746 Lee&Man Spin Off

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
If you are in doubt as to any aspect of this circular, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in Lee & Man Holding Limited (Company), you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. The information contained in this circular is subject to amendment and finalisation and approval of the Listing Document (as defined herein). In additional, unless otherwise stated, the historical financial information of the Spin-off Group (as defined herein) in this circular is unaudited and may differ from the audited financial information of the Spin-off Group which will be included in the Listing Document. Shareholders and prospective investors of the Company should therefore exercise extreme caution in interpreting the information contained in this circular and when dealing in such securities. Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited (Stock Exchange) take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.
LEE & MAN HOLDING LIMITED

*
(incorporated in the Cayman Islands with limited liability) (Stock Code: 746)
MAJOR TRANSACTION DEEMED DISPOSAL OF A SUBSIDIARY IN RELATION TO THE PROPOSED SPIN-OFF OF LEE & MAN HANDBAGS HOLDING LIMITED ON THE MAIN BOARD OF THE STOCK EXCHANGE OF HONG KONG LIMITED AND ADOPTION OF THE NEW LISTCO SHARE OPTION SCHEME Independent financial adviser to the Independent Board Committee and the Shareholders
A letter from OSK, the independent financial adviser to the Independent Board Committee and the Shareholders, containing its advice in relation to the Proposed Spin-off is set out on pages 35 to 52 of this circular. A notice convening the EGM to be held at Unit A, 29/F., Admiralty Centre 1, 18 Harcourt Road, Hong Kong, on Monday, 13 June 2011 at 10:30 a.m. is set out on pages N-1 to N-3 of this circular. Whether or not you intend to attend the EGM, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.
* For identification purposes only
19 May 2011
EXPECTED TIMETABLE
(NOTES 1 AND 2)
2011 Last day of dealing in the Shares on a cum entitlement basis . . . . . . . . . . . . Friday, 3 June First day of dealing in the Shares on a ex entitlement basis . . . . . . . . . . . . Tuesday, 7 June Latest time for lodging transfers of Shares cum entitlement to New Listco Shares pursuant to the Distribution at (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 4:30 p.m. on Wednesday, 8 June Latest time for return of proxy forms in respect of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . 10:30 a.m. on Saturday, 11 June Register of members of the Company closes (both dates inclusive) (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 9 June to Monday, 13 June Distribution Record Date and the record date for determining the eligibility of Shareholders to attend and vote at the EGM (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 13 June EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:30 a.m. on Monday, 13 June Register of members of the Company re-opens on . . . . . . . . . . . . . . . . . . Tuesday, 14 June
Notes: (1) (2) All time refers to Hong Kong local time. The Board may determine another date for closure of the register of members of the Company and for determination of entitlements to the Distribution and the eligibility of Shareholders to attend and vote at the EGM, in which case a further announcement will be made by the Company.
The above timetable is tentative only and is subject to change depending on the final timetable of the Proposed Spin-off. Further announcement(s) will be made by the Company as and when necessary.
CONTENTS
Page Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . Letter from OSK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix I Appendix II Financial information of the Remaining Group . . . . . . . . . . . . . Summary of the principal terms of the New Listco Share Option Scheme . . . . . . . . . . . . . . . . . . . . 1 6 33 35 I-1
II-1
Appendix III General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N-1
ii
DEFINITIONS
In this circular, unless the context otherwise requires, the following expressions shall have the following meanings: Articles the articles of association of the Company as amended from time to time has the meaning ascribed to it under the Listing Rules the board of Directors the British Virgin Islands compound annual growth rate China Chlor-Alkali Online, an independent third party consultancy entity, which provides market reports and consultation services on the chloro-alkali and related chemical industries in China to enterprises or business units since 2004 the Central Clearing and Settlement System established and operated by HKSCC Chemease (http://www.chemease.com) is a professional business information provider focusing on the chemical commodity market in China. Chemease provides customised information on energy, organic chemicals, chemical fibres, plastics, rubbers and polyurethanes dichloromethane and chloroform Lee & Man Holding Limited, a company incorporated in the Cayman Islands with limited liability, the Shares of which are listed on the Main Board of the Stock Exchange the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, as amended, supplemented or modified from time to time has the meaning ascribed to it under the Listing Rules carbon tetrachloride, a by-product in the production process of CMS directors of the Company
associate Board BVI CAGR CCAON
CCASS
Chemease
CMS Company
Companies Law
connected person(s) CTC
Directors
DEFINITIONS
Distribution the payment of a special interim dividend by the Company to the Shareholders to be satisfied: (a) by way of distribution in specie of such number of New Listco Shares to the Qualifying Shareholders in the proportion of one New Listco Share for every one Share held by them as at the close of business on the Distribution Record Date; and by way of cash payment (after deducting expenses) to the Excluded Shareholders which equals to the net proceeds of the sale by the Company on their behalf the New Listco Shares to which the Excluded Shareholders would otherwise be entitled to receive,
(b)
in either case, on the terms and conditions contained in this circular Distribution Record Date 13 June 2011, being the record date for ascertaining entitlements to the Distribution region covers the eastern coastal area of China, which, for this circular only, include the provinces of Anhui, parts of Fujian, Jiangsu, Jiangxi, Shandong and Zhejiang, as well as the municipality of Shanghai the extraordinary general meeting to be held on 13 June 2011 by the Company for the purpose of approving the Proposed Spin-off and the adoption of the New Listco Share Option Scheme Euro Chlor is the European federation which represents the producers of chlorine and its primary derivatives in Europe. Based in Brussels, the federation works with national, European and international authorities to ensure that legislation affecting the industry is workable, efficient and effective the Overseas Shareholder(s) whom the Board, after making enquiries and based on the legal opinion provided by legal advisers, considers it necessary or expedient not to transfer the New Listco Shares to, on account either of legal restrictions under the laws of the relevant place or the requirements of the relevant regulatory body or stock exchange in that place
Eastern China
EGM
Euro Chlor
Excluded Shareholder(s)
DEFINITIONS
Fortune Star Fortune Star Tradings Ltd., a Shareholder which was interested in 75% of the Companys issued share capital as at the Latest Practicable Date and a company incorporated in the BVI and was owned by each of Mr. Lee Wan Keung and Mr. Norman Lee as to 55% and 45% respectively as at the Latest Practicable Date gross domestic product the Company and its subsidiaries Hong Kong Securities Clearing Company Limited Hong Kong dollars, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the PRC the independent board committee formed by the independent non-executive Directors to advise the Shareholders on the Proposed Spin-off 13 May 2011, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular the listing of the New Listco Shares on the Main Board of the Stock Exchange the listing sub-committee of the board of directors of the Stock Exchange the listing document to be issued by the New Listco in relation to the Proposed Spin-off the Rules Governing the Listing of Securities on the Stock Exchange Mr. Lee Man Yan, an executive Director Ms. Wai Siu Kee, the chairman of the Group and a Director, and the proposed chairman and an executive director of the New Listco
GDP Group HKSCC HK$ Hong Kong
Independent Board Committee
Latest Practicable Date
Listing
Listing Committee
Listing Document
Listing Rules
Mr. Norman Lee Ms. Wai
DEFINITIONS
New Listco Lee & Man Handbags Holding Limited (formerly known as Heng Sing Holdings Limited), an exempted company incorporated in the Cayman Islands on 4 January 2011 under the Companies Law with limited liability the share option scheme which will be conditionally adopted by the New Listco which will take effect subject to, among others things, the commencement of dealings in the New Listco Shares on the Main Board of the Stock Exchange ordinary shares of nominal value of HK$0.10 each in the capital of the New Listco OSK Capital Hong Kong Limited, a corporation licensed to carry out business in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and is the independent financial adviser to the Independent Board Committee and the Shareholders in connection with the Proposed Spin-off Shareholders whose addresses appear on the register of members of the Company at the close of business on the Distribution Record Date are in jurisdictions outside of Hong Kong practice note 15 to the Listing Rules the Peoples Republic of China, but for the purpose of this circular and for geographical reference only, does not include Hong Kong, the Macao Special Administrative Region of the PRC and Taiwan the proposed on the Main expected to together with separate listing of the New Listco Shares Board of the Stock Exchange, which is be effected by way of introduction, the Distribution
New Listco Share Option Scheme
New Listco Shares
OSK
Overseas Shareholder(s)
PN15 PRC or China
Proposed Spin-off
Qualifying Shareholder(s)
Shareholder(s) at the close of business on the Distribution Record Date other than the Excluded Shareholders the Hong Kong branch share registrar of the Company, Tricor Secretaries Limited, of 26th Floor, Tesbury Centre, 28 Queens Road East, Wanchai, Hong Kong
Registrar
DEFINITIONS
Remaining Group RMB SFC SFO the Group excluding the Spin-off Group Renminbi, the lawful currency of the PRC The Securities and Futures Commission of Hong Kong the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time ordinary shares of HK$0.10 each in the issued share capital of the Company the holder(s) of the Share(s) the New Listco and its subsidiaries The Stock Exchange of Hong Kong Limited has the meaning ascribed to it under the Listing Rules kilometres square metres per cent.
Shares
Shareholder(s) Spin-off Group Stock Exchange substantial shareholder km sq.m. or m2 %
Unless otherwise specified, for the purpose of this circular and for the purpose of illustration only, Hong Kong dollar amounts have been translated using the following rates: US$1: HK$7.8 RMB1: HK$1.1765 No representation is made that any amounts in US$, RMB or HK$ were or could have been converted at the above rate or at any other rates or at all. For ease of reference, the names of certain PRC laws and regulations or the PRC established companies or entities have been included in this circular in both the Chinese and English languages. The English names of these companies and entities are only English translation of their respective official Chinese names and they are denoted with *. In the event of any inconsistency as to the names of such laws, regulations, companies or entities, the Chinese version shall prevail.
LETTER FROM THE BOARD

*
(incorporated in the Cayman Islands with limited liability) (Stock Code: 746) Executive Directors: Ms. WAI Siu Kee (Chairman) Ms. POON Lai Ming Mr. LEE Man Yan Mr. KUNG Phong Independent non-executive Directors: Mr. WONG Kai Tung, Tony Mr. WAN Chi Keung, Aaron BBS JP Mr. HENG Victor Ja Wei Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands Principal place of business in Hong Kong: 8th Floor, Liven House 61-63 King Yip Street Kwun Tong Kowloon Hong Kong 19 May 2011 To the Shareholders Dear Sirs
MAJOR TRANSACTION DEEMED DISPOSAL OF A SUBSIDIARY IN RELATION TO THE PROPOSED SPIN-OFF OF LEE & MAN HANDBAGS HOLDING LIMITED ON THE MAIN BOARD OF THE STOCK EXCHANGE OF HONG KONG LIMITED AND ADOPTION OF THE NEW LISTCO SHARE OPTION SCHEME
INTRODUCTION Reference is made to the announcements of the Company dated 26 January 2011 and 16 May 2011 in relation to the Proposed Spin-off. The Board announced that on 26 January 2011, the New Listco submitted a listing application form (for equity securities and debt securities) to the Stock Exchange for the separate listing of, and permission to deal in, the New Listco Shares in issue or to be issued

under the Proposed Spin-off (including the New Listco Shares to be issued upon the exercise of the options that may be granted under the New Listco Share Option Scheme) on the Main Board of the Stock Exchange. The Directors confirm that the Company will implement the Proposed Spin-off in compliance with the requirements under PN15 and other relevant provisions of the Listing Rules. The Proposed Spin-off is expected to be effected by way of introduction. Upon completion of the Distribution, the New Listco will cease to be a subsidiary of the Company. It is expected that the New Listco will be beneficially owned as to 75% in aggregate by Mr. Lee Wan Keung and Mr. Norman Lee, an executive Director, through an investment holding company which was held by them in the proportion of 55% and 45% respectively as at the Latest Practicable Date, immediately following the Proposed Spin-off. The New Listco Share Option Scheme will be conditionally adopted by the New Listco prior to the date of this circular for the purposes of the Proposed Spin-off. The Proposed Spin-off is conditional upon the fulfillment of the conditions set out in the paragraph headed Conditions precedent for the Proposed Spin-off below. Completion of the Proposed Spin-off will not affect the listing of the Shares on the Main Board of the Stock Exchange. The Shares will continue to be separately listed and traded on the Main Board of the Stock Exchange after completion of the Proposed Spin-off. The purposes of this circular are, among others: (1) to provide Shareholders with information on the reasons for, and the benefits of, the Proposed Spin-off (together with such other information relating to the Proposed Spin-off as required by the Listing Rules for a major transaction of the Company) and the adoption of the New Listco Share Option Scheme which will be conditionally adopted by the New Listco; to provide Shareholders with general information of the chemical business carried out by the Remaining Group; to set out the recommendations of the Independent Board Committee to the Shareholders regarding the Proposed Spin-off; to set out the letter of advice from OSK containing its recommendation to the Independent Board Committee and the Shareholders regarding the terms of the Proposed Spin-off and its recommendation to the Shareholders regarding voting on the Proposed Spin-off; and to give notice to Shareholders of the EGM at which ordinary resolutions will be proposed to approve the Proposed Spin-off (including the Distribution) and transactions related thereto and the adoption of the New Listco Share Option Scheme.
(2)
(3)
(4)
(5)

