resources of the Group, margin financing is strictly prohibited;

• iii) the monthly volume of securities trading must be limited to a level which the Group was able to finance by its internal financial resources;

• iv) the portfolio of securities investment must be diversified; and

• v) in relation to equity-linked note entered into by the Group, the strike price must represent a discount rate of no less than 7% of the spot (market) price of the securities covered by the note.

As at 30 September 2000, the aggregate value of the securities held by the Group was approximately HK$8 million which resulted in an unrealized loss of approximately HK$1 million for the six months ended 30 September 2000. The then directors of the Company have confirmed that all securities held by the Group had been disposed of prior to the New Listing and in connection with such disposal, the Group incurred a realised loss of approximately HK$0.5 million.

Reasons for the Proposal

Given the securities investment was not the core business of the Group prior to New Listing and the intention of the then directors of the Company to focus their resources on electrical engineering contracting business and electrical and component trading business in Hong Kong and the PRC, the then directors of the Company decided to terminate the securities investment activity and have confirmed in the Prospectus that, prior to the New Listing, all securities held by the Group had been disposed of and in connection with such disposal, the Group incurred a realised loss of approximately HK$0.5 million. The then directors of the Company have further confirmed in the Prospectus that the Group will cease to engage in investing in securities after the New Listing.

In view of the deteriorating market condition in the electrical engineering industry after the New Listing as detailed above, the Group has been pursuing a diversification strategy to expand its business portfolio. In 2002, the Company appointed three new executive Directors, namely Mr. Zhang Dachun, Mr. Hon Ming Kong and Mr. Lee Yu Leung, who have extensive experience in financial services businesses and making investments in the PRC. Brief details of the curriculum vitae of Mr. Zhang, Mr. Hon and Mr. Lee are set out in the section headed “New Directors” below.

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LETTER FROM THE BOARD

In view of the solid fundamentals of the Hong Kong economy and the Directors’ belief that Hong Kong will continue to serve as one of the Asian pillars in the global stock market, the Directors have been holding a positive view on the securities market in Hong Kong and believe that the Hong Kong stock market will remain attractive to different types of investors in the long term. The Group has already commenced its corporate consultancy business and stockbroking business via Hong Tong Hai Consultants Limited and HTH in June 2002 and September 2002 respectively.

Given that the then board of directors of the Company has confirmed in the Prospectus that the Group will cease to engage in investing in securities after the New Listing, the Group has been unable to expand its stockbroking business by undertaking placing and underwriting of securities, engaging in proprietary trading of securities or making investments in securities. The Directors believe that, similar to other countries, the securities market and the economy of Hong Kong are cyclical in nature. Despite the current difficult economic condition and volatile stock market performance, the Directors are confident that the market performance and trading volumes will eventually be restored once the economy of Hong Kong indicates improvements and the booming sentiment returns to the stock market. As the Directors consider that the securities industry in Hong Kong will continue to be very competitive, the Directors believe that it is important for the Group to have the capability to provide a wide range of services in order to maintain a competitive edge in the market. In view of the change in market circumstances in the electrical engineering industry, the diversification of the business portfolio of the Group after the New Listing and the objective of increasing the competitiveness of the securities business of the Group in the industry, the Board considers that it is no longer practicable and is not in the interests of the securities business of the Group if the Group continues to be refrained from being engaged in securities investment business. On such basis, the Board resolved to put forward the Proposal for approval by the Independent Shareholders. It is expected that upon the granting of the approval from the Independent Shareholders, HTH will have more flexibility in its stockbroking business by undertaking placing and underwriting of securities, if opportunities arise.

New Directors

Mr. Zhang Dachun was appointed as an executive Director with effect from 8 April 2002. Mr. Zhang has about 30 years of experience in shipping industry and business management. He was Vice-President of COSCO Group Limited, Executive Vice-Chairman and President of COSCO (Hong Kong) Group Limited, Chairman of COSCO (Hong Kong) Shipping Company Limited, Vice-Chairman of both COSCO Pacific Limited and COSCO International Holdings Limited, Director and Chief Executive of COSCO (U.K.) Company Limited and President of China Merchants Holdings (International) Ltd.

