(Stock Code: 605) - Tricor · 4/29/2011 · A letter from the Board is set out on pages 7 to 53 of...

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

If you have sold or transferred all your shares in K.P.I. Company Limited (the “Company”), you should at once hand thiscircular with the enclosed forms of proxy to the purchaser or transferee or to the bank, licensed securities dealer or otheragent through whom the sale or transfer was effected for transmission to the purchaser or the transferee.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase, orsubscribe for the securities of the Company.

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

K.P.I. COMPANY LIMITED(Incorporated in Hong Kong with limited liability)

(Stock Code: 605)

(1) MAJOR AND CONNECTED TRANSACTION;

(2) WHITEWASH WAIVER;

(3) PROPOSED CHANGE OF COMPANY NAME; AND

(4) NOTICES OF EXTRAORDINARY GENERAL MEETINGS

Financial Adviser to the Company

Independent financial adviser to the Independent Board Committee,the Whitewash Independent Board Committee

and the Independent Shareholders

A letter from the Board is set out on pages 7 to 53 of this circular. A letter from the Independent Board Committee (as definedin this circular) containing its recommendation to the Independent Shareholders is set out on page 54 of this circular. A letterfrom the Whitewash Independent Board Committee (as defined in this circular) containing its recommendation to theIndependent Shareholders is set out on pages 55 to 56 of this circular. A letter from Quam Capital containing its advice tothe Independent Board Committee, the Whitewash Independent Board Committee and the Independent Shareholders is setout on pages 57 to 86 of this circular.

A notice convening the First EGM to be held on 18 May 2011 (Wednesday) at 11:15 a.m. at Boardroom V, Ground Floor,Renaissance Harbour View Hotel, No. 1 Harbour Road, Wanchai, Hong Kong is set out on pages EGM-1 to EGM-2 of thiscircular. A notice convening the Second EGM to be held on 23 June 2011 (Thursday) at 11:00 a.m. at Suite 5606, 56/F.,Central Plaza, 18 Harbour Road, Wanchai, Hong Kong is set out on pages EGM-3 to EGM-4 of this circular. Whether or notyou are able to attend either or both the First EGM and the Second EGM, you are requested to complete and return theenclosed proxy forms in accordance with the instructions printed thereon to the office of the share registrar and transferoffice of the Company, Tricor Tengis Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kongas soon as possible and in any event not less than 48 hours before the time appointed for holding the First EGM and theSecond EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy shall not precludeyou from attending and voting in person at the First EGM and the Second EGM or any adjourned meeting thereof (as thecase may be) should you so desire.

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

29 April 2011

Page

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Letter from the Whitewash Independent Board Committee . . . . . . . . . . . . . . . . . 55

Letter from Quam Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Appendix I – Financial Information of the Group . . . . . . . . . . . . . . . . . . . . I-1

Appendix II – Financial Information of the Target Group . . . . . . . . . . . . . . II-1

Appendix III – Unaudited Pro Forma Financial

Information of the Enlarged Group. . . . . . . . . . . . . . . . . . . III-1

Appendix IV – Reports on the 2011 Profit Guarantee . . . . . . . . . . . . . . . . . . IV-1

Appendix V − Independent Valuation Report. . . . . . . . . . . . . . . . . . . . . . . . . V-1

Appendix VI – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VI-1

Notice of the First EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EGM-1

Notice of the Second EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EGM-3

CONTENTS

– i –

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

following meanings:

“2011 Audited Net Profit” the consolidated net profit after taxation (excluding

non-controlling interest) of the Target Group for the year

ending 31 December 2011, to be audited in accordance

with the HKFRS

“Acquisition” the proposed acquisition of the Sale Share and the Sale

Loan by the Purchaser pursuant to the Acquisition

Agreement

“Acquisition Agreement” the acquisition agreement dated 27 January 2011 (as

supplemented by a supplemental agreement dated 25

February 2011) entered into among the Company, the

Purchaser and the Vendor in relation to the Acquisition

“acting in concert” has the meaning ascribed to it in the Takeovers Code

“Announcement” the announcement dated 7 March 2011 issued by the

Company in relation to, among others, the Acquisition,

the Whitewash Waiver and Change of Company Name

“associate(s)” has the meaning ascribed thereto under the Listing Rules

“Board” the board of Directors

“Business Day” a day (other than a Saturday or Sunday) on which banks

in Hong Kong are open for business

“BVI” the British Virgin Islands

“Change of Company Name” the proposed change of the Company’s name

“Company” K.P.I. Company Limited, a company incorporated in

Hong Kong with limited liability, the issued Shares of

which are listed on the Main Board of the Stock

Exchange

“Completion” completion of the Acquisition in accordance with the

Acquisition Agreement

DEFINITIONS

– 1 –

“Completion Date” the date on which the Completion takes place, being the

fifth Business Day after the conditions precedent under

the Acquisition Agreement have been fulfilled or waived

(as the case may be)

“connected person(s)” has the meaning ascribed thereto under the Listing Rules

“Consideration” HK$600 million, being the total consideration for the

Acquisition

“Consideration Share(s)” 1,250,000,000 new Shares to be allotted and issued by the

Company to the Vendor (or his nominee(s)) on the

Completion Date as part of the Consideration

“Director(s)” director(s) of the Company

“Enlarged Group” the Group as enlarged by the Target Group

“Executive” the Executive Director of the Corporate Finance Division

of the Securities and Futures Commission of Hong Kong

or any of his delegates

“First EGM” the first extraordinary general meeting of the Company to

be convened and held on 18 May 2011 (Wednesday) at

11:15 a.m. at Boardroom V, Ground Floor, Renaissance

Harbour View Hotel, No. 1 Harbour Road, Wanchai,

Hong Kong for the Independent Shareholders to consider

and, if thought fit, approve (i) the Acquisition Agreement

and the transactions contemplated thereunder and (ii) the

Whitewash Waiver

“Gangjia Huitong Co” Beijing Gangjia Huitong Management Consultancy

Company Limited# (北京港佳匯通財務諮詢有限公司)

“Group” the Company and its subsidiaries

“HK$” Hong Kong dollars, the lawful currency of Hong Kong

“HKFRS” Hong Kong Financial Reporting Standard

“Hong Kong” the Hong Kong Special Administrative Region of the

PRC

DEFINITIONS

– 2 –

“Huaxia Xingye Co” Beijing Huaxia Xingye Investment Guarantee Company

Limited# (北京華夏興業投資擔保有限公司)

“Huifeng Rongjin Co” Beijing Huifeng Rongjin Credit Finance Company

Limited# (北京惠豐融金小額貸款有限公司)

“Independent Board Committee” the independent committee of the Board established by

the Company consisting of all the independent non-

executive Directors, namely Mr. Wang Jian Sheng, Mr.

Chan Chun Keung and Mr. Tsang Kwok Wai, to advise

the Independent Shareholders on the fairness and

reasonableness of terms of the Acquisition Agreement,

and to advise the Independent Shareholders how to vote

at the First EGM

“Independent Shareholders” Shareholders other than Mr. Cheung and parties acting in

concert with him and his associates and any parties

involved or interested in the Acquisition and the

Whitewash Waiver

“Independent Third Party(ies)” a party(ies) who is/are independent of and is/are not

connected with any of the directors, chief executives or

substantial shareholders of the Company or any of its

subsidiaries or any of their respective associates

“Last Trading Day” 27 January 2011, being the last day on which the Shares

were traded on the Stock Exchange prior to suspension of

trading in the Shares pending release of the

Announcement

“Latest Practicable Date” 27 April 2011, being the latest practicable date prior to

the printing of this circular for ascertaining certain

information contained herein

“Listing Committee” the listing sub-committee of the board of directors of the

Stock Exchange

“Listing Rules” the Rules Governing the Listing of Securities on the

Stock Exchange

“Mr. Cheung” or “Vendor” Mr. Cheung Siu Lam, being the Chairman of Board, an

executive Director, the controlling Shareholder and the

sole beneficial owner of the Target Company

DEFINITIONS

– 3 –

“PRC” the People’s Republic of China, which for the purpose of

this circular, shall exclude Hong Kong, the Macau

Special Administrative Region of the PRC and Taiwan

“PRC Legal Adviser” Dacheng Law Offices, a legal adviser engaged by the

Company in respect of PRC laws in relation to the

Acquisition

“Purchaser” K.P.B. Group Holdings Limited, a company incorporated

in the BVI with limited liability, being a wholly-owned

subsidiary of the Company

“Quam Capital” Quam Capital Limited, a licensed corporation to conduct

type 6 (advising on corporate finance) regulated activity

under the SFO, being the independent financial adviser to

the Independent Board Committee, the Whitewash

Independent Board Committee and the Independent

Shareholders in respect of the Acquisition and the

Whitewash Waiver

“Relevant Period” the period commencing on the date falling six months

immediately prior to the date of the Announcement and

ending on the Latest Practicable Date

“RMB” Renminbi, the lawful currency of the PRC

“Sale Loan” the aggregate amount of all the actual, contingent or

deferred liabilities, obligations and indebtedness owed by

the Target Group to the Vendor as at the Completion Date

“Sale Share” the one ordinary share of US$1 in the share capital of the

Target Company, being the entire issued share capital of

the Target Company

“Second EGM” the second extraordinary general meeting of the

Company to be convened and held on 23 June 2011

(Thursday) at 11:00 a.m. at Suite 5606, 56/F., Central

Plaza, 18 Harbour Road, Wanchai, Hong Kong for the

Shareholders to consider and, if thought fit, approve the

Change of Company Name

“SFC” the Securities and Futures Commission

DEFINITIONS

– 4 –

“SFO” Securities and Futures Ordinance (Chapter 571 of the

Laws of Hong Kong)

“Share(s)” share(s) of HK$0.10 each in the share capital of the

Company

“Shareholder(s)” holder(s) of the Share(s)

“Stock Exchange” The Stock Exchange of Hong Kong Limited

“Takeovers Code” the Code on Takeovers and Mergers

“Target Company” K.P. Financial Group Limited, a company incorporated in

the BVI with limited liability

“Target Group” the Target Company and its subsidiaries as at the date of

the Acquisition Agreement including, for the avoidance

of doubt, Huifang Rongjin Co and Huaxia Xingye Co

“US$” United States dollars, the lawful currency of the United

States of America

“Whitewash Independent Board

Committee”

the independent committee of the Board established by

the Company comprising the non-executive Director and

all the independent non-executive Directors, namely Mr.

Liu Hui, Mr. Wang Jian Sheng, Mr. Chan Chun Keung

and Mr. Tsang Kwok Wai, to advise the Independent

Shareholders on the fairness and reasonableness of terms

of the Acquisition Agreement and the Whitewash Waiver,

and to advise the Independent Shareholders how to vote

at the First EGM

“Whitewash Wavier” a waiver from the Executive pursuant to Note 1 on

Dispensations from Rule 26 of the Takeovers Code to

waive the obligation of Mr. Cheung and parties acting in

concert with him to make a mandatory general offer for

all the Shares not already owned or agreed to be acquired

by them which would otherwise arise as a result of the

issue of the Consideration Shares pursuant to the

Acquisition Agreement

“%” per cent.

# The English name is not an official name and is provided for reference only

DEFINITIONS

– 5 –

If there is any inconsistency between the Chinese names of PRC entities, departments,

facilities or titles mentioned in this circular and their English translation, the Chinese version

shall prevail.

Unless the context requires otherwise, all amounts in RMB are translated into HK$ at an

exchange rate of RMB1: HK$1.176, all amounts in US$ are translated into HK$ at an exchange

rate of US$1: HK$7.78. Such translation should not be construed as a representation that the

amount in question has been, could have been or could be converted at any particular rate at

all.

DEFINITIONS

– 6 –


(Stock Code: 605)

Executive Directors:

Mr. Cheung Siu Lam (Chairman)

Mr. Chan Yuk Ming (Vice Chairman)

Madam Lo Wan

Non-executive Director

Mr. Liu Hui

Independent non-executive Directors:

Mr. Wang Jian Sheng

Mr. Chan Chun Keung

Mr. Tsang Kwok Wai

Registered Office and Principal Place of

Business in Hong Kong:

Suite 5606

56th Floor

Central Plaza

18 Harbour Road

Wanchai

Hong Kong

29 April 2011

To the Shareholders

Dear Sir or Madam,

(1) MAJOR AND CONNECTED TRANSACTION;

(2) WHITEWASH WAIVER; AND

(3) PROPOSED CHANGE OF COMPANY NAME

1. INTRODUCTION

On 7 March 2011, the Company announced that on 27 January 2011, the Company and

the Purchaser (being a wholly-owned subsidiary of the Company) entered into the Acquisition

Agreement with the Vendor, pursuant to which the Purchaser conditionally agreed to acquire

and the Vendor conditionally agreed to sell the Sale Share, representing the entire issued share

capital of K.P. Financial Group Limited, and the Sale Loan at the Consideration of HK$600

million.

LETTER FROM THE BOARD

– 7 –

Pursuant to the Acquisition Agreement, the Consideration shall be satisfied as to (i)

HK$500 million by the allotment and issue of 1,250,000,000 Consideration Shares to the

Vendor (or his nominee(s)) at an issue price of HK$0.4 per Share, credited as fully paid, on the

Completion Date; and (ii) the balance of HK$100 million by the Purchaser in cash, either

one-off or by such number of instalments and amount as determined by the Purchaser, within

six months after the Completion Date. The Consideration Shares represent approximately

71.55% of the existing issued share capital of the Company and approximately 41.71% of the

issued share capital of the Company as enlarged by the allotment and issue of the Consideration

Shares.

The Board also announces that it intended to put forward a proposal to the Shareholders

to change its name from “K.P.I. Company Limited 港佳控股有限公司” to “China Financial

Services Holdings Limited 中國金融投資管理有限公司”.

The purposes of this circular are to provide you with, among other things, (i) further

details of the Acquisition and the Whitewash Waiver; (ii) the letter from Quam Capital

containing its advice to the Independent Board Committee, the Whitewash Independent Board

Committee and the Independent Shareholders on the Acquisition and the Whitewash Waiver;

(iii) the recommendation of the Independent Board Committee regarding the Acquisition to the

Independent Shareholders; (iv) the recommendation of the Whitewash Independent Board

Committee regarding the Acquisition and the Whitewash Waiver to the Independent

Shareholders; (v) the financial information of the Group; (vi) the financial information of the

Target Group; (vii) the unaudited pro forma financial information of the Enlarged Group; (viii)

the reports on the 2011 Profit Guarantee; (ix) the Change of Company Name; (x) other

information as required by the Takeovers Code and the Listing Rules; (xi) the notice of the First

EGM; and (xii) the notice of the Second EGM.

2. THE ACQUISITION

The Acquisition Agreement

Date: 27 January 2011 (as supplemented on 25 February 2011)

Parties:

Purchaser: K.P.B. Group Holdings Limited, being a wholly-owned

subsidiary of the Company

Issuer: the Company

Vendor: Mr. Cheung

Mr. Cheung is the Chairman of the Board, an executive Director and the controlling

Shareholder, and together with his associates, beneficially interested in 681,967,796 Shares,

representing approximately 39.04% of the issued share capital of the Company as at the Latest

Practicable Date. Accordingly, the Vendor is a connected person of the Company under the

Listing Rules.


– 8 –

Assets to be acquired

(1) The Sale Share: being the entire issued share capital of the Target Company which

indirectly has beneficial interests in 70% of the equity interests in Huifeng Rongjin Co

and 100% of the equity interests in Huaxia Xingye Co through a set of agreements as set

out in the paragraph headed “Information on Gangjia Huitong Co” under the section

headed “Information on the Target Group” below; and

(2) The Sale Loan: being all the liabilities, obligations and indebtedness owed by the Target

Group to the Vendor.

Upon Completion, the entire registered capital of Huaxia Xingye Co will have been

transferred to the Company or its wholly owned subsidiary as it is one of the conditions

precedent under the Acquisition Agreement. The Target Company, which has indirect beneficial

interests in 70% of the equity interests in Huifeng Rongjin Co, and Huaxia Xingye Co will

become wholly-owned subsidiaries of the Company and the financial results of the Target

Group including Huaxia Xingye Co will be consolidated into the Group’s financial statements

upon Completion.

The consideration for the Acquisition

The consideration for the Sale Share (the “Sale Share Consideration”) is

HK$597,475,010 and the consideration for the Sale Loan (the “Sale Loan Consideration”) is

HK$2,524,990, representing a total consideration of HK$600 million, which shall be satisfied

as to (i) HK$500 million by the allotment and issue of 1,250,000,000 Consideration Shares to

the Vendor (or his nominee(s)) at an issue price of HK$0.4 per Share, credited as fully paid,

on the Completion Date; and (ii) the balance of HK$100 million by the Purchaser in cash,

either one-off or by such number of instalments and amount as determined by the Purchaser,

within 6 months after the Completion Date. The Company intends to satisfy the cash portion

of the Consideration using its internal resources.

Conditions precedent to the Acquisition Agreement

Completion of the Acquisition is conditional upon the fulfilment or to the applicable

extent, waiver of the following conditions:

(i) the Listing Committee granting the listing of and permission to deal in the

Consideration Shares;

(ii) the Purchaser being satisfied with the due diligence review to be conducted on the

Target Group;

(iii) the Independent Shareholders passing the resolutions by poll at the First EGM

approving (a) the Acquisition and the transactions contemplated thereunder; and (b)

the Whitewash Waiver;


– 9 –

(iv) the Purchaser having received a PRC legal opinion, in form and substance

satisfactory to the Purchaser, in relation to (including but not limited to) each of the

PRC incorporated entities of the Target Group;

(v) the registered capital of Huaxia Xingye Co having been transferred to the Company

or its wholly owned subsidiary;

(vi) all representations and warranties given by the Vendor under the Acquisition

Agreement being true and correct in all material aspects;

(vii) the Executive having granted and not having withdrawn the Whitewash Waiver, and

all the conditions (if any) of such approval and/or waiver having been satisfied; and

(viii) all necessary consent, authorizations, permissions, approvals in respect of the

transactions and other matter contemplated under the Acquisition Agreement having

been obtained.

If any of the above conditions precedent is not fulfilled or waived by the Purchaser on or

before 30 June 2011 or such later date as may be agreed in writing between the parties to the

Acquisition Agreement, the Acquisition Agreement shall lapse and be of no further effect (save

for the confidentiality clause which requires the parties to the Acquisition Agreement to keep

all information in relation to the Acquisition confidential will remain in effect) and no party

shall have any claim against, or liability or obligation to, the other party save in respect of any

antecedent breaches of the Acquisition Agreement. Pursuant to the Acquisition Agreement, the

Purchaser may at any time waive in writing conditions (ii), (iv) and (vi) above. The other

conditions are not capable of being waived. As at the Latest Practicable Date, none of the

conditions precedent have been fulfilled and the Company does not have any intention to waive

any of the conditions (ii), (iv) and (vi) above.

Nomination rights

The Vendor undertakes in favour of the Purchaser that, after signing of the Acquisition

Agreement, the Vendor shall procure companies under the Target Group to appoint persons

nominated by the Purchaser as legal representative, director(s) and secretary, so as to enable

the Purchaser to exercise operation right over and to make financial decision on the Target

Group; and to change specimen signatures of bank accounts under the name of the companies

under the Target Group in accordance with the request of the Purchaser.

However, if the Acquisition Agreement is rescinded by the Purchaser before Completion

or the conditions precedent under the Acquisition Agreement cannot be fulfilled or waived on

or before 30 June 2011 or such later date as may be agreed in writing between the parties to

the Acquisition Agreement (as the case may be), the Purchaser shall procure the legal

representative, director and secretary of the companies under the Target Group so appointed

pursuant to the nomination by the Purchaser after signing of the Acquisition Agreement to

resign, and shall change the specimen signatures of the bank accounts under the name of the

companies under the Target Group in accordance with the request of the Vendor so as to enable

the Vendor to resume the operation right over and to make financial decision on the Target

Group.


– 10 –

Completion

Completion shall take place on the fifth Business Day after the conditions precedent

under the Acquisition Agreement have been fulfilled or waived (as the case may be).

Profit guarantee

The Vendor irrevocably guarantees and warrants to the Purchaser that the 2011 Audited

Net Profit for the year ending 31 December 2011 (the “Guarantee Period”) shall not be less

than HK$80 million (the “2011 Profit Guarantee”).

In the event that the 2011 Audited Net Profit is less than the 2011 Profit Guarantee, the

Vendor shall compensate to the Purchaser an amount equivalent to 5.5 times of the shortfall in

cash within 7 days from the date of issue of the audited accounts of the Target Group for the

Guarantee Period which shall be available within 3 months from the financial year end date.

The compensation multiple of 5.5 times was determined after arm’s length negotiations

between the Company and the Vendor with reference to (i) the difference between the Sale

Share Consideration of HK$597,475,010 and the net asset value of the Target Group and (ii)

the 2011 Profit Guarantee. The rationale for using only the Sale Share Consideration is that the

Sale Loan Consideration represents a dollar to dollar repayment for the amount of the Sale

Loan as a debt and is not related to the profitability of the Target Group. The difference

between the Sale Share Consideration and the net asset value of the Target Group represents

the amount of premium paid for the Target Group. The maximum amount of compensation

under the 2011 Profit Guarantee is HK$440,000,000. It is intended that, if the Target Group is

unable to realise any consolidated net profit after taxation (excluding non-controlling interest)

in the Guarantee Period, the maximum amount of compensation under the 2011 Profit

Guarantee of HK$440,000,000 would be adequate to compensate the Company for amount of

premium paid as mentioned above.

An undertaking has been given by Madam Lo Wan, the spouse of the Vendor, to the

Company that if the Vendor fails to pay for any liability which may arise under the 2011 Profit

Guarantee, she shall pay such liability on behalf of the Vendor. The Directors have assessed the

financial position of the Vendor and his spouse in the event that the Vendor is required to pay

any compensation under the 2011 Profit Guarantee. The Directors have taken into account the

followings: (i) the market value of the 681,967,796 Shares currently held by Mr. Cheung,

Madam Lo Wan (the spouse of Mr. Cheung) and Arbalice Holdings Limited (a company

beneficially owned as to 60% by Mr. Cheung and 40% by Madam Lo Wan) was approximately

HK$306.9 million based on the closing price of HK$0.450 as quoted on the Stock Exchange

on the Last Trading Day (the market value of such Shares was approximately HK$354.6

million based on the closing price of HK$0.520 as quoted on the Stock Exchange on the Latest

Practicable Date), (ii) the market value of other marketable securities and cash held by Mr.

Cheung and Madam Lo Wan was over HK$200 million as at 31 March 2011; and (iii) upon

Completion, Mr. Cheung will receive the Consideration of HK$100 million in cash and

1,250,000,000 Shares, the market value of which was approximately HK$562.5 million based

on the closing price of HK$0.450 as quoted on the Stock Exchange on the Last Trading Day

(the market value of such Shares was approximately HK$650 million based on the closing price

of HK$0.520 as quoted on the Stock Exchange as at the Latest Practicable Date). The total


– 11 –

value of the above assets of Mr. Cheung and Madam Lo Wan was approximately HK$1,169

million, which is well above the maximum amount of compensation of HK$440,000,000 under

the 2011 Profit Guarantee. In view of that, the Board considers that Mr. Cheung should have

sufficient financial resources to honour his obligation under the 2011 Profit Guarantee. In order

to secure and honour his obligation under the 2011 Profit Guarantee, Mr. Cheung has given an

undertaking to the Company and the Purchaser that he shall charge all the Consideration Shares

in favour of the Group upon Completion by executing a share charge and depositing the share

certificates of the Consideration Shares with the relevant transfer documents signed in blank

by Mr. Cheung such that in the event of a default by Mr. Cheung under the 2011 Profit

Guarantee, the Group has the right to enforce the share charge by having the power to dispose

of and deal with the Consideration Shares in order to realise the money to meet any shortfall

under the 2011 Profit Guarantee. Mr. Cheung has also undertaken to provide further security

and assurances as the Group shall consider necessary to secure his obligations under the 2011

Profit Guarantee. As advised by the legal advisor of the Company as to Hong Kong law, the

Directors are satisfied that the undertaking given by Mr. Cheung and Madam Lo Wan are duly

executed and are legal, valid and enforceable against Mr. Cheung and Madam Lo Wan

respectively, and the undertaking will continue to remain enforceable against Mr. Cheung and

Madam Lo Wan until the 2011 Profit Guarantee is fulfilled in full. In view of the substantial

number of Shares that may be involved in order for the Vendor to pay any compensation under

the 2011 Profit Guarantee, the trading price of the Shares may be subject to volatility.

The 2011 Profit Guarantee is deemed as a profit forecast under Rule 10 of the Takeovers

Code and therefore has to be reported on by the auditors or consultant accountants and the

financial adviser of the Company as required by the Takeovers Code. The 2011 Profit

Guarantee has been reported on in accordance with the Takeovers Code by CCIF CPA Limited,

the Company’s auditors, and Ample Capital Limited, the financial adviser of the Company. The

reports on the 2011 Profit Guarantee are set out in Appendix IV to this circular.

As advised by the Vendor, the management of the Target Group (the “Target Group

Management”) prepared the forecast for the 2011 Profit Guarantee of HK$80 million based on

the available funding, market interest rates and budgets for operating expenditures of each of

the three main business units as set out in the section headed “Business Model of the Target

Group”, taking into account any impact on the results of operations of applicable PRC laws and

regulations and applicable accounting standards. As most of the principal operating

subsidiaries of the Target Group only commenced their operations recently, the 2011 Profit

Guarantee represented an estimation by the Target Group Management only and was not based

on the historical performance of the Target Group or contracts on hand of the Target Group.

Based on the information provided by the Vendor, the Target Group Management has adopted

the following assumptions in the preparation of the 2011 Profit Guarantee:

1. The Target Group is able to secure sufficient funding from banks and other parties

pursuant to existing agreements, undertakings and banking facilities, which are

revocable by the bank, during the Guarantee Period. These funding will be utilised

by the Target Group through lending to borrowers by way of small loans or entrusted

loans services, or placing in banks as guarantee deposits in carrying out loan

guarantee services.

2. There will be no material change in the economic environment that would affect the

demand for small loan, entrusted loan and loan guarantee service in the locations in

which the Target Group operates.


– 12 –

3. The benchmark lending rate as published by the People’s Bank of China (the

“PBOC benchmark lending rate”) does not increase materially from the forecasted

rates of 5.81-7% during the Guarantee Period.

4. There will be neither material deterioration of creditability of a significant portion

of the Target Group’s clients, nor material deterioration in the prices of their pledged

assets.

5. There will be no change in the existing laws and regulations that would materially

affect the business model of the Target Group during the Guarantee Period.

6. There will be no material changes in the bases or rates of taxation in the PRC.

7. The Target Group’s business and operation will not be severely interrupted by any

unforeseeable factors or unforeseen reasons that are beyond the control of the Target

Group, including but not limited to the occurrence of natural disasters or

catastrophes (such as flood or typhoons), or serious accidents.

The Board has reviewed the 2011 Profit Guarantee and its underlying assumptions listed

above, and is satisfied that these assumptions have been made with due care and objectivity on

a reasonable basis.

In the event that the 2011 Audited Net Profit is less than the 2011 Profit Guarantee of

HK$80 million, the Vendor shall compensate to the Purchaser an amount equivalent to 5.5

times of the shortfall in cash, and the Company will publish an announcement in respect of this

in accordance with Rule 2.07C of the Listing Rules and will include details in the annual report

of the Company for the year ending 31 December 2011. The independent non-executive

Directors will provide an opinion in the annual report of the Company for the year ending 31

December 2011 as to whether the Vendor has fulfilled his obligations for the 2011 Profit

Guarantee under the Acquisition Agreement.

Non-competition undertaking

Within two years from the Completion Date, the Vendor undertakes to the Purchaser that

he shall not, and shall procure his associates and connected persons not to, in any capacity,

whether directly or indirectly, engage in (i) the existing business of the Target Group, namely

provision of loan and guarantee services in the PRC; and (ii) any other business in the PRC

similar to any business carried on by any member of the Target Group at the date of the

Acquisition Agreement in which he shall have been actively involved in the year prior to

Completion.

Consideration Shares

The 1,250,000,000 Consideration Shares represent approximately 71.55% of the existing

issued share capital of the Company and approximately 41.71% of the issued share capital of

the Company as enlarged by the allotment and issue of the Consideration Shares.


– 13 –

The Consideration Shares, when allotted and issued shall rank pari passu in all respects

with all other Shares in issue on the date of allotment and issue of the Consideration Shares

including the right to all dividends, distributions and other payments made or to be made, the

record date for which falls on or after the date of such allotment and issue. There will be no

restriction on the subsequent sale of the Consideration Shares.

The issue price of HK$0.40 per Consideration Share was determined after arm’s length

negotiation among the parties to the Acquisition Agreement and represents:

(i) a discount of approximately 11.1% to the closing price of HK$0.450 per Share as

quoted on the Stock Exchange on the Last Trading Day;

(ii) a discount of approximately 10.5% to the average of the closing prices of HK$0.447

per Share as quoted on the Stock Exchange for last five consecutive trading days up

to and including the Last Trading Day;

(iii) a discount of approximately 10.7% to the average of the closing prices of HK$0.448

per Share as quoted on the Stock Exchange for last ten consecutive trading days up

to and including the Last Trading Day;

(iv) a discount of approximately 7.9% to the average of the closing prices of HK$0.434

per Share as quoted on the Stock Exchange for last thirty consecutive trading days

up to and including the Last Trading Day; and

(v) a discount of approximately 23.1% to the closing price of HK$0.52 per Share as

quoted on the Stock Exchange on the Latest Practicable Date.

The issue price of the Consideration Shares was negotiated on an arm’s length basis

among the parties to the Acquisition Agreement with reference to the prevailing market prices

of the Shares during the negotiation of the Acquisition. The Directors (including members of

the Independent Board Committee and the Whitewash Independent Board Committee) consider

that the issue price of the Consideration Shares is fair and reasonable.

As at the Latest Practicable Date, Mr. Cheung and parties acting in concert with him were

interested in a total of 681,967,796 Shares, representing approximately 39.04% of the existing

issued share capital of the Company. Upon Completion, Mr. Cheung and parties acting in

concert with him will become interested in a total of 1,931,967,796 Shares, representing

approximately 64.46% of the issued share capital of the Company as enlarged by the issue of

the Consideration Shares, assuming that no further Shares will be issued or repurchased by the

Company on or before Completion.

Mandate to issue the Consideration Shares

The Consideration Shares will be issued and allotted pursuant to the specific mandate

proposed to be sought from the Independent Shareholders at the First EGM.

Application for listing

An application will be made to the Stock Exchange for the listing of and permission to

deal in the Consideration Shares.


– 14 –

BASIS OF THE CONSIDERATION

The Consideration was determined on an arm’s length basis between the Company and theVendor after taking into account (i) the 2011 Profit Guarantee given by the Vendor under theAcquisition Agreement; (ii) the future prospects and growing demand of loans from smallenterprises and individuals in the PRC as described under the section headed “Reasons for theAcquisition” below; (iii) the net asset value of the Target Group; and (iv) the principal amountof the Sale Loan on dollar to dollar basis, which amount to HK$2,524,990 as at the date of theAcquisition Agreement. The Consideration was arrived at after arm’s length negotiationsbetween the Company and the Vendor and was not made by reference to any pre-definedcalculation.

As part of the due diligence conducted by the Directors, an independent valuation on theTarget Group was conducted by the Directors. Based on the independent valuation, the fairvalue of the Target Group as of 11 March 2011 is not less than the Consideration. Details ofthe independent valuation including its bases and assumptions are set out in Appendix V to thiscircular.

The original investment costs made by the Vendor to the Target Group were aboutHK$161,285,000.

Based on the above, the Directors (including members of the Independent BoardCommittee and the Whitewash Independent Board Committee) are of the opinion that theConsideration is fair and reasonable and on normal commercial terms.

EFFECT ON SHAREHOLDING STRUCTURE OF THE COMPANY

The below table set outs the shareholding structure in the Company (i) as at the LatestPracticable Date; and (ii) immediately upon Completion (assuming that no Shares will beissued or repurchased and the outstanding options granted pursuant to the share option schemeadopted by the Company will not be exercised between the Latest Practicable Date and theCompletion Date):

Shareholder

As at the Latest

Practicable Date

Immediately upon

Completion

NotesNumber of

Shares %Number of

Shares %

Mr. Cheung 460,044,240 26.33 1,710,044,240 57.06Madam Lo Wan (1) 135,523,556 7.76 135,523,556 4.52Arbalice Holdings

Limited (2) 86,400,000 4.95 86,400,000 2.88

Sub-total for Mr.Cheung and theparties acting inconcert with him 681,967,796 39.04 1,931,967,796 64.46

Public Shareholders 1,065,034,540 60.96 1,065,034,540 35.54

Total 1,747,002,336 100.00 2,997,002,336 100.00

Notes:

(1) Madam Lo Wan is the spouse of Mr. Cheung

(2) Arbalice Holdings Limited is beneficially owned as to 60% by Mr. Cheung and 40% by Madam Lo Wan(being the spouse of Mr. Cheung)


– 15 –

3. INFORMATION ON THE TARGET GROUP

Corporate Structure

The diagram below sets out the corporate structure of the Target Group as at the

Latest Practicable Date:

K.P. Financial Group

Limited

KP Financial Services

Limited

KP Financial

Holdings Limited

Gangjia Huitong Co

Huifeng Rongjin Co Huaxia Xingye Co

100% 100%

100%

70% 100%

Through Huaxia Xingye

Control Agreements before Completion

Through Huifeng Rongjin

Control Agreements

Information on K.P. Financial Group Limited

K.P. Financial Group Limited is a company incorporated in the BVI with limited

liability on 29 November 2010 whose entire issued share capital is owned by the Vendor

as at the date of the Acquisition Agreement. It is an investment holding company whose

principal assets are the beneficial interest in the entire equity interests of each of KP

Financial Services Limited and KP Financial Holdings Limited.

Information on KP Financial Services Limited

KP Financial Services Limited is a company incorporated in Hong Kong with

limited liability on 19 November 2010 whose entire issued share capital is owned by K.P.

Financial Group Limited. It is an investment holding company whose principal assets are

the beneficial interest in the entire equity interest of Gangjia Huitong Co. Other than that,

KP Financial Services Limited does not engage in any business activity.

Information on KP Financial Holdings Limited

KP Financial Holdings Limited is a company incorporated in Hong Kong with

limited liability on 19 November 2010 whose entire issued share capital is owned by K.P.

Financial Group Limited. It is currently inactive and does not hold any material asset as

of the Latest Practicable Date.


– 16 –

Information on Gangjia Huitong Co

Gangjia Huitong Co is a wholly foreign owned enterprise established in the PRC on

22 December 2010 with registered and fully paid up capital of USD300,000 and is wholly

owned by KP Financial Services Limited. The director of Gangjia Huitong Co is Mr.

Cheung. It is principally engaged in the provision of consultancy services in relation to

financing and provision of entrusted loans for its clients. Gangjia Huitong Co has

commenced its business in February 2011. Other than the business licence obtained by

Gangjia Huitong Co on 22 December 2010, no specific license or approval is required by

the applicable PRC laws for Gangjia Huitong Co to carry out its business. Gangjia

Huitong Co is beneficially interested in 70% of the equity interests in Huifeng Rongjin

Co and 100% of the equity interests in Huaxia Xingye Co through a set of agreements as

mentioned below.

Pursuant to the Circular of the People’s Bank of China on Putting Down

Underground Banks and Cracking Down on Usury Behaviors (中國人民銀行關於取締地下錢莊及打擊高利貸行為的通知, the “PBOC Circular”) announced by the People’s

Bank of China in 2002, prevailing interest rates charged by private entities in PRC shall

not exceed four times of PBOC benchmark lending rate with the same term.

A set of agreements (the “Huifeng Rongjin Control Agreements”) has been entered

into among Gangjia Huitong Co, Huifeng Rongjin Co, registered shareholders of Huifeng

Rongjin Co which in aggregate hold 70% of its registered capital, and the director of

Huifeng Rongjin Co; and a set of agreements (the “Huaxia Xingye Control

Agreements”) has been entered into among Gangjia Huitong Co, Huaxia Xingye Co;

registered shareholders of Huaxia Xingye Co which in aggregate hold its entire registered

capital, and the director of Huaxia Xingye Co. These agreements include (i) loan

agreement, (ii) loan assignment agreement, (iii) entrust shareholding agreement, (iv)

share pledge agreement, (v) management agreement, (vi) exclusive share purchase option

agreement, (vii) voting right agreement and (viii) director undertaking. Through the

Huifeng Rongjin Control Agreements and the Huaxia Xingye Control Agreements,

Gangjia Huitong Co has in substance secured the ownership and management control of

each of Huifeng Rongjin Co and Huaxia Xingye Co respectively. The entering into of the

Huifeng Rongjin Control Agreements was due to the limitation of shareholding of

Huifeng Rongjin Co pursuant to the Trial Implementation Rules on Small Loan Company

in Beijing (北京市小額貸款公司試點實施辦法), further details of which are set out in the

paragraph headed “Information on Huifeng Rongjin Co” below. The entering into of the

Huaxia Xingye Control Agreements was to save time as it takes time for the approval of

the transfer of its interests.


– 17 –

Below set forth the material terms and arrangements of the Huifeng Rongjin Control

Agreements:

Loan agreements (the “Huifeng Rongjin Loan Agreements”)

Date: 30 September 2010

Parties: (i) 北京中嘉利通商貿有限公司 (Beijing Zhongjia Litong

Trading Company Limited); Mr. Liu De Qi; Ms. Guan Xue

Ling; and Mr. Bi Zhen, being registered shareholders of

Huifeng Rongjin Co which in aggregate hold 70% of its

registered capital (collectively the “Registered

Shareholders of Huifeng Rongjin Co”); and

(ii) Mr. Cheung

Loans amount: RMB35,000,000 in aggregate

Term: 10 years from the date of loan agreements, which shall

automatically renew for successive terms of one year upon each

expiry, unless Mr. Cheung raises objection by written notice

three months before each expiry.

Subject: Mr. Cheung has granted loans of RMB35,000,000 in aggregate

interest free to the Registered Shareholders of Huifeng Rongjin

Co (the “Loans for Huifeng Rongjin”), for the sole purpose of

capital injection in respect of their interests in 70% of the

registered capital of Huifeng Rongjin Co. The Loans for

Huifeng Rongjin shall only be repaid by using the consideration

receivable by the Registered Shareholders of Huifeng Rongjin

Co upon the exercise of the exclusive right by Gangjia Huitong

Co under the exclusive share purchase option agreements as

mentioned below. The Registered Shareholders of Huifeng

Rongjin Co are not permitted to settle the Loans for Huifeng

Rongjin using other sources of funding.


– 18 –

Assignment of loan agreements (the “Huifeng Rongjin Loan Assignment”)

Date: 31 December 2010

Parties: (i) Registered Shareholders of Huifeng Rongjin Co;

(ii) Mr. Cheung; and

(iii) Gangjia Huitong Co

Subject: Mr. Cheung has assigned all his rights with respective to the

Loans for Huifeng Rongjin under the Huifeng Rongjin Loan

Agreements to Gangjia Huitong Co at nil consideration. The

Huifeng Rongjin Loan Assignment has been completed.

Entrust shareholding agreements


Parties: (i) Gangjia Huitong Co; and

(ii) Registered Shareholders of Huifeng Rongjin Co

Subject: Gangjia Huitong Co entrusts the Registered Shareholders of

Huifeng Rongjin Co to hold 70% of the registered capital of

Huifeng Rongjin Co on behalf of Gangjia Huitong Co and to

exercise all the rights and bear the responsibilities as owners of

Huifeng Rongjin Co on behalf of Guangjia Huitong Co. Gangjia

Huitong Co is entitled to all the proportionate beneficial interest

in Huifeng Rongjin Co, and enjoy all the proportionate

economic benefit of Huifeng Rongjin Co. Gangjia Huitong Co

shall have the rights to effect the transfer of respective

registered capital of Huifeng Rongjin Co to Gangjia Huitong Co

or any person nominated by Gangjia Huitong Co without the

consent of Registered Shareholders of Huifeng Rongjin Co.

Term: The entrust shareholding agreements cannot be terminated

without the consent of the parties thereto.


– 19 –

Share pledge agreements


Parties: (i) Gangjia Huitong Co;

(ii) Huifeng Rongjin Co; and

(iii) Registered Shareholders of Huifeng Rongjin Co

Term: From the date of agreements to 2 years after all liabilities and

obligations under the Huifeng Rongjin Loan Agreements have

been fulfilled (i.e. the repayment of the Loans for Huifeng

Rongjin by way of receiving the consideration through exercise

of the exclusive right by Gangjia Huitong Co under the

exclusive share purchase option agreements). The term is longer

than the period up to the completion of the transfer of ownership

under the exclusive share purchase option agreements (i.e. the

date of settlement of the Loans for Huifeng Rongjin). The share

pledge will be released two years thereafter to ensure there is

sufficient time available for the PRC regulatory approval

process involved in the transfer of the 70% registered capital of

Huifeng Rongjin Co to Gangjia Huitong Co.

Subject: All obligations of the Registered Shareholders of Huifeng

Rongjin Co under the Huifeng Rongjin Loan Assignment are

secured by the registered capital of Huifeng Rongjin Co held by

Registered Shareholders of Huifeng Rongjin Co, altogether

being 70% of the registered capital of Huifeng Rongjin Co.

Management agreement


Parties: (i) Gangjia Huitong Co; and

(ii) Huifeng Rongjin Co

Term: From 1 January 2011 until 31 December 2020

Upon three months before the expiry of the term, Gangjia

Huitong Co shall have the right to unilaterally extend the

agreement by written notice for successive terms of 10 years if

it thinks fit.


– 20 –

Subject: Gangjia Huitong Co shall have sufficient and complete

management and control right over all the tangible and

intangible assets of Huifeng Rongjin Co. Gangjia Huitong Co

shall have the right to i) select candidates for directors and

decide key management personnel of Huifeng Rongjin Co; ii)

make or approve important or regular decisions of Huifeng

Rongjin Co; and iii) assign these rights and novate the

obligations to other party nominated by Gangjia Huitong Co,

without the consent of Huifeng Rongjin Co. Huifeng Rongjin

Co shall not dispose of its properties or grant pledge or

guarantee to other parties without the consent of Gangjia

Huitong Co. Gangjia Huitong Co shall also have the right to

receive regularly financial information and reports of Huifeng

Rongjin Co, or appoint auditors to Huifeng Rongjin Co to

ensure a proper financial control.

Exclusive share purchase option agreements





Term: The initial term is a fixed term of ten years from the date of

agreements and if any of the registered capital has not been

acquired or transferred on the expiration of the agreements, the

agreements shall automatically renew for successive terms of 10

years.

Subject: Registered Shareholders of Huifeng Rongjin Co have granted

irrevocable and exclusive rights to Gangjia Huitong Co to

acquire the 70% of the registered capital of Huifeng Rongjin Co

individually held by Registered Shareholders of Huifeng

Rongjin Co. Gangjia Huitong Co or any parties nominated by it

can exercise such right at any time when such acquisition is

permitted under the PRC laws. The consideration shall be

determined as the amounts of the Loans for Huifeng Rongjin,

adjusted for any additions to the Loans for Huifeng Rongjin due

to any subsequent capital injection and the minimum price as

permitted by the relevant PRC laws and regulations.


– 21 –

Voting right agreements





Subject: Registered Shareholders of Huifeng Rongjin Co shall exercise

voting right in Huifeng Rongjin Co only in accordance with the

written instruction of Gangjia Huitong Co.

Term: The voting right agreements cannot be terminated without the

consent of the parties thereto.

Director undertaking


Party: Mr. Lu Yong, being the sole director of Huifeng Rongjin Co

(“Mr. Lu”), given in favour of Gangjia Huitong Co.

Subject: Mr. Lu has irrevocably and unconditionally undertaken to

Gangjia Huitong Co to exercise his power in Huifeng Rongjin

Co in accordance with the instruction of Gangjia Huitong Co.

This undertaking shall be transferred to the new director of

Huifeng Rongjin Co when he is no longer appointed as the

director of Huifeng Rongjin Co.

Term: The director undertaking cannot be terminated without the

consent of Gangjia Huitong Co.

In view of the terms of the Huifeng Rongjin Control Agreements, (i) Gangjia Huitong Co

has in substance enjoyed the economic benefits of and has effective management control over

the operation of Huifeng Rongjin Co, (ii) leakages of assets or values to Registered

Shareholders of Huifeng Rongjin Co are prevented, (iii) the financial results of Huifeng

Ronjing Co can be consolidated into the Group’s financial statements, and (iv) the equity

interests in Huifeng Rongjin Co can be acquired at an agreed amount.


– 22 –

The Directors are of the view that the Target Group has ability to ensure sound and proper

control of Huifeng Rongjin Co through the Huifeng Rongjin Control Agreements. The PRC

Legal Adviser has also opined that no approval is required by PRC authorities for the Huifeng

Rongjin Control Agreements, and that the Huifeng Rongjin Control Agreements are in

compliance with the PRC rules and regulations and are legally valid and enforceable. Upon

Completion, the Company indirectly holds 100% equity interests in K.P. Financial Group

Limited which in turn indirectly holds 100% equity interests in Gangjia Huitong Co. Through

the Huifeng Rongjin Control Agreements, the Enlarged Group can exercise power to govern the

financial and operating policies, appoint or remove majority of the members of the board of

directors of Huifeng Rongjin Co and has power to cast more than half of the voting rights of

Huifeng Rongjin Co. Pursuant to HKAS 27 Consolidated and Separate Financial Statements,

control is the power to govern the financial and operating policies of an entity so as to obtain

benefits from its activities; control is presumed to exist when the parent owns, directly or

indirectly through subsidiaries, more than half of the voting power of an entity. In view of the

above, the Directors have confirmed with CCIF CPA Limited, the Company’s auditors, that

Huifeng Rongjin Co would become a subsidiary of the Group upon Completion, and its results

would then be consolidated into the financial statements of the Group.

The terms and arrangements of the Huaxia Xingye Control Agreements are similar to

those of the Huifeng Rongjin Control Agreements. The Vendor has procured that the Huaxia

Xingye Control Agreements will be terminated upon the transfer of the registered capital from

the existing registered shareholders of Huaxia Xingye Co to the Company or its wholly owned

subsidiary. Such a transfer is one of the conditions precedent of the Acquisition Agreement. As

a result, the Huaxia Xingye Control Agreements will no longer exist upon Completion.

Information on Huifeng Rongjin Co

Huifeng Rongjin Co is a limited liability company established in the PRC on 2 December

2010 with registered and fully paid up capital of RMB50 million. It is beneficially owned as

to 70% of the equity interest by Gangjia Huitong Co (through the Huifeng Rongjin Control

Agreements) and the remaining 30% by Beijing Wanfang Dalong Property Management

Company Limited (北京萬方達隆物業管理有限公司 , “Wanfang Dalong”), a company which

Mr. Cheung has an indirect interest of approximately 19.1%. The remaining beneficial interests

of Wanfang Dalong are held by Independent Third Parties. Registered Shareholders of Huifeng

Rongjin Co include: (i) Beijing Zhongjia Litong Trading Company Limited (北京中嘉利通商貿有限公司), a wholly-owned subsidiary of the Group; (ii) Ms. Guan Xue Ling who is a

management personnel of the Target Group; (iii) Mr. Liu De Qi; and (iv) Mr. Bi Zhen who are

both Independent Third Parties. These Registered Shareholders of Huifeng Rongjin Co hold

20%, 20%, 20% and 10% of the registered capital of Huifeng Rongjin Co respectively and they

have entered into the Huifeng Rongjin Control Agreement. Save as disclosed herein, these

Registered Shareholders of Huifeng Rongjin Co are not connected persons of the Company, nor

associates of Mr. Cheung as defined in the Listing Rules nor parties acting in concert with Mr.

Cheung, Madam Lo Wan and Arbalice Holdings Limited as defined in the Takeovers Code. The

remaining registered shareholder of Huifeng Rongjin Co, Wanfang Dalong, which holds 30%

of the registered capital has not entered into the Huifeng Rongjin Control Agreements.


– 23 –

Wanfang Dalong has been informed of the transfer of the 70% equity interest of Huifeng

Rongjin Co to Gangjia Huitong Co through the Huifeng Rongjin Control Agreements and has

given consent in this regard. Wanfang Dalong, as the major registered shareholder of Huifeng

Rongjin Co, enjoys the same legal status and rights as other Registered Shareholders of

Huifeng Rongjin Co. The director of Huifeng Ronjin Co is Mr. Lu.

Except for Wanfang Dalong who intends to hold registered capital of Huifeng Rongjin Co

for investment purpose, the other Registered Shareholders of Huifeng Rongjin Co are

registered shareholders nominated by Mr. Cheung in order to satisfy the relevant limitations on

shareholding of Huifeng Rongjin Co. Pursuant to the Trial Implementation Rules on Small

Loan Company in Beijing (北京市小額貸款公司試點實施辦法 , the “Trial Implementation

Rules”) promulgated by Beijing Finance Office (北京市金融辦), Beijing Administration for

Industry and Commerce (北京市工商行政管理局), Beijing Office of China Banking Regulatory

Commission (北京銀監局) and Operation Office of The People’s Bank of China

(人民銀行營業管理部) on 4 January 2009, no registered shareholders of Huifeng Rongjin Co

other than the major registered shareholder shall hold more than 20% of the registered capital

of Huifeng Rongjin Co, while the major registered shareholder, Wanfang Dalong, is allowed to

hold a maximum of 30% of the registered capital of Huifeng Rongjin Co. The existing

shareholding structure complies with the Trial Implementation Rules.

Huifeng Rongjin Co is principally engaged in the provision of small loan services in

Miyun county, Beijing, PRC. On 11 November 2010, the Beijing Municipal Bureau of

Financial Work (北京市金融工作局), in accordance with Trial Implementation Rules, approved

the establishment of Huifeng Rongjin Co for the provision of loan services in Miyun county,

Beijing, PRC. Save for the Beijing Municipal Bureau of Financial Work (北京市金融工作局),

Huifeng Rongjin Co is not under the supervision of any other regulatory body in the PRC. The

PRC Legal Adviser has also opined that no approval by the Beijing Municipal Bureau of

Financial Work (北京市金融工作局) is required for the Acquisition in respect of the interest in

Huifeng Rongjin Co.

Huifeng Rongjin Co provides small loan to individual and/or corporate client. Potential

clients of Huifeng Rongjin Co are individuals and corporations, in particular those small-to-

medium sized enterprises, in Beijing, the PRC. Huifeng Rongjin Co can request the borrower

to provide pledge of assets or other guarantees to secure borrower’s liabilities arising from the

performance of the loan agreement. Huifeng Rongjin Co has commenced its business in

February 2011. Pursuant to the Trial Implementation Rules, Huifeng Rongjin Co is subject to

the following major restrictions and regulatory requirements:

1. the maximum outstanding loan amount to each borrower shall not exceed 3% of the

registered capital of Huifeng Rongjin Co;

2. the maximum amount of loan it can raise from banks or financial institutions in

financing its loan business is limited to 50% of its registered capital, or RMB25

million based on the current registered capital of RMB50 million of Huifeng

Rongjin Co;


– 24 –

3. the interest rate charged by it shall not fall below 0.9 time of the PBOC benchmark

lending rate with the same term;

4. it shall make monthly reporting of its financial statements and loan statistics to the

relevant local governing authority;

5. it shall appoint a suitable commercial bank for the custody of its own funds and

clearing of transactions with borrowers; and

6. it shall establish internal control procedures in respect of risk assessments, credit

examination and loan approval, etc.

In addition, pursuant to the PBOC Circular, prevailing interest rates charged by private

entities in PRC shall not exceed four times of PBOC benchmark lending rate with the same

term.

Pursuant to the Trial Implementation Rules, the establishment or share transfer of a small

loan company in the PRC is subject to certain limitations including but not limited to (i)

shareholders of small loan companies shall be domestic natural person, domestic corporate

legal person or other social organizations; and (ii) the largest shareholder must not hold more

than 30% of the registered capital and each of the other shareholders must not hold more than

20% of the registered capital of a small loan company. In light of the above, Gangjia Huitong

Co, as a wholly owned foreign enterprise, is not permitted to become a registered shareholder

of Huifeng Rongjin Co under the existing PRC laws and regulations and its shareholding

cannot exceed 30%. Although Gangjia Huitong Co is not a registered shareholder of Huifeng

Rongjin Co, it has in substance secured effective control over Huifeng Rongjin Co through the

Huifeng Rongjin Control Agreements while the shareholding of the registered shareholders of

Huifeng Rongjin remains in compliance with the above rules. According to the PRC Legal

Adviser, the current shareholding structure of Huifeng Rongjin Co complies with the Trial

Implementation Rules and the Huifeng Rongjin Control Agreements do not violate any

applicable PRC laws and regulations including the Trial Implementation Rules, and are valid

and enforceable. Huifeng Rongjin Co has obtained all necessary licenses to operate in its

business under the applicable PRC laws and regulations. The establishment of Huifeng Rongjin

Co was approved by the Beijing Municipal Bureau of Financial Work (北京市金融工作局) on

11 November 2010. Other than such approval and the business licence obtained by Huifeng

Rongjin Co on 2 December 2010, no specific licence or approval is required by the applicable

PRC laws and regulations for Huifeng Rongjin Co to carry out its business.

Information on Huaxia Xingye Co

Huaxia Xingye Co is a limited liability company established in the PRC on 13 August

2010 with registered and fully paid up capital of RMB100 million and is beneficially owned

by Gangjia Huitong Co through the Huaxia Xingye Control Agreements. Registered

shareholders of Huaxia Xingye Co include Mr. Cheung and Beijing Hengtuo Zhixin Investment

Consultancy Company Limited (北京恒拓智信投資諮詢有限公司, “Hengtuo Zhixin”), a


– 25 –

company incorporated in PRC. Hengtuo Zhixin is principally engaged in investment holding

and property investment. Mr. Cheung holds 99% of the beneficial interest in Hengtuo Zhixin.

Mr. Cheung and Hengtuo Zhixin hold 10% and 90% of the registered capital of Huaxia Xingye

Co respectively and they have entered into the Huaxia Xingye Control Agreements. Mr.

Cheung is the chairman of the Board, an executive Director and the controlling Shareholder,

and together with his associates, beneficially interested in approximately 39.04% in the issued

share capital of the Company as at the date of the Latest Practicable Date. As one of the

conditions precedent of the Acquisition Agreement, the registered capital of Huaxia Xingye Co

will be transferred from its existing registered shareholders to the Company or its wholly

owned subsidiary. In addition, the Vendor has procured that the Huaxia Xingye Control

Agreements will be terminated upon completion of the above transfer. As result, the Huaxia

Xingye Control Agreements will no longer exist and the Group will directly hold the interest

in Huaxia Xingye Co through equity ownership upon Completion. The director of Huaxia

Xingye Co is Mr. Cheung.

Huaxia Xingye Co is principally engaged in the provision of loan guarantee services to

individuals and corporations. In March 2010, China Banking Regulatory Commission (中國銀監局), the National Development and Reform Commission (中國國家發展和改革委員會),

Ministry of Finance People’s Republic of China (中華人民共和國財政部) and the People’s

Bank of China (中國人民銀行) promulgated the Tentative Measures for the Administration of

Financing Security Companies (融資性擔保公司管理暫行辦法, the “Security Tentative

Measure”) to govern the loan guarantee business in the PRC. This Security Tentative Measure

has national applicability. On 31 December 2010, empowered by the Security Tentative

Measure, the Beijing Municipal Bureau of Financial Work (北京市金融工作局) as the regional

regulatory body further promulgated the Beijing Tentative Measures for the Administration of

Financing Security Companies (北京融資性擔保公司管理暫行辦法, the “Beijing Security

Tentative Measure”) to govern loan guarantee companies in Beijing, the PRC. Both the

Security Tentative Measure and the Beijing Security Tentative Measure (collectively the “Two

Security Measures”) are directly applicable to Huaxia Xingye Co. The Two Security Measures

set out detailed rules governing the companies engaging in the loan guarantee business.

