Yunkang Group Limited — Proxy Solicitation & Information Statement 2003

Dec 11, 2003

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Legend Group Limited, you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer 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 disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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CONTINUING CONNECTED TRANSACTIONS

Independent Financial Adviser to the Independent Board Committee

8 December 2003

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Connected persons/connected transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Application for continuing connected transaction waiver . . . . . . . . . . . . . . . . . . . .	7
Certificate in Lieu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	10
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Letter from DBS Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	12
Appendix – General Information
Responsibility statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Disclosure of directors’ interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20
Substantial shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Material adverse change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Service contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Documents available for inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24

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DEFINITIONS

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

“associates”	has the meaning ascribed to it under the Listing Rules
“Board”	the board of Directors
“Business”	the business of manufacturing and sale of computer
	motherboard and related accessories carried out mainly
	in the PRC and Europe
“Certificate in Lieu”	a written certificate in lieu of convening a general
	meeting of shareholders of the Company signed by a
	shareholder (or shareholders) having beneficial interest
	in more than 50% in nominal value of the shares of the
	Company giving the right to attend and vote at a general
	meeting, giving its/their approval to the Continuing
	Connected Transactions
“Company”	Legend Group Limited, a company incorporated in Hong
	Kong with limited liability, the shares of which are listed
	on the Stock Exchange
“Continuing Connected	the Wu Purchase Arrangement, the Wu Sales
Transactions”	Arrangement, the Newco Purchase Arrangement and the
	Newco Sales Arrangement
“DBS Asia”	DBS Asia Capital Limited, a deemed licensed corporation
	under the SFO permitted to engage in types 1, 4, 6 and 9
	of the regulated activities as defined in the SFO, and is
	the independent financial adviser to the Independent
	Board Committee
“Directors”	the directors of the Company
“Disposal”	the proposed disposal of 50% equity interest in Newco
“Group”	the Company and its subsidiaries
“HK$”	Hong Kong dollars
“Independent Board Committee”	an independent board committee of the Company
	comprising Mr. Wong Wai Ming, Professor Woo Chia-
	Wei and Mr. Ting Lee Sen

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DEFINITIONS

“Latest Practicable Date”	8 December 2003, being the latest practicable date prior
	to the printing of this circular for ascertaining certain
	information contained herein
“Listing Rules”	The Rules Governing the Listing of Securities on the
	Stock Exchange
“Mr. Wu”	Mr. Wu To Hing, a proposed director of Newco
“Newco”	QDI Holdings Limited, a company incorporated on 25
	August 2003 in the British Virgin Islands with limited
	liability which was incorporated initially as a wholly-
	owned subsidiary of UL and will become a 50%
	subsidiary of UL upon completion of the Disposal
“PRC”	the People’s Republic of China
“Pre-Completion Reorganization”	a corporate restructuring to be undertaken by the
	Company prior to completion of the Disposal whereby
	the Business and the QDI Companies will be transferred
	to Newco
“Purchaser”	Swift Glory Limited, a company incorporated in the
	British Virgin Islands with limited liability and a wholly-
	owned subsidiary of Ramaxel
“QDI Companies”	the companies which carry on the Business and are to be
	transferred to Newco pursuant to the Pre-Completion
	Reorganization, they are Hui Yang Legend Computer
	Co. Ltd. (惠陽聯想電腦有限公司), Legend-QDI Spain,
	S.L., QDI Computer (UK) Ltd., QDI Computer Handels
	GmbH, QDI Europe B.V. and QDI System Handel GmbH
“QDI Products”	motherboards and related accessories for the manufacture
	of computers and other information technology products
“Ramaxel”	Ramaxel Technology Limited, a company incorporated
	in Hong Kong with limited liability and owned as to
	90% by Mr. Wu and as to 10% by Mr. Liu Jing Hui
“SFO”	the Securities and Futures Ordinance, Chapter 571 of
	the Laws of Hong Kong

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DEFINITIONS

“Shareholders” registered holders of shares of the Company “Stock Exchange” The Stock Exchange of Hong Kong Limited “UL” Ultimate Legend Limited, a company incorporated in the British Virgin Islands with limited liability and a whollyowned subsidiary of the Company “Waiver Application” the application made by the Company for waiver from strict compliance with the requirements under Chapter 14 of the Listing Rules in relation to the Continuing Connected Transactions “Wu Associates” the Purchaser, Mr. Wu and Ramaxel and their respective associates

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LETTER FROM THE BOARD

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Executive Directors:

Mr. Liu Chuanzhi (Chairman) Mr. Yang Yuanqing (Vice Chairman and President) Ms. Ma Xuezheng

Non-executive Director:

Mr. Zeng Maochao

Registered office: 23rd Floor Lincoln House Taikoo Place 979 King’s Road Quarry Bay Hong Kong

Independent Non-executive Directors: Mr. Wong Wai Ming Professor Woo Chia-Wei Mr. Ting Lee Sen

8 December 2003

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

INTRODUCTION

On 28 November 2003, the Board announced that UL, a wholly-owned subsidiary of the Company, entered into agreement dated 1 November 2003 with, amongst others, the Purchaser in relation to the Disposal. The Disposal, once completed, will result in certain persons being connected persons and certain transactions with such persons being connected transactions within the meanings of the Listing Rules and will then be subject to the disclosure and/or shareholders’ approval requirements under Chapter 14 of the Listing Rules.