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LETTER FROM THE BOARD

Mr. Hon Ming Kong was appointed as an executive Director with effect from 25 April 2002. Mr. Hon has over 12 years of experience in shipping industry and making investments in the PRC. He was a director and has been a substantial shareholder of a listed company in Hong Kong which has been primarily engaged in freight forwarding and vessel operating common carrier services, container depots operation and logistic management services, technology and information system services, finance and management services and securities trading.

Mr. Lee Yu Leung was appointed as an executive Director with effect from 1 February 2002. Mr. Lee has more than 22 years of experience in the investment services industry and has taken up directorship with certain reputable local securities firms. He is a former member of the Listing Committee of the Stock Exchange as well as a former council member of the Stock Exchange. SFC announced on 21 February 2002 that it had publicly reprimanded Mr. Lee, a former dealer and investment adviser under the Securities Ordinance, and a former commodity dealer under the Commodities Trading Ordinance. The reprimand follows an investigation by the SFC that two former employees of a brokerage had sold and repurchased derivative warrants between accounts they operated and controlled at a number of brokerages including a security house whilst Mr. Lee was a dealing director. A former dealer’s representative at such securities house under Mr. Lee’s direct supervision had facilitated the two former employees in their activities. Mr. Lee has resigned from his positions at such securities house with effect from 1 February 2002. Mr. Lee is responsible for the overall business development and strategic decision of the Group as well as participating in the management of all the business operations of the Group other than construction engineering and securities businesses.

Risk factors of the securities investment business

Proprietary trading operations

It is the intention of HTH not to engage in active proprietary trading activities in securities. HTH’s trading result from its proprietary trading operations is affected by a number of factors including market conditions and economic factors. HTH will only make investment in securities for long-term investment purposes with the prior approval of the board of HTH after careful evaluation of the underlying companies’ fundamentals, price performance and liquidity of the securities. HTH generally adopts a cautious approach to its proprietary trading activities. Should HTH expand its proprietary operations in the future, the results and liquidity of the Group may be adversely affected in the event of an unfavourable market move.

Market conditions

HTH’s business is directly affected by the prevailing market conditions including stock prices, volume of trading, interest rates and availability of credit. Increase in volatility in these factors may expose HTH to certain risks such as funding risk, liquidity risk, settlement risk and market risk.

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LETTER FROM THE BOARD

Underwriting business

If the securities underwritten by HTH are undersubscribed, HTH is obliged to take up the unsubscribed securities. The financial position of HTH would be adversely affected if the underwritten securities taken up by HTH become illiquid and/or their market value drops.

Risk of margin financing

Margin financing can be a high risk business as it is particularly vulnerable to volatility in stock prices and liquidity of the securities pledged. If a client is unable to meet a margin call, HTH may sell the pledged securities and use the sale proceeds thereof towards repayment of the loan. Nevertheless, there is a risk that the amount recovered from the sale of the pledged securities may fall short of the outstanding amount of the loan and if the client fails to repay the shortfall, HTH may suffer a loss.

Risk of compliance failure

HTH operates in a highly regulated industry. HTH is required to be registered, and to maintain such registrations, with the SFC and other relevant regulatory bodies. As such, HTH have to ensure continuous compliance with all applicable laws, regulations and codes and to satisfy the SFC and other relevant regulatory bodies that it remains fit and proper to be registered. HTH’s operations and/or financial performance may be adversely affected as a result of failure to renew the registrations or licences or comply with any new laws and regulations introduced from time to time.

Credit risks

Cash clients have to settle their transaction amount within two trading days from the transaction day. If a client fails to settle the transaction amount, HTH is required to settle with Hong Kong Securities Clearing Company Limited with its own funding for the transaction amount. There is a risk of default in payment by cash clients.

Competition

HTH’s stockbroking and margin financing businesses operate in a highly competitive environment. HTH’s competitors include many small and medium sized stockbroking firms, local securities houses and banks which provide margin financing facilities. If HTH fails to maintain its competitive edge, HTH’s financial performance may be adversely affected.

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LETTER FROM THE BOARD

Risk of error trading

Given HTH will settle losses arising from dealing error made by its staff, HTH’s financial performance may be adversely affected if error trading is not effectively controlled and prevented by HTH.