The Two Security Measures specifies that all companies carrying on the loan guarantee

business shall obtain a loan guarantee business permit (融資性擔保公司經營許可証) from a

relevant regulatory body. Huaxia Xingye Co has been established and has been carrying on its

loan guarantee business since 13 August 2010. It provides corporate or credit guarantee for

bank loans and other liabilities to individuals and small-to-medium seized enterprises for a

service charge. The Two Security Measures specified a grace period for existing loan guarantee

companies to comply with the Two Security Measures by 31 March 2011. Huaxia Xingye Co

was granted a loan guarantee business permit from the Beijing Municipal Bureau of Financial

Work (北京市金融工作局) on 31 March 2011.

In addition to the loan guarantee business permit granted by the the Beijing Municipal

Bureau of Financial Work (北京市金融工作局) on 31 March 2011, Huaxia Xingye Co has also

obtained the business licence on 13 August 2010. Apart from the business licence and the loan

guarantee business permit, no other specific licence or approval is required by the applicable

PRC laws for Huaxia Xingye Co to carry out its business. Huaxia Xingye Co is under the

supervision of the Beijing Municipal Bureau of Financial Work (北京市金融工作局).


– 26 –

Pursuant to the Security Tentative Measure , Huaxia Xingye Co is subject to the following

major restrictions and regulatory requirements:

1. the registered capital of a loan guarantee company shall not fall short of RMB5

million;

2. it is prohibited from guaranteeing total loan balances of over 10 times of its net

assets, and/or providing guarantee to any individual with the amount exceeding 10%

of its net assets;

3. it shall make a provision on guarantee of 50% on its annual revenue generated from

its guarantee business, which is accounted for as an administrative expense, until the

accumulated provision on guarantee has reached 10% of the total guarantee liability

at the end of a year, after which the movement on the provision shall be determined

on actual basis. Consequently, 50% on revenue generated from guarantee business

is charged to expense on top of normal operating expense;

4. it is prohibited from providing guarantee in favour of its parent company(ies) or

subsidiary(ies);

5. it shall make quarterly reporting of use of capital to the relevant governing

authority(ies);

6. it shall submit financial reports, compliance reports or other documents as stipulated

by the relevant governing authority(ies) at its/their request; and

7. it shall establish internal control procedures in respect of risk assessments,

guarantee approval and debt recovery, etc.

The provisions in the Beijing Security Tentative Measure are not materially different from

that of the Security Tentative Measure, except for the following requirements:

1. the local regulatory body under the Beijing Security Tentative Measure shall be the

Beijing Municipal Bureau of Financial Work (北京市金融工作局); and


million;

The loan guarantee business permit granted by the Beijing Municipal Bureau of Financial

Work (北京市金融工作局) has a term of five years and is valid until 31 March 2016. It is one

of the first 46 loan guarantee companies that were granted loan guarantee business permits for

a five years term under the Beijing Security Tentative Measure. The Directors are not aware

of any legal impediment for renewing this business permit.


– 27 –

There is no restriction on the transfer and ownership of the registered capital of Huaxia

Xingye Co.

Business model of the Target Group

Huifeng Rongjin Co, Huaxia Xingye Co and Gangjia Huitong Co provide distinct services

of small loans, loan guarantee, entrusted loans and consultancy services respectively under

their permitted business scopes to meet the financing needs of customers. It is the Target

Group’s strategy to focus its business on provision of short-term loan/guarantee services for

loans/guarantees that last for less than twelve months.

Provision of small loan services

Huifeng Rongjin Co provides small loans to individuals and small-to-medium sized

enterprises for an interest fee. Pursuant to the Trial Implementation Rules, Huifeng Rongjin Co

is permitted to grant loans of no more than 3% of its registered capital to each individual

customer, and the interest rate charged by Huifeng Rongjin Co should not exceed four times

of the current financial institution loan interest rate with the same term as stipulated by the

People’s Bank of China.

Provision of loan guarantee services

Huaxia Xingye Co provides corporate guarantee for bank loans to individuals and

small-to-medium sized enterprises for a guarantee fee. Huaxia Xingye Co does not lend fund

to customers, instead it provides corporate guarantee in favour of third party banks in respect

of loans granted by third party banks to customers, who may have difficulty in obtaining bank

loans without corporate guarantee. By acting as a guarantor, Huaxia Xingye Co is required to

deposit a certain percentage of the loan amount with the bank as a guarantee, where the banks

shall charge interest rates directly to the customers. There is no statutory ceiling on the

guarantee fee imposed by PRC laws and regulations. Guarantee fee as charged by Huaxia

Xingye Co is determined after arm’s length negotiation between Huaxia Xingye Co and its

customers.

Provision of entrusted loan services

In an entrusted loan arrangement, Gangjia Huitong Co grants loans by depositing funds

in the entrusted bank’s trust account. The entrusted bank will then act as the lender and release

the fund to customers in accordance with the terms determined by Gangjia Huitong Co. No

direct creditor/debtor relationship exists between Gangjia Huitong Co and the customer. For

entrusted loans granted, a nominal monthly handling fee was charged by the banks to the

borrowers, and no further interest was charged by the entrusted banks. There is no limit on the

amount of individual loan and total loan imposed by PRC laws and regulations. Interest rate

of entrusted loan as charged by Gangjia Huitong Co is determined after arm’s length

negotiation between Gangjia Huitong Co and its customers, and the interest rate charged by

Gangjia Huitong Co should not exceed four times of the current financial institution loan

interest rate with the same term as stipulated by the People’s Bank of China.


– 28 –

To minimise credit risk, the Target Group usually seeks security from the customers either

by way of collateral of assets, personal guarantee and/or surety as indemnity for any potential

loss, in all of the small loan, loan guarantee and entrusted loan business.

Provision of consultancy services

Gangjia Huitong Co is also engaged in the provision of consultancy services in relation

to financing services of the Target Group’s customers. Gangjia Huitong Co specialises in

understanding the needs and financial background of customers and providing the appropriate

financing solution to them. Depending on the financing needs of the customers, customers may

be referred to any subsidiaries of the Target Group for suitable financing packages and a

consultancy fee is charged by Gangjia Huitong Co on top of interest/guarantee fee charged by

the other subsidiaries.

External funding provided by other parties

As disclosed in the paragraphs below, the Target Group is provided with external funding

of up to RMB750 million in total during the year ending 31 December 2011 by virtue of some

contractual or financial arrangements, including certain banking facilities granted by a bank in

the PRC, an undertaking from and agreements with other parties. The funding of RMB750

million during the year ending 31 December 2011 consists of i) banking facilities of RMB500

million granted by a bank in the PRC to the Target Group; ii) an undertaking from the Vendor

to provide funding of RMB50 million; and iii) two contractual agreements with a connected

person and an Independent Third Party under which the parties agree to provide funding of

RMB200 million to the Target Group. The Target Group intends to utilise these external

funding through lending to borrowers by way of small loans or entrusted loans services, or

placing in banks as guarantee deposits in carrying out loan guarantee services. On top of that,

funding may be transferred within the Target Group in cases needed. The banking facilities of

RMB500 million, as are other normal banking facilities, are revocable by the bank. The

material terms of the undertaking from the Vendor and the two contractual agreements in

respect of funding to the Target Group of RMB200 million are set out below:

In January 2011, Gangjia Huitong Co entered into two separate agreements with Beijing

Wanfang Yacheng Investment Management Company Limited (北京萬方雅誠投資管理有限公司) (“Wanfang Yacheng”) and Beijing Runli Investment Company Limited (北京潤利投資有限公司) (“Beijing Runli”) respectively, under which each of Wanfang Yacheng and Beijing

Runli has agreed to provide a total funding of up to RMB100 million to Gangjia Huitong Co

and refer clients to Gangjia Huitong Co for the purpose of provision of entrusted loans services

during the calendar year of 2011. The funding is provided to Gangjia Huitong Co for granting

entrusted loans to customers of Gangjia Huitong Co. A loan interest of 8% per annum based

on the amount advanced to Gangjia Huitong Co plus a referral fee of 4% of the income earned

by Gangjia Huitong Co from providing the relevant loans are charged by Wanfang Yacheng. A

loan interest of 12% per annum based on the amount advanced to Gangjia Huitong Co plus a

referral fee of 4% of the income earned by Gangjia Huitong Co from providing the relevant

loans are charged by Beijing Runli. The interest rates of 8% and 12% were determined after

negotiations with the counterparties after considering the prevailing one-year fixed deposit


– 29 –

interest rate normally offered by banks in the PRC, and the referral fee rate of 4% was

determined by reference to similar rates generally offered by other financing companies in

Beijing for successful referrals from other parties or companies according to the best

knowledge of the Directors. Beijing Runli, with the principal business being business advisory,

is an Independent Third Party and is also a subsidiary of, Beijing Aoqi Property Development

Group Limited (北京傲祺房地產開發集團有限公司), an Independent Third Party real estate

developer. Wanfang Yacheng is a subsidiary of Wanfang Dalong, the registered shareholder of

Huifeng Rongjin Co holding 30% of registered capital of Huifeng Rongjin Co. Upon

Completion, Wanfang Yacheng will become a connected person of the Company pursuant to the

Listing Rules, by virtue of it being an associate of Wanfang Dalong. Any transaction arising

from the said agreement with Wanfang Yacheng will amount to a connected transaction upon

Completion. The Directors consider that the loan interest rate under the funding agreement

with Wanfang Yacheng is on normal commercial terms. Pursuant to Rule 14A.65(4) of the

Listing Rules, the financial assistance provided by Wanfang Yacheng with no security granted

over the assets of the Group is exempt from the reporting, announcement and independent

shareholders’ approval requirements under Chapter 14A of the Listing Rules. In addition, the

amount of referral fee to be charged by Wanfang Yacheng upon Completion to 31 December

2011 is estimated to be less than HK$1,000,000 and therefore is a de minimis transaction

pursuant to Rule 14A.33(3) of the Listing Rules. The Target Group intends, subject to renewal

of respective agreements with Wanfang Yacheng and Beijing Runli, to extend the

abovementioned funding arrangements upon expiry of the above agreements on 31 December

2011. If these agreements fail to be renewed, the outstanding amounts will be settled by

internal resources of the Enlarged Group.

On 5 January 2011, the Vendor irrevocably undertook to Gangjia Huitong Co in writing

that the Vendor will provide an interest-free funding of up to RMB50 million to Gangjia

Huitong Co at the request of Gangjia Huitong Co until 4 January 2012. Upon Completion,

Gangjia Huitong Co will become a wholly owned subsidiary of the Company and any

transaction arising from this undertaking will amount to a connected transaction pursuant to the

Listing Rules. Such funding arrangement with the Vendor is on terms favourable to the Target

Group. Pursuant to Rule 14A.65(4) of the Listing Rules, the financial assistance provided by

the Vendor with no security granted over the assets of the Group is exempt from the reporting,

announcement and independent shareholders’ approval requirements under Chapter 14A of the

Listing Rules. As advised by the PRC Legal Advisor, the Directors are satisfied that such

undertaking is duly executed and is legal, valid and enforceable against Mr. Cheung, the

undertaking will continued to remain enforceable against Mr. Cheung throughout the period,

and its validity and enforceability would be not affected upon the Completion.

Based on the unaudited pro forma financial information of the Enlarged Group set out in

Appendix III, the pro forma unaudited balance of cash and cash equivalents of the Enlarged

Group was approximately HKD 316 million. Other than the external funding as disclosed in the

above paragraphs, the Directors believe that internal resources of the Enlarged Group is

sufficient for the business expansion of the Target Group after the Completion.

Operation Flow

The Target Group’s flow of operation is generally divided into the three stages: (i)

granting of loans/guarantee; (ii) after loan services; and (iii) completion of transaction. There


– 30 –

is no significant difference in the operation flow for the various types of services provided by

the Target Group and all of its services essentially follow the same operation flow as described

below:

1. Granting of loan/guarantee

Customer identification

The Target Group identifies potential customers through networks with commercial

banks, trusts, property developers and small-to-medium sized enterprises. The Target

Company relies on the business network of its senior management team (the details of

which are set out in the below paragraph headed “Management experience” under the

section headed “Management of the Target Group” contained in the letter from the Board

contained in this circular), which has extensive networks with property developers, banks,

trusts and various associations in the loan/guarantee market, in identifying customers and

expanding the Target Company’s business. Apart from the existing networks of the senior

management team, the Target Group also reaches new potential customers through

referrals from agents. Wanfang Yacheng and Beijing Runli, which provide certain funding

to the Target Group by virtue of contractual agreements, the details of which are set out

in the paragraph headed “External funding provided by other parties” under the section

headed “Information of the Target Group” above, may also refer new customers to the

Target Group. The Target Group did not enter into any long-term legally-binding referral

agreement with other agents and the Target Group has indicated to other agents that a

referral fee of approximately 4% on the income earned by the Target Group from

providing the relevant loans would be given for successful referrals. These other agents

include banks and property developers which are Independent Third Parties. Details of the

arrangements are set out in the paragraph headed “Business model of the Target Group”

under the section headed “Information of the Target Group” in the letter from the Board

contained in this circular. A project executive of the operation department of the Target

Group liaises with the potential customer in proceeding with the loan/guarantee

application.

Services advisory and data collection

The project executive of the operation department of the Target Group understands

the need of the potential customer in respect of the size of the loan, the duration and his

means of repayment. The project executive also studies the financial background, scope

of business, type and value of collateral of the potential customers. Detailed information

and documents of the potential customer such as corporate constitution documents,

financial reports, any credit rating and details of pledged assets would be obtained. The

project executive would collect title documents (property ownership certificate

documents in case of immovable property) of the collateral property and, if it is an

immovable property, submit the property ownership certificate documents to the Beijing

Municipal Commission of Housing and Urban-Rural Development (北京住房和城鄉建設委員會) for verification of the property ownership certificate documents and registration


– 31 –

of mortgage. These enquiries and collection of information are then followed by physical

visit and inspection of the pledged assets (usually immovable properties) by the project

executive and credit risk personnel of the Target Group.

Loan application and approval

Interest/consultancy fee to be charged, loan/guarantee amount and repayment

schedule are negotiated between the potential customer and the project executive. The

project executive then fill in the respective loan/guarantee application form and credit

rating form together with the credit evaluation report will be submitted to the respective

manager of the operation department and the risk control department. All loan/guarantee

application shall be approved in accordance with the Target Group’s credit control policy

as detailed in the paragraph under “Credit Control Policy of the Target Group” under the

section headed “Management of the Target Group” in the letter from the Board contained

in this circular.

Interest rate or guarantee fee rate charged by the Target Group is determined taking

into account the risks associated with the loan/guarantee application on a case-by-case

basis, factors include duration of loan, type of collateral assets, and means of repayment

etc. Consultancy fee is charged by the Target Group for providing consultation on

recommended loan/guarantee and collateral arrangement to reflect the complexity of the

loan/guarantee and the level of inspection works involved. Under the Target Group’s

pricing policy, interest fee is charged at a rate between 10% and 12% per annum on the

principal amount; and guarantee fee is charged at a rate between 1% and 4% per annum

on the principal amount.

Loan Execution

The customer signs respective agreements with the Target Group (or its subsidiaries)

depending on his package. Consultancy and administration fee are deducted from the

approval loan amount before the loan is deposited to his designated bank accounts as a

lump sum. Assuming that all the required documentation has been provided, the Target

Group advises the customer of the outcome of loan/guarantee applications within 24

hours upon receipt of all documentation. The whole granting of loan process normally

takes three to seven days. For loan guarantee service, an executed loan agreement in

favour of a third-party bank will be signed and made available to the bank for its

processing of the bank loans.

2. After-loan services

Periodic inquiries into customers’ financial condition

In an attempt to maintain good relations with customers and monitor the risks, the

operation department is responsible for monitoring the financial position of the customers

after granting their loans. In deciding the borrower’s loan renewal application, the

operation department will consider the customer’s payment records as an indicator of

his/her/its financial condition and integrity.


– 32 –

Repayment reminder

Our project executives remind customers of their loan repayment obligations in due

course to ensure repayments are made on time.

3. Completion of transaction

Repayment of principal and interest

If the customer repays the principal and interest in accordance with the

loan/guarantee agreement, the secured collateral shall be released and the transaction is

deemed completed.

Repayment of interest and renewal of loan

If the customer is interested in renewing the loan/guarantee, the project executive

and the personnel from the credit control department would re-assess the creditability of

the customer. Any renewal of loan/guarantee requires approval from our credit control

department. The risk assessment and credit approval committee is also responsible for

approving the renewal of loan/guarantee.

Default of loan repayment and enforcement of security

Where irregularity is noted by the operation department, the risk control department

would plan and take remedial actions, which normally include extending repayment terms

and selling the rights outright to other interested third parties in the market. If these

remedial actions prove unsuccessful, the risk control department will take legal action

against the customer and take control of the collateral assets.

Management of the Target Group

Management experience

The senior management team of the Target Group is experienced in the loan and loan

guarantee service industry in the PRC. Some of the members of the senior management team

have years of experience in the market, and therefore, the senior management team has

accumulated breadth of experience in and extensive knowledge of the PRC loan and loan

guarantee service industry. Set out below are the experience and qualifications of some of the

senior management team members:

Mr. Luo Rui, aged 43, is the Chief Operating Officer of the Target Group. Before joining

the Target Group, Mr. Luo has more than 15 years of experience in property investment, project

finance and property management in Beijing and Hainan. Mr. Luo has extensive networks with

senior management of property developers and major commercial banks in Beijing. He is

currently a councilor of the Beijing Guarantee Association (北京市擔保協會), the Beijing


– 33 –

Association of Small and Medium Enterprises (北京市中小企業協會), the Beijing Association

of Pawn Business (北京市典當協會) and the Beijing Microcredit Association (北京市小額貸款業協會). Mr. Luo graduated with a Bachelor and Master’s degree in Building Construction

Department of Xi’an University of Architecture and Technology (西安建築科技大學). He has

joined the Target Group since January 2011.

Mr. Tang Zhi Yong, aged 35, is the General Manager of Huaxia Xingye Co. Mr. Tang has

more than ten years of management experience in guarantee, investment and project financing,

and has extensive networks with banks, trusts, guarantee associations and small-to-medium

sized enterprises and in the guarantee service industry. Mr. Tang worked as General Manager

with three guarantee service companies, namely Northern Credit Guarantee Company (北方信用擔保公司) between March 2002 to October 2004; Sinosafe Credit Management Company

Limited (中國華安商業信用風險管理公司) between November 2004 to July 2005; and

Zhongyuan Hengfeng Investment and Guarantee Company Limited (中元恒豐投資擔保有限公司) between January 2005 to December 2008, and was responsible for the formation and

establishment of two guarantee service companies. Mr. Tang was skilled in designing business

model of guarantee service companies, risk control systems of guarantee service institutions

and cooperative business of financial institutions, and has extensive resources and management

skills in market exploration and networking of guarantee service companies. He participated in

the study of Credit Evaluation and Market Supervision of Guarantee Institution (擔保機構資信評價及市場行為監管) commissioned by the Ministry of Housing and Urban-Rural

Development of the People’s Republic of China (中華人民共和國住房和城鄉建設部) in 2006.

He was appointed by the Beijing Municipal Bureau of Construction (北京市建設委員會) to

participate in the preparation of the Beijing Construction Guarantee Market Supervision

System (北京市工程擔保市場監管系統). He is currently acting as the Vice-chairman of the

China Construction Guarantee Professional Committee (中國工程擔保專家委員會) and a

general councilor of the Beijing Guarantee Association (北京市擔保協會). Mr. Tang graduated

from the School of International Studies, Peking University (北京大學國際關係學院), obtained

a Graduate Diploma in Integrated Marketing Communications from the School of Professional

and Continuing Education, the Hong Kong University, and is currently taking a research master

study in the Liaoning University Philosophy and Public Management School (遼寧大學哲學與公共管理學院) in Public Administration. He has joined the Target Group since August 2010.

Ms. Zhang Man Hong, aged 61, is the chief risk officer and advisor of risk assessment

and credit approval committee of the Target Group. Ms Zhang is a senior accountant in the

PRC. Before joining the Target Group, She has worked for Bank of Communications, Beijing

Branch (交通銀行北京支行) for nearly 20 years and finally held the position of Head of Credit

Department. She has joined the Target Group since January 2011.

Ms. Guan Xue Ling, aged 37, is the financial controller and executive Vice President of

the Target Group. She has more than 12 years of experience in Auditing, Finance and

Accounting. Ms. Guan possessed the qualification of Registered Accountant of the PRC and is

a member of the Chinese Institute of Certified Public Accountants. She is a member of risk

assessment and credit approval committee of the Target Group. Ms. Guan received her Master

degree in Business Administration from the Capital University of Economics and Business (首都經貿大學). She has joined the Target Group since December 2010.


– 34 –

Mr. Wu Yue, aged 31, is the General Manager of Huifeng Rongji Co. Mr. Wu has worked

for the Shenzhen Development Bank (深圳發展銀行) between 2000 to 2006 and held the

position of Vice-President before he left the bank. Before he joined Huifeng Rongjin Co, he

was a chief executive officer of a small loan company in Beijing. Mr. Wu is an economist in

the PRC and obtained his Bachelor’s degree in Finance from the Open University of China

(中央廣播電視大學). He has joined the Target Group since January 2011.

The Company intends to preserve the management continuity of the Target Group upon

Completion by maintaining or offering attractive salary packages to the staff after the

Completion.

Internal control system of the Target Group

The Target Group has established and implemented a set of internal control framework in

order to safeguard the Target Group’s assets and interests, monitor and respond to various risk

exposures in a timely and effective manner, ensure compliance with relevant laws and

regulations and direct the Target Group’s towards its business objectives. The Target Group has

established a risk assessment and credit approval committee to review and exercise effective

risk monitoring measures. The operation department is responsible for the implementation of

the control measures based on established policies and procedures. The risk control department

conducts compliance testing to evaluate and validate the adequacy and effectiveness of internal

controls policies and procedures such as segregation of duties, conflict of interests, limit of

authorization and approval, completeness of legal documents and any objective evidence of

impairment of pledged assets. Regular meetings within the risk assessment and credit approval

committee of the Target Group are held to discuss and evaluate the need for improvement in

the internal control system as well as changes in internal regulations. Each of the service line

of the Target Group has its own set of internal control procedures in place to address the unique

business needs of each service line, and the exact internal control procedures vary across

different service lines. Major internal control procedures that are commonly applicable to all

service lines are summarised as follow:

1. Loan/guarantee application and inspection

All loan/guarantee application is initiated by an expression of interest by a customer

for a loan/guarantee arrangement. The project executive of the operation department

would meet the potential customer to understand his financing needs and requirements

and have a preliminary screening of the potential customer based on the Target Group’s

criteria (e.g. values of collateral assets and scope of business, etc). If the potential

customer appears to have satisfied the Target Group’s requirements on loan/guarantee

service, the project executive would recommend the suitable loan/guarantee packages to

him. Detailed information and documents of the potential customer such as corporate

constitutional documents, financial reports, any credit rating and details of collateral

assets would be obtained. These enquiries and collection of information are then followed

by physical visit and inspection of the collateral assets (usually immovable properties) by

the project executive and credit risk personnel of the Target Group.


– 35 –

2. Loan/guarantee approval

The interest/fee to be charged, loan/guarantee amount and repayment schedule are

negotiated between the potential customer and the project executive. After the receipt of

the formal loan/guarantee application and the physical visit of the collateral assets, a

detailed inspection report would be compiled by the project executive and a detailed

credit evaluation report would be compiled by the credit risk personnel. These reports,

together with the draft terms of the loan/guarantee application, are then reviewed and

approved by the respective manager of the operation department and the risk control

department. All loan/guarantee applications shall be approved and authorised by the

Target Group’s risk assessment and credit approval committee by vote and/or the Target

Group’s directors, depending on the principal amount of the loan/guarantee application.

The Target Group’s risk assessment and credit approval committee was established to

oversight the loan/guarantee approval procedure, and consists of members of the senior

management team of the Target Group. After granting of approval, loan/guarantee

agreements, collateral agreements and personal guarantees will be entered into with the

customer, and the legal procedures to secure the collateral assets will be taken. For the

loan guarantee business, loan guarantee agreements will be entered into and will be made

available to third party banks for bank’s approval of their loans.

3. Monitoring of loan position

The timely repayment of principals and interests and risk exposures is monitored by

the operation department. The operation department is responsible for evaluating

loan/guarantee projects based on principal balance, financial position of the customer,

collateral status and any payment in default and assess the risk levels of each

loan/guarantee project. All default in payment will be reported to the general manager

monthly. The operation department performs checking on each customer at least quarterly

to identify any significant potential credit risk.

4. Debt recovery

Where irregularity is noted by the operation department, the risk control department

would plan and take remedial actions, which normally include extending repayment terms

and selling the rights outright to other interested third parties in the market. If these

remedial actions prove unsuccessful, the risk control department will take legal action

against the customer and take control of the collateral assets.

Credit control policy of the Target Group

The credit control policies cover pre-approval inspection, pre-approval risk assessment,

collateral value, loan/guarantee approval hierarchy and continuing monitoring and assessment

process.

The project executive and credit risk personnel would collect information in support of

the financial background of the loan/guarantee applicant, perform physical inspection of


– 36 –

collateral assets and obtain market value of collateral assets. The Target Group’s credit control

manual has explicitly required that every loan/guarantee application shall be supported by

collateral of immovable properties with loan-to-value ratio of no more than 60%, and collateral

of other properties with loan-to-value ratio of no more than 30%. Loan-to-value ratio is

calculated as the principal amount of loan/guarantee divided by the market value of collateral

properties at the time of application. Approval to the loan/guarantee application is granted

according to the specified approval hierarchy ranging from the Chief Operating Officer of the

Target Group to directors of the Target Company, as set out below:

Principal amount of

loan/guarantee: Approval procedures:

RMB5 million or below (i) the risk assessment and credit approval

committee by 4/5 majority vote; and (ii) the Chief

operating officer

Between RMB5 million and

RMB10 million

(i) the risk assessment and credit approval

committee by 4/5 majority vote; and (ii) any of the

director or general manager appointed by Target

Company (any of the director or general manager

appointed by the Company after Completion)

Over RMB10 million (i) the risk assessment and credit approval

committee by 4/5 majority vote; and (ii) any of the

director or general manager appointed by Target

Company (any of the director or general manager

appointed by the Company after Completion); and

(iii) executive Directors by 2/3 majority vote (after

Completion)

The operation department monitors and continuingly assesses risks of loan/guarantee

projects based on principal balance, financial position of the customer, collateral status and any

payment in default. Non-regular check on each customer is conducted at least quarterly by the

operation department to identify any significant potential credit risk and take remedial actions.

To properly control and manage exposures to credit risks, the Target Group select

customers or consider loan/guarantee applications based on the following major criteria:

• Nature of collateral asset. The assets with assessable and stable market prices, such

as immovable properties, are generally preferred.

• Presence of title documents. The Target Group requires potential customers to

produce valid and complete documents in support of their titleship and ownership of

the collateral assets.

• Location of properties. For immovable properties, those that are situated close to

city centre of Beijing are preferred by the Target Group as collateral assets in view

of the market price stability and transparency.


– 37 –

• Financial position. The Target Group would collect customer’s financial statements

to assess their financial positions and repayment ability.

• Nature of and reasons for loan. The Target Group would understand the reasons for

the loan and the underlying business risks.

• Loan duration. It is the Target Group’s strategy to focus its business on provision of

short-term loan/guarantee services that last for less than twelve months.

Financial Information

An accountants’ report of the Target Group has been prepared and included in Appendix

II to this circular. Summarized below is the audited consolidated financial information of the

Target Group for the period since the date of incorporation of Huaxia Xingye Co (i.e. 13 August

2010) until 31 December 2010:

For the period from

13 August 2010

to 31 December

2010

HK$ million

Revenue 8.01

Profit before taxation 7.83

Profit after taxation 5.87

As at

31 December 2010

HK$ million

Non-current assets 0.01

Current assets 190.03

Current liabilities 7.77

Net current assets 182.26

Net assets 182.27

Upon Completion, the Target Company and Huaxia Xingye Co will become wholly-

owned subsidiaries of the Company. The financial results of the Target Group including Huaxia

Xingye Co will be consolidated into the Group’s financial statements.

OVERVIEW OF THE LEGAL AND REGULATORY REQUIREMENTS

The business scope of the Target Group is governed by various government bodies in the

PRC under different PRC rules and regulations. The principal business of the Target Group is

the provision of small loan, loan guarantee and entrusted loan services and consultancy

services in relation to financing.


– 38 –

Pursuant to the PBOC Circular announced by the People’s Bank of China in 2002,

prevailing interest rates charged by private entities in PRC shall not exceed four times of PBOC

benchmark lending rate with the same term. This rule is applicable to all loan lending activities

conducted by the Target Group. Meanwhile, according to the opinion of the PRC Legal

Adviser, Huifeng Rongjin Co is further subject to the requirements of the Trial Implementation

Rules for the reason that (i) it was established as a small loan company in Miyun country,

Beijing, the PRC with the approval of the Beijing Municipal Bureau of Financial Work (北京市金融工作局) in accordance with the Trial Implementation Rules; and (ii) its principal

business is the provision of small loan and related services in Beijing, the PRC. The PRC Legal

Adviser has also opined that Huaxia Xingye Co is further subject to the requirements of the

Two Security Measures for the reason that its principal business is the provision of loan

guarantee related services in the PRC. Save for the above, the Trial Implementation Rules and

the Two Security Measures do not apply to any other company in the Target Group.

The existing corporate structure of the Target Group was established with the purpose of

complying with existing PRC laws and regulations, in particular, the ownership restrictions

under the Trial Implementation Rules.

The Trial Implementation Rules impose certain restrictions on Huifeng Rongjin Co in

terms of both registered capital and business operations. The establishment of Huifeng Rongjin

Co for the provision of loan services in Miyun county, Beijing, PRC was approved by the

Beijing Municipal Bureau of Financial Work (北京市金融工作局). No registered shareholders

of Huifeng Rongjin Co other than the major registered shareholder shall hold more than 20%

of the registered capital of Huifeng Rongjin Co, while the major registered shareholder,

Wanfang Dalong, is allowed to hold a maximum of 30% of the registered capital of Huifeng

Rongjin Co. The Trail Implementation Rules also stipulate that shareholders of small loan

companies shall be domestic natural person, domestic corporate legal person or other social

organizations. Consequently, Gangjia Huitong Co as a wholly foreign owned enterprise

established in the PRC and the Company (upon Completion) are prohibited from becoming a

registered shareholder of Huifeng Rongjin Co. According to the PRC Legal Adviser, the capital

industry is a restricted business in the PRC in which certain restrictions are imposed on the

entry of foreign investment to control and manage the capital market order. Small loan

companies engaging in direct loan lending business are participants in the capital industry in

the PRC and are thus subject to additional restrictions as far as foreign investment is

concerned. Furthermore, the relevant regulatory bodies, including the Beijing Office of China

Banking Regulatory Commission (北京銀監局) and Operation Office of The People’s Bank of

China (人民銀行營業管理部), launched the Trial Implementation Rules for the development of

small loan businesses in the PRC as a pilot scheme. Policies on direct foreign investment in

small loan businesses in Beijing have not been developed or implemented. Under such

circumstance, the Huifeng Rongjin Control Agreements were set up to enable Gangjia Huitong

Co to exercise and secure effective ownership and management over Huifeng Rongjin Co. The

PRC Legal Adviser has opined that the current arrangement of Gangjia Huitong Co exercising

ownership and management control of Huifeng Rongjin Co through the Huifeng Rongjin

Control Agreements complies with the Trial Implementation Rules. The Huifeng Rongjin

Control Agreements do not violate any applicable PRC laws and regulations including the Trial

Implementation Rules, and are valid and enforceable.


– 39 –

The loan guarantee service conducted by Huaxia Xingye Co is governed by the Two

Security Measures. According to the PRC Legal Adviser, there is no restriction on the transfer

and ownership (including foreign ownership) of the registered capital of Huaxia Xingye Co.

Loan guarantee companies with foreign investment are permitted under the Two Security

Measures, and it is therefore legitimate for Gangjia Huitong Co (or other foreign owned

enterprise or foreign companies) to hold all equity interests in Huaxia Xingye Co. The equity

interests in Huaxia Xingye Co were held by Gangjia Huitong Co through Huaxia Xingye

Control Agreements as it takes time for the approval of the transfer of interests from existing

registered shareholders of Huaxia Xingye Co to Gangjia Huitong Co which is a foreign owned

enterprise. As one of the conditions precedent of the Acquisition Agreement, the registered

capital of Huaxia Xingye Co will be transferred from its existing registered shareholders to the

Company or its wholly owned subsidiary before Completion.

The Trial Implementation Rules further impose the following major restrictions and

regulatory requirements on Huifeng Rongjin Co:

1. the maximum outstanding loan amount to each borrower shall not exceed 3% of the

registered capital of Huifeng Rongjin Co;

2. the maximum amount of loan it can raise from banks or financial institutions in

financing its loan business is limited to 50% of its registered capital, or RMB25

million based on the current registered capital of RMB50 million of Huifeng

Rongjin Co. The maximum statutorily allowable borrowing amounts are adjusted

accordingly if the registered capital of Huifeng Rongjin Co is increased;

3. the interest rate charged by it shall not fall below 0.9 time of the PBOC benchmark

lending rate with the same term;

4. it shall make monthly reporting of its financial statements and loan statistics to the

relevant local governing authority;

5. it shall appoint a suitable commercial bank for the custody of its own funds and

clearing of transactions with borrowers; and

6. it shall establish internal control procedures in respect of risk assessments, credit

examination and loan approval, etc. The internal control system of Huifeng Rongjin

Co is subject to annual review by the regulator.

The establishment of Huifeng Rongin Co was approved by the Beijing Municipal Bureau

of Financial Work (北京市金融工作局) on 11 November 2010. Other than such approval and

the business licence obtained by Huifeng Rongjin Co on 2 December 2010, no specific licence

or approval is required by the applicable PRC laws and regulations for Huifeng Rongjin Co to

carry out its business.

The loan guarantee service conducted by Huaxia Xingye Co is governed by the Security

Tentative Measure issued in March 2010 and the Beijing Security Tentative Measure issued in


– 40 –

December 2010. Huaxia Xingye Co is under the supervision of Beijing Municipal Bureau of

Financial Work (北京市金融工作局). There is no restriction on the transfer and ownership of

the registered capital of Huaxia Xingye Co. Pursuant to the Security Tentative Measure, Huaxia

Xingye Co is subject to the following major restrictions and regulatory requirements:


million;

2. it is prohibited from guaranteeing total loan balances of over 10 times of its net

assets, and/or providing guarantee to any individual with the amount exceeding 10%

of its net assets;

3. it shall make a provision on guarantee of 50% on its annual revenue generated from

its guarantee business, which is accounted for as an administrative expense, until the

accumulated provision on guarantee has reached 10% of the total guarantee liability

at the end of a year, after which the movement on the provision shall be determined

on actual basis. Consequently, 50% on revenue generated from guarantee business

is charged to expense on top of normal operating expense;

4. it is prohibited from providing guarantee in favour of its parent company(ies) or

subsidiary(ies);

5. it shall make quarterly reporting of use of capital to the relevant governing

authority(ies);

6. it shall submit financial reports, compliance reports or other documents as stipulated

by the relevant governing authority(ies) at its/their request; and

7. it shall establish internal control procedures in respect of risk assessments,

guarantee approval and debt recovery, etc.

The provisions in the Beijing Security Tentative Measure are not materially different from

that of the Security Tentative Measure, except for the following requirements:

1. the local regulatory body under the Beijing Security Tentative Measure shall be the

Beijing Municipal Bureau of Financial Work (北京市金融工作局); and


million;

Other than the business licence obtained by Huaxia Xingye Co on 13 August 2010 and the

loan guarantee business permit obtained by Huaxia Xingye Co on 31 March 2011, no specific

licence or approval is required by the applicable PRC laws for Huaxia Xingye Co to carry out

its business.

Save as the PBOC Circular disclosed above, there are no specific PRC rules and

regulations on the entrusted loan and consultancy services conducted by Gangjia Huitong Co.


– 41 –

The internal control system of Huifeng Rongjin Co is subject to annual review by the regulator.

In accordance with Trial Implementation Rules, the regulator will monitor the operation and

the associated risks of small loan companies monthly, quarterly and annually. The Directors are

satisfied that the Target Group has established sufficient internal control procedures and credit

control policy in compliance with the relevant PRC rules and regulations including the Trial

Implementation Rules and the Security Tentative Measure mentioned above.

All PRC subsidiaries of the Target Group, namely Gangjia Huitong Co, Huifeng Rongjin

Co and Huaxia Xingye Co, have obtained business licence since their establishment. They are

subject to annual inspection by the Beijing Administration for Industry and Commerce (北京市工商行政管理局) for their business licences. Their business licences will expire on 21

December 2030, 1 December 2060 and 12 August 2030 respectively. The loan guarantee

business permit obtained by Huaxia Xingye Co has a term of five years and is valid until 31

March 2016. At present, the Directors are not aware of any legal impediment for renewing

these licences and the loan guarantee business permit.

RISK FACTORS

Start-up risk

The Directors are confident of the business prospects of the Target Group as the demand

for loans from private enterprises and self-employed individuals in the PRC is expected to

increase in the coming future, however, there are the usual start-up risks involved in its

operations as some principal operating subsidiaries of the Target Group have just recently

commenced its business and there are risks, both from a commercial and regulatory

perspective, for businesses operating in the PRC.

Any inability to effectively mitigate credit risk may have a material adverse impact on

the Target Group’s business, financial condition and results of operations.

The sustainability of the Target Group’s business and future growth depends largely on

the Target Group’s ability to effectively manage the Target Group’s credit risk and maintain the

quality of the Target Group’s receivables portfolio. As such, any deterioration in the Target

Group’s receivable portfolio or impairment in the collectability of the receivables could

materially and adversely affect the Target Group’s results of operations.

The quality of the Target Group’s receivables portfolio may deteriorate for a variety of

reasons, including factors beyond the Target Group’s control, such as a slowdown in the

economic growth of the PRC or global economies, a recurrence of a global credit crisis or other

adverse macroeconomic trends which may cause operational, financial and liquidity problems

for the Target Group’s customers thereby affecting their ability to make timely loan

repayments. If the level of the Target Group’s impaired receivables increases, the Target

Group’s business, financial condition and results of operations may be materially and adversely

affected.

The Target Group may not be able to obtain sufficient funds on commercially

acceptable terms to finance the Target Group’s operations or expansion plans, or at

all.

Due to the capital-intensive nature of the Target Group’s business operations, a

substantial amount of capital as well as ongoing funding is required to support the growth of


– 42 –

the Target Group’s receivables portfolio, as well as to fund future expansion. If sufficient

financing is not available to meet the Target Group’s needs, or cannot be obtained on

commercially acceptable terms, or at all, the Target Group may not be able to fund the

operation and/or expansion of the Target Group’s business, or compete effectively.

The value of collateral or guarantees securing the Target Group’s loan may be

inadequate to cover the Target Group’s receivables.

To minimise credit risk, the Target Group usually seeks security from the customers either

by way of collateral of assets, personal guarantee and/or surety as indemnity for any potential

loss, in all of the small loan, loan guarantee and entrusted loan business. In the event of any

material default on interest payment terms, the Target Group is contractually entitled to enforce

its security rights over any collateral or guarantee. The value of the collateral may decline and

may be materially and adversely affected by a number of factors, such as damage, loss,

oversupply, devaluation or reduced market demand. Similarly, a significant deterioration in the

financial condition of guarantors could significantly decrease the amounts the Target Group

may recover under such guarantees. Declines in the value of such collateral or guarantees may

result in impairments and require the Target Group to make additional impairment provisions

against its receivables, which may, in turn, materially and adversely affect the Target Group’s

business, financial condition and results of operations.

Interest rate changes may adversely affect interest expense related to the Target

Group’s borrowings, reduce net interest income and reduce demand for the Target

Group’s loan or guarantee services.

The Target Group’s business is affected by interest rates, including both the interest rates

charged to the Target Group’s customers and the rate of interest the Target Group pay on the

Target Group’s loans and financing obligations. An increase in interest rates, or the perception

that such an increase may occur, could adversely affect the Target Group’s ability to obtain

bank loans or other financing at favorable interest rates, the Target Group’s ability to maximize

the Target Group’s interest income, the Target Group’s ability to source new customers and the

Target Group’s ability to grow. Any increase in the Target Group’s interest expense or decrease

in the Target Group’s net interest income could have a material adverse effect on the Target

Group’s business, results of operations and financial condition.

The PRC Government may determine that the Huifeng Rongjin Control Agreements

are not in compliance with applicable PRC laws, rules, regulations or policies in

future.

In order for the Target Group to manage and operate the small loan business of Huifeng

Rongjin Co in the PRC, the Huifeng Rongjin Control Agreements have been entered into under

which all the business activities of Huifeng Rongjin Co are managed and operated by Gangjia

Huitong Co and all economic benefits and risks arising from the business of Huifeng Rongjin

Co are transferred to Gangjia Huitong Co. Further information on the Huifeng Rongjin Control

Agreements is set out in the paragraph headed “Information on the Target Group” under this


– 43 –

section. To the best knowledge of the Directors, if the Huifeng Rongjin Control Agreements are

considered to be in breach of any PRC laws or regulations or governmental policy in future,

the Target Group’s business, financial condition and results of operations may be adversely

affected.

Control over Huifeng Rongjin Co. through the Huifeng Rongjin Control Agreements

may not be as effective as direct ownership in Huifeng Rongjin Co.

Immediately upon Completion, the Group will have no equity ownership interest in

Huifeng Rongjin Co.. The Group will rely on the Huifeng Rongjin Control Agreements to

control and operate Huifeng Rongjin Co.. Even if the Huifeng Rongjin Control Agreements are

enforceable, they may not be as effective in providing control over the PRC Company as direct

ownership. There is no assurance that the Target Company will be able to exercise its rights to

protect its interests in the event of any breach or default by Huifeng Rongjin Co.. If Huifeng

Rongjin Co. or its shareholders fail to perform their respective obligations under the Huifeng

Rongjin Control Agreements, the Target Company and Huifeng Rongjin Co.may have to rely

on legal remedies under PRC law, which may not be effective. Any inability, or limitation of

ability, to enforce the contractual arrangements with Huifeng Rongjin Co. or its shareholders

could disrupt business of the Target Group and have a material adverse effect on the results of

operations and financial condition of the Target Group.

Failure to renew the loan guarantee business permit of Huaxia Xingye Co or

revocation of the loan guarantee business permit by authorities

Pursuant to the Two Security Measures, a loan guarantee company is required to obtain

a loan guarantee business permit from a relevant regulatory body. On 31 March 2011 Huaxia

Xingye Co was granted a loan guarantee business permit from the Beijing Municipal Bureau

of Financial Work (北京市金融工作局). The loan guarantee business permit has a term of five

years and is valid until 31 March 2016. At present the Directors are not aware of any legal

impediment for renewing this loan guarantee business permit, but if Huaxia Xingye Co fails to

renew the loan guarantee business permit upon its expiry in 2016, or if Huaxia Xingye Co fails

to observe requirements in relevant PRC laws and regulations such that the loan guarantee

business permit is revoked or terminated by relevant regulatory bodies, Huaxia Xingye Co will

not be able to continue its operation and the loan guarantee business pursuant to the Two

Security Measures, and the Target Group’s results of operations will be adversely affected.

REASONS AND BENEFITS FOR THE ACQUISITION

The Group is principally engaged in the retail business and provisions of short term pawn

loan in the PRC. The Group launched the provisions of short term pawn loan in the PRC since

August 2009. As disclosed in the annual report of the Company for the year ended 31

December 2010, the audited revenue and the net profit after taxation for provisions of short

term pawn loan amounted to approximately HK$15.5 million and HK$4.9 million respectively,

representing approximately 7.1% of the Group’s total revenue and approximately 15.3% of the

Group’s net profit respectively for the year ended 31 December 2010. More resources will be


– 44 –

deployed in this new business as the profitability level is very attractive. This short term pawn

loan business has achieved a higher net profit margin than the retail businesses of the Company

for the year ended 31 December 2010.

The Group commenced its short term loan finance service by way of provision of pawn

loans in the PRC in August 2009. With a view to reformulating the Group’s business strategy

and devoting more time and resources to strengthen its market leadership in its convenience

store business and financial service business in Beijing, the Group has discontinued its retail

business in Shanghai by disposal of its entire 60% interest in Hualian GMS Shopping Center

Company Limited (“GMS”), a company principally engaged in hypermarket chain operation

mainly in Shanghai and nearby provinces such as Jiangsu and Zhejiang, PRC, in August 2010,

despite GMS has been making profits in the past years.

The Directors consider that the rapid economic growth in the PRC over the past years

triggered a substantial expansion in the private enterprises sector, and has created a huge

demand for funding. According to the latest statistics published on the website of the National

Bureau of Statistics of China, the RMB-denominated loans to private enterprises and

self-employed individuals in China increased at a compound annual growth rate of

approximately 30.18% from RMB146.2 billion in 2003 to RMB422 billion in 2008. In view of

the upward trend of loans to private enterprises and self-employed individuals, and the

relatively rigorous credit approval policies to small enterprises and individuals among banks,

the demand for loans from private enterprises and self-employed individuals in the PRC is

expected to increase in the coming future.

In general, banks do not offer small loans and impose numerous requirements on the

creditworthiness of borrowers and restrictions on the use of loans. The flexibility of the

services provided by banks in the PRC is relatively low. In this regards, many private

enterprises are experiencing difficulties in obtaining loans from the banks for their business.

The Directors believe that the Target Group, which is engaged in the provision of small loans,

loan guarantee, entrusted loan service and related consultancy services, will provide the major

channels to satisfy their immediate financial needs.

In view of the above, the Directors (including members of the Independent Board

Committee and the Whitewash Independent Board Committee) considered that the Acquisition

not only provides an opportunity for the Group to expand its short term financing business,

which is expected to have a rising demand, but also enables the Group to leverage on its

existing resources and experiences to provide a variety of solutions of short-term financing in

the PRC which is in the interests of the Company and the Shareholders as a whole.

The Directors have decided to proceed with the Acquisition at the time when some

principal operating subsidiaries of the Target Group have just recently commenced its business,

instead of acquiring it at a later stage when its business has proven track record due to the

following factors: (i) the consideration for acquiring a start up business is generally lower than

the consideration for acquiring a business with track record, (ii) the Directors, having taken

into consideration the operating results of the existing pawn loan business and their


– 45 –

understanding of the short term loan market, considered that the short term loan financing

business is a business with promising growth and as the short term loan financing is a business

that mainly rely on the available funding, it can make use of the cash on hand of the Group,

in particular the net proceeds of approximately HK$504 million received from the disposal of

GMS in August 2010, (iii) the Target Group, although being a start up business, has already

obtained the necessary licence or approval to run its business and by virtue of some contractual

or financial arrangements, including certain banking facility granted by a bank in PRC, an

undertaking from and agreements with other parties, the Target Group is provided with external

funding of up to RMB750 million in 2011, which facilitate its operation and future business

expansion; (iv) the offering of the 2011 Profit Guarantee and the compensation to be provided

by the Vendor in the event that the 2011 Audited Net Profit is less than the 2011 Profit

Guarantee provide the Group with sufficient safeguard against the start-up risk faced by the

Target Group.

In order to carry out the small loan business in the PRC, approval from the relevant

authority is required. The Target Group has already obtained the approval from the Beijing

Municipal Bureau of Financial Work for the establishment of the small loan company, being

Huifeng Rongjin Co. To the Directors’ best knowledge, it is difficult to obtain such approval

in the PRC. Having considered that (i) the Group may face the risk of not getting the approval

from the relevant authority to carry out the small loan business; (ii) the Group has to bear start

up risk if developing the business of the Target Group itself, the Group has not developed the

business of the Target Group itself but acquired the Target Group from the Vendor, who has

spent time and effort to get the necessary approval and offers the Group the 2011 Profit

Guarantee to mitigate its risks in running such business.

The Company has no present intention or plan to dispose of any of the existing businesses

of the Company.

FINANCIAL EFFECT OF THE ACQUISITION

Upon Completion, the Target Company and Huaxia Xingye Co will become wholly-

owned subsidiaries of the Company. The financial results of the Target Group including, inter

alia, Huaxia Xingye Co will be consolidated into the Group’s financial statements. Upon

Completion, the Company indirectly holds 100% equity interests in K.P. Financial Group

Limited which in turn indirectly holds 100% equity interests in Gangjia Huitong Co. Through

the Huifeng Rongjin Control Agreements, the Enlarged Group can exercise power to govern the

financial and operating policies, appoint or remove majority of the members of the board of

directors of Huifeng Rongjin Co and has power to cast more than half of the voting rights of

Huifeng Rongjin Co. Pursuant to HKAS 27 Consolidated and Separate Financial Statements,

control is the power to govern the financial and operating policies of an entity so as to obtain

benefits from its activities; control is presumed to exist when the parent owns, directly or

indirectly through subsidiaries, more than half of the voting power of an entity. In view of the

above, the Directors have confirmed with CCIF CPA Limited, the Company’s auditors, that

Huifeng Rongjin Co would become a subsidiary of the Group upon Completion, and its results

would then be consolidated into the financial statements of the Group.


– 46 –

Based on the unaudited pro forma financial information of the Enlarged Group following

the Acquisition as set out in Appendix III to this circular, the total assets of the Group following

the Acquisition would increase from approximately HK$886 million to approximately

HK$1,406 million, which includes goodwill arising from the Acquisition of approximately

HK$433 million, while the total liabilities of the Group following the Acquisition would

increase from approximately HK$112 million to approximately HK$117 million. The details of

the financial effect of the Acquisition on the financial position together with the bases and

assumptions taken into account in preparing the unaudited pro forma financial information are

set out, for illustration purpose only, in Appendix III to this circular.

As set out in the paragraph headed “Financial Information” under the section

“Information on the Target Group” above, the Target Group recorded audited net profit of

approximately HK$5.9 million since the date of incorporation of Huaxia Xingye Co (i.e. 13

August 2010) until 31 December 2010. Furthermore, as set out in the paragraph “Profit

guarantee” above, the Vendor irrevocably guarantees and warrants to the Purchaser that the

2011 Audited Net Profit for the year ending 31 December 2011 shall not be less than HK$80

million. In the event that the 2011 Audited Net Profit is less than the 2011 Profit Guarantee,

the Vendor shall compensate to the Purchaser an amount equivalent to 5.5 times of the shortfall

in cash. The maximum amount of compensation under the 2011 Profit Guarantee is

HK$440,000,000. On this basis, the Directors consider that the Acquisition and consolidation

of the Target Group and Huaxia Xingye Co into the Group would have a positive impact on the

Group’s earnings upon Completion.

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

The Group is principally engaged in the retail business, sale of food products and

provisions of short term pawn loan in the PRC. As disclosed in the annual report of the

Company for the year ended 31 December 2009, the Group launched the provisions of short

term pawn loan in the PRC since August 2009. In August 2010, the Group has discontinued its

retail business in Shanghai by disposal of its entire 60% interest in Hualian GMS Shopping

Center Company Limited (“GMS”), a company principally engaged in hypermarket chain

operation mainly in Shanghai and nearby provinces such as Jiangsu and Zhejiang, PRC, with

a view to devoting more resources to strengthen its market leadership in its convenience store

business and financial service business in Beijing.

Upon Completion, the Enlarged Group will, through the Target Group, expand its short

term financing business by extending its loan business to provision of small loans, loan

guarantee, entrusted loan service and related consultancy services.

As mentioned in the paragraph headed “Reasons and Benefits for the Acquisition” above,

the proposed Acquisition provides an opportunity for the Group to leverage on its existing

resources and experiences, expand the Group’s business in the fast growing loan industry in the

PRC and generate income from the cash on hand of the Group, in particular the net proceeds

of approximately HK$502 million received from the disposal of GMS in August 2010.

The Company has no present intention to increase the registered capital of subsidiaries of

the Target Group immediately upon Completion. Capital injection may be considered when

their businesses become more fully developed.


– 47 –

It is the intention of the Directors that the Group will substantially continue its current

business after the Completion. Other than the Acquisition, Mr. Cheung and parties acting in

concert with him have no intention to introduce any change to the existing business of the

Group or the Enlarged Group, including any redeployment of the fixed assets of the Group or

the Enlarged Group. It is the intention of the Group, Mr. Cheung and parties acting in concert

with him to continue the employment of the employees of the Group and the Enlarged Group.

4. WHITEWASH WAIVER

As at the Latest Practicable Date, there were 1,747,002,336 Shares in issue and there were

share options pursuant to which 97,000,000 Shares may be issued upon exercise of such share

options. Save for the above, there were no other relevant securities (as defined in Note 4 to

Rule 22 of the Takeovers Code) in issue as at the Latest Practicable Date.


interested in a total of 681,967,796 Shares, representing approximately 39.04% of the existing

issued share capital of the Company. Upon Completion, the interests of Mr. Cheung and parties

acting in concert with him will become interested in a total of 1,931,967,796 Shares,

representing approximately 64.46% of the issued share capital of the Company as enlarged by

the issue of the Consideration Shares, assuming that no further Shares will be issued or

repurchased by the Company on or before Completion. Mr. Cheung and parties acting in

concert with him will then, in the absence of the Whitewash Waiver, be obliged to make a

mandatory general offer for all the Shares not already owned or agreed to be acquired by them

pursuant to Rule 26 of the Takeovers Code as a result of the issue of the Consideration Shares

to the Vendor (or his nominee(s)) upon Completion. Mr. Cheung has made an application to the

Executive for the grant of the Whitewash Waiver. The Whitewash Waiver, if granted by the

Executive, would be subject to, among other things, the approval of the Independent

Shareholders taken by way of a poll at the First EGM. The Executive has indicated that the

Whitewash Waiver will be granted and will be subject to, among other things, the approval of

the Independent Shareholders taken by way of a poll at the First EGM. It is one of the

conditions of the Acquisition Agreement that the Whitewash Waiver be granted by the

Executive. If the Whitewash Waiver is not granted by the Executive or if granted but is not

approved by the Independent Shareholders at the First EGM, the Acquisition Agreement will

not become unconditional and the Acquisition will not proceed.

Mr. Cheung has confirmed that he and parties acting in concert with him have not dealt

in any relevant securities (as defined in Note 4 of Rule 22 of the Takeovers Code) in the

Company during the Relevant Period.

Shareholders and public investors should note that immediately upon issue of the

Consideration Shares, the shareholding of Mr. Cheung and parties acting in concert with

him in the Company will exceed 50% of the voting rights of the Company and that Mr.

Cheung and parties acting in concert with him may increase their shareholding without

incurring any further obligations under Rule 26 of the Takeovers Code to make a general

offer for the securities of the Company. However, there may be circumstances where there


– 48 –

are changes in the make-up of the concert group consisting of Mr. Cheung, Madam Lo

Wan and Arbalice Holdings Limited and holdings of each party in this concert group may

change from time to time. This being the case, any party in this concert group holding less

than 50% of the issued share capital of the Company may incur further obligation to

make a general offer under Rule 26.1 of the Takeovers Code upon further acquisition of

the Shares by any of them unless a waiver from the Executive is granted.