Shareholders and potential investors of the Company should note that the Proposed Spin-off (including the Distribution) is subject to, among others, the final decision of the Board and the board of directors of the New Listco and the approvals from the Shareholders and the Stock Exchange, and may or may not proceed. Accordingly, Shareholders and potential investors of the Company are reminded to exercise caution when dealing in the Shares. The Proposed Spin-off As at the Latest Practicable Date, the Proposed Spin-off had not been approved by the Board. The Board will hold a meeting to conditionally approve the Proposed Spin-off on 18 May 2011. The Proposed Spin-off is expected to be conducted by way of an introduction together with the Distribution whereby all issued New Listco Shares will be (i) distributed to the Qualifying Shareholders by way of distribution in specie without raising any new fund; and (ii) as regards those New Listco Shares to which the Excluded Shareholders shall be entitled to under the Distribution, they will be sold to independent third party(ies) who purchased such shares; and will be accompanied by a separate listing of the New Listco Shares on the Main Board of the Stock Exchange. The final structure of the Proposed Spin-off will be decided by the Board and the board of the New Listco. Upon successful conclusion of the Proposed Spin-off, the New Listco Shares will be separately listed on the Main Board of the Stock Exchange. The Distribution As at the Latest Practicable Date, the Distribution had not been approved by the Board. The Board will hold a meeting to conditionally approve the Distribution on 18 May 2011. Pursuant to the Distribution, each Qualifying Shareholder or Excluded Shareholder will be entitled to one New Listco Share or equivalent cash payment (net of expenses) (as appropriate) for each Share held as at the close of business on the Distribution Record Date, as explained below. Based on the issued share capital of the Company as at the Latest Practicable Date and assuming it will remain unchanged on the Distribution Record Date, to effect the Distribution, subject to the Stock Exchange granting approval for the separate listing of, and permission to deal in, the New Listco Shares on the Main Board of the Stock Exchange, a total of 825,000,000 New Listco Shares will be issued representing the entire issued share capital of the New Listco. There will be no dilution of the attributable interests of the Qualifying Shareholders in the Spin-off Group. If there are any Overseas Shareholders at the close of business on the Distribution Record Date, the Overseas Shareholders may not be eligible to receive the New Listco Shares as explained below. The Directors will make enquiries, based on legal opinions provided by legal advisers if the Directors consider it necessary, as to whether the transfer of the New Listco Shares to the Overseas Shareholders may contravene the applicable securities legislation of the relevant overseas places or the requirements of the relevant regulatory body or stock exchange. If, after making such enquiry, the Directors are of the opinion that it would be necessary or expedient, on account either of the legal restrictions under the laws of the relevant place or any requirement of the relevant regulatory body or stock exchange in that place, not to

transfer the New Listco Shares to such Overseas Shareholders, the Excluded Shareholders (if any) will be entitled to the Distribution but will not receive the New Listco Shares. Instead, they will receive a cash amount equals to the net proceeds of the sale by the Company on their behalf of the New Listco Shares to which they would otherwise be entitled pursuant to the Distribution after dealings in the New Listco Shares commence on the Stock Exchange at the prevailing market price. The Company will ensure that the purchaser(s) of such New Listco Shares will be independent third party(ies). The proceeds of such sale, net of expenses, will be paid to the relevant Excluded Shareholders in Hong Kong dollars. Cheques for such net proceeds are expected to be despatched within approximately two weeks following the commencement of dealings in the New Listco Shares on the Main Board of the Stock Exchange. As at the Latest Practicable Date, there was no Overseas Shareholder. Subject to the granting of the separate listing of, and permission to deal in, the New Listco Shares on the Main Board of the Stock Exchange as well as compliance with the stock admission requirements of HKSCC, the New Listco Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of Listing or such other date as may be determined by HKSCC. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. Further announcement(s) will be made by the Company to update Shareholders and prospective investors of the Company of any significant development relation to the Proposed Spin-off as and when appropriate. Shareholding effect of the Distribution Shareholding structure upon completion of the Distribution As at the Latest Practicable Date, the Company directly held the entire interest of the New Listco. Upon completion of the Distribution, taking no account of any New Listco Shares which may be allotted and issued pursuant to the exercise of the options which may be granted under the New Listco Share Option Scheme, the Company will no longer be interested in the then issued share capital of the New Listco.

The following chart sets out the corporate structure of the Spin-off Group immediately after certain reorganisation (which has not been completed as at the Latest Practicable Date but will be completed as of the date of this circular) and the Distribution:
Mr. Lee Wan Keung 55%
Mr. Norman Lee 45%
Public shareholders 25%
Full Gold Trading Limited (Notes ii and iii) 75% New Listco (Note i) 100% Lee & Man Development Company Limited 100%
Lee & Man Company Limited
Lee & Man Handbag Manufacturing Company Limited
Well Known Associates Limited
Lee & Man Management Company Limited
Lee & Man Luggage Manufacturing Company Limited
Lee & Man Handbag (Thailand) Company Limited
Lee Wai Handbag Manufacturing Company Limited
100%
100%
Catini Bags, Inc.
Catini Bags (Hong Kong) Limited
Dongguan Lee Wai Handbag Company Limited
Notes: (i) As at the date of this circular, the New Listco is a wholly-owned subsidiary of the Company, and is the sole shareholder of Lee & Man Development Company Limited, which, together with its subsidiaries, are wholly-owned subsidiaries of the Company. Subject to the conditions disclosed in the paragraph headed The Distribution above being satisfied, the New Listco Shares held by the Company will be (i) distributed to the Qualifying Shareholders in the Distribution; (ii) and as regards those New Listco Shares to which the Excluded Shareholders shall be entitled to under the Distribution, they will be sold to independent third party(ies) who purchased such
(ii)
10

shares. Fortune Star, which is an investment holding company held as to 55% by Mr. Lee Wan Keung and 45% by Mr. Norman Lee, being the Shareholder holding 75% of the issued Shares as at the Latest Practicable Date, will direct the New Listco Shares to be issued to and held by Full Gold Trading Limited. (iii) Upon completion of the Distribution 75% of the New Listco Shares will be held by Full Gold Trading Limited, which is an investment holding company owned as to 55% by Mr. Lee Wan Keung and 45% by Mr. Norman Lee.
The shareholding structure of the New Listco set out above is indicative only and the final percentage of relevant shareholdings will be published in the Listing Document. Businesses of the Group and the Spin-off Group The New Listco was incorporated as an exempted company in the Cayman Islands on 4 January 2011 and as at the Latest Practicable Date was wholly-owned by the Company. On 22 March 2011, the name of the New Listco changed from Heng Sing Holdings Limited to Lee & Man Handbags Holding Limited. Before the Distribution, the major businesses of the Group are (i) the manufacture and sale of handbags and (ii) the manufacture and sale of chloro-alkali chemical products which consist of dichloromethane, chloroform and other ancillary products such as hydrogen peroxide and sodium hydroxide. Both businesses in the Group continued to develop stably with clear delineation. Immediately following completion of the Distribution, the Remaining Group will be principally engaged in the manufacture and sale of chloro-alkali chemical products which consist of dichloromethane, chloroform and other ancillary products such as hydrogen peroxide and sodium hydroxide. On the other hand, the Spin-off Group, which is the subject of the Proposed Spin-off, will focus on the manufacture and sale of handbags. The core businesses of the Remaining Group and Spin-off Group, by their very nature, are separate and distinct businesses which are independently operated in distinct markets. Further details of the business of the Remaining Group are set out in the paragraph headed Information of the Remaining Group below. By the nature of the products and services provided by the Remaining Group and the Spin-off Group, there is a clear delineation between the business retained by the Remaining Group and the business of the Spin-off Group and there will not be any overlapping of business of the Remaining Group and that of the Spin-off Group. Directorship of the Remaining Group and the Spin-off Group The Board currently comprises a total of seven Directors. The board of directors of the New Listco is expected to comprise seven directors. None of the directors of the New Listco, except Ms. Wai and Mr. Heng Victor Ja Wei, will assume any employment, role or function in any company that will form part of the Remaining Group after completion of the Proposed Spin-off. Ms. Wai, an executive Director and the chairman of the Company, will remain as an executive Director after the Proposed Spin-off. Ms. Wai had been concentrated on strategic planning and overseeing the overall operation and general management of the Spin-off Group since her appointment as an executive Director and the chairman of the Company in 2001. It is expected that Ms. Wai will serve the same function and will not be involved in 11

the day-to-day operation of business of the Spin-off Group after the Proposed Spin-off. It is also expected that Ms. Wai will be responsible for overall management of the Remaining Group without involving in its day-to-day operation after the Proposed Spin-off. Mr. Heng Victor Ja Wei, who was appointed as an independent non-executive Director on 30 June 2010, did not participate in the day-to-day operation of the Remaining Group and the Spin-off Group before Listing and it is expected that Mr. Heng will not participate in such work in both the Remaining Group and the Spin-off Group after the Proposed Spin-off. Mr. Kung Phong and Ms. Poon Lai Ming, each being an executive Director, will resign from his/her directorship subject to Listing. Each of Ms. Wai and Mr. Kung Phong was appointed as an executive director of the New Listco on 4 January 2011. Each of Ms. Poon Lai Ming and Mr. Heng Victor Ja Wei will be appointed as an executive director of the New Listco and an independent non-executive director of the New Listco respectively. Ms. Wong Yuet Ming, the company secretary of the Company, will remain as the common company secretary for both the Company and the New Listco and will become an executive Director. Ms. Wong will lead two separate company secretarial personnel to carry out the daily general secretarial work for each of the Company and the New Listco while Ms. Wong will mainly be responsible for overseeing compliance and reporting obligations of the Company and the New Listco. To discharge her role as executive Director, Ms. Wong will be responsible for giving advice in financial aspects when the Remaining Group makes strategic plan and decision without involving day-to-day operation of the business of the Remaining Group. Other than Ms. Wai and Mr. Heng Victor Ja Wei, who will be the common executive director and independent non-executive director for both the Company and the New Listco respectively, all of the other three executive Directors will be independent from the Spin-off Group. The daily operations and management of the Spin-off Group will continue to be handled by the other three executive directors of the New Listco and a group of experienced senior management with extensive experience in handbag business and other employees of the Spin-off Group. Hence, it is expected that there will not be any conflict of interests arising as a result of the overlapping of the roles of the two directors. It is the intention of the Board to maintain continued management independence of the Remaining Group and the Spin-off Group. All directors of the New Listco, except Ms. Wai and Mr. Heng Victor Ja Wei, will not have any official capacity or involvement in, or be remunerated by the Remaining Group after the Proposed Spin-off. Save as disclosed above, it is also expected that there will not be any overlapping senior management between the Remaining Group and the Spin-off Group after the Proposed Spin-off.
12

Financial effects of the Distribution Effect on net assets value Upon completion of the Distribution, the New Listco will cease to be a subsidiary of the Company and the financial information of the Spin-off Group will no longer be consolidated into the financial statements of the Company. The consolidated total assets, total liabilities and net assets of the Company immediately after the Distribution will be reduced by the amount of the total assets, total liabilities and net assets of the Spin-off Group, respectively. As at 31 December 2010, the audited consolidated total assets, total liabilities and net assets of the Company were approximately HK$2,256.6 million, HK$879.2 million and HK$1,377.4 million respectively. As at 31 December 2010, the Spin-off Group had total assets of HK$471.3 million, total liabilities of HK$259.3 million and net assets of HK$212.0 million. Effect on earnings Upon completion of the Distribution, the New Listco will no longer be a subsidiary of the Company and the financial information of the Spin-off Group will no longer be consolidated into the financial statements of the Company. For each of the two years ended 31 December 2010, the consolidated profit before taxation and extraordinary items of the Company amounted to approximately HK$244.3 million and HK$529.5 million respectively while the Spin-off Group recorded consolidated profit before taxation and extraordinary items of approximately HK$117.5 million and HK$111.1 million for the respective year. For each of the two years ended 31 December 2010, the consolidated net profit of the Company amounted to approximately HK$233.8 million and HK$457.5 million respectively while the Spin-off Group recorded consolidated net profit of approximately HK$106.9 million and HK$102.2 million for the respective year. On the assumption that the Distribution had taken place at the beginning of the year ended 31 December 2010, the consolidated profit of the Company for the year ended 31 December 2010 would have been reduced by the amount of consolidated profit of the Spin-off Group. As the Distribution will be accounted for by the Company as a distribution in specie at carrying value, neither gain nor loss will be recognised by the Company as a result of the Distribution. Reasons for and benefits of the Proposed Spin-off The Board believes that the separate listing of the Spin-off Group will be beneficial to both the Company and the New Listco based on the following reasons: (i) the Company and the New Listco are believed to have different growth paths and different business strategies and the Proposed Spin-off will allow separate platforms for the businesses of the two groups;
13

(ii) the Proposed Spin-off will create two groups of companies and will offer investors with an opportunity to participate in the future development of both the Remaining Group as well as the Spin-off Group and flexibility to invest in both or either of the groups; (iii) the Proposed Spin-off will be by way of a distribution in specie whereby upon listing of the New Listco Shares, all such shares will be held by the Qualifying Shareholders and the independent third party(ies) who purchased the New Listco Shares which the Excluded Shareholders shall be entitled to under the Distribution. Excluded Shareholders will be entitled to receive the net proceeds from the disposal of such New Listco Shares to which they are entitled under the Distribution. The Company will thus be able to return value to the Shareholders in the form of liquid securities or cash; (iv) the Proposed Spin-off will enable the management team of the Company to continue to focus on building the core businesses of the Remaining Group (i.e. the manufacture and sale of chloro-alkali chemical products including dichloromethane, chloroform, and other by-products such as hydrogen peroxide and sodium hydroxide), thereby enhancing the decision-making process and its responsiveness to market changes; (v) the Proposed Spin-off will provide a mechanism to attract and motivate the Spin-off Groups management directly in line with the financial performance of the Spin-off Group on a standalone basis;
(vi) the Proposed Spin-off is expected to improve the operational and financial transparency of the Spin-off Group and provide investors, the market and rating agencies with greater clarity on the businesses as well as the respective financial status of the Spin-off Group and the Remaining Group; and (vii) the Proposed Spin-off will provide separate fundraising platforms for the Remaining Group and the Spin-off Group with respect to their respective operations and future expansion. Conditions precedent for the Proposed Spin-off The Proposed Spin-off will be conditional on, among others, the following: (i) the Stock Exchange approving the Proposed Spin-off;
(ii) the Listing Committee granting separate listing of, and permission to deal in, the New Listco Shares in issue and any New Listco Shares which may be issued pursuant to the exercise of the options granted under the New Listco Share Option Scheme, on the Main Board of the Stock Exchange; and (iii) the Shareholders passing ordinary resolutions at the EGM approving the Proposed Spin-off and the New Listco Share Option Scheme.
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If any of these and other applicable conditions are not fulfilled or waived, if applicable, prior to the dates and times to be specified, the Proposed Spin-off (including the Distribution) will not proceed and the Stock Exchange will be notified immediately and an announcement will be published by the Company as soon as practicable thereafter. No proceeds from the Proposed Spin-off The Proposed Spin-off does not involve an offering of new Shares or any other securities and no new proceeds will be raised pursuant to the Proposed Spin-off. CLOSURE OF REGISTER The register of members of the Company will be closed from 9 June 2011 to 13 June 2011 (both dates inclusive) (or such other date(s) as the Board may determine and announce) for the purpose of determining the entitlements to the Distribution and the eligibility of Shareholders to attend and vote at the EGM. No transfer of Shares may be registered during that period. In order to qualify for the Distribution, all transfers must be lodged with the Registrar by no later than 4:30 p.m. on 8 June 2011 (or such later date as the Board may determine and announce). The last day of dealing in the Shares on a cum entitlement basis is expected to be on 3 June 2011. SHARE OPTION SCHEME The New Listco Share Option Scheme As at the Latest Practicable Date, the New Listco Share Option Scheme had not been adopted. The board of the New Listco will conditionally adopt its own share option scheme prior to the date of this circular. The purpose of the New Listco Share Option Scheme is to enable the Spin-off Group to grant options to selected participants as incentives or rewards for their contribution to the Spin-off Group. It will thus enable the Spin-off Group to reward its employees, its directors and other selected participants for their contributions to the Spin-off Group and to motivate them to contribute to the development of the Spin-off Group. The New Listco Share Option Scheme constitutes share option scheme governed by Chapter 17 of the Listing Rules. As the directors of the New Listco are entitled to determine any performance targets and minimum holding period which apply to an option on a case by case basis, and fix the subscription price, it is expected that grantees of an option will have an incentive to contribute to the development of the Spin-off Group. A summary of the principal terms of the New Listco Share Option Scheme is set out in Appendix II to this circular. The New Listco Share Option Scheme will become effective upon: (i) the Shareholders passing an ordinary resolution at the EGM to approve and adopt the New Listco Share Option Scheme and the shareholders of the New Listco passing an ordinary resolution to approve and adopt the New Listco Share Option Scheme; (ii) the Listing Committee granting the listing of, and permission to deal in, such number of the New Listco Shares to be issued pursuant to the exercise of any options which may be granted under the New Listco Share Option Scheme; and (iii) the commencement of dealings
15