Internet business development

HTH currently adopts BSS which has an interface with the “Automatic Matching System” of the Stock Exchange to process trading orders placed by clients. HTH plans to establish its own internet on-line trading network. To the extent that HTH makes substantial investment in developing its internet business, any failure suffered by HTH in developing its internet business could have a material adverse effect on its results of operation.

New statutory rules on securities margin financing

On 12 June 2000, the Securities (Margin Financing) Ordinance came into force. Under the Securities (Margin Financing) Ordinance, a person who engages in the business of securities margin financing is required to meet a set of fit and proper criteria and be registered as a securities margin financier with the SFC. A registered dealer, however, is not required to be registered as a securities margin financier to carry on margin financing activities.

A registered dealer, in carrying on margin financing activities, is required to maintain, at all times, liquid capital of no less than the higher of HK$3 million or an amount equal to 5% of the aggregate of the total liabilities of the securities dealer, the initial margin requirement in respect of open positions in futures or options contracts held by such dealer on behalf of clients and the amount of margin required to be deposited in respect of open positions of futures or options contracts held by him on behalf of clients to the extent that those futures or options contracts have not been subject to the initial margin requirement aforesaid, as well as paid up share capital of no less than HK$10 million. HTH is also required to comply with the Financial Resources Rules prescribed by the SFC.

In order to comply with the Securities (Margin Financing) Ordinance, HTH must maintain a high level of liquidity at all times. Failure to meet the above requirement may cause appropriate actions to be taken by the SFC against HTH, which may adversely affect HTH’s operations and performance.

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LETTER FROM THE BOARD

Risk of the industry

Proposed abolition of minimum commission rate by the board of Hong Kong Exchanges and Clearing Limited

On 17 May 2000, the board of Hong Kong Exchanges and Clearing Limited endorsed a proposal to remove the rules which fix the respective minimum commission rates for stock and futures transactions, currently being 0.25% of the value of the stock transactions and other prescribed minimum sums for futures transactions, with effect from 1 April 2002. After intensive lobbying from brokers, the Hong Kong Government announced on 24 January 2002 the postponement of the abolition of the minimum brokerage commission for 12 months. With effect from 1 April 2003, stockbrokers and futures brokers will be free to negotiate commission rates with their customers. As a result of the liberalisation of commission rates, the profit margin of HTH’s stock broking and futures broking may be reduced.

Cost of operations

In 1998, the Stock Exchange released a strategic plan for the securities industry for 1998 to 2001 entitled “Positioning for a New Era”. The objectives of the plan include major changes that will prepare the stock market to position for the intense competition and to capitalise on opportunities for business growth. Strategies including developing a straight-through securities transactions process and tightening of the current regulatory regime are key concerns in the plan. Future technology-related developments and regulations may be introduced from time to time by the Stock Exchange. The introduction of new regulations to enhance market development and investor protection may lead to rising cost for HTH’s stockbroking business.

Macroeconomic

All of HTH’s earnings are derived from Hong Kong and its businesses are directly related to the performance of the Hong Kong stock market which is influenced by factors affecting the general state of the Hong Kong economy. These factors include changes in the regulatory environment such as the introduction of any new laws and regulations, changes in local and international economic and political conditions such as the general market sentiment, volatility of exchange rates and fluctuations in the interest rates.

The value of the Hong Kong dollar has remained relatively stable due to its peg to the US dollar peg system that has been in effect in Hong Kong since 1983. In mid-1997, interest rates in Hong Kong rose significantly, real estate and retail sales declined and Hong Kong then slipped into a recession. In 1998, Hong Kong suffered deflation and Hong Kong dollar was subject to devaluation speculation. The economic conditions have, however, gradually recovered since mid-2000. However, there can be no assurance that the Hong Kong economy will not worsen or that the historical currency peg of the Hong Kong dollar to the US dollar will be maintained. Recession in Hong Kong, deflation or the discontinuation of the historical currency peg could adversely affect the general economy in Hong Kong and, in turn, HTH’s businesses.