Other arrangements

As at the Latest Practical Date,

(i) save for the undertakings given by Mr. Cheung and Madam Lo Wan in relation to

the 2011 Profit Guarantee (including the share change in respect of the

Consideration Shares to be given by Mr. Cheung upon Completion), there was no

arrangement (whether by way of option, indemnity or otherwise) in relation to the

Shares which might be material to the Acquisition or the Whitewash Waiver;

(ii) save for the Acquisition Agreement, there was no other agreement or arrangement

to which Mr. Cheung is a party which relates to the circumstances in which it may

or may not invoke or seek to invoke a pre-condition or a condition to the Acquisition

or the Whitewash Waiver;

(iii) save for the employee share options granted by the Company to Mr. Cheung and

Madam Lo Wan on 4 October 2007, which enable them to exercise in a maximum

of 22,000,000 Shares, neither Mr. Cheung nor any person acting in concert with him

held any convertible securities, warrants or options of the Company;

(iv) neither Mr. Cheung nor person acting in concert with him has entered into any

outstanding derivative in respect of securities in the Company;

(v) there were no relevant securities (as defined in Note 4 to Rule 22 of the Takeovers

Code) in the Company, which Mr. Cheung or any person acting in concert with him

has borrowed or lent; and

(vi) neither Mr. Cheung nor any person acting in concert with him has received an

irrecoverable commitment from anyone to vote for or against the Acquisition and the

Whitewash Waiver.

5. LISTING RULES IMPLICATIONS

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

Mr. Cheung is the Chairman of the Board, an executive Director and the controlling

Shareholder, and together with his associates, that beneficially interested in approximately

39.04% of the issued share capital of the Company as at the Latest Practicable Date. Mr.

Cheung is also the Vendor who owns the entire equity interest of the Target Company. By virtue


– 49 –

of Mr. Cheung’s interest in the Company and the Target Company, and his directorship in the

Company, the transactions contemplated under the Acquisition Agreement constitute a

connected transaction of the Company under the Listing Rules. Accordingly, the transactions

contemplated under the Acquisition Agreement, including the issue of the Consideration

Shares, are subject to the approval of the Independent Shareholders at the First EGM. Mr.

Cheung and Madam Lo Wan who have a material interest in the Acquisition, in their capacity

as Directors, had abstained from voting on the relevant board resolution in respect of the

Acquisition and Acquisition Agreement. Mr. Cheung, Madam Lo Wan (being the spouse of Mr.

Cheung and an executive Director), Arbalice Holdings Limited (which is owned as to 60% by

Mr. Cheung and 40% by Madam Lo Wan) and their respective associates and concert parties

and those who are interested in or involved in the Acquisition and the Whitewash Waiver shall

abstain from voting on the relevant resolutions in relation to the Acquisition and the Whitewash

Waiver at the First EGM. As at the Latest Practicable Date, apart from Mr. Cheung, Madam Lo

Wan and Arbalice Holdings Limited, there is no other person who has a material interest in the

Acquisition or the Whitewash Waiver and shall abstain from voting on the relevant resolutions

in relation to the Acquisition and the Whitewash Waiver at the First EGM.

6. CHANGE OF COMPANY NAME

The Proposal

The Board announced on 7 March 2011 that it intended to put forward a proposal to

the Shareholders to change its name from “K.P.I. Company Limited 港佳控股有限公司”

to “China Financial Services Holdings Limited 中國金融投資管理有限公司”.

Conditions

The Change of Company Name will be subject to the following:

1. the passing of a special resolution by the Shareholders approving the Change

of Company Name at the Second EGM; and

2. the Registrar of Companies in Hong Kong approving the Change of Company

Name.

The new name of the Company will take effect on the date of the issuance of the

certificate of change of name by the Registrar of the Companies in Hong Kong.

Reasons for the Change of Company Name

Under the Change of Company Name, the name of the Company will change from

“K.P.I. Company Limited 港佳控股有限公司” to “China Financial Services Holdings

Limited中國金融投資管理有限公司”. The Board considered that the new name is a better

reflection of the business trend of the Company in the future. As such, the Change of

Company Name is in the interests of the Company and the Shareholders as a whole.


– 50 –

Effects on the Change of Company Name

The Change of Company Name will not affect any of the rights of the Shareholders

or the Company’s daily business operation and its financial position.

The Change of Company Name will be effective on the date of the issuance of the

certificate of change of name by Registrar of the Companies in Hong Kong. Thereafter,

share certificates of the Company will be issued in the new name of the Company.

However, all existing share certificates in issue bearing the existing name of the Company

will, after the Change of Company Name has become effective, continue to be effective

as documents of title to and be valid for trading, settlement and registration purposes.

There will not be any arrangement for the exchange of the existing share certificates of

the Company for new share certificates bearing the new name of the Company.

The Company will make an announcement when the Change of Company Name

becomes effective.

7. THE FIRST EGM, THE SECOND EGM AND VOTING ARRANGEMENT

The First EGM will be convened and held for the Independent Shareholders to, among

other things, consider and, if thought fit, approve the Acquisition, the grant of the specific

mandate for the issue of the Consideration Shares and the Whitewash Waiver.

By reason of the requirements of the Takeovers Code and the Listing Rules, Mr. Cheung,

Madam Lo Wan, Arbalice Holdings Limited and their respective associates and concert parties,

and those Shareholders who are involved in or interested in the Acquisition and the Whitewash

Waiver are required to abstain from voting at the First EGM in respect of the resolutions to

approve the Acquisition, the grant of specific mandate for the issue of the Consideration Shares

and the Whitewash Waiver.

Save for the aforesaid, to the best of the knowledge, information and belief of the

Directors after having made all reasonable enquiries, no other Shareholder is required to

abstain from voting in respect of the resolutions to consider and approve the Acquisition and

the Whitewash Waiver at the First EGM.

A notice convening the First EGM to be held on 18 May 2011 (Wednesday) at 11:15 a.m.

at Boardroom V, Ground Floor, Renaissance Harbour View Hotel, No. 1 Harbour Road,

Wanchai, Hong Kong is set out on pages EGM-1 to EGM-2 of this circular for the purpose of

considering and, if thought fit, passing the ordinary resolutions set out therein.

The Second EGM will be convened and held for the Shareholders to approve the Change

of Company Name.

The Change of Company Name is subject to the Shareholders’ approval at the Second

EGM. Since no Shareholder has material interest in the Change of Company Name, no

Shareholder is required to abstain from voting in respect of the resolution to consider and

approve the Change of Company Name.


– 51 –

A notice convening the Second EGM to be held on 23 June 2011 (Thursday) at 11:00 a.m.

at Suite 5606, 56/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong is set out on pages

EGM-3 to EGM-4 of this circular for the purpose of considering and, if thought fit, passing the

special resolution set out therein.

Under Rule 13.39(4) of the Listing Rules any vote of the Shareholders at general meetings

must be taken by poll. Under Rule 2.9 of the Takeovers Code, voting on the Whitewash Waiver

at the First EGM must be taken by poll.

You will find enclosed the proxy forms for use at the First EGM and the Second EGM.

Whether or not you are able to attend the First EGM and the Second EGM, you are requested

to complete and return the enclosed proxy forms in accordance with the instructions printed

thereon to the office of the share registrar and transfer office of the Company, Tricor Tengis

Limited, at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon

as possible but in any event not less than 48 hours before the time appointed for holding the

First EGM and the Second EGM, or any adjournment thereof. Completion and return of the

proxy form will not preclude you from attending and voting in person at the First EGM and the

Second EGM, or any adjournment thereof, should you so wish.

RECOMMENDATION

The Independent Board Committee comprising all the independent non-executive

Directors, namely Mr. Wang Jian Sheng, Mr. Chan Chun Keung and Mr. Tsang Kwok Wai, has

been established to consider, and to advise the Independent Shareholders as to the fairness and

reasonableness of the terms of the Acquisition Agreement. The Whitewash Independent Board

Committee comprising the non-executive Director, Mr. Liu Hui, and all the independent

non-executive Directors has been established to consider, and to advise the Independent

Shareholders on the fairness and reasonableness of terms of the Acquisition Agreement and the

Whitewash Waiver.

The Independent Board Committee, having considered the advice from Quam Capital,

considers that the terms of the Acquisition Agreement are fair and reasonable and in the

interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board

Committee has recommended the Independent Shareholders to vote in favour of the resolutions

in respect of the Acquisition Agreement to be proposed at the First EGM.

The Whitewash Independent Board Committee, having considered the advice from Quam

Capital, considers that the terms of the Acquisition Agreement and the Whitewash Waiver are

fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Accordingly, the Whitewash Independent Board Committee has recommended the Independent

Shareholders to vote in favour of the resolutions in respect of the Acquisition Agreement and

the Whitewash Waiver to be proposed at the First EGM.


– 52 –

The Directors, including the non-executive Director and independent non-executive

Directors, consider the terms of the Acquisition Agreement and the Whitewash Waiver, and the

Change of Company Name are in the best interests of the Company and the Shareholders as a

whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour

of the resolutions in respect of the Acquisition, the grant of specific mandate for the issue of

the Consideration Shares and the Whitewash Waiver to be proposed at the First EGM, and

recommend all Shareholders to vote in favour of the resolution in respect of the Change of

Company Name to be proposed at the Second EGM.

The recommendation of the Independent Board Committee is set out on page 54 to this

circular, the recommendation of the Whitewash Independent Board Committee is set out on

pages 55 to 56 to this circular and the letter from Quam Capital is set out on pages 57 to 86

to this circular.

ADDITIONAL INFORMATION

Your attention is also drawn to the information set out in the appendices to this circular.

By Order of the Board

K.P.I. Company Limited

Chung Chin Keung

Company Secretary


– 53 –


(Stock Code: 605)

29 April 2011

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

We refer to the circular of K.P.I. Company Limited (the “Company”) dated 29 April 2011

(the “Circular”) to the shareholders of the Company, of which this letter forms part. Terms

defined in the Circular shall have the same meanings in this letter unless the context requires

otherwise.

We have been appointed by the Board as the Independent Board Committee to advise you

as to whether the terms of the Acquisition Agreement are fair and reasonable and in the

interests of the Company and the Shareholders as a whole.

Quam Capital has been appointed to act as the independent financial adviser to advise the

Independent Board Committee and the Independent Shareholders in respect of the terms of the

Acquisition Agreement. The text of the letter of advice from Quam Capital containing their

recommendation and the principal factors they have taken into account in arriving at their

recommendation is set out on pages 57 to 86 of the Circular.

Independent Shareholders are recommended to read the letter of advice from Quam

Capital, the letter from the Board contained in the Circular as well as the additional information

set out in the appendices to the Circular. Having considered the terms of the Acquisition

Agreement and the advice of Quam Capital, we consider that the terms of the Acquisition

Agreement are fair and reasonable and in the interests of the Company and the Shareholders

as a whole.

We recommend the Independent Shareholders to vote in favour of the resolutions in

respect of the Acquisition Agreement to be proposed at the First EGM.

Yours faithfully,

For and on behalf of

the Independent Board Committee

Mr. Wang Jian Sheng Mr. Chan Chun Keung

Independent non-executive Director Independent non-executive Director

Mr. Tsang Kwok Wai

Independent non-executive Director

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

– 54 –


(Stock Code: 605)

29 April 2011

To the Independent Shareholders

Dear Sir or Madam,

(1) MAJOR AND CONNECTED TRANSACTION; AND

(2) WHITEWASH WAIVER

We refer to the circular of K.P.I. Company Limited (the “Company”) dated 29 April 2011

(the “Circular”) to the shareholders of the Company, of which this letter forms part. Terms

defined in the Circular shall have the same meanings in this letter unless the context requires

otherwise.

We have been appointed by the Board as the Whitewash Independent Board Committee

to advise you as to whether the terms of the Acquisition Agreement and the Whitewash Waiver

are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Quam Capital has been appointed to act as the independent financial adviser to advise the

Whitewash Independent Board Committee and the Independent Shareholders in respect of the

terms of the Acquisition Agreement and the Whitewash Waiver. The text of the letter of advice

from Quam Capital containing their recommendation and the principal factors they have taken

into account in arriving at their recommendation is set out on pages 57 to 86 of the Circular.

Independent Shareholders are recommended to read the letter of advice from Quam

Capital, the letter from the Board contained in the Circular as well as the additional information

set out in the appendices to the Circular. Having considered the terms of the Acquisition

Agreement, the Whitewash Waiver and the advice of Quam Capital, we consider that the terms

of the Acquisition Agreement and the Whitewash Waiver are fair and reasonable and in the

interests of the Company and the Shareholders as a whole.

LETTER FROM THE WHITEWASH INDEPENDENT BOARD COMMITTEE

– 55 –

We recommend the Independent Shareholders to vote in favour of the resolutions in

respect of the Acquisition Agreement and the Whitewash Waiver to be proposed at the First

EGM.

Yours faithfully,


the Whitewash Independent Board Committee

Mr. Liu Hui Mr. Wang Jian Sheng

Non-executive Director Independent non-executive Director

Mr. Chan Chun Keung Mr. Tsang Kwok Wai

Independent non-executive Director Independent non-executive Director

LETTER FROM THE WHITEWASH INDEPENDENT BOARD COMMITTEE

– 56 –

The following is the full text of a letter of advice from Quam Capital, the independent

financial adviser to the Independent Board Committee, the Whitewash Independent Board

Committee and the Independent Shareholders, which has been prepared for the purpose of

incorporation into this circular, setting out its advice to the Independent Board Committee, the

Whitewash Independent Board Committee and the Independent Shareholders in respect of the

transactions contemplated under the Acquisition Agreement.

29 April 2011

To the Independent Board Committee,

the Whitewash Independent Board Committee

and the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

AND

WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent

Board Committee, the Whitewash Independent Board Committee and the Independent

Shareholders in respect of the Acquisition and the application for Whitewash Waiver, details

of which are set out in the “Letter from the Board” contained in the circular issued by the

Company to its shareholders dated 29 April 2011 (the “Circular”), of which this letter forms

part. Terms used in this letter shall have the same meaning as defined in the Circular unless the

context otherwise requires.

On 27 January 2011, the Company, the Purchaser and the Vendor entered into the

Acquisition Agreement (as supplemented by a supplemental agreement dated 25 February

2011) pursuant to which the Purchaser conditionally agreed to acquire and the Vendor

conditionally agreed to sell the Sale Share and the Sale Loan at the Consideration of HK$600

million. The Consideration will be satisfied as to (i) HK$500 million by the allotment and issue

of 1,250,000,000 Consideration Shares to the Vendor (or his nominee(s)) at an issue price of

HK$0.4 per Share, credited as fully paid, on the Completion Date; and (ii) the balance of

HK$100 million by the Purchaser in cash, either one-off or by such number of instalments and

amount as determined by the Purchaser, within six months after the Completion Date. The

Consideration Shares represent approximately 71.55% of the existing issued share capital of

the Company and approximately 41.71% of the issued share capital of the Company as enlarged

by the allotment and issue of the Consideration Shares.

LETTER FROM QUAM CAPITAL

– 57 –


interested in a total 681,967,796 Shares, representing approximately 39.04% of the existing

issued share capital of the Company. Upon Completion, Mr. Cheung and parties acting in

concert with him will become interested in a total of 1,931,967,796 Shares, representing

approximately 64.46% of the issued share capital of the Company as enlarged by the issue of

the Consideration Shares, assuming that no further Shares will be issued or repurchased by the

Company on or before Completion. Mr. Cheung and parties acting in concert with him will be

obliged, in the absence of the Whitewash Waiver, to make an unconditional mandatory general

offer for all the issued Shares not already owned or agreed to be acquired by them pursuant to

Rule 26 of the Takeovers Code as a result of the issue of the Consideration Shares to the Vendor

(or his nominee(s)) upon Completion. Mr. Cheung has made an application to the Executive for

the grant of the Whitewash Waiver. The Whitewash Waiver, if granted by the Executive, will

be subject to approval by the Independent Shareholders on a vote taken by way of poll at the

First EGM in accordance with Note 1 on Dispensations from Rule 26 of the Takeovers Code.

The granting of the Whitewash Waiver is one of the conditions precedent of the Acquisition

Agreement. If the Whitewash Waiver is not granted by the Executive or if granted but is not

approved by the Independent Shareholders at the First EGM, the Acquisition Agreement will

not become unconditional and the Acquisition will not proceed.

By reasons of the requirements of the Takeovers Code and the Listing Rules, Mr. Cheung,

Madam Lo Wan, Arbalice Holdings Limited and their respective associates and concert parties,

and those Shareholders who are involved in or interested in the Acquisition and the Whitewash

Waiver are required to abstain from voting at the First EGM in respect of the resolutions to

approve the Acquisition and the Whitewash Waiver. Save for the aforesaid, to the best of the

knowledge, information and belief of the Directors after having made all reasonable enquires,

no other Shareholder is required to abstain from voting in respect of the resolutions to consider

and approve the Acquisition and the Whitewash Waiver at the First EGM.

By virtue of Mr. Cheung’s interest in the Company and the Target Company, and his

directorship in the Company, the transactions contemplated under the Acquisition Agreement

constitute a major and connected transaction of the Company under the Listing Rules and are

subject to approval of the Independent Shareholders at the First EGM.

The Independent Board Committee comprising all the independent non-executive

Directors, namely Mr. Wang Jian Sheng, Mr. Chan Chun Keung and Mr. Tsang Kwok Wai, has

been established to consider, and to advise the Independent Shareholders as to the fairness and

reasonableness of the terms of the Acquisition Agreement. The Whitewash Independent Board

Committee comprising the non-executive Directors, Mr. Liu Hui, and all the independent

non-executive Directors has been established to consider, and to advise the Independent

Shareholders on the fairness and reasonableness of the terms of the Acquisition Agreement and

the Whitewash Waiver. None of the members of the Independent Board Committee and the

Whitewash Independent Board Committee has been involved in, or interested in, the

Acquisition and the Whitewash Waiver. As the independent financial adviser, our role is to give

an independent opinion to the Independent Board Committee, the Whitewash Independent

Board Committee and the Independent Shareholders in such regard.


– 58 –

BASIS OF OUR OPINION

In formulating our recommendation, we have relied on (i) the information and facts

contained or referred to in the Circular; (ii) the information supplied by the Company and its

advisers; (iii) the opinions expressed by and the representations of the Directors and

management of the Group; and (iv) our review of the relevant public information. We have

assumed that all the information provided and representations and opinions expressed to us or

contained or referred to in the Circular were true, accurate and complete in all respects as at

the Latest Practicable Date and may be relied upon. The Company is obliged to inform the

Shareholders if there is any material change to the information disclosed in the Circular prior

to the date of the First EGM, in which case we will consider whether it is necessary to revise

our opinion and inform the Shareholders accordingly. If it comes to our attention that there is

any material change to the information contained in our letter, we will inform the Shareholders

through supplemental announcement and/or circular of the Company accordingly. We have no

reason to doubt the truth, accuracy and completeness of such information and representations

provided to us by the management of the Group, the Directors and the advisers of the Company.

We have also sought and received confirmation from the Directors that no material facts have

been withheld or omitted from the information provided and referred to in the Circular and that

all information or representations regarding the Company and the Acquisition provided to us

by the Company and/or the Directors and the management of the Group are true, accurate,

complete and not misleading in all respects at the time they were made and continued to be so

until the date of the First EGM.

We consider that we have reviewed sufficient information currently available to reach an

informed view and to justify our reliance on the accuracy of the information contained in the

Circular so as to provide a reasonable basis for our recommendation. We have not, however,

carried out any independent verification of the information, nor have we conducted any form

of in-depth investigation into the business, affairs, operations, financial position or future

prospects of the Company and the Target Group or any of their respective subsidiaries and

associates.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation in respect of the transactions contemplated under the

Acquisition Agreement, we have taken into consideration the following factors and reasons:

I. Background of and reasons for the Acquisition

1. Background information of the Group

The Group is principally engaged in the retail business and provisions of short term

pawn loan in the PRC. The Group launched the provision of short term pawn loan in the

PRC since August 2009. As disclosed in the annual report of the Company for the year

ended 31 December 2010, the total revenue and net profit from continuing operations of

the Group amounted to approximately HK$217 million and HK$27 million, respectively,


– 59 –

representing a net margin of 12.4%. The audited revenue and the net profit for the

provision of short term pawn loan amounted to approximately HK$15.5 million and

HK$4.9 million, respectively, representing a net margin of approximately 31.6%. In view

that the net margin of provision of short term pawn loan is significantly higher than that

of the retail business of the Group, we consider it to be a reasonable approach for the

Company to, as stated in the Letter from the Board, deploy more resources in this new

business as the profitability level is relatively attractive.

2. Background information of the Target Group

K.P. Financial Group Limited

K.P. Financial Group Limited is an investment holding company whose entire

issued share capital is owned by the Vendor as at the date of the Acquisition

Agreement. Its principal assets are the beneficial interest in the entire equity

interests of each of KP Financial Services Limited and KP Financial Holdings

Limited.

KP Financial Services Limited

KP Financial Services Limited is an investment holding company whose entire

issued share capital is owned by K.P. Financial Group Limited. Its principal assets

are the beneficial interest in the entire equity interest of Gangjia Huitong Co. Other

than that, KP Financial Services Limited does not engage in any business activity.

KP Financial Holdings Limited

KP Financial Holdings Limited is currently inactive and its entire issued share

capital is owned by K.P. Financial Group Limited. It does not hold any material asset

as at the Latest Practicable Date.

Gangjia Huitong Co

Gangjia Huitong Co is a wholly foreign owned enterprise established in the

PRC on 22 December 2010 with registered and fully paid up capital of USD300,000

and is wholly owned by KP Financial Services Limited. It is principally engaged in

the provision of consultancy services in relation to financing and provision of

entrusted loans for its client. Gangjia Huitong Co has commenced its business in

February 2011. Other than the business licence obtained by Gangjia Huitong Co on

22 December 2010, no specific license or approval is required by the applicable PRC

laws for Gangjia Huitong Co to carry out its business. Gangjia Huitong Co is

beneficially interested in 70% of the equity interests in Huifeng Rongjin Co and

100% of the equity interests in Huaxia Xingye Co through a set of agreements as

mentioned below.


– 60 –

Huifeng Rongjin Co

Huifeng Rongjin Co is a limited liability company established in the PRC on

2 December 2010 with registered and fully paid up capital of RMB50 million. It is

beneficially owned as to 70% of the equity interest by Gangjia Huitong Co (through

the Huifeng Rongjin Control Agreements) and the remaining 30% by Beijing

Wanfang Dalong Property Management Company Limited (北京萬方達隆物業管理有限公司). It is principally engaged in the provision of small loan services in Miyun

county, Beijing, the PRC. On 11 November 2010, the Beijing Municipal Bureau of

Financial Work (北京市金融工作局), which is a municipal agency responsible for

the development and promotion of financial service industry, and supervision of

small loan companies and loan guarantee companies in Beijing, in accordance with

Trial Implementation Rules on Small Loan Company in Beijing (北京市小額貸款公司試點實施辦法, the “Trial Implementation Rules”) promulgated by Beijing Finance

Office (北京市金融辦), Beijing Administration for Industry and Commerce (北京市工商行政管理局), Beijing Office of China Banking Regulatory Commission (北京銀監局) and Operation Office of The People’s Bank of China (人民銀行營業管理部)

on 4 January 2009, approved the establishment of Huifeng Rongjin Co for the

provision of loan services in Miyun county, Beijing, the PRC. Save for the Beijing

Municipal Bureau of Financial Work (北京市金融工作局), Huifeng Rongjin Co is

not under the supervision of any other regulatory body in the PRC. Pursuant to the

legal opinion issued by the PRC Legal Adviser of the Company (the “PRC Legal

Opinion”), Huifeng Rongjin Co has obtained all necessary licenses to operate its

business under the applicable PRC laws and regulations and no further licence or

approval from the Beijing Municipal Bureau of Financial Work (北京市金融工作局)

is required for Huifeng Rongjin Co in carrying out its operation. Huifeng Rongjin

Co has commenced its business in February 2011 and it is subject to certain

restrictions and regulatory requirements under the Trial Implementation Rules,

details of which are referred to in the Letter from the Board.

Huaxia Xingye Co

Huaxia Xingye Co is a limited liability company established in the PRC on 13

August 2010 with registered and fully paid up capital RMB100 million and is

beneficially owned by Gangjia Huitong Co through the Huaxia Xingye Control

Agreements. It is principally engaged in the provision of loan guarantee services to

individuals and corporations. In March 2010, China Banking Regulatory

Commission (中國銀監局), the National Development and Reform Commission (中國國家發展和改革委員會), Ministry of Finance People’s Republic of China (中華人民共和國財政部) and the People’s Bank of China (中國人民銀行) promulgated the

Tentative Measures for the Administration of Financing Security Companies (融資性擔保公司管理暫行辦法 , the “Security Tentative Measure”) to govern the loan

guarantee business in the PRC. This Security Tentative Measure has national

applicability. On 31 December 2010, empowered by the Security Tentative Measure,

the Beijing Municipal Bureau of Financial Work (北京市金融工作局) as the regional


– 61 –

regulatory body further promulgated the Beijing Tentative Measures for the

Administration of Financing Security Companies (北京融資性擔保公司管理暫行辦法 , the “Beijing Security Tentative Measure”) to govern loan guarantee companies

in Beijing, the PRC. Both the Security Tentative Measure and the Beijing Security

Tentative Measure (collectively the “Two Security Measures”) are directly

applicable to the Huaxia Xingye Co. The Two Security Measures set out detailed

rules governing the companies engaging in the loan guarantee business.

The Two Security Measures specifies that all companies carrying on the loan

guarantee business shall obtain 融資性擔保公司經營許可證 (loan guarantee

business permit) from a relevant regulatory body. Huaxia Xingye Co has been

established and has been carrying on its loan guarantee business since 13 August

2010. It provides corporate or credit guarantee for bank loans and other liabilities to

individuals and small-to-medium seized enterprises for a service charge. The Two

Security Measures specified a grace period for existing loan guarantee companies to

comply with the Two Security Measures by 31 March 2011. Huaxia Xingye Co was

granted a loan guarantee business permit from the Beijing Municipal Bureau of

Financial Work (北京市金融工作局) on 31 March 2011.

In addition to the loan guarantee business permit granted by the the Beijing

Municipal Bureau of Financial Work (北京市金融工作局) on 31 March 2011,

Huaxia Xingye Co has also obtained the business licence on 13 August 2010. Apart

from the business licence and the loan guarantee business permit, no other specific

licence or approval is required by the applicable PRC laws for Huaxia Xingye Co

to carry out its business. Huaxia Xingye Co is under the supervision of Beijing

Municipal Bureau of Financial Work (北京市金融工作局).

According to the PRC Legal Opinion, the Beijing Municipal Bureau of

Financial Work (北京市金融工作局) is responsible for the supervision of Huaxia

Xingye Co since early 2011. Huaxia Xingye Co provides corporate or credit

guarantee for bank loans and other liabilities to individuals and small-to-medium

sized enterprises for a services charge. It has commenced its business since August

2010 and is subject to certain restrictions and regulatory requirements under the

Security Tentative Measure and the Beijing Security Tentative Measure, details of

which are referred to in the Letter from the Board.

As stated in the Letter from the Board, a set of agreements (the “Huifeng

Rongjin Control Agreements”) has been entered into among Gangjia Huitong Co,

Huifeng Rongjin Co, registered shareholders of Huifeng Rongjin Co which in

aggregate holds 70% of its registered capital, and the director of Huifeng Rongjin

Co; and a set of agreements (the “Huaxia Xingye Control Agreements”) has been

entered into among Gangjia Huitong Co, Huaxia Xingye Co; registered shareholders

of Huaxia Xingye Co which in aggregate hold its entire registered capital, and the

director of Huaxia Xingye Co. Through the Huifeng Rongjin Control Agreements

and the Huaxia Xingye Control Agreements, Gangjia Huitong Co has in substance


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secured the ownership and management control of each of Huifeng Rongjin Co and

Huaxia Xingye Co respectively. The Vendor has procured that the Huaxia Xingye

Control Agreements will be terminated upon the transfer of the registered capital

from the existing registered shareholders of Huaxia Xingye Co to the Company or

its wholly owned subsidiary. Such transfer is one of the conditions precedent of the

Acquisition Agreement. As a result, the Huaxia Xingye Control Agreements will no

longer exist upon Completion.

The Directors are of the view that the Target Group has ability to ensure sound

and proper control of Huifeng Rongjin Co through the Huifeng Rongjin Control

Agreements. As stated in the Letter from the Board, the PRC Legal Adviser has

opined that no approval is required by PRC authorities for the Huifeng Rongjin

Control Agreements and that the Huifeng Rongjin Control Agreements are in

compliance with the PRC rules and regulations and are legally valid and

enforceable. As advised by the Company, the Directors have confirmed with the

auditors of the Company that Huifeng Rongjin Co would become a subsidiary of the

Group upon Completion and the financial results of Huifeng Rongjin Co would be

consolidated into the financial statements of the Group.

Further details of the background information, major restrictions and

regulatory requirements for the business operation of each member of the Target

Group and material terms and arrangements of the Huifeng Rongjin Control

Agreements, have been set out in the Letter from the Board.

3. Financial information of the Target Group

Set out below is the key audited consolidated financial information of the

Target Group since the date of incorporation of Huaxia Xingye Co (i.e. 13 August

2010) to 31 December 2010 as extracted from the accountants’ report of the Target

Group as set out in Appendix II to the Circular.


– 63 –

For the period from

13 August 2010 to

31 December 2010

(HK$000)

Revenue 8,013

Profit before taxation 7,834

Profit for the period and total comprehensive

income for the period attributable to owners

of the Target Group 5,869

As at

31 December 2010

(HK$000)

Non-current assets 13

Current assets 190,022

Total assets 190,035

Current liabilities 7,766

Net current assets 182,256

Net assets value 182,269

4. Reasons for the Acquisition

As stated in the Letter from the Board, the Group commenced its short term

loan finance service by way of provision of pawn loans in the PRC in August 2009.

The Directors consider that the Acquisition will provide an opportunity for the

Group to expand its short term financing business as it is expected to have an

increasing demand for loans from private enterprises and individuals in the PRC. We

have reviewed certain recent official economic statistics, which include (i) statistics

available from the National Bureau of Statistics of China; (ii) the China Financial

Stability Report 2010; (iii) the statistical report on uses of loans of financial

institutions (2010); (iv) “Several Opinions of the State Council on Encouraging and

Guiding the Healthy Development of Private Investment” (《國務院關於鼓勵和引導民間投資健康發展的若干意見》) ; (v) the China Monetary Policy Report Quarter

Two (2010); and (vi) the Opinions on Further Improving Financial Services to SMEs

(PBOC Document No. 193 [2010]), published by the PRC Government or the

People’s Bank of China (the (“PBOC”) in 2010. Based on National Bureau of

Statistics of China, China was one of the fastest growing economies in the world

over the past decade. The GDP in the PRC grew at a compound annual growth rate

of approximately 14.3% from 1999 to 2009. The growth of GPD in the PRC is

principally as a result of the increase in domestic consumption. According to the

China Financial Stability Report 2010 published by the PBOC on 5 August 2010, the

financial liabilities/ assets ratio of the household sector in the PRC increased in

recent years which indicates that there is an increasing demand of debt financing in

the PRC. Also, the financial liabilities/ assets ratio is relatively low compared with


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other developed countries such as US and UK. Based on the above, there is still

room for the PRC debt market to further expand and it is expected that the financing

services of the Target Group has a growth potential.

In line with the economic growth in the PRC, the private enterprises sector in

the PRC has expanded rapidly in recent years and the demand for funding is on an

increasing trend. With reference to the statistical report on uses of loans of financial

institutions, 2010 issued by the PBOC, loans to small and medium enterprises

(“SMEs”) grow faster than loans to larger enterprises. The outstanding loans to

small enterprises increased by 29.3% to RMB7.55 trillion, surpassing the growth of

those to large enterprises by 16.0% from 2009 to 2010. As shown in the latest

statistics published on the website of the National Bureau of Statistics of China, the

RMB-denominated loans to private enterprises and self-employed individuals in

China increased at a compound annual growth rate of approximately 23.62% from

RMB146.2 billion in 2003 to RMB422 billion in 2008. With the rapid expansion of

the private enterprise sector in the PRC and the upward trend of loans to private

enterprises and self-employed individuals in the PRC, the Directors believe that

there will be upside potential in the demand for the financing services of the Target

Group.

According to the China Financial Stability Report 2010 published by the

PBOC, the loan guarantee companies have played an active role in complementing

the main traditional financing channel and easing financing difficulties of SMEs,

and become a good complement to bank credits. The financing guaranty companies

have covered SMEs of most industries, providing guarantee through credit

multiplication and upgrading. Many SMEs may not be able to obtain loans from

banks to satisfy their emergency needs as banks would impose numerous

requirements on the creditworthiness of borrowers and restrictions on the use of

loans. In this regards, many SMEs are experiencing difficulties in obtaining loans

from banks for their business. The Directors believe that the Target Group would

allow a more flexible and quicker means of accessing to financing services than

traditional banking services and would attract a wider customer base which includes

SMEs, proprietors of SMEs and individuals, thus offering the Target Group with

ample business opportunities.

With reference to the “Several Opinions of the State Council on Encouraging

and Guiding the Healthy Development of Private Investment” (《國務院關於鼓勵和引導民間投資健康發展的若干意見》) issued by the State Council in May 2010, it

was spelled out explicitly that the Chinese government aimed to encourage and

guide private capital to enter the financial service field, including the development

of small loan companies. It proposed to widen rationally the limitation of

shareholding by a single investor in small loan companies. It also pronounced the

support towards the establishment of credit guarantee corporations by private

capital. With reference to the China Monetary Policy Report Quarter Two, 2010

issued by the PBOC, it stated that PBOC will step up financial support to solve the


– 65 –

difficulties of SMEs in accessing loans. According to the Opinions on Further

Improving Financial Services to SMEs (PBOC Document No. 193 [2010]) released

by the PBOC, jointly with the China Banking Regulatory Commission, the China

Securities Regulatory Commission, and the China Insurance Regulatory

Commission on 21 June 2010 (the “Opinions”), the Opinions sought to expand the

financing channels for SMEs, such as increasing banking facilities to small loan

companies from large commercial banks so that more capital will be available for

SMEs’ borrowings. The support of the Chinese government to the industry is

becoming apparent and it is reasonable to expect that the business of the Target

Group will benefit from such direction in long run.

In view of (i) the expansion of the private enterprise sector in the PRC; (ii)

potential growth in loan demand from SMEs; (iii) the flexibility in the financing

services offered by the Target Group to SMEs as compared to traditional banks; and

(iv) the support of the Chinese government to the industry, we are of the opinions

that the Acquisition which would provide the Group with a business opportunity

which is in line with the Group’s business development strategy of deploying more

resources in the financing business as mentioned in the Letter from the Board.

According to the regulations of China Banking Regulatory Commission

(中國銀行業監督管理委員會), the interest rates offered by banks and financial

institutions to the public are regulated and must not exceed certain percentage as

stipulated by the PBOC. As set out in the Letter from the Board, pursuant to the

Circular of the PBOC on Putting Down Underground Banks and Cracking

Down on Usury Behaviours (中國人民銀行關於取締地下錢莊及打擊高利貸行為的通知) announced by the PBOC in 2002, prevailing interest rates charged by private

entities in the PRC shall not exceed four times of PBOC benchmark lending rate

with the same term. In addition, the small loan services conducted by Huifeng

Rongjin Co is governed by the Trial Implementation Rules that the interest rate

charged by the small loan companies is set at a floor rate of 0.9 times of the PBOC

benchmark lending rate and capped at the rate of which shall not exceed certain

percentage as stipulated by the regulators. Therefore, the respective interest rates

charged by Huifeng Rongjin Co and Gangjia Huitong Co should not exceed four

times of current financial institution loan interest rate with the same term as

stipulated by the PBOC and the interest rate of Huifeng Rongjin Co is set at a floor

rate of 0.9 times of the PBOC benchmark lending rate. We are advised by the

Company that the administration fee charged by the members of the Target Group

is determined by arm’s length negotiation with the customers as there is no limit on

the monthly handling fee being charged by Gangjia Huitong Co for the entrusted

loan and no statutory ceiling on the guarantee fee being charged by Huaxia Xingye

Co for the provision of loan guarantee services under the PRC laws and regulations.

We have been provided with certain loan agreement(s) entered into among the

members of the Target Group and their respective customers and noted that the

interest rates charged by the members of the Target Group are approximately four

times of the PBOC benchmark lending rate, depending on the loan amount and terms


– 66 –

of loan. The Company confirmed that the said agreements are standard form which

the members of the Target Group adopt in providing financing services to their

respective customers. Further, we are advised by the management of the Company

that the Target Group has secured external funding from a bank in the PRC (“Bank

Funding”) in which interest rate will be charged at the PBOC benchmark lending

rate which will not increase materially from the forecasted rate of 5.81%–7% per

annum under the assumptions in the preparation of the 2011 Profit Guarantee. The

Target Group will utilise these external funding through lending by way of small

loans, entrusted loans and provision of guarantee at the rate of approximately four

times of the PBOC rate. As such, the Directors consider the Target Group could earn

a high net interest margin (the difference between the borrowing rates and lending

rates) through providing the financial services and believe that the Group could

benefit from it after the Acquisition. In light of the above, we concur with the view

of the Directors that the Acquisition provides an opportunity for the Company to tap

into the business of high profit margin which will benefit the Company and the

Shareholders as a whole.

As the Target Group’s businesses and the Group’s existing pawn loan business

target similar types of customers, namely SMEs and individuals, the Directors

consider that the Target Group’s established business coverage and connections with

SMEs communities will benefit the Group’s existing pawn loan business. As

disclosed in the Letter from the Board, the Chief Operating Officer of the Target

Group, Mr. Luo Rui, is a councilor of the Beijing Association of Small and Medium

Enterprise (北京市中小企業協會). The Directors believe that the Target Group’s

established sales channel through Mr. Luo Rui’s relationship with the Beijing

Association of Small and Medium Enterprise will help to build a wider customer

referral network and further increase the customer bases of both Target Group’s

business and the Group’s existing pawn loan business after the Acquisition. Further,

as stated in the Letter from the Board, Gangjia Huitong Co entered into two separate

agreements with Beijing Wanfang Yacheng Investment Management Company

Limited (北京萬方雅誠投資管理有限公司 “Wanfang Yacheng”) and Beijing Runli

Investment Company Limited (北京潤利投資有限公司“Beijing Runli”) respectively,

under which each of Wanfang Yacheng and Beijing Runli has agreed to provide a

total funding of up to RMB100 million to Gangjia Huitong Co (“Strategic Partners’

Funding”) and refer clients to Gangjia Huitong Co for the provision of entrusted

loans services during 2011. The Directors believe that the client referral from such

strategic business partnership will broaden the Target Group’s customer base and

may bring more business opportunities to the Group’s existing short term pawn loan

business. Nevertheless, there is no assurance that such agreements can be renewed

following its expiry or the Target Group can secure replacement for the said

arrangements in case the agreements were not renewed upon expiry.

We have discussed with the Directors for the reason that the Group does not

intend to set up the financing business itself but acquired the Target Group from the

Vendor, the Directors are of the view that it is uncertain whether the Group can


– 67 –

obtain approval from the relevant authorities for the establishment of the companies

of the Target Group. Pursuant to the Beijing Security Tentative Measure, the

establishment of loan guarantee companies is subject to the following major

regulatory requirements:

(i) It shall meet the requirements of the Company Law of the PRC;

(ii) It shall employ specialised staff and senior management possessing

relevant qualification and professional experience;

(iii) It shall establish internal control procedures in respect of risk assessment,

credit examination and loan approval, etc; and

(iv) the minimum registered capital shall not be less than RMB50 million.

To the Directors’ best knowledge, it is difficult to obtain the 融資性擔保公司經營許可證 (loan guarantee business permit) for loan guarantee company in the

PRC. According to the PRC Legal Opinion, the loan guarantee companies are

required to obtain 融資性擔保公司經營許可證 (loan guarantee business permit)

subject to the examination and approval by the Beijing Municipal Bureau of

Financial Work since its supervision in early 2011. As such, there were

approximately 100 loan guarantee companies being disqualified by the Beijing

Municipal Bureau of Financial Work as they failed to meet the prudential conditions

specified by the Beijing Municipal Bureau of Financial Work such as requirements

of assets, business development and risk management system. As a result, there were

only approximately 46 loan guarantee services companies in Beijing being approved

with 融資性擔保公司經營許可證 (loan guarantee business permit) by the Beijing

Municipal Bureau of Financial Work which are valid for five years as at 8 April 2011

according to the website of Beijing Municipal Bureau of Financial Work. In respect

of the establishment of the small loan companies, the establishment of small loan

companies is subject to the following major regulatory requirements under the Trial

Implementation Rules:

(i) The shareholders of small loan companies shall be domestic natural

person, domestic corporate legal person or other social organizations;

(ii) It shall employ specialised staff and senior management possessing

relevant qualification and professional experience;

(iii) It shall have a sound organizational structure;

(iv) It shall have a place of business in conformity with relevant requirements;

(v) It shall establish internal control procedures in respect of risk assessment,

credit examination and loan approval, etc; and


– 68 –

(vi) the minimum registered capital shall not be less than RMB50 million for

company with limited liability.

According to the website of Beijing Municipal Bureau of Financial Work, there

were approximately 28 small loans companies in Beijing as at 31 December 2010.

The Directors consider that they may not be able to obtain approval for the

establishment of loan guarantee company and small loan company as they have to

undergo examination and authorization from the Beijing Municipal Bureau of

Financial Work if the Group sets up such businesses itself rather than acquiring the

Target Group. The Acquisition therefore provides the Company with a shortcut to

establish the businesses of small loan and loan guarantee in the PRC. In addition, the

Directors consider that the Group may have to bear start-up risk if setting up the

businesses of the Target Group itself, the existing structure of the Target Group

avails the Company with a platform for a more comprehensive financing business,

including among others, the business of entrusted loan and consultancy services,

while the start-up risk is mitigated. Furthermore, the Directors believe that through

leveraging the Target group’s expertise and extensive network in the PRC, the

Acquisition would allow the Group to expand its business segment to provision of

small loan, loan guarantee, entrusted loan and consultancy services in the PRC,

being the existing businesses of the Target Group, with promising prospect. We

concur with the Directors’ view that the Acquisition provides the Company with an

immediate access to the business of provision of small loan, loan guarantee,

entrusted loan and consultancy services in the PRC with an existing platform of the

Target Group.

In addition, we have been advised by the management of the Company that

certain corporate customers of the Group’s short term pawn loan business require

the loan guarantee, entrusted loans and consultancy services in the PRC. Given that

the principal businesses of the Target Group include provision of (i) small loan

services; (ii) loan guarantee services to individuals and corporations; and (iii)

consultancy services in relation to financing and provision of entrusted loans for

clients, the Group will be able to expand its business scope to include the financing

services currently provided by the Target Group after the Acquisition. The

Acquisition therefore allows the Group to offer a more comprehensive range of

services to different customers with different needs. The Group will further

strengthen the development of its financing business in the PRC through the

Acquisition. Having considered the discussion above, we are of the view that the

businesses of the Target Group complements with the existing pawn loan business

of the Group as the Group can develop its financing business further by providing

a comprehensive range of financing services and thus diversify its existing

businesses. The Group will thus avail of further business opportunity which we

consider to be in the interest of the Company and the Shareholders as a whole.

Our View

Based on the above analysis, we are of the view that the Acquisition is in the

interest of the Company and its Shareholders as a whole. However, Independent


– 69 –

Shareholders should note that the operation of the Target Group is still at the start-up

stage and its profitability during the limited track record period may not be entirely

reflective of its future performance. Also, the financial performance of the Target

Group will depend on a number of factors beyond the Group’s control, in particular,

the default risk in repayment by borrowers.

II. Risks relating to the financing business of the Target Group

To the best of our understanding and as discussed in the Letter from the Board, the

following are risk factors associated with the financing business of the Target Group:

(a) Start-up risk

The Directors are confident of the business prospects of the Target Group as

the demand for loans from private enterprises and self-employed individuals in the

PRC is expected to increase in the coming future, however, there are the usual

start-up risks involved in its operations as some principal operating subsidiaries of

the Target Group have just recently commenced its business and there are risks, both

from a commercial and regulatory perspective, for business operating in the PRC.

(b) Any inability to effectively mitigate credit risk may have a material

adverse impact on the Target Group’s business, financial condition and

results of operations

The sustainability of the Target Group’s business and future growth depends

largely on the Target Group’s ability to effectively manage the Target Group’s credit

risk and maintain the quality of the Target Group’s receivable portfolio. As such, any

deterioration in the Target Group’s receivable portfolio or impairment in the

collectability of the receivables could materially and adversely affect the Target

Group’s results of operations.

The quality of the Target Group’s receivable portfolio may deteriorate for a

variety of reasons, including factors beyond the Target Group’s control, such as a

slowdown in the economic growth of the PRC or global economies, a recurrence of

a global credit crisis or other adverse macroeconomic trends which may cause

operational, financial and liquidity problems for the Target Group’s customers

thereby affecting their ability to make timely loan repayments. If the level of the

Target Group’s impaired receivables increases, the Target Group’s business,

financial condition and results of operations may be materially and adversely

affected.

(c) The Target Group may not be able to obtain sufficient funds on

commercially acceptable terms to finance the Target Group’s operations or

expansion plans, or at all

Due to the capital-intensive nature of the Target Group’s business operations,

a substantial amount of capital as well as ongoing funding is required to support the


– 70 –

growth of the Target Group’s receivables portfolio, as well as to fund future

expansion. If sufficient financing is not available to meet the Target Group’s needs,

or cannot be obtained on commercially acceptable terms, or at all, the Target Group

may not be able to fund the operation and/or expansion of the Target Group’s

business, or compete effectively.

As advised by the Company, given the Target Group is still at the start up stage,

it intends to finance the business expansion of the Target Group by the funding

provided by the strategic partners as mentioned above and the external funding

secured by a bank in the PRC.

(d) The value of collateral or guarantees securing the Target Group’s loan

may be inadequate to cover the Target Group’s receivables

To minimize credit risk, the Target Group usually seeks security from the

customers either by way of collateral of assets, personal guarantee and/ or surety as

indemnity for any potential loss, in all of the small loan, loan guarantee and

entrusted loan business. In the event of any material default on interest payment

terms, the Target Group is contractually entitled to enforce its security rights over

any collateral or guarantee. The value of the collateral may decline and may be

materially and adversely affected by a number of factors, such as damage, loss,

oversupply, devaluation or reduced market demand. Similarly, a significant

deterioration in the financial condition of guarantors could significantly decrease the

amounts that the Target Group may recover under such guarantees. Declines in the

value of such collateral or guarantees may result in impairments and require the

Target Group to make additional impairment provisions against its receivables,

which may, in turn, materially and adversely affect the Target Group’s business,

financial condition and results of operations.

(e) Interest rate changes may adversely affect interest expense related to the

Target Group’s borrowings, reduce net interest income and reduce

demand for the Target Group’s loan or guarantee services

The Target Group’s business is affected by interest rates, including both the

interest rates charged to the Target Group’s customers and the rate of interest the

Target Group pay on the Target Group’s loan and financing obligations. An increase

in interest rates, or the perception that such an increase may occur, could adversely

affect the Target Group’s ability to obtain bank loans or other financing at favorable

interest rates, the Target Group’s ability to maximize the Target Group’s interest

income, the Target Group’s ability to source new customers and the Target Group’s

ability to grow. Any increase in the Target Group’s interest expense or decrease in

the Target Group’s net interest income could have a material adverse effect on the

Target Group’s business, results of operations and financial condition.

(f) The PRC Government may determine that the Huifeng Rongjin Control

Agreements are not in compliance with applicable PRC laws, rules,

regulations or policies in future.

In order for the Target Group to manage and operate the small loan business of

Huifeng Rongjin Co in the PRC, the Huifeng Rongjin Control Agreements have been


– 71 –

entered into under which all the business activities of Huifeng Rongjin Co are

managed and operated by Gangjia Huitong Co and all economic benefits and risks

arising from the business of Huifeng Rongjin Co are transferred to Gangjia Huitong

Co. Further information on the Huifeng Rongjin Control Agreements is set out in the

paragraph headed “Information of the Target Group” in the Letter from the Board.

To the best knowledge of the Directors, if the Huifeng Rongjin Control Agreements

are considered to be in breach of any PRC laws or regulations or governmental

policy in the future, the Target Group’s business, financial condition and results of

operations may be adversely affected.

(g) Control over Huifeng Rongjin Co. through the Huifeng Rongjin Control

Agreements may not be as effective as direct ownership in Huifeng

Rongjin Co.

Immediately upon Completion, the Group will have no equity ownership

interest in Huifeng Rongjin Co. The Group will rely on the Huifeng Rongjin Control

Agreements to control and operate Huifeng Rongjin Co. Even if the Huifeng

Rongjin Control Agreements are enforceable, they may not be as effective in

providing control over the PRC Company as direct ownership. There is no assurance

that the Target Company will be able to exercise its rights to protect its interests in

the event of any breach or default by Huifeng Rongjin Co. If Huifeng Rongjin Co

or its shareholders fail to perform their respective obligations under the Huifeng

Rongjin Control Agreements, the Target Company and Huifeng Rongjin Comay

have to rely on legal remedies under PRC law, which may not be effective. Any

inability, or limitation of ability, to enforce the contractual arrangements with

Huifeng Rongjin Co or its shareholders could disrupt business of the Target Group

and have a material adverse effect on the results of operations and financial

condition of the Target Group.

(h) Failure to renew the loan guarantee business permit of Huaxia Xingye Co

or revocation of the loan guarantee business permit by authorities

Pursuant to the Two Security Measures, a loan guarantee company is required

to obtain a loan guarantee business permit from a relevant regulatory body. On 31

March 2011 Huaxia Xingye Co was granted a loan guarantee business permit from

the Beijing Municipal Bureau of Financial Work (北京市金融工作局). The loan

guarantee business permit has a term of five years and is valid until 31 March 2016.

At present the Directors are not aware of any legal impediment for renewing this

loan guarantee business permit, but if Huaxia Xingye Co fails to renew the loan

guarantee business permit upon its expiry in 2016, or if Huaxia Xingye Co fails to

observe requirements in relevant PRC laws and regulations such that the loan

guarantee business permit is revoked or terminated by relevant regulatory bodies,

Huaxia Xingye Co will not be able to continue its operation and the loan guarantee

business pursuant to the Two Security Measures, and the Target Group’s results of

operations will be adversely affected.


– 72 –

Our View

With respect to risk factor (a), we consider that the availability of the 2010

Profit Guarantee from the Vendor to be an appropriate arrangement to mitigate the

start-up risk. For risk factor (c), the securing by the Target Group of the Bank

Funding and the Strategic Partners’ Funding would diminish the said risk faced by

the Target Group in its start-up stage. In respect of the risk factors (e) and (h), we

are of the view that they are common industry risks generally faced by financing

companies in the industry. Regarding risk factors (f) and (g), as disclosed in the

Letter from the Board, according to the PRC Legal Adviser, the current arrangement

of Gangjia Huitong Co exercising ownership and management control of Huifeng

Rongjin Co through the Huifeng Rongjin Control Agreements complies with the

Trial Implementation Rules. As such, the Huifeng Rongjin Control Agreements do

not violate any applicable PRC laws and regulations including the Trial

Implementation Rules, and are valid and enforceable. For risk factors (b) and (d), we

are advised by the Company that the Target Group has established comprehensive

internal control system and procedure regarding the control of the credit risks

associated with the Target Group which we consider to be sufficient, details of

which are set out in the section headed “Internal control system and credit control

policy of the Target Group” below.

Taking into account that there exists certain arrangements or measures to

mitigate each of the above risks of the Target Group, we are of the view that, even

with the presence of the above factors, it is still reasonable for the Company to

proceed with the Acquisition.

III. Internal control system and credit control policy of the Target Group

In order to minimize the credit and operational risks associated with the financing

services provided by the Target Group, the internal control system and credit control

policy have been, as disclosed in the Letter from the Board, adopted by the Target Group:

Our View

We have discussed with the management of the Company the rationale of

relevant key internal control measures and procedures. We are advised that the

Target Group has adopted the internal control measures and procedures with an aim

to minimize the risks associated with the financing business. The management of the

Company confirmed that the internal control system and credit control policy of

Huaxia Xingye Co are complied with the relevant regulations as the adoption of

internal control system is one of the requirements for the establishment of loan

guarantee companies under the Tentative Measures for the Administration of

Financing Security Companies and for the establishment of Huifeng Rongjin Co

under the Trial Implementation Rules. In addition, the internal control system of

Huaxia Xingye Co is subject to annual review by the competent regulatory


– 73 –

department of Beijing Municipal Bureau of financial Work. In accordance with Trial

Implementation Rules, Beijing Municipal Bureau of Financial Work will monitor the

operation and the associated risks of Huifeng Rongjin Co monthly. Generally, the

effectiveness of an internal control system has to be tested over time and may be

assessed by indicator such as payment defaults or bad debt amounts. Given the

limited track record of the Target Group, we are unable to opine the effectiveness of

the internal control systems of the Target Group. However, we are advised by the

management of the Company that there was no default on payment from its

customers and no bad debt was incurred since its incorporation. Taking into account

the factors discussed and that the regulator will regularly review the internal control

system, we consider that the Target Group has sufficient internal control measures

in place in compliance with the relevant rules and regulations to monitor the

financial health position and assess the risk profile of its financing business.

IV. Principal terms of the Acquisition Agreement

1. Assets to be acquired

(i) The Sale Share, being the entire issued share capital of the Target Company

which indirectly has beneficial interests in 70% of the equity interests in

Huifeng Rongjin Co and 100% of the equity interests in Huaxia Xingye Co

through a set of agreements as set out in the paragraph headed “Information on

Gangjia Huitong Co” under the section headed “Information on the Target

Group” in the Letter from the Board; and

(ii) The Sale Loan, being all the liabilities, obligations and indebtedness owed by

the Target Group to the Vendor.

2. Consideration

The total consideration for the Acquisition is HK$600 million, which comprises the

Sale Share consideration of HK$597,475,010 and the Sale Loan consideration of

HK$2,524,990.


– 74 –

As set out in the Letter from the Board, the Consideration was determined on an

arm’s length basis between the Company and the Vendor after taking into account (i) the

2011 Profit Guarantee given by the Vendor under the Acquisition Agreement; (ii) the

future prospects and growing demand of loans from small enterprises and individuals in

the PRC; (iii) the net asset value of the Target Group; and (iv) the principal amount of the

Sale Loan on dollar to dollar basis, which amount to HK$2,524,990 as at the date of the

Acquisition Agreement.

3. Profit Guarantee

Pursuant to the Acquisition Agreement, the Vendor irrevocably guarantees and

warrants to the Purchaser that the 2011 Audited Net Profit for the year ending 31

December 2011 (the “Guarantee Period”) shall not be less than HK$80 million (the “2011

Profit Guarantee”).

In the event that the 2011 Audited Net Profit is less than the 2011 Profit Guarantee,

the Vendor shall compensate to the Purchaser an amount equivalent to 5.5 times of the

shortfall in cash within 7 days from the date of issue of the audited account of the Target

Group for the Guarantee Period which shall be available within 3 months from the

financial year end date. As set out in the Letter from the Board, the compensation multiple

of 5.5 times was determined after arm’s length negotiation between the Company and the

Vendor with reference to (i) the difference between the Sale Share consideration of

HK$597,475,010 and the net asset value of the Target Group and (ii) the 2011 Profit

Guarantee. In view of the above, the formula for calculating the compensation multiple

is as follow:

Compensation multiple = (Consideration – the net asset value of the Target Group

– Sale loan) / 2011 Profit Guarantee

The difference between the Sale Share consideration of approximately HK$597.5

million and the net asset value attributable to owners of the Target Group as at 31

December 2010 of approximately HK$164.6 million represents the premium of

approximately HK$432.9 million paid for the Target Group and a multiple of

approximately 5.5 times of the 2011 Profit Guarantee. The maximum amount of

compensation under the 2011 Profit Guarantee of HK$440 million would be adequate to

compensate the Company for the amount of premium paid, i.e. approximately HK$432.9

million.