in the New Listco Shares on the Main Board of the Stock Exchange. Pursuant to Rule 17.03(3) of the Listing Rules, the total number of the New Listco Shares which may be issued upon exercise of all options to be granted under the New Listco Share Option Scheme and other share option scheme of the New Listco (if any) must not in aggregate exceed 10% of the number of all issued New Listco Shares on the date of the EGM. The total number of the issued New Listco Shares as at the date of this circular is 825,000,000 and assuming that no New Listco Shares will be issued before the date of the EGM, the maximum number of the New Listco Shares to be issued under the General Scheme Limit (as defined in Appendix II to this circular) is 82,500,000. The Directors consider it inappropriate to disclose the value of options which may be granted under the New Listco Share Option Scheme as if they had been granted as at the Latest Practicable Date. Any such valuation will have to be made on the basis of certain option pricing model or other methodology, which depends on various assumptions including, the exercise price, the exercise period, interest rate, expected volatility and other variables. As no options have been granted, certain variables are not available for calculating the value of options. The Directors and the directors of the New Listco believe that any calculation of the value of options as at the Latest Practicable Date based on a number of speculative assumptions would not be meaningful and would be misleading to investors. INFORMATION OF THE REMAINING GROUP Upon the completion of the Distribution, the Spin-off Group, which is principally engaged in the manufacture and sale of handbags, will cease to be the Companys subsidiaries. The Remaining Group will focus on manufacture and sale of chloro-alkali chemical products which consist of dichloromethane, chloroform and other ancillary products such as hydrogen peroxide and sodium hydroxide. The Company set up its chemical business in 2005. Production of our chemical production plant commenced in May 2008 and its principal products are dichloromethane, chloroform and other ancillary products such as hydrogen peroxide and sodium hydroxide. CMS products have a broad spectrum of usages. The major usage of chloroform is as the major upstream raw material of chlorodifluoromethane (HCFC-22), which is mainly used as feedstock for fluorochemical products and also used in refrigerants for air-conditioners and refrigerators. Other usages of chloroform include being the feedstuff in the synthesis of dyestuffs, pharmaceutical products and pesticides. Dichloromethane also has a broad spectrum of applications including adhesives, pharmaceuticals (as processing solvent for the manufacture of steroids, antibiotics, vitamins, and tablet coatings), blowing agent for polyurethanes, degreasing solvent, refrigerant (HFC-32) production and paint removers. As at the Latest Practicable Date, the Remaining Groups chemical production plant had an annual designed production capacity of 120,000 tons CMS, 160,000 dry tons sodium hydroxide and 120,000 tons hydrogen peroxide.
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Industry overview Source of information The CCAON Report The Company commissioned CCAON, an independent third party consultancy entity, to conduct a market research report on, among other things, the market conditions of dichloromethane and chloroform market in China. The market research report is not an official government publication and is prepared in the ordinary course of business of CCAON. According to CCAON, CCAON has been providing market reports and consultation services on the chloro-alkali and related chemical industries in China to enterprises or business units since 2004. The Company decided to commission CCAON as there is no readily available public information on dichloromethane and chloroform market in China. Overview of the China economy GDP and GDP per capita Chinas economy has been growing rapidly since the implementation of market liberalisation policies by the PRC government in the late 1970s. Economic growth was further reinforced by the launch of special economic zones along the coastal PRC regions since the 1980s. According to the National Bureau of Statistics of China, the national GDP increased from approximately RMB18,493.7 billion in 2005 to approximately RMB34,050.7 billion in 2009, representing a CAGR of approximately 16.49%, reflecting a rapid growth. The GDP per capita also increased from approximately RMB14,185 in 2005 to approximately RMB25,575 in 2009, representing a CAGR of approximately 15.88%. The following chart sets forth Chinas GDP and GDP per capita for the periods indicated. GDP & GDP per capita in China, 2005-2009
40,000 35,000 GDP (RMB billion) 30,000 25,000 20,000 15,000 10,000 5,000 0 2005 2006 GDP
Source: National Bureau of Statistics of China
30,000 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 GDP per capita (RMB)
GDP per capita
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In view of the global financial crisis which started in 2008, the PRC government implemented a RMB4 trillion economic stimulus plan in November 2008, which mainly targeted at areas of domestic consumption, infrastructures, residential housing etc.. As evident from the above figures, the PRC economy has responded positively to the plan, with the national GDP boosted by approximately 8.4% in 2009 over that of 2008. Disposable income growth of urban households The consumer purchasing power in China has been increasing along with the economic growth. According to the National Bureau of Statistics of China, the annual disposable income per capita of urban households in China has increased from approximately RMB10,493 in 2005 to approximately RMB17,175 in 2009, representing a CAGR of approximately 13.11%. The following chart sets out the annual disposable income per capita of urban households in China for the periods indicated. Annual disposable income per capita of urban households in China, 2005-2009
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2005 2006 2007 2008 2009
Chinas dichloromethane market Consumption for dichloromethane in the China market According to Euro Chlor, dichloromethane, a versatile chlorinated solvent, is produced by chlorination of either methanol or methyl chloride. It is used in a broad spectrum of applications including adhesives, pharmaceuticals (as processing solvent for the manufacture of steroids, antibiotics, vitamins, and tablet coatings), blowing agent for polyurethanes, degreasing solvent, refrigerant (HFC-32) production and paint removers. The following chart sets forth a breakdown of the consumption of dichloromethane in the China market in 2010.
RMB
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Breakdown of consumption of dichloromethane in China, 2010
Refrigerant (HFC-32) Production Others 3% 2% Degreasing Solvent 8% Blowing Agent for Polyurethanes 20% Adhesives 35%
Pharmaceuticals 32%
Source: CCAON
According to CCAON, the domestic consumption volume of dichloromethane in China grew from approximately 257.22 thousand tons in 2005 to approximately 467.25 thousand tons in 2010, representing a CAGR of approximately 12.68%. Due to deteriorating global and domestic market conditions in 2008, many domestic enterprises suspended their production operations and resulted in a low level of domestic consumption volume. However, since the second half of 2009, the domestic consumption volume increased substantially due to the market recovery with increasing demand from the downstream industries. With the development of the aeronautical and aviation technology and the construction of high speed railway in China, together with the applications of the new energy sector, the demand for adhesives in the China market demonstrated a rising trend with a stable growth rate of approximately 10% per annum in recent years. Moreover, given the reform of the medical system in China and the continuous improvement of Chinas medical insurance system, the pharmaceutical sector in China is undergoing a rapid growth period with an annual growth rate of approximately 20% in recent years and it is expected that the demand for pharmaceutical products in China would maintain a continuous rapid growth trend. Production for dichloromethane in China According to CCAON, the production volume of dichloromethane in China grew from approximately 213.90 thousand tons in 2005 to approximately 485.64 thousand tons in 2010, representing a CAGR of approximately 17.82%. With the success of anti-dumping measures of dichloromethane implemented in China, the imports of dichloromethane to China showed a downward trend from 2005 to 2010. The import of dichloromethane to China decreased from approximately 47.98 thousand tons in 2005 to approximately 7.44 thousand tons in 2010, representing a negative CAGR of approximately 31.12%. The net export of dichloromethane from China was at a level of approximately 18.39 thousand tons in 2010, accounted for approximately 3.79% of the total production volume of dichloromethane in China in 2010. The table below sets forth the annual dichloromethane production and domestic consumption levels in the China market for the periods indicated.
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Annual production volume and domestic consumption levels of dichloromethane in China, 2005-2010
600 500 thousand tons 400 300 200 100 0 2005 2006 2007 2008 2009 2010
Total production volume

Source: CCAON
Total domestic consumption
Chinas chloroform market Consumption for chloroform in the China market Chloroform can be generated by the chlorination of methanol and chloromethane on hydrodechlorination of CTC. Chloroform is the major raw material of chlorodifluoromethane (HCFC-22), which is mainly used as feedstock for fluorochemical products and also used in refrigerants for air-conditioners and refrigerators. Chloroform is also used as feedstock in the synthesis of dyestuffs, pharmaceutical products and pesticides.
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The demand for chloroform in China is closely correlated with its downstream production activities. In particular, the consumption of chloroform is highly driven by the production of HCFC-22. According to CCAON, the production of HCFC-22 accounted for 84% of the total consumption of chloroform in China. The following chart sets forth a breakdown of the demand for chloroform in the China market: Breakdown of consumption of chloroform in China, 2010
Degreasing Solvent Others 3% 3% Pharmaceuticals & Pesticide 10% HCFC-22 Production 84%
Source: CCAON
According to CCAON, the domestic consumption volume of chloroform in China grew from approximately 501.18 thousand tons in 2005 to approximately 603.55 thousand tons in 2010, representing a CAGR of approximately 3.79%. Due to the financial crisis in the third quarter of 2008 and also the strengthening of the environmental protection efforts in China, there was a decrease in demand of chloroform from its downstream industries in 2009. As the domestic consumption volume of chloroform is highly driven by the production and market development potential of HCFC-22, the analysis of the HCFC-22 market is shown as follows: Refrigerant market in China HCFC-22 is used in refrigerants for air-conditioners and refrigerators. According to the National Bureau of Statistics of China, the annual production volume of air-conditioners was approximately 67,650 thousand units in 2005 and approximately 80,780 thousand units in 2009, representing a CAGR of approximately 4.53% and the annual production volume of household refrigerators was approximately 29,870 thousand units in 2005 and approximately 59,300 thousand units in 2009, representing a CAGR of approximately 18.70%. The following chart sets forth the annual production volume of air-conditioners and household refrigerators in China for the periods indicated.
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Annual production volume of air-conditioners and household refrigerators in China, 2005-2009
90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005 2006 2007 2008 2009
Thousand units
Total production volume of air conditioners Total production volume of household refrigerators
According to the discussion paper entitled HFC-23 (CHF3) emission trend response to HCFC-22 (CHCIF2) production and recent HFC-23 emission abatement measures published by Copernicus Publications on behalf of the European Geosciences Union (Note), use of HCFC-22 in the commercial refrigeration, air-conditioning and extruded polystyrene foam industries is considered to be a dispersive use and results in emissions to the atmosphere. HCFC-22 has an ozone depletion potential (ODP) of 0.055 and is included in the phase-out of HCFC consumption and production for dispersive uses in developed countries under the Montreal Protocol and its amendments. Decision XIX/6 of the 2007 Meeting of the Montreal Protocol Parties stipulates a phase-out timetable for production and consumption of HCFCs for dispersive applications in developed and developing countries (Decision XIX/6). Developing countries will be subject to a phase-out beginning with a freeze in 2013, with the baseline for that phase-out based on the average ODP-weighted consumption of 2009 and 2010. The production of HCFC-22 for use as feedstock (such as in in fluoropolymer manufacture), however, is considered to be a non-dispersive use and thus unrestricted. According to CCAON, the demand for HCFC-22 used in refrigerants is expected to maintain at a high level within a certain period in the future, and is mainly due to (i) the implementation of the Home Appliances Go Rural policy in China which increased the demand for HCFC-22 from air-conditioner manufacturers; (ii) the development of refrigerating sector in other developing countries; and (iii) the drastic fall in the global production capacity of HCFC-22, particularly in developed countries, which, the Directors believed was due to Decision XIX/6. Moreover, there is temporarily no foreseeable
Note: The authors of this paper are B. R. Miller, M. Rigby, L. J. M. Kuijpers, P. B. Krummel, L. P. Steele, M. Leist, P. J. Fraser, A. McCulloch, C. Harth, P. Salameh, J. Muhle, R. F. Weiss, R. G. Prinn, R. H. J. Wang, S. ODoherty, B. R. Greally and P. G. Simmonds.
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replacement of chloroform for its existing applications in the short run, and also with the development of new energies, the features of chloroform will also be developed which will then enable chloroform to be used in more applications. Fluorochemcial market in China HCFC-22 is also used as feedstock of fluorochemical products and is not restricted under Decision XIX/6. Fluorochemical products are widely used in infrastructure projects due to its chemical resistance properties. Driven by the increasing trend of urbanisation and industrialisation in recent years, total fixed asset investments in China also increased substantially, growing at a CAGR of approximately 26.12% from approximately RMB8,877.36 billion in 2005 to approximately RMB22,459.88 billion in 2009 according to the National Bureau of Statistics of China. The following chart sets out the total fixed asset investments in China for the periods indicated. Total fixed asset investments in China, 2005-2009
25,000 20,000 RMB billion 15,000 10,000 5,000 0 2005 2006 2007 2008 2009
Total fixed asset investments in China

The Directors believe that as a result of Chinas growth in total fixed asset investments and an infrastructure boom due to the economic stimulus plan implemented in China after the financial crisis broke out in 2008, Chinas construction industry experienced rapid growth in recent years. According to the National Bureau of Statistics of China, the total output of Chinas construction industry increased at a CAGR of approximately 22.10% from approximately RMB3,455.21 billion in 2005 to approximately RMB7,680.77 billion in 2009. The following chart sets forth the total output of construction industry in China for the periods indicated.
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Total output of construction industry in China, 2005-2009
10,000 8,000 RMB billion 6,000 4,000 2,000 0 2005 2006 2007 2008 2009
Total output of construction industry in China

Production for chloroform in the China market According to CCAON, the production volume of chloroform in China grew from approximately 264.60 thousand tons in 2005 to approximately 497.84 thousand tons in 2010, representing a CAGR of approximately 13.47%. Chloroform produced in China is mainly used for domestic applications. The table below sets forth the annual chloroform production and domestic consumption levels in the China market for the periods indicated. Annual production volume and domestic consumption levels of chloroform in China, 2005-2010
800 700 600 thousand tons 500 400 300 200 100 0 2005 2006 2007 2008 2009 2010
Total production volume