The Directors expect that such transactions will continue on a continuing basis from year to year. The Company has applied to the Stock Exchange for waiver from strict compliance with the requirements under Chapter 14 of the Listing Rules in relation to the Continuing Connected Transactions on and subject to the terms contained in this circular.

The Company has also applied to the Stock Exchange to waive the requirement on convening a general meeting of the Company to approve the waiver for the Continuing Connected Transactions upon presentation of the Certificate in Lieu. The Company has on 27

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LETTER FROM THE BOARD

November 2003 obtained the Certificate in Lieu from Legend Holdings Limited and its whollyowned subsidiary, Right Lane Limited, which together held approximately 57% of the entire issued share capital of the Company as at the Latest Practicable Date, approving the Continuing Connected Transactions and the Waiver Application.

DBS Asia has been appointed as the independent financial adviser to the Independent Board Committee relating to the Continuing Connected Transactions.

The purposes of this circular are to provide you with, inter alia, information relating to the Continuing Connected Transactions, the Waiver Application and the letter of advice from DBS Asia to the Independent Board Committee in relation to the Continuing Connected Transactions.

BACKGROUND

UL, a wholly-owned subsidiary of the Company, has conditionally agreed on 1 November 2003 to dispose of 50% of its interest in the Business to the Purchaser at a consideration to be determined with reference to its proforma consolidated assets value as at 31 October 2003 plus a premium of RMB12.5 million, subject to Pre-Completion Reorganization to be undertaken by the Company prior to completion of the Disposal. Under the Pre-Completion Reorganization, the Business and the QDI Companies will be transferred to Newco. Subsequent to such Business transfer, the Company will be selling 50% of the issued share capital of Newco to the Purchaser, resulting in the Newco becoming a 50%:50% joint venture of UL and the Purchaser. By virtue of UL’s right to control the composition of the board of directors of Newco, subsequent to the Disposal, Newco will be regarded as an indirect non-wholly owned subsidiary of the Company. The principal activity of Newco and its subsidiaries will be the manufacture and sale of QDI Products. The requirements of Newco’s working capital to finance the Business transfer and the acquisition of the assets and equity interests in the QDI Companies will be met by UL and the Purchaser on a pro-rata basis.

The reasons for the Disposal insofar the Company is concerned are two-fold. Firstly, it has been the strategy of the Company to concentrate on its core line businesses of computer manufacturing, handset manufacturing and provision of IT services. Secondly, to lead in a strategic partner experienced in electronic component manufacturing to take up 50% interest in the QDI business will be seen by the management as beneficial to the development of the Business.

The Purchaser is a company incorporated in the British Virgin Islands which is whollyowned by Ramaxel. Ramaxel is in turn held by Mr. Wu as to 90% and by Mr. Liu Jing Hui as to 10%. Ramaxel, Mr. Wu and Mr. Liu Jing Hui are independent of and not connected with any of the directors, chief executives or substantial shareholders of the Company and its subsidiaries or any of their respective associates (as defined in the Listing Rules). Ramaxel is a developer and manufacturer of memory modules and Universal Serial Bus products (“USB”) for the manufacture of computers and related accessories in the PRC.

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LETTER FROM THE BOARD

It is one of the condition to completion of the Disposal that a waiver is to be granted by the Stock Exchange from strict compliance with the requirements under Chapter 14 of the Listing Rules in relation to the Continuing Connected Transactions.

The Disposal does not constitute a notifiable transaction or connected transaction under Chapter 14 of the Listing Rules.

CONNECTED PERSONS/CONNECTED TRANSACTIONS

The Disposal, when completed, will result in Newco, the Purchaser, Mr. Wu and Ramaxel being regarded as connected persons of the Company within the meaning of the Listing Rules.

As a result, any transactions between members of the Group and any of these connected persons or their respective associates will after the completion of the Disposal constitute connected transactions under Chapter 14 of the Listing Rules. The Continuing Connected Transactions are described below.

Sales to and Purchases from Wu Associates

Members of the Group have been purchasing information technology products such as memory modules, USB and card readers etc. for manufacture and sale of computers and related computer accessories from, and selling information technology products such as integrated circuits and other components for manufacture of memory modules and other products to, Wu Associates since 1997.