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LETTER FROM THE BOARD

Information on connected transactions

Mr. Hon Ming Kong has opened a cash securities trading account with HTH. Each of Sincere Bonus Investment Ltd. and Highworth Venture Limited has opened a margin securities trading account with HTH. By virtue of the fact that Mr. Hon is an executive Director and each of Sincere Bonus Investment Ltd. and Highworth Venture Limited is a company wholly owned by Mr. Hon, Mr. Hon, Sincere Bonus Investment Ltd. and Highworth Venture Limited are Connected Persons. The trading transactions of Mr. Hon, Sincene Bonus Investment Ltd. and Highworth Venture Limited (the “Trading Transactions”) have been entered into by HTH on normal commercial terms and on arm’s length basis and in the usual and ordinary course of business of HTH.

As it is expected that the aggregate amount of income derived from the Trading Transactions will not exceed HK$1,000,000, the Trading Transactions fall within the category of connected transactions under Rule 14.24(5) will be exempted from the disclosure requirements under Chapter 14 of the Listing Rules. The directors of HTH will closely monitor the aggregate amount of income derived from the Trading Transactions and in the event that the amount exceeds HK$1,000,000 or if the Trading Transactions are not conducted on normal commercial terms in the future, the Company will comply with all applicable requirements under the Listing Rules.

General

The Proposal will be subject to the approval of the Independent Shareholders at the EGM. YSH Investments Limited and Highworth Venture Limited and their respective associates, which together are interested in approximately 50.86% of the existing issued share capital of the Company as at the Latest Practicable Date, will abstain from voting in respect of their shareholding interests in the Company in the resolution for the approval of the Proposal at the EGM.

THE EXISTING SCHEME AND THE NEW SCHEME

The Existing Scheme was adopted by the Company on 3 April 2001 and will expire on 3 April 2011. To be in line with the recent changes of the Listing Rules in relation to share option schemes and to provide the Company with a flexible means of giving incentive to, rewarding, remunerating, compensating and/or providing benefits to the Eligible Employees and for such other purposes as the Directors may approve from time to time, the Directors propose that the Existing Scheme be terminated and the New Scheme for the Eligible Employees be approved and adopted at the EGM.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, the Company had granted 11,000,000 options under the Existing Scheme, 10,500,000 of which remained outstanding and 500,000 of which has lapsed. Upon termination of the Existing Scheme, no further options may be offered thereunder. However, all options granted under the Existing Scheme shall continue to be valid and exercisable in accordance the rules of the Existing Scheme and the provisions of Chapter 17 of the Listing Rules. The Company will not grant any further options under the Existing Scheme prior to the EGM.

At the EGM, ordinary resolution will be proposed that the Existing Scheme be terminated and the New Scheme be approved and adopted at the EGM. Since the purpose of the New Scheme is to provide the Company with a means to recognize the contributions of the Eligible Employees, the Company does not consider it necessary to impose any conditions for exercising the Option granted at the Option Price, such as a minimum period for which an Option has to be held or a performance target that a holder of Option has to achieve before the Option can be exercised. A summary of the principal terms of the New Scheme is set out in the Appendix hereto. The terms of the New Scheme are in line with the provisions of Chapter 17 of the Listing Rules, which govern the terms of the share option schemes of listed companies.

The Directors consider it inappropriate to value the Options that can be granted under the New Scheme as if they had been granted on the Latest Practicable Date as various factors (such as the Option Price and other terms and conditions that an Option may be subject to) crucial for valuation cannot be predicted or ascertained and may vary from case to case. The Directors believe that valuation based on assumptions would be speculative and not meaningful, and indeed might be misleading.

The New Scheme will take effect upon satisfaction of the following conditions:

1. the approval of the termination of the Existing Scheme by the Shareholders at the EGM;

2. the approval of the adoption of the New Scheme by the Shareholders at the EGM; and

3. the Listing Committee granting approval for the listing of, and permission to deal in, the Shares to be issued and allotted pursuant to the exercise of the Options granted under the New Scheme.