Source: CCAON
Total domestic consumption
According to CCAON, with the success of anti-dumping measures of chloroform which was implemented in China and also listing of HCFC-22 in the Product Catalogue of Prohibited Processing Business announced on 5 April 2008, which banned the export of HCFC-22 and indirectly banned the import of chloroform under processing business and chloroforms 24

re-export as HCFC-22, the import of chloroform to China showed a downward trend from 2005 to 2010. The import of chloroform to China decreased from approximately 236.58 thousand tons in 2005 to approximately 105.71 thousand tons in 2010, representing a negative CAGR of approximately 14.88%. Pricing dynamics Pricing of raw materials The manufacturing system of the Company achieves overall material balance and makes use of every by-product as feedstock to produce value-added chemicals, such as converting chlorine into CMS and hydrogen into hydrogen peroxide. As such, there are two major raw materials used, which are salt and methanol. Salt The electrolysis of salt and in the form of brine, which produces sodium hydroxide, chlorine and hydrogen. According to CCAON, the average price of salt in the Eastern China was approximately RMB321 per ton in 2009 and approximately RMB386 per ton in 2010. Methanol Methanol is used for the production of CMS. According to Chemease, the average price of methanol in the Jiangsu Province was approximately RMB2,005 per ton in 2009 and approximately RMB2,554 per ton in 2010. Pricing of products Dichloromethane and chloroform In general, the price of CMS is influenced by the costs of raw materials, including salt and methanol, and also the supply-demand balance within the CMS market. The prices of CMS increased significantly since 2009. According to CCAON, the average price of dichloromethane in the China market was approximately RMB1,900 per ton in January 2009 and approximately RMB7,000 per ton in December 2010, representing a CAGR of approximately 91.94%. The average price of chloroform in the China market was approximately RMB2,000 per ton in January 2009 and approximately RMB8,100 per ton in December 2010, representing a CAGR of approximately 101.25%. In September 2010, as a consequence of the implementation of the energy saving and emission reduction policy of the Eleventh Five-Year Plan of the PRC, many of the CMS suppliers in China had to reduce their production volume, which resulted in a shortage of supply in the CMS market and thus drove the price of CMS up. Moreover, due to a high demand of chloroforms downstream product, HCFC-22, the price of chloroform reached a record high. In February 2011, the highest price of dichloromethane was approximately RMB7,200 per ton, while the highest price of chloroform went up to approximately RMB11,500 per ton. The following charts set forth the historical prices of salt in the Eastern China market and methanol in the Jiangsu Province market, dichloromethane and chloroform in the China market for the periods indicated.
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Selling price of salt, methanol, dichloromethane and chloroform, 2009-2010
10,000 8,000 RMB/ton 6,000 4,000 2,000 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Dichloromethane
Source: Chemease and CCAON
Chloroform
Salt
Methanol
Competitive strengths The Directors believe that the following competitive strengths of the Remaining Groups chemical business had contributed to the success of the business to date and will contribute to its potential for future long-term growth: Proximity to customers The production plant of our chemical business is situated in Changshu City, Suzhou, which is in the southern part of the Jiangsu Province, the PRC. Changshu City is within approximately 100 km from Shanghai, and is adjacent to the Zhejiang Province and on the southern bank of Yangtze River. All of the top ten customers for our chemical business for the year ended 31 December 2010 are located in the Jiangsu Province and the Zhejiang Province, the PRC. With close proximity to our customers, our Directors believe that the transportation costs for delivering our products to our customers incurred by us will be lower when compared to products sourced by them from manufacturers in other parts of China or overseas. With the close proximity, we can also offer better after-sales services to our customers as we can respond to their needs more efficiently. Convenient water transportation Our chemical production plant is situated in (Changshu Economic Development Region Coastal Industrial Park*), which is on the southern part of Yangtze River, a part of Changjiang, the largest river in the PRC, the rivulet of which passed through seven provinces and two municipalities in the PRC and is the only water transportation channel which passes through eastern, central and western parts of the PRC. We deliver our chemical products which are in liquid form from our production plant to the ports at Yangtze River directly through the pipelines connecting our production plant and the ports, from
26

where we deliver our products mainly by water transportation. Water transportation can generally carry larger volume of liquid than truck transportation for each shipment, and the unit cost of water transportation is significantly lower than that of truck transportation. Our proximity to Yangtze River and our facilities for delivery of products from our production plant to the ports allow us to make full use of the more efficient water transportation and enjoy cost advantages. Efficient production process utilisation of by-products In our production system, most of the by-products are being used as feedstock to produce more value-added products for sale. For example, chlorine produced after electrolysis of brine is used for production for CMS. Hydrogen, another by-product through electrolysis, is further processed to produce hydrogen peroxide for sale. We are also able to convert CTC, a by-product in the production of our CMS into chloroform. The Directors believe that our efficient utilisation of the by-products from our production processes reduces wastages and enable us to lower our overall costs and improves our profitability. High entry barriers We believe that the CMS industry has a relatively high entry barrier to new entrants. The high entry barrier to potential new-comers helps avoid over competition in this industry. According to the revisions to the (Foreign Investment Industrial Guidance Catalogue) issued by the Ministry of Commerce of the PRC and the National Development and Reform Commission on 31 October 2007 and took effect on 1 December 2007, enterprises with foreign ownership were restricted from engaging in the business of the production of CMS products. According to our PRC legal advisers, enterprises existed prior to the coming into force of the revisions to the Catalogue are not affected. CTC is a by-product in the production of CMS. Pursuant to the Vienna Convention for the Protection of the Ozone Layer adopted on 22 March 1985, to which the government of the PRC acceded on 11 September 1989, and its protocols The Montreal Protocol on Substances that Deplete the Ozone Layer which came into force on 1 January 1989 with their respective adjustments and ratifications, parties to such protocols agreed to ensure that from 1 January 1996 (for developed countries) and 1 January 2010 (for developing countries) the calculated level of production and consumption of CTC will not exceed zero, unless under special circumstances. In 2004, the PRC government formulated a plan for the acceleration of elimination of Halon/CFC/CTC production (Halon/CFCs/CTC (Plans for the acceleration of elimination of Halon/CFCs/CTC production in China*)) which set down a plan for the acceleration of the elimination of the production and consumption of, among other substances, CTC to 1 July 2007. In order to implement the Vienna Convention for the Protection of the Ozone Layer and The Montreal Protocol on Substances that Deplete the Ozone Layer, the State Council of the PRC further promulgated the (Depletion of Ozone Substance Management Regulation*) (the Ozone Regulation) on 1 June 2010, pursuant to which entities are not allowed to sell, produce and consume CTC unless being granted a quota permit and in accordance with such quota permit. The quota permit can only be obtained if the entity has, among others, the approved environmental protection facilities. In our production of CMS, CTC produced will
27

be converted into chloroform, one of our main products, by using a PRC patented technology invented by us, namely (A gas phase catalytic hydrodechlorination plant*), the patent for utility model of which was obtained by us on 16 September 2009. Hence, we will not be affected by the Ozone Regulation. However, we believe that the Ozone Regulation would be a barrier to new entrants and also existing players which do not have the capability to treat CTC produced during their production processes. Business outlook and strategies We are optimistic about the business outlook of the CMS industry. Chinas economy enjoyed robust growth in recent years, according to the National Bureau of Statistics of China, the national GDP increased from approximately RMB18,493.7 billion in 2005 to approximately RMB34,050.7 billion in 2009, representing a CAGR of approximately 16.49%. The GDP per capita also increased from approximately RMB14,185 in 2005 to approximately RMB25,575 in 2009, representing a CAGR of approximately 15.88%. As CMS products have a wide spectrum of usage, we believe that with Chinas growing economy and increasing per capita spending power, there will be an increasing demand for CMS products and other related products, in particular products for use in the fluorochemical industry. Since the commencement of our chemical business, we have always been putting our efforts on improving production efficiency of existing products and developing new products. In March 2010, we modified and refined our production process and increased the annual production capacity of our hydrogen peroxide from approximately 60,000 tons to approximately 120,000 tons. We also plan to start the commercial operation of our fourth CMS production line with a designed capacity of 40,000 tons within the first half of 2011. As to new products, we plan to develop perchloroethylene (PCE) to broaden our product range. We have also entered into land use rights transfer agreement with the government of Ruichang City, Jiangxi Province of the PRC (the Ruichang Government) on 18 January 2011, whereby the Ruichang Government agreed to grant us state-owned land use rights in respect of an area of around 1,241 mu (approximately 827,333.33 sq.m.) located in Ruichang City, Jiangxi Province of the PRC, the details of which were disclosed in the announcement of the Company dated 18 January 2011. The acquisition of land was part of our business plan to develop our chemical business. Products and customers Our main products are chloromethane products (CMS) which consist of chloroform and dichloromethane, which are principally made from salt. The sales of CMS accounted for over 60% of the total revenue of the Remaining Group for the year ended 31 December 2010. The major use of chloroform is as the major upstream raw material of chlorodifluoromethane (HCFC-22), which is mainly used as feedstock for fluorochemical products, and also used in refrigerants for air-conditioners and refrigerators. Other usages of chloroform include being feedstuff in the synthesis of dyestuffs, pharmaceutical products and pesticides. Dichloromethane also has a broad spectrum of applications including adhesives,
28

pharmaceuticals (as processing solvent for the manufacture of steroids, antibiotics, vitamins, and tablet coatings), blowing agent for polyurethanes, degreasing solvent, refrigerant (HFC-32) production and paint removers. We also sell ancillary products including hydrogen peroxide and sodium hydroxide, which are produced in the production process of CMS. We are also capable of producing hydrogen peroxide of different concentration for different customers needs. Our customers are mainly fluorochemical manufacturers which are located in the PRC. Production and raw materials Raw materials for the production of our products include salt and methanol, which accounted for approximately 73.9% of the total costs of sales for the Remaining Group for the year ended 31 December 2010. Set out below is a simplified chart showing our production process:
Salt + water Brine
Electrolysis
chlorine + methanol Chlorination
hydrogen + oxygen hydrogen peroxide
sodium hydroxide
chloroform
dichloromethane
CTC
CTC converted to chloroform Our products
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As the first step of our production, water is added to salt to form brine as a medium for electrolysis. Electrolysis is a process of using an electric current to separate elements in a mixture of ions. Hydrogen, sodium hydroxide and chlorine are produced after the electrolysis of brine. Methanol is then added to chlorine by chlorination to produce dichloromethane and chloroform, our major products, while hydrogen will react with oxygen to produce hydrogen peroxide. CTC produced during the production process of dichloromethane and chloroform in chlorination will be converted into chloroform by our patented technology, further details of which are disclosed in the paragraph headed Research and development below. The table below illustrates the annual production capacity and utilisation rate of our production facilities for the year ended 31 December 2010: For the year ended 31 December 2010 Annual production capacity (Notes 1 and 2) dichloromethane chloroform Approximate annual production volume dichloromethane chloroform Approximate utilisation rate dichloromethane chloroform
Notes: 1. Production capacity for the production lines is based on its designed annual capacity according to equipment manufacturers specifications. However, the actual production capacity may exceed its designed capacity due to machine and process optimisation. As confirmed by the Directors, the production capacity of 120,000 tons for CMS products is typically allocated to 50% and 50% to dichloromethane and chloroform (i.e. 60,000 tons for each), although theoretically we can allocate the production capacity in some other ratios.
60,000 tons 60,000 tons
70,000 tons 78,000 tons
117% 130%
2.
Research and development Our research and development team, which has about 30 members, focuses on improving production efficiency. Despite our short operating history since 2007, we have obtained one patent for utility model registration in the PRC in respect of CTC conversion, namely (A gas phase catalytic hydrodechlorination plant*), by using which CTC produced will be converted into chloroform, one of our main products. We have another four patent applications being announced and three other patent applications being filed in the PRC from 2008 to 2010.
30

LISTING RULES IMPLICATIONS As at the Latest Practicable Date, the Company directly held the entire equity interest of the New Listco. Under the current structure of the Proposed Spin-off, immediately upon completion of the Distribution, the Company will no longer be interested in the then issued share capital of the New Listco and it is expected that the New Listco will beneficially owned as to 75% in aggregate by Mr. Lee Wan Keung and Mr. Norman Lee, an executive Director, through an investment holding company which was held by them in the proportion of 55% and 45% respectively as at the Latest Practicable Date. The Proposed Spin-off will constitute a deemed disposal of the Companys equity interest in its subsidiary under Rule 14.29 of the Listing Rules. Given that one of the applicable percentage ratios calculated in accordance with Rule 14.06 of the Listing Rules is more than 25% but less than 75%, the Proposed Spin-off, if proceeds, will constitute a major transaction for the Company under Chapter 14 of the Listing Rules and be subject to the reporting, announcement and shareholders approval requirements under the Listing Rules. Approval from the Shareholders for the Proposed Spin-off is also required under PN 15 of the Listing Rules. In addition, the New Listco Share Option Scheme will also be subject to approval of the Shareholders under Chapter 17 of the Listing Rules. EGM As no Shareholder has a material interest in the Proposed Spin-off and the New Listco Share Option Scheme which is different from that of the other Shareholders, all Shareholders are entitled to vote on the ordinary resolutions to approve the Proposed Spin-off and the adoption of the New Listco Share Option Scheme. A notice convening the EGM to be held on Monday, 13 June 2011 at 10:30 a.m. at Unit A, 29/F., Admiralty Centre 1, 18 Harcourt Road, Hong Kong is set out on pages N-1 to N-3 of this circular. Whether or not you intend to attend the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and deposited together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of that power or authority, at the offices of the Companys Hong Kong branch share registrar, Tricor Secretaries Limited, at 26th Floor, Tesbury Centre, 28 Queens Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish. RECOMMENDATIONS The Directors (including the independent non-executive Directors) are of the view that the terms of the Proposed Spin-off and the adoption of the New Listco Share Option Scheme are fair and reasonable so far as the Shareholders and the Company are concerned and in the interests of the Company and the Shareholders as a whole. An Independent Board Committee has been formed to advise the Shareholders in connection with the Proposed Spin-off. OSK has been appointed as an independent financial adviser to advise the Independent Board Committee and the Shareholders on the same. OSK considers that the
31

Proposed Spin-off and the terms thereof are fair and reasonable so far as the Shareholders and the Company are concerned and that the Proposed Spin-off is in the interest of the Company and the Shareholders as a whole. Accordingly, OSK advises the Independent Board Committee to recommend, and OSK themselves recommend, the Shareholders to vote in favour of the resolutions in relation to the Proposed Spin-off. The letter from OSK containing its advice in relation to the Proposed Spin-off, together with the factors and reasons it considered in arriving at its opinion, is set out on pages 35 to 52 of this circular. The Independent Board Committee, having taken into account the advice of OSK, considers that the terms of the Proposed Spin-off are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Shareholders to vote in favour of the ordinary resolutions to approve the Proposed Spin-off and transactions related thereto as set out in the notice of EGM on pages N-1 to N-3 of this circular. GENERAL CIMB Securities (HK) Limited has been appointed as the sole sponsor of the Proposed Spin-off. The Board expects that the Listing Document containing, among other matters, details of the Distribution will be published in due course. ADDITIONAL INFORMATION This circular is being distributed to the Shareholders. This circular does not constitute an offer or invitation to subscribe for or purchase any securities nor is it calculated to invite any such offer or invitation. Neither this circular nor anything contained therein shall form the basis of any contract or commitment whatsoever. Your attention is drawn to the additional information set out in the appendices to this circular. Yours faithfully For and on behalf of the board of directors of Lee & Man Holding Limited Wai Siu Kee Chairman
32
LETTER FROM THE INDEPENDENT BOARD COMMITTEE