For the three financial years ended 31 March 2003, the Group purchased approximately HK$793 million, HK$893 million and HK$892 million worth of information technology products from Wu Associates, representing approximately 2.9%, 4.3% and 4.4% respectively of the Group’s total turnover in those periods. In the same periods, the Group also sold approximately HK$797 million, HK$941 million and HK$911 million worth of information technology products to Wu Associates, representing approximately 2.9%, 4.5% and 4.5% respectively of the Group’s total turnover in those periods.

The Group intends to continue to purchase from, and sell to, Wu Associates such information technology products (such purchase arrangement and selling arrangement shall be respectively referred to as “ Wu Purchase Arrangement ” and “ Wu Sales Arrangement ”) after the completion of the Disposal because the relevant products offered by each of the two groups complement the business or product requirements of the other.

The Directors currently estimate that purchases to be effected under the Wu Purchase Arrangement will not amount to more than HK$1,100 million, HK$1,200 million and HK$1,300 million for each of the three financial years ending 31 March 2006 whereas the sales to be effected under the Wu Sales Arrangement will not amount to more than HK$1,100 million, HK$1,200 million and HK$1,300 million for each of the three financial years ending 31 March 2006.

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LETTER FROM THE BOARD

Sales to and Purchases from Newco

There has been on-going consumption of QDI Products amongst the subsidiaries or associates of the Company. Such QDI Products are manufactured or produced by the QDI Companies which primarily engaged in the Business and supplied to the Company and its other subsidiaries in support of the Company’s business of manufacture and sale of computers and related accessories since 1997. On the other hand, the Company and its relevant subsidiaries have also been selling information technology products such as chipset for manufacture of motherboard to the QDI Companies since 1997.

For the three years ended 31 March 2003, purchases of the QDI Products from the QDI Companies amounted to approximately HK$825 million, HK$685 million and HK$610 million, representing approximately 3.0%, 3.3% and 3.0% respectively of the Group’s total turnover in those periods. And, sales of information technology products to the QDI Companies amounted to approximately HK$37 million, HK$179 million and HK$176 million, representing approximately 0.1%, 0.9% and 0.9% respectively of the Group’s total turnover in those periods.

It is expected that the Group will continue to purchase such QDI Products and sell such information technology products from and to Newco or its subsidiaries following the completion of the Disposal on terms comparable to the prevailing market rate and practice (the purchase arrangement and sales arrangement are referred to as “ Newco Purchase Arrangement ” and “ Newco Sales Arrangement ”).

Based on the historical consumption and the projection for future demands, the Directors currently estimate that purchases to be effected under the Newco Purchase Arrangement will not amount to more than HK$680 million, HK$770 million and HK$860 million for each of the three financial years ending 31 March 2006 whereas the sales to be effected under the Newco Sales Arrangement will not amount to more than HK$210 million, HK$230 million and HK$260 million for each of the three financial years ending 31 March 2006.

APPLICATION FOR CONTINUING CONNECTED TRANSACTION WAIVER

As the Continuing Connected Transactions will continue to be carried out in the ordinary and usual course of business of the Group, the Directors consider that it would not be practical for the Company to strictly comply with the disclosure or (where necessary) shareholders’ approval requirements under the Listing Rules applicable to the Continuing Connected Transactions on each occasion when they take place. The Company has applied to the Stock Exchange for waiver in respect of each of the Continuing Connected Transactions from strict compliance with the disclosure requirement under Rule 14.26 of the Listing Rules on and subject to the following conditions:

1. that the Continuing Connected Transactions shall be:

2. (i) entered into by the Group in the ordinary and usual course of its business;

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LETTER FROM THE BOARD

• (ii) conducted either (a) on normal commercial terms (which expression will be applied by reference to transactions of a similar nature and to be made by similar entities) or (b) (where there is no available comparison) on terms that are fair and reasonable so far as the shareholders of the Company are concerned; and

• (iii) entered into either (a) in accordance with the terms of the agreements governing such transactions or (b) (where there are no such agreements) on terms no less favourable than those available to or from independent third parties;

• the aggregate amount of the Wu Purchase Arrangement for each of the three financial years of the Company ending 31 March 2006 shall not exceed the cap amount (the “ Wu Purchase Cap Amount ”) of 5% of the audited consolidated turnover of the Group or HK$1,300 million in that financial year, whichever is higher;

• the aggregate amount of the Wu Sales Arrangement for each of the three financial years of the Company ending 31 March 2006 shall not exceed the cap amount (the “ Wu Sales Cap Amount ”) of 5% of the audited consolidated turnover of the Group or HK$1,300 million in that financial year, whichever is higher;

• the aggregate amount of the Newco Purchase Arrangement for each of the three financial years of the Company ending 31 March 2006 shall not exceed the cap amount (the “ Newco Purchase Cap Amount ”) of 4% of the audited consolidated turnover of the Group or HK$860 million in that financial year, whichever is higher;