Application will be made to the Listing Committee for the approval of the listing of, and permission to deal in, the Shares which may fall to be allotted and issued pursuant to the exercise of any Options granted under the New Scheme up to 10% of the Shares in issue as at 12 February 2003 or the date on which the New Scheme is adopted by a resolution of the Company, whichever is the later.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, the issued share capital of the Company comprised 223,800,000 Shares. Assuming that there is no change in the issued share capital between the period from the Latest Practicable date and the date of adoption of the New Scheme, the maximum number of Shares issuable pursuant to the New Scheme will be 22,380,000 Shares.

DOCUMENT AVAILABLE FOR INSPECTION

Copy of the rules of the New Scheme will be available for inspection at the principal place of business of the Company during normal business hours during the 14-day period before the date of the EGM and at the venue of the EGM during the EGM.

RECOMMENDATIONS

The Board believes that the Proposal, the termination of the Existing Scheme and the adoption of the New Scheme are in the best interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends (i) the Independent Shareholders to vote in favour of resolution no. 1 and (ii) the Shareholders to vote in favour of resolution no. 2, both as set out in the notice of the EGM.

THE EGM

A notice convening the EGM at which the relevant resolutions will be proposed to consider, and if thought fit, to approve the Proposal, the termination of the Existing Scheme and the adoption of the New Scheme is set out on pages 36 to 37 of this circular.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not you intend to attend the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the Company’s branch registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as practicable and in any event by not later than 48 hours before the time appointed for holding such meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM should you so wish.

Yours faithfully, By order of the Board Lai Sai Sang Chairman

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

The following is a summary of the principal terms of the New Scheme proposed to be adopted by the Shareholders at the EGM.

(A) PURPOSE

The purpose of the New Scheme is to recognise the contribution of the employees of the Group by granting options under the New Scheme to them as incentives or rewards.

(B) WHO MAY JOIN

The Directors may, at their discretion, invite full-time employees of any member of the Group, including any executive director of any member of the Group, to take up options to subscribe for Shares at a price calculated in accordance with paragraph (C) below. Upon acceptance of the option, the grantee shall pay HK$1.00 to the Company by way of consideration for the grant.

(C) PRICE FOR SHARES

The subscription price for Shares under the New Scheme shall be determined on the Date of Grant at the discretion of the Directors as an amount per Share which shall be at least the highest of:

• (a) the nominal value of a Share;

• (b) the closing price of the Shares as stated in the Stock Exchange’s daily quotations sheet on the Date of Grant, which must be a Trading Day; and

• (c) the average closing price of the Shares as stated in the Stock Exchange’s daily quotations sheets for the five Trading Days immediately preceding the Date of Grant.

(D) ACCEPTANCE OF OFFERS OF OPTIONS

Offers to grant an option shall be open for acceptance in writing. Such acceptance must be received by the Secretary of the Company within a period of 30 days inclusive of, and from, the Date of Grant provided that no such offer shall be open for acceptance after the expiry of the period of the New Scheme or after the New Scheme has been terminated. An offer shall be deemed to have been accepted on the date when the duplicate comprising acceptance of the offer is duly signed by the grantee with the number of Shares in request of which the offer is accepted clearly stated therein, together with a remittance in favour of the Company of HK$1.00 by way of consideration for the grant thereof.

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

(E) MAXIMUM NUMBER OF SHARES

The maximum number of Shares in respect of which options may be granted under the New Scheme and any other share option schemes of any company in the Group (the “Other Schemes”) shall not in aggregate exceed 10% of the Shares in issue as at the date of approval of the New Scheme unless the Company obtains a fresh approval from the Shareholders as described below (the “Scheme Limit”).

Subject to the approval of the Shareholders in general meeting, the Company may renew the Scheme Limit, provided that such limit as renewed shall not exceed 10% of the Shares in issue as at the date of approval of such limit. Options previously granted under the New Scheme and the Other Schemes (including those options outstanding, cancelled, lapsed in accordance with such schemes or exercised) shall not be counted for the purpose of calculating the Scheme Limit as renewed.

Subject to the separate approval of the Shareholders in general meeting and in accordance with the requirements under the Listing Rules from time to time in force, the Company may grant options beyond the Scheme Limit, provided that the options in excess of the Scheme Limit are granted only to persons specifically identified by the Company before such Shareholders’ approval is sought.