*
(incorporated in the Cayman Islands with limited liability) (Stock Code: 746) 19 May 2011 To the Shareholders Dear Sir or Madam,
We refer to the circular issued by the Company to its shareholders and dated 19 May 2011 (Circular) of which this letter forms part. Terms defined in the Circular have the same meanings when used in this letter unless the context otherwise requires. Under the Listing Rules, the Proposed Spin-off constitutes a major transaction and a deemed disposal of subsidiary by the Company under Rule 14.29 and pursuant to PN15 to the Listing Rules, it will be subject to the approval of the Shareholders. We have been appointed by the Board to consider the terms of the Proposed Spin-off and to advise the Shareholders as to whether, in our opinion, the terms of the Proposed Spin-off are fair and reasonable and in the interests of the Company and the Shareholders as a whole. OSK has been appointed as the independent financial adviser to advise us and the Shareholders in this respect.
33
LETTER FROM THE INDEPENDENT BOARD COMMITTEE

We wish to draw your attention to the letter from the Board and the letter from OSK as set out in the Circular. Having considered the principal factors and reasons considered by, and the advice of, OSK as set out in its letter of advice, we consider that the terms of the Proposed Spin-off are fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, we would recommend the Shareholders to vote in favour of the ordinary resolutions to approve the Proposed Spin-off at the EGM. Yours faithfully, For and on behalf of Independent Board Committee Mr. Wong Kai Tung, Tony, Mr. Wan Chi Keung, Aaron BBS JP and Mr. Heng Victor Ja Wei Independent non-executive Directors
34
LETTER FROM OSK

The following is the text of a letter of advice from OSK Capital Hong Kong Limited, the independent financial adviser to the Independent Board Committee and Shareholders in respect of the Proposed Spin-off, which has been prepared for the purpose of incorporation into this circular.
11/F., Hip Shing Hong Centre, 55 Des Voeux Road Central, Hong Kong 19 May 2011 The Independent Board Committee and Shareholders Lee & Man Holding Ltd. Dear Sirs,
INTRODUCTION We refer to our appointment as the independent financial adviser to the Independent Board Committee and Shareholders in connection with the Proposed Spin-off, details of which are set out in the circular of the Company dated 19 May 2011 (the Circular) of which this letter forms part. Capitalised terms used in this letter have the same meanings as defined in the Circular, unless the context requires otherwise. On 26 January 2011, the New Listco submitted a listing application form (Form A1) to the Stock Exchange for an application for the separate listing of, and permission to deal in, the New Listco Shares in issue or to be issued under the Proposed Spin-off (including the New Listco Shares to be issued upon the exercise of the options that may be granted under the New Listco Share Option Scheme) on the Main Board of the Stock Exchange. The Proposed Spin-off is subject to the requirements under PN15 of the Listing Rules and other relevant provisions of the Listing Rules. The Spin-off Group, which is the subject of the Proposed Spin-off, comprises certain existing subsidiaries of the Company which are principally engaged in manufacturing and sale of handbags. The Proposed Spin-off is expected to be conducted by way of an introduction together with the Distribution whereby the entire issued New Listco Shares will be distributed to the Qualifying Shareholders by way of distribution in specie without raising any new fund, and will be accompanied by a separate listing of the New Listco Shares on the Main Board of the Stock Exchange. The final structure of the Proposed Spin-off will be 35
LETTER FROM OSK

decided by the Board and the board of the New Listco. Upon the successful conclusion of the Proposed Spin-off, the New Listco Shares will be separately listed on the Main Board of the Stock Exchange. The Proposed Spin-off, if proceeds, will constitute a major transaction for the Company under Chapter 14 of the Listing Rules and is subject to the applicable reporting, announcement and shareholders approval requirements under the Listing Rules. Approval from the Shareholders for the Proposed Spin-off is also required under PN 15 of the Listing Rules. Upon completion of the Proposed Spin-off, the New Listco will cease to be a subsidiary of the Company. It is expected that the New Listco will be beneficially owned as to 75% in aggregate by two substantial shareholders of the Company (through an intermediate holding company) immediately following the Proposed Spin-off. The proposed adoption of the New Listco Share Option Scheme will also be subject to the approval of the Shareholders under Chapter 17 of the Listing Rules. The Independent Board Committee comprising the independent non-executive Directors, Mr. Wan Chi Keung, Aaron BBS JP, Mr. Heng Victor Ja Wei and Mr. Wong Kai Tung, Tony, has been established to give advice and recommendation to the Shareholders in respect of the Proposed Spin-off. OSK Capital Hong Kong Limited has been appointed as the independent financial adviser to advise the Independent Board Committee and Shareholders as to whether the terms of the Proposed Spin-off are fair and reasonable and whether the Proposed Spin-off is in the interests of the Company and Shareholders as a whole. In formulating our opinion, we have relied upon the information, facts and representations contained in the Circular and those supplied or made available to us by the Directors and management of the Company. We have assumed that all such information, facts and representations were true and accurate in all respects at the time they were supplied or made and continue to be true and accurate at the date of the Circular and can be relied upon. We have no reason to doubt the truth, accuracy and completeness of such information and representations and have confirmed with the Directors and management of the Company that no material facts have been withheld or omitted from such information and representations. We have taken all reasonable and necessary steps to comply with the requirements set out in Rule 13.80 of the Listing Rules. We consider that we have been provided with sufficient information to enable us to reach an informed view. We have not, however, conducted any independent verification of such information or any independent in-depth investigation into the business, affairs, financial position or prospects of the Group nor have we carried out any in-depth research on the Group and the Spin-off Group.
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LETTER FROM OSK

PRINCIPAL FACTORS CONSIDERED In formulating our opinion on the Proposed Spin-off, we have taken into consideration the following principal factors: Background information The Group (including the Spin-off Group) is principally engaged in the manufacture and sale of (i) handbags (the Handbag Business) and (ii) chloro-alkali chemical products which consist of dichloromethane, chloroform and other ancillary products such as hydrogen peroxide and sodium hydroxide (the Chemical Business). We understand from the Company that the Handbag Business is conducted through the Spin-off Group, which is the subject of the Proposed Spin-off and, after the Proposed Spin-off, the Remaining Group will continue to be engaged in the Chemical Business. Set out below are highlights of the financial results of the Group (including the Spin-off Group) for the three years ended 31 December 2008, 2009 and 2010: For the year ended 31 December 2008 2009 2010 HK$000 HK$000 HK$000 (audited) (audited) (audited) Revenue Profit before tax Profit after tax 1,064,077 91,600 81,562 1,403,428 244,311 233,823 2,138,808 529,532 457,543
As at 31 December 2010, the Group (including the Spin-off Group) had audited consolidated net assets of HK$1,377.4 million.
37
LETTER FROM OSK

Set out below are highlights of the financial results of the Handbag Business and the Chemical Business for the three years ended 31 December 2008, 2009 and 2010. After the Proposed Spin-off, the Spin-off Group will continue to be engaged in the Handbag Business and the Remaining Group will continue to be engaged in the Chemical Business, both of which have substantial level of businesses and operations: For the year ended 31 December 2008 2009 2010 (note 1) (note 2) (note 2) (audited) (audited) (audited) HK000 % HK000 % HK000 Segment revenue Handbag business Chemical Business
901,240 162,837
84.7% 15.3%
727,555 675,873
51.8% 853,539 48.2% 1,285,269
39.9% 60.1%
1,064,077 100.0% 1,403,428 100.0% 2,138,808 100.0% Segment profit/(loss) (note 3) Handbag business Chemical Business
114,770 (12,512) 102,258
119,865 139,400 259,265
112,799 428,952 541,751
Note 1: Note 2: Note 3:
based on the annual report of the Company for the year ended 31 December 2009. based on the annual report of the Company for the year ended 31 December 2010. before allocation of central administration costs, interest on bank borrowings wholly repayable within five years, finance costs and other income.
FY 2008 As stated in the Companys annual report for the year ended 31 December 2008 (FY 2008), for FY 2008, the Group (including the Spin-off Group) recorded revenue of HK$1,064 million, representing an increase of 35.6% as compared with that of the year ended 31 December 2007, and a net profit of HK$82 million. A majority (approximately 84.7%) of the revenue for FY 2008 was contributed from the Handbag Business, with approximately 15.3% derived from the Chemical Business. The segment results in the Chemical Business recorded a segment loss of approximately HK$13 million in FY 2008. The Company explained that this was a result of the Group only commenced the first production line of chemical production in May 2008. The Chemical Businesss second and third production lines commenced in 2009, which represented a majority of the then production capacity of the Chemical Business. To prepare for the commencement of the second and third production lines, the Group conducted training for its sales and production staff and incurred significant expenses in this regard in FY 2008. The results of the Chemical Business were also affected by the decline of product prices in
38
LETTER FROM OSK

the forth quarter of FY 2008, whilst the Group had already stocked up some level of raw materials before the financial crisis. This adversely affected the profitability of the Chemical Business in FY 2008. FY 2009 As stated in the Companys annual report for the year ended 31 December 2009 (FY 2009), for FY 2009, the Group (including the Spin-off Group) recorded a revenue of HK$1,403.4 million representing an increase of 31.9% than that of FY 2008; and a net profit of HK$233.8 million, representing an increase of 186.7% over that of FY 2008. The Handbag Business and Chemical Business contributed approximately 51.8% and 48.2% to the Groups revenue for FY 2009. The revenue from the Handbag Business for FY 2009 dropped by 19.3% over that of FY 2008. According to the Company, it was partly as a result of the then sluggish European and the U.S. market. In respect of the Chemical Business, with the second and third production lines commenced operation in 2009, the Group recorded a segment profit of approximately HK$139.4 million. The Company considers that the improved profitability of the Chemical Business was mainly attributable to recovery in the PRC domestic market in FY 2009 which is the major market of the Chemical Business. FY 2010 For the year ended 31 December 2010 (FY 2010), the Group (including the Spin-off Group) recorded revenue of HK$2,138.8 million representing an increase of 52.4% over that of FY 2009, and a net profit of HK$457.6 million, representing an increase of 95.7% over that of FY 2009. For FY 2010, the Handbag Business recorded revenue of HK$853.5 million representing an increase of 17.3% over that of FY 2009. For FY 2010, the Chemical Business achieved revenue of HK$1,285.3 million representing an increase of 90.2% over that of FY 2009. The increase in the segment revenue of the Chemical Business was mainly due to the increased selling price of the Groups chemical products as well as the full year commercial operation of the first, second and third chemical production lines. Raw materials which mainly included salt and methanol represented the major cost of production of the Chemical Business and their purchase prices were maintained at a fairly stable level throughout FY 2010. Background information on the Spin-off Group The Spin-off Group is principally engaged in the manufacture and sale of handbags, which include ladies handbags, tote bags, cosmetics bags, childrens bags and backpacks to brand owners or brand carriers, department stores and/or megastores. We understand from the Company that for each of the three years ended 31 December 2008, 2009 and 2010, over 90% of the Spin-off Groups revenue was derived from sales of its products to brand owners or brand carriers, department stores and megastores. A few of the Spin-off Groups products are also sold to importers which will in turn on-sell such products to their customers.
39
LETTER FROM OSK

The Spin-off Groups customers are mainly located in the U.S. and Europe. Currently, all of the handbag products are manufactured in the PRC. The Spin-off Group manufactures products for its customers on an OEM basis. Up to the Latest Practicable Date, the Handbag Business had been carried out by Lee & Man Development Company Limited (a wholly owned subsidiary of the Company, LM Development) and its subsidiaries. For the purpose of the Proposed Spin-off, the entire issued share capital of LM Development is being transferred to the New Listco under a reorganisation exercise (the Reorganisation). The New Listco was incorporated as an exempted company in the Cayman Islands on 4 January 2011 and was as at the Latest Practicable Date wholly-owned by the Company. The Board will hold a meeting to conditionally approve the Distribution which includes, among other things, the payment of a special interim dividend by the Company to be satisfied by way of a distribution in specie of the entire issued share capital of the New Listco to the Qualifying Shareholders in proportion to their respective shareholdings in the Company on the Distribution Record Date. Pursuant to the Distribution, each Qualifying Shareholder will be entitled to one New Listco Share for each Share held on the Distribution Record Date. Upon completion of the Proposed Spin-off, the New Listco (i) will cease to be a subsidiary of the Company and (ii) is expected to be beneficially owned as to 75% in aggregate by Mr. Lee Wan Keung and Mr. Norman Lee (two beneficial controlling Shareholders as at the Latest Practicable Date) immediately upon the Proposed Spin-off takes place. Mr. Norman Lee is also an executive Director. Mr. Lee Wan Keung and Mr. Norman Lee will hold their 75% shareholding interests in the New Listco through an intermediate holding company in the proportion of 55% and 45% respectively. We understand from the Company that the Proposed Spin-off will be conducted by way of introduction where no fund will be raised in connection with the Proposed Spin-off. Completion of the Proposed Spin-off will not affect the listing of the Shares on the Main Board of the Stock Exchange. The Shares will continue to be separately listed and traded on the Main Board of the Stock Exchange after completion of the Proposed Spin-off. Set out below are highlights of the financial results of the Spin-off Group (i.e. the Handbag Business) for the three years ended 31 December 2008, 2009 and 2010: For the year ended 31 December 2008 2009 2010 HK$000 HK$000 HK$000 (audited) (audited) (audited) Revenue Profit before tax Profit after tax 901,240 112,064 102,271 727,555 117,500 106,936 853,539 111,092 102,166
As at 31 December 2010, the Spin-off Group had audited net assets of HK$211.97 million. For FY 2008, the Spin-off Group achieved revenue of approximately HK$901.2 million and a majority of the Groups revenue was derived from sales to customers in the U.S. and Europe.
40
LETTER FROM OSK