As stated in the Letter from the Board, an undertaking has been given by Madam Lo

Wan, the spouse of the Vendor, to the Company that if the Vendor fails to pay for any

liability which may arise under the 2011 Profit Guarantee, she shall pay such liability on

behalf of the Vendor. We have been provided with an undertaking duly signed by Madam

Lo Wan, which confirms that she will accept the responsibility to the Company under the

profit guarantee jointly with the Vendor and accordingly we extend our consideration to

the assets held by Madam Lo Wan. As stated in the Letter from the Board, the Directors


– 75 –

have assessed the financial position of the Vendor and his spouse in the event that the

Vendor is required to pay any compensation under the 2011 Profit Guarantee. The

Directors have taken into account the followings: (i) the market value of the 681,967,796

Shares currently held by Mr. Cheung, Madam Lo Wan and Arbalice Holdings Limited (a

company beneficially owned as to 60% by Mr. Cheung and 40% by Madam Lo Wan) was

approximately HK$306.9 million based on the closing price of HK$0.450 as quoted on

the Stock Exchange on the Last Trading Day) (ii) the market value of other marketable

securities and cash held by Mr. Cheung and Madam Lo Wan was over HK$200 million

as at 31 March 2011; and (iii) upon Completion, Mr. Cheung will receive the

Consideration of HK$100 million in cash and 1,250,000,000 Shares, the market value of

which was approximately HK$562.5 million based on the closing price of HK$0.450 as

quoted on the Stock Exchange on the Last Trading Day. The total value of the above

assets of Mr. Cheung and Madam Lo Wan was approximately HK$1,169 million, which

is well above the maximum amount of compensation of HK$440,000,000 under the 2011

Profit Guarantee. In view of that, the Board considers that Mr. Cheung should have

sufficient financial resources to honour his obligation under the 2011 Profit Guarantee, In

order to secure and honour the Vendor’s obligation under the 2011 Profit Guarantee, the

Vendor has also given an undertaking to the Company and the Purchaser that he shall

charge all the Consideration Shares in favour of the Group upon Completion by executing

a share charge and depositing the share certificates of the Consideration Shares with the

relevant transfer documents signed in blank by Mr. Cheung such that in the event of a

default by Mr. Cheung under the 2011 Profit Guarantee, the Group has the right to enforce

the share charge by having the power to dispose of and deal with the Consideration Shares

in order to realise the money to meet any short fall under the 2011 Profit Guarantee. Mr.

Cheung has also undertaken the Group to provide further security and assurances as the

Group shall consider necessary to secure his obligations under the 2011 Profit Guarantee.

The voting rights attached to the Consideration Shares shall remain at Mr. Cheung

notwithstanding the share charge unless and until the share charge is enforced by the

Group. As disclosed in the Letter from the Board, as advised by the legal adviser of the

Company as to Hong Kong law, the Directors are satisfied that the undertaking given by

Mr. Cheung and Madam Lo Wan are duly executed and are legal, valid and enforceable

against Mr. Cheung and Madam Lo Wan respectively, and the undertaking will continue

to remain enforceable against Mr. Cheung and Madam Lo Wan until the 2011 Profit

Guarantee is fulfilled in full.

We consider that the arrangements procured by the Company to safeguard its interest

in respect of the Vendor’s obligation to honour the compensation related to the 2011 Profit

Guarantee to be sufficient in the circumstances as at the date hereof on the basis that (i)

the market value of the Consideration Shares to be charged in favour of the Group based

on the market price as at the Last Trading Day is higher than the maximum compensation

amount; (ii) the Company is entitled to request further security and assurance from the

Vendor as it considers necessary; (iii) as disclosed in the Letter from the Board, based on

the information available to the Company, the Vendor, together with his spouse (who have

undertaken to take up the liability should the Vendor fails to pay any liability which may

arise under the 2011 Profit Guarantee.) have demonstrated their financial strength with


– 76 –

assets, including cash, certain securities of a listed company in Hong Kong and the Shares

being held by the Vendor and his spouse, of market value of more than HK$600 million

in addition to the Consideration Shares charged to the Company which may be available

to the Company in case the Company exercise its rights under (ii), barring unforeseen

circumstances; and (iv) the relevant compensation obligation of the Vendor are bounded

by contract and the Company may further pursue any outstanding amount from the Vendor

and his spouse through court actions. Although the market value of the Consideration

Shares to be charged to the Group is subject to change and the disposal of which is subject

to the then liquidity of the Share (assuming it were to be disposed in the open market for

cash), having considered the factors as mentioned in (ii), (iii) and (iv) above, we are of

the view that the arrangement is acceptable to the Company.

In order to access the fairness and reasonableness of the Consideration, we have

made reference to the valuation of the 100% equity interest of the Target Group of

approximately HK$646.4 million as prepared by Greater China Appraisal Limited, the

valuer of the Company (the “Valuer”), which report on the valuation is set out in appendix

V to this circular.

We have discussed with the Valuer on the basis and assumptions it used in preparing

the valuation report and have also conducted reasonable checks to assess the relevant

experience and expertise of the Valuer to satisfy ourselves that reliance could fairly be

placed on the work of it.

We noted from the valuation report that the market approach has been adopted due

to (i) sufficient number of comparable public companies is available to facilitate a

meaningful comparison; and (ii) the 2011 Profit Guarantee provides a good reference

point to start the valuation. The Valuer has selected a number of public companies and

made necessary adjustments to their financial information, and then determine the

appropriate valuation multiples based on the comparable companies for the purpose of

determining the valuation of the Target Group. We have also assessed the comparable

companies reviewed by the Valuer and noted that all the comparable companies are

engaged in business operations which are comparable to that of the Target Group. We

have discussed with the Company and the Valuer the qualification, bases and assumptions

adopted by the Valuer in the course of their work and satisfied ourselves that the

qualification, bases and assumptions have been made with due care and objectivity, and

on a reasonable basis. Based on the above, we consider that the valuation methodology,

and basis and assumption adopted by the Valuer are generally consistent with market

practices and reasonable and acceptable.

In light that (i) in the event that the 2011 Audited Net Profit is less than the 2011

Profit Guarantee, the Vendor shall compensate to the Purchaser an amount equivalent to

5.5 times of the shortfall in cash; (ii) the maximum amount of compensation under the

2011 Profit Guarantee of HK$440 million would be adequate to compensate the Company

for the amount of premium paid for the Acquisition of approximately HK$432.9 million;

(iii) the undertakings which have been given by the Madam Lo and the Vendor to the


– 77 –

Company that it should have sufficient financial resources to secure and honour the

Vendor’s obligation under the 2011 Profit Guarantee; and (iv) the valuation of the 100%

equity interest of the Target Group of approximately HK$646.4 million is higher than the

Consideration, we consider the Consideration is fair and reasonable and in the interest of

the Company and the Independent Shareholders as a whole.

4. Issue Price of the Consideration Shares

Pursuant to the terms of the Acquisition Agreement, HK$500 million of the

Consideration will be settled by the issue of the Consideration Shares. The issue price of

HK$0.40 per Consideration Share (the “Issue Price”) represents:

(i) a discount of approximately 23.1% to the closing price of HK$0.52 per Share

as quoted on the Stock Exchange on the Latest Practicable Date;

(ii) a discount of approximately 11.1% to the closing price of HK$0.450 per Share

as quoted on the Stock Exchange on the Last Trading Day;

(iii) a discount of approximately 10.5% to the average closing price of

approximately HK$0.447 per Share for the last five consecutive trading days

up to and including the Last Trading Day as quoted on the Stock Exchange;

(iv) a discount of approximately 10.7% to the average closing price of

approximately HK$0.448 per Share for the last ten consecutive trading days up

to and including the Last Trading Day as quoted on the Stock Exchange;

(v) a discount of approximately 7.9% to the average closing price of the Shares of

approximately HK$0.434 per Share for the last thirty consecutive trading days

up to and including the Last Trading Day as quoted on the Stock Exchange;

(vi) a premium of approximately 11.1% over the average closing price of the Share

of approximately HK$0.36 per Share for the last six months up to and

including the Last Trading Day as quoted on the Stock Exchange; and

(vii) a discount of approximately 8.8% to the consolidated net asset value

attributable to owners of the Company of approximately HK$0.439 per Share

based on the financial statements of the Company for the year ended 31

December 2010.


– 78 –

In assessing the fairness and reasonableness of the Issue Price, we have considered

the following principal factors and reasons:

(a) Historical market price and liquidity of the Shares

We have reviewed the movements in trading prices of the Shares during the

period from 27 January 2010 to 27 January 2011, being the date of the Acquisition

Agreement, representing one year period preceding the date of the Acquisition

Agreement (the “Review Period”).

Price of the Shares

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Date

Issue Price = HK$0.40Issue Price = HK$0.40Issue Price = HK$0.40Issue Price = HK$0.40Pric

e (

HK

$)

27/1

/201

0

27/1

2/20

10

27/1

1/20

10

27/1

/201

1

27/9

/201

0

27/8

/201

0

27/1

0/201

0

27/6

/201

0

27/5

/201

0

27/7

/201

0

27/3

/201

0

27/2

/201

0

27/4

/201

0

Source: Bloomberg

During the Review Period, the closing price of the Shares ranged from the

lowest of HK$0.28 per Share (recorded on 20 August 2010 and the period from 25

August 2010 to 27 August 2010) to the highest of HK$0.46 per Share (recorded on

20 January 2011). As shown in the graph above, the Issue Price was above the

closing price of the Shares most of the time during the Review Period before

publication of the Announcement. The closing price of the Shares experienced an

increasing trend since the third quarter of 2010 and closed above the Issue Price

since mid-December 2010. The closing price of the Shares surged up to HK$0.48 on

8 March 2011, being the first trading day immediately after the publication of the

Announcement. Thereafter and up to the Latest Practicable Date, the closing prices

of the Shares fluctuated between HK$0.44 to HK$0.54. The monthly average daily

closing price of the Share for the Review Period ranged from HK$0.30 to HK$0.45

per share and the Issue Price falls within such market range. In order to eliminate

the effects of any short term fluctuations in share prices on the trading pattern of the

Shares on the Stock Exchange, we have made reference to the Share price for a


– 79 –

longer period of time and compared the average closing price of the Share for the

last six months up to and including the Last Trading Day with the Issue Price. It is

noted that the Issue Price represents an approximately 11.1% premium over the

average of the closing prices of approximately HK$0.36 per Share for the last six

months up to and including the Last Trading Day. In light of the above, we consider

the Issue Price is fair and reasonable.

(b) Comparable analysis

In order to access the fairness and reasonableness of the Issue Price, to the best

of our knowledge, we have reviewed companies listed on the Main Board or GEM

of the Stock Exchange which have made announcements for acquisition of assets by

issuing consideration shares (the “Share Comparables”) from 27 October 2010 up to

and including 27 January 2011 (being the date of the Acquisition Agreement), the

list of which is exhaustive. As the terms of the Share Comparables are determined

under similar market conditions and sentiments as the Consideration Shares, we

believe that the Share Comparables may reflect the recent trend of the issue of

consideration shares in the market and thus consider them to be fair and

representative sample for the Issue Price. However, Independent Shareholders

should note that the businesses, operations, prospect and financial position of the

Company are not the same as the Share Comparables which may affect the

determination of respective terms of the Share Comparables as indicated by the

varied range of result of our comparison. Therefore, in forming our opinion, we have

considered the results of the comparison together with other factors stated in this

letter as a whole. The following table sets out the key terms of the Share

Comparables:

Share Comparables

(stock code)

Date of

announcement

Value of the

consideration

shares

Approximate

premium/

(discount)

of issue

price to the

closing price

prior to the

release of the

announcement

Approximate

premium/

(discount) of

issue price to

the closing

price for the

last five

consecutive

trading days

prior to the

release of the

announcement

HK$ million % %

Neo-Neon Holdings Ltd

(1868) 25/1/2011 101.45 – (3.31)

Celestial Asia Securities Holdings Ltd

(1049) 11/1/2011 47.80 (2.34) –


– 80 –

Share Comparables

(stock code)

Date of

announcement

Value of the

consideration

shares

Approximate

premium/

(discount)

of issue

price to the

closing price

prior to the

release of the

announcement

Approximate

premium/

(discount) of

issue price to

the closing

price for the

last five

consecutive

trading days

prior to the

release of the

announcement

HK$ million % %

China Post E-commerce (Holdings) Ltd

(8041) 6/1/2011 80.00 (19.35) (10.29)

Jutal Offshore Oil Services Ltd

(3303) 5/1/2011 144.65 (5.69) 0.52

Kunlun Energy Company Ltd

(135) 31/12/2010 21,973.30 (16.90) (17.41)

Prosperity International Holdings (HK) Ltd

(803) 24/12/2010 178.69 1.00 2.90

CMMB Vision Holdings Ltd

(471) (Note) 24/12/2010 40.91 89.19 81.82

Soluteck Holdings Ltd

(8111) 14/12/2010 66.50 (5.66) (3.10)

Golden Resorts Group Ltd

(1031) 14/12/2010 4,800.00 (3.61) 14.60

Vodone Ltd

(82) 7/12/2010 160.52 (0.43) (0.34)

Sino-Tech International Holdings Ltd

(724) 25/11/2010 225.97 19.40 16.62

National Arts Holdings Ltd

(8228) 18/11/2010 148.50 (15.40) (11.30)

Vodone Ltd

(82) 14/11/2010 82.23 – 1.22

Mayer Holdings Ltd

(1116) 12/11/2010 130.00 3.77 (0.36)


– 81 –

Share Comparables

(stock code)

Date of

announcement

Value of the

consideration

shares

Approximate

premium/

(discount)

of issue

price to the

closing price

prior to the

release of the

announcement

Approximate

premium/

(discount) of

issue price to

the closing

price for the

last five

consecutive

trading days

prior to the

release of the

announcement

HK$ million % %

SYSCAN Technology Holdings Ltd

(8083) 12/11/2010 70.00 (11.11) (12.09)

Lumena Resources Corp.

(67) 7/11/2010

maximum

10,471.28 7.51 4.72

King Stone Energy Group Ltd

(663) 4/11/2010 949.44 (14.53) (10.31)

Hopson Development Holdings Limited

(754) 3/11/2010 4,970.84 7.80 8.30

China Argotech Holdings Ltd

(1073) 29/10/2010 68.00 29.90 25.90

Maximum (Note) 29.90 25.90

Minimum (Note) (19.35) (17.41)

Mean (Note) (1.42) 0.35

Company 500.00 (11.10) (10.50)

Source: website of the Stock Exchange (www.hkex.com.hk)

Note: We consider the premium of issue price of CMMB Vision Holdings Ltd may not be an appropriate

comparison for being an extreme outliner among the other Share Comparables and therefore we exclude

CMMB Vision Holdings Ltd in our analysis.

Based on the above illustration, the premium/discount represented by the issue

price per consideration share issued by respective Share Comparables to their

respective closing price on the last trading day before the suspension of trading in

shares pending for the release of the relevant announcements ranged from a

premium of approximately 29.9% to a discount of approximately 19.35% and with

an average of discount of approximately 1.42%. Also, the premium/discount

represented by the issue price per consideration share issued by respective Share

Comparables to their respective closing price for the last five consecutive trading

days prior to the release of the relevant announcements ranged from a premium of

approximately 25.90% to a discount of approximately 17.41% and with an average


– 82 –

of premium of approximately 0.35%. We note that the discounts of the Issue Price

to the closing price of the Shares on the Last Trading Day and the average closing

price of the Shares for the last five consecutive trading days up to and including the

Last Trading Day of approximately 11.1% and 10.5% respectively are within the

relevant range of the Share Comparables. However, Shareholders should note that

13 out of 18 Share Comparables issued consideration shares at a price of

premium/discount which is more favourable than the discount of Issue Price of

approximately 11.1% to the closing price of the Shares as quoted on the Stock

Exchange on the Last Trading Day. Although the Issue Price represents a discount

of approximately 11.1% to the closing price of the Shares as quoted on the Stock

Exchange on the Last Trading Day, it is noted that 10 out of 18 Share Comparables

issued consideration shares at a discount in the range of 0.43% to 19.35%.

To conclude, in light of (i) the Issue Price falls within the range of the daily

closing prices of the Shares during the Review Period; and (ii) a discount as

represented by the Issue Price to the closing price of the Shares on the Last Trading

Day that falls within the range of the relevant premium/discount of the Share

Comparables, we are of the view that the Issue Price is fair and reasonable so far as

the Independent Shareholders are concerned and is in the interests of the Company

and the Shareholders as a whole.

5. Other terms of the Acquisition Agreement

We have also reviewed the other terms of the Acquisition Agreement and are not

aware of any terms which are uncommon. Accordingly, we consider that the terms of the

Acquisition Agreement are on normal commercial terms and are fair and reasonable so far

as the Independent Shareholders are concerned.

V. Financial effects of the Acquisition

1. Net asset value

We noted from the unaudited pro forma financial information of the Target Group

as set out in Appendix III to the Circular that the net asset value attributable to owners

of the Company amounted to approximately HK$765.8 million as at 31 December 2010.

The unaudited pro forma net asset value attributable to owners of the Enlarged Group will

be increased to approximately HK$1,263.3 million upon Completion. Goodwill of

approximately HK$432.8 million is expected to be recorded in respect of the Acquisition.

2. Earnings

Pursuant to the Acquisition Agreement, the Vendor irrevocably guarantees and

warrants to the Purchaser that the 2011 Audited Net Profit for the year ending 31

December 2011 shall not be less than HK$80 million. Given the profit guarantee

mechanism is in place, the Directors consider that the Acquisition and consolidation of

the Target Group and Huaxia Xingye Co into the Group would have a positive impact on

the Group’s earnings upon Completion.


– 83 –

3. Working Capital

Pursuant to the Acquisition Agreement, the total consideration for the Acquisition

will be settled as to (i) HK$500 million by the allotment and issue of Consideration

Shares; and (ii) HK$100 million by cash. As set out in the unaudited pro forma financial

information of the Target Group contained in Appendix III to the Circular, the cash and

cash equivalents of the Group would decrease from approximately HK$340 million as at

31 December 2010 to approximately HK$315.8 million as a result of the Acquisition.

4. Gearing

Based on the annual report of the Company, as at 31 December 2010, total liabilities

of the Group were approximately HK$111.6 million whilst the consolidated net assets

attributable to owners of the Company as at 31 December 2010 were approximately

HK$765.8 million. As at 31 December 2010, the gearing ratio of the Group (measured by

total liabilities over net assets attributable to owners of the Company) was approximately

14.6%.

According to the unaudited pro forma consolidated balance sheet of the Group set

out in Appendix III to the Circular, the unaudited pro forma total liabilities of the Group

will be HK$116.8 million and the pro forma net assets of the Group will be enhanced by

approximately HK$497.5 million, Hence, the pro forma gearing ratio will become

approximately 9.25%.

Based on the above analyses, we are of the view that although the Acquisition would

slightly decrease the working capital position of the Group which would not have material

adverse impact on the Group, it is expected to improve the net assets value of the Group

and have a positive impact on the earnings and decrease the gearing ratio of the Group

upon Completion. Notwithstanding that a goodwill of approximately HK$432.8 million

which represents the premium paid for the Acquisition is expected to be recorded in

respect of the Acquisition. In light of the above, we are of the view that the arising of such

goodwill is normal and acceptable on the basis that (i) such accounting goodwill arise

based on the difference of the Consideration and the assets value so purchased whereas

the transaction is structured based on earnings rather than assets; and (ii) According to the

Group’s accounting policy on asset impairment as disclosed in Appendix III to the

Circular. Whenever it is found that the carrying amount of the Target Group exceeds its

recoverable amount, impairment loss is recognised in profit or loss. Such impairment loss

shall be allocated first to reduce the carrying amount of the goodwill arising from the

Acquisition of the Target Group and then to reduce the carrying amount of the other assets

in the Target Group on a pro rata basis. As the goodwill is attributable to expected

profitability of the Target Group in the future, there will not be material adverse impact

to the Group for having the goodwill recording as an asset of the Group unless the Target

Group underperform in the future which may result in devaluation of such goodwill.

Based on the foregoing, we consider the Acquisition is in the interests of the Company

and the Shareholders as a whole.


– 84 –

VI. Potential dilution effect

The table showing the effect of the Acquisition on the shareholding structure of the

Company has been set out under the section headed “Effect on shareholding structure of

the Company” in the Letter from the Board.

As shown in the shareholding table, the shareholding of public Shareholders will be

decreased from approximately 60.96% as at the Latest Practicable Date to approximately

35.54% immediately after Completion.

Based on our discussion with the management of the Company, part of the

Consideration will be satisfied by the allotment and issue of the Consideration Shares as

this method of settlement allows the Group to strengthen its equity base and to retain

more working capital for its existing business. In light of this, we are of the view that the

dilution to the shareholding of the public Shareholders as a result of the issue of

Consideration Shares is acceptable.

VII. The Whitewash Waiver

As at the Latest Practicable Date, Mr. Cheung and parties acting in concert with him

were interested in a total 681,967,796 Shares, representing approximately 39.04% of the

existing issued share capital of the Company. Upon Completion, Mr. Cheung and parties

acting in concert with him will become interested in a total of 1,931,967,796 Shares,

representing approximately 64.46% of the issued share capital of the Company as

enlarged by the issue of the Consideration Shares, assuming that no further Shares will

be issued or repurchased by the Company on or before Completion. Mr. Cheung and

parties acting in concert with him will be obliged, in the absence of the Whitewash

Waiver, to make an unconditional mandatory general offer for all the issued Shares not

already owned or agreed to be acquired by them pursuant to Rule 26 of the Takeovers

Code as a result of the issue of the Consideration Shares to the Vendor (or his nominee(s))

upon Completion. Mr. Cheung has made an application to the Executive for the grant of

the Whitewash Waiver. The Whitewash Waiver, if granted by the Executive, will be

subject to approval by the Independent Shareholders on a vote taken by way of poll at the

First EGM in accordance with Note 1 on Dispensations from Rule 26 of the Takeovers

Code. The granting of the Whitewash Waiver is one of the conditions precedent of the

Acquisition Agreement. If the Whitewash Waiver is not granted by the Executive or if

granted but is not approved by the Independent Shareholders at the First EGM, the

Acquisition Agreement will not become unconditional and the Acquisition will not

proceed.

We note from the Letter from the Board that Mr. Cheung has confirmed that he and

parties acting in concert with him have not dealt in any relevant securities (as defined in

Note 4 of Rule 22 of the Takeovers Code) in the Company during the Relevant Period.


– 85 –

Completion is subject to the Whitewash Waiver being approved by the Independent

Shareholders and granted by the Executive. If the Whitewash Waiver is not granted by the

Executive or not approved by the Independent Shareholders at the First EGM, the

Acquisition Agreement will not become unconditional and the Acquisition will not

proceed.

Our View

Given the background of and reasons for the Acquisition as mentioned above and

that the terms of the Acquisition Agreement being fair and reasonable so far as the

Independent Shareholders are concerned, we are of the opinion that the approval of the

Whitewash Waiver is in the interest of the Company and the Shareholders as a whole.

RECOMMENDATION

Having taken into account the above principal factors, we are of the opinion that the terms

of the Acquisition Agreement are on normal commercial terms, fair and reasonable so far as the

Independent Shareholders are concerned and the Whitewash Waiver is fair and reasonable. We

are of the view that the Acquisition and the Whitewash Waiver are in the interests of the

Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board

Committee to advise, and we ourselves advise, the Independent Shareholders to vote in favour

of the resolution to be proposed at the First EGM to approve the Acquisition Agreement; and

we recommend the Whitewash Independent Board Committee to advise the Independent

Shareholders to vote in favour of the resolution to be proposed at the First EGM to approve the

Whitewash Waiver.

Yours faithfully,


Quam Capital Limited

Gary Mui

Executive Director


– 86 –

1. SUMMARY OF FINANCIAL INFORMATION OF THE GROUP

Set out below is a summary of the audited consolidated results and assets and liabilities

of the Group for each of the three years ended 31 December 2008, 2009 and 2010 as extracted

from the respective published annual reports of the Company.

According to the published annual reports of the Company, in the opinion of CCIF CPA

Limited, the auditors of the Group, the consolidated financial statements for the year ended 31

December 2008, 2009 and 2010 give a true and fair view of the state of affairs of the Company

and of the Group as at 31 December 2008, 2009 and 2010 and of the Group’s profit and cash

flows for the years then ended in accordance with Hong Kong Financial Reporting Standards

and have been properly prepared in accordance with the Hong Kong Companies Ordinance.

There are no extraordinary and exceptional items in the audited financial statements of the

Group for each of the three years ended 31 December 2010.

Summary Information of the Consolidated Income Statement

Year ended 31 December

2008 2009 2010

(audited) (audited) (audited)

(Note) (Note)

HK$’000 HK$’000 HK$’000

Continuing operations

Turnover 1,408 168,601 217,022

(Loss)/profit before taxation from continuing

operations (21,713) 23,641 31,557

Income tax (820) (3,745) (4,565)

(Loss)/profit for the year from continuing

operations (22,533) 19,896 26,992

Profit for the year from discontinued

operations 278,407 22,718 5,154

Profit for the year 255,874 42,614 32,146

Attributable to:

Owners of the Company 247,686 26,303 25,355

Non-controlling interests 8,188 16,311 6,791

255,874 42,614 32,146

Dividend Nil Nil Nil

APPENDIX I FINANCIAL INFORMATION OF THE GROUP

– I-1 –

Year ended 31 December

2008 2009 2010


(Note) (Note)

HK cents HK cents HK cents

Earnings per Share

– Basic 14.43 1.52 1.47

– Diluted 14.33 1.52 1.46

Note: On 19 August 2010, the Group completed the disposal of the entire issued share capital in K.P.I. (BVI) Retail

Management Company Limited which directly and indirectly holds 60% of the equity interests in GMS

engaging mainly in supermarket operations in Shanghai and nearby provinces such as Jiangsu and Zhejiang,

PRC. The comparative profit from discontinued operations have been re-presented to include those operations

classified as discontinued in the year ended 31 December 2010.


– I-2 –

Summary Information of the Consolidated Statement of Financial Position

As at 31 December

2008 2009 2010


(Restated) (Restated)

HK$’000 HK$’000 HK$’000

Non-current assets 699,830 721,293 126,481

Current assets 1,122,124 1,366,521 759,259

Current liabilities (998,216) (1,183,469) (91,118)

Non-current liabilities (41,951) (63,296) (20,480)

Total equity 781,787 841,049 774,142

Attributable to:

Owners of the Company 694,140 736,833 765,829

Non-controlling interests 87,647 104,216 8,313

781,787 841,049 774,142


– I-3 –

2. AUDITED FINANCIAL STATEMENTS OF THE GROUP FOR THE YEAR

ENDED 31 DECEMBER 2010

The following is a reproduction of the text of the audited consolidated financial

statements of the Group together with the accompanying notes contained on pages 31 to 127

of the annual report of the Company for the year ended 31 December 2010.

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2010

2010 2009

Note HK$’000 HK$’000


Turnover 3 217,022 168,601

Cost of sales (156,800) (130,526)

Gross profit 60,222 38,075

Other revenue 3 32,598 27,045

Other net income 3 49,958 30,257

Change in fair value of investment property 15 8,066 7,939

Selling and distribution expenses (73,054) (51,359)

Administrative expenses (44,683) (26,854)

Profit from operations 33,107 25,103

Finance costs 6 (1,550) (1,462)

Profit before taxation from continuing

operations 5 31,557 23,641

Income tax 8(a) (4,565) (3,745)

Profit for the year from continuing

operations 26,992 19,896

Discontinued operations

Profit for the year from discontinued

operations 9 5,154 22,718

Profit for the year 32,146 42,614


– I-4 –

2010 2009


Other comprehensive income, net of

income tax

Exchange differences on translation of

financial statements of overseas

subsidiaries 8,571 358

Change in fair value of available-for-sale

financial assets (6,724) 16,057

Other comprehensive income for the year,

net of income tax 1,847 16,415

TOTAL COMPREHENSIVE INCOME FOR

THE YEAR 33,993 59,029

Profit for the year attributable to:

Owners of the Company 25,355 26,303

Non-controlling interests 6,791 16,311

32,146 42,614

Total comprehensive income attributable to:

Owners of the Company 26,270 42,543

Non-controlling interests 7,723 16,486

33,993 59,029

Earnings per share (in HK cent) 12

From continuing and discontinued operations

– Basic HK1.469 cents HK1.524 cents

– Diluted HK1.459 cents HK1.515 cents

From continuing operations

– Basic HK1.553 cents HK0.850 cents

– Diluted HK1.542 cents HK0.845 cents


– I-5 –

Consolidated Statement of Financial Position

As at 31 December 2010

31/12/2010 31/12/2009 1/1/2009

Note HK$’000 HK$’000 HK$’000


Non-current assets

Property, plant and equipment 13 3,624 71,068 66,108

Land lease premium 14 – – –

Investment property 15 73,959 65,893 57,954

Intangible assets 16 403 160,479 167,431

Goodwill 18 – 377,972 377,972

Long term lease prepayment 24 – 7,516 8,591

Available-for-sale investments 19 48,495 38,365 21,774

126,481 721,293 699,830

Current assets

Inventories 23 35,581 222,949 219,514

Land lease premium 14 – – –

Accounts receivable 20 1,143 43,755 28,055

Short term loans receivable 21 186,209 52,365 –

Other receivables, deposits and

prepayments 24 160,814 394,400 323,264

Financial assets at fair value

through profit or loss 22 35,558 2,623 –

Tax recoverable 8(b) – 567 567

Pledged deposits 26 – 174 339

Cash and cash equivalents 27 339,954 649,688 550,385

759,259 1,366,521 1,122,124

Current liabilities

Tax payable 8(b) 1,510 1,549 825

Accounts payable 28 54,365 550,785 457,387

Other payables, deposits received

and accruals 29 9,440 479,042 370,417

Short term bank loans – secured 30 4,650 4,650 –

Short term bank loans – unsecured 30 21,153 147,443 169,587

91,118 1,183,469 998,216


– I-6 –

31/12/2010 31/12/2009 1/1/2009

Note HK$’000 HK$’000 HK$’000


Net current assets 668,141 183,052 123,908

Total assets less current liabilities 794,622 904,345 823,738

Non-current liabilities

Long-term bank loans – secured 30 16,277 21,096 –

Deferred tax liabilities 31 4,203 42,200 41,951

20,480 63,296 41,951

NET ASSETS 774,142 841,049 781,787

EQUITY

Share capital 32 174,600 172,590 172,590

Reserves 34 591,229 564,243 521,550

TOTAL EQUITY ATTRIBUTABLE

TO EQUITY SHAREHOLDERS OF

THE COMPANY 765,829 736,833 694,140

Non-controlling interests 34 8,313 104,216 87,647

TOTAL EQUITY 774,142 841,049 781,787

Approved and authorised for issue by the board of directors on 29 March 2011.


– I-7 –

Statement of Financial Position

As at 31 December 2010

2010 2009


Non-current assets

Property, plant and equipment 13 391 633

Interests in subsidiaries 17 33,519 33,519

33,910 34,152

Current assets

Other receivables, deposits and

prepayments 24 2,286 2,048

Amounts due from subsidiaries 25 576,417 527,294

Cash and cash equivalents 27 142,676 1,476

721,379 530,818

Current liabilities

Other payables, deposits received and

accruals 29 571 138

Amounts due to subsidiaries 25 190,639 13,849

191,210 13,987

Net current assets 530,169 516,831

Total assets less current liabilities 564,079 550,983

NET ASSETS 564,079 550,983

EQUITY

Equity attributable to owners of the

Company

Share capital 32 174,600 172,590

Reserves 34 389,479 378,393

564,079 550,983

TOTAL EQUITY 564,079 550,983

Approved and authorised for issue by the board of directors on 29 March 2011.


– I-8 –

Consolidated Statement of Changes in Equity


Other comprehensive

income

Share

capital

Share

premium

Share-

based

compensation

reserve

Exchange

fluctuation

reserve

Fair value

reserve

Statutory

surplus

reserve

Retained

earnings

Attributable

to owners

of the

Company

Non-

controlling

interests Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2009 172,590 287,362 16,914 11,009 (7,043) 747 212,561 694,140 87,647 781,787

Exchange adjustment – – – 183 – – – 183 175 358

Fair value adjustment for

available-for-sale financial

assets – – – – 16,057 – – 16,057 – 16,057

Profit for the year – – – – – – 26,303 26,303 16,311 42,614

Total comprehensive income – – – 183 16,057 – 26,303 42,543 16,486 59,029

Transfer – – – – – 357 (207) 150 83 233

At 31 December 2009 and 1

January 2010 172,590 287,362 16,914 11,192 9,014 1,104 238,657 736,833 104,216 841,049

Exchange adjustment – – – 7,639 – – – 7,639 932 8,571

Profit for the year – – – – – – 25,355 25,355 6,791 32,146

Fair value adjustment for

financial assets – – – – (6,724) – – (6,724) – (6,724)

Total comprehensive income – – – 7,639 (6,724) – 25,355 26,270 7,723 33,993

Shares issued under share

option scheme 2,010 3,125 (2,369) – – – – 2,766 – 2,766

Decrease in non-controlling

interests arising on disposal

of interest in KPIRM – – – – – – – – (103,626) (103,626)

Decrease in exchange

fluctuation reserve arising

on disposal of interest in

KPIRM – – – (7,335) – – – (7,335) – (7,335)

Decrease in statutory surplus

reserve arising on disposal

of interest in KPIRM – – – – – (493) – (493) – (493)

Equity settled share-based

transactions – – 7,788 – – – – 7,788 – 7,788

At 31 December 2010 174,600 290,487 22,333 11,496 2,290 611 264,012 765,829 8,313 774,142


– I-9 –

Consolidated Statement of Cash Flows


2010 2009


Operating activities

Profit for the year 32,146 42,614

Adjustments for

Income tax expense recognised in profit or

loss 6,843 5,392

Depreciation of property, plant and

equipment 13 20,888 25,245

(Gain)/loss on disposal of property, plant

and equipment (168) 3,718

Interest income (1,951) (4,952)

Finance costs 4,223 12,471

Share-based payment expenses 7,788 –

Dividend income from listed investments (560) (442)

Loss on disposal of subsidiaries 36 8,080 –

Amortisation of intangible assets 16 4,407 6,952

Changes in fair value of investment

property 15 (8,066) (7,939)

Changes in working capital 73,630 83,059

Increase in short term loans receivables (103,172) (52,365)

Decrease/(increase) in inventories 75,312 (3,435)

Decrease/(increase) in accounts receivable 42,612 (146)

Increase in other receivables, deposits and

prepayments (178,837) (85,615)

Increase in accounts payables 7,815 93,398

Increase in other payables and accruals 33,237 108,625

Increase in financial assets at fair value

through profit or loss (32,935) (2,623)

Cash (used in)/generated from operations (155,968) 57,839

Taxation paid

– PRC enterprise income tax 8(b) (4,395) (4,419)

Net cash (used in)/generated from operating

activities (86,733) 136,479


– I-10 –

2010 2009


Investing activities

Purchase of property, plant and equipment (26,012) (33,787)

Purchase of available-for-sale investment (42,304) (7,282)

Proceeds from sale of available-for-sale

investment 25,450 6,748

Proceeds on disposal of subsidiaries, net

of cash disposed 36 (117,766) –

Interest received 1,951 4,952

Proceeds from issue of shares 2,766 –

Dividend received from listed investment 560 442

Proceeds on disposal of property, plant and

equipment 1,721 70

Net cash outflow from investing activities (153,634) (28,857)

Financing activities

Interest paid (4,223) (12,471)

Proceeds from new bank loans 21,153 173,189

Repayment of bank loans (94,947) (169,587)

Net cash outflow from financing activities (78,017) (8,869)

(Decrease)/increase in cash and cash

equivalents (318,384) 98,753

Effect of foreign exchange rate changes 8,476 385

Cash and cash equivalents at beginning of

the year 649,862 550,724

Cash and cash equivalents at end of the year 27 339,954 649,862


– I-11 –

Notes to the Financial Statements


1. CORPORATE INFORMATION

The principal activity of the Company is investment holding. The principal activities of the Company’s

subsidiaries are set out in note 17 to the financial statements.

The Company is a limited liability company incorporated in Hong Kong. The address of its registered office

is Suite 5606, 56th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.

2. SIGNIFICANT ACCOUNTING POLICIES

a) Statement of compliance

These financial statements have been prepared in accordance with all applicable Hong Kong Financial

Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong

Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the

Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles generally accepted

in Hong Kong and the requirements of the Hong Kong Companies Ordinance. These financial statements also

comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock

Exchange of Hong Kong Limited. A summary of the significant accounting policies adopted by the Group is

set out below.

The HKICPA has issued certain amendments and interpretations which are or have become effective. It

has also issued certain new and revised HKFRSs that are first effective or available for early adoption for the

current accounting period of the Group and the Company. Note 2(b) provides information on any changes in

accounting policies resulting from initial applications of these developments to the extent that they are relevant

to the Group for the current and prior accounting periods reflected in these financial statements.

b) Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December 2010 comprise the Company and

its subsidiaries (together referred to as the “Group”).

Items included in the financial statements of each entity in the Group are measured using the currency

that best reflects the economic substance of the underlying events and circumstances relevant to the entity.

These financial statements are presented in Hong Kong dollars (“HKD”), rounded to the nearest thousand

except for per share data. Hong Kong dollar is the Company’s functional and presentation currency.

The measurement basis used in the preparation of the financial statements is the historical cost basis

except that the following assets are stated at their fair value as explained in the accounting policies set out

below:

– investment property (see note 2(v));

– financial instruments classified as available-for-sale or as financial assets at fair value through

profit or loss (see note 2(k)).

The preparation of financial statements in conformity with HKFRSs requires management to make

judgements, estimates and assumptions that affect the application of policies and reported amounts of assets,

liabilities, income and expenses. The estimates and associated assumptions are based on historical experience

and various other factors that are believed to be reasonable under the circumstances, the results of which form

the basis of making the judgements about carrying amounts of assets and liabilities not readily apparent from

other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognised in the period in which the estimate is revised if the revision affects only that period,

or in the period of the revision and future periods if the revision affects both current and future periods.


– I-12 –

Judgements made by management in the application of HKFRSs that have significant effect on the

financial statements and major sources of estimation uncertainty are discussed in note 40.

Application of new and revised HKFRSs

The Group has adopted the following new and revised Standards, Amendments and

Interpretations (“new and revised HKFRSs”) that are first effective for the current accounting period.

In the current year, the Group has adopted the following new and revised Standards, Amendments

and Interpretations (“new and revised HKFRSs”) that are first effective for the current accounting

period.

HKFRSs (Amendments) Amendment to HKFRS 5 as part of Improvements to

HKFRSs 2008

HKFRSs (Amendments) Improvements to HKFRSs 2009

HKAS 27 (Revised 2008) Consolidated and Separate Financial Statements

HKAS 39 (Amendments) Eligible Hedged Items

HKFRS 1 (Amendment) Additional Exemptions for First-time Adopters

HKFRS 2 (Amendments) Group Cash-settled Share-based Payment Transactions

HKFRS 3 (Revised 2008) Business Combinations

HK-Interpretation (“Int”) 5 Presentation of Financial Statements – Classification by the

Borrower of a Term Loan that Contains a Repayment on

Demand Clause

HK(IFRIC) – Int 17 Distributions of Non-cash Assets to Owners

Except as described below, the application of the other new and revised HKFRSs had no effect

on the consolidated financial statements of the Group for the current or prior accounting periods.

Amendments to HKAS 17 Leases, as part of Improvements to HKFRSs issued in 2009

HKAS 17 Leases has been amended in relation to the classification of leasehold land. Before the

amendments to HKAS 17, the Group was required to classify leasehold land as operating leases and to

present leasehold land as prepaid lease payments in the consolidated statement of financial position. The

amendments to HKAS 17 have removed such a requirement. The amendments require that the

classification of leasehold land should be based on the general principles set out in HKAS 17, that is,

whether or not substantially all the risks and rewards incidental to ownership of a leased asset have been

transferred to the lessee.

In accordance with the transitional provisions set out in the amendments to HKAS 17, the Group

reassessed the classification of unexpired leasehold land as at 1 January 2010 based on information that

existed at the inception of the leases. Leasehold land that qualifies for finance lease classification has

been reclassified from prepaid lease payment to property, plant, and equipment retrospectively.

The effect of the adoption of the amendments to HKAS 17 is as follows:

31 December 31 December 1 January

2010 2009 2009

HK$’000 HK$’000 HK$’000

Decrease in prepaid lease payments (858) (881) (905)

Increase in property, plant and

equipment 858 881 905

The application of the amendments to HKAS 17 has had no impact on the reported profit or loss

for the current and prior years.


– I-13 –

New/revised HKFRSs not adopted

Up to the date of issue of these financial statements, the HKICPA has issued the following

amendments, new standards and Interpretations which are not yet effective for the year ended 31

December 2010.

The Group has not early applied any of the following new and revised Standards, Amendments

or Interpretations that have been issued but are not yet effective.

HKFRSs (Amendments) Improvements to HKFRSs 2010 except for the amendments

to HKFRS 3 (Revised in 2008), HKFRS 7, HKAS 1 and

HKAS 281

HKFRS 1 (Amendment) Limited Exemption from Comparative HKFRS 7 Disclosures

for First-time Adopters3

HKFRS 1 (Amendment) Severe Hyperinflation and Removal of Fixed Dates for First-

time Adopters5

HKFRS 7 (Amendments) Disclosures – Transfers of Financial Assets5

HKFRS 9 Financial instruments7

HKAS 12 (Amendment) Deferred Tax: Recovery of Underlying Assets6

HKAS 24 (Revised) Related Party Disclosures4

HKAS 32 (Amendment) Classification of Rights Issues2

HK(IFRIC) – Int 14

(Amendments)

Prepayments of a Minimum Funding Requirement4

HK(IFRIC) – Int 19 Extinguishing Financial Liabilities with Equity Instruments3

1 Effective for annual periods beginning on or after 1 July 2010 and 1 January 2011, as

appropriate.

2 Effective for annual periods beginning on or after 1 February 2010.

3 Effective for annual periods beginning on or after 1 July 2010.

4 Effective for annual periods beginning on or after 1 January 2011.




HKFRS 9 Financial Instruments issued in November 2009 and amended in October 2010

introduces new requirements for the classification and measurement of financial assets and financial

liabilities and for derecognition.

• HKFRS 9 requires all recognised financial assets that are within the scope of HKAS 39

Financial Instruments: Recognition and Measurement to be subsequently measured at

amortised cost or fair value. Specifically, debt investments that are held within a business

model whose objective is to collect the contractual cash flows, and that have contractual

cash flows that are solely payments of principal and interest on the principal outstanding

are generally measured at amortised cost at the end of subsequent accounting periods. All

other debt investments and equity investments are measured at their fair values at the end

of subsequent accounting periods.

• The most significant effect of HKFRS 9 regarding the classification and measurement of

financial liabilities relates to the accounting for changes in fair value of a financial liability

(designated as at fair value through profit or loss) attributable to changes in the credit risk

of that liability. Specifically, under HKFRS 9, for financial liabilities that are designated

as at fair value through profit or loss, the amount of change in the fair value of the financial

liability that is attributable to changes in the credit risk of that liability is recognised in

other comprehensive income, unless the recognition of the effects of changes in the

liability’s credit risk in other comprehensive income would create or enlarge an accounting

mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit

risk are not subsequently reclassified to profit or loss. Previously, under HKSA 39, the

entire amount of the changes in the fair value of the financial liability designated as at fair

value through profit or loss was recognised in profit or loss.

HKFRS 9 is effective for annual periods beginning on or after 1 January 2013, with earlier

application permitted.


– I-14 –

The directors of the Company anticipate that HKFRS 9 will be adopted in the Group’s

consolidated financial statements for the annual period beginning 1 January 2013 and that the

application of the new standard will have a significant impact on amounts reported in respect of the

Group’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable

estimate of that effect until a detailed review has been completed.

The amendments to HKFRS 7 titled Disclosures – Transfers of Financial Assets increase the

disclosure requirements for transactions involving transfers of financial assets. These amendments are

intended to provide greater transparency around risk exposures when a financial asset is transferred but

the transferor retains some level of continuing exposure in the assets. The amendments also require

disclosures where transfers of financial assets are not evenly distributed throughout the period. To date,

the Group has not entered into transactions involving transfers of financial assets. However, if the Group

enters into any such transactions in the future, disclosures regarding those transfers may be affected.

HKAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party

and simplifies disclosures for government-related entities. The disclosure exemptions introduced in

HKAS 24 (as revised in 2009) do not affect the Group because the Group is not a government-related

entity.

The amendments to HKAS 32 titled Classification of Rights issues address the classification of

certain rights issues denominated in a foreign currency as either an equity instrument or as a financial

liability. To date, the Group has not entered into any arrangements that would fall within the scope of

the amendments. However, if the Group does enter into any rights issues within the scope of the

amendments in future accounting periods, the amendments to HKAS 32 will have an impact on the

classification of those rights issues.

The amendments to HK(IFRIC)-Int 14 require entities to recognise as an economic benefit any

prepayment of minimum funding requirement contributions. As the Group has no defined benefit

scheme, the amendments are unlikely to have any financial impact on the Group.

HK(IFRIC)-Int 19 provides guidance regarding the accounting the extinguishment of a financial

liability by the issue of equity instruments. To date, the Group has not entered into transactions of this

nature. However, if the Group does enter into such transactions in the future, HK(IFRIC)-Int 19 will

affect the required accounting. In particular, under HK(IFRIC)-Int 19, equity instruments issued under

such arrangements will be measured at their fair value, and any difference between the carrying amount

of the financial liability extinguished and the fair value of equity instruments issued will be recognised

in profit or loss.

The directors of the Company anticipate that the application of other new and revise standards,

amendments or interpretations will have no material impact on the results and the financial position of

the Group.

All relevant changes in accounting policies and disclosures have been made in accordance with

the provisions of the respective standards.

c) Consolidation

The consolidated financial statements include the financial statements of the Company and all of its

subsidiaries made up to 31 December. The results of subsidiaries acquired or disposed of during the year are

included in the consolidated statement of comprehensive income from the effective date of acquisition or up

to the effective date of disposal, as appropriate.

All material inter-company transactions and balances within the Group are eliminated on consolidation.

The gain or loss on the disposal of a subsidiary represents the difference between the sales proceeds and

the Group’s share of its net assets together with any goodwill or capital reserve which was not previously

charged or recognised in the consolidated statement of comprehensive income.

Non-controlling interests represent the interests of outside shareholders in the operating results and net

assets of subsidiaries.


– I-15 –

d) Subsidiaries and non-controlling interests

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern

the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control,

potential voting rights that presently exercisable are taken into account. On adoption of HKAS 27 (Revised),

when control is lost, any remaining interest in the entity is re-measured to fair value, and a gain or loss is

recognised in profit or loss. (The adoption of this change in HKAS 27 (Revised) should be applied

prospectively.)

An investment in a subsidiary is consolidated into the consolidated financial statements from the date

that control commences until the date that control ceases. Intra-group balances and transactions and any

unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated

financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way

as unrealised gains but only to the extent that there is no evidence of impairment.

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the

Company, and in respect of which the Group has not agreed any additional terms with the holders of those

interests which would result in the Group as a whole having a contractual obligation in respect of those

interests that meets the definition of a financial liability. For each business combination, the Group can elect

to measure any non-controlling interests either at fair value or at their proportionate share of the subsidiary’s

net identifiable assets.

Non-controlling interests are presented in the consolidated statement of financial position within equity,

separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the

results of the Group are presented on the face of the consolidated statement of comprehensive income as an

allocation of the total profit or loss and total comprehensive income for the year between non-controlling

interests and the equity shareholders of the Company. Loans from holders of non-controlling interests and

other contractual obligations towards these holders are presented as financial liabilities in the consolidated

statement of financial position in accordance with notes 2(w), (t), (j) or (i) depending on the nature of the

liability.

Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in existing subsidiaries on or after 1 January 2010

Changes in the Group’s interests in a subsidiary that do not result in a loss of control are

accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and

non-controlling interests within consolidated equity to reflect the change in relative interests, but no

adjustments are made to goodwill and no gain or loss is recognised.

When the Group losses control of a subsidiary, it is accounted for as a disposal of the entire

interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest

retained in that former subsidiary at the date when control is lost is recognised at fair value and this

amount is regarded as the fair value on initial recognition of a financial asset (see note 2(k)).

Changes in the Group’s ownership interests in existing subsidiaries prior to 1 January 2010

Increases in interests in existing subsidiaries were treated in the same manner as the acquisition

of subsidiaries, with goodwill or a bargain purchase gain being recognised where appropriate. For

decreases in interests in subsidiaries, regardless of whether the disposals would result in the Group

losing control over the subsidiaries, the difference between the consideration received and the

adjustment to the non-controlling interests was recognised in profit or loss.

In the Company’s statement of financial position, an investment in a subsidiary is stated at cost

less impairment losses (see note 2(i)), unless the investment is classified as held for sale (or included

in a disposal group that is classified as held for sale).


– I-16 –

e) Business combinations

Business combinations on or after 1 January 2010

Acquisitions of businesses are accounted for using the acquisition method. The consideration

transferred in a business combination is measured at fair value, which is calculated as the sum of the

acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to

the former owners of the acquiree and the equity interests issued by the Group in exchange for control

of the acquiree. Acquisition related costs are generally recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised

at their acquisition-date fair values, except that:

– deferred tax asset or liability arising from the assets acquired and liabilities assumed in a

business combination and the potential tax effects of temporary differences and carry

forwards of an acquiree that exist at the acquisition date or arise as a result of acquisition

are recognised and measured in accordance with HKAS 12, Income Tax;

– liabilities or assets relating to employee benefit arrangements are recognised and measured

in accordance with HKAS 19 Employee Benefits;

– liabilities or equity instruments relating to share-based payment transactions of the

acquiree or the replacement of an acquiree’s share-based payment transactions with

share-based payment transactions of the Group are measured in accordance with HKFRS

2 Share-based Payment at the acquisition date; and

– assets (or disposal groups) that are classified as held for sale in accordance with HKFRS

5 Non-current Assets Held for Sale and Discontinued Operations are measured in

accordance with that Standard.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any

non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity

interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets

acquired and the liabilities assumed. If, after re-assessment, the net of the acquisition-date amounts of

the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred,

the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously

held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain

purchase gain.

Non-controlling interests that are present ownership interests and entitle their holders to a

proportionate share of the entity’s net assets in the event of liquidation may be initially measured either

at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the

acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-

transaction basis. Other types of non-controlling interests are measured at their fair value or another

measurement basis required by another Standard.

Where the consideration the Group transfers in a business combination includes assets or

liabilities resulting from a contingent consideration arrangement, the contingent consideration is

measured at its acquisition-date fair value and considered as part of the consideration transferred in a

business combination. Changes in the fair value of the contingent consideration that qualify as

measurement period adjustments are adjusted retrospectively, with the corresponding adjustments being

made against goodwill or gain on bargain purchase. Measurement period adjustments are adjustments

that arise from additional information obtained during the measurement period about facts and

circumstances that existed as of the acquisition date. Measurement period does not exceed one year from

the acquisition date.

The subsequent accounting for changes in the fair value of the contingent consideration that do

not qualify as measurement period adjustments depends on how the contingent consideration is

classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting

dates and its subsequent settlement is accounted for within equity. Contingent consideration that is

classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with HKAS

39, or HKAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the

corresponding gain or loss being recognised in profit or loss.


– I-17 –

When a business combination is achieved in stages, the Group’s previously held equity interest

in the acquiree is remeasured to fair value at the acquisition date (i.e. the date when the Group obtains

control), and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from

interests in the acquiree prior to the acquisition date that have previously been recognised in other

comprehensive income are reclassified to profit or loss where such treatment would be appropriate if

that interest were disposed of.

Changes in the value of the previously held equity interest recognised in other comprehensive

income and accumulated in equity before the acquisition date are reclassified to profit or loss when the

Group obtains control over the acquiree.

If the initial accounting for a business combination is incomplete by the end of the reporting

period in which the combination occurs, the Group reports provisional amounts for the items for which

the accounting is incomplete. Those provisional amounts are adjusted during the measurement period

(see above), or additional assets or liabilities are recognised, to reflect new information obtained about

facts and circumstances that existed as of the acquisition date that, if known, would have affected the

amounts recognised as of that date.

Business combinations prior to 1 January 2010

Acquisition of businesses was accounted for using the purchase method. The cost of the

acquisition was measured at the aggregate of the fair values, at the date of exchange, of assets given,

liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of

the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable

assets, liabilities and contingent liabilities that met the relevant conditions for recognition were

generally recognised at their fair value at the acquisition date.

Goodwill arising on acquisition was recognised as an asset and initially measured at cost, being

the excess of the cost of the acquisition over the Group’s interest in the recognised amounts of the

identifiable assets, liabilities and contingent liabilities recognised. If, after assessment, the Group’s

interest in the recognised amounts of the acquiree’s identifiable assets, liabilities and contingent

liabilities exceeded the cost of the acquisition, the excess was recognised immediately in profit or loss.

The non-controlling interest in the acquiree was initially measured at the non-controlling

interest’s proportionate share of the recognised amounts of the assets, liabilities and contingent

liabilities of the acquiree.

Contingent consideration was recognised, if and only if, the contingent consideration was

probable and could be measured reliably. Subsequent adjustments to contingent consideration were

recognised against the cost of the acquisition.

Business combinations achieved in stages were accounted for as separate steps. Goodwill was

determined at each step. Any additional acquisition did not affect the previously recognised goodwill.

f) Goodwill

Goodwill represents the excess of

i) the aggregate of the fair value of the consideration transferred, the amount of any non-controlling

interest in the acquiree and the fair value of the Group’s previously held equity interest in the

acquiree; over

ii) the Group’s interest in the net fair value of the acquiree’s identifiable assets and liabilities

measured as at the acquisition date.

When (ii) is greater than (i), then this excess is recognised immediately in profit or as a gain on a bargain

purchase.

Goodwill is stated at cost less accumulated impairment losses. For the purposes of equipment testing,

goodwill is allocated to each of the cash-generating unit, or groups of cash generating units, that is expected

to benefit from the synergies of the combination.


– I-18 –

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more

frequently whenever there is indication that the unit may be impaired. For goodwill arising on an acquisition

in a reporting period, the cash-generating unit to which goodwill has been allocated is tested for impairment

before the end of that reporting period. If the recoverable amount of the cash-generating unit is less than the

carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any

goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying

amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in

the consolidated statement of comprehensive income. An impairment loss recognised for goodwill is not

reversed in subsequent periods.

On disposal of a cash generating unit during the year, any attributable amount of purchased goodwill

is included in the calculation of the profit or loss on disposal.

g) Intangible assets

Intangible assets with finite useful lives acquired by the Group are stated in the consolidated statement

of financial position at cost less accumulated amortisation and impairment losses (see note 2(i)). Expenditure

on internally generated goodwill and brands is recognised as an expense in the period in which it is incurred.

Expenditure on advertising and promotional activities is recognised as an expense when the Group either

has the right to access the goods or has received the service.

Amortisation of intangible assets with finite useful lives is charged to profit or loss on a straight-line

basis over the assets’ estimated useful lives. The intangible assets in respect of trademarks with finite useful

lives are amortised from the date they are available for use and their estimated useful lives of 25 years.

Gains or losses arising from derecognition of an intangible asset are measured at the difference between

the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss in the period

when the asset is derecognised.

h) Property, plant and equipment

Property, plant and equipment are stated in the statement of financial position at cost less accumulated

depreciation and impairment losses (see note 2(i)).

When a lease includes both land and building elements, the Group assesses the classification of each

element as a finance or an operating lease separately based on the assessment as to whether substantially all

the risks and rewards incidental to ownership of each element have been transferred to the Group.

To the extent the allocation of the lease payments can be made reliably, interest in leasehold land that

is accounted for as an operating lease is presented as “prepaid lease payments” in the consolidated statement

of financial position and is amortised over the lease term on a straight-line basis.

Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may

also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency

purchases of property, plant and equipment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as

appropriate, only when it is probable that future economic benefits associated with the item will flow to group

and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised.