• the aggregate amount of the Newco Sales Arrangement for each of the three financial years of the Company ending 31 March 2006 shall not exceed the cap amount (the “ Newco Sales Cap Amount ”) of 1.5% of the audited consolidated turnover of the Group or HK$260 million in that financial year, whichever is higher;

• the independent non-executive directors of the Company shall review the Continuing Connected Transactions annually and confirm in the Company’s next annual report that these were conducted in the manner as stated in sub-paragraphs 1, 2 , 3, 4 and 5 above;

• the Company’s auditors shall review the Continuing Connected Transactions annually and confirm in a letter (the “Letter”) to the Directors stating whether:

• (i) the Continuing Connected Transactions have received the approval of the Company’s board of Directors;

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LETTER FROM THE BOARD

• (ii) the Continuing Connected Transactions have been entered into in accordance with the terms of the agreements governing such transactions or, if there are no such agreements, on terms no less favourable than those available to or from independent third parties; and

• (iii) the Wu Purchase Cap Amount, the Wu Sales Cap Amount, the Newco Purchase Cap Amount and the Newco Sales Cap Amount have been exceeded;

where, for whatever reason, the auditors decline to accept the engagement or are unable to provide the Letter, the Directors shall contact the Stock Exchange immediately; and

1. in the event that the transaction value of the relevant Continuing Connected Transaction during any relevant financial year of the Company shall exceed the relevant cap amount as stated in sub-paragraphs 2, 3, 4 and 5 above, the Company will have to comply with the relevant provisions of the Listing Rules.

CERTIFICATE IN LIEU

Under Chapter 14 of the Listing Rules, the Stock Exchange will normally require, amongst other things, that the continuing connected transactions are conditional on approval by the independent shareholders of the Company in a general meeting.

The controlling shareholders of the Company which together hold approximately 57% of the entire issued share capital of the Company are Legend Holdings Limited and its whollyowned subsidiary, Right Lane Limited. According to the register of members dated 27 November 2003 and relying on the representation made by Mr. Wu, the Directors confirmed that the Purchaser, Ramaxel, Mr. Wu and their respective associates have no shareholding interest in the Company. Since no shareholder has to abstain from voting at the shareholders’ meeting to approve the Continuing Connected Transactions, the Company has accordingly applied to the Stock Exchange for a waiver from the requirement to hold a general meeting by way of a written certificate of approval by the controlling shareholders.

By the Certificate in Lieu, the controlling shareholders, Legend Holdings Limited and its wholly-owned subsidiary, Right Lane Limited, have approved the Continuing Connected Transactions and the Waiver Application.

RECOMMENDATION

The Directors confirmed that the Continuing Connected Transactions are entered into in the ordinary and normal course of business of the Group and are conducted on an arm’s length basis on normal commercial terms which the Directors consider are fair and reasonable to the Company and its shareholders as a whole.

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LETTER FROM THE BOARD

Your attention is drawn to the letter from the Independent Board Committee set out on page 11 of this circular and the letter of advice from DBS Asia to the Independent Board Committee in relation to the Continuing Connected Transactions, the text of which is set out on pages 12 to 19 of this circular.

ADDITIONAL INFORMATION

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

Yours faithfully,

For and on behalf of the Board

Legend Group Limited Liu Chuanzhi Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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8 December 2003

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

We refer to the letter from the Board set out on pages 4 to 10 of the circular of the Company dated 8 December 2003 (the “Circular”) of which this letter forms part. As the Independent Board Committee, we have been appointed to advise the Shareholders on the fairness and reasonableness of the Continuing Connected Transactions so far as the Shareholders are concerned. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

We wish to draw your attention to the letter from DBS Asia as set out on pages 12 to 19 of the Circular and the letter from the Board as set out on pages 4 to 10 of the Circular. Having considered, inter alia, the factors and reasons considered by, and the opinions of, DBS Asia as stated in its letter of advice, we consider that the terms of the Continuing Connected Transactions are fair and reasonable so far as the Shareholders are concerned.

Yours faithfully,

Independent Board Committee Wong Wai Ming Woo Chia-Wei Ting Lee Sen

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LETTER FROM DBS ASIA

16th Floor Man Yee Building 68 Des Voeux Road Central Hong Kong

8 December 2003

The Independent Board Committee Legend Group Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

We refer to our engagement as the independent financial adviser to the Independent Board Committee in relation to the Continuing Connected Transactions, details of which are contained in a circular (the “Circular”) to the Shareholders dated 8 December 2003, of which this letter forms part. Expressions used in this letter have the same meanings as defined in the Circular unless the context otherwise requires.

In formulating our recommendation, we have relied on the information and facts contained or referred to in the Circular. We have also assumed that the information and representations contained or referred to in the Circular were true and accurate at the time they were made and continue to be so at the date of the dispatch of the Circular. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors. We have also been advised by the Directors and believe that no material facts have been omitted from the Circular.