For FY 2009, the Spin-off Groups revenue decreased by approximately 19.3% over the previous financial year to approximately HK$727.6 million. We understand from the Company that the drop in revenue was partly due to the global financial crisis causing a contraction of global consumers spending which in turn led to the decline in orders from customers especially those in the U.S. and Europe. For FY 2010, the Spin-off Group recorded revenue of approximately HK$853.5 million, representing a 17.3% increase over that of FY 2009. We understand from the Company that the growth in revenue was mainly attributable to the gradual recovery of consumers spending in the U.S. and the Spin-off Groups continuing efforts in marketing its own design of different collections of handbags. Prospects and future plans of the Remaining Group Upon the completion of the Proposed Spin-off, the Spin-off Group, which is principally engaged in the manufacture and sale of handbags, will cease to be a part of the Group. The Remaining Group will focus on the Chemical Business. We understand from the Company that it is optimistic about the continuing business development of the Remaining Group. As set out in the letter form the board in the Circular (the Letter from the Board), the Directors believe that the Remaining Group had the following, among others, competitive strengths: Proximity to customers The Remaining Groups chemical production plant is situated in Changshu City, Suzhou, which is in the southern part of the Jiangsu Province, the PRC. All of the top ten customers for the Chemical business for the year ended 31 December 2010 are located in the Jiangsu Province and the Zhejiang Province. The close proximity to the major customers helps the Remaining Group control its transportation costs in respect of delivering products to customers. Convenient water transportation The production plant of the Chemical Business is located at the southern part of Yangtze River. Products of the Chemical Business are mainly transported by river that could carry larger volume of products with significantly lower unit cost. High entry barriers As set out in the Letter from the Board, the CMS industry has a relatively high entry barrier to new entrants. According to the revisions to the (Foreign Investment Industrial Guidance Catalogue) issued by the Ministry of Commerce of the PRC and the National Development and Reform Commission on 31 October 2007 and took effect on 1 December 2007, enterprises with foreign ownership were restricted from engaging in the business of the production of CMS products. According to the Companys PRC legal advisers, enterprises existed prior to the coming into force of the revisions to the Foreign Investment Industrial Guidance Catalogue are not affected.
41
LETTER FROM OSK

We agree with the Company that the separate listing of the Handbag Business would allow the Remaining Group and its management to focus on developing its existing Chemical Business. Prospects and future plans of the Spin-off Group after Proposed Spin-off After implementation of the Proposed Spin-off, the Spin-off Group intends to (i) improve its production efficiency and extend the use of the one-piece-flow workflow to its entire production facilities, it will also continue to upgrade its production equipment and to identify other new production equipment; (ii) strengthen and expand customer base by exploring more potential customers as well as developing more new sample products to customers. The Spin-off Group will aim at producing products with a higher value to enhance its profitability and (iii) expand the Spin-off Groups market share in the PRC. In September 2009, the Spin-off Group set up a subsidiary in China with a view to expanding sales in China. The Spin-off Group is also developing and selling handbags products to certain brand owners doing business in China on an OEM basis and the Spin-off Group plans to further expand business with similar business modules (i.e. manufacturing handbag products on an OEM basis for customers) in China. Details of the Proposed Spin-off Structure of the Proposed Spin-off The Board will hold a meeting to conditionally approve the payment of a special interim dividend by the Company to be satisfied by way of a distribution in specie of the entire issued share capital of the New Listco to the Qualifying Shareholders in proportion to their respective shareholdings in the Company on the Distribution Record Date. Pursuant to the Distribution, each Qualifying Shareholder will be entitled to one New Listco Share for each Share held on the Distribution Record Date. The New Listco is a private company wholly-owned by the Group as at the Latest Practicable Date. The Distribution is a way to create a sufficiently wide spread of shareholders for the New Listco and to achieve the separately listing of the New Listco Shares on the Stock Exchange by way of introduction. There is no deemed disposal of the Qualifying Shareholders interest in the New Listco, which is currently held through the Company, as there is no new issue of New Listco Shares in connection with the Proposed Spin-off. We are of the view that the structure of the Proposed Spin-off, in particular, the Distribution, where the New Listco Shares will be distributed to the Qualifying Shareholders save for the arrangement in respect of the Excluded Shareholders fair and reasonable in view of (i) each Qualifying Shareholder shall receive the number of the New Listco Shares in proportion to their respective shareholding in the Company on the Distribution Record Date and there will be no dilution of the indirect attributable interests of the Qualifying Shareholders, (ii) save for the expenses incurred in connection with the Proposed Spin-off, the Proposed Spin-off by way of the Distribution, without any dilution of the indirect attributable interest of the Qualifying Shareholders, shall not have any negative impact on the aggregate value of the Shareholders investments in the Remaining Group and the Spin-off Group and (iii) the listing of the New Listco Shares may help improve the flexibility of the Shareholders in handling their investments in the Chemical Business and the Handbag Business.
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LETTER FROM OSK

The Proposed Spin-off effectively split the Group into the Spin-off Group and the Remaining Group without affecting their aggregate financial position. The existing business structure
Shareholders 100% Company
the Remaining Group - the Chemical Business
the Spin-off Group - the Handbag Business
The business structure immediately upon completion of the Proposed Spin-off

Shareholders 100% Company 100% New Listco
the Chemical Business
the Handbag Business
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LETTER FROM OSK

Set out below is an illustrative shareholding structure of the Spin-off Group immediately prior to the Reorganisation and the Distribution:
Mr. Lee Wan Keung 55% Mr. Norman Lee 45%
Shareholders of the Company 25%
Fortune Star Tradings Ltd. 75%
the Company 100%
LM Development
100%
100%
100% Catini Bags (Hong Kong) Limited
100% Dongguan Lee Wai Handbag Company Limited
Catini Bags, Inc.
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LETTER FROM OSK

Set out below is an illustrative shareholding structure of the Spin-off Group after the Reorganisation and the Distribution:
Mr. Lee Wan Keung 55% Mr. Norman Lee 45%
Public shareholders 25%
Full Gold Trading Limited 75%
New Listco 100%
LM Development
100%
100%
100% Catini Bags (Hong Kong) Limited
100% Dongguan Lee Wai Handbag Company Limited
Catini Bags, Inc.
The shareholding structure of the New Listco set out above is indicative only and the final percentage of the shareholdings will be published in the Listing Document. New Listco Share Option Scheme As set out in the Letter from the Board, it is proposed that the board of the New Listco will conditionally adopt its own share option scheme prior to the date of the Circular. The purpose of the New Listco Share Option Scheme is to enable the Spin-off Group to grant options to selected participants as incentives or rewards for their contribution to the Spin-off Group. It will thus enable the Spin-off Group to reward its employees, its directors and other selected participants for their contributions to the Spin-off Group and to motivate them to contribute to the development of the Spin-off Group. The New Listco Share Option Scheme will become effective upon: (i) the Shareholders passing an ordinary resolution at the EGM to approve and adopt the New Listco Share Option Scheme and the shareholders of the New Listco passing an ordinary resolution to
45
LETTER FROM OSK

approve and adopt the New Listco Share Option Scheme; (ii) the Listing Committee granting the listing of, and permission to deal in, such number of the New Listco Shares to be issued pursuant to the exercise of any options which may be granted under the New Listco Share Option Scheme; and (iii) the commencement of dealings in the New Listco Shares on the Main Board of the Stock Exchange. We have reviewed the summary of the principal terms of the New Listco Share Option Scheme set out in Appendix II of the Circular and we are of the view that it contains the usual terms of share option schemes commonly adopted by companies listed on the Stock Exchange and are in compliance with Chapter 17 of the Listing Rules. Excluded Shareholders As set out in the Letter from the Board, Qualifying Shareholders will receive one New Listco Share for each Share held on the Distribution Record Date. If there are Overseas Shareholders at the close of business on the Distribution Record Date, the Overseas Shareholders may not be eligible to receive the New Listco Shares. As set out in the Letter from the Board, the Directors will make enquiries, to be based on legal opinions provided by the legal advisers if the Directors consider it necessary, as to whether the transfer of the New Listco Shares to the Overseas Shareholders may contravene the applicable securities legislation of the relevant overseas places or the requirements of the relevant regulatory body or stock exchange. If, after making such enquiry, the Directors are of the opinion that it would be necessary or expedient, on account either of the legal restrictions under the laws of the relevant place or any requirement of the relevant regulatory body or stock exchange in that place, not to transfer the New Listco Shares to such Overseas Shareholders, the Excluded Shareholders (if any) will be entitled to the Distribution but will not receive the New Listco Shares. Instead, they will receive a cash amount equals to the net proceeds net of expenses from the sale by the Company on their behalf of the New Listco Shares to which they would otherwise be entitled pursuant to the Distribution after dealings in the New Listco Shares commence on the Stock Exchange at the market price. As at the Latest Practicable Date, there were no Overseas Shareholders. Among those companies listed on the Main Board of the Stock Exchange, we have identified companies in the table below which have involved transactions in relation to spin-off and distribution in specie (the Spin-off Comparable Companies) from 2006 to 2010*. Based on our research, 4 out of 5 cases of the Spin-off Comparable Companies distributed shares of the relevant companies to be spun-off (the Distribution Shares) to their respective overseas shareholders (shareholders whose addresses on the register of members were outside Hong Kong at the then record date) at a cash amount equal to the net proceeds from the sale by the Spin-off Comparable Companies on the overseas shareholders behalf the Distribution Shares to which they would otherwise be entitled pursuant to the distribution in specie, after dealings in the shares of the respective companies to be spun-off (the Dealings) commenced on the Stock Exchange.
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LETTER FROM OSK

Date of announcement/ circular 4 March 2009 (joint announcement of HTIL and Hutchison Whampoa Limited)
Stock code 2332
Company name Hutchison Telecommunications International Limited (HTIL) Hutchison Whampoa Limited Playmates Holdings Ltd. (PHL)
Remarks Overseas shareholders would not receive the Distribution Shares and they would receive a cash amount equals to the net proceeds from the sale of the Distribution Shares by HTIL on their behalf after Dealings at the prevailing market price. Overseas shareholders (excluding certain overseas shareholders whose addresses as shown on the register of members of PHL as at the then record date are in the United Kingdom, Malaysia, Singapore, Macau and the United States (the Excepted Overseas Shareholders)) would not receive the Distribution Shares and they would receive a cash amount equal to the net proceeds from the sale of the Distribution Shares by PHL on their behalf after Dealings at the prevailing market price. The proceeds of such sale, net of expenses, will be paid to the overseas shareholders (excluding the Excepted Overseas Shareholders) in Hong Kong dollars, unless the net proceeds falling to be distributed to the overseas shareholders (excluding the Excepted Overseas Shareholders) is less than HK$100, in which case such proceeds will be retained for the benefit of PHL. Overseas shareholders would not receive the Distribution Shares and the Distribution Shares would be retained by EIL for sale in the market after Dealings for the benefit of the overseas shareholders. Overseas shareholders would not receive the Distribution Shares and they would receive cash in lieu of the relevant number of Distribution Shares to which they would otherwise have been entitled on the basis and subject to the conditions set out in the relevant circular. Overseas shareholders would not receive the Distribution Shares.
13
31 December 2007
635
16 February 2007
163
Emperor International Holdings Ltd. (EIL)
22 December 2006
142
First Pacific Co. Ltd.
8 October 2006
506
China Foods Ltd.
*Source:
the HKEx Fact Book 2006 to 2010 and the respective announcements and circulars of the Spin-off Comparable Companies.
47
LETTER FROM OSK

The Company will only exclude those Excluded Shareholders from getting the New Listco Shares under the Distribution after the Directors making enquires and with reference to legal opinions if they consider it necessary. The New Listco Shares that are not distributed to the Excluded Shareholders whose registered addresses are at places where there are legal or regulatory requirements to comply with and the compliance of which may be costly or impracticable. In this case, the Excluded Shareholders are excluded from the Distribution. Instead, the Company will sell the New Listco Shares on market at market price and return the net proceeds (net of expenses) to those Excluded Shareholders. This on one hand allows the Company to proceed with the Distribution without incurring significant additional cost and on the other hand allows the Excluded Shareholders to continue to entitle the Distribution and will still have a return based on the market prices of the New Listco Shares. If those Excluded Shareholders consider it a good opportunity, they may use the proceeds to buy the New Listco Shares on market subject to complying with any applicable requirements. Besides, based on our research above, we are of the view that such arrangement is in line with the market practice. Accordingly, we consider such arrangement to be reasonable to both the Company and the Excluded Shareholders. Reasons for and benefits of the Proposed Spin-off The Board believes that the separate listing of the New Listco will be, among other things, beneficial to both the Company and the New Listco based on the following reasons: (i) the Company and the New Listco have different growth paths and different business strategies and the Proposed Spin-off will set up separate platforms for the business development of the two groups which in turn on one hand may enable the management team of the Company to continue to focus on building the core business of the Remaining Group, thereby enhancing the decision-making process and its responsiveness to market changes; whilst on the other hand will also provide a mechanism to attract and motivate the Spin-off Groups management directly in line with the financial performance of the Spin-off Group on a standalone basis;
(ii) the Proposed Spin-off will create two groups of companies and will offer the Shareholders and other investors flexibility to participate in the future development of both the Remaining Group and the Spin-off Group or either of the groups; (iii) the Proposed Spin-off is expected to improve the operational and financial transparency of the Spin-off Group and provide investors, the market and rating agencies with greater clarity on the businesses as well as the respective financial status of the Spin-off Group and the Remaining Group; and (iv) the Proposed Spin-off will provide separate fundraising platforms for the Remaining Group and the Spin-off Group with respect to their respective operations and future prospects.
48
LETTER FROM OSK