All other repairs and maintenance are charged to the income statement during the financial period in which

they are incurred.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying

amount is greater than its estimated recoverable amount.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are

determined as the difference between the net proceeds on disposal and the carrying amount of the item and are

recognised in profit or loss on the date of retirement or disposal.


– I-19 –

Subsequent expenditure relating to property, plant and equipment that has already been recognised is

added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the

originally assessed standard of performance of the existing asset, will flow to the enterprise. All other

subsequent expenditure is recognised as an expense in the period in which it is incurred.

The gain or loss on disposal of property, plant and equipment other than investment properties is the

difference between the net sales proceeds and the carrying amount of the relevant asset, and is recognised in

profit or loss on the date of retirement or disposal.

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their

estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

– buildings situated on leasehold land are depreciated on a straight-line basis over the shorter of the

unexpired term of lease and their estimated useful lives, being no more than 50 years after the

date of completion;

– other property, plant and equipment are depreciated on a straight-line method over their estimated

useful lives as follows:

Leasehold improvements 5 years or over the remaining term of the lease, if shorter

Furniture and equipment 5 to 8 years

Motor vehicles 5 years

Where parts of an item of property, plant and equipment have different useful lives, the cost or valuation

of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both

the useful life of an asset and its residual value, if any, are reviewed annually.

i) Impairment of assets

i) Impairment of investments in equity securities and other receivables

Investments in equity securities (other than investments in subsidiaries and associates: see note

2(i)(ii)) and other current and non-current receivables that are stated at cost or amortised cost or are

classified as available-for-sale equity securities are reviewed at the end of each reporting period to

determine whether there is objective evidence of impairment. Objective evidence of impairment

includes observable data that comes to the attention of the Group about one or more of the following

loss events:

– significant financial difficulty of the debtor;

– a breach of contract, such as a default or delinquency in interest or principal payments;

– it becoming probable that the debtor will enter bankruptcy or other financial

reorganisation;

– significant changes in the technological, market, economic or legal environment that have

an adverse effect on the debtor; and

– a significant or prolonged decline in the fair value of an investment in an equity instrument

below its cost.

If any such evidence exists, any impairment loss is determined and recognised as follows:

– For unquoted equity securities carried at cost, impairment loss is measured as the

difference between the carrying amount of the financial asset and the estimated future cash

flows, discounted at the current market rate of return for a similar financial asset where the

effect of discounting is material. Impairment losses for equity securities are not reversed.

– For accounts receivables and other financial assets carried at amortised cost, the

impairment loss is measured as the difference between the asset’s carrying amount and the

present value of estimated future cash flows, discounted at the financial asset’s original


– I-20 –

effective interest rate (i.e. the effective interest rate computed at initial recognition of these

assets), where the effect of discounting is material. This assessment is made collectively

where financial assets carried at amortised cost share similar risk characteristics, such as

similar past due status, and have not been individually assessed as impaired. Future cash

flows for financial assets which are assessed for impairment collectively are based on

historical loss experience for assets with credit risk characteristics similar to the collective

Group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be

linked objectively to an event occurring after the impairment loss was recognised, the impairment loss

is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying

amount exceeding that which would have been determined had no impairment loss been recognised in

prior years.

– For available-for-sale securities, the cumulative loss that has been recognised in the fair

value reserve is reclassified to profit or loss. The amount of the cumulative loss that is

recognised in profit or loss is the difference between the acquisition cost (net of any

principal repayment and amortisation) and current fair value, less any impairment loss on

that asset previously recognised in profit or loss.

Impairment losses recognised in profit or loss in respect of available-for-sale equity securities are

not reversed through profit or loss. Any subsequent increase in the fair value of such assets is recognised

in other comprehensive income.

Impairment losses are written off against the corresponding assets directly, except for impairment

losses recognised in respect of trade debtors included within trade and other receivables, whose recovery

is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded

using an allowance account. When the Group is satisfied that recovery is remote, the amount considered

irrecoverable is written off against trade debtors directly and any amounts held in the allowance account

relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance

account are reversed against the allowance account. Other changes in the allowance account and

subsequent recoveries of amounts previously written off directly are recognised in profit or loss.

ii) Impairment of other assets

Internal and external sources of information are reviewed at the end of each reporting period to

identify indications that the following assets may be impaired or, except in the case of goodwill an

impairment loss previously recognised no longer exists or may have decreased:

– property, plant and equipment;

– lease premium for land;

– investments in subsidiaries, associates and jointly controlled entity (except for those

classified as held for sale);

– intangible assets; and

– goodwill.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for

goodwill, the recoverable amount is estimated annually whether or not there is any indication of

impairment.

– Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs to sell and its

value in use. In assessing value in use, the estimated future cash flows are discounted to their

present value using a pre-tax discount rate that reflects current market assessments of the time

value of money and the risks specific to the asset. Where an asset does not generate cash inflows

largely independent of those from other assets, the recoverable amount is determined for the

smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).


– I-21 –

– Recognition of impairment losses

An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the

cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses

recognised in respect of cash-generating units are allocated first to reduce the carrying amount

of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the

carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that

the carrying value of an asset will not be reduced below its individual fair value less costs to sell,

or value in use, if determinable.

– Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been

a favourable change in the estimates used to determine the recoverable amount. An impairment

loss in respect of goodwill is not reversed.

A reversal of impairment losses is limited to the asset’s carrying amount that would have

been determined had no impairment loss been recognised in prior years. Reversals of impairment

losses are credited to profit or loss in the year in which the reversals are recognised.

iii) Interim financial reporting and impairment

Under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong

Limited, the Group is required to prepare an interim financial report in compliance with HKAS 34,

Interim financial reporting, in respect of the first six months of the financial year. At the end of the

interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it

would at the end of the financial year (see note 2(i)).

Impairment losses recognised in an interim period in respect of goodwill and available-for-sale

equity securities carried at cost are not reversed in a subsequent period. This is the case even if no loss,

or a smaller loss, would have been recognised had the impairment been assessed only at the end of the

financial year to which the interim period relates. Consequently, if the fair value of an available-for-sale

equity security increases in the remainder of the annual period, or in any period subsequently, the

increase is recognised in other comprehensive income and not profit or loss.

j) Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Company or Group has

a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic

benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of

money is material, provisions are stated at the present value of the expenditures expected to settle the

obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot

be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of

economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence

or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the

probability of outflow of economic benefits is remote.

k) Financial assets

The Group classified its investments in securities in the following categories: available-for-sale

financial assets, financial assets at fair value through profit or loss and loans and receivables. The classification

depends on the purpose for which the investments were acquired.

i) Available-for-sale financial assets

Available-for-sale financial assets are initially recognised at fair value plus transaction costs. At

the end of each reporting period the fair value is remeasured, with any resultant gain or loss being

recognised directly in equity. Dividend income from these investments is recognised in profit or loss in


– I-22 –

accordance with the policy set out in note 2(l) and, where these investments are interest-bearing, interest

calculated using the effective interest method is recognised in profit or loss as set out in note 2(l). When

these investments are derecognised, the cumulative gain or loss previously recognised directly in equity

is recognised in profit or loss.

For available-for-sale financial assets that do not have a quoted market price in an active market

and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled

by delivery of such unquoted equity instruments, they are measured at cost less any identified

impairment losses at the end of each reporting period subsequent to initial recognition. An impairment

loss is recognised in profit or loss when there is objective evidence that the asset is impaired. The

amount of the impairment loss is measured as the difference between the carrying amount of the asset

and the present value of the estimated future cash flows discounted at the current market rate of return

for a similar financial asset. Such impairment losses will not reverse in subsequent period.

Investments are recognised/derecognised on the date the Group and/or the Company commits to

purchase/sell the investments or when they expire.

ii) Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at

fair value through profit or loss at inception. A financial asset is classified in this category if acquired

principally for the purpose of selling in the short term or if so designated by management. Assets in this

category are classified as current assets if they are either held for trading or are expected to be realised

within 12 months of the end of reporting period. Financial assets at fair value through profit or loss are

carried at fair value, realised and unrealised gains and losses arising from changes in the fair value of

these investments are included in the profit or loss in the period in which they arise.

iii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments

that are not quoted in an active market. Such assets are carried at amortised cost using the effective

interest method. Gains or losses are recognised in the statement of comprehensive income when the

loans and receivables are derecognised or impaired, as well as through the amortisation process. They

arise when the Group provides money or services directly to a debtor or a related company with no

intention of trading the receivable. They are included in current assets, except for maturities greater than

12 months after the statement of financial position date. These are classified as non-current assets.

Reclassification of financial assets, other than as set out below, or of financial liabilities between

categories are not permitted following their initial recognition.

Held for trading non-derivative financial assets can only be transferred out of the held at fair

value through profit or loss category in the following circumstances: to the available-for-sale category,

where, in rare circumstances, they are no longer held for the purpose of selling or repurchasing in the

near term; or to the loan and receivables category, where they are no longer held for the purpose of

selling or repurchasing in the near term and they would have met the definition of a loan and receivable

at the date of reclassification and the Group has the intent and ability to hold the assets for the

foreseeable future or until maturity.

Financial assets can only be transferred out of the available-for-sale category to the loan and

receivables category, where they would have met the definition of a loan and receivable at the date of

reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or

until maturity.

Financial assets are reclassified at their fair value on the date of reclassification. For financial

assets reclassified out the available-for-sale category into loans and receivables, any gain or loss on

those assets recognised in shareholders’ equity prior to the date of reclassification is amortised to the

income statement over the remaining life of the financial assets, using the effective interest method.


– I-23 –

l) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable

that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured

reliably, revenue is recognised in profit or loss as follows:

i) Sale of goods

Revenue from the sale of merchandise is recognised on the transfer of risks and rewards of

ownership, which generally coincides with the time when the merchandise are delivered to customers

and title has passed.

ii) Promotion and store display income, income from leasing of merchandise storage space are

recognised according to contract terms and as services are provided.

iii) Revenue from short term financing service

– Short term financing service income, which is collected from the customer at the inception

of the short term loan, is recognised ratably over the term of the loan made.

– Interest income on provision of short term financing service is recognised using the

effective interest method for all short term loans that the Group deems to be collectible

based on historical short term loan redemption statistics.

iv) Rental income from operating leases

Rental income receivable under operating leases is recognised in profit or loss in equal

instalments over the periods covered by the lease term, except where an alternative basis is more

representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives

granted are recognised in profit or loss as an integral part of the aggregate net lease payments receivable.

Contingent rentals are recognised as income in the accounting period in which they are earned.

v) Dividends

Dividend income from unlisted investments is recognised when the shareholder’s right to receive

payment is established. Dividend income from listed investments is recognised when the share price of

the investment goes ex-dividend.

vi) Interest income

Interest income is recognised as it accrues using the effective interest method.

vii) Government grants

Government grants are recognised in the statement of financial position initially when there is

reasonable assurance that they will be received and that the Group will comply with the conditions

attaching to them. Government grants shall be recognised as income over the periods necessary to match

them with the related costs which they are intended to compensate, an a systematic basis. Grants that

compensate the Group for the cost of an asset are deducted in arriving at the carrying amount of the asset

and consequently are recognised as income over the life of a depreciable asset by way of a reduced

depreciation charge.

viii) Sale of trading securities

Revenue on sale of trading securities is recognised on a trade date basis when the relevant

transactions are executed.

m) Accounts receivable and other receivables

Accounts and other receivables are initially recognised at fair value and thereafter stated at amortised

cost less allowance for impairment of doubtful debts, except where the receivables are interest-free loans made

to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such

cases, the receivables are stated at cost less allowance for impairment of doubtful debts (see note 2(i)).


– I-24 –

n) Short term loan receivables

Short term loan receivables secured by the pledge of personal property are recognised initially at fair

value and subsequently measured at amortised cost using the effective interest method. A typical short term

loan has a term of 30-180 days. If the loan is not repaid, the loan principal becomes the cost of the forfeited

collateral, which is held for sale.

o) Accounts and other payables

Accounts and other payables are initially recognised at fair value and thereafter stated at amortised cost

unless the effect of discounting would be immaterial, in which case they are stated at cost.

p) Foreign currencies

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the

currency of the primary economic environment in which the entity operates (“the functional currency”).

The consolidated financial statements are presented in Hong Kong dollars, which is the Company’s

functional and presentation currency.

Transactions and balances

Foreign currency transactions during the year are translated at the foreign exchange rates ruling

at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated

at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are

recognised in profit or loss, except those arising from foreign currency borrowings used to hedge a net

investment in a foreign operation which are recognised in other comprehensive income.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign

currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary

assets and liabilities denominated in foreign currencies that are stated at fair value are translated using

the foreign exchange rates ruling at the dates the fair value was determined.

The results of foreign operations are translated into Hong Kong dollars at the exchange rates

approximating the foreign exchange rates ruling at the dates of the transactions. Statement of financial

position items, including goodwill arising on consolidation of foreign operations acquired on or after 30

January 2008, are translated into Hong Kong dollars at the foreign exchange rates ruling at the end of

the reporting period. The resulting exchange differences are recognised in other comprehensive income

and accumulated separately in equity in the exchange reserve. Goodwill arising on consolidation of a

foreign operation acquired before 30 January 2008 is translated at the foreign exchange rate that applied

at the date of acquisition of foreign operation.

From 1 January 2010 onwards, on the disposal of a foreign operation (i.e. a disposal of the

Group’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary

that includes a foreign operation, or a disposal involving loss of significant influence over an associate

that includes a foreign operation), all of the exchange differences accumulated in equity in respect of

that operation attributable to the owners of the Company are reclassified to profit or loss.

In the case of a partial disposal of a subsidiary that does not result in the Group losing control

over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to

non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e.

partial disposals of associates that do not result in the Group losing significant influence), the

proportionate share of the accumulated exchange differences in reclassified to profit or loss.


– I-25 –

q) Retirement scheme

The Group operates a defined contribution mandatory provident fund retirement benefits scheme (the

“Hong Kong Scheme”) under the Mandatory Provident Fund Scheme Ordinance, for those employees who are

eligible to participate in the Hong Kong Scheme. The Hong Kong Scheme became effective on 1 December

2000. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the

statement of comprehensive income as they become payable in accordance with the rules of the Hong Kong

Scheme. The assets of the Hong Kong Scheme are held separately from those of the group in an independently

administered fund. The Group’s employer contributions vest fully with the employees when contributed into

the Hong Kong Scheme.

For the Group’s PRC operations participate in defined contribution retirement plans managed by the

local municipal government in the locations in which it operates. The relevant authorities of the local

municipal government in the PRC is responsible for the retirement benefit obligations payable to the Group’s

retired employees. The Group has no obligation for payment of retirement benefits beyond the annual

contribution. The contribution payable is charged as an expense to profit or loss as and when incurred.

r) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs

of conversion and other costs such as direct labour costs incurred in bringing the inventories to their present

location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated

costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the

period in which the related revenue is recognised. The amount of any write-down of inventories to net

realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss

occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount

of inventories recognised as an expense in the period in which the reversal occurs.

s) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other

financial institutions, and short-term, highly liquid investments that are readily convertible into known

amounts of cash and which are subject to an insignificant risk of changes in value, having been within three

months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of

the Group’s cash management are also included as a component of cash and cash equivalents for the purpose

of the consolidated statement of cash flows.

t) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities.

Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the

extent that they relate to items recognised in other comprehensive income or directly in equity, in which case

the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or

substantively enacted at the end of reporting period, and any adjustment to tax payable in respect of previous

years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively,

being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and

their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent

that it is probable that future taxable profits will be available against which the asset can be utilised, are

recognised. Future taxable profits that may support the recognition of deferred tax assets arising from


– I-26 –

deductible temporary differences include those that will arise from the reversal of existing taxable temporary

differences, provided those differences relate to the same taxation authority and the same taxable entity, and

are expected to reverse either in the same period as the expected reversal of the deductible temporary

difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward.

The same criteria are adopted when determining whether existing taxable temporary differences support the

recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken

into account if they relate to the same taxation authority and the same taxable entity, and are expected to

reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary

differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities

that affect neither accounting nor taxable profit (provided they are not part of a business combination), and

temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable

differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse

in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse

in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or

settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted

at the end of the reporting period. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is

reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the

related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that

sufficient taxable profits will be available.

Additional income taxes that arise from the distribution of dividends are recognised when the liability

to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from

each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets

against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current

tax assets against current tax liabilities and the following additional conditions are met:

– in the case of current tax assets and liabilities, the Company or the Group intends either to settle

on a net basis, or to realise the asset and settle the liability simultaneously: or

– in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same

taxation authority on either:

– the same taxable entity; or

– different taxable entities, which, in each future period in which significant amounts of

deferred tax liabilities or assets are expected to be settled or recovered, intend to realise

the current tax assets and settle the current tax liabilities on a net basis or realise and settle

simultaneously.

u) Operating lease charges

Where the Group has the use of assets under operating leases, payments made under the leases are

charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except

where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset.

Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments

made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the

period of the lease term except where the property is classified as an investment property.


– I-27 –

v) Investment properties

Investment property is property (land and/or a building – or part of a building – or both) held (by the

owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

i) use in the production or supply of goods or services or for administrative purposes; or

ii) sale in the ordinary course of business.

Land held under operating leases are classified and accounted for as investment property when the rest

of the definition of investment property is met. The operating lease is accounted for as if it were a finance

lease.

Investment property is measured initially at its cost, including related transaction costs.

After initial recognition, investment property is carried at fair value. Fair value is based on active market

prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this

information is not available, the Group uses alternative valuation methods such as recent prices on less active

markets or discounted cash flow projections. These valuations are performed in accordance with the guidance

issued by the International Valuation Standards Committee. These valuations are reviewed annually by external

valuers. Investment property that is being redeveloped for continuing use as investment property, or for which

the market has become less active, continues to be measured at fair value.

The fair value of investment property reflects, among other things, rental income from current leases and

assumptions about rental income from future leases in the light of current market conditions.

The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of

the property. Some of those outflows are recognised as a liability, including finance lease liabilities in respect

of land classified as investment property; others, including contingent rent payments, are not recognised in the

financial statements.

Subsequent expenditure is charged to the asset’s carrying amount only when it is probable that future

economic benefits associated with the item will flow to the Group and the cost of the item can be measured

reliably. All other repairs and maintenance costs are expensed in the statement of comprehensive income

during the financial period in which they are incurred. Changes in fair values are recognised in the statement

of comprehensive income.

If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment,

and its fair value at the date of reclassification becomes its cost for accounting purposes. Property that is being

constructed or developed for future use as investment property is classified as property, plant and equipment

and stated at cost until construction or development is complete, at which time it is reclassified and

subsequently accounted for as investment property.

If an item of property, plant and equipment becomes an investment property because its use has changed,

any difference resulting between the carrying amount and the fair value of this item at the date of transfer is

recognised in equity as a revaluation of property, plant and equipment under HKAS 16. However, if a fair value

gain reverses a previous impairment loss, the gain is recognised in the statement of comprehensive income.

Investment property held for sale without redevelopment is classified within non-current assets held for

sale, under HKFRS 5.

w) Employee benefits

i) Short term employee benefits and contributions to defined contribution plans

Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement

plans, leave passage and the cost to the Group of non-monetary benefits are accrued in the year in which

the associated services are rendered by employees of the Group. Where payment or settlement is

deferred and the effect would be material, these amounts are stated at their present values.


– I-28 –

ii) Share-based payments

The fair value of share options granted to employees is recognised as an employee cost with a

corresponding increase in capital reserve within equity. The fair value is measured at grant date using

the binomial lattice model, taking into account the terms and conditions upon which the options were

granted. Where the employees have to meet vesting conditions before becoming unconditionally entitled

to the options, the total estimated fair value of the options is spread over the vesting period, taking into

account the probability that the options will vest.

During the vesting period, the number of share options that is expected to vest is reviewed. Any

resulting adjustment to the cumulative fair value recognised in prior years is charged/credited to the

profit or loss for the year of the review, unless the original employee expenses qualify for recognition

as an asset, with a corresponding adjustment to the capital reserve. On vesting date, the amount

recognised as an expense is adjusted to reflect the actual number of options that vest (with a

corresponding adjustment to the capital reserve) except where forfeiture is only due to not achieving

vesting conditions that relate to the market price of the company’s shares. The equity amount is

recognised in the capital reserve until either the option is exercised (when it is transferred to the share

premium account) or the option expires (when it is released directly to retained profits).

iii) Termination benefits

Termination benefits are recognised when, and only when, the Group demonstrably commits itself

to terminate employment or to provide benefits as a result of voluntary redundancy by having a detailed

formal plan which is without realistic possibility of withdrawal.

x) Related parties

For the purpose of these financial statements, parties are considered to be related to the Group if:

i) the party has the ability, directly or indirectly through one or more intermediaries, to control the

Group or exercise significant influence over the Group in making financial and operating policy

decisions, or has joint control over the Group; or

ii) the Group and the party are subject to common control; or

iii) the party is an associate of the Group or a joint venture in which the Group is a venturer; or

iv) the party is a member of key management personnel of the Group or the Group’s parent, or a close

family member of such an individual, or is an entity under the control, joint control or significant

influence of such individuals; or

v) the party is a close family member of a party referred to in (i) or is an entity under the control,

joint control or significant influence of such individuals; or

vi) the party is a post-employment benefit plan which is for the benefit of employees of the Group

or of any entity that is a related party of the Group.

Close family members of an individual are those family members who may be expected to influence,

or be influenced by, that individual in their dealings with the entity.

y) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset

which necessarily takes a substantial period of time to get ready for its intended use or sale, are capitalised

as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when

expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary

to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended

or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or

sale are interrupted or complete.


– I-29 –

z) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs.

Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference

between cost and redemption value being recognised in profit or loss over the period of the borrowings using

the effective interest method.

aa) Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are

identified from the financial information provided regularly to the Group’s most senior executive management

for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of

business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the

segments have similar economic characteristics and are similar in respect of the nature of products and

services, the nature of production processes, the type or class of customers, the methods used to distribute the

products or provide the services, and the nature of the regulatory environment. Operating segments which are

not individually material may be aggregated if they share a majority of these criteria.

ab) Government grants

Government grants are recognised in the statement of financial position initially when there is

reasonable assurance that they will be received and that the Group will comply with the conditions attaching

to them. Grants that compensate the Group for expenses incurred are recognised as revenue in profit or loss

on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the group

for the cost of an asset are deducted from the carrying amount of the asset and consequently are effectively

recognised in profit or loss over the useful life of the asset by way of reduced depreciation expense.

ac) Discontinued operations

A discontinued operation is a component of the Group’s business, the operations and cash flows of

which can be clearly distinguished from the rest of the Group and which represents a separate major line of

business or geographical area of operations, or is part of a single co-ordinated plan to dispose of a separate

major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view

to resale.

Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria

to be classified as held for sale, if earlier. It also occurs if the operation is abandoned.

Where an operation is classified as discontinued, a single amount is presented on the face of the income

statement, which comprises:

– the post-tax profit or loss of the discontinued operation; and

– the post-tax gain or loss recognised on the measurement to fair value less costs to sell, or on the

disposal, of the assets or disposal group(s) constituting the discontinued operation.


– I-30 –

3. TURNOVER, OTHER REVENUE AND OTHER NET INCOME

The principal activities of the Group are the retailing operations in convenience stores, sales of food products

and provision of short term financing services.

Turnover represents the net invoiced value of goods sold, after deduction of relevant taxes and allowances for

returns and trade discounts in convenience stores and sales of food products and financial service income and interest

income arising from provision of short term financing services in short term financing business during the year.

The Group’s turnover, other revenue and other net income for the year arose from continuing operations of the

following activities:

Group

2010 2009

HK$’000 HK$’000

Turnover

Convenience store operations 201,515 164,967

Sales of food products – 671

Interest income on provision of short term financing

services 2,570 167

Short term financing service income 12,937 2,796

217,022 168,601

Other revenue

Bank interest income, being total interest income on

financial assets not at fair value through profit or loss 451 383

Rental receivable from operating leases, less direct

outgoings of Nil (2009: Nil) 6,284 6,114

Dividend income from listed investments 560 442

Promotion and store display income from suppliers 25,303 20,106

32,598 27,045

Other net income

Gain on disposal of financial assets at fair value through

profit or loss 2,650 3,273

Gain on disposal of available-for-sale financial assets 9,864 1,567

Exchange gain, net 5,236 –

Compensation (Note) 22,870 –

Reversal of impairment loss on other loans receivables – 16,653

Income from government subsidies 976 2,151

Gross rental income from sub-leasing of shop premises 3,659 4,163

Others 4,535 2,450

Gain on disposal of property, plant and equipment 168 –

49,958 30,257

Note: On 11 August 2009, a subsidiary within the Group, Hualian GMS Shopping Centre Company Limited,

signed a letter of intent (“LOI”) with Shanghai Xin Meng Investment Company Limited (The

“Vendor”) and ARC Capital Holding Limited (The “Guarantor”) pursuant to which the Group is

granted a pre-emptive right for the possible acquisition in consideration of payment of an earnest

money of RMB500 million to the Vendor. If the formal acquisition cannot be concluded, the earnest

money shall be repaid to the Group upon expiry of the pre-emptive period together with a

compensation fee at the rate of 15% per annum (subject to a minimum of return of 8% per annum for

a period of six months). On 28 January 2010, the parties of the LOI entered into a cancellation


– I-31 –

agreement pursuant to which the LOI was terminated with effect from the date of the cancellation

agreement and none of the parties have any further obligation or liability under the LOI. The Vendor

paid a compensation fee of RMB20 million (approximately equivalent to HK$22,870,000) to the

Group, according to the terms set out in the LOI by 30 June 2010.

4. SEGMENTAL INFORMATION

Operating segments are identified on the basis of internal reports which provide information about components

of the Group. These information are reported to and reviewed by the Board of Directors, the chief operating

decision-makers for the purpose of resource allocation and performance assessment.

The Group has presented the segment information by the following categories. These segments are managed

separately.

1. Convenience stores

2. All others

a) Segment revenue, results, assets and liabilities

For the purpose of assessing segment performance and allocating resources between segments, the

Group’s chief operating decision maker monitors the results, assets and liabilities attributable to each

reportable segment on the following basis:

Segment profit represents the profit earned by each segment without allocation of central administration

costs. This is the measure reported to the chief operating decision maker for the purposes of resource allocation

and performance assessment. Taxation charge/(credit) is not allocated to reportable segment.

Revenue and expenses are allocated to the reportable segments with reference to sales generated by

those segments and the expenses incurred by those segments or which otherwise arise from the depreciation

or amortization of assets attributable to those segments. Head office and corporate expenses are not allocated

to individual segments.

Segment assets principally comprise all tangible assets, intangible assets and current assets directly

attributable to each segment.

The two reportable operating segments are listed as follows:

i) Convenience stores engaged in the distribution of live and fresh products, dry products,

beverages, processed food and daily necessities through the convenience stores of the Group;

ii) All others comprised, principally, short term financing business, trading of financial securities

and property investment.

The supermarket chain operation was discontinued in the current year. The segment information

reported on the below does not include any amount for this discontinued operation, which is described in more

details in note 8.


– I-32 –

The following is an analysis of the Group’s revenue and results from continuing operations by reportable

segments.

Convenience store All others Total

2010 2009 2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Revenue from external

customer 201,515 164,967 12,937 3,467 214,452 168,434

Interest revenue – – 2,570 167 2,570 167

Reportable segment

revenue 201,515 164,967 15,507 3,634 217,022 168,601

Reportable segment

profit before taxation 936 2,727 29,196 15,364 30,132 18,091

Interest income 319 315 132 68 451 383

Interest expenses – – (1,550) (1,462) (1,550) (1,462)

Depreciation and

amortisation – – (731) (531) (731) (531)

Income tax (292) (726) (4,273) (3,019) (4,565) (3,745)

Reportable segment

assets 126,900 86,602 755,091 199,992 881,991 286,594

Additions to non-

current segment

assets – – 2,041 412 2,041 412

Reportable segment

liabilities (59,998) (29,944) (50,979) (28,048) (110,977) (57,992)


– I-33 –

b) Reconciliations of reportable segment revenues, profit or loss, assets and liabilities

2010 2009

HK$’000 HK$’000

Revenue

Reportable segments’ revenue 217,022 168,601

Consolidated revenue 217,022 168,601

Profit

Reportable segments’ profit derived form Group’s

external customers 30,132 18,091

Unallocated other revenue 22,870 16,653

Unallocated head office and corporate expenses (21,445) (11,103)

Consolidated profit before taxation 31,557 23,641

Assets

Reportable segments’ assets 881,991 286,594

Unallocated head office and corporate assets 3,749 1,252

Consolidated total assets 885,740 287,846

Liabilities

Reportable segments’ liabilities (110,977) (57,992)

Unallocated head office and corporate liabilities (621) (153)

Consolidated total liabilities (111,598) (58,145)

c) Geographical Information

The geographical location of customers is based on the location at which the goods are delivered.

Substantially, all of the Group’s revenue from external customers, non-current assets and capital expenditure

are located in the People’s Republic of China (“PRC”), no analysis on revenue from external customers and

non-current assets by location are presented.

d) Information about major customers

The Group has a very wide customer base, no single customer contributed more than 10% of the Group’s

revenue for each of the years ended 31 December 2009 and 2010.


– I-34 –

5. PROFIT BEFORE TAXATION FROM CONTINUING OPERATIONS

The Group’s profit from continuing operations before taxation is arrived at after charging/(crediting):

2010 2009

HK$’000 HK$’000


Depreciation 731 531

Amortisation of intangible assets 18 18

Operating lease payments – land and buildings 28,248 21,556

Auditors’ remuneration 950 950

Cost of inventories 156,126 130,373

Staff costs (including directors’ remuneration):

Salaries, allowances and other benefits 39,392 25,320

Pension scheme contribution 5,970 4,625

Equity settled share-based payment expenses 7,788 –

53,150 29,945

6. FINANCE COSTS

Group

2010 2009

HK$’000 HK$’000


Interest expense on bank loans, bank overdrafts and other

loans repayable within five years, being total interest

expense on financial liabilities not at fair value through

profit or loss 1,550 1,462


– I-35 –

7. DIRECTORS’ AND FIVE HIGHEST PAID INDIVIDUALS’ REMUNERATION

Director’s remuneration disclosed pursuant to section 161 of the Hong Kong Companies Ordinance is asfollows:

i) The details of emoluments of every director are shown below:

Year ended 31 December 2010

Fees

Salaries,

allowances

and other

benefits

Share-based

payments

Pension

scheme

contribution Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Executive directors

Cheung Siu Lam

(Chairman) – 3,512 216 12 3,740

Chan Yuk Ming

(Vice chairman) – 839 432 12 1,283

Lo Wan – 303 216 12 531

Non-executive

directors

Liu Hui 40 – – – 40

Independent non-

executive

directors

Wang Jian Sheng 40 – – – 40

Chan Chun Keung 40 – – – 40

Tsang Kwok Wai 80 – – – 80

200 4,654 864 36 5,754

Year ended 31 December 2009

Fees

Salaries,

allowances

and other

benefits

Share-based

payments

Pension

scheme

contribution Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Executive directors

Cheung Siu Lam

(Chairman) – 3,060 – 12 3,072

Chan Yuk Ming

(Vice chairman) – 839 – 12 851

Lo Wan – 303 – 12 315

Non-executive

directors

Liu Hui 40 – – – 40

Independent non-

executive

directors

Wang Jian Sheng 40 – – – 40

Chan Chun Keung 40 – – – 40

Tsang Kwok Wai 80 – – – 80

200 4,202 – 36 4,438


– I-36 –

As at 31 December 2010, the directors held share options under the Company’s share option scheme.

The details of the share options are disclosed under the paragraph “Share Option Scheme” in the report of the

directors and in note 33.

No directors waived any emoluments during the year. No incentive payment or compensation for loss

of office was paid or payable to any directors for the year ended 31 December 2010 (2009: Nil).

ii) Individuals with highest emoluments

Of the five individuals with the highest emoluments in the Group, three (2009: three) were directors of

the Company whose emoluments are included in the disclosure in note 7(i) above. The emoluments of the

remaining two (2009: two) individuals were as follows:

2010 2009

HK$’000 HK$’000


Retirement scheme contribution 24 24

Share-based payments 432 –

1,525 1,117

During the year, no emoluments were paid to the five highest paid individuals (including directors and

other employees) as inducement to join or upon joining the Group or as compensation for loss of office.

The emoluments of the two individuals other than directors with the highest emoluments are within the

following bands:

2010 2009

Number of individuals

HK$Nil up to HK$1,000,000 2 2

HK$1,000,001 to HK$1,500,000 – –

2 2

8. INCOME TAX (RELATING TO CONTINUING OPERATIONS)

a) Income tax in the consolidated statement of comprehensive income represents:

Group

2010 2009

HK$’000 HK$’000

Current tax

PRC Enterprise Income Tax 2,232 1,762

Under-provision of PRC Enterprise Income Tax in

prior years 316 –

Deferred tax

Current year 2,017 1,983

Tax charge 4,565 3,745


– I-37 –

Reconciliation between tax expense and accounting profit at the applicable tax rate:

2010 2009

HK$’000 HK$’000

Profit before taxation from continuing operations 31,557 23,641

Notional tax on profit before taxation, calculated at the

rates applicable to profits in the tax jurisdictions

concerned 8,042 5,409

Income not subject to taxation (8,023) (5,404)

Expenses not deductible for taxation purposes 1,908 2,394

Effect of unrecognised temporary difference (79) (15)

Utilisation of tax losses previously not recognised (787) (529)

Deferred tax assets not recognised 3,188 1,890

Under-provision in prior years 316 –

Tax charge 4,565 3,745

No provision for profits tax in Hong Kong has been made as the Group has no income assessable for

profits tax for the year in Hong Kong.

PRC subsidiaries are subject to PRC Enterprise Income Tax at 25% (2009: 25%).

b) Taxation in the consolidated statement of financial position represents:

Group

2010 2009

HK$’000 HK$’000

At 1 January (982) (258)

Provision for the year

– PRC taxation (2,232) (1,762)

Under provision in prior year (316) –

Taxation paid for PRC enterprise 2,020 1,038

At 31 December (1,510) (982)

Analysed for reporting purposes as:

Tax recoverable – 567

Tax payables (1,510) (1,549)

(1,510) (982)


– I-38 –

9. DISCONTINUED OPERATIONS

On 24 March 2010, K.P.B. Marketing Limited (“K.P.B.”), an indirect wholly-owned subsidiary of the Companyentered into a sale agreement with Best Links (HK) Co., to dispose of the entire issued share capital in K.P.I. (BVI)Retail Management Company Limited, a company incorporated in the British Virgin Islands with limited liabilitywhich directly and indirectly holds 60% of the equity interests in Hualian GMS which mainly engaged in supermarketoperations, at a consideration of approximately HK$504 million. The disposal of the supermarket operations isconsistent with the Group’s long-term policy to focus its resources in the convenience stores chain operation andprovision of short-term financing service operations. The disposal was completed on 19 August 2010, on which datecontrol of the supermarket operations passed to the acquirer. Details of the assets and liabilities disposed of, and thecalculation of the profit or loss on disposal, are disclosed below:

Analysis of profit for the year from discontinued operations

The results of the discontinued operation (i.e. supermarket operation) included in the consolidatedstatement of comprehensive income and consolidated statement of cash flows are set out below. Thecomparative profit and cash flows from discontinued operations have been re-presented to include thoseoperations classified as discontinued in the current year.

2010 2009

HK$’000 HK$’000

Profit for the year from discontinued operations

Turnover 1,214,880 1,904,483

Cost of sales (1,095,840) (1,693,382)

Other gains 143,206 216,622

Expenses (246,734) (403,358)

Profit before tax 15,512 24,365

Income tax expense (2,278) (1,647)

13,234 22,718

Loss on disposal of operations (8,080) –

Profit for the year from discontinued operations

attributable to owners of the Company 5,154 22,718

Profit for the year from discontinued operation include

the following:

Depreciation and amortisation 24,546 31,648

Cash flows from discontinued operations

Net cash inflows from operating activities 115,979 4,165

Net cash (outflows)/inflows from investing activities (23,704) 93,281

Net cash outflows from financing activities (92,801) (8,870)

Net cash (outflows)/inflows (526) 88,576

10. PROFIT ATTRIBUTABLE TO OWNERS OF THE COMPANY

The consolidated profit attributable to owners of the Company includes a profit of HK$2,542,000 (2009: lossof HK$11,103,000) which has been dealt with in the financial statements of the Company.

11. DIVIDEND

The directors do not recommend the payment of a dividend for the year ended 31 December 2010 (2009: Nil).


– I-39 –

12. EARNINGS PER SHARE

From continuing and discontinued operations

The calculation of the basic and diluted earnings per share attributable to owners of the Company is

based on the following data:

2010 2009

HK$’000 HK$’000

Earnings

Earnings for the purpose of basic earnings per share

(profit for the year attributable to owners of the

Company) 25,355 26,303

2010 2009

Number of shares

Weighted average number of ordinary shares for the

purpose of basic earnings per share 1,725,935,213 1,725,902,336

Effect of deemed issue of shares under the Company’s

share options scheme 12,326,592 10,550,372

Weighted average number of ordinary shares for the

purpose of diluted earnings per share 1,738,261,805 1,736,452,708

From continuing operations

The calculation of the basic and diluted earnings per share from continuing operations attributable to

owners of the Company is based on the following data:

Earnings figures are calculated as follows:

2010 2009

HK$’000 HK$’000

Profit for the year attributable to owners of the

Company 25,355 26,303

Adjustment for loss/(profit) for the year from

discontinued operations 1,456 (11,629)

Earnings for the purpose of basic earnings per share

from continuing operations attributable to owners of

the Company 26,811 14,674

The denominators used are the same as those detailed above for both basic and diluted earnings per

share.

From discontinued operations

Basic loss/earnings per share for the discontinued operations attributable to owners of the Company is

loss of HK0.084 cents per share (2009: earnings of HK0.674 cents per share) and diluted loss/earnings per

share for the discontinued operations attributable to owners is loss of HK0.084 cents per share (2009: earnings

of HK0.670 cents per share), based on the loss/profit for the year from the discontinued operations of the

Company of loss of HK$1.46 million (2009: profit of HK$11.63 million) and the denominators detailed above

for both basic and diluted earnings per share.


– I-40 –

13. PROPERTY, PLANT AND EQUIPMENT

Group

Leaseholdland and

building heldfor own use

carried atcost

Leaseholdimprovements

Motorvehicles

Furnitureand

equipment TotalHK$’000 HK$’000 HK$’000 HK$’000 HK$’000

CostAt 1/1/2009, as previously reported 827 79,543 4,294 69,994 154,658Effect of adoption of HKAS 17

(Amendment) 1,298 – – – 1,298

At 1/1/2009, as restated 2,125 79,543 4,294 69,994 155,956Additions – 25,117 – 8,670 33,787Disposals – (3,300) (415) (12,848) (16,563)Exchange adjustment – 619 14 648 1,281

At 31/12/2009 and 1/1/2010, asrestated 2,125 101,979 3,893 66,464 174,461

Additions – 10,645 587 14,780 26,012Disposals – (29,051) (746) (18,039) (47,836)Derecognised on disposal of

subsidiaries – (81,792) (1,155) (62,051) (144,998)Exchange adjustment – 5 – 11 16

At 31/12/2010 2,125 1,786 2,579 1,165 7,655

Accumulated depreciationAt 1/1/2009, as previously reported 512 44,102 2,113 42,728 89,455Effect of adoption of HKAS 17

(Amendment) 393 – – – 393

At 1/1/2009, as restated 905 44,102 2,113 42,728 89,848Effect of adoption of HKAS 17

(Amendment) 24 – – – 24Charge for the year 10 14,463 745 10,003 25,221Written back on disposals – (1,980) (351) (10,444) (12,775)Exchange adjustment – 498 11 566 1,075

At 31/12/2009 and 1/1/2010, asrestated 939 57,083 2,518 42,853 103,393

Charge for the year 33 10,424 698 9,733 20,888Written back on disposals – (28,829) (754) (16,700) (46,283)Eliminated on disposal of

subsidiaries – (38,070) (676) (35,222) (73,968)Exchange adjustment – 3 – (2) 1

At 31/12/2010 972 611 1,786 662 4,031

Carrying amountAt 31/12/2010 1,153 1,175 793 503 3,624

At 31/12/2009 (Restated) 1,186 44,896 1,375 23,611 71,068

At 1/1/2009 (Restated) 1,220 35,441 2,181 27,266 66,108

The leasehold land and building of the Group is held under medium term lease and situated in Hong Kong.


– I-41 –

Company

Leasehold

improvements

Motor

vehicles

Furniture

and

equipment Total

HK$’000 HK$’000 HK$’000 HK$’000

Cost

At 1/1/2009 378 1,992 470 2,840

Additions – – 25 25

As at 31/12/2009 and 1/1/2010 378 1,992 495 2,865

Additions – – 72 72

As at 31/12/2010 378 1,992 567 2,937

Accumulated depreciation

At 1/1/2009 378 1,258 278 1,914

Charge for the year – 245 73 318

As at 31/12/2009 and 1/1/2010 378 1,503 351 2,232

Charge for the year – 244 70 314

At 31/12/2010 378 1,747 421 2,546

Carrying amount

At 31/12/2010 – 245 146 391

At 31/12/2009 – 489 144 633

14. LAND LEASE PREMIUM

The Group’s interests in lease premium for land represent prepaid operating lease payments and their carrying

amount are analysed as follows:

Group

2010 2009

HK$’000 HK$’000

Carrying amount at 1 January, as previously reported 881 905

Effect of adoption of HKAS 17 (Amendment) (881) (905)

Carrying amount at 1 January, as restated – –

Carrying amount at 31 December, as restated – –


– I-42 –

15. INVESTMENT PROPERTY

Group

2010 2009

HK$’000 HK$’000

At valuation:

At 1 January 65,893 57,954

Increase in fair value 8,066 7,939

At 31 December 73,959 65,893

The Group’s investment property is situated at No. 88, Xi San Wan Road North, Hai Ding District, Beijing.

It is held under a long term lease for rental purpose. It was stated at fair value as at 31 December 2010. The

investment property was revalued on 31 December 2010 by 北京六合正旭資產評估有限公司, an independent

qualified valuer, who have among their staff members of the Ministry of Construction of the People’s Republic of

China with recent experience in the location and category of property being valued. The valuation, which conform

to the 房地產估價規範, were based on either capitalization of net rental income derived from the existing tenancies

with allowance for the reversionary income potential of the properties and on direct comparison approach assuming

sale of each of these properties in its existing state with the benefit of vacant possession by making reference to

comparable sales transactions as available in the relevant market.

The Group’s investment property was pledged to a bank in the PRC to secure banking facilities granted to a

subsidiary of the Group in February 2009 (Note 39).

16. INTANGIBLE ASSETS – TRADEMARKS

Group

Hualian GMS

(note a)

Hi-24

(note b) Total

HK$’000 HK$’000 HK$’000

Cost

At 1/1/2009 173,348 448 173,796

Disposal of subsidiaries (173,348) – (173,348)

At 31/12/2009 and 31/12/2010 – 448 448

Accumulated amortisation

At 1/1/2009 6,356 9 6,365

Amortisation for the year 6,934 18 6,952

At 31/12/2009 and 1/1/2010 13,290 27 13,317

Amortisation for the year 4,389 18 4,407

Written back on disposal of subsidiaries (17,679) – (17,679)

At 31/12/2010 – 45 45

Carrying amount

At 31/12/2010 – 403 403

At 31/12/2009 160,058 421 160,479


– I-43 –

The amortisation charge for the year is included in “administrative expenses” in the consolidated statement of

comprehensive income.

Note:

a) Hualian GMS is the trademark for a supermarket chain operation. The supermarket chain operation was

discontinued in the current year, which is described in more detail in note 9.

b) Hi-24 is the trademark for a convenience chain stores operation.

17. INTERESTS IN SUBSIDIARIES

Company

2010 2009

HK$’000 HK$’000

Unlisted shares, at cost 33,519 33,519

The following list contains only the particulars of subsidiaries which principally affected the results, assets or

liabilities of the Group:

Name

Country of

incorporation/

registration and

operations

Nominal

value of

registered

share capital

Percentage

of equity

attributable to

the Company Principal activities

Direct Indirect

K.P.B. Group

Holdings

Limited

British Virgin

Islands (“BVI”)/

Hong Kong

Ordinary US$12 100% – Investment holding

Charter Merit

Limited

Hong Kong Ordinary HK$2 – 100% Holding of a club

membership

Charter Paradise

Limited

Hong Kong Ordinary HK$2 – 100% Holding of a club

membership

K.P.A. Company

Limited

Hong Kong Ordinary HK$2

Deferred HK$2

– 100% Property investment

K.P.B. Asset

Holdings

Limited

BVI/Hong Kong Ordinary US$6 – 100% Investment holding

K.P.B. Marketing

Limited (“KPB

Marketing”)


K.P.B. – T.C.

Holdings

Limited


K.P.B. Trading

Limited


K.P.I.

Development

Limited


Deferred

HK$10,000

– 100% Trading of financial

securities


– I-44 –

Name

Country of

incorporation/

registration and

operations

Nominal

value of

registered

share capital

Percentage

of equity

attributable to


Direct Indirect

K.P.I. Industries

Limited


Deferred HK$2

– 100% Investment holding and

property investment

K.P.I.

International

Trading

Company

Limited


Deferred HK$2

– 100% Holding of a club

membership and

trading of financial

securities

K.P.I. (BVI)

Retail

Management

Company

Limited

(“KPIRM”)

BVI/Hong Kong Ordinary

US$18,087,700

– Disposal

on 19

August

2010

(2009:

100%)

Investment holding

K.P.I.

Convenience

Retail

Company

Limited

(“KPICR”)

BVI/Hong Kong Ordinary

US$50,000

– 72% Investment holding

Bestjoy

International

Limited

BVI/Hong Kong Ordinary US$10 – Disposal

on 19

August

2010

(2009:

100%)

Investment holding

K.P.I. Property

Investment Co.

Ltd.

Hong Kong Ordinary HK$1 – 100% Property investment

華聯集團吉買盛購物中心有限公司 (Note 1)

PRC Registered

capital

RMB80,000,000

– Disposal

on 19

August

2010

(2009:

100%)

Supermarket chains

海口港佳貿易有限公司(海口港佳) (Note 2)

PRC Registered

capital

US$12,366,664

– 100% Investment holding and

property investment

上海港佳倍盛經貿有限公司#

(Note 3)

PRC Registered

capital

RMB2,000,000

– 100% General trading

北京中嘉利通商貿有限公司(Note 4)

PRC Registered

capital

RMB30,000,000

– 100% General trading


– I-45 –

Name

Country of

incorporation/

registration and

operations

Nominal

value of

registered

share capital

Percentage

of equity

attributable to


Direct Indirect

北京中港佳鄰商業有限公司(Note 5)

PRC Registered

capital

US$1,000,000

– 72% Convenience stores chain

北京萬方利通典當行有限公司(Note 6)

PRC Registered

capital

RMB15,000,000

– 100% Provision of short term

financing services

# Not audited by CCIF CPA Limited

Notes:

1) 華聯集團吉買盛購物中心有限公司 (Hualian GMS Shopping Center Company Limited*) (“Hualian

GMS”) is an equity joint venture established in the PRC to be operated for 20 years up to March 2016.

The operating license will be renewed the validity period. Hualian GMS was disposed in the current

year, which described in more detail in note 9.

2) 海口港佳 is a wholly foreign-owned enterprise established in the PRC to be operated for 20 years up

to August 2015. The operating license will be renewed the validity period.

3) 上海港佳倍盛經貿有限公司 is a sino-foreign equity joint venture established in the PRC to be operated

for 10 years up to March 2012. The operating licence will be renewed the validity period.

4) 北京中嘉利通商貿有限公司 is a wholly foreign-owned enterprise by 海口港佳 to be operated for 15

years up to March 2023.

5) 北京中港佳鄰商業有限公司 is a wholly foreign-owned enterprise established in the PRC to be operated

for 20 years up to March 2028.

6) 北京萬方利通典當行有限公司 is a limited liability company established in the PRC.

* For identification purposes only.

18. GOODWILL

Group

2010 2009

HK$’000 HK$’000

Carrying amount

At 1 January 377,972 377,972

Disposal (note 36) (377,972) –

At 31 December – 377,972


– I-46 –

Goodwill is allocated to the Group’s cash-generating units (“CGUs”) identified according to reportable

segments as follows:

Group

2010 2009

HK$’000 HK$’000

Supermarket chain operation – 377,972

Impairment tests for cash-generating unit containing goodwill

In 2009, the recoverable amount of the CGU is determined based on value-in-use calculations. These

calculations use cash flow projections based on financial budgets approved by management covering a five

year period. Cashflow beyond the five year period are extrapolated using the estimated rates stated below. The

growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

Discount rate of 9% has been used for the value-in-use calculation. The supermarket chain operation was

discontinued in the current year, which is described in more detail in note 9.

Key assumptions used for value-in-use calculations:

Group

2009

%

Gross margin 9.98

Growth rate 8

Discount rate 9

In 2009, management determined the budgeted operating profit margin based on past performance and

its expectation for market development. The discount rates used are pre-tax and reflect specific risks relating

to the relevant CGU.

Based on the impairment tests performed, the recoverable amount of the CGU based on value-in-use

calculation is higher than its carrying amount. Accordingly, no impairment loss is recognised for the year 2009.

19. AVAILABLE-FOR-SALE INVESTMENTS

Group

2010 2009

HK$’000 HK$’000

Listed securities, at fair value – Hong Kong 44,961 34,831

Unlisted investments:

– Golf club memberships, at cost 2,761 2,761

– Long term equity interest, at cost (Note) 773 773

Total 48,495 38,365

Note: As at 31 December 2009 and 2010, the Group’s long term equity interest was not stated at fair value

but at cost because it did not have a quoted market price in an active market and the fair value cannot

be reliably measured. No impairment is recognised since there is no objective evidence that the long

term equity interests will be impaired.


– I-47 –

20. ACCOUNTS RECEIVABLE

Group

2010 2009

HK$’000 HK$’000

Accounts receivable 1,143 43,755

All the accounts receivable are expected to be recovered within one year. The carrying amount of accounts

receivable approximate to their fair values.

Accounts receivable are due within 30 days from date of billing.

a) Aging analysis

The aging analysis of accounts receivable at the end of the reporting period is as follows:

2010 2009

HK$’000 HK$’000

Outstanding balances with ages

Due within 1 month or on demand 1,143 43,348

Due after 1 month but within 3 months – 407

1,143 43,755

b) Accounts receivable that are not impaired

2010 2009

HK$’000 HK$’000

Neither past due nor impaired 1,143 43,348

Accounts receivable that were neither past due nor impaired relate to recognised and creditworthy

customers for whom there was no recent history of default.

The Group does not hold any collateral or other credit enhancements over these balances.

21. SHORT TERM LOANS RECEIVABLE

Group

2010 2009

HK$’000 HK$’000

Loans advanced 328,359 139,174

Repayment during the year (142,150) (87,483)

Exchange adjustment – 674

Balance carried forward 186,209 52,365

The Group offers loans secured by tangible personal property, such as real estates, merchandise, commonly

known as short term loans. A typical short term loan generally has a term of 30 days to 360 days.


– I-48 –

a) Aging analysis

The aging analysis of short term loans receivable at the end of the reporting period is as follows:

2010 2009

HK$’000 HK$’000



b) Short term loans receivable

2010 2009

HK$’000 HK$’000

Neither past due nor impaired 186,209 52,365

Short term loans receivable that were neither past due nor impaired relate to recognised and

creditworthy borrowers for whom there was no recent history of default.

c) All the Group’s short term loans receivable in the PRC were denominated in RMB. The short term loans

receivable in the PRC carry interest plus service charge at a monthly effective rate of 1% to 3.2%.

22. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Group

2010 2009

HK$’000 HK$’000

Listed securities – Hong Kong & financial derivatives 35,558 2,356

Listed securities – PRC – 267

35,558 2,623

23. INVENTORIES

a) Inventories in the consolidated statement of financial position comprise:

Group

2010 2009

HK$’000 HK$’000

Commodities held for sale 35,581 222,949

As at 31 December 2010, none of the inventories were carried at net realisable value (2009: Nil).


– I-49 –

b) The analysis of the amount of inventories recognised as an expense is as follows:

Group

2010 2009

HK$’000 HK$’000

Carrying amount of inventories sold in continuing

operations 156,126 130,373

Carrying amount of inventories sold in discontinued

operation 1,095,840 1,693,382

1,251,966 1,823,755

24. OTHER RECEIVABLES, DEPOSITS AND PREPAYMENTS

Group Company

2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000

Other loan receivable 19,855 28,786 – –

Less: Allowance for doubtful debt (6,365) (6,365) – –

Other loan receivable, net 13,490 22,421 – –

Receivables from store display

income – 130,082 – –

Others 48,243 61,428 1,455 1,013

Loans and receivables 61,733 213,931 1,455 1,013

Trade and deposits paid 82,653 142,209 – –

Prepayments 14,116 24,496 252 294

Utility and sundry deposits 582 743 579 741

VAT and other tax recoverables 1,730 20,537 – –

160,814 401,916 2,286 2,048

Less: Long-term prepaid rent and

rental deposit (Note 1) – (7,516) – –

160,814 394,400 2,286 2,048

Note 1: For 2009, this amount represents rentals prepayment by one of the supermarkets of Hualian GMS.

This signed tenancy agreement covers a period up to February 2018 and the prepayment would be

amortised annually. The Group would amortise the prepayment till the expiry of tenancy agreement.

The Hualian GMS was disposed on 19 August 2010. Details of the assets and liabilities disposed

of, are disclosed in Note 36.

Impairment losses in respect of other loan receivable are recorded using an allowance account unless the Group

is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against other loan

receivable directly (see note 2(i)).


– I-50 –

The movement in the allowance for loans receivable during the year is as follows:

Group

2010 2009

HK$’000 HK$’000

At 1 January 6,365 23,018

Reversal of impairment (note 3) – (16,653)

At 31 December 6,365 6,365

As at 31 December 2010, other loans receivable of the Group amounting to HK$6,365,000 (2009:HK$6,365,000) were individually determined to be impaired and full provision had been made. These individuallyimpaired receivables were outstanding for more than 1 year.

As at 31 December 2009, other loan receivables of the Group impaired in previous years amounting toHK$16,653,000 was recovered.

The Group does not hold any collateral or other credit enhancements over these balances.

25. AMOUNTS DUE FROM/(TO) SUBSIDIARIES

The amounts due from/(to) subsidiaries are unsecured, non-interest bearing and have no fixed terms ofrepayment.

26. PLEDGED DEPOSITS

Group Company

2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000

Pledged cash deposits – 174 – –

In 2009, the amount represents the cash deposits pledged to certain financial institutions to secure for theacquisition of the financial assets at fair value through profit or loss and available-for-sale investments of the Grouprespectively.

27. CASH AND CASH EQUIVALENTS

Group Company

2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000

Cash at banks/financial institutions

and on hand 339,954 649,862 142,676 1,476

Cash and cash equivalents in the

consolidated statement of cash

flows 339,954 649,862 142,676 1,476

Pledged cash balances against

financial assets – (174) – –

Cash and cash equivalents in the

consolidated statement of financial

position 339,954 649,688 142,676 1,476

Deposits with bank carry interest at market rates of 0.32% (2009: 0.36%) per annum. The directors considerthe carrying amounts of cash and cash equivalents at the end of the reporting period approximate to their fair value.


– I-51 –

28. ACCOUNTS PAYABLES

The aging of the Group’s accounts payables is analysed as follows:

Group

2010 2009

HK$’000 HK$’000



Due after 1 month but within 3 months 34,037 339,667

54,365 550,785

Accounts payable are interest free and are normally settled on 90-day terms. The carrying amounts of accounts

payable approximate to their fair values due to their short term maturity and measured at amortised cost.