We consider that we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our recommendation. We have not, however, conducted an independent verification of the information nor have we conducted any form of in-depth investigation into the businesses and affairs or the prospects of the Company or any of its respective subsidiaries or associates or any of the Wu Associates.

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LETTER FROM DBS ASIA

PRINCIPAL FACTORS CONSIDERED

In arriving at our opinion in respect of the Continuing Connected Transactions, we have considered the following principal factors and reasons:

Background and Rationale

The Group is principally engaged in the provision of advanced information technology products and services in the PRC. We understand that prior to the Pre-Completion Reorganization, the Group has been selling raw materials required for the manufacture of information technology products to, and purchasing information technology products from QDI Companies and Wu Associates. The Group regards the Wu Associates and Newco as the Group’s original equipment manufacturers (“OEM”), responsible for manufacture of different information technology products for the Group’s assembly and manufacture of computers and other advanced information technology products. Thus all of the Continuing Connected Transactions fall within the Group’s usual and ordinary course of business. Given that Wu Associates and Newco will become connected person of the Group following completion of the Disposal, the Wu Sales Arrangement, the Wu Purchase Agreement and the Newco Sales Arrangement and the Newco Purchase Arrangement by the Group with Newco and Wu Associates will become connected transactions for the Group.

In view of the above and the fact that the nature of the Continuing Connected Transactions are all related to the Group’s principal business and operations and have been conducted amongst the parties before the Pre-Completion Reorganization, we concur with the views of the Directors that the continuation of the entering into of the Continuing Connected Transactions would facilitate the continuing business operation of the Group and minimize disruptions to the Group’s existing business and operations and the application of the Waiver Application will minimize the practical difficulties of the Company in the fulfillment of the relevant requirements for the Continuing Connected Transactions under the Listing Rules every time it occurs. Given this, we consider that the continued entering into of the Continuing Connected Transactions is in the interests of the Company and the Shareholders as a whole.

Basis of Determination

We summarise below the basis of determination for each type of the Continuing Connected Transactions and our views thereof:

• A. Wu Sales Arrangement and Wu Purchase Arrangement

The Group has been carrying on the Wu Sales Arrangement and the Wu Purchase Arrangement since 1997. We have been advised by the executive Directors that the Group regards the Wu Associates as the Group’s OEM, mainly for the manufacture of information technology products such as memory modules, USB and card readers. As per the Group’s common practice in dealings with the other independent OEM, the Wu

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LETTER FROM DBS ASIA

Sales Arrangement was and will continue to be effected on a cost basis. We have been advised by the executive Directors that it is a common practice of the Company to supply its OEM with materials at cost given the Group’s ability to enjoy the benefits of bulk purchases due to its scale of business. The Company supplies the Wu Associates and other independent OEM with relevant information technology products, such as integrated circuits and other components, at cost for use in their manufacture of memory modules, USB and other information technology products, which will in turn be purchased by the Group. We have reviewed the purchase orders of the Group to its suppliers and the sales invoices of the Group to the Wu Associates and to other independent OEM of the Group and note that similar cost arrangements have also been effected with other independent OEM of the Group.

The executive Directors considers that it more beneficial for the Company to purchase raw materials required for the manufacture of memory modules and other information technology products and sell them onward to Wu Associates at cost for their use in the production of memory modules and other information technology products. This is because the raw materials (principally integrated circuits) required for the manufacture of memory modules fluctuates throughout the year and the executive Directors consider that with the Company’s bulk purchase benefits and its ability to develop a cost effective production schedule through the supply of the raw materials to the Wu Associates, the Group could then be able to monitor and have a better control over the cost components of the products manufactured by the Wu Associates, thus in turn, could minimise the overall purchase price of the products payable by the Group underlying the Wu Purchase Arrangement. Based on the Group’s reputation, size of bulk purchase, bargaining position, experience gained in dealings with the suppliers and the market knowledge of the pricing of the required materials, the executive Directors believe that savings could be achieved by supplying raw materials to Wu Associates than having the Wu Associates to make purchase on their own.

We note from the information (principally purchase orders and invoices) provided by the management of the Company that similar sales at cost arrangement have also been effected with other independent OEM of the Group. Given the Group’s scale of business and the bulk purchase benefits, we concur with the views of the executive Directors that the Wu Sales Arrangement to be effected on a cost basis would be more beneficial to the Company as the purchase price of the products payable by the Group underlying the Wu Purchase Arrangement could be lower.

For the Wu Purchase Arrangement, we note from the information (principally invoices, purchase contracts and price quotations) provided by the management of the Company relating to the Company’s dealings with the Wu Associates as well as other independent OEM that the purchases of products have been effected on normal commercial terms that are comparable to or no less favourable than terms available to the Group as quoted by other independent third parties.