Delineation of the Handbag Business from the Chemical Business We understand from the Company that the operations of the Spin-off Group are distinct from the Remaining Group. Immediately upon completion of the Proposed Spin-off, the Company will no longer be interested in the then issued share capital of the New Listco. The New Listco was set up for the sole purpose of becoming the listed holding company of the Handbag Business separately from the other businesses of the Remaining Group. The products of the Remaining Group (i.e. the Chemical Business) and those of the Spin-off Group differ significantly with separate production process, unique usages and distinct sales networks. After the Proposed Spin-off, the Remaining Group will continue to engage principally in the Chemical Business and the Spin-off Group will focus on the Handbag Business. The core businesses of the Remaining Group and the Spin-off Group are by their nature separate and distinct businesses which are independently operated. There is a clear delineation between the business of the Remaining Group and that of the Handbag Business. We further understand from the Company that the Company and the New Listco will also function and operate independently in the following areas. (i) The Company confirms that it is expected that the New Listco will be managed by a board of directors comprising seven members. Other than Ms. Wai Siu Kee, an executive director and the chairman of the Company, and Mr. Heng Victor Ja Wei, an independent non-executive Director of the Company, none of the directors of the New Listco will assume any employment, role or function in any company that will form part of the Remaining Group after completion of the Proposed Spin-off. Ms. Wai Siu Kee focuses on and will continue to be involved in the strategic planning and overseeing the overall operation and general management of the Spin-off Group. With regard to the Remaining Group, the Company expects that Ms. Wai will continue to be responsible for the overall management of the Remaining Group without involving in the day-to-day operation after the Proposed Spin-off. Similar to Ms. Wai, the Company expects that Mr. Heng Victor Ja Wei will not participate in the day-to-day operations in both the Remaining Group and the Spin-off Group after the Proposed Spin-off. Mr. Kung Phong and Ms. Poon Lai Ming, each being an executive Director, will resign from his/her directorship subject to Listing. Each of Ms. Wai Siu Kee and Mr. Kung Phong was appointed as an executive director of the New Listco on 4 January 2011. Each of Ms. Poon Lai Ming and Mr. Heng Victor Ja Wei will be appointed as an executive director of the New Listco and an independent non-executive director of the New Listco respectively. Ms. Wong Yuet Ming, the company secretary of the Company, will remain as the common company secretary for both the Company and the New Listco and will become an executive Director. Ms. Wong will lead two separate company secretarial personnel to carry out the daily general secretarial work for each of the Company and the New Listco while Ms. Wong will mainly be responsible for overseeing compliance and reporting obligation of the Company and the New Listco. To discharge her role as
49
LETTER FROM OSK

executive Director, Ms. Wong will be responsible for giving advice in financial aspects when the Remaining Group makes strategic plan and decision without involving day-to-day operation of the business of the Remaining Group. (ii) The Spin-off Group has its own production, merchandising and marketing, product development, logistics procurement and administrative, finance and human resources teams which have been operated and is expected to continue to operate separately and independently of the Remaining Group. (iii) We understand from the Company that it currently expects that the Spin-off Group can finance its own operations. We further understand from the Company that all the outstanding banking facilities of the Spin-off Group are, among other terms, guaranteed by the Company. Agreements in principle for the release of such guarantees replacement by other security and/or corporate guarantees to be provided by the Spin-off Group upon its listing have been obtained from the relevant banks. The Handbag Business and the Chemical Business are very different in nature. We agree that the Proposed Spin-off will help clearly divide the respective businesses of the Remaining Group and the Spin-off Group into separate listed groups which allow the Shareholders and investors to better evaluate the performance, business prospects and investment value of each group and thus will give the Shareholders greater flexibility in handling their investments in the Company and the New Listco. As the Proposed Spin-off will facilitate each of the Company and the New Listco to attract specific group of investors and lenders interested in either the Chemical Business or the Handbag Business, we agree that a separate listing of the New Listco on the Stock Exchange may help improve the Companys and the New Listcos fund rising ability. This is particularly true in the case of the New Listco when it will become a public company and its shares listed on the Stock Exchange. After the listing of the New Listco Shares, the Qualifying Shareholders, if they choose to continue to hold the New Listco Shares, they shall thus be able to enjoy the enhanced prospects of the Spin-off Group as well as the better liquidity of their shareholding in the New Listco. The adoption of the New Listco Share Option Scheme shall help the New Listco attract and retain talent staff. We concur with the Company that the listing of the New Listco should be beneficial to the development of both the Remaining Group and the Spin-off Group.
50
LETTER FROM OSK

Set out below is a chart showing the closing prices of the Shares from 1 January 2010 to the Latest Practicable Date.
As shown in the above chart, the closing prices of the Shares showed an upward trend. The Company announced on 26 January 2011 the submission of the listing application of the New Listco to the Stock Exchange. The closing price of the Shares then increased by 1.06% from HK$8.51 to HK$8.6 on the trading day immediately following the announcement date. On the same date the Heng Sang Index decreased by 0.27%. Financial Impact Effect on earnings Upon completion of the Distribution, the New Listco will no longer be a subsidiary of the Company and the financial information of the Spin-off Group will cease to be consolidated into the financial statements of the Remaining Group. For the year ended 31 December 2010, the consolidated net profit of the Company amounted to approximately HK$457.5 million while the Spin-off Group recorded consolidated net profit of approximately HK$102.2 million for the same year. On the assumption that the Distribution had taken place at the beginning of the year ended 31 December 2010, the consolidated net profit of the Group for the year then ended would have been reduced by the amount of the consolidated profit of the Spin-off Group. As the Distribution will be accounted for by the Company as a distribution in specie at carrying value, the Company does not expect any gain or loss to be recognized as a result of the Distribution. Effect on net assets value As mentioned above, upon completion of the Distribution, the New Listco will cease to be a subsidiary of the Company and the financial information of the Spin-off Group will no longer be consolidated into the financial statements of the Remaining Group.
51
LETTER FROM OSK

In addition, as the New Listco will cease to be a subsidiary of the Company upon completion of the Proposed Spin-off, the consolidated assets, liabilities, and net assets of the Company immediately after the Proposed Spin-off will be reduced by the amount of the assets, liabilities and net assets of the Spin-off Group, respectively. As at 31 December 2010, the Spin-off Group had total assets of HK$471.3 million, total liabilities of HK$259.3 million and net assets of HK$212.0 million. Effect on cashflow The entire issued share capital of the New Listco will be distributed to the Qualifying Shareholders pursuant to the Proposed Spin-off. As at 31 December 2010, the Spin-off Group held a cash and bank balance of HK$56.3 million. The cash and bank balances of the Spin-off Group will cease to be counted as part of the Groups cash and bank balances after the Proposed Spin-off. Any future cash flow of the Spin-off Group will no longer be reflected in the cash flow statement of the Remaining Group after the Proposed Spin-off. The Proposed Spin-off does not involve an offering of the New Listco Shares or any other securities and no new proceeds will be raised. Despite all the effects of the Proposed Spin-off to the Group as mentioned above, the Proposed Spin-off merely split the Group into the Remaining Group and the Spin-off Group to be held by the Qualifying Shareholders. On the basis of aggregating the interests in the Remaining Group and the Spin-off Group, there should not be any material adverse impact on the Qualifying Shareholders interests in the Group (in terms of share of net assets value, profits and net cash) as a result of the Proposed Spin-off. RECOMMENDATION Having considered the principal reasons and factors, we are of the view that the Proposed Spin-off is in the interests of the Company and Shareholders as a whole, and its terms are fair and reasonable so far as the Company and Shareholders are concerned. Accordingly, we advise the Independent Board Committee to recommend the Shareholders vote in favour of the resolution to be proposed at the EGM in relation to approving the Proposed Spin-off. Yours faithfully, For and on behalf of OSK Capital Hong Kong Limited Allen Tze Director
52
APPENDIX I
FINANCIAL INFORMATION OF THE REMAINING GROUP
I.
FINANCIAL SUMMARY Set out below is the unaudited combined financial information of the Remaining Group for the three years ended 31 December 2008, 2009 and 2010 (the Financial Information), which has been prepared on the basis set out in note 1 to the Financial Information. The auditor of the Company has been engaged to report on the Financial Information in accordance with the Hong Kong Standard on Assurance Engagements 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information issued by the Hong Kong Institute of Certified Public Accountants and reported to the directors of the Company that, based on the work described in their report, nothing has come to their attention that causes them to believe that the Financial Information is not prepared on the basis set out in note 1 to the Financial Information.
I-1
APPENDIX I
Combined Statements of Comprehensive Income of the Remaining Group Year ended 31 December 2008 2009 2010 HK$000 HK$000 HK$000 162,837 (153,641) 9,196 6,065 (8,354) (20,992) (6,379) (20,464) (245) (20,709) 675,873 (476,827) 199,046 1,007 (35,696) (26,119) (11,427) 126,811 76 126,887 1,285,269 (712,841) 572,428 5,135 (44,916) (105,434) (8,773) 418,440 (63,063) 355,377
Notes Revenue Cost of sales Gross profit Other income Selling and distribution costs General and administrative expenses Finance costs (Loss) profit before taxation Income tax (expense) credit (Loss) profit for the year Other comprehensive income (Deficit) surplus arising on revaluation of property, plant and equipment Reversal (recognition) of deferred tax liability arising on revaluation of property, plant and equipment Exchange difference arising on translation Share of reserve of a jointly controlled entity Other comprehensive income for the year Total comprehensive income for the year (Loss) earnings per share (HK cents) 2
(4,743)
2,255
7,652
1,829 23,909
261 (696)
(1,913) 38,006 161
20,995
1,820
43,906
286 (2.5)
128,707 15.4
399,283 43.1
I-2
APPENDIX I
Combined Statements of Financial Position of the Remaining Group As at 31 December 2008 2009 2010 HK$000 HK$000 HK$000
Notes NON-CURRENT ASSETS Property, plant and equipment Prepaid lease payments Intangible assets Deposits paid for acquisition of property, plant and equipment Interest in a jointly controlled entity
858,103 30,698 5,292 72,494 966,587
1,024,009 37,516 8,480 12,390 1,082,395
1,128,729 38,095 8,323 28,504 4,706 1,208,357
CURRENT ASSETS Inventories Prepaid lease payments Trade and other receivables Restricted bank balances Bank balances and cash
37,511 546 18,318 28,692 85,067
38,471 720 59,941 1,705 21,805 122,642
85,388 745 153,707 337,095 576,935
CURRENT LIABILITIES Trade and other payables Amount due to the Spin-off Group Amounts due to related companies Tax payable Bank borrowings
151,272 280,044 2,961 42 113,454 547,773
185,652 163,041 7,870 46 138,487 495,096
190,031 6,029 25,403 353,724 575,187
NET CURRENT (LIABILITIES) ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES
(462,706)
(372,454)
1,748
503,881
709,941
1,210,105
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APPENDIX I

As at 31 December 2008 2009 2010 HK$000 HK$000 HK$000
Notes NON-CURRENT LIABILITIES Bank borrowings Other long term payables Deferred taxation
124,800 45,631 971 171,402
83,616 1,676 588 85,880 624,061
41,808 2,863 44,671 1,165,434
NET ASSETS CAPITAL AND RESERVES Share capital Reserves TOTAL EQUITY
332,479
82,500 249,979 332,479
82,500 541,561 624,061
82,500 1,082,934 1,165,434
I-4
APPENDIX I
Combined Statements of Cash Flows of the Remaining Group 2008 HK$000 OPERATING ACTIVITIES (Loss) profit before taxation Adjustments for: Depreciation of property, plant and equipment Share-based payment expense Interest expenses Write-down (reversal of write-down) of inventories Release of prepaid lease payments Amortisation of intangible assets Impairment loss recognised in respect of trade receivables Loss on disposal of property, plant and equipment Interest income Recovery of doubtful debt Operating cash flows before movements in working capital (Increase) decrease in inventories Increase in trade and other receivables Increase in trade and other payables Increase (decrease) in amounts due to related companies Cash generated from operations Hong Kong Profits Tax refunded Income tax paid for other jurisdictions Net cash from operating activities 2009 HK$000 2010 HK$000
(20,464) 20,991 6,379 3,865 546 384 (428)
126,811 50,968 11,427 (3,866) 576 800 114 161 (262)
418,440 87,856 66,804 8,773 727 1,019 480 (1,656) (6)
11,273 (33,409) (15,051) 54,348 2,961 20,122 35 (35) 20,122
186,729 2,906 (42,160) 52,823 4,909 205,207 14 (56) 205,165
582,437 (46,917) (93,760) 47,209 (1,841) 487,128 (37,757) 449,371
I-5
APPENDIX I

2008 HK$000 2009 HK$000 2010 HK$000
INVESTING ACTIVITIES Purchase of property, plant and equipment Investment in a jointly controlled entity Deposit paid on acquisition of property, plant & equipment Increase in prepaid lease payments Decrease (increase) in restricted bank balances Purchase of intangible assets Interest received Proceeds from disposal of property, plant and equipment NET CASH USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Repayment of bank borrowings Dividend paid Interest paid Bank borrowings raised Repayment to the Spin-off Group Advance from the Spin-off Group NET CASH FROM FINANCING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR EFFECT OF CHANGES IN EXCHANGE RATE CASH AND CASH EQUIVALENTS AT END OF THE YEAR
(276,140) (72,613) 4,737 428
(132,383) (87,135) (7,501) (1,705) (921) 262 93
(104,948) (4,545) (105,659) 1,705 1,656 150
(343,588)
(229,290)
(211,641)
(79,332) (41,250) (6,379) 155,541 (200) 305,244 333,624
(165,771) (37,125) (11,427) 148,440 82,997 17,114
(78,241) (132,000) (8,773) 251,785 (76,523) 120,768 77,016
10,158 19,202 (668)
(7,011) 28,692 124
314,746 21,805 544
28,692
21,805
337,095
I-6
APPENDIX I
NOTES TO THE UNAUDITED COMBINED FINANCIAL INFORMATION OF THE REMAINING GROUP