The maximum number of Shares which may be issued upon the exercise of all outstanding options granted and yet to be exercised under the New Scheme and all outstanding options granted and yet to be exercised under the Other Schemes shall not exceed 30% of the Shares in issue from time to time (the “Overall Limit”). Neither options under the New Scheme nor options under the Other Schemes may be granted if this will result in the Overall Limit being exceeded.

(F) MAXIMUM NUMBERS OR OPTIONS TO ANY ONE INDIVIDUAL

No option shall be granted to any one person such that the total number of Shares issued and to be issued upon the exercise of the options granted and to be granted to such person under the New Scheme and the Other Schemes (including exercised, cancelled and outstanding options) in any 12-month period up to and including the Date of Grant exceeds 1% of the Shares in issue from time to time (the “Participant Limit”). Subject to the approval of the Shareholders in general meeting and in accordance with the requirements under the Listing Rules from time to time in force, the Directors may grant options to a person such that the Participant Limit is exceeded. Such person and his associates shall abstain from voting at such general meeting.

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

(G) TIME OF EXERCISE OF OPTION

An option may be exercised in accordance with the terms of the New Scheme during such period commencing from the Acceptance Date and expiring at the close of business on the day falling immediately prior to the fifth anniversary of the Acceptance Date.

No performance targets are required to be achieved by any grantee before an option is capable of being exercised by the grantee except as otherwise imposed by the Directors and stated in the relevant letter of offer of the grant of an option.

(H) RIGHTS ARE PERSONAL TO GRANTEES

An option may not be transferred or assigned and is personal to the grantee of the option.

(I) RIGHTS ON CEASING EMPLOYMENT, DEATH OR DISMISSAL

If the grantee of an option leaves the service of the Group for any reason other than death, ill-health or retirement in accordance with his/her contract of employment or voluntary resignation or termination of his/her employment in accordance with his/her contract of employment by the relevant members of the Group or serious misconduct or certain other grounds, the grantee may exercise the option up to the grantee’s entitlement at the date of cessation (to the extent not already exercised) within the period of one month following the date of such cessation or such other period as the Directors may in their absolute discretion determine.

If the grantee of an option ceases to be an employee of the Group by reason of death, his or her personal representatives, may exercise the option in full (to the extent not already exercised) within a period of six months thereafter or at the expiration of the relevant Option Period, whichever is earlier, or such longer period as the Directors may determine, failing which it will lapse.

If the grantee of any option leaves the service of the Group by reason of serious misconduct or on certain other grounds, his or her option will thereupon lapse forthwith.

(J) EFFECT OF ALTERATIONS TO SHARE CAPITAL

In the event of any reduction, subdivision or consolidation of the share capital of the Company or any capitalisation issue or rights issue, the number or nominal amount of Shares comprised in each option and/or the Option Price may be adjusted in such manner as the Directors (having received a statement in writing from the auditors of the Company that in their opinion the adjustments proposed are fair and reasonable) may

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

deem appropriate, provided always that no increase shall be made in the aggregate subscription price relating to any option, no Share shall be issued at less than its nominal value and the proportion of the issued share capital of the Company to which a grantee is entitled after the adjustments shall remain the same as that to which he was entitled before the adjustments.

(K) RIGHTS ON WINDING UP

If notice is given of an extraordinary general meeting of the Company at which a resolution will be proposed for the voluntary winding-up of the Company, each grantee shall be entitled, at any time no later than two business days prior to the proposed resolution being duly passed, to exercise his outstanding options in whole or in part, but only so far as such options shall be subsisting immediately prior to the passing of such a resolution. Subject thereto, all then outstanding options shall lapse upon the proposed resolution being duly passed.

(L) RIGHTS ON A GENERAL OFFER

If, in consequence of any general offer made to all the holders of Shares (or all such holders other than the offeror and/or any person controlled by the offeror and/or any person acting in association or connection with the offeror), any person shall have obtained control of the Company, each grantee of an option shall be entitled to exercise at any time within a period of fourteen days after such control has been obtained the option in whole or in part.