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LETTER FROM DBS ASIA

Having considered the above, particular that the terms of the Wu Sales Arrangement are in line with the normal commercial terms when dealings with other independent OEM of the Group and that the Wu Purchase Arrangement have been effected on normal commercial terms, we consider that the basis for the Wu Sales Arrangement and the Wu Purchase Arrangement is fair and reasonable so far as the Company and the Shareholders are concerned.

B. Newco Sales Arrangement and Newco Purchase Arrangement

There has been on-going consumption of QDI Products amongst the subsidiaries or associates of the Company. Such QDI Products are manufactured or produced by the QDI Companies which primarily engaged in the Business and supplied to the Company and its other subsidiaries in support of the Company’s business of manufacture and sale of computers and related accessories since 1997. On the other hand, the Company and its relevant subsidiaries have also been selling information technology products such as chipset for manufacture of motherboard to the QDI Companies since 1997.

Upon completion of the Disposal, Newco will be the holding company of the QDI Companies and Newco will be owned as to 50% by the Company and 50% by the Purchaser. By virtue of the Group’s right to control the composition of the board of directors of Newco, Newco will be regarded as an indirect non-wholly owned subsidiary of the Company. The principal activity of Newco and its subsidiaries will be the manufacture and sale of QDI Products, whilst the QDI Products are manufactured or produced by the QDI Companies and supplied to the Company and its other subsidiaries in support of the Company’s business of manufacture of computers. On the other hand, the Group has also been selling information technology products such as chipset to the QDI Companies. The executive Directors confirmed that the Group would continue to purchase such QDI Products and sell such information technology products from and to Newco or its subsidiaries following completion of the Disposal.

We have been advised by the executive Directors that the Group regards QDI Companies (and after completion of the Disposal, Newco) as the Group’s OEM, mainly responsible for the manufacture of QDI Products which are required for the Group’s manufacture of computer. Similar to the Wu Sales Arrangement, the sales to QDI Companies as well as the Newco Sales Arrangement were and will be effected on a cost basis. We have been advised by the executive Directors that it is a common practice of the Company to supply its OEMs with materials at cost because the Group is able to enjoy the benefits of bulk purchases due to its scale of business. Thus the Group supplies the QDI Companies (and after completion of the Disposal, Newco) and other independent OEM with relevant information technology products, such as chipsets and other components at cost for use in their manufacture of QDI Products, which will in turn be purchased by the Group. We have reviewed the purchase orders of the Group to its suppliers and the sales invoices of the Group to the QDI Companies and to other independent OEM of the Group and note that similar cost arrangements have also been effected with other independent OEM of the Group.

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LETTER FROM DBS ASIA

The executive Directors consider that it more beneficial for the Company to purchase raw materials required for the manufacture of modules and other information technology products and sell them onward to Newco at cost for its use in the production of QDI Products. This is because with the Group’s bulk purchase benefits, and its ability to develop a cost effective production schedule through the supply of the raw materials to Newco, the Group could then be able to monitor and have a better control over the cost components of the QDI Products, which, in turn, could minimise the overall purchase price of the QDI Products payable by the Group under the Newco Purchase Arrangement. Based on the Group’s reputation, size of bulk purchase, bargaining position, experience gained in dealings with the suppliers and the market knowledge of the pricing of the required materials, the executive Directors believe that savings could be achieved by supplying raw materials to Newco than having Newco to make purchase on its own.

We note from the information (principally purchase orders and invoices) provided by the management of the Company that similar sales at cost arrangement have also been effected with other independent OEM of the Group. Given the Group’s scale of business and the bulk purchase benefits, we concur with the views of the executive Directors that the Newco Sales Arrangement to be effected on a cost basis would be more beneficial to the Company as the purchase price of the products payable by the Group underlying the Newco Purchase Arrangement could be lower.

For the purchase from QDI Companies and the Newco Purchase Arrangement, we note from the information (principally invoices, purchase contracts and price quotations) provided by the management of the Company relating to the Company’s dealings with the QDI Companies as well as with other independent OEM that the purchases of the QDI Products have been effected on normal commercial terms that are comparable to or no less favourable than terms available to the Group as quoted by other independent third parties.

Having considered the above, particular that the terms of the Newco Sales Arrangement are in line with the normal commercial terms when dealings with other independent OEM of the Group and that the Newco Purchase Arrangement will be effected on normal commercial terms, we consider that the basis for the Newco Sales Arrangement and the Newco Purchase Arrangement is fair and reasonable so far as the Company and the Shareholders are concerned.