29. OTHER PAYABLES, DEPOSITS RECEIVED AND ACCRUALS

Group Company

2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000

Accrued salaries, wages and benefits 2,319 16,292 – –

Accrued expenses 5,145 11,035 571 138

Others 326 38,600 – –

Financial liabilities measured at

amortised cost 7,790 65,927 571 138

Rental and other deposit received 1,265 28,329 – –

Deposits from gift vouchers and

membership cards – 381,754 – –

VAT and other tax payables 385 3,032 – –

9,440 479,042 571 138

All of the other payables, deposits received and accruals are expected to be settled or recognised as income

within one year or are repayable on demand.


– I-52 –

30. BANK BORROWINGS

At the end of the reporting period, all the bank loans of the Group, which were all obtained in PRC and

denominated in RMB, are listed as follows:

Group

2010 2009

HK$’000 HK$’000

Within 1 year or on demand

Bank loans – secured 4,650 4,650

Bank loans – unsecured 21,153 147,443

25,803 152,093

After 1 year but within 2 years


After 2 years but within 5 years


After 5 years

Bank loans – secured – 2,495

16,277 21,096

42,080 173,189

All of the non-current interest bearing borrowings are carried at amortised cost. None of the non-current

interest-bearing borrowing is expected to be settled within one year.

The directors consider the carrying value of the amounts at the end of the reporting period.

The ranges of effective interest rates on the Group’s borrowings are as follows:

Group

2010 2009

HK$’000 HK$’000

Effective interest rates:

Bank loans – secured 6.53% 6.53%

Bank loans – unsecured 9% 4.62% – 5.58%

per annum per annum

The secured bank borrowings were secured by the Group’s investment property with a carrying amount of

approximately HK$73,959,000 (2009: HK$65,893,000).


– I-53 –

31. DEFERRED TAXATION

a) The components of deferred tax (assets)/liabilities recognised in the consolidated statement of financial

position and the movements during the year are as follow:

Group

Amortisation

of Intangible

assets-

trademarks

Revaluation of

investment

property Total

HK$’000 HK$’000 HK$’000

Deferred tax arising from:

At 1 January 2009 41,748 203 41,951

(Credited)/charged to profit or loss (1,734) 1,983 249

Deferred tax liabilities arising on

acquisition of subsidiaries – – –

At 31 December 2009 and 1 January 2010 40,014 2,186 42,200

(Credited)/charged to profit or loss (1,097) 2,017 920

Less: Disposal of subsidiaries (Note 36) (38,917) – (38,917)

At 31 December 2010 – 4,203 4,203

b) Withholding tax

Pursuant to the new PRC EIT Law which took effect from 1 January 2009, a 10% withholding tax was

levied on dividends declared to foreign enterprise investors from the PRC effective from 1 January 2009. A

lower withholding tax rate may be applied if there is a tax treaty arrangement between the PRC and the

jurisdiction of the foreign enterprise investors. On 22 February 2009, Caishui (2009) No. 1 was promulgated

by the PRC tax authorities to specify that dividends declared and remitted out of the PRC from the retained

earnings as at 31 December 2007 determined based on the relevant PRC tax laws and regulations are exempted

from the withholding tax. Deferred tax liabilities of RMB9,154,000 have not been recognised, as the Company

controls the dividend policy of the Group’s PRC subsidiaries and it has been determined that it is probable that

certain of the profits earned by these subsidiaries for the year from 1 January 2009 to 31 December 2010 will

not be distributed in the foreseeable future.

c) Deferred tax assets in respect of the unused tax losses carried forward are to be recognised to the extent

that it is probable that future taxable profits will be available against which the unused tax losses can

be utilised.

The Group has not recognised deferred tax assets in respect of the tax losses of HK$18,422,000 (2009:

HK$20,844,000) due to the unpredictability of future profit streams. The unrecognised tax losses,

mainly arising from Hong Kong companies, can be carried forward indefinitely.


– I-54 –

32. SHARE CAPITAL

2010 2009

No. of shares HK$’000 No. of shares HK$’000

Authorised:

Ordinary shares of HK$0.10 each 4,000,000,000 400,000 4,000,000,000 400,000

Issued and fully paid:

At beginning of the year 1,725,902,336 172,590 1,725,902,336 172,590

Shares issued under share option

scheme (note a) 20,100,000 2,010 – –

At end of the year 1,746,002,336 174,600 1,725,902,336 172,590

a) On 29 September 2010 an 20 December 2010, options were exercised to subscribe for 20,100,000

ordinary shares in the company at a consideration of HK$2.76 million of which HK$2.01 million was

credited to share capital and the balance of HK$0.75 million was credited to the share premium account.

HK$2.4 million has been transferred from the share-based compensation reserve to the share premium

account.

33. SHARE OPTIONS

Equity-settled share option schemes

Pursuant to an ordinary resolution passed on 19 March 2003, the Company adopted a share option

scheme (“Old Share Option Scheme”) pursuant to which the directors of the Company were authorised to grant

share options to full-time employees (including executive directors) of the Company or any of its subsidiaries

to subscribe for shares in the Company.

On 7 June 2004, the Old Share Option Scheme was terminated and a new share option scheme (“New

Share Option Scheme”) was adopted. The purpose of the New Share Option Scheme is to enable the Company

to grant option to eligible participants in order to reward or provide incentives to its employees or any person

who has contributed or will contribute to the Group. The New Share Option Scheme shall continue in force

for the period commencing from 7 June 2004 and expiring at the close of business on the tenth anniversary

thereof, after such period no further options will be granted but the provisions of the New Share Option

Scheme shall remain in full force and effect in respect of any options granted before its expiry or termination

but not yet exercised.

Under the New Share Option Scheme, the directors of the Company may offer to any employees or any

person who has contributions to the Group including directors of the Company or any of its subsidiaries share

options to subscribe for shares in the Company in accordance with the terms of the New Share Option Scheme.

The maximum number of shares in respect of which share options may be granted under the New Share

Option Scheme shall not, when aggregate with any shares subject to any other schemes, exceed such number

of shares as represents 10% of the issued shares as at the date of approval of the New Share Option Scheme

(the “Scheme Mandate Limit”) which shall be equivalent to 67,725,155 shares. On 28 April 2005, the Scheme

Mandate Limit was refreshed to 101,587,733 shares. The Company may seek approval from the shareholders

in a general meeting to refresh the Scheme Mandate Limit. However, the total number of shares which may

be issued upon exercise of all share options to be granted under all of the schemes of the Company or its

subsidiaries under the limit as refreshed must not exceed 10% of the shares in issue as at the date of approval

of the Scheme Mandate Limit. Share options previously granted under the New Share Scheme (excluding those

outstanding, cancelled, lapsed in accordance with the New Share Option Scheme or any other share option

schemes and exercised the share options) will not be counted for the purpose of calculating the Scheme

Mandate Limit.

The total number of shares which may be issued upon exercise of all outstanding share options granted

and yet to be exercised under the New Share Option Scheme and any other scheme of the Company must not

exceed 10% except seeking separate approval by its shareholders in general meeting for granting further

options. Moreover in any case, must not exceed 30% of the total issued share capital from time to time.


– I-55 –

The total number of shares issued and to be issued on the exercise of share options granted and to be

granted in any 12-month period up to the date of grant of each eligible participant (including both exercised

and outstanding options) shall not exceed 1% of the total issued shares.

The exercise price is determined by the directors of the Company, and shall not be less than the highest

of (i) the closing price of the Company’s shares on the date of grant, (ii) the average closing price of the shares

for the five business days immediately preceding the date of grant, and (iii) the nominal value of the

Company’s shares.

On 17 May 2004 and 7 July 2004, 38,000,000 share options granted to the executive directors and

1,000,000 share options granted to the continuous contract employees outstanding under the Old Share Option

Scheme were lapsed respectively.

On 10 January 2005, 2 February 2005 and 1 September 2005, the Company granted in aggregate

99,500,000 share options to its directors and employees under the New Share Option Scheme. Options granted

must be taken up within 21 days of the date of grant, upon payment of HK$1 by each of the grantees. The

options may be exercised at any time after date of grant of the share options to the half past-ninth anniversary

of the date of grant.

On 4 October 2007, the Company granted 68,500,000 share options to its directors and employees under

the New Share Option Scheme. Options granted must be taken up within 21 days of the date of grant, upon

payment of HK$1 by each of the grantees. The options may be exercised at any time after twelve months from

the date of grant of the share options to the tenth anniversary of the date of grant.

On 22 October 2010, the Company granted 36,000,000 share options to the eligible grantees under the

share option scheme of the Company adopted on 7 June 2004, subject to acceptance of the Grantees. The Share

Options shall entitle the Grantees to subscribe for a total of 36,000,000 ordinary shares of HK$0.1 each in the

share capital of the Company.

The following table discloses movements of the Company’s share options granted under the New Share

Option Scheme and movements in such holdings:

Category of

grantee

Exercise price

per share Date of grant Exercisable period

Contractual

life of option

HK$

Directors 0.479 4 October 2007 4 October 2007 to 3

October 2017

10 years

0.359 22 October 2010 22 October 2010 to

21 October 2020

10 years

Employees 0.126 10 January 2005 10 January 2005 to 6

June 2014

9.5 years

0.479 4 October 2007 4 October 2007 to 3

October 2017

10 years

0.359 22 October 2010 22 October 2010 to

21 October 2020

10 years


– I-56 –

a) The following table discloses movements of the Company’s share options held by employees and

directors during year.

Option type

Outstanding

at 1/1/10

Granted

during

the year

Exercised

during

the year

Forfeited

during

the year

Expired

during

the year

Outstanding

at 31/12/10

’000 ’000 ’000 ’000 ’000 ’000

2005 19,100 – (19,100) – – –

2007 68,500 – – (5,500) – 63,000

2010 – 36,000 (1,000) – – 35,000

87,600 36,000 (20,100) (5,500) – 98,000

Exercisable at the

end of the year 98,000

Weighted average

exercise price HK$ 0.402 HK$ 0.359 HK$ 0.126 – – HK$ 0.442

The following share options granted under the employee share option plan were exercised in the

current year:

Options type

Number

exercised Exercise date

Share price at

exercise date

2005 19,100,000 29/9/2010 HK$0.31

2010 1,000,000 20/12/2010 HK$0.40

20,100,000


– I-57 –

b) Fair value of share options and assumptions

The fair value of services received in return of share options granted are measured by reference

to the fair value of share options granted. The estimate of the fair value of the services received is

measured based on a binomial lattice model. The contractual life of the option is used as an input into

this model. Expectations of early exercise are incorporated into the binomial lattice model.

Grand dates Employee Director Employee Director Employee

10 January

2005

4 October

2007

4 October

2007

22 October

2007

22 October

2007

Fair value of share

options and

assumptions:

Fair value at

measurement

date (HK$) 0.042 0.235 0.235 0.216 0.216

Share price (HK$) 0.131 0.470 0.470 0.355 0.355

Exercise price

(HK$) 0.126 0.479 0.479 0.359 0.359

Expected volatility

(expressed as a

weighted average

volatility used in

the modelling

under binomial

lattice model) 107.00% 68.60% 68.60% 103.93% 103.93%

Option life 9.5 years 10 years 10 years 10 years 10 years

Expected dividends 0% 0% 0% 0% 0%

Rick-free interest

rate (based on

Exchange Fund

Notes) 3.52% 4.31% 4.31% 0.58% 0.58%

Expected forfeiture

rate 0% 0% 0% 0% 0%

The expected volatility is based on the historic volatility, adjusted for any expected changes to

future volatility due to publicly available information. Expected dividends are based on historical

dividends. Changes in the subjective input assumptions could materially affect the fair value estimate.

Share options were granted under a service condition. This condition has not been taken into

account in the grant date fair value measurement of the services received. There were no market

conditions associated with the share option grants.


– I-58 –

34. RESERVES

Group

Other comprehensive

income

Share

premium

Share-based

compensation

reserve

Exchange

fluctuation

reserve

Fair value

reserve

Statutory

surplus

reserve

Retained

earnings

Attributable

to owners of

the

Company

Non-

controlling

interests Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2009 287,362 16,914 11,009 (7,043) 747 212,561 521,550 87,647 609,197

Exchange adjustment – – 183 – – – 183 175 358

Fair value adjustment for available-for-sale

financial assets – – – 16,057 – – 16,057 – 16,057

Profit for the year – – – – – 26,303 26,303 16,311 42,614

Transfer to reserve – – – – 357 (207) 150 83 233

At 31 December 2009 and 1 January 2010 287,362 16,914 11,192 9,014 1,104 238,657 564,243 104,216 668,459

Share issued under share option scheme 3,125 (2,369) – – – – 756 – 756

Decrease in non-controlling interests arising

on disposal of interest in KPIRM – – – – – – – (103,626) (103,626)

Decrease in exchange fluctuation reserve

arising on disposal of interest in KPIRM – – (7,335) – – – (7,335) – (7,335)

Decrease in statutory surplus reserve arising

on disposal of interest in KPIRM – – – – (493) – (493) – (493)

Equity settled share-based transactions – 7,788 – – – – 7,788 – 7,788

Exchange adjustment – – 7,639 – – – 7,639 932 8,571

Profit for the year – – – – – 25,355 25,355 6,791 32,146

Fair value adjustment for financial assets – – – (6,724) – – (6,724) – (6,724)

At 31 December 2010 290,487 22,333 11,496 2,290 611 264,012 591,229 8,313 599,542

Company

Share

premium

Share-based

compensation

reserve

Retained

earnings Total

HK$’000 HK$’000 HK$’000 HK$’000

At 1 January 2009 287,362 16,914 85,220 389,496

Issue of new shares – – – –

Employee share option benefits – – – –

Profit for the year – – (11,103) (11,103)

At 31 December 2009 and 1 January

2010 287,362 16,914 74,117 378,393

Share issued under share option

scheme 3,125 (2,369) – 756

Equity settled share-based

transactions – 7,788 – 7,788

Profit for the year – – 2,542 2,542

At 31 December 2010 290,487 22,333 76,659 389,479


– I-59 –

At 31 December 2010, the Company has reserve available for distribution to shareholders as calculated

in accordance with the provisions of Section 79B of the Hong Kong Companies Ordinance at HK$76,659,000

(2009: HK$74,117,000).

Nature and purpose of reserves

i) Share premium

The application of the share premium account is governed by Section 48B of the Hong Kong Companies

Ordinance.

ii) Share-based compensation reserve

The share-based compensation reserve represents the fair value of the actual or estimated number of

unexercised share options granted to employees of a subsidiary recognised in accordance with the accounting

policy adopted for share-based payments set out in note 2(w)(ii).

iii) Exchange fluctuation reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the

financial statements of operations outside Hong Kong. The reserve is dealt with in accordance with the

accounting policy set out in note 2(p).

iv) Fair value reserve

The fair value reserve comprises the cumulative net change in the fair value of available-for-sale

securities held at the end of the reporting period and is dealt with in accordance with the accounting policies

in note 2(k).

v) Statutory surplus reserve

According to the Company’s PRC subsidiaries’ articles of association, the PRC company is required to

transfer 10% of its net profit after tax, as determined in accordance with the PRC accounting rules and

regulations, to the statutory surplus reserve. When the balance of the statutory surplus reserve reaches 50% of

the PRC company’s registered capital, any further appropriation is optional. The transfer to this reserve must

be made before distribution of a dividend to the shareholders.

Statutory surplus reserve can be used to make up previous years’ losses, if any, and may be converted

into capital in proportion to their existing shareholdings, provided that the balance after such conversion is not

less than 25% of the registered capital.

35. RETIREMENT BENEFITS SCHEME

The group operates a Mandatory Provident Fund Scheme (“the MPF scheme”) under the Hong Kong

Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong

Employment Ordinance and not previously covered by the defined benefit retirement plan. The MPF scheme is a

defined contribution retirement plan administered by independent trustees. Under the MPF scheme, the employer and

its employees are each required to make contributions to the plan at 5% of the employees’ relevant income, subject

to a cap of monthly relevant income of HK$20,000. Contributions to the plan vest immediately.

The employees of the Group’s subsidiaries in the PRC are members of the state-managed retirement benefit

scheme operated by the government of the PRC. The subsidiaries of the Group are required to contribute certain

percentage of their payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the

Group with respect to the retirement benefit scheme is to make the specified contributions.


– I-60 –

36. DISPOSAL OF A SUBSIDIARY

On 19 August 2010, the Group disposed of KPIRM, Bestjoy International Limited and Hualian GMS whichcarried out the entire supermarket operations.

2010

HK$’000

Consideration received

Total consideration received in cash and cash equivalents 503,912

Analysis of asset and liabilities over which control was lost

19 August 2010

HK$’000

Non-current assets

Property, plant and equipment 71,030

Intangible assets (note 16) 155,669

Long term lease prepayment 7,596

Goodwill (note 18) 377,972

Current assets

Inventories 112,056

Prepayment and other receivables 381,751

Cash and cash equivalents 621,678

Current liabilities

Trade payables (504,235)

Other payables, deposit received and accruals (502,839)

Tax payables (1,001)

Short term bank loans (57,314)


Deferred taxation (note 31(a)) (38,917)

Net assets disposed of 623,446

Loss on disposal of a subsidiary

Year ended 31

December 2010

HK$’000

Consideration received and receivable 503,912

Net assets disposed of (623,446)

Non-controlling interests 103,626

Cumulative exchange differences in respect of the net assets of the subsidiaries

reclassified from equity to profit or loss of control of subsidiary 493

Cumulative statutory surplus reserve in respect of the net assets on loss of the

subsidiaries reclassified from equity to profit or loss on loss of control of

subsidiary 7,335

Loss on disposal (Note 9) (8,080)

The loss on disposal is included in the profit for the year from discontinued operations in theconsolidated statement of comprehensive income (see Note 9).


– I-61 –

Net cash inflow on disposal of a subsidiary

2010

HK$’000

Consideration received 503,912

Less: Cash and cash equivalent balances disposed of (621,678)

(117,766)

37. OPERATING LEASE ARRANGEMENTS

a) As lessor

The Group leases its investment property (note 15 to the financial statements), sub-lease its shop

premises of convenience stores chain operations and golf club membership under operating lease

arrangements, with leases negotiated for terms of one to fifteen years for investment property, one to ten years

for shop premises of convenience stores chain operations and one to two years for golf club membership. The

terms of the leases generally also require the lessees to pay security deposits and provide for periodic rent

adjustments according to the then prevailing market conditions.

At the end of the reporting period, the Group had total future minimum lease receivables under

non-cancellable operating leases with its lessees falling due as follows:

Group

2010 2009

HK$’000 HK$’000

Within one year 8,858 32,297

In the second to fifth years, inclusive 14,484 61,090

After the fifth year 10,126 13,937

33,468 107,324

b) As lessee

The Group leases certain of its office properties, director’s quarter and shop premises of convenience

stores chain operations under operating lease arrangements. Leases for properties are negotiated for terms

ranging from one to twenty years.

At the end of the reporting period, the Group and the Company had total future minimum lease payments

under non-cancellable operating leases falling due as follows:

Group Company

2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000

Within one year 11,882 103,830 1,510 2,257

In the second to fifth years,

inclusive 15,492 364,697 727 2,227

After the fifth year 10,126 439,635 – –

37,500 908,162 2,237 4,484


– I-62 –

38. RELATED PARTY TRANSACTIONS

During the year, the Group had the following significant transactions with related parties:

a) Related party transactions included in the statement of comprehensive income:

2010 2009

HK$’000 HK$’000

Rental expenses to a company controlled by directors

(note i) 332 996

Note:

i) Rental expenses for two directors were paid to a company controlled by them. The monthly rental

of HK$83,000 was calculated by reference to open market rental. The rental expenses were fully

settled up to 30 April 2010.

b) Compensation of key management personnel of the Group

2010 2009

HK$’000 HK$’000


Pension scheme contribution 12 12

Share-based payments expenses 216 –

3,740 3,072

Note: Further details of pension scheme contribution and directors’ emoluments are included in note

7 to the financial statements.

39. BANKING FACILITIES

During 2010, the Group was granted banking facilities aggregating to approximately HK20,927,000 (2009:

HK$173,189,000), which is secured by an investment property (note 15). At 31 December 2010, the banking facilities

were fully utilised.

40. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

a) Key sources of estimation uncertainty

In the process of applying the Group’s accounting policies which are described in note 2, management

has made certain key assumptions concerning the future, and other key sources of estimated uncertainty at the

end of the reporting period that may have a significant risk of causing a material adjustment to the carrying

amounts of assets and liabilities within the next financial year, as discussed below.

i) Impairment of property, plant and equipment and land lease premium

The recoverable amount of an asset is the higher of its net selling price and value in use. In

assessing value in use, the estimated future cash flows are discounted to their present value using a

pre-tax discount rate that reflects current market assessments of the time value of money and the risks

specific to the asset, which requires significant judgement relating to level of revenue and amount of

operating costs. The Group uses all readily available information in determining an amount that is a

reasonable approximation of the recoverable amount, including estimates based on reasonable and

supportable assumptions and projections of revenue and operating costs. Changes in these estimates

could have a significant impact on the carrying value of the assets and could result in additional

impairment charge or reversal of impairment in future periods.


– I-63 –

ii) Estimated fair value of investment property

The investment property was revalued at the end of the reporting period on market value of

existing use basis by independent qualified valuers. Such valuations were based on certain assumptions,

which are subject to uncertainty and might materially differ from the actual results. In making the

judgement, the Group considers information from current prices in an active market for similar

properties and uses assumptions that are mainly based on market conditions existing at each end of the

reporting period.

iii) Impairment of receivables

The Group maintains impairment allowance for doubtful accounts based upon evaluation of the

recoverability of the accounts receivables and other receivables, where applicable, at each end of the

reporting period. The estimates are based on the aging of the accounts receivables and other receivables

balances and the historical write-off experience, net of recoveries. If the financial condition of the

debtors were to deteriorate, additional impairment allowance may be required.

iv) Estimated fair value of available-for-sale financial assets

The fair value of financial instruments in active markets (such as trading securities) is based on

quoted market prices at the end of the reporting period. The quoted market price used for financial assets

held by the Group is the closing bid price at the end of the reporting period.

The fair value of financial instruments that are not traded in active market is determined based

on available recent market information such as most recent market transaction price with third parties

and the latest available financial information existing at each end of the reporting period.

v) Write down of inventories

The management of the Group reviews its inventories at each end of the reporting period and

write down inventories to net realisable value. Management estimates the net realisable value for such

items based primarily on the latest invoice prices and current market conditions. The Group carries out

an inventory review on a product-by-product basis at each statement of financial position date and make

allowance for obsolete items.

vi) Recognition of deferred tax assets

The recognition of deferred tax assets requires formal assessment by the Group of the future

profitability of related operations. In making this judgement, the Group evaluates, amongst other

factors, the forecast financial performance, changes in operational and financing cashflows.

vii) Acquired intangible assets

Acquired intangible assets are trademarks for supermarkets and convenience chain stores

operations. They are amortised over their estimated useful lives. The valuation and estimated useful

lives of trademarks is dependent on a number of assumptions and judgements, such as expected cash

flows, customer attrition, and royalty rates, variations in which could produce different values and/or

useful lives.

viii) Income taxes

As at 31 December 2010, no deferred tax asset (2009: Nil) in relation to unused tax losses

HK$18,442,000 (2009: HK$20,844,000) has been recognised in the Group consolidated statement of

financial position due to the unpredictability of future profit streams. The realisability of the deferred

tax asset mainly depends on whether sufficient future profits or taxable temporary differences will be

available in the future.


– I-64 –

b) Critical accounting judgements in applying the Group’s accounting policies

In determining the carrying amounts of some assets and liabilities, the Group makes assumptions for the

effects of uncertain future events on those assets and liabilities at the end of the reporting period. These

estimates involve assumptions about such items as cash flows and discount rates used. The Group’s estimates

and assumptions are based on historical experience and expectations of future events and are reviewed

periodically. In addition to assumptions and estimations of future events, judgements are also made during the

process of applying the Group’s accounting policies.

Certain available-for-sale financial assets are stated at cost less impairment. Judgement is required when

determining whether an impairment existed. In making this judgement, historical data and factors such as

industry and sector performance and financial information regarding the investee are taken into account.

41. FINANCIAL RISK MANAGEMENT AND FAIR VALUES

The Group’s major financial instruments include equity investments, borrowings, trade receivable and

accounts payables. Details of the financial instruments are disclosed in respective notes. The risks associated with

these financial instruments include credit risk, liquidity risk, currency risk, interest rate risk and other price risk. The

policies on how to mitigate these risks are set out below. The management manages and monitors these exposures

to ensure appropriate measures are implemented on a timely and effective manner.

a) Credit risk

i) As at 31 December 2010, the maximum exposure to credit risk is represented by the carrying

amount of each financial asset in the consolidated statement of financial position after deducting

any impairment allowance.

ii) In respect of accounts receivable, other receivables and short term loans receivables, in order to

minimise risk, the management has a credit policy in place and the exposures to these credit risks

are monitored on an ongoing basis. Credit evaluations of its customers’ financial position and

condition is performed on each and every major customer periodically. These evaluations focus

on the customer’s past history of making payments when due and current ability to pay, and take

into account information specific to the customer as well as pertaining to the economic

environment in which the customer operates. The Group does not require collateral in respect of

accounts receivable and other receivables. Debts are usually due within 30 days from the date of

billing. In addition, the management of the Group reviews the recoverable amount of each

individual short term loans receivables at the end of the reporting period to ensure that adequate

impairment losses are made for irrecoverable amounts. In this regard, the directors of the

Company consider that the Group and the Company’s credit risk is significantly reduced.

iii) In respect of accounts receivable, other receivables and short term loans receivables, the Group’s

exposure to credit risk is influenced mainly by the individual characteristics of each customer.

The default risk of the industry and country in which customers operate also has an influence on

credit risk. At the end of the reporting period, the Group had no significant concentrations of

credit risk which individual accounts receivable, other receivables and short term loans

receivables balance exceeds 10% of the total accounts receivable, other receivables and short

term loans receivables at the end of the reporting period.

iv) The majority of the Group’s investments are liquid securities listed on the recognised stock

exchanges. No exposure to credit risk is expected.

v) The credit risk on liquid funds is limited because the counterparties are banks with high credit

ratings assigned by international credit-rating agencies.

Further quantitative disclosures in respect of the Group’s exposure to credit risk arising accounts and

other receivables are set out in notes 20, 21 and 24.


– I-65 –

b) Liquidity risk

The Group is responsible for its own cash management, including the short term investment of cash

surpluses and the raising of loans to cover expected cash demand, subject to board approval. The Group’s

policy is to regularly monitor current and expected liquidity requirements and its compliance with lending

covenants to ensure that it maintains sufficient amount of cash and adequate committed lines of funding from

major financial institutions to meet its liquidity requirements in the short and longer term. The Group relies

on bank borrowings as a significant source of liquidity.

The following liquidity table set out the remaining contractual maturities at the end of the reporting

period of the Group’s financial liabilities based on contractual undiscounted cash flows (including interest

payments computed using contractual rates or, if floating, based on rates current at the statement of financial

position date) and the earliest date the Group and the Company required to pay:

Group

2010 2009

Within 1

year or on

demand

More than 1

year but

less than

2 years

More than 2

years but

less than

5 years

Total

contractual

undiscounted

cash flow

Carrying

amount

Within 1

year or on

demand

More than 1

year but

less than

2 years

More than 2

years but

less than

5 years

More than 5

years

Total

contractual

undiscounted

cash flow

Carrying

amount

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Non-derivative

financial liability

Bank and other

borrowings

– variable rates 25,803 4,954 14,056 44,813 42,080 159,987 4,882 17,805 3,344 186,018 173,189

Account and other

payables 63,805 – – 63,805 63,805 1,029,827 – – – 1,029,827 1,029,827

89,608 4,954 14,056 108,618 105,885 1,189,814 4,882 17,805 3,344 1,215,845 1,203,016

Company

2010 2009

Within 1

year or on

demand

More than

1 year but

less than

2 years

Total

contractual

undiscounted

cash flow

Carrying

amount

Within 1

year or on

demand

More than

1 year but

less than

2 years

Total

contractual

undiscounted

cash flow

Carrying

amount

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Non-derivative

financial

liability

Other payables 571 – 571 571 138 – 138 138


– I-66 –

c) Interest rate risk

The Group is exposed to cash flow interest rate risk in relation to variable-rate bank borrowings (see

Note 30 for details of these borrowings).

i) Interest rate profile

The following table details the interest rate profile of the Group’s and the Company’s borrowings

at the end of the reporting period:

Group

2010 2009

Effective

interest rates

Effective

interest rates

% HK$’000 % HK$’000

Variable rate

Borrowings:

Bank loans 6.53% 42,080 7.20% 173,189

Variable rate bank

balances and deposit 0.36% 339,954 0.74% 649,862

ii) Sensitivity analysis

All of the bank loans of the Group which are fixed rate instruments are insensitive to any change

in interest rates. A change in interest rates at the end of the reporting period would not affect profit or

loss.

At 31 December 2010, it is estimated that a general increase/decrease of 100 basis points in

interest rates for variable rate bank balances and deposits and bank borrowings, with all other variables

held constant, would decrease/increase the Group’s profit after tax and retained profits by approximately

HK$1,154,000 (2009: HK$1,299,000). Other components of consolidated equity would not change in

response to the general increase/decrease in interest rates.

The sensitivity analysis above has been determined assuming that the change in interest rates had

occurred at the end of the reporting period and had been applied to the exposure to interest rate risk for

variable rate interest bearing financial instruments in existence at that date. The 100 basis points

increase or decrease represents management’s assessment of a reasonably possible change in interest

rates over the period until the next annual end of the reporting period. The analysis is performed on the

same basis for 2009.


– I-67 –

d) Currency risk

i) Exposure to currency risk

The following table details the Group’s exposure at the end of the reporting period to currency

risk arising from recognised assets or liabilities denominated in a currency other than the functional

currency of the entity to which they relate. The currency giving rise to this risk is primarily United

States dollars. The Company does not expose to material currency at the end of the reporting period.

Group

Exposure to foreign currencies

(expressed in Hong Kong dollars)

United States dollars

2010 2009

’000 ’000

Cash and cash equivalents 164,952 919

ii) Sensitivity analysis

The following table indicates the approximate change in the Group’s profit after tax and retained

profits in response to reasonably possible changes in the foreign exchange rate to which the Group has

significant exposure at the end of the reporting period.

2010 2009

Increase/

(decrease) in

foreign

exchange

rate

Effect on

profit after

tax and

retained

profits

Increase/

(decrease) in

foreign

exchange

rate

Effect on

profit after

tax and

retained

profits

HK$’000 HK$’000

United States dollars 5% 6,186 5% 38

(5)% (6,186) (5)% (38)

The sensitivity analysis has been determined assuming that the change in foreign exchange rates

had occurred at the end of the reporting period and had been applied to the Group’s exposure to currency

risk for both derivative and non derivative financial instruments in existence at that date, and that all

other variables, in particular interest rates, remain constant.

The stated changes represent management’s assessment of reasonably possible changes in foreign

exchange rate over the period until the next end of annual reporting period. In this respect, it is assumed

that the pegged rate between the Hong Kong dollar and the United States dollar would be materially

unaffected by any changes in movement in value of the United States dollar against other currencies.

The analysis is performed on the same basis for 2009.

iii) RMB is not freely convertible into foreign currencies. All foreign exchange transactions

involving RMB must take place through the People’s Bank of China (“PBOC”) or other

institutions authorised to buy and sell foreign exchange. The exchange rate adopted for foreign

exchange transactions are the rates of exchange quoted by the PBOC that would be subject to a

managed float against an unspecified basket of currencies.

Foreign currency payments, including the remittance of earnings outside the PRC, are subject to

the availability of foreign currency (which depends on the foreign currency denominated earnings

of the Group) or must be arranged through the PBOC with government approval.

All the revenue-generating subsidiaries of the Company are transacted in RMB. Depreciation or

appreciation of the RMB against foreign currencies can affect the Group’s results. The Group did

not hedge its currency exposure.


– I-68 –

e) Equity price risk

The Group is exposed to equity price changes arising from equity investments classified as financial

assets at fair value through profit or loss (see note 22) and available-for-sale investments (see note 19).

The Group’s listed investments are listed on the recognised stock exchanges. Decisions to buy or sell

financial assets at fair value through profit or loss are based on daily monitoring of the performance of

individual securities compared to that of the Index and other industry indicators, as well as the Group’s

liquidity needs. Listed investments held in the available-for-sale portfolio have been chosen based on their

longer term growth potential and are monitored regularly for performance against expectations. The portfolio

is diversified in terms of industry distribution, in accordance with the limits set by the Group.

At 31 December 2010, it is estimated that an increase/(decrease) of 10% (2009: 10%) in the relevant

stock market index (for listed investments), the price/earning ratios of comparable listed companies (for

unquoted investments) as applicable, with all other variables held constant, would have increased/decreased

the Group’s profit after tax and retained profit as follows:

Group

2010 2009

Effect on

profit after

tax and

retained

profits

Effect on

profit after

tax and

retained

profits

HK$’000 HK$’000

Change in the relevant equity

price risk variable:

Increase 10% 6,723 10% 3,390

Decrease (10)% (6,723) (10)% (3,390)

The sensitivity analysis indicates the instantaneous change in the Group’s profit after tax and retained

profits that would arise assuming that the changes in the stock market index or other relevant risk variables

had occurred at the balance sheet date and had been applied to re-measure those financial instruments held by

the Group which expose the Group to equity price risk at the end of the reporting period. It is also assumed

that the fair values of the Group’s equity investments would change in accordance with the historical

correlation with the relevant stock market index or the relevant risk variables, that none of the group’s

available-for-sale investments would be considered impaired as a result of the decrease in the relevant stock

market index or other relevant risk variables, and that all other variables remain constant. The analysis is

performed on the same basis for 2009.

f) Fair values

i) Financial instruments carried at fair value

The following table presents the carrying value of financial instruments measured at fair value at

the end of the reporting period across the three levels of the fair value hierarchy defined in HKFRS 7,

Financial Instruments: Disclosures, with the fair value of each financial instrument categorised in its

entirety based on the lowest level of input that is significant to that fair value measurement. The levels

are defined as follows:

• Level 1 (highest level): fair values measured using quoted prices (unadjusted) in active

markets for identical financial instruments

• Level 2: fair values measured using quoted prices in active markets for similar financial

instruments, or using valuation techniques in which all significant inputs are directly or

indirectly based on observable market data


– I-69 –

• Level 3 (lowest level): fair values measured using valuation techniques in which any

significant input is not based on observable market date

2010 2009

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Assets

Financial assets

at fair value through

profit or loss 35,558 – – 35,558 2,623 – – 2,623

Available-for-sale

investment 44,961 – – 44,961 34,831 – – 34,831

80,519 – – 80,519 37,454 – – 37,454

During the year there were no significant transfers between instruments in Level 1 to Level 2 or

Level 3.

ii) Fair value of financial instruments carried at other than fair value

The carrying amounts of the Group’s and the Company’s financial instruments carried at cost or

amortised cost are not materially different from their fair values as at 31 December 2009 and 2010.

g) Capital management

The Group’s objectives when managing capital are to ensure that entities in the Group will be able to

continue as a going concern while maximising the return to shareholders through the optimisation of the debt

and equity balance. The management reviews the capital structure by considering the cost of capital and the

risks associated with each class of capital. In view of this, the Group will balance its overall capital structure

through the payment of dividends, new share issues as well as the issue of new debt or the redemption of

existing debt as it sees fit and appropriate.

The Group monitors capital on the basis of the gearing ratio, which is calculated as total borrowings

divided by total equity as shown in the consolidated statement of financial position. The gearing ratios as at

31 December 2010 and 2009 were as follows:

Group Company

2010 2009 2010 2009

HK$’000 HK$’000 HK$’000 HK$’000

Interest-bearing bank loans 42,080 173,189 – –

Total borrowings 42,080 173,189 – –

Total equity 774,142 841,049 564,079 550,983

Gearing ratio 5.44% 20.59% N/A N/A

Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.


– I-70 –

h) Estimation of fair values

The following summarises the major methods and assumptions used in estimating the fair values of the

following financial instruments.

i) Listed securities

Fair value is based on listed market price at the end of the reporting period without any deduction

for transaction costs.

ii) Interest-bearing loans and borrowings

The fair value is estimated as the present value of future cash flows, discounted at current market

interest rates for similar financial instruments.

42. ULTIMATE CONTROLLING PARTY

The directors regard Mr. Cheung Siu Lam through his direct shareholding in the Company as being the ultimate

controlling party. The Company does not have any parent company.

43. COMPARATIVE FIGURES

As a result of the amendments of HKAS 17, Leases, certain comparative figures have been adjusted to conform

to current year’s presentation and to provide comparative amounts in respect of items disclosed for the first time in

2010. Further details of these developments are disclosed in note 2.

44. EVENTS AFTER THE REPORTING PERIOD

a) Acquisition of subsidiaries

On 27 January 2011, a wholly owned subsidiary of the Company has entered an acquisition agreement

with the controlling shareholder, Mr Cheung Siu Lam, to acquire the entire issued share capital of K.P.

Financial Group Limited which indirectly has beneficial interests in 70% of the equity interests in Beijing

Huifeng Rongjin Credit Finance Company Limited and 100% of the equity interests in Beijing Huaxia Xingye

Investment Guarantee Company Limited. The Company decides to acquire the above mentioned companies in

order to stay focus on providing small loans, loan guarantee, entrusted loans and consultancy services to meet

immediate financing needs of customers in PRC. With the amount of cash available and there is a huge demand

for funding in the private enterprises sector in the PRC, the management believes it would be a great

opportunity to build a platform to meet a wide range of customer needs.

b) Change of Company Name

In the announcement on 7 March 2011, the Board announces that it intended to put forward a proposal

to the shareholders to change the name of the Company from “K.P.I. Company Limited 港佳控股有限公司”to “China Financial Services Holdings Limited中國金融投資管理有限公司 ”.


– I-71 –

3. WORKING CAPITAL

After taking into account the financial resources available to the Enlarged Group,

including the internally generated funds and the available banking facilities, and the effect of

the Acquisition, the Directors, after due and careful enquiry, are of the opinion that the

Enlarged Group will have sufficient working capital for its present requirements for at least the

next 12 months from the date of this circular, in the absence of unforeseeable circumstances.

4. INDEBTEDNESS

Indebtedness

As at the close of business on 31 March 2011, being the latest practicable date for

the purpose of this indebtedness statement prior to the printing of this circular, the

Enlarged Group had total outstanding bank borrowings of approximately HK$16.3

million, of which approximately HK$16.3 milion were secured by the Enlarged Group’s

investment property with a carrying amount of approximately HK$74.0 million.

Contingent liability

As at 31 March 2011, the Enlarged Group had no contingent liabilities.

Disclaimers

Saved as aforesaid, and apart from intra-group liabilities, and normal accounts

payable, the Enlarged Group did not have any loan capital issued or agreed to be issued,

bank overdrafts, loans, debt securities issued and outstanding, any authorized or

otherwise created but unissued term loans or other borrowings, indebtedness in nature of

borrowings, liabilities under acceptances (other than trade bills) or acceptance credits,

debentures, mortgages, charges, finance leases or hire purchase commitments, which are

either guaranteed, unguaranteed, secured, or unsecured, guarantees or other material

contingent liabilities outstanding at the close of business on 31 March 2011.

The Directors confirm that there is no material change in the indebtedness and

contingent liability of the Enlarged Group from the close of business on 31 March 2011

to the Latest Practicable Date.

5. MATERIAL CHANGE

The Directors confirm that there was no material change in the financial or trading

position or outlook of the Group since 31 December 2010, being the date to which the latest

published audited consolidated accounts of the Group were made up, and up to the Latest

Practicable Date.


– I-72 –

1. ACCOUNTANTS’ REPORT ON THE TARGET GROUP

The following is the text of a report, prepared for the sole purpose of inclusion in the

circular, received from the independent reporting accountants, CCIF CPA Limited, Certified

Public Accountants, Hong Kong.

29 April 2011

The Directors


Dear Sirs,

We set out below our report on the financial information relating to K.P. Financial Group

Limited (the “Target Company”) and its subsidiaries (collectively referred to as the “Target

Group”), including the combined and Target Company’s statement of financial position as at

31 December 2010, and the combined statement of comprehensive income, the combined

statement of cash flows, the combined statement of changes in equity and the notes thereto of

the Target Group for the period from 13 August 2010, the earliest date of incorporation of the

combining entities which are under the common control of the vendor, Mr. Cheung Siu Lam,

to 31 December 2010 (the “Reporting Period”) (hereinafter collectively the “Financial

Information of the Target Group”) prepared for inclusion in the circular dated 29 April 2011

(the “Circular”) issued by K.P.I. Company Limited (the “Company”) in connection with the

proposed acquisition of the entire equity interests in the Target Company.

The Target Company was established in the British Virgin Islands (“BVI”) on 29

November 2010 as a limited liability company. The principal activity is investment holding.

For the purpose of this report, the directors of the Target Company have prepared the

financial statements of the Target Group for the Reporting Period (the “Underlying Financial

Statements”) in accordance with the Hong Kong Financial Reporting Standards (“HKFRSs”)

issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), and

accounting principles generally accepted in Hong Kong. We have, for the purpose of this

report, audited the Underlying Financial Statements in accordance with Hong Kong Standards

on Auditing issued by the HKICPA.

APPENDIX II FINANCIAL INFORMATION OF THE TARGET GROUP

– II-1 –

The preparation of the Underlying Financial Statements and the Financial Information of

the Target Group which give a true and fair view is the responsibility of the directors of the

Target Company. The directors of K.P.I. Company Limited are responsible for the contents of

the Circular in which this report is included. In preparing the Underlying Financial Statements

and the Financial Information of the Target Group which give a true and fair view, it is

fundamental that appropriate accounting policies are selected and applied consistently. It is our

responsibility to form an independent opinion and a review opinion, based on our examination,

on the Underlying Financial Statements of the Target Group and to report our opinion to you.

We believe that our work provides a reasonable basis for our opinion.

For the purpose of this report, we have examined the Financial Information of the Target

Group for the Reporting Period and have carried out such additional procedures as we

considered necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the

Reporting Accountant” issued by the HKICPA.

In our opinion, the Financial Information gives, for the purpose of this report, a true and

fair view of the state of affairs of the Target Group as at 31 December 2010 and of the result

and cash flows of the Target Group for the Reporting Period.


– II-2 –

A. FINANCIAL INFORMATION OF THE TARGET GROUP

COMBINED STATEMENT OF COMPREHENSIVE INCOME

FOR THE PERIOD FROM 13 AUGUST 2010 TO 31 DECEMBER 2010

Notes HK$’000

Turnover 3 8,013

Other revenue 3 31

Administrative and other operating expenses (210)

Profit before taxation 5 7,834

Income tax 6(a) (1,965)

Profit for the period and total comprehensive income for

the period attributable to owners of the Target

Company 5,869

The accompanying notes form an integral part of the financial statements.


– II-3 –

COMBINED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2010

Notes HK$’000

Non-current assets

Property, plant and equipment 9 13

Current assets

Accounts receivable and advances provided to

customers 11 111,720

Cash and cash equivalents 13 78,302

190,022

Current liabilities

Other payables, deposits received and accruals 14 3,276

Taxation payable 6(b) 1,965

Shareholder’s loan 12 2,525

7,766

Net current assets 182,256

TOTAL ASSETS LESS CURRENT LIABILITIES 182,269

EQUITY

Equity attributable to owners of the Target Company

Share capital 15 –

Reserves 16 164,629

164,629

Non-controlling interests 17,640

TOTAL EQUITY 182,269



– II-4 –

COMBINED STATEMENT OF CHANGES IN EQUITY


Share

capital

Contributed

surplus

Retained

profits

Attributable

to owners

of the

Target

Company

Non-

controlling

interests Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Issue of share capital – – – – – –

Capital injection – 158,760 – 158,760 – 158,760

Profit for the period – – 5,869 5,869 – 5,869

Non-controlling interests

arising on the

acquisition of

Huifeng Rongjin Co. – – – – 17,640 17,640

At 31 December 2010 – 158,760 5,869 164,629 17,640 182,269



– II-5 –

STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2010

Notes HK$’000

Non-current assets

Interests in subsidiaries 10 –

Current liabilities

Shareholder’s loan 12 11

Net current liabilities (11)

TOTAL ASSETS LESS

CURRENT LIABILITIES (11)

EQUITY

Share capital 15 –

Reserves 16 (11)

TOTAL EQUITY (11)



– II-6 –

COMBINED STATEMENT OF CASH FLOWS


Notes HK$’000

Operating activities

Profit before tax 7,834

Adjustment for:

Depreciation of property, plant and equipment 9 1

Interest income (31)

7,804

Changes in working capital

Increase in shareholder’s loan 2,525

Increase in accounts receivable and advances provided

to customers (111,720)

Increase in other payables, deposits received and

accruals 3,276

Cash used in operations (98,115)

PRC income tax paid 6(b) –

Net cash used in operating activities (98,115)

Investing activities

Purchase of property, plant and equipment 9 (14)

Interest received 31

Net cash generated from investing activities 17

Financing activities

Capital injection 176,400

Issue of shares –

Net cash generated from financing activities 176,400

Net increase in cash and cash equivalents 78,302

Cash and cash equivalents at beginning of the period –

Cash and cash equivalents at end of the period 13 78,302



– II-7 –

B. NOTES TO THE FINANCIAL INFORMATION OF THE TARGET GROUP

1. CORPORATE INFORMATION

The principal activity of the Target Company is investment holding. The principal activities of the Target

Company’s subsidiaries are set out in note 10 to the financial statements.

The Target Company is a limited liability company incorporated in the British Virgin Islands (the “BVI”) on

29 November 2010. The address of its registered office is Portcullis Trust Net (BVI) Limited, Portcullis Trust Net

Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands. The address of its principal place of business

is Suite 5606, 56th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

The Financial Information of the Target Group has been prepared in accordance with all applicable Hong

Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual

Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations

issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), accounting principles

generally accepted in Hong Kong and the requirements of the Hong Kong Companies Ordinance. The Financial

Information also complies with the applicable disclosure provisions of the Rules Governing the Listing of

Securities on The Stock Exchange of Hong Kong Limited as applicable to the Accountants’ Report included

in listing documents.

(b) Basis of preparation

Items included in the Financial Information of each entity in the Target Group are measured using the

currency that best reflects the economic substance of the underlying events and circumstances relevant to the

entity. The Financial Information are presented in Hong Kong dollars (“HKD”), rounded to the nearest

thousand except for per share data. The Target Group and other investment holding subsidiaries incorporated

in BVI and Hong Kong have adopted HKD as their functional currency. The functional currency of the PRC

subsidiaries is Renminbi (“RMB”). As the Target Group mainly operates in Hong Kong, HKD is used as the

presentation currency of the Target Group.

The measurement basis used in the preparation of the Financial Information is the historical cost basis.

Pursuant to a group reorganisation and Beijing Huifeng Rongjin Credit Finance Company Limited

Control Agreements and Beijing Huaxia Xingye Investment Guarantee Company Control Agreements entered

among the members of the Target Group on 31 December 2010, the Target Company became the holding

company of the subsidiaries (collectively referred to as the “Target Group”).

Since all entities which took part in the group reorganisation were under common control of the same

equity shareholder, Mr. Cheung Siu Lam, the Target Group is regarded as a continuing entity resulting from

the reorganisation of entities under common control. These financial statements have been prepared on the

basis that the current group structure had been in existence at the beginning of the earliest year presented.

Accordingly, the combined results of the Target Group for the period ended 31 December 2010 include the

result of the Target Company and its subsidiaries with effect from 1 January 2010 or, if later, since their

respective dates of incorporation, as if the current group structure had been in existence throughout the year

presented. The combined statement of financial position of the Target Group as at 31 December 2010 has been

prepared as if the current group structure had been in existence as at that date. All material intra-group

transactions and balances have been eliminated on combination.

The preparation of Financial Information in conformity with HKFRSs requires management to make

judgments, estimates and assumptions that affect the application of policies and reported amounts of assets,

liabilities, income and expenses. The estimates and associated assumptions are based on historical experience

and various other factors believed to be reasonable under the circumstances, the results of which form the basis

of making the judgments about carrying values of assets and liabilities not readily apparent from other sources.

Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognized in the period in which the estimate is revised if the revision affects only that period,

or in the period of the revision and future periods if the revision affects both current and future periods.


– II-8 –

For the purpose of preparing the Financial Information of the Reporting Period, has consistently applied

all the new and revised standards, amendments and interpretations issued by the HKICPA that are relevant to

its operations and effective for the annual period beginning on or after 1 January 2010 throughout the

Reporting Period.

The Target Group has not early applied the following new Hong Kong Accounting Standards

(“HKASs”), HKFRSs, amendments or interpretations that have been issued but are not yet effective for the

period ended 31 December 2010. The directors of the Target Company anticipate that the application of these

new standards, amendments or interpretations will have no material impact on the results and the financial

position of the Target Group.

HKFRSs (Amendments) Improvements to HKFRSs 2010 except for the amendments to

HKFRS 3 (Revised in 2008), HKFRS 7, HKAS 1 and HKAS 28l

HKFRS 1 (Amendment) Limited Exemption from Comparative HKFRS 7 Disclosures for

First-time Adopters3

HKFRS 1 (Amendment) Severe Hyperinflation and Removal of Fixed Dates for First-time

Adopters5

HKFRS 7 (Amendments) Disclosures – Transfers of Financial Assets5

HKFRS 9 Financial instruments7

HKAS 12 (Amendment) Deferred Tax: Recovery of Underlying Assets6

HKAS 24 (Revised) Related Party Disclosures4

HKAS 32 (Amendment) Classification of Rights Issues2

HK(IFRIC)-Int 14

(Amendments)

Prepayments of a Minimum Funding Requirement4

HK(IFRIC)-Int 19 Extinguishing Financial Liabilities with Equity Instruments3

1 Effective for annual periods beginning on or after 1 July 2010 and 1 January 2011, as appropriate.

2 Effective for annual periods beginning on or after 1 February 2010.




6 Effective for annual periods beginning on or after I January 2012.


HKFRS 9 Financial Instruments issued in November 2009 and amended in October 2010 introduces new

requirements for the classification and measurement of financial assets and financial liabilities and for

derecognition.

• HKFRS 9 requires all recognised financial assets that are within the scope of HKAS 39 Financial

Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair

value. Specifically, debt investments that are held within a business model whose objective is to

collect the contractual cash flows, and that have contractual cash flows that are solely payments

of principal and interest on the principal outstanding are generally measured at amortised cost at

the end of subsequent accounting periods. All other debt investments and equity investments are

measured at their fair values at the end of subsequent accounting periods.

• The most significant effect of HKFRS 9 regarding the classification and measurement of financial

liabilities relates to the accounting for changes in fair value of a financial liability (designated as

at fair value through profit or loss) attributable to changes in the credit risk of that liability.

Specifically, under HKFRS 9, for financial liabilities that are designated as at fair value through

profit or loss, the amount of change in the fair value of the financial liability that is attributable

to changes in the credit risk of that liability is recognised in other comprehensive income, unless

the recognition of the effects of changes in the liability’s credit risk in other comprehensive

income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value

attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss.

Previously, under HKAS 39, the entire amount of the changes in the fair value of the financial

liability designated as at fair value through profit or loss was recognised in profit or loss.

HKFRS 9 is effective for annual periods beginning on or after 1 January 2013, with earlier application

permitted.


– II-9 –

The directors of the Target Company anticipate that HKFRS 9 will be adopted in the Target Group’s

combined financial statements for the annual period beginning 1 January 2013 and that the application of the

new standard will have a significant impact on amounts reported in respect of the Target Group’s financial

assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect

until a detailed review has been completed.

The amendments to HKFRS 7 increase the disclosure requirements for transactions involving transfers

of financial assets. These amendments are intended to provide greater transparency around risk exposures

when a financial asset is transferred but the transferor retains some level of continuing exposure in the assets.

The amendments also require disclosures where transfers of financial assets are not evenly distributed

throughout the period. To date, the Target Group has not entered into transactions involving transfers of

financial assets. However, if the Target Group enters into any such transactions in the future, disclosures

regarding those transfers may be affected.

HKAS 24 Related Party Disclosures (as revised in 2009) modifies the definition of a related party and

simplifies disclosures for government-related entities. The disclosure exemptions introduced in HKAS 24 (as

revised in 2009) do not affect the Target Group because the Target Group is not a government-related entity.

The amendments to HKAS 32 address the classification of certain rights issues denominated in a foreign

currency as either an equity instrument or as a financial liability. To date, the Target Group has not entered into

any arrangements that would fall within the scope of the amendments. However, if the Target Group does enter

into any rights issues within the scope of the amendments in future accounting periods, the amendments to

HKAS 32 will have an impact on the classification of those rights issues.

The amendments to HK(IFRIC)-Int 14 require entities to recognise as an economic benefit any

prepayment of minimum funding requirement contributions. As the Target Group has no defined benefit

scheme, the amendments are unlikely to have any financial impact on the Target Group.

HK(IFRIC)-Int 19 provides guidance regarding the accounting the extinguishment of a financial liability

by the issue of equity instruments. To date, the Target Group has not entered into transactions of this nature.

However, if the Target Group does enter into such transactions in the future, HK(IFRIC)-Int 19 will affect the

required accounting. In particular, under HK(IFRIC)-Int 19, equity instruments issued under such

arrangements will be measured at their fair value, and any difference between the carrying amount of the

financial liability extinguished and the fair value of equity instruments issued will be recognised in profit or

loss.

The directors of the Target Company anticipate that the application of other new and revise standards,

amendments or interpretations will have no material impact on the results and the financial position of the

Target Group.

All relevant changes in accounting policies and disclosures have been made in accordance with the

provisions of the respective standards.

(c) Subsidiaries and non-controlling interests

Subsidiaries are entities controlled by the Target Group. Control exists when the Target Group has the

power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

In assessing control, potential voting rights that presently exercisable are taken into account. On adoption of

HKAS 27 (Revised), when control is lost, any remaining interest in the entity is re-measured to fair value, and

a gain or loss is recognised in profit or loss. (The adoption of this change in HKAS 27 (Revised) should be

applied prospectively.)

An investment in a subsidiary is combined into the combined financial statements from the date that

control commences until the date that control ceases. Intra-group balances and transactions and any unrealised

profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial

statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as

unrealised gains but only to the extent that there is no evidence of impairment.

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the

Target Company, and in respect of which the Target Group has not agreed any additional terms with the holders

of those interests which would result in the Target Group as a whole having a contractual obligation in respect


– II-10 –

of those interests that meets the definition of a financial liability. For each business combination, the Target

Group can elect to measure any non-controlling interests either at fair value or at their proportionate share of

the subsidiary’s net identifiable assets.

Non-controlling interests are presented in the combined statement of financial position within equity,

separately from equity attributable to the equity shareholders of the Target Company. Non-controlling interests

in the results of the Target Group are presented on the face of the combined income statement and the combined

statement of comprehensive income as an allocation of the total profit or loss and total comprehensive income

for the year between non-controlling interests and the equity shareholders of the Target Company. Loans from

holders of non-controlling interests and other contractual obligations towards these holders are presented as

financial liabilities in the combined statement of financial position in accordance with notes 2(o), (f) or (g)

depending on the nature of the liability.

Changes in the Target Group’s ownership interests in existing subsidiaries

Changes in the Target Group’s ownership interests in existing subsidiaries on or after 1 January

2010

Changes in the Target Group’s interests in a subsidiary that do not result in a loss of control are

accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and

non-controlling interests within combined equity to reflect the change in relative interests, but no

adjustments are made to goodwill and no gain or loss is recognised.

When the Target Group losses control of a subsidiary, it is accounted for as a disposal of the entire

interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest

retained in that former subsidiary at the date when control is lost is recognised at fair value and this

amount is regarded as the fair value on initial recognition of a financial asset (see note 2(h)).