(M) RIGHTS ON A COMPROMISE OR ARRANGEMENT

If a compromise or arrangement between the Company and its members or creditors is proposed for the purposes of or in connection with a scheme of reconstruction of the Company or its amalgamation with any other company or companies, the Company shall give notice thereof to all grantees on the same date as it despatches the notice to each member or creditor of the Company to consider such a compromise or arrangement, and thereupon any grantee (or where permitted his personal representatives) may forthwith and until the expiry of the period commencing with such date and ending with the earlier of the date falling two calendar months thereafter and the date on which such compromise or arrangement is sanctioned by the Court be entitled to exercise his option, but the exercise of the option shall be conditional upon such compromise or arrangement being sanctioned by the Court and becoming effective. The Company may thereafter require each grantee to transfer or otherwise deal with the Shares issued as a result of such exercise of his option so as to place the grantee in the same position as nearly as would have been the case had such Shares been subject to such compromise or arrangement.

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

(N) LAPSE OF OPTION

An option shall lapse automatically and not be exercisable (to the extent not already exercised) on the earliest of:

• (1) the date of expiry of the Option Period;

• (2) the expiry of any of the periods referred to in paragraphs (I), (K), (L), (M) above; and

• (3) the date on which the option holder commits a breach of paragraph (H) above, if the Directors shall exercise the Company’s right to cancel any outstanding option or part thereof granted.

(O) CANCELLATION OF OPTIONS GRANTED BUT NOT EXERCISED

Options granted but not exercised may not be cancelled without the consent of the relevant grantees thereof and any new options issued to the same grantee in replacement of options cancelled may only be issued under the New Scheme (or the Other Schemes) to the extent unissued options (excluding the cancelled options) are available for issue, with the limits prescribed in paragraphs (E) and (F) above.

(P) GRANT OF OPTIONS TO CONNECTED PERSONS

The independent non-executive directors of the Company (not being the independent non-executive director who is or whose associate is, a grantee) will be required to approve each grant of options to any director, chief executive or substantial shareholder of the Company or any of their respective associates.

If a grant of an option to a substantial shareholder or an independent non-executive director of the Company or to any of their respective associates would result in the total number of Shares issued and to be issued upon the exercise of the options granted and to be granted under the New Scheme and the Other Schemes (including options exercised, cancelled and outstanding) to such person in the 12-month period up to and including the Date of Grant of such option:

• (a) representing in aggregate over 0.1% of the Shares in issue from time to time; and

• (b) having an aggregate value, based on the closing price of the Shares as stated in the Stock Exchange’s daily quotations sheet on each Date of Grant, in excess of HK$5,000,000,

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

such further grant of options shall be approved by the Shareholders in general meeting voting by way of a poll. The Company shall send a circular to the Shareholders containing the information required by the Listing Rules. All Connected Persons of the Company shall abstain from voting at such general meeting, except that any Connected Person may vote against the relevant resolution at the general meeting provided that his intention to do so has been stated in the circular.

(Q) PERIOD OF THE NEW SCHEME

The New Scheme will remain in force for a period of 10 years commencing on the Approval Date.

(R) AMENDMENTS AND TERMINATION OF THE NEW SCHEME

The Directors may from time to time in its absolute discretion waive, modify or amend any of the provisions of the New Scheme as it deems desirable, provided that, except with the prior approval of the Shareholders in general meeting, no alteration shall be made to any of the provisions of the New Scheme relating to, among other things, the matters set out in Rule 17.03 of the Listing Rules to the advantage of grantees.

Save as otherwise provided in the terms of the New Scheme, neither an amendment of a material nature to the New Scheme nor any change to the terms of options granted may be made by the Directors without the prior approval of the Shareholders in general meeting.

The Company by resolution in general meeting may at any time terminate the operation of the New Scheme before the expiry of the period referred to in paragraph (Q) above and in such event no further offer shall be made but in all other respects the provisions of the New Scheme shall remain in force. All options granted and accepted prior to such termination shall continue to be valid and exercisable in accordance with their terms and the terms of the New Scheme.