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LETTER FROM DBS ASIA

Cap Amount for the Continuing Connected Transactions

As a condition for the waiver granted by the Stock Exchange, details of which are set out on pages 7 to 9 of the Circular, each type of the Continuing Connected Transactions will be subject to, among other things, the relevant annual cap for each financial year up to 31 March 2006. We summarise the proposed annual cap amount for each type of the Continuing Connected Transactions with their respective historical transaction value as follows:

	Year	% of the	Year	% of the	Year	% of the
Type of Continuing	ended	Group’s	ended	Group’s	ended	Group’s
Connected Transactions	31/3/2001	turnover	31/3/2002	turnover	31/3/2003	turnover	Cap Amount
	HK$ in		HK$ in		HK$ in
	million		million		million
Wu Purchase Arrangement	793	2.9%	893	4.3%	892	4.4%	The Wu Purchase Cap
							Amount being: The higher
							of (i) HK$1,300 million or
							(ii) 5% of the Group’s
							audited consolidated
							turnover of each
							corresponding financial
							year
Wu Sales Arrangement	797	2.9%	941	4.5%	911	4.5%	The Wu Sales Cap Amount
							being: The higher of (i)
							HK$1,300 million or (ii)
							5% of the Group’s audited
							consolidated turnover of
							each corresponding
							financial year
Newco Purchase Arrangement	825	3.0%	685	3.3%	610	3.0%	The Newco Purchase Cap
							Amount being: The higher
							of (i) HK$860 million or
							(ii) 4% of the Group’s
							audited consolidated
							turnover of each
							corresponding financial
							year
Newco Sales Arrangement	37	0.1%	179	0.9%	176	0.9%	The Newco Sales Cap
							Amount being: The higher
							of (i) HK$260 million or
							(ii) 1.5% of the Group’s
							audited consolidated
							turnover of each
							corresponding financial
							year

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LETTER FROM DBS ASIA

We note that the Directors have principally determined the Cap Amounts with reference to the historical amounts of the transactions as well as their percentage to the Group’s turnover under the various sale and purchase arrangements between the Group, the Wu Associates and QDI Companies; and the estimated annual growth of the Group’s business in coming years.

As noted above, the respective percentages of each of the Continuing Connected Transactions to the Group’s turnover in that particular year was relatively steady. We note that the volume of the Wu Sales Arrangement and the Newco Sales Arrangement are principally dependent upon the volume of the Wu Purchase Arrangement and the Newco Purchase Arrangement, whilst the volume of these purchases are, in turn, principally dependent on the growth of the Group’s business. Furthermore, we note that given the respective historical percentages of each of the Continuing Connected Transactions to the Group’s turnover, the executive Directors have determined the Cap Amount with reference to the estimated turnover of the Group in coming years which, in turn, have been estimated based on the independent market consensus on the estimated annual growth of the Group’s business as estimated by independent stock brokerage firms on the Company as well as the estimated annual growth in demand for computers and related products in the PRC. On these bases, we consider it reasonable for the executive Directors to have determined the respective Cap Amount based on and with reference to these factors, including the estimated annual growth pace of the Group’s business in coming years.

• In addition, the Continuing Connected Transactions shall be:

• (a) entered into by the Group in the ordinary and usual course of its business;

• (b) entered into either (i) on normal commercial terms; or (ii) (where there is no available comparison) on terms that are fair and reasonable so far as the Shareholders are concerned; and

• (c) carried out in accordance with the terms of the respective agreements governing such transaction or (where there are no such agreements) on terms no less favourable than terms available to or from independent third parties.

Details of the transactions in each financial year as required under Rule 14.25(1) of the Listing Rules shall be disclosed in the Company’s annual report together with a statement of opinion of the independent non-executive Directors and the auditors of the Company referred as above. Based on the above, we consider that the interests of the Shareholders will be properly safeguarded.

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LETTER FROM DBS ASIA

RECOMMENDATION

Having considered the principal factors and reasons referred to the above, we consider that the Continuing Connected Transactions are in the interests of the Company and the Shareholders as a whole and the terms thereof as well as the respective Cap Amounts are fair and reasonable so far as Company and the Shareholders are concerned.

Yours faithfully, For and on behalf of DBS ASIA CAPITAL LIMITED Alex Lau Flavia Hung Managing Director Director

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GENERAL INFORMATION

APPENDIX

RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable inquires, that to the best of their knowledge, opinions expressed herein have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement contained herein misleading.

DISCLOSURE OF DIRECTORS’ INTERESTS

As at the Latest Practicable Date, the interests and short positions of the directors and chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register maintained under Section 352 of the SFO were as follows:

Long position in the shares of the Company

Interests in the shares/ underlying shares Note Liu Chuanzhi Shares Share options 1 Zeng Maochao Shares Share options 1 Yang Yuanqing Shares Share options 1 Ma Xuezheng Shares Share options 1	Capacity and number of shares/underlying shares held	Capacity and number of shares/underlying shares held
	Personal Family interests interests 16,010,000 976,000 5,250,000 – 8,080,000 600,000 1,600,000 – 10,200,000 – 11,250,000 – 20,714,000 2,360,000 6,120,000 –	Aggregate interests 16,986,000 5,250,000
		22,236,000 8,680,000 1,600,000
		10,280,000 10,200,000 11,250,000
		21,450,000 23,074,000 6,120,000
		29,194,000

Note:

1. Particulars of interests in the share options of the Company are set out under the sub-section headed “Share options to subscribe for shares in the Company” below. Please refer to the Company’s 2002/03 annual report for details of share option scheme.