(d) Business combinations

Merger accounting is applied in accordance with Accounting Guideline 5 Merger Accounting for

Common Control Combinations

The combined financial statements incorporate the financial statements items of the combining

entities or businesses in which the common control combination occurs as if they had been combined

from the date when the combining entities or businesses first came under the control of the controlling

party.

The net assets of the combining entities or businesses are consolidated using the existing book

values from the controlling party’s perspective. No amount is recognised in respect of goodwill or

excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and

contingent liabilities over cost at the time of common control combination, to the extent of the

continuation of the controlling party’s interest.

The combined statement of comprehensive income includes the results of each of the combining

entitles or businesses from the earliest date presented or since the date when the combining entities or

businesses first came under the common control, where this is a shorter period, regardless of the date

of the common control combination.

The comparative amounts in the combined financial statements are presented as if the entities or

businesses had been combined at the end of the previous reporting period or when they first came under

common control, whichever is shorter.

(e) Property, plant and equipment

Property, plant and equipment are stated in the statement of financial position at cost less accumulated

depreciation and impairment losses (see note 2(f)):

When a lease includes both land and building elements, the Target Group assesses the classification of

each element as a finance or an operating lease separately based on the assessment as to whether substantially

all the risks and rewards incidental to ownership of each element have been transferred to the Target Group.


– II-11 –

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their

estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

Furniture and fixtures 5 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item

is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful

life of an asset and its residual value, if any, are reviewed annually.

Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may

also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency

purchases of property, plant and equipment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as

appropriate, only when it is probable that future economic benefits associated with the item will flow to group

and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised.

All other repairs and maintenance are charged to the income statement during the financial period in which

they are incurred.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying

amount is greater than its estimated recoverable amount.

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are

determined as the difference between the net proceeds on disposal and the carrying amount of the item and are

recognised in profit or loss on the date of retirement or disposal.

(f) Impairment of assets

(i) Impairment of investments in equity securities and other receivables

Investments in equity securities (other than investments in subsidiaries and associates: see note

2(g)(ii)) and other current and non-current receivables that are stated at cost or amortised cost or are

classified as available-for-sale equity securities are reviewed at the end of each reporting period to

determine whether there is objective evidence of impairment. Objective evidence of impairment

includes observable data that comes to the attention of the Target Group about one or more of the

following loss events:

– significant financial difficulty of the debtor;

– a breach of contract, such as a default or delinquency in interest or principal payments;

– it becoming probable that the debtor will enter bankruptcy or other financial

reorganisation;

– significant changes in the technological, market, economic or legal environment that have

an adverse effect on the debtor; and

– a significant or prolonged decline in the fair value of an investment in an equity instrument

below its cost.

If any such evidence exists, any impairment loss is determined and recognised as follows:

– For unquoted equity securities carried at cost, impairment loss is measured as the

difference between the carrying amount of the financial asset and the estimated future cash

flows, discounted at the current market rate of return for a similar financial asset where the

effect of discounting is material. Impairment losses for equity securities are not reversed.

– For accounts receivables and other financial assets carried at amortised cost, the

impairment loss is measured as the difference between the asset’s carrying amount and the

present value of estimated future cash flows, discounted at the financial asset’s original


– II-12 –

effective interest rate (i.e. the effective interest rate computed at initial recognition of these

assets), where the effect of discounting is material. This assessment is made collectively

where financial assets carried at amortised cost share similar risk characteristics, such as

similar past due status, and have not been individually assessed as impaired. Future cash

flows for financial assets which are assessed for impairment collectively are based on

historical loss experience for assets with credit risk characteristics similar to the collective

group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be

linked objectively to an event occurring after the impairment loss was recognised, the impairment loss

is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying

amount exceeding that which would have been determined had no impairment loss been recognised in

prior years.

Impairment losses are written off against the corresponding assets directly, except for impairment

losses recognised in respect of trade debtors included within trade and other receivables, whose recovery

is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded

using an allowance account. When the Target Group is satisfied that recovery is remote, the amount

considered irrecoverable is written off against trade debtors directly and any amounts held in the

allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously

charged to the allowance account are reversed against the allowance account. Other changes in the

allowance account and subsequent recoveries of amounts previously written off directly are recognised

in profit or loss.

(ii) Impairment of other assets

Internal and external sources of information are reviewed at the end of each reporting period to

identify indications that the following assets may be impaired or, except in the case of goodwill an

impairment loss previously recognised no longer exists or may have decreased:

– property, plant and equipment; and

– investments in subsidiaries (except for those classified as held for sale);

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for

goodwill, the recoverable amount is estimated annually whether or not there is any indication of

impairment.

– Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs to sell and its

value in use. In assessing value in use, the estimated future cash flows are discounted to their

present value using a pre-tax discount rate that reflects current market assessments of the time

value of money and the risks specific to the asset. Where an asset does not generate cash inflows

largely independent of those from other assets, the recoverable amount is determined for the

smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

– Recognition of impairment losses

An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the

cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses

recognised in respect of cash-generating units are allocated first to reduce the carrying amount

of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the

carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that

the carrying value of an asset will not be reduced below its individual fair value less costs to sell,

or value in use, if determinable.

– Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been

a favourable change in the estimates used to determine the recoverable amount. An impairment

loss in respect of goodwill is not reversed.


– II-13 –

A reversal of impairment losses is limited to the asset’s carrying amount that would have

been determined had no impairment loss been recognised in prior years. Reversals of impairment

losses are credited to profit or loss in the year in which the reversals are recognised.

(g) Provisions and contingent liabilities

Provisions the recognised for liabilities of uncertain timing or amount when the Company or Group has

a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic

benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of

money is material, provisions are stated at the present value of the expenditures expected to settle the

obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot

be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of

economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence

or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the

probability of outflow of economic benefits is remote.

(h) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are

not quoted in an active market. Such assets are carried at amortised cost using the effective interest method.

Gains or losses are recognised in the statement of comprehensive income when the loans and receivables are

derecognised or impaired, as well as through the amortisation process. They arise when the Target Group

provides money or services directly to a debtor or a related company with no intention of trading the

receivable. They are included in current assets, except for maturities greater than 12 months after the statement

of financial position date. These are classified as non-current assets.

(i) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable

that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured

reliably, revenue is recognised in profit or loss as follows:

– Financing service income on provision of short term financing services is recognised using the

effective interest method for all short term loans that the Target Group deems to be collectible

based on historical short term loan redemption statistics.

– Loan guarantee service income consists of guarantee fee and related services income and is

recognised in profit or loss on a straight line basis over the guarantee period.

– Interest income is recognised as it accrues using the effective interest method.

(j) Accounts receivable and other receivables

Accounts and other receivables are initially recognised at fair value and thereafter stated at amortised

cost less allowance for impairment of doubtful debts, except where the receivables are interest-free loans made

to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such

cases, the receivables are stated at cost less allowance for impairment of doubtful debts (see note 2(f)).

(k) Accounts and other payables

Accounts and other payables are initially recognised at fair value and thereafter stated at amortised cost

unless the effect of discounting would be immaterial, in which case they are stated at cost.

(l) Foreign currencies

Functional and presentation currency

Items included in the financial statements of each of the Target Group’s entities are measured

using the currency of the primary economic environment in which the entity operates (“the functional

currency”). The Target Group and other investment holding subsidiaries incorporated in BVI and Hong


– II-14 –

Kong have adopted HKD as their functional currency. The functional currency of the PRC subsidiaries

is Renminbi (“RMB”). As the Target Group mainly operates in Hong Kong, HKD is used as the

presentation currency of the Target Group.

Transactions and balances

Foreign currency transactions during the year are translated at the foreign exchange rates ruling

at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated

at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are

recognised in profit or loss, except those arising from foreign currency borrowings used to hedge a net

investment in a foreign operation which are recognised in other comprehensive income.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign

currency are translated using the foreign exchange rates ruling at the transaction dates. Non-monetary

assets and liabilities denominated in foreign currencies that are stated at fair value are translated using

the foreign exchange rates ruling at the dates the fair value was determined.

On disposal of a foreign operation, the cumulative amount of the exchange differences relating

to that operation is reclassified from equity to profit or loss when the profit or loss on disposal is

recognised.

(m) Retirement scheme

The Target Group’s PRC operations participate in defined contribution retirement plans managed by the

local municipal government in the locations in which it operates. The relevant authorities of the local

municipal government in the PRC is responsible for the retirement benefit obligations payable to the Target

Group’s retired employees. The Target Group has no obligation for payment of retirement benefits beyond the

annual contribution. The contribution payable is charged as an expense to profit or loss as and when incurred.

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other

financial institutions, and short-term, highly liquid investments that are readily convertible into known

amounts of cash and which are subject to an insignificant risk of changes in value, having been within three

months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of

the Target Group’s cash management are also included as a component of cash and cash equivalents for the

purpose of the consolidated statement of cash flows.

(o) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities.

Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the

extent that they relate to items recognised in other comprehensive income or directly in equity, in which case

the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or

substantively enacted at the end of reporting period, and any adjustment to tax payable in respect of previous

years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively,

being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and

their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent

that it is probable that future taxable profits will be available against which the asset can be utilised, are

recognised. Future taxable profits that may support the recognition of deferred tax assets arising from

deductible temporary differences include those that will arise from the reversal of existing taxable temporary

differences, provided those differences relate to the same taxation authority and the same taxable entity, and

are expected to reverse either in the same period as the expected reversal of the deductible temporary

difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward.

The same criteria are adopted when determining whether existing taxable temporary differences support the


– II-15 –

recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken

into account if they relate to the same taxation authority and the same taxable entity, and are expected to

reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary

differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities

that affect neither accounting nor taxable profit (provided they are not part of a business combination), and

temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable

differences, the Target Group controls the timing of the reversal and it is probable that the differences will not

reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will

reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or

settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted

at the end of the reporting period. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is

reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the

related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that

sufficient taxable profits will be available.

Additional income taxes that arise from the distribution of dividends are recognised when the liability

to pay the related dividends is recognised.

Current tax balances and deferred tax balances, and movements therein, are presented separately from

each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets

against deferred tax liabilities, if the Target Company or the Target Group has the legally enforceable right to

set off current tax assets against current tax liabilities and the following additional conditions are met:

– in the case of current tax assets and liabilities, the Target Company or the Target Group intends

either to settle on a net basis, or to realise the asset and settle the liability simultaneously: or

– in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same

taxation authority on either:

– the same taxable entity; or

– different taxable entities, which, in each future period in which significant amounts of

deferred tax liabilities or assets are expected to be settled or recovered, intend to realise

the current tax assets and settle the current tax liabilities on a net basis or realise and settle

simultaneously.

(p) Related parties

For the purpose of these financial statements, parties are considered to be related to the Group if:

(i) the party has the ability, directly or indirectly through one or more intermediaries, to control the

Target Group or exercise significant influence over the Target Group in making financial and

operating policy decisions, or has joint control over the Target Group; or

(ii) the Target Group and the party are subject to common control; or

(iii) the party is an associate of the Target Group or a joint venture in which the Group is a venturer;

or

(iv) the party is a member of key management personnel of the Target Group or the Target Group’s

parent, or a close family member of such an individual, or is an entity under the control, joint

control or significant influence of such individuals; or

(v) the party is a close family member of a party referred to in (i) or is an entity under the control,

joint control or significant influence of such individuals, or


– II-16 –

(vi) the party is a post-employment benefit plan which is for the benefit of employees of the Target

Group or of any entity that is a related party of the Target Group.

Close family members of an individual are those family members who may be expected to influence,

or be influenced by, that individual in their dealings with the entity.

(q) Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are

identified from the financial information provided regularly to the Target Group’s most senior executive

management for the purposes of allocating resources to, and assessing the performance of, the Target Group’s

various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the

segments have similar economic characteristics and are similar in respect of the nature of products and

services, the nature of production processes, the type or class of customers, the methods used to distribute the

products or provide the services, and the nature of the regulatory environment. Operating segments which are

not individually material may be aggregated if they share a majority of these criteria.

3. TURNOVER AND OTHER REVENUE

The principal activities of the Target Group are the provision of short term financing services, loan guarantee

services and related consultancy and management services.

Revenue represents the net invoiced value of the above services income, after deduction of relevant taxes

during the Reporting Period.

The Target Group’s revenue and other revenue for the Reporting Period arose from the following activities:

Target Group

2010

HK$’000

Revenue

Financing service income 7,813

Loan guarantee service income 200

8,013

Other revenue

Bank interest income, being total interest income on financial assets not at fair

value through profit or loss 31


– II-17 –

4. SEGMENT INFORMATION

Operating segments, and the amounts of each segment item reported in the combined financial statements, are

identified from the financial data and information provided regularly to the Target Company’s Board of Directors,

the chief operation decision makers, who are the most senior executive management, for the purposes of allocating

resources to, and assessing the performance of, the Target Group’s various lines of business and geographical

locations. No segment information is presented in respect of the Target Group’s operating segment as the Target

Group is principally engaged in one segment in the provision of loan guarantee services and related financing services

in the PRC. The Target Group did not operate in any other geographical locations during the year.

(a) Turnover

The Target Group’s turnover during the Reporting Periods is derived from the provision of loan

guarantee services and related financing services.

(b) Geographical

The Target Group mainly operates in the People’s Republic of China (the “PRC”). The Target Group’s

revenue during the Reporting Period is derived from customers located in the PRC. All of the non-current

assets of the Target Group are located in the PRC.

(c) Information about major customer

During the period ended 31 December 2010, revenue from a single customer account for 100% of the

Target Group’s revenue.

5. PROFIT BEFORE TAXATION

The profit before taxation of the Target Group is arrived at after charging/(crediting):

Target Group

2010

HK$’000

Depreciation 1

Staff costs

Salaries, allowances and other benefits 37

Pension scheme contribution 6

43

6. INCOME TAX

(a) Income tax in the combined statement of comprehensive income represents:

Target Group

2010

HK$’000

Current tax

PRC Enterprise Income tax 1,965

Tax charge 1,965


– II-18 –

Reconciliation between tax expense and accounting profit at the applicable tax rate:

Target Group

2010

HK$’000

Profit before taxation 7,834

Notional tax on profit before taxation, calculated at the rates applicable to

profits in the tax jurisdictions concerned 1,959

Expenses not deductible for taxation purposes 6

Tax charge 1,965

No provision for profits tax in Hong Kong has been made as the Group has no income assessable for

profits tax for the period in Hong Kong.

PRC subsidiaries are subject to PRC Enterprise Income Tax at 25%.

(b) Taxation in the consolidated statement of financial position represents:

Target Group

2010

HK$’000

Provision for the year

– PRC taxation (1,965)

At 31 December (1,965)

Analysed for reporting purposes as:

Tax payables (1,965)

7. PROFIT ATTRIBUTABLE TO OWNERS OF THE TARGET COMPANY

The combined profit attributable to owners of the Target Company includes a loss of HK$11,000 which has

been dealt with in the financial statements of the Target Company.

8. DIVIDEND

The directors do not recommend the payment of a dividend for the period ended 31 December 2010.


– II-19 –

9. PROPERTY, PLANT AND EQUIPMENT

Target Group

Furniture and

equipment

HK$’000

Cost

Additions 14

At 31/12/2010 14

Accumulated depreciation

Charge for the period 1

At 31/12/2010 1

Carrying amount

At 31/12/2010 13

10. INTERESTS IN SUBSIDIARIES

Target Company

HK$’000

Unlisted shares, at cost –

The following list contains only the particulars of subsidiaries which principally affected the results, assets or

liabilities of the Group:

Name

Country of

incorporation/

registration and

operations

Nominal

value of

registered

share capital

Percentage

of equity

attributable to


Direct Indirect

KP Financial

Services

Limited

Hong Kong Ordinary

HK$1

100% – Investment holding

KP Financial

Holdings

Limited

Hong Kong Ordinary

HK$1

100% – Investment holding

北京港佳匯通財務諮詢有限公司

PRC Registered

capital

USD300,000

– 100% Provision of entrusted

loan, consultancy and

management services

北京惠豐融金小額貸款有限公司

PRC Registered

capital

RMB50,000,000

– 70% Provision of corporate

and individual

financing services

北京華夏興業投資擔保有限公司

PRC Registered

capital

RMB100,000,000

– 100% Provision of loan

guarantee services


– II-20 –

11. ACCOUNTS RECEIVABLE AND ADVANCES PROVIDED TO CUSTOMER

Target Group

HK$’000

Accounts receivable and advance to customer 111,720

Loan and receivable 111,720

The Target Group generally offers loans secured by tangible property, such as real estate commonly known as

property loans. A typical loan generally has a term of 1-6 months.

(a) Aging analysis

The aging analysis of accounts receivable and advances provided to customer at the end of the reporting

period is as follows:

HK$’000

Outstanding balances with age

Due within 1 month or on demand 111,720

(b) Accounts receivable and advances provided to customer that are not impaired

HK$’000

Neither past due nor impaired 111,720

Accounts receivable and advances provided to customer that were neither past due nor impaired relate

to recognised and creditworthy borrower for whom there was no recent history of default.

(c) All the Target Group’s accounts receivable and advances provided to customer in the PRC were

denominated in RMB. The accounts receivable in the PRC carry interest plus service charge at a monthly

effective rate of 2.9%.

12. SHAREHOLDER’S LOAN

Shareholder’s loan is unsecured, non-interest bearing and have no fixed terms of repayment.

13. CASH AND CASH EQUIVALENTS

Target Group

HK$’000

Cash at banks/financial institutions and on hand 78,302

Cash and cash equivalents in the combined statement of financial position and

combined statement of cash flows 78,302

Deposits with bank carry interest at market rates of 0.32% per annum. The directors consider the carrying

amounts of cash and cash equivalents at the end of the reporting period approximate to the fair value.


– II-21 –

14. OTHER PAYABLES, DEPOSITS RECEIVED AND ACCRUALS

Target Group

HK$’000

Accrued expenses 483

Financial liabilities measured at amortised cost 483

Deposits received in advance 2,793

3,276

All of the other payables, deposits received and accruals are expected to be settled or recognised as income

within one year or are repayable on demand.

15. SHARE CAPITAL

No. of shares HK$’000

Authorised:

Ordinary shares of US$1 each 50,000 390

Issued and fully paid:

Shares issued 1 –

At end of the year 1 –

The Target Company was incorporated on 29 November 2010. The authorised share capital of the Target

Company was approximately HK$390,000 by the creation of 50,000 shares of US$1 each. On the same date, the

Target Company issued 1 share of US$1 each at par for cash as its initial working capital.

16. RESERVES

Target Group

Contributed

surplus

Retained

earnings

Attributable

to owners

of the

Company

Non-

controlling

interests Total

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Capital injection 158,760 – 158,760 – 158,760

Non-controlling interests

arising on the

acquisition of Huifeng

Rongjin Co – – – 17,640 17,640

Profit for the period – 5,869 5,869 – 5,869

At 31 December 2010 158,760 5,869 164,629 17,640 182,269


– II-22 –

Target Company

Accumulated

losses

HK$’000

Loss for the period (11)

At 31 December 2010 (11)

At 31 December 2010, the Target Company has no reserve available for distribution to shareholders.

Nature and purpose of reserves

(i) Contributed surplus

The contributed surplus comprises the aggregate amount of releasing the shareholder’s loan by the

equity shareholder of the Target Company.

17. RETIREMENT BENEFITS SCHEME

The employees of the Target Group’s subsidiaries in the PRC are members of the state-managed retirement

benefit scheme operated by the government of the PRC. The subsidiaries of the Group are required to contribute

certain percentage of their payroll costs to the retirement benefit scheme to fund the benefits. The only obligation

of the Group with respect to the retirement benefit scheme is to make the specified contributions.

18. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

(a) Key sources of estimation uncertainty

In the process of applying the Target Group’s accounting policies which are described in note 2,

management has made certain key assumptions concerning the future, and other key sources of estimated

uncertainty at the end of the reporting period that may have a significant risk of causing a material adjustment

to the carrying amounts of assets and liabilities within the next financial year, as discussed below.

Impairment of receivables

The Target Group maintains impairment allowance for doubtful accounts based upon evaluation

of the recoverability of the accounts receivables and other receivables, where applicable, at each end of

the reporting period. The estimates are based on the aging of the accounts receivables and other

receivables balances and the historical write-off experience, net of recoveries. If the financial condition

of the debtors were to deteriorate, additional impairment allowance may be required.

(b) Critical accounting judgements in applying the Target Group’s accounting policies

In determining the carrying amounts of some assets and liabilities, the Target Group makes assumptions

for the effects of uncertain future events on those assets and liabilities at the end of the reporting period. These

estimates involve assumptions about such items as cash flows and discount rates used. The Target Group’s

estimates and assumptions are based on historical experience and expectations of future events and are

reviewed periodically. In addition to assumptions and estimations of future events, judgements are also made

during the process of applying the Target Group’s accounting policies.

19. FINANCIAL RISK MANAGEMENT AND FAIR VALUES

The Target Group’s major financial instruments include equity investments, accounts receivable and advances

provided to customer and other payables. Details of the financial instruments are disclosed in respective notes. The

risks associated with these financial instruments include credit risk, liquidity risk, currency risk, interest rate risk and

other price risk. The policies on how to mitigate these risks are set out below. The management manages and monitors

these exposures to ensure appropriate measures are implemented on a timely and effective manner.


– II-23 –

(a) Credit risk

(i) As at 31 December 2010, the maximum exposure to credit risk is represented by the carryingamount of each financial asset in the combined statement of financial position after deducting anyimpairment allowance.

(ii) In respect of accounts receivable and advances provided to customer, the Target Group’s exposureto credit risk is influenced mainly by the individual characteristics of each customer. The defaultrisk of the industry and country in which customers operate also has an influence on credit risk.

(b) Liquidity risk

The Target Group is responsible for its own cash management, including the short term investment ofcash surpluses and the raising of loans to cover expected cash demand, subject to board approval. The TargetGroup’s policy is to regularly monitor current and expected liquidity requirements and its compliance withlending covenants to ensure that it maintains sufficient amount of cash and adequate committed lines offunding from major financial institutions to meet its liquidity requirements in the short and longer term. TheTarget Group relies on bank borrowings as a significant source of liquidity.

The following liquidity table set out the remaining contractual maturities at the end of the reportingperiod of the Target Group’s financial liabilities based on contractual undiscounted cash flows (includinginterest payments computed using contractual rates or, if floating, based on rates current at the statement offinancial position date) and the earliest date the Target Group and the Target Company required to pay:

Target Group

2010

Within

1 year or

on demand

More than

1 year but

less than

2 years

Total

contractual

undiscounted

cash flow

Carrying

amount

$’000 $’000 $’000 $’000

Non-derivative financial

liability shareholder’s loan 2,525 – 2,525 2,525

Other payables 3,276 – 3,276 3,276

5,801 – 5,801 5,801

Target Company

2010

Within

1 year or

on demand

More than

1 year but

less than

2 years

Total

contractual

undiscounted

cash flow

Carrying

amount

$’000 $’000 $’000 $’000

Non-derivative financial

liability shareholder’s loan 11 – 11 11

(c) Currency risk

The directors of the Target Company consider that the Target Group’s exposure to foreign currencyexchange risk is insignificant as more than 90% of the Target Group’s financial assets and financial liabilitiesare denominated in RMB, the functional currency of the relevant group entities.

The directors consider that the sensitivity of the Target Group’s exposure towards the change in foreignexchange rates is minimal in view of the insignificant balances denominated in foreign currencies as at the endof the reporting period.


– II-24 –

(d) Capital management

The Target Group’s objectives when managing capital are to ensure that entities in the Target Group will

be able to continue as a going concern while maximising the return to shareholders through the optimisation

of the debt and equity balance. The management reviews the capital structure by considering the cost of capital

and risks associated with each class of capital. In view of this, the Target Group will balance its overall capital

structure through the payment of dividends, new share issues as well as the issue of new debt or the redemption

of existing debt as it sees fit and appropriate.

The Target Group monitors capital on the basis of the gearing ratio, which is calculated as total

borrowings divided by total equity as shown in the combined statement of financial position. The gearing ratio

as at 31 December 2010 was as follows:

Target Group

2010

Target Company

2010

HK$’000 HK$’000

Total borrowings 7,766 11

Total equity 182,269 11

Gearing ratio 0.04 1

Neither the Target Company nor any of its subsidiaries are subject to externally imposed capital

requirements.

20. ULTIMATE CONTROLLING PARTY

The directors regard Mr. Cheung Siu Lam through his direct shareholding in the Target Company as being the

ultimate controlling party. The Target Company does not have any parent company.

C. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by Target Group in respect of any

period subsequent to 31 December 2010

Yours faithfully,

CCIF CPA Limited

Certified Public Accountants

Hong Kong

Kwok Cheuk Yuen

Practising Certificate Number P02412


– II-25 –

2. MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

Set out below is the management discussion and analysis on the performance of the Target

Group during the period from 13 August 2010 (date of incorporation of Huaxia Xingye Co) to

31 December 2010.

Business review

Target Company is an investment holding company incorporated in BVI with limited

liability on 29 November 2010 for the sole purpose as the holding company of the Target

Group. During the period from 13 August 2010 (date of incorporation of Huaxia Xingye

Co) to 31 December 2010, the Target Group was principally engaged in the provision of

loan guarantee service in the PRC. During the period, the Target Group recorded revenue

of approximately HK$8.0 million derived from the provision of loan guarantee and

related financing services. The net profit attributable to the sole shareholder of the Target

Company during the period from 13 August 2010 to 31 December 2010 amounted to

HK$5.9 million, representing a net profit margin, calculated as net profit divided by

turnover, of approximately 73.2%.

Liquidity and financial resources

As at 31 December 2010, the Target Group maintained cash and bank balances of

approximately HK$78.3 million and accounts receivables of approximately HK$111.7

million due from a customer who is an Independent Third Party. All the accounts

receivables are due within 3 months and are classified as current assets. The balance of

shareholder’s loan due to the Vendor by the Target Group as at 31 December 2010

amounted to approximately HK$2.5 million. Under the Acquisition Agreement, any

amount owed by the Target Group to the Vendor upon Completion will become the Sales

Loan, the rights will be transferred to the Company upon Completion. The shareholder’s

loan is unsecured, interest-free and has no fixed terms of repayment. The Target Group’s

current assets and current liabilities as at 31 December 2010 were HK$190.0 million and

HK$7.8 million, respectively. Other than the shareholder’s loan, the Target Group had no

other borrowings as at 31 December 2010. The gearing ratio of the Target Group as at 31

December 2010 calculated as total debt divided by total asset was 1.3%.

Accounts receivables and advances provided to a customer

The balance of accounts receivable and advance to a customer as at 31 December

2010 of approximately HK$111.7 million represents a short term loan receivable and

related accrued loan interest receivable from a customer of the Target Group. The

customer is a property developer and is an Independent Third Party. The loan has been

settled in full on 14 January 2011. The loan was secured by an immovable property at the

value of approximately RMB670 million (equivalent to approximately HK$788 million).


– II-26 –

Capital structure

The capital structure of the Target Group as at 31 December 2010 was composed of

shareholder’s capital contribution, capital contribution from non-controlling interests and

retained profit generated during the period from 13 August 2010 to 31 December 2010.

The Target Group did not raise any debt financing during the period.

Capital commitment

As at 31 December 2010, the Target Group had no significant capital commitment.

Significant investments

Save as its interest in the entire equity interests of each of KP Financial Services

Limited and KP Financial Holdings Limited, there was no significant investment held by

the Target Group as at 31 December 2010.

Acquisition/disposal of subsidiary

Save as the interests in KP Financial Services Limited, KP Financial Holdings

Limited, Gangjia Huitong Co, Huifeng Rongjin Co and Huaxia Xingye Co, the Target

Group had no acquisition or disposal of subsidiary or associated company during the

period from 13 August 2010 to 31 December 2010.

Analysis of segmental information

No segment information was presented as the Target Group operated in one single

operating segment during the period from 13 August 2010 to 31 December 2010. The

Target Group’s revenue of approximately HK$8.0 million and net profit of approximately

HK$5.9 million were wholly derived from the provision of loan guarantee services and

related financing services. During the period from 13 August 2010 to 31 December 2010,

Huifeng Rongjin Co and Gangjia Huitong Co have not commenced business, and Huaxia

Xingye Co operated as a single business unit in provision of loan guarantee services and

related financing services during the period.

Please refer the section headed “Operation Flow” in the letter from the Board

contained in this circular for the operation flow of the Target Group.

Network on identifying potential customers

The Target Company relies on the business network of its senior management team

in identifying customers and expanding the Target Company’s business. The senior

management team has diverse background, with some of the members having worked

with banks, guarantee service companies and government bodies in the past. They have

extensive networks with property developers, banks, trusts and various associations in the


– II-27 –

loan/guarantee market. Details of the experience of the senior management team are set

out in the paragraph headed “Management experience” under the section headed

“Management of the Target Group” in the letter from the Board contained in this circular.

Employees and staff policy

As at 31 December 2010, the Target Group had two employees, who were based in

the head office in Beijing, the PRC. The remuneration policy and package of the Target

Group’s employees are periodically reviewed. More staff will be recruited in the coming

year to meet the expansion of the Target Group’s business. Apart from fixed salaries,

employees are entitled to social insurance. The Target Group did not operate any share

option scheme and no share option in respect of any share was granted during the period

from 13 August 2010 to 31 December 2010.

Charges on the assets

As at 31 December 2010, no assets of the Target Group were pledged.

Future plans for material investments or capital assets

As at 31 December 2010, the Target Group had no plans for material investments or

capital assets.

Foreign exchange exposure

The Target Group operates in the PRC and the majority of the Group’s revenues,

expenses and cashflows are denominated in Renminbi. Assets and liabilities of the Group

are mostly denominated in Renminbi. Hong Kong dollar is the Target Group’s

presentation currency. Any significant exchange rate fluctuations of Renminbi against

Hong Kong dollar may have financial impact on the Target Group.

Contingent liabilities

As at 31 December 2010, the Target Group had no material contingent liabilities.

Apart from intra-group liabilities, none of the companies in the Enlarged Group had

outstanding any bank overdrafts, loans or other similar indebtedness, mortgages, charges

or other material contingent liabilities.


– II-28 –

I. UNAUDITED PRO FORMA STATEMENT OF ASSETS AND LIABILITIES OF

THE ENLARGED GROUP

A. Introduction to the Unaudited Pro Forma Financial Information of the

Enlarged Group

The accompanying unaudited pro forma statement of assets and liabilities of the

Enlarged Group (the “Statement”) has been prepared to illustrate the effect of the

Acquisition, assuming the transaction had been completed as at 31 December 2010, might

have affected the financial position of the Group.

The Statement is prepared based on the audited consolidated statement of financial

position of the Group as at 31 December 2010 as extracted from the annual report of the

Company for the year ended 31 December 2010 and the audited statement of financial

position of Target Group as at 31 December 2010 as extracted from the Accountants’

Report set out in Appendix II to this circular after making certain pro forma adjustments

resulting from the Acquisition.

The Statement is prepared based on a number of assumptions, estimates,

uncertainties and currently available information, and is provided for illustrative purposes

only. Accordingly, as a result of the nature of the Statement, it may not give a true picture

of the actual financial position of the Enlarged Group that would have been attained had

the Acquisition actually occurred on 31 December 2010. Furthermore, the Statement does

not purport to predict the Enlarged Group’s future financial position.

The Statement should be read in conjunction with the financial information of the

Group as set out in Appendix I to this circular, the financial information of the Target

Group as set out in Appendix II to this circular and other financial information included

elsewhere in this circular.

APPENDIX III UNAUDITED PRO FORMA FINANCIALINFORMATION OF THE ENLARGED GROUP

– III-1 –

B. Unaudited Pro Forma Consolidated Statement of Financial Position of the

Enlarged Group

The Group

as at 31

December

2010

Target Group

as at 31

December

2010 Subtotal

Pro forma

adjustments

Pro forma

Enlarged

Group

HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000

(audited) (audited) (unaudited) (unaudited)

(Note 1) (Note 2)

Non-current assets

Property, plant and

equipment 3,624 13 3,637 – 3,637

Investment property 73,959 – 73,959 – 73,959

Goodwill – – – 432,846 2(d) 432,846

Intangible assets 403 – 403 – 403

Available-for-sale

investments 48,495 – 48,495 – 48,495

126,481 13 126,494 432,846 559,340

Current assets

Accounts receivable 1,143 – 1,143 – 1,143

Short term loans

receivables 186,209 111,720 297,929 – 297,929

Financial assets at fair

value through profit or

loss 35,558 – 35,558 – 35,558

Inventories 35,581 – 35,581 – 35,581

Prepayments, deposits

and other receivables 160,814 – 160,814 – 160,814

Cash and cash

equivalents 339,954 78,302 418,256

(100,000)

(2,500)

2(c)

2(f) 315,756

759,259 190,022 949,281 (102,500) 846,781


– III-2 –

The Group

as at 31

December

2010

Target Group

as at 31

December

2010 Subtotal

Pro forma

adjustments

Pro forma

Enlarged

Group

HK$’000 HK$’000 HK$’000 HK$’000 Notes HK$’000

(audited) (audited) (unaudited) (unaudited)

(Note 1) (Note 2)

Current liabilities

Accounts payables 54,365 – 54,365 – 54,365

Other payables, deposits

received and accruals 9,440 3,276 12,716 – 12,716

Short term bank loans 25,803 – 25,803 – 25,803

Shareholder’s loan – 2,525 2,525 (2,525) 2(d) –

Tax payable 1,510 1,965 3,475 – 3,475

91,118 7,766 98,884 (2,525) 96,359

Net current assets 668,141 182,256 850,397 (99,975) 750,422

Total assets less current

liabilities 794,622 182,269 976,891 332,871 1,309,762


Long term bank loans 16,277 – 16,277 – 16,277

Deferred tax liabilities 4,203 – 4,203 – 4,203

20,480 – 20,480 – 20,480

NET ASSETS 774,142 182,269 956,411 332,871 1,289,282

Capital and reserve

Share capital 174,600 – 174,600 125,000 2(b) 299,600

Reserves 591,229 164,629 755,858 (164,629)

375,000

(2,500)

2(e)

2(b)

2(f)

963,729

Total equity attributable

to owners of the

Company 765,829 164,629 930,458 332,871 1,263,329

Non-controlling interests 8,313 17,640 25,953 – 25,953

TOTAL EQUITY 774,142 182,269 956,411 332,871 1,289,282


– III-3 –

Notes:

1. The audited consolidated statement of financial position of the Group is extracted from thepublished annual reports for the year ended 31 December 2010.

2. The figures of the Target Group at 31 December 2010 are extracted from the Accountants’ reportset out in Appendix II to this circular.

(a) The consideration for the Acquisition of HK$600,000,000 is to be satisfied by:

HK$’000

Issuance of new shares (the “Consideration Shares”) 500,000Cash consideration 100,000

600,000

(b) The adjustment represents the issuance of 1,250,000,000 new shares, at an issue price ofHK$0.40 each. Upon completion, the issue of new shares will increase the Company’sshare capital by approximately HK$125,000,000 and share premium by HK$375,000,000.

(c) The adjustment represents cash consideration of HK$100,000,000 assumed to be settled infull and to be financed by the Group’s internal resources.

(d) Being adjustment for recognition of goodwill of approximately HK$432,846,000 arisingon the Acquisition. Under Hong Kong Financial Reporting Standard 3 “BusinessCombinations” issued by the Hong Kong Institute of Certified Public Accounts(“HKICPA”), the Group will apply the purchase method to account for the acquisition ofthe Target Group in the consolidated financial statements of the Group. Goodwill ofapproximately HK$432,846,000 was determined assuming that the fair values ofidentifiable assets and liabilities of the Target Group, amounting to approximatelyHK$164,629,000 less shareholder’s loan of approximately HK$2,525,000. For the purposeof compiling this unaudited pro forma consolidated statement of financial position, theaudited net asset value of the Target Group as at 31 December 2010 is assumed to be thefair value of the identifiable net assets. The goodwill is stated at cost less accumulatedimpairment loss.

No impairment is recognized as at 31 December 2010 as the directors of the Companyestimate that the recoverable amount of the Target Group (being considered as a singlecash-generating unit to which the goodwill has been allocated) is higher than the carryingamount of the unit including goodwill in accordance with Hong Kong Accounting Standard36 “Impairment of Assets” issued by the Hong Kong Institute of Certified PublicAccountants.

On completion, the fair value of the net Consideration and the net identifiable assets andliabilities of the Target Group will have to be reassessed. As a result of the reassessment,the amount of goodwill may be different from that estimated based on the basis statedabove for the purpose of preparation of the unaudited pro forma financial position.Accordingly, the actual goodwill at the date of completion may be different from thatpresented above. Whenever it is found that the carrying amount of the Target Groupexceeds its recoverable amount, impairment loss is recognised in profit or loss. Suchimpairment loss shall be allocated first to reduce the carrying amount of the goodwillarising from the Acquisition of the Target Group and then to reduce the carrying amountof the other assets in the Target Group on a pro rata basis.


– III-4 –

The goodwill arising on the Acquisition is calculated as follows:

HK$’000

Consideration Shares 500,000Cash consideration 100,000

Total cost of Acquisition 600,000Less: Share of net assets of the Target Group attributable to

owners of the Target Group as at 31 December 2010 (164,629)Repayment of Shareholder’s loan (2,525)

Goodwill arising on Acquisition 432,846

(e) The adjustment represents the elimination of paid-in capital and pre-acquisition reserves ofTarget Group as at 31 December 2010, amounting to HK$8 and HK$164,629,000respectively.

(f) The adjustment represents the payment of cost directly attributable to the Acquisitiontotalled approximately HK$2,500,000, deemed had been paid on 31 December 2010.


– III-5 –

II. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL

INFORMATION OF THE ENLARGED GROUP

The following is the text of a report from CCIF CPA Limited, the independent reporting

accountants, in respect of the Unaudited Pro Forma Financial Information of the Enlarged

Group as set out in this Appendix and prepared for the sole purpose of inclusion in this circular.

Accountants’ report on the Unaudited Pro Forma Financial Information to the

directors of K.P.I. Company Limited

We report on the unaudited pro forma consolidated statement of financial position of the

Enlarged Group (as defined in the Circular) (the “Unaudited Pro Forma Financial

Information”) of K.P.I. Company Limited (the “Company”) and its subsidiaries (hereinafter

collectively referred to as the “Group”), which has been prepared by the directors of the

Company (“Directors”) for illustrative purposes only, to provide information about how the

proposed acquisition of the entire equity interest in K.P. Financial Group Limited and its

subsidiaries (the “Major Transaction”), might have affected the financial information

presented, for inclusion in Section I of Appendix II (“Unaudited Pro Forma Financial

Information on the Enlarged Group”) to the circular of the Company dated 29 April 2011 (the

“Circular”). The basis of preparation of the Unaudited Pro Forma Financial Information is also

set out in Section I of Appendix II to the Circular.

Respective responsibilities of Directors of the Company and reporting accountants

It is the responsibility solely of the Directors of the Company to prepare the Unaudited

Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the

Listing of Securities of The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and

with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for

Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public

Accountants.

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing

Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We

do not accept any responsibility for any reports previously given by us on any financial

information used in the compilation of the Unaudited Pro Forma Financial Information beyond

that owed to those to whom those reports were addressed by us at the dates of their issue.

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment

Circular Reporting Engagement (HKSIR) 300 “Accountants’ Reports on Pro Forma Financial

Information in Investment Circulars” issued by the Hong Kong Institute of Certified Public

Accountants. Our work consisted primarily of comparing the unaudited financial information

with source documents, considering the evidence supporting the adjustments and discussing

the Unaudited Pro Forma Financial Information with the Directors of the Company. This

engagement did not involve independent examination of any of the underlying financial

information.


– III-6 –

We planned and performed our work so as to obtain the information and explanations we

considered necessary in order to provide us with sufficient evidence to give reasonable

assurance that the Unaudited Pro Forma Financial Information has been properly compiled by

the Directors of the Company on the basis stated, that such basis is consistent with the

accounting policies of the Group and that the adjustments are appropriate for the purposes of

the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) to

the Listing Rules,

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based

on the judgements and assumptions of the Directors of the Company, and, because of its

hypothetical nature, does not provide any assurance or indication that any event will take place

in the future and may not be indicative of the financial position of the Enlarged Group as at

31 December 2010 or at any future dates.

Opinion

In our opinion:

(a) the unaudited pro forma financial information has been properly compiled by the

Directors of the Company on the basis stated;

(b) such basis is consistent with the accounting policies of the Group; and

(c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma

Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing

Rules.

CCIF CPA Limited


Hong Kong

Kwok Cheuk Yuen



– III-7 –

Set out below are the texts of the reports from CCIF CPA Limited, the auditors of the

Group, and Ample Capital Limited, the financial adviser to the Company, in connection with

the 2011 Profit Guarantee, for the purpose of inclusion in this circular.

1. REPORT FROM CCIF CPA LIMITED

29 April 2011

The Directors


Dear Sirs

K.P. Financial Group Limited (the “Target Company”)

and its subsidiaries (the “Target Group”)

We have reviewed the accounting policies adopted and calculations made in arriving at

the forecast of the consolidated net profit after taxation (excluding non-controlling interest) of

the Target Group for the year ending 31 December 2011 (“the Profit Forecast”), for which the

vendor, Mr Cheung Siu Lam (the “Vendor”) and the directors of the Target Company are solely

responsible, and based on which the Vendor provides irrevocable guarantees and warrants to

the purchaser of the Target Company, as detailed in the section headed “Profit guarantee” in

the Letter from the Board of the circular of the Company to the shareholders dated 29 April

2011 (the “Circular”).

The Profit Forecast has been prepared by the Vendor and the directors of the Target

Company based on the unaudited consolidated results of the Target Group for the period ended

27 January 2011 and a forecast of the consolidated results of the Target Group for the

remaining period ending 31 December 2011.

In our opinion, so far as the accounting policies and calculations are concerned, the Profit

Forecast has been properly compiled in accordance with the assumptions made by the Vendor

and the directors of the Target Company as set out in the section headed “Profit guarantee” of

the Circular and is presented on a basis consistent in all material respects with the accounting

policies adopted by the Target Group.

CCIF CPA Limited


Hong Kong

Kwok Cheuk Yuen


APPENDIX IV REPORTS ON THE 2011 PROFIT GUARANTEE

– IV-1 –

2. REPORT FROM AMPLE CAPITAL LIMITED

29 April 2011

The Board of Directors

K.P.I. Company limited

Suite 5606, 56th Floor

Central Plaza, 18 Harbour Road

Wanchai, Hong Kong

Dear Sirs,

We refer to the 2011 Profit Guarantee in connection with the Acquisition, in which the

Vendor provides irrevocable guarantees and warrants to the Purchaser, as detailed in the section

headed “Profit guarantee” of the circular of the Company to the Shareholders dated 29 April

2011 (the “Circular”). We note that the 2011 Profit Guarantee was prepared by the Vendor and

directors of the Target Company and constitutes a profit forecast under Rule 10 of the

Takeovers Code. Details of the 2011 Profit Guarantee are set out in the Circular. Terms used

in this letter shall have the same meanings as defined in the Circular unless the context requires

otherwise.

We have discussed with the Vendor and directors of the Target Company the bases and

assumptions adopted in preparing the 2011 Profit Guarantee. We have also discussed with

CCIF CPA Limited (“CCIF”), the auditors of the Company, the results of their review of the

2011 Profit Guarantee. CCIF has confirmed that, so far as the accounting policies and

calculations are concerned, the 2011 Profit Guarantee has been properly compiled in

accordance with the assumptions made by the Vendor and directors of the Target Company as

set out in the paragraph headed “Profit guarantee” of the Circular and is presented on a basis

consistent in all material respects with the accounting policies adopted by the Target Group.

On the bases and assumptions on which the 2011 Profit Guarantee has been prepared by

the Vendor and directors of the Target Company and on the basis of the review performed by

CCIF, we are of the opinion that the 2011 Profit Guarantee, for which the Vendor and directors

of the Target Company are solely responsible, has been made with due care and consideration.


Ample Capital Limited

H. W. Tang

President

APPENDIX IV REPORTS ON THE 2011 PROFIT GUARANTEE

– IV-2 –

1. LETTER FROM AMPLE CAPITAL LIMITED

29 April 2011


K.P.I. Company limited


Central Plaza, 18 Harbour Road

Wanchai, Hong Kong

Dear Sirs,

We refer to the circular dated 29 April 2011 in relation to the Acquisition and the

Whitewash Waiver (the “Circular”). Unless otherwise defined or if the context otherwise

requires, all terms defined in the Circular shall have the same meaning when used in this letter.

This letter constitutes a report pursuant to Rule 11.1(b) of the Takeovers Code and sets

out our assessment and review of the qualifications and experience of Greater China Appraisal

Limited, the independent valuer of the Company (the “Independent Valuer”) in respect of the

Acquisition whose reports are set out in this Circular. We hereby confirm that (i) we have

undertaken reasonable checks to assess the relevant experience and expertise of the

Independent Valuer and to satisfy ourselves that reliance could fairly be placed on their work;

(ii) we have reviewed and discussed with the Company and the Independent Valuer the

qualifications, bases and assumptions adopted by the Independent Valuer, in the course of their

work, and have satisfied ourselves that the Independent Valuer is suitably qualified and

experienced with sufficient current knowledge, skills and understanding necessary to undertake

the valuation of the Target Group competently, that the qualifications, bases and assumptions

have been made with due care and objectivity, and on a reasonable basis.


Ample Capital Limited

H. W. Tang

President

APPENDIX V INDEPENDENT VALUATION REPORT

– V-1 –

2. LETTER FROM GREATER CHINA APPRAISAL LIMITED

The following is the text of a letter, summary of value and valuation certificate, prepared

for the purpose of incorporation in this circular received from Greater China Appraisal

Limited, an independent valuer, in connection with its valuation as at 11 March 2011 of the

equity interest of the Target Group.

Room 2703-08

Shui On Centre

6-8 Harbour Road

Wanchai, Hong Kong

29 April 2011




Central Plaza

18 Harbour Road

Wanchai, Hong Kong

Dear Sirs/Madams,

Re: Valuation of 100% Equity Interest of K.P. Financial Group Limited and its

subsidiaries

At the request of K.P.I. Company Limited (the “Company”), we were engaged to assist

you in the valuation analysis on 100% equity interest (the “Equity Interest”) of K.P. Financial

Group Limited and its subsidiaries (collectively referred to as the “Target Group”) as of 11

March 2011 (the “Valuation Date”).

It is our understanding that our analysis will be used by the management of the Company

as investment purpose only, details of which are set out in the circular dated 29 April 2011

issued by the Company to the shareholders (the “Circular”), of which this valuation report

forms part. Unless otherwise stated, terms used in this valuation report have the same meanings

as those defined in the Circular. Our analysis was conducted for the above mentioned purpose

only and this report should be used for no other purposes. The standard of value is fair value.

The approaches and methodologies used in our work did not comprise an examination in

accordance with generally accepted accounting principles, the objective of which is an

expression of an opinion regarding the fair presentation of financial statements or other

financial information, whether historical or prospective, presented in accordance with

generally accepted accounting principles.


– V-2 –

We express no opinion and accept no responsibility for the accuracy and completeness of

the financial information or other data provided to us by others. We assume that the financial

and other information provided to us is accurate and complete, and we have relied upon this

information in performing our valuation.

PURPOSE OF ENGAGEMENT

As aforementioned, the purpose of this particular engagement is to assist the management

of the Company in determining fair value of the Equity Interest as of the Valuation Date for

investment purpose.

The premise of value is Going Concern, defined as:

“an ongoing and operating business enterprise”.

Going Concern value is defined as:

“the value of a business enterprise that is expected to operate into the future. The

intangible elements of Going Concern Value result from factors such as having a trained

workforce, an operational plant, and the necessary licenses, systems, and procedures in

place”.

BASIS OF VALUATION

We have valued the Equity Interest on the basis of fair value.

Fair Value

According to Hong Kong Financial Reporting Standards, fair value is the amount for

which an asset could be exchanged, or a fair value liability settled, between knowledgeable and

willing parties in an arm’s length transaction.

For the purpose of this valuation, the term fair value is similar and/or interchangeable

with the valuation standards or definitions below and will be used throughout this valuation

report.

Market Value

According to The Hong Kong Business Valuation Forum – Business Valuation Standards,

market value is defined as the estimated amount for which an asset (a property) should

exchange on the date of valuation between a willing buyer and willing seller in an arm’s length

transaction after proper marketing wherein the parties had each acted knowledgeably,

prudently, and without compulsion.


– V-3 –

Fair Market Value

The International Valuation Glossary defines fair market value as the amount at which

property would change hands between a willing buyer and a willing seller, when the former is

not under any compulsion to buy and the latter is not under any compulsion to sell, both parties

having reasonable knowledge of relevant facts.

Our valuation has been prepared in accordance with the HKIS Valuation Standards on

Trade-related Business Assets and Business Enterprise (First Edition 2004) published by the

Hong Kong Institute of Surveyors and the Business Valuation Standards (First Printed 2005)

published by the Hong Kong Business Valuation Forum. Both are generally accepted valuation

standards followed by relevant professional practitioners in Hong Kong. These standards

contain detailed guidelines on the basis and valuation approaches in valuing assets used in the

operation of a trade or business and business enterprises.

LEVELS OF VALUE

Although valuation is a range concept, current valuation theory suggests that there are

three basic “levels” of value applicable to a business or business interest. The levels of value

are respectively:

– Controlling interest: the value of the enterprise as a whole, also known as

enterprise value

– As if freely tradable minority interest: the value of a minority interest, lacking

control, but enjoying the benefit of market liquidity

– Non-marketable minority interest: the value of a minority interest, lacking both

control and market liquidity

This valuation is prepared on a controlling interest basis.

PREMISE OF VALUE

Premise of value relates to the concept of valuing a subject in the manner in which it

would generate the greatest return to the owner of the property, taking into account what is

physically possible, financially feasible, and legal. Premises of value include the following:

• Going concern: appropriate when the business is expected to continue operating

without the intention or threat of liquidation in the foreseeable future;

• Orderly liquidation: appropriate for a business that is clearly going to cease

operations in the near future and is allowed sufficient time to sell its assets in the

open market;


– V-4 –

• Forced liquidation: appropriate when time or other constraints do not allow an

orderly liquidation;

• Assembled group of assets: appropriate when all assets of a business are sold in the

market piecemeal instead of the entire business itself.

This valuation of the Equity Interest is prepared on a going concern basis.

SCOPE OF SERVICES

We were engaged by the management of the Company to assist in their estimate of the fair

value of the Equity Interest as of the Valuation Date.

• We understand that the Company will use our analysis solely for investment purpose

only;

• Our analysis and conclusion of opinion of value of the Equity Interest was based on

our discussions with the management of the Company, as well as a review of recent

announcement and company records, including:

• The Company’s Announcement dated 7 March 2011;

• The legal opinion of the PRC legal Advisor; and

• The Target Group’s background information.

We also relied upon publicly available information from sources on capital markets,

including industry reports, and various databases of publicly traded companies and news.

TRANSACTION OVERVIEWS

K.P. Financial Group Limited and its subsidiaries (the “Target Group”)

K.P. Financial Group Limited is a company incorporated in the BVI with limited liability

on 29 November 2010. It is an investment holding company whose principal assets are the

beneficial interest in the entire equity interests of each of KP Financial Services Limited and

KP Financial Holdings Limited. The Target Group provides distinct services of small loans,

loan guarantee, entrusted loans and consultancy services respectively under their permitted

business scopes to meet the financing needs of customers. The Target Group usually seeks

security from the customers either by way of collateral of assets, personal guarantee and/or

surety as indemnity for any potential loss, in all of the small loan, loan guarantee and entrusted

loan business.


– V-5 –

The Target Group structure as shown in the Company’s Announcement as of 7 March

2011:

K.P. Financial Group

Limited

KP Financial Services

Limited

KP Financial

Holdings Limited

Beijing Gangjia Huitong

Management Consultancy

Company Limited

Beijing Huifeng Rongjin

Credit Finance

Company Limited

Beijing Huaxia Xingye

Investment Guarantee

Company Limited

100% 100%

100%

70% 100%

Through Huaxia Xingye

Control Agreements before Completion

Through Huifeng Rongjin

Control Agreements

K.P.I. Company Limited (the “Company”)

The Company is listed on the main board of the Stock Exchange of Hong Kong Limited

(HKSE: 605). The Company and its subsidiaries have launched the provisions of short term

pawn loan in the PRC since August 2009.

More resources will be deployed in this new business as the profitability level is very

attractive. This short term pawn loan business has achieved a higher gross profit margin than

the retail businesses of the Company for the six months ended 30 June 2010.

With a view to reformulating the business strategy and devoting more time and resources

to strengthen its market leadership in its convenience store business and financial service

business in Beijing, it has discontinued its retail business in Shanghai in August 2010.

Profit Guarantee

Mr. Cheung Siu Lam (the “Vendor”) irrevocably guarantees that the 2011 audited net

profit after taxation (excluding non-controlling interest) of the Target Group for the year

ending 31 December 2011 (the “Guarantee Period”) shall not be less than HK$80 million (the

“2011 Profit Guarantee”).


– V-6 –

In the event that the 2011 audited net profit after taxation (excluding non-controlling

interest) of the Target Group is less than the 2011 Profit Guarantee, the Vendor shall

compensate to the K.P.B. Group Holding Limited, a wholly-owned subsidiary of the Company

(the “Purchaser”) an amount equivalent to 5.5 times of the shortfall in cash. The maximum

amount of compensation under the 2011 Profit Guarantee is HK$440,000,000.

ECONOMIC OVERVIEW

The PRC is the world’s second largest economy in nominal and PPP terms1 after United

States. Boosted by the China Renminbi (RMB) 4 trillion government stimulus plan announced

in late 2008, together with the cumulative effects of fiscal and monetary easing, China has

shifted its economy driver from exports towards domestic consumption and made the most

impressive recovery from the global financial crisis among all major economies.

In 2010, China’s economic growth was sustained by the economic stimulus while the

European and north American economies were slowing. The stimulus provided funds for

further infrastructure projects and housing developments; some were used to assist local

government to lend money to state-owned companies for housing estates, road and bridges

developments. According to IMF’s World Economic Outlook as of October 2010, China’s

economy has just taken over Japan in mid 2010 and become the second largest in the world

after United States. It should not be to anyone’s surprise that if China can sustain its current

growth rate, it could become the world’s largest economic (by nominal GDP) sometime as

early as 20202.

Country GDP (Billions of US$)

2008A 2009A 2010F 2011F 2012F 2013F 2014F

1 United States 14,369 14,119 14,624 15,157 15,825 16,526 17,268

2 China 4,520 4,985 5,745 6,422 7,170 8,001 8,936

3 Japan 4,887 5,069 5,391 5,683 5,878 6,081 6,302

4 Germany 3,652 3,339 3,306 3,358 3,454 3,547 3,641

5 Canada 1,499 1,336 1,564 1,633 1,701 1,762 1,823

6 India 1,261 1,237 1,430 1,598 1,762 1,955 2,174

Source: World Economic Outlook of October 2010, International Monetary Fund

1 International Monetary Fund, World Economic Outlook Database, October 2010: Nominal GDP list of

countries.

2 Adam, Shamim (14 November 2010). “China to Exceed U.S. by 2020, Standard Chartered Says”. Bloomberg

Businessweek


– V-7 –

China recorded an impressive GDP growth of 9.2% (revised) in 2009 and 10.3% in 20103.

In the early 2010, with economies worldwide starting to settle down from the global financial

crisis, GDP growth increased by 11.9% in the first quarter, supported both by domestic demand

and a recovery in exports. In subsequent quarters of 2010, GDP grew by 10.3%, 9.6% and 9.8%

respectively, resulting in an average growth of 10.3% for 2010. China continues to exhibit

strong momentum in its economic growth, particularly in the areas of investment in

infrastructures and domestic consumption.