1. GENERAL AND BASIS OF PRESENTATION OF THE UNAUDITED COMBINED FINANCIAL INFORMATION The Company and all its subsidiaries are collectively referred to as the Group. On 26 January 2011, the Company submitted an application to The Stock Exchange of Hong Kong Limited (the Stock Exchange) in connection with the proposed listing by way of introduction of the New Listco, a wholly-owned subsidiary of the Company, on the Stock Exchange (the Listing). The Listing will be effected by way of introduction, together with a distribution-in-specie of the entire share capital of the New Listco to the shareholders of the Company on a pro rata basis (the Distribution). The New Listco is the holding company of the Groups handbag manufacturing business (the Spin-off Group). Immediately following the completion of the Distribution, (i) the Spin-off Group will cease to be subsidiaries of the Company and their financial information will no longer be consolidated by the Group; (ii) the Spin-off Group will be controlled by the same ultimate controlling shareholders as the Company; and (iii) the Company and its subsidiaries other than the Spin-off Group (the Remaining Group) will be engaged solely in the chemical business. The unaudited combined financial information of the Remaining Group has been prepared on the basis that the Distribution had taken place prior to 1 January 2008 and that the Spin-off Group had not been the subsidiaries of the Group during the three years ended 31 December 2010. The amounts included in the unaudited combined financial information have been recognised and measured in accordance with the relevant accounting policies of the Company adopted in the preparation of its consolidated financial statements for the three years ended 31 December 2010, which conform with Hong Kong Financial Reporting Standards (HKFRS) issued by the Hong Kong Institute of Certified Public Accountants. The structure of the Remaining Group did not exist during the three years ended 31 December 2010 as the Distribution has not yet become effective and the Spin-off Group is still part of the Group as at the date of this circular. Accordingly, the unaudited combined financial information of the Remaining Group prepared on the basis as mentioned above does not constitute a set of general purpose financial statements, as defined in Hong Kong Accounting Standard 1 Presentation of Financial Statements. The unaudited combined financial information of the Remaining Group has been prepared solely for the purpose of inclusion in the circular to be issued by the Company in connection with the Proposed Spin-off. 2. REVENUE Revenue represents amounts receivable for goods sold and services provided in the normal course of business, net of discounts and sales related taxes. 3. INCOME TAX EXPENSE (CREDIT) 2008 HK$000 The charge comprises: Current tax: Hong Kong Profits Tax Other jurisdictions income tax Deferred tax: Current year 42 203 245 46 (122) (76) 62,701 362 63,063 2009 HK$000 2010 HK$000
I-7
APPENDIX I
Hong Kong On 26 June 2008, the Hong Kong Legislative Council passed the Revenue Bill 2008 which reduced corporate profits tax rate from 17.5% to 16.5% effective from the year of assessment 2008/2009. Accordingly, the applicable tax rate is 16.5% during the three years ended 31 December 2010. The Peoples Republic of China (the PRC) Under the Law of the Peoples Republic of China on Enterprise Income Tax (the EIT Law) and Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries is 25% from 1 January 2008 onwards. Pursuant to the relevant laws and regulations in the PRC, one of the Remaining Groups PRC subsidiaries is exempted from PRC income tax for two years starting from 2008, followed by a 50% reduction for the next three years. These tax holidays and concessions expire in 2012. Other jurisdictions Taxation arising in other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. 4. TRADE AND OTHER RECEIVABLES 2008 HK$000 Trade receivables Less: allowance for doubtful debts 2,505 2,505 5,329 7,834 9,834 650 18,318 2009 HK$000 24,050 (114) 23,936 9,143 4,375 37,454 21,605 882 59,941 2010 HK$000 9,045 (117) 8,928 70,303 18,045 97,276 54,457 1,974 153,707
Bills receivables Bills receivables discounted with recourse
Prepayment and deposits Other receivables
The Group generally allows its trade customers an average credit period ranged from 0 to 60 days. Included in the balance are trade and bills receivables of HK$97,276,000 (2009: HK$37,454,000 and 2008: HK$7,834,000). The aged analysis of trade and bills receivables based on the invoice date at the end of the reporting period is as follows: 2008 HK$000 Less than 30 days 31 60 days 61 90 days Over 90 days 7,268 302 151 113 7,834 2009 HK$000 33,380 4,074 37,454 2010 HK$000 97,260 16 97,276
I-8
APPENDIX I
5.
TRADE AND OTHER PAYABLES Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period obtained for trade purchases is 30 to 90 days. Included in trade and other payables are trade and bills payables of HK$64,824,000 (2009: HK$57,099,000 and 2008: HK$5,876,000). The aged analysis of trade and bills payables at the end of the reporting period is as follows: 2008 HK$000 Less than 30 days 31 60 days 61 90 days Over 90 days 4,947 693 165 71 5,876 145,396 151,272 2009 HK$000 50,934 2,457 732 2,976 57,099 128,553 185,652 2010 HK$000 53,850 2,040 3,526 5,408 64,824 125,207 190,031
Other payables and accruals
6.
BANK BORROWINGS 2008 HK$000 Bank loans Bank import loans Advances drawn on bills discounted with recourse 235,229 3,025 238,254 Carrying amount repayable: Within one year More than one year, but not exceeding two years More than two years but not more than five years 113,454 41,184 83,616 238,254 Carrying amount of bank loans that are not repayable within one year from the end of the reporting period but contain a repayment on demand clause (shown under current liabilities) 2009 HK$000 217,728 4,375 222,103 68,253 41,808 41,808 151,869 2010 HK$000 377,487 18,045 395,532 142,264 41,808 184,072
238,254
70,234 222,103 (138,487) 83,616
211,460 395,532 (353,724) 41,808
Less: Amounts due within one year shown under current liabilities Amounts shown under non-current liabilities
(113,454) 124,800
Analysed as: Secured Unsecured
238,254 238,254
4,375 217,728 222,103
18,045 377,487 395,532
I-9
APPENDIX I
As at 31 December 2010, the Group had available banking facilities of approximately HK$768,498,000 (2009: HK$450,904,000 and 2008: HK$396,678,000) of which HK$395,532,000 (2009: HK$222,103,000 and 2008: HK$238,254,000) was utilised. 7. SHARE CAPITAL Number of ordinary shares
Amount HK$000
Ordinary shares of HK$0.10 each: Authorised: At 31 December 2008, 31 December 2009 and 31 December 2010
5,000,000,000
500,000
Issued and fully paid: At 31 December 2008, 31 December 2009 and 31 December 2010
825,000,000
82,500
There was no movement in the Companys share capital for the three years ended 31 December 2010.
I-10
APPENDIX I
II. 1.
OTHER FINANCIAL INFORMATION INDEBTEDNESS At the close of business on 31 March 2011, being the latest practicable date for the purpose of preparing this indebtedness statement prior to the printing of this circular, the Group had the following indebtedness: HK$000 Spin-off Group Bank loans Bank import trade loans Trust receipts Advances drawn on bills discounted with recourse Amount due to a related company
50,000 38,563 4,074 8,044 401 101,082
Remaining Group Bank loans Other long-term payables
384,554 31,544 416,098
Total indebtedness of the Group
517,180
Of the Spin-off Groups indebtedness, approximately HK$8,044,000 represents bills receivables of the Spin-off Group already discounted to banks with recourse and the Spin-off Group recognised the full amount of discount proceeds as liabilities. Accordingly, advances drawn on bills discounted with recourse of approximately HK$8,044,000 were secured by bills receivables discounted to banks with recourse. Of the Remaining Groups indebtedness, no bank borrowings are secured over assets of the Remaining Group. In addition, all the Groups banking facilities are secured by corporate guarantees given by the Company. It is expected that the guarantees provided by the Company in support of the Spin-off Group will be released and replaced by guarantees provided by the New Listco (as defined in this Circular) upon listing of its securities on The Stock Exchange of Hong Kong Limited.
I-11
APPENDIX I
Save as aforesaid or as otherwise disclosed herein, the Group did not have outstanding at the close of business on 31 March 2011, any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptable credits, debentures, mortgages, charges, hire purchases commitments, guarantees or other material contingent liabilities. Foreign currency amounts have been translated at the approximate exchange rates prevailing at the close of business on 31 March 2011. 2. WORKING CAPITAL The Directors, after due and careful consideration, are of the opinion that, in the absence of unforeseen circumstances and after taking into account the Groups internal resources, cash flow from operations, present available banking facilities and the institutions providing finance have stated in writing that such facilities exist, completion of the Proposed Spin-off, the Group will have sufficient working capital for its present requirements for at least twelve months from the date of this circular. 3. MATERIAL ADVERSE CHANGE As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 December 2010, being the date to which the latest audited financial statements of the Group were made up. 4. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION OF THE REMAINING GROUP For the year ended 31 December 2010 Results of operation For the year ended 31 December 2010, the Remaining Group had achieved a revenue of approximately HK$1,285.3 million and a net profit of approximately HK$355.4 million, representing an increase of 90.2% and 180.1% respectively, as compared to approximately HK$675.9 million and HK$126.9 million respectively for the same period in 2009. The increase in revenue was mainly due to the increased selling price of our main products, dichloromethane and chloroform, as well as the full year commercial operation of our first, second and third CMS production lines with total actual output of approximately 148,000 tons for the year ended 31 December 2010. At 31 December 2010, the new 4th CMS production lines with designed capacity of 40,000 tons per annum was in the final stage of installation. During the year, the average selling price of the main chemical products, dichloromethane and chloroform, was increased by more than 80% to approximately at RMB4,970 and RMB4,920 respectively due to the keen market demand. Raw materials which mainly include salt and methanol are the largest items of the chemical production costs and their purchase price were maintained at a fairly stable level
I-12
APPENDIX I
throughout the year. As a result, the gross profit margin of the Remaining Groups business was significantly increased to 44.5% for the year ended 31 December 2010 as compared with 29.5% for the same period in 2009. Liquidity and financial resources As at 31 December 2010, the total equity of the Remaining Group was approximately HK$1,165.4 million, the Remaining Groups current assets were approximately HK$576.9 million and current liabilities were approximately HK$575.2 million. As at 31 December 2010, the Remaining Group had bank balances of approximately HK$337.1 million which was placed as short term deposits with major leading banks in Hong Kong and PRC. The Remaining Group generally financed its operations with credit facilities provided by its principal bankers in Hong Kong and the PRC. As at 31 December 2010, the Remaining Group had outstanding bank borrowings of approximately HK$395.5 million. Due to the strong cash inflow generated from the operations, the Remaining Groups net debt-to-equity ratio (total borrowings net of cash and cash equivalents over shareholders equity) has significantly decreased from 0.32 as at 31 December 2009 to 0.05 as at 31 December 2010. Significant investments held As at 31 December 2010, no significant investment was held by the Remaining Group. Segmental information For the financial years ended 31 December 2010, the Remaining Group engaged in a single business of manufacturing and sales of chemical products, thus no segment information is presented. Capital expenditure For the year ended 31 December 2010, the Remaining Group acquired property, plant and equipment and paid deposits at a total amount of approximately HK$210.6 million for expanding its production capacity for its chemical plant in Jiangsu Province of the PRC. Employees and remuneration policies The Remaining Group had a total of around 700 employees as at 31 December 2010. The staff cost for the Remaining Group for the year ended 31 December 2010 amounted to HK$102.2 million. Remuneration packages consisted of salary, wages, allowances, staff welfare, share-based payment expenses as well as discretionary bonuses.
I-13
APPENDIX I
Charges on Remaining Group assets As at 31 December 2010, the Remaining Group did not have any banking facilities which were secured by fixed assets and current assets of the Remaining Group. Exposure to fluctuations in exchange rates and related hedges During the year ended 31 December 2010, the Remaining Group had net exposure to Renminbi income as its revenue and the operating costs were principally denominated in Renminbi dollars. The Remaining Group has not experienced any material difficulties or effects on its operations or liquidity as a result of fluctuation in currency exchange rates during the year ended 31 December 2010. Commitments and contingent liabilities As at 31 December 2010, the Remaining Group had no material commitments and contingent liabilities. For the year ended 31 December 2009 Results of operation The revenue of the Remaining Group increased significantly from approximately HK$162.8 million for the year ended 31 December 2008 to approximately HK$675.9 million for the same period in 2009, representing an annual growth of approximately 315.1%. The increase in turnover was mainly attributable to the increase in the sales of chemical products as a result of the full commercial operation of the first CMS production line and the start-up commercial operation of the second and third CMS production lines in the middle of the year, with actual output of approximately 119,000 tons in aggregate. Liquidity and financial resources As at 31 December 2009, the total equity of the Remaining Group was approximately HK$624.1 million, the Remaining Groups current assets were approximately HK$122.6 million and current liabilities were approximately HK$495.1 million. As at 31 December 2009, the Remaining Group had bank balances of approximately HK$21.8 million which was placed as short term deposits with major leading banks in Hong Kong and PRC. The Remaining Group generally financed its operations with credit facilities provided by its principal bankers in Hong Kong and the PRC. As at 31 December 2009, the Remaining Group had outstanding bank borrowings of approximately HK$222.10 million.
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APPENDIX I
Due to the strong cash inflow from the operations, the Remaining Groups net debt-to-equity ratio (total borrowings net of cash and cash equivalents over shareholders equity) has significantly decreased from 0.63 as at 31 December 2008 to 0.32 as at 31 December 2009. Significant investments held As at 31 December 2009, no significant investment was held by the Remaining Group. Segmental information For the financial years ended 31 December 2009, the Remaining Group engaged in a single business of manufacturing and sales of chemical products, thus no segment information is presented. Capital expenditure For the year ended 31 December 2009, the Remaining Group acquired property, plant and equipment and paid deposits at a total amount of approximately HK$ 219.5 million for expanding the production capacity of its chemical plant in Jiangsu Province of the PRC. Employees and remuneration policies The Remaining Group had a total of around 600 employees as at 31 December 2009. The staff cost for the Remaining Group for the year ended 31 December 2009 amounted to approximately HK$27.5 million. Remuneration packages consisted of salary, wages, allowances, staff welfare, as well as discretionary bonuses. Charges on Remaining Group assets As at 31 December 2009, the Remaining Group did not have any banking facilities which were secured by fixed assets and current assets of the Remaining Group. Exposure to fluctuations in exchange rates and related hedges During the year ended 31 December 2009, the Remaining Group had net exposure to Renminbi income as its revenue and the operating costs Remaining Group were principally denominated in Renminbi dollars. The Remaining Group has not experienced any material difficulties or effects on its operations or liquidity as a result of fluctuation in currency exchange rates during the year ended 31 December 2009. Commitments and contingent liabilities As at 31 December 2009, the Remaining Group had no material commitments and contingent liabilities.
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APPENDIX I
For the year ended 31 December 2008 Results of operation The Remaining Groups first CMS production line started its commercial operation in May 2008, with the total actual output of 26,000 tons. The second and third CMS production lines were under installation and it was expected to start commercial operation in June 2009. To prepare for the production of the second and third CMS production lines, sales and production staff have been recruited and trained since August 2008, and accordingly, a major portion of pre-operation costs had been incurred in the year ended 31 December 2008. Moreover, due to the global financial crisis in the third quarter of 2008, the average selling price of the chemical products dropped significantly resulting in margin compression especially the Remaining Group required two months raw material inventory in the warehouse to maintain its normal operation. As a result, the Remaining Group recorded a net loss of approximately HK$20.7 million for the year ended 31 December 2008. Liquidity and financial resources As at 31 December 2008, the total equity of the Remaining Group was approximately HK$332.5 million, the Remaining Groups current assets were approximately HK$85.1 million and current liabilities were approximately HK$547.8 million. As at 31 December 2008, the Remaining Group had bank balances of approximately HK$28.7 million which was placed as short term deposits with major leading banks in Hong Kong and PRC. The Remaining Group generally financed its operations with credit facilities provided by its principal bankers in Hong Kong and the PRC. As at 31 December 2008, the Remaining Group had outstanding bank borrowings of approximately HK$238.3 million. The Remaining Groups net debt-to-equity ratio (total borrowings net of cash and cash equivalents over shareholders equity) was 0.63 as at 31 December 2008. Significant investments held As at 31 December 2008, no significant investment was held by the Remaining Group. Segmental information For the financial years ended 31 December 2008, the Remaining Group engaged in a single business of manufacturing and sales of chemical products, thus no segment information is presented.
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APPENDIX I
Capital expenditure For the year ended 31 December 2008, the Remaining Group acquired property, plant and equipment and paid deposits at a total amount of approximately HK$ 348.8 million for business expansion of its chemical plant in Jiangsu Province of the PRC. Employees and remuneration policies The Remaining Group had a total of around 450 employees as at 31 December 2008. The staff cost for the Remaining Group for the year ended 31 December 2008 amounted to HK$21.9 million. Remuneration packages consisted of salary, wages, allowances, staff welfare, as well as discretionary bonuses. Charges on Remaining Group assets As at 31 December 2008, the Remaining Group did not have any banking facilities which were secured by fixed assets and current assets of the Remaining Group. Exposure to fluctuations in exchange rates and related hedges During the year ended 31