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GENERAL INFORMATION

APPENDIX

Share options to subscribe for shares in the Company

	Options held	Exercise
	at the Latest	price
	Practicable Date	per share	Grant date	Exercise period
		HK$
Old Option Scheme
Liu Chuanzhi	2,250,000	2.876	31/8/2001	31/8/2001 to 30/8/2011
Yang Yuanqing	6,000,000	4.072	16/4/2001	16/4/2001 to 15/4/2011
	2,250,000	2.876	31/8/2001	31/8/2001 to 30/8/2011
Ma Xuezheng	2,920,000	4.072	16/4/2001	16/4/2001 to 15/4/2011
	1,600,000	2.876	31/8/2001	31/8/2001 to 30/8/2011
New Option Scheme
Liu Chuanzhi	3,000,000	2.245	26/4/2003	26/4/2003 to 25/4/2013
Zeng Maochao	1,600,000	2.245	26/4/2003	26/4/2003 to 25/4/2013
Yang Yuanqing	3,000,000	2.245	26/4/2003	26/4/2003 to 25/4/2013
Ma Xuezheng	1,600,000	2.245	26/4/2003	26/4/2003 to 25/4/2013

Long position in the shares of Digital China Holdings Limited

Liu Chuanzhi Zeng Maochao Ma Xuezheng	Capacity and number of shares held
	Personal Family Aggregate interests interests interests 1,496,000 97,600 1,593,600 808,000 60,000 868,000 1,046,400 – 1,046,400

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GENERAL INFORMATION

APPENDIX

Save as disclosed above, as at the Latest Practicable Date, none of the directors, chief executive of the Company or their associates had any interests or short positions in the shares, underlying shares or debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which were recorded in the register maintained under Section 352 of the SFO.

Save as disclosed in this circular,

• i. none of the Directors is materially interested in any contract or arrangement subsisting as at the date of this circular which is significant in relation to the business of the Group; and

• ii. none of the Directors, nor DBS Asia has any direct or indirect interest in any assets which have, since 31 March 2003 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group.

SUBSTANTIAL SHAREHOLDERS

As at the Latest Practicable Date, the interests or short positions of each person, other than the directors and chief executive of the Company, in the shares and underlying shares of the Company as recorded in the register maintained under Section 336 of the SFO were as follows:

Legend Holdings Limited_(note 1) Employees’ Shareholding Society of Legend Holdings Limited (note 3)_	Long/short position	Capacity and number of shares held Beneficial Corporate Aggregate long/ Percentage owner interests short position (note 4)
	Long position 2,787,340,724 1,469,311,247 4,256,651,971 56.9% (note 2) Short position 119,704,000 – 119,704,000 1.6% Long position – 4,256,651,971 4,256,651,971 56.9% Short position – 119,704,000 119,704,000 1.6%

Notes:

1. The English company name “Legend Holdings Limited” is a direct transliteration of its Chinese company name.

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APPENDIX

GENERAL INFORMATION

1. The shares were beneficially held by Right Lane Limited, a direct wholly-owned subsidiary of Legend Holdings Limited.

2. Employees’ Shareholding Society of Legend Holdings Limited is an equity holder of Legend Holdings Limited which in turn wholly owns Right Lane Limited. Therefore, it is taken to be interested, or has short positions, in any shares in which they are interested or have short positions.

3. The calculation of percentage figure is based on the aggregate long/short position as a percentage of the number of shares of the Company in issue as at the Latest Practicable Date. The percentage figure is cut off at 1 decimal place and without round up.

Save as disclosed above, as at the Latest Practicable Date, no other interests or short positions in the shares or underlying shares of the Company were recorded in the register maintained under Section 336 of the SFO.

EXPERT

Name

Qualifications

DBS Asia

a deemed licensed corporation under the SFO permitted to engage in types 1, 4, 6 and 9 of the regulated activities as defined in the SFO

DBS Asia has given and has not withdrawn its respective consents to the issue of this circular with the inclusion of its report and/or letter and/or references to its name in the form and context in which they respectively appear.

DBS Asia does not have any shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for shares in any member of the Group.

MATERIAL ADVERSE CHANGE

The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 March 2003, the date to which the latest published audited accounts of the Group were made up.

SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered into any service contracts with any member of the Group (excluding contracts expiring or determinable by the Group within one year without payment of compensation (other than statutory compensation)).

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GENERAL INFORMATION

APPENDIX

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours on weekdays (excluding Saturday and public holidays) at the registered office of the Company at 23/F., Lincoln House, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong from 11 December 2003 to 6 January 2004.

• the letter from the Independent Board Committee; and

• the letter from DBS Asia.

– 24 –