Major Economic Indicators 2009 2010

Value Growth (%) Value Growth (%)

Area (sq km, mn) 9.6 9.6

Population (mn) 1,334.7 1,334.7

Gross Domestic Product (RMB Billions)e 34,090.3 9.2a 39,798.3 10.3a

Urban Per Capita Disposable Income

(RMB) 17,175.0 9.8a 19,109 7.8a

Rural Per Capita Disposable Income

(RMB) 5,153.0 8.5a 5,919 10.9a

Fixed Assets Investmentb (RMB Billions) 19,413.9 30.5 24,141.5 24.5

Added-Value of Industrial Outputc

(RMB Billions) 11.0a 15.7a

Consumer Goods Retail Sales

(RMB Billions) 13,267.8 15.5 15,455.4 18.4

Consumer Price Index -0.7 3.3

Urban Unemployment Rate (%) 4.3 4.2d

Exports (US$ Billions) 1,201.7 -16.0 1,577.9 31.3

Imports (US$ Billions) 1,005.6 -11.2 1,394.8 38.7

Trade Surplus (US$ Billions) +196.0 +183.1

Utilised Foreign Direct Investment

(US$ Billions) 90.0 -2.6 105.7 17.4

Foreign Currency Reserves (US$ Billions) 2,399.2 23.3 2,847.3 18.7

Note:

a Real growth

b Urban investments in fixed assets

c All state-owned and other types of enterprises with annual sales over RMB 5 million

d As of June 2010

e Current prices

Sources: The National Bureau of Statistics, Ministry of Commerce, and General Administration of Customs

3 Hong Kong Trade Development Council (HKTDC), Market Profile on Chinese Mainland, Issue 20 January

2011


– V-8 –

Even though the latest economic figures have indicated that there is a slight slowdown in

GDP growth rate in the third and fourth quarters of 2010, the economy growth was still far

higher than most of other economies in the world and an appropriate slowdown of the growth

rate, in fact, is believed to benefit China economy’s long term sustainable development as it

will prevent the economy from growing too fast to being overheated.

Riding on the momentum of its robust economic growth, the Chinese government has

begun to plan for exiting the stimulus monetary policies with a focus on structural economic

and social issues, and expected to phase out its economic stimulus gradually in 2011.

Despite these possible tightening measures, the Chinese government will continue its

“proactive fiscal policy and moderately easing monetary policy” to maintain a healthy

economic growth in longer term. The real GDP is expected to expand 9.6% in 2011 and 9.5%

in 2012, driven by domestic demand.

There are still many challenges and uncertainties for the Chinese government to deal with

in order to ensure a speedy economic recovery without the creation of excessive liquidity in

the financial system, which will then lead to excessive asset inflation in both the stock and

property markets. While the stimulus on infrastructure and housing developments will drive

both drive employment in areas of manufacturing, steel, cement and other sectors of the

economy4, there is also a risk of the stimulus generating inflation and a property bubble5.

Managing inflation risk is a key issue in 2010. The consumer price index (CPI) dropped

slightly by 0.7% in 2009 while food prices have started to accelerate since August 2009. In

December 2010, food prices increased by 9.6% and non-food prices increased by 2.1%,

resulting in a 4.6% increase in overall CPI. In 2010, CPI increased by 3.3% on average and

4 China’s Looming Real-Estate Bubble; A massive Keynesian spending program has misallocated capital and set

the stage for a crisis. Wall Street Journal (Online) serial online. August 20, 2010. Available from:

ABI/INFORM Global. Accessed September 6, 2010, Document ID: 2115639161

5 Shikha Dalmia, Anthony Randazzo. China’s Looming Real-Estate Bubble. Wall Street Journal (Eastern

Edition).


– V-9 –

forecasted to increase by 2.7% in 2011 according to IMF World Economic Outlook, January

2011. Due to the success of the economic stimulus plan and the fear of property bubbles and

inflation risk, the central government has tightened regulation in the financial system on banks

to curb lending6, and a series of fine tuning measures such as stricter restrictions on mortgage

lending, tighter requirement for second and third home purchases, introduction of property tax

and further increment of bank’s reserve requirement ratio were implemented.

Economic Indicators 2008 2009 2010 2011 2012 2013

Actual Actual Forecast Forecast Forecast Forecast

Real GDP (RMB Billions)a 11,723 12,789 14,126 15,481 16,957 18,567

Real GDP growth (%)a 9.6 9.1 10.3b 9.6c 9.5c 9.5

Consumer price

inflation (%) 5.9 –0.7 3.5 2.7c 2.0 2.0

Unemployment (%) 4.2 4.3 4.1 4.0 4.0 4.0

Population (Millions) 1,328 1,335 1,341 1,348 1,355 1,362

Current account balance

(US$ Billions) 436 297 270 325 394 494

Note:

a Constant price

b Actuals from IMF World Economic Outlook, January 2011

c Forecasts from IMF World Economic Outlook, January 2011

Source: IMF World Economic Outlook, October 2010

Besides, as the global demand recovers and external exports grow, the Chinese

government will face increasing pressure from its trading partners, who demand the RMB to

be appreciated. Beginning from 21 July 2005, China reformed the RMB exchange rate regime

by moving into a managed floating exchange rate system with reference to a basket of

currencies, and the exchange rate of RMB was re-valued to 8.11 per US dollar on 21 July 2005.

Effective 21 May 2007, the floating band of RMB against the US dollar is enlarged from 0.3%

to 0.5% around the central parity published by the People’s Bank of China on each working

day. By the end of December 2010, the exchange rate of RMB was 6.5911 per US dollar

compared to 6.7813 at the end of June. Under tremendous pressure from various nations around

the world, the IMF has forecasted that the Chinese government will allow RMB to rise

moderately in 2011.

6 China’s Banks Face Hangover as Lending Slows. Wall Street Journal (Online). 26 August 2010


– V-10 –

Economic Indicators 2008 2009 2010 2011

Actual Actual Forecast Forecast

Real GDP growth (%) 9.0 8.7 9.5 8.8

Consumer price inflation (%) 5.9 –0.7 2.7 2.4

Current-account balance (% GDP) 9.6 6.1 4.2 3.5

Commercial bank prime rate (%) 5.31 5.31 5.25 5.75

Exchange rate RMB:US$ (average) 6.95 6.83 6.55 6.30

Source: National Bureau of Statistics of China and Bloomberg

VALUATION METHODOLOGIES

The valuation of any asset or business can be broadly classified into one of three

approaches, namely asset approach, market approach and income approach. In any valuation

analysis, all three approaches must be considered, and the approach or approaches deemed

most relevant will then be selected for use in the fair value analysis of that asset.

Asset Approach

This is a general way of determining a fair value indication of a business, business

ownership interest, security, or intangible asset by using one or more methods based on the

value of the assets net of liabilities.

Value is established based on the cost of reproducing or replacing the property, less

depreciation from physical deterioration and functional and economic obsolescence, if present

and measurable.

We have considered but rejected the asset approach for this valuation due to:

• The value of the Equity Interest is determined by the ability to generate a stream of

benefits in future, rather than the cost of replacement.

Income Approach


ownership interest, security, or intangible asset by using one or more methods that convert

anticipated benefits into a present value amount.

In the income approach, an economic benefit stream of the asset under analysis is

selected, usually based on historical and/or forecasted cash flow. The focus is to determine a

benefit stream that is reasonably reflective of the asset’s most likely future benefit stream. This

selected benefit stream is then discounted to present value with an appropriate risk-adjusted

discount rate. Discount rate factors often include general market rates of return at the Valuation

Date, business risks associated with the industry in which the company operates, and other

risks specific to the asset being valued.


– V-11 –

We have considered but rejected the income approach for this valuation because:

• The Target Group’s business has only operated for several months. It is very difficult

to support the long term projection with a short period of operation history; and

• New business usually has significant expansion in the first few years. It would be

difficult to forecast the financial performance reliably at this early stage.

Market Approach


ownership interest, security, or intangible asset by using one or more methods that compare the

subject to similar businesses, business ownership interests, securities, or intangible assets that

have been sold.

Value is established based on the principle of substitution. This simply means that if one

thing is similar to another and could be used for the other, then they must be equal.

Furthermore, the price of two alike and similar items should approximate one another.

We have considered and accepted the market approach for this valuation due to the

following reasons:

• Sufficient number of comparable public companies is available to facilitate a

meaningful comparison; and

• The announced profit guarantee provides a good reference point to start the

valuation.

Guideline Public Company Method

The premise behind the Guideline Public Company Method is that prices of publicly

traded stocks in the same or a similar industry provide objective evidence as to values at which

investors are willing to buy and sell interest of companies in that industry.

In applying the Guideline Public Company Method, we compute a valuation multiple for

various benefit streams for each guideline public company. The appropriate valuation multiple

is determined and adjusted for the unique aspects of the subject company being valued. This

multiple is then applied to the subject company being valued to arrive at an estimate of value

for the appropriate ownership interest. Since the purpose of the valuation is to determine a

controlling interest of the Target Group, the valuation multiple is based on Equity Value.

A valuation multiple represents a ratio that uses a comparative company’s market value

on the Valuation Date as the numerator and a measure of the company’s operating results (or

financial position) as the denominator. In this valuation, the most preferable valuation multiple

for valuing equity value is Price-to-Earnings multiple (“P/E”). The P/E is an appropriate

valuation multiple for the valuation of the Target Group because it measures the amount an

investor, or a shareholder, is paying for a given amount of earnings.


– V-12 –

Once we have selected a number of guideline public companies and make the necessary

adjustments to their financial information, the next step is to determine and compute the

appropriate valuation multiples, and the calculation method is the same for all selected

comparable companies. The process of computing the valuation multiple in this case consists

of the following procedures:

1. Determination of the equity value for each comparative company as of the Valuation

Date. The equity value for each comparative company, which is the market

capitalization, is computed by multiplying their share prices to the number of shares

outstanding as of the Valuation Date.

2. Determination of the measure of operating results – Earnings for the appropriate

time period. This measure of operating results represents the denominator of the

multiple.

The application of this method depends on the selection of publicly traded guideline

companies that are similar enough to the underlying business so as to provide a meaningful

comparison. We exercised due care in the selection of guideline public companies by using

reasonable criteria in deciding whether or not a particular guideline public company is relevant.

When difference is so large such that meaningful comparison cannot be made, we would then

question the use of this method.

The following is the list of guideline public companies that we have reviewed in

connection with the Target Group:

Company Ticker

Market

Capitalization Location Description7

(in millions)

Aeon Credit

Service Asia

Co Ltd

900 HK HK$2,763.85 Hong Kong • Provides a range of

consumer credit

finance services

which include the

issuance of credit

cards, vehicle

financing, hire

purchase financing,

and personal loan

financing.

7 Bloomberg data


– V-13 –

Company Ticker

Market


(in millions)

Credit China

Holdings Ltd

8207 HK RMB1,723.65 Hong Kong • It is a short-term

financing service

provider in

Shanghai.

• Focus in offering

financing

consultancy services

and short-term real

estate pawn loans

and entrusted loans

to SMEs and

individuals.

Goldbond Group

Holdings Ltd

172 HK HK$1,076.62 Hong Kong • Provides a wide

range of financial

services.

• Develops and

invests in properties.

J Trust Co Ltd 8508 JP JPY14,242.77 Japan • Provides financial

services to small to

medium-sized firms

and individuals.

• Services includes

non-collateral loan

on promissory notes,

small-lot and short-

term loans,

commissions, and

bill discount.

7 Bloomberg data


– V-14 –

Company Ticker

Market


(in millions)

Jaccs Co Ltd 8584 JP JPY45,953.70 Japan • It is a consumer

credit company.

• Provides consumer

installment credits,

credit cards, loan

guarantees and

loans.

• Operates car lease

and art rental

businesses and have

subsidiaries in U.S.,

Singapore, and

Hong Kong.

eGuarantee Inc 8771 JP JPY5,755.55 Japan • Offers guarantee

services for

accounts and note

receivables arising

from business and

financial service

transactions.

• Provides consulting

services for credit

risk and credit

management.

UCS Co Ltd 8787 JP JPY6,733.16 Japan • Financial services

include loans, credit

cards, and leases.

7 Bloomberg data


– V-15 –

Company Ticker

Market


(in millions)

IFS Capital Ltd IFS SP SG$75.19 Singapore • Provides loans and

advances to

companies for use

as short-term

working capital and

for the purchase of

fixed assets.

• Provides financial

services consultants

and advisers,

insurance and

guarantee business,

as well as venture

capital investment.

Sing Investments

& Finance Ltd

SIF SP SG$175.49 Singapore • Provides loans and

credit services to

individuals and

businesses.

• Offers deposit, hire

purchase financing,

mortgage lending,

stock and share

financing, trade and

inventory financing,

equipment leasing,

and nominee

services.

When selecting comparable companies, we consider comparables that are in the same or

similar line of business. Since the Target Group provides loan services, loan guarantees,

entrusted loans and consultancy services to meet the customers’ need. We therefore also

selected companies which have similar business activities.

7 Bloomberg data


– V-16 –

Additional criteria:

1) Market capitalization less than HK$5,000 million;

2) Operation in China, Hong Kong, Japan and Singapore;

3) Positive earnings in the last financial year; and

4) Non-bank financial company

To the best of our knowledge, the selected listed companies are all the appropriate

companies based on the above criteria. We believe that the selected listed companies are

sufficiently comparable to the operations of the Target Group and allow a meaningful

comparison because they engage in the similar business operation, and that their lines of

products are comparable to those of the Target Group under valuation.

Details of the equity value multiples calculated for the comparable companies are as

follows:

Ticker Equity Value

Last Annual

Earnings P/E

(in millions) (in millions)

900 HK HK$2,763.85 HK$259.40 10.65x

8207 HK RMB1,723.65 RMB52.29 32.96x

172 HK HK$1,076.62 HK$118.60 9.08x

8508 JP JPY14,242.77 JPY4,108.03 3.47x

8584 JP JPY45,953.70 JPY3,569.00 12.88x

8771 JP JPY5,755.55 JPY342.35 16.81x

8787 JP JPY6,733.16 JPY823.82 8.17x

IFS SP SG$75.19 SG$7.10 10.59x

SIF SP SG$175.49 SG$25.41 6.91x

Median 10.58x

Source: Bloomberg

The median value was selected for the valuation multiple for the valuation of the Equity

Interest of the Target Group. Selected multiple for the Target Group is listed as below:

Selected Multiple Median

P/E 10.58x


– V-17 –

HK$

The 2011 Profit Guarantee 80,000,000

Discount Rate 14.10%

Time to Valuation Date (years) 0.81

Discount Factor 0.8985

Present Value of the 2011 Profit Guarantee 71,883,495

Selected Multiple (P/E) 10.58x

Implied Equity Value 760,527,378

Less: Discount for Lack of Marketability (“DLOM”) 15% (114,079,107)

Equity Value after DLOM 646,448,272

Ownership Proportion 100%

Fair Value of the Equity Interest (Rounded) 646,448,000

DETERMINATION OF DISCOUNT RATE

Discount rate is applied for calculation of the present value of cash flows. Discounting the

future cash flows allows for the time value of money. For the purpose of valuing the Equity

Interest, we have assessed the Weighted Average Cost of Capital (“WACC”) to calculate the

discount rate for the operation. WACC is determined through the utilisation of the Modified

Capital Asset Pricing Model (“MCAPM”), the industry beta (which is a reflection of market

sensitivity), cost of equity and cost of debt.

Modified Capital Asset Pricing Model (“MCAPM”)

In financial theory, the cost of equity is defined as the minimum rate of return required

by investors that a company must earn on the equity-financed portion of its capital to leave the

market price of its stock unchanged. If the return on equity was lower than the minimum rate

required by investors (that is, the company was not meeting the earnings expectations), the

company’s share price would fall so that it would yield the necessary minimum return. Thus,

we calculate the required rate of return on equity by using the MCAPM. When applying the

MCAPM to estimate a company’s cost of equity capital, we add a risk premium; that is, the

additional return that investors require over the risk-free rate. The underlying assumption is

that investors are risk-adverse and are seeking to maximize the returns on their investments.

The cost of equity using MCAPM is calculated from the formula below:

Re = Rf + Beta x RPm + RPs + RPu

Risk Free Return (“Rf”)

Rf was found by looking at the yields of the Chinese government bonds. Ideally, the

duration of the security used as an indication of Rf should match the horizon of the projected

cash flows that were being discounted. For this reason, we adopted the 30-Year Chinese

Government Bond yield as at the Valuation Date for Rf.


– V-18 –

Market Equity Premium (“RPm”)

RPm was found by looking at the long term equity risk premium of respective guideline

public companies. We adopted the recent long term equity risk premium of respective markets.

We relied on International Equity Risk Premia Report Handbook published by Ibbotson

Associates. For those markets that are not covered by the above publication, the equity risk

premium of US market is multiplied by the relative volatility between S&P 500 Index and

equity indices of respective country of risk of guideline public companies to obtain the equity

risk premium. The volatility of US equity market is obtained from Stocks, Bonds, Bills, and

Inflation Yearbook. The volatility of other equity indices is obtained from Bloomberg.

Beta

In the MCAPM formula, beta is a measure of the systematic risk of a particular

investment relative to the market for all investment assets. We obtained betas for 9 identified

publicly traded guideline companies. The identified betas were unlevered to remove the effects

of financial leverage on the indication of relative risk provided by the beta, and re-levered at

the optimal industry capital structure.

Small Company Premium (“RPs”)

RPs, is typically added to account for the additional risk inherent in small company

stocks. Generally, small companies likewise have higher risks than larger companies. Investors

will demand for a higher return to compensate for the higher inherent risk. In this case, we

compared the size of the Target Group and applied the size premium return in excess of

MCAPM of companies in the Micro cap segment of NYSE/AMEX/NASDAQ in the United

States. We relied on the studies performed by Ibbotson Associates as reflected in their Stocks,

Bonds, Bills and Inflation: 2011 Yearbook.

Specific Company Adjustment (“RPu”)

RPu for unsystematic risk attributable to the specific company is designed to account for

additional risk factors specific to the new business.

Specific risk factors may include the following:

• Competition

• Customer Concentration

• Size

• Poor Access to Capital

• Thin Management


– V-19 –

• Lack of Diversification

• Environmental

• Litigation

• Distribution Channels

• Old Technology

• Company Outlook

In this case, we believe it was necessary to apply an RPu to the cost of equity as the

business exposes to specific risk factors which include relatively high credit risk of borrowers

and short operation history. As a general practice, 3 – 5% specific risk premium would be

applied with consideration to the facts that the business has short operation history and the

borrower with relatively poorer creditability. 5% specific risk premium has been applied to this

case.

The calculation of MCAPM therefore becomes:

MCAPM

Risk Free Rate (“Rf”) 4.34%

Beta 0.949

Market Equity Premium (“RPm”) 9.08%

Small Company Premium (“RPs”) 6.36%

Specific Company Adjustment (“RPu”) 5.00%

Cost of Equity (“Re”) 24.31%

Weighted Average Cost of Capital (“WACC”)

WACC (being the discount rate for this valuation) is determined by the weighted average,

at market value, of the cost of all financing sources in the business enterprise’s capital

structure. We have “levered” the subject companies as if it mirrored the median percentage of

debt as the comparable companies, on the assumption that over time, the subject company will

approach an optimal capital structure with 52.73% of debt, which is the less expensive form

of capital than equity, to remain competitive. Subsequent to the calculations of cost of equity

and the cost of debt, the following equation is used to develop the WACC:

WACC = (%D) × (Rd) × (1-Tax Rate) + (%E) × (Re)


– V-20 –

The calculation of WACC, or the discount rate, therefore becomes:

WACC

Percentage of Interest Bearing Debt (%D) 52.73%

× Market Cost of Debt (China above 5 years lending rate) (Rd) 6.60%

× (1 – Tax Rate) 75.00%

Weighted Cost of Debt 2.61%

+

Percentage of Equity (%E) 47.27%

× Cost of Equity (Re) 24.31%

Weighted Cost of Equity 11.49%

WACC 14.10%

DISCOUNT FOR LACK OF MARKETABILITY (“DLOM”)

Because private companies generally do not have a ready market for their stock, a

discount for lack of marketability/illiquidity is applicable in this valuation. The discount for

lack of marketability/illiquidity recognizes the fact that an investment is worth more if the

interest is readily marketable, or conversely, worth less if it is not.

Regarding the DLOM for controlling interests, it is generally accepted that such discount

for privately held companies exists, and also that a DLOM for a controlling interest in a

privately held company is smaller than for a non-controlling interests, provided that all other

things being equal.

In our valuation analysis, the Equity Interest is not publicly traded nor does an established

active market exist for it. Moreover, the size of the Target Group is relatively small as

compared with that of listed and publicly traded companies. After considering that the

valuation of the Equity Interest is on a controlling interest basis and the above factors

mentioned, prudent investors would apply a discount to reflect its lack of

marketability/liquidity. As a general practice, 5-15% DLOM would be applied for controlling

interests. The market conditions and transaction costs are the primary factors that influence the

discount size. For this particular case, we apply 15% DLOM for the purpose of this valuation.

VALUATION ASSUMPTIONS

A number of assumptions have to be established in order to sufficiently support our

concluded Equity Interest of the Target Group. The major assumptions adopted in this valuation

are:

– there will be no material changes in the existing political, legal, fiscal, foreign trade

and economic conditions in the PRC and other worldwide places where the Target

Group is carrying on its businesses;


– V-21 –

– there will be no significant deviation in the industry trends and market conditions

from the current market expectation;

– there will be no material changes in interest rates or foreign currency exchange rates

from those currently prevailing;

– there will be no major changes in the current taxation law in the PRC, Hong Kong

and countries of origin of our comparable companies;

– the Target Group will retain competent management, key personnel, and technical

staff to support the ongoing business operations; and

– the Target Group will achieve the 2011 Profit Guarantee.

LIMITING CONDITIONS

We have made no investigation of and assumed no responsibility for the title to or any

liabilities against K.P. Financial Group Limited and its subsidiaries.

The opinions expressed in this report have been based on the information supplied to us

by the Company and its staff, as well as from various institutes and government bureaus

without verification. All information and advice related to this valuation are provided by the

management of the Company. Readers of this report may perform due diligence themselves. We

have exercised all due care in reviewing the supplied information. Although we have compared

key supplied data with expected values, the accuracy of the results and conclusions from the

review are reliant on the accuracy of the supplied data. We have relied on this information and

have no reason to believe that any material facts have been withheld, or that a more detailed

analysis may reveal additional information. We do not accept responsibility for any errors or

omissions in the supplied information and do not accept any consequential liability arising

from commercial decision or actions resulting from them.

Facts and conditions existing at the valuation date have been reflected in this valuation.

Based on information that is made available to us, we are not aware of any change in the

business affair of the Target Company subsequent to the Valuation Date that would materially

affect the valuation of the Target Company as at the Valuation Date, and on this basis we

confirm that this valuation report remains accurate up to the Latest Practicable Date. If any

change in the business affair of the Target Company subsequent to the Valuation Date would

materially affect the valuation of the Target Company as at the Valuation Date, we will inform

the shareholders through the Company as soon as possible by means of further announcement

or supplemental circular.


– V-22 –

CONCLUSION OF VALUE

In conclusion, based on the investigation and analysis stated above and on the valuation

method employed, it is our opinion that the fair value of the Equity Interest is as follows:

Fair Value

HK$

100% equity interest of the Target Group 646,448,000

Yours faithfully,


GREATER CHINA APPRAISAL LIMITED

K. K. Ip

Registered Business Valuer of HKBVF

MRICS, MHKIS and RPS (GP)

Managing Director

Rachel S.K. Au

CPA, CVA

Head of Business Advisory

Mr. K.K. Ip, a Chartered Valuation Surveyor of The Royal Institution of Chartered Surveyors (RICS), Member of

Surveyors Registration Board of Hong Kong, Member (General Practice Division) of The Hong Kong Institute of

Surveyors (HKIS) and Registered Business Valuer of The Hong Kong Business Valuation Forum (HKBVF), has

substantial experience in property, plant and machinery, business enterprise and intellectual property valuations for

various purposes in Greater China Region since 1992.

Ms. Rachel S.K. Au, CPA, Certified Valuation Analyst (CVA) of the International Association of Consultants,

Valuators and Analysts (IACVA), is experienced in performing business and intangible asset valuation & advisory for

both private and public companies for various purposes, including financial reporting, merger and acquisition,

restructuring, disposal, liquidation and litigation. Her experience covers diverse industries, including healthcare,

financial services, mining, toll road, information technology, manufacturing and retail.


– V-23 –

GENERAL SERVICES CONDITIONS

The service(s) provided by Greater China Appraisal Limited will be performed in

accordance with professional appraisal standards. Our compensation is not contingent in any

way upon our conclusions of values. We assume, without independent verification, the

accuracy of all data provided to us. We will act as an independent contractor and reserve the

right to use subcontractors. All files, workpapers or documents developed by us during the

course of the engagement will be our property. We will retain this data for at least five years.

Our report is to be used only for the specific purposes stated herein and any other use is

invalid. No reliance may be made by any third party without our prior written consent. You may

show our report in its entirety to those third parties who need to review the information

contained herein. No one should rely on our report as a substitute for his or her own due

diligence. No reference to our name or our report, in whole or in part, in any document you

prepare and/or distribute to third parties may be made without our written consent.

You agree to indemnify and hold us harmless against and from any and all losses, claims,

actions, damages, expenses or liabilities, including reasonable attorneys’ fees, to which we

may become subjects in connection with this engagement. You will not be liable for our

negligence. Your obligation for indemnification and reimbursement shall extend to any

controlling person of Greater China Appraisal Limited, including any director, officer,

employee, subcontractor, affiliate or agent. In the event we are subject to any liability in

connection with this engagement, regardless of legal theory advanced, such liability will be

limited to the amount of fees we received for this engagement.

We reserve the right to include your company/firm name in our client list, but we will

maintain the confidentiality of all conversations, documents provided to us, and the contents

of our reports, subject to legal or administrative process or proceedings. These conditions can

only be modified by written documents executed by both parties.


– V-24 –

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full

responsibility, includes particulars given in compliance with the Listing Rules and the

Takeovers Code for the purpose of giving information with regard to the Group. The Directors,

having made all reasonable enquiries, confirm that to the best of their knowledge and belief the

information contained in this circular is accurate and complete in all material respects and not

misleading or deceptive and there are no other matters the omission of which would make any

statement herein misleading.

The Directors jointly and severally accept full responsibility for the accuracy of

information contained in this circular (other than those relating to Mr. Cheung and Madam Lo

Wan) and confirm, having made all reasonable inquiries, that to the best of their knowledge,

opinions expressed in this circular (other than those relating to Mr. Cheung and Madam Lo

Wan) 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 in this circular

misleading.

Mr. Cheung and Madam Lo Wan (for themselves and as directors of Arbalice Holdings

Limited) jointly and severally accept full responsibility for the accuracy of the information in

this circular (other than those relating to the Group) and confirm, having made all reasonable

enquiries, that to the best of their knowledge, opinions expressed in this circular (other than

those expressed by the Group) 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 in this circular misleading.

2. SHARE CAPITAL

The authorized and issued share capital of the Company as at the Latest Practicable Date

was, and as a result of the allotment and issue of the Consideration Shares will be, as follows:

Authorized share capital: HK$

4,000,000,000 Shares as at the Latest

Practicable Date 400,000,000.00

Issued and fully paid share capital or credited as fully paid:

1,747,002,336 Shares as at the Latest

Practicable Date 174,700,233.60

1,250,000,000 Consideration Shares

to be issued upon Completion 125,000,000.00

Total 299,700,233.60

APPENDIX VI GENERAL INFORMATION

– VI-1 –

The nominal value of the Shares and the Consideration Shares is HK$0.1 each. All the

existing issued Shares rank pari passu in all respects including all rights as to dividends, voting

and capital. The Consideration Shares to be issued upon Completion will rank pari passu in all

respects with the existing Shares on the relevant date of allotment.

Since 31 December 2010, the date of which the latest audited financial statement of the

Company was made up, and up to the Latest Practicable Date, the Company has issued

1,000,000 new Shares to employees who have exercised their options under the share option

scheme of the Company.

As at the Latest Practicable Date, there are share options pursuant to which 97,000,000

Share may be issued upon exercise of such share options. Save as disclosed above, the

Company does not have any outstanding options, warrants or derivatives or other securities

which are convertible into Shares as at the Latest Practicable Date.

3. MARKET PRICES

The table below shows the closing price of the Shares on the Stock Exchange on (i) the

last trading day of the Stock Exchange for each calendar month during the Relevant Period; (ii)

the Last Trading Day; and (iii) the Latest Practicable Date:

Date

Closing price

per Share

HK$

31 August 2010 0.290

30 September 2010 0.320

29 October 2010 0.360

30 November 2010 0.395

31 December 2010 0.425

27 January 2011 (being the date of the Acquisition Agreement) 0.450

Last Trading Day 0.450

28 January 2011 Suspended

28 February 2011 Suspended

31 March 2011 0.495

Latest Practicable Date 0.520

Note: The trading of Shares has been suspended between 28 January 2011 and 7 March 2011.

The highest and lowest closing prices of the Shares recorded on the Stock Exchange

during the Relevant Period were HK$0.540 on 12 April 2011 and HK$0.290 on 15 September

2010 respectively.


– VI-2 –

4. DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS IN SHARES AND

UNDERLYING SHARES

As at the Latest Practicable Date, the interests and short positions of the Directors and the

chief executive of the Company in the shares, underlying shares or debentures of the Company

and its associated corporations (within the meaning of the Part XV of the SFO) (i) which were

required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8

of Part XV of the SFO (including interests or short positions which they were taken or deemed

to have under such provisions of the SFO); or (ii) which were required, pursuant to section 352

of the SFO, to be entered in the register referred to therein; or (iii) which were required to be

notified to the Company and the Stock Exchange pursuant to the Model Code for Securities

Transactions by Directors of Listed Companies (the “Model Code”), were as follows:

(a) Long positions in the Shares and underlying shares of the Company

Name of Director

Number of

issued

Shares and

underlying

shares held

Nature of Interest

Position

Percentage of

the issued

share capital

of the

Company

Beneficial

Owner

Controlled

Corporation Spouse

(Note 3)

Cheung Siu Lam

(Notes 1 and 3) 1,953,967,796 1,721,044,240 86,400,000 146,523,556 Long 111.85%

Lo Wan

(Notes 2 and 3) 1,953,967,796 146,523,556 86,400,000 1,721,044,240 Long 111.85%

Chan Yuk Ming

(Note 3) 22,000,000 22,000,000 – – Long 1.26%

Notes:

1. By virtue of SFO, Mr. Cheung is deemed to be interested in 146,523,556 Shares held by Ms. Lo Wan

and 86,400,000 Shares held by Arbalice Holdings Limited which is a company beneficially owned as

to 60% by Mr. Cheung Siu Lam and 40% by Madam Lo Wan. Mr. Cheung is also deemed to be interested

in the Consideration Shares to be issued to him upon Completion.

2. By virtue of SFO, Madam Lo Wan is deemed to be interested in 1,721,044,240 Shares held by Mr.

Cheung Siu Lam and 86,400,000 Shares held by Arbalice Holdings Limited.

3. The beneficial interest of each of Cheung Siu Lam and Lo Wan includes 10,000,000 underlying Shares

from holding share option exercisable during the period between 4 October 2007 and 3 October 2017

at an exercise price of HK$0.479 per Share and 1,000,000 underlying shares from holding share options

exercisable during the period between 22 October 2010 and 21 October 2020 at an exercise price of

HK$0.359 per Share. The beneficial interest of Chan Yuk Ming includes 10,000,000 underlying shares

from holding share options exercisable during the period between 4 October 2007 and 3 October 2017

at an exercise price of HK$0.479 per Share and 2,000,000 underlying shares from holding share options

exercisable during the period between 22 October 2010 and 21 October 2020 at an exercise price of

HK$0.359 per Share.


– VI-3 –

(b) Long positions in the shares and underlying shares of the associated corporation

Name of Director

Name of

the associated corporation

Number of issued

shares held Position

Percentage of

the issued share

capital of

the Company

Cheung Siu Lam K.P.I. Convenience Retail

Company Limited

21,437 shares Long 28.0%

Save as disclosed herein, as at the Latest Practicable Date, none of the Directors nor the

chief executive of the Company had or was deemed to have any interests or short positions in

the shares, underlying shares or debentures of the Company and its associated corporations

(within the meaning of Part XV of the SFO) (i) where were required to be notified to the

Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO

(including interests or short positions which they were taken or deemed to have under such

provisions of the SFO); or (ii) which were required, pursuant to section 352 of the SFO, to be

entered in the register referred to therein; or (iii) which were required to be notified to the

Company and the Stock Exchange pursuant to the Model Code.

5. SUBSTANTIAL SHAREHOLDERS’ INTERESTS IN SHARES AND

UNDERLYING SHARES

So far as is known to the Directors and the chief executive of the Company, as at the

Latest Practicable Date, the following person (not being Directors or chief executive of the

Company) had, or was deemed to have, interests or short positions in the Shares or underlying

Shares which would fall to be disclosed to the Company and the Stock Exchange under the

provisions of Divisions 2 and 3 of Part XV of the SFO or who were directly or indirectly

interested in 10% or more of the nominal value of any class of share capital carrying rights to

vote in all circumstances at general meetings of any member of the Group:

Long positions in the Shares and underlying shares of the Company

Name of Shareholder Capacity

Number of issued

Shares held Position

Percentage of

the issued share

capital of

the Company

Zhang Hao Chen Beneficial Owner 106,242,000 Long 6.08%


– VI-4 –

As at the Latest Practicable Date, so far as is known to the Directors, the following

person/entity was interested in 10% or more of the nominal value of any class of share capital

carrying rights to vote in all circumstances at general meeting of any member of the Group:

Name of member of the Group Name of person/entity

Approximate

percentage

K.P.I. Convenience Retail

Company Limited

Cheung Siu Lam 28.0%

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief

executive of the Company were not aware of any other person (other than the Directors and the

chief executive of the Company) who had, or was deemed to have, interests or short positions

in the Shares or underlying Shares which would fall to be disclosed to the Company and the

Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was

directly or indirectly interested in 10% or more of the nominal value of any class of share

capital carrying rights to vote in all circumstances at general meetings of any member of the

Group.

6. ADDITIONAL DISCLOSURE OF SHAREHOLDING AND DEALINGS

PURSUANT TO THE TAKEOVERS CODE

(a) The shareholding of Mr. Cheung and the parties acting in concert with him in the

Company as at the Latest Practicable Date are set out in the letter from the Board

and in the paragraph headed “Effect on Shareholding Structure of the Company”

above.

(b) None of Mr. Cheung and any person acting in concert with him had dealt for value

in any relevant securities (as defined under Note 4 to Rule 22 of the Takeovers Code)

during the Relevant Period. As at the Latest Practicable Date, the Company had no

shareholding interest or any relevant securities (as defined in note 4 to Rule 22 of

the Takeovers Code) in Arbalice Holdings Limited, nor had the Company dealt for

value in any shares or other relevant securities (as defined in Note 4 to Rule 22 of

the Takeovers Code) of Arbalice Holdings Limited.

(c) Save as set out in the paragraphs headed “Directors’ and Chief Executives’ Interests

in Shares and Underlying Shares” and “Substantial Shareholders’ Interests in Shares

and Underlying Shares” above, as at the Latest Practicable Date, none of the

directors of Arbalice Holdings Limited was interested in any securities of the

Company nor had the directors of Arbalice Holdings Limited dealt for value in any

Shares or other securities of the Company during the Relevant Period, save for the

Consideration Shares.


– VI-5 –

(d) Save as set out in the paragraphs headed “Directors’ and Chief Executives’ Interests

in Shares and Underlying Shares” and “Substantial Shareholders’ Interests in Shares

and Underlying Shares” and item 6.(a) above, as at the Latest Practicable Date, none

of Mr. Cheung and any person acting in concert with him owned or controlled any

Shares or other securities of the Company. Save for the entering into of the

Acquisition Agreement, none of Mr. Cheung and any person acting in concert with

him had dealt for value in relevant securities (as defined under Note 4 to Rule 22

of the Takeovers Code) during the Relevant Period.

(e) As at the Latest Practicable Date, none of Mr. Cheung and any person acting in

concert with him had any arrangement of the kind described in Note 8 to Rule 22

of the Takeovers Code with any person.

(f) As at the Latest Practicable Date, save for the Acquisition Agreement and the

transactions contemplated thereunder including the undertaking given by Madam Lo

Wan in respect of the liabilities of Mr. Cheung under the 2011 Profit Guarantee,

there was no agreement, arrangement or understanding (including any compensation

arrangement) between Mr. Cheung and any person acting in concert with him and

any Director, recent Director, shareholder or recent shareholder of the Company

which had any connection with or dependence upon the Acquisition or the

Whitewash Wavier.

(g) As at the Latest Practicable Date, save as disclosed in the paragraphs headed

“Directors’ and Chief Executives’ Interests in Shares and Underlying Shares” and

“Substantial Shareholders’ Interests in Shares and Underlying Shares” above, none

of the Directors was interested in any Shares or relevant securities (as defined under

Note 4 to Rule 22 o the Takeovers Code) of the Company and in any shares or other

securities of Arbalice Holdings Limited. During the Relevant Period, save for the

Consideration Shares, none of the Directors had dealt for value in any Shares or

relevant securities (as defined under Note 4 to Rule 22 o the Takeovers Code) of the

Company and in any shares or other securities of Arbalice Holdings Limited.

(h) As at the Latest Practicable Date, no shareholding in the Company was owned or

controlled by a subsidiary of the Company or by a pension fund of any member of

the Group or by Quam Capital and none of the advisers to the Company as specified

in class (2) of the definition of associate in the Takeovers Code owned or had any

interest in any Shares or other securities of the Company.

(i) As at the Latest Practicable Date, no person had any arrangement of the kind as

described to in Note 8 to Rule 22 of the Takeovers Code with the Company or with

any person who is an associate of the Company by virtue of classes (1), (2), (3) and

(4) of the definition of associate under the Takeovers Code.

(j) As at the Latest Practicable Date, no shareholding in the Company was managed on

a discretionary basis by fund managers connected with the Company.


– VI-6 –

(k) As at the Latest Practicable Date, no benefit would be given to any Director as

compensation for loss of office or otherwise in connection with the Acquisition or

the Whitewash Waiver.

(l) As at the Latest Practicable Date, save for the Acquisition Agreement and the

transactions contemplated thereunder including the undertaking given by Madam Lo

Wan in respect of the liabilities of Mr. Cheung under the 2011 Profit Guarantee,

there was no agreement or arrangement between any Director and any other person

which is conditional on or dependent upon the outcome of the Acquisition, the

Whitewash Waiver or otherwise connected with any of them.

(m) As at the Latest Practicable Date, save for the Acquisition Agreement, there was no

material contracts which have been entered into by Mr. Cheung and any person

acting in concert with him in which any Director has any a material personal

interest.

(n) Save for the share charge in respect of the Consideration Shares to be entered into

by Mr. Cheung upon Completion to secure the 2011 Profit Guarantee, no Shares

acquired by the Mr. Cheung and any person acting in concert with him in pursuance

of the Acquisition will be transferred, charged or pledged to any other persons.

(o) Save for the entering into of the Acquisition Agreement, none of Mr. Cheung and

any person acting in concert with him has acquired any Shares or had any dealings

in the relevant securities of the Company (as defined under Note 4 to Rule 22 of the

Takeovers Code) during the Relevant Period.

(p) As at the Latest Practicable Date, there was no shareholding in the Company which

Mr. Cheung or any person acting in concert with him has borrowed or lent, and there

were no dealings in the Shares or other securities of the Company by Mr. Cheung

or any person acting in concert with him has borrowed or lent the Shares or other

securities of the Company during the Relevant Period.

(q) As at the Latest Practicable Date, there was no shareholding in the Company which

the Company or the Directors has/ have borrowed or lent, and there were no dealings

in the Shares or other securities of the Company by any person which the Company

or the Directors has/have borrowed or lent the Shares or other securities in the

Company during the Relevant Period.

(r) Mr. Cheung and his wife, Madam Lo Wan and the associates and any parties acting

in concert with any of them are required to abstain from voting on the resolution

approving the Whitewash Waiver at the First EGM. Mr. Chan Yuk Ming advised that

he intended, in respect of his shareholdings, to vote for the Whitewash Waiver. As

at the Latest Practicable Date, the other Directors did not have any Shares or

relevant securities of the Company (as defined under note 4 to Rule 22 of the

Takeover Code) and thus will not vote on the resolution approving the Whitewash

Waiver at the First EGM.


– VI-7 –

(s) As at the Latest Practicable Date, there was no shareholding in the Company owned

or controlled by any persons who, prior to the posting of this circular, have

irrevocably committed themselves to vote for or against the Whitewash Waiver.

7. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed

service contract with the Enlarged Group or associated companies which: (i) has been entered

into or amended within 6 months before the date of the Announcement, or (ii) is continuous

contract with a notice period of 12 months or more, or (iii) is fixed term contract with more

than 12 months to run irrespective of the notice period, or (iv) is not determinable by the

employer within one year without payment of compensation (other than statutory

compensation).

8. COMPETING INTERESTS

Save and except that Mr. Liu Hui, who is a non-executive Director of ARC Capital

Holdings Limited (which is a closed ended fund listed on the AIM market of the London Stock

Exchange principally engaged in the making and holding investments in the retail, consumer

products and service sectors of Greater China and other countries in Asia), as at the Latest

Practicable Date, none of the Directors or their respective associates had any interest in any

business which competes or is likely to compete, either directly or indirectly, with the business

of the Group.

9. INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS OR

ARRANGEMENTS SIGNIFICANT TO THE ENLARGED GROUP

Save for the Acquisition Agreement and the transactions contemplated thereunder:

(i) none of the Directors has any direct or indirect interests in any assets which have

been acquired or disposed of by or leased to, or which are proposed to be acquired

or disposed of by or leased to, the Enlarged Group since 31 December 2010, the date

to which the latest published audited consolidated financial statements of the Group

were made up; and

(ii) there is no contract or arrangement entered into by any member of the Enlarged

Group subsisting at the Latest Practicable Date in which any Director is materially

interested and which is significant to the business of the Enlarged Group.

10. LITIGATION

As at the Latest Practicable Date, no member of the Enlarged Group was engaged in any

litigation, arbitration or claim of material importance and no litigation, arbitration or claim of

material importance was known to the Directors to be pending or threatened by or against any

member of the Enlarged Group.


– VI-8 –

11. MATERIAL CONTRACTS

The following material contracts (not being contracts in the ordinary course of business)

have been entered into by the members of the Enlarged Group within the two years

immediately preceding the date of the Announcement (7 March 2011) up to and including the

Latest Practicable Date.

(a) the Letter of Intent dated 11 August 2009 entered into among Hualian GMS

Shopping Centre Company Limited, a former non-wholly owned subsidiary of the

Company, as purchaser, Shanghai Xin Meng Investment Company Limited, an

Independent Third Party, as vendor, and ARC Capital Holdings Limited, a former

substantial shareholder of the Company, as guarantor for the acquisition of the entire

registered capital of a supermarket chain operation in the PRC;

(b) the Cancellation Agreement dated 28 January 2010 entered into among Hualian

GMS Shopping Centre Company Limited, Shanghai Xin Meng Investment Company

Limited and ARC Capital Holdings Limited pursuant to which the Letter of Intent

dated 11 August 2009 was terminated and the Group was paid a compensation fee

in the sum of RMB20 million by Shanghai Xin Meng Investment Company Limited

before 30 June 2010;

(c) the sale and purchase agreement dated 24 March 2010 entered into among K.P.B.

Marketing Limited, a wholly-owned subsidiary of the Company, as vendor and

Best-Links (HK) Co., Limited as purchaser, the Company and Bailian Group Co.,

Ltd in relation to the disposal of the entire issued share capital of K.P.I. (BVI) Retail

Management Company Limited at a consideration of RMB441,760,000;

(d) the Acquisition Agreement (with the supplemental agreement dated 25 February

2011);

(e) Huifeng Rongjin Control Agreements; and

(f) Huaxia Xingye Control Agreements.


– VI-9 –

12. EXPERTS AND CONSENTS

(a) The following are the names and qualifications of the experts who have given its

opinions and advice which are included in this circular:

Name Qualification

Ample Capital Limited a licensed corporation to carry out type 4

(advising on securities), type 6 (advising on

corporate finance) and type 9 (asset

management) regulated activities under the

SFO

CCIF CPA Limited (“CCIF”) Certified Public Accountants

Dacheng Law Offices

(“Dacheng”)

a registered law firm in the PRC

Greater China Appraisal Limited an independent professional business valuer

Quam Capital a licensed corporation to conduct type 6

(advising on corporate finance) regulated

activity under the SFO

(b) None of Ample Capital Limited, CCIF, Dacheng, Greater China Appraisal Limited

or Quam Capital has any shareholding, directly or indirectly, in any member of the

Group or any right (whether legally enforceable or not) to subscribe for or to

nominate persons to subscribe for securities in any member of the Group.

(c) Each of Ample Capital Limited, CCIF, Dacheng, Greater China Appraisal Limited

and Quam Capital has given and has not withdrawn its written consent to the issue

of this circular, with the inclusion of the references to its name and/or its opinion in

the form and context in which they are included.

(d) None of Ample Capital Limited, CCIF, Dacheng, Greater China Appraisal Limited

or Quam Capital had any direct or indirect interest in any asset which had been

acquired, or disposed of by, or leased to any member of the Enlarged Group, or was

proposed to be acquired, or disposed of by, or leased to any member of the Enlarged

Group since 31 December 2010, the date to which the latest published audited

financial statements of the Group were made up.


– VI-10 –

13. MISCELLANEOUS

(a) The residential address of Mr. Cheung is situated at House 3, 2 Barker Road, The

Peak, Hong Kong. The correspondence address of Mr. Cheung in Hong Kong is

Suite 5606, 56/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. The

residential address of Madam Lo Wan is House 3, 2 Barker Road, The Peak, Hong

Kong. The correspondence address of Madam Lo Wan in Hong Kong is Suite 5606,

56/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.

(b) The registered address of Arbalice Holdings Limited is situated at the offices of

Tricor Services (BVI) Limited, P.O. Box 3340, Road Town, Tortola, British Virgin

Islands. Arbalice Holdings Limited is beneficially owned as to 60% by Mr. Cheung

and 40% by Madam Lo Wan and the directors of Arbalice Holdings Limited are Mr.

Cheung and Madam Lo Wan.

(c) The registered office of the Company is located at Suite 5606, 56th Floor, Central

Plaza, 18 Harbour Road, Wanchai, Hong Kong.

(d) The secretary of the Company is Mr. Chung Chin Keung, who is a fellow member

of the Association of Chartered Certified Accountants, a fellow member of the Hong

Kong Institute of Certified Public Accountants and a member of the Institute of

Chartered Accountants in England and Wales.

(e) The share registrar and transfer office of the Company is Tricor Tengis Limited, at

26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

(f) The registered address of Ample Capital Limited, the financial adviser to the

Company, is situated at Unit A, 14th Floor, Two Chinachem Plaza, 135 Des Voeux

Road Central, Central, Hong Kong.

(g) The registered address of Quam Capital is situated at 32/F, Gloucester Tower, The

Landmark, 11 Pedder Street, Central, Hong Kong.

(h) In the event of inconsistency, the English text of this circular shall prevail over the

Chinese text.

14. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal

business hours (Saturdays and public holidays excepted) from 10:00 a.m. to 12:30 p.m. and

from 2:30 p.m. to 5:00 p.m. at (i) the head office of the Company at Suite 5606, 56th Floor,

Central Plaza, 18 Harbour Road, Wanchai, Hong Kong; (ii) on the website of the SFC

(http://www.sfc.hk/); and (iii) on the website of the Company (http://www.kpi.com.hk/) during

the period from the date of this circular up to the date of the First EGM:

(a) the memorandum and articles of association of the Company;


– VI-11 –

(b) the letter from the Independent Board Committee containing its advice to the

Independent Shareholders, the text of which is set out in the section headed “Letter

from the Independent Board Committee” in this circular;

(c) the letter from the Whitewash Independent Board Committee containing its advice

to the Independent Shareholders, the text of which is set out in the section headed

“Letter from the Whitewash Independent Board Committee” in this circular;

(d) the letter from Quam Capital containing its advice to the Independent Board

Committees, the Whitewash Independent Board Committees and the Independent

Shareholders, the text of which is set out in the section headed “Letter from Quam

Capital” in this circular;

(e) the annual reports of the Company for each of the two years ended 31 December

2010;

(f) the PRC legal opinion issued by Dacheng dated 29 April 2011;

(g) the accountants’ report on the Target Group, the text of which is set out in Appendix

II to this circular;

(h) the accountants’ report in respect of the unaudited pro forma financial information

of the Enlarged Group, the text of which is set out in Appendix III to this circular;

(i) the letter from CCIF CPA Limited in relation to the 2011 Profit Guarantee, the text

of which is set out in Appendix IV to this circular;

(j) the letter from Ample Capital Limited in relation to the 2011 Profit Guarantee, the

text of which is set out in Appendix IV to this circular;

(k) the letter from Ample Capital Limited in relation to the experience and

qualifications of the independent valuer, Greater China Appraisal Limited, the text

of which is set out in Appendix V to this circular;

(l) the independent valuation report from Greater China Appraisal Limited in relation

to the valuation of the equity interest of the Target Group, the text of which is set

out in Appendix V to this circular;

(m) the letters of consent referred to under the paragraph headed “Experts and Consents”

in this appendix;

(n) the material contracts referred to in the paragraph headed “Material Contracts” in

this appendix;

(o) the undertaking given by Madam Lo Wan in respect of the liabilities of Mr. Cheung

under the 2011 Profit Guarantee;

(p) the circular of the Company dated 14 May 2010 for a very substantial disposal and

connected transaction in relation to the disposal of the entire issued share capital of

K.P.I. (BVI) Retail Management Company Limited; and

(q) this circular.


– VI-12 –


(Stock Code: 605)

NOTICE OF FIRST EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “First EGM”)

of K.P.I. Company Limited (the “Company”) will be held at Boardroom V, Ground Floor,

Renaissance Harbour View Hotel, No. 1 Harbour Road, Wanchai, Hong Kong on Wednesday,

18 May 2011 at 11:15 a.m. for the purposes of considering and, if thought fit, passing the

following resolutions of the Company:

ORDINARY RESOLUTIONS

1. “THAT:

(a) the sale and purchase agreement (the “Sale and Purchase Agreement”) entered into

between the Company, K.P.B. Group Holdings Limited and Mr. Cheung Siu Lam

(the “Vendor”) dated 27 January 2011 (as supplemented by a supplemental

agreement dated 25 February 2011) in relation to the acquisition (the “Acquisition”)

of the entire issued share capital of, and the debts due by K.P. Financial Group

Limited and its subsidiaries, a copy of the Sale and Purchase Agreement having been

produced to the First EGM and marked “A” and initialed by the chairman of the First

EGM for the purpose of identification, and the transactions contemplated thereby be

and are hereby approved, confirmed and ratified;

(b) the allotment and issue of 1,250,000,000 (the “Consideration Shares”) new shares

of HK$0.10 each (each a “Share”) in the capital of the Company to the Vendor (or

its nominee(s)), credited as fully paid, as part of the consideration for the

Acquisition be and are hereby approved; and

(c) any one or more directors (the “Directors”) of the Company be and are hereby

authorised to allot and issue the Consideration Shares in accordance with the terms

of the Sale and Purchase Agreement and to do all such acts and things as he/she/they

consider(s) necessary or expedient for the purpose of giving effect to the Sale and

Purchase Agreement and completing the transactions contemplated thereby.”

NOTICE OF THE FIRST EGM

– EGM-1 –

2. “THAT conditional upon the passing of resolution no. 1 above, the application for the

waiver granted or to be granted by the Executive Director of the Corporate Finance

Division of the Securities and Futures Commission to the Vendor and parties acting in

concert with him pursuant to Note 1 on Dispensations from Rule 26 of the Code on

Takeovers and Mergers of Hong Kong from their obligations to make a general offer for

all the Shares not already owned or agreed to be acquired by them as a result of the issue

of the Consideration Shares be and are hereby approved.”

By order of the Board


Chung Chin Keung

Company Secretary

Hong Kong, 29 April 2011

Registered office:


Central Plaza

18 Harbour Road

Wanchai

Hong Kong

Notes:

1. A member of the Company entitled to attend and vote at the First EGM convened by the above notice is entitled

to appoint one or more proxies to attend and, on a poll, vote in his stead in accordance with the Company’s

articles of association. A proxy need not be a member of the Company.

2. A form of proxy for use at the First EGM is enclosed herewith. To be valid, the form of proxy and the power

of attorney or other authority (if any) under which it is signed or a certified copy thereof must be deposited

at the share registrar of the Company, Tricor Tengis Limited, 26/F., Tesbury Centre, 28 Queen’s Road East,

Wanchai, Hong Kong not later than 48 hours before the time appointed for holding the First EGM or any

adjournment thereof, as the case may be. Completion and return of a form of proxy will not preclude a member

from attending in person and voting at the First EGM or any adjournment thereof, should he so wish.

3. Where there are joint registered holders of any share, any one of such persons may vote at the First EGM,

either in person or by proxy, in respect of such share as if he was solely entitled thereto; but if more than one

of such joint holders are present at the First EGM in person or by proxy, that one of the said persons so present

whose name stands first on the register of member of the Company in respect of such share shall alone be

entitled to vote in respect thereof.

4. The voting on all the resolutions at the First EGM will be conducted by way of a poll.

NOTICE OF THE FIRST EGM

– EGM-2 –


(Stock Code: 605)

NOTICE OF SECOND EXTRAORDINARY GENERAL MEETING

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “Second

EGM”) of K.P.I. Company Limited (the “Company”) will be held at Suite 5606, 56/F., Central

Plaza, 18 Harbour Road, Wanchai, Hong Kong on Thursday, 23 June 2011 at 11:00 a.m. for the

purposes of considering and, if thought fit, passing the following resolution of the Company:

SPECIAL RESOLUTION

“THAT subject to and conditional upon the approval of the Registrar of Companies in

Hong Kong being obtained, the name of the Company be and is hereby changed from

“K.P.I. Company Limited 港佳控股有限公司” to “China Financial Services Holdings

Limited中國金融投資管理有限公司”, and that any one or more directors of the Company

be and are hereby authorised to do all such acts, deeds and things and execute all

documents as he/she/they consider(s) necessary or expedient to give effect to the

aforesaid change of name of the Company.”

By order of the Board


Chung Chin Keung

Company Secretary

Hong Kong, 29 April 2011

Registered office:


Central Plaza

18 Harbour Road

Wanchai

Hong Kong

NOTICE OF THE SECOND EGM

– EGM-3 –

Notes:

1. A member of the Company entitled to attend and vote at the Second EGM convened by the above notice is

entitled to appoint one or more proxies to attend and, on a poll, vote in his stead in accordance with the

Company’s articles of association. A proxy need not be a member of the Company.

2. A form of proxy for use at the Second EGM is enclosed herewith. To be valid, the form of proxy and the power

of attorney or other authority (if any) under which it is signed or a certified copy thereof must be deposited

at the share registrar of the Company, Tricor Tengis Limited, 26/F., Tesbury Centre, 28 Queen’s Road East,

Wanchai, Hong Kong not later than 48 hours before the time appointed for holding the Second EGM or any

adjournment thereof, as the case may be. Completion and return of a form of proxy will not preclude a member

from attending in person and voting at the Second EGM or any adjournment thereof, should he so wish.

3. Where there are joint registered holders of any share, any one of such persons may vote at the Second EGM,

either in person or by proxy, in respect of such share as if he was solely entitled thereto; but if more than one

of such joint holders are present at the Second EGM in person or by proxy, that one of the said persons so

present whose name stands first on the register of member of the Company in respect of such share shall alone

be entitled to vote in respect thereof.

4. The voting at the Second EGM will be conducted by way of a poll.

NOTICE OF THE SECOND EGM

– EGM-4 –

(Stock Code: 605) - Tricor · 4/29/2011 · A letter from the Board is set out on pages 7 to 53 of...

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