(S) RANKING OF SHARES

The Shares to be allotted upon the exercise of an option will be subject to all the provisions of the Articles of Association for the time being in force and will rank pari passu with the fully paid Shares in issue on the date of allotment and accordingly will entitle the holders thereof to participate in all dividends or other distributions paid or made on or after the date of allotment other than any dividend or other distribution previously declared or recommended or resolved to be paid or made. The Shares to be allotted upon the exercise of an option will not carry voting rights until completion of the registration of the option holder (or any other person) as the holder of those Shares.

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SUMMARY OF THE PRINCIPAL TERMS OF THE NEW SCHEME

APPENDIX

(T) ADMINISTRATION

The New Scheme shall be administered by the Directors and the Directors shall, subject to the provisions of the New Scheme, so administer it in such manner as it shall in its discretion deem fit.

(U) CONDITIONS OF THE NEW SCHEME

The New Scheme is conditional on the Listing Committee of the Stock Exchange granting the approval for the listing of, and permission to deal in, the Shares to be issued and allotted pursuant to the exercise of the options.

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NOTICE OF THE EGM

Yew Sang Hong (Holdings) Limited 耀生行（集團）有限公司 [*]

(Incorporated in Cayman Islands with limited liability)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of the shareholders of Yew Sang Hong (Holdings) Limited (the “Company”) will be held at Unit 3616, 36th Floor, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, Sheung Wan, Hong Kong on Wednesday, 12 February 2003 at 11:00 a.m. for the purpose of considering and, if thought fit, passing with or without amendments, the following ordinary resolutions:

ORDINARY RESOLUTIONS

1. “ THAT the proposal for the commencement of engaging in investing in securities via Hong Tong Hai Securities Limited (“HTH”), a wholly-owned subsidiary of the Company, which had been established for engaging in stockbroking and related securities businesses, be and is hereby accepted and approved and that the establishment and operations of HTH before this meeting be and is hereby confirmed, ratified and approved.”

2. “ THAT :

3. (i) the existing share option scheme for the employees of the Company and its subsidiaries which was adopted by the Company pursuant to written resolutions passed on 3 April 2001 be and is hereby terminated with effect from the conclusion of this meeting; and

4. (ii) subject to and conditional upon, the Listing Committee of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting the approval for the listing of, and permission to deal in, the shares in the Company to be issued and allotted pursuant to the exercise of any options to be granted under the share option scheme of the Company (the “New Scheme”), the rules of which are contained in the document marked “A” produced to this meeting and by way of identification signed by the Chairman thereof and the rules of which are also summarised in the document marked “B” produced to this meeting and by way of identification signed by the Chairman thereof, the New Scheme be and is hereby approved and adopted with effect from the date of this meeting and the board of directors of the Company be and is hereby authorised to:

   • (a) grant options to subscribe for shares in the Company pursuant to the New Scheme up to 10% of the issued share capital of the Company as at the date of this resolution;

* For identification purpose only

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NOTICE OF THE EGM

• (b) allot, issue and deal with the shares in the Company pursuant to the exercise of subscription rights under any option granted under the New Scheme; and

• (c) do all such acts and to enter into all such transactions, arrangements and agreements as may be necessary or expedient in order to implement the New Scheme.”

By order of the Board Lai Yau Hong, Thomson Company Secretary

Hong Kong, 27 January 2003

Head Office and Principal Place of Business:

13/F., Hing Yip Centre 37 Beech Street Tai Kok Tsui Kowloon Hong Kong

Notes:

1. Any member of the Company entitled to attend and vote at the above meeting is entitled to appoint one or more proxies to attend and vote instead of him. A proxy need not be a member of the Company.

2. A form of proxy for use at the meeting is enclosed.

3. In order to be valid, a form of proxy, together with the power of attorney or other authority (if any) under which it is signed or a notarially certified copy thereof, must be deposited at the Company’s branch registrar and transfer office in Hong Kong, Computershare Hong Kong Investor Services Limited at Rooms 1901-5, 19th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong in accordance with the instructions printed thereon as soon as possible and in any event by not later than 48 hours before the time of the meeting, delivering of an instrument appointing a proxy shall not preclude a member of the company from attending and voting in person at the meeting or on the poll concerned and, in such event, the instrument appointing a proxy shall be deemed to be revoked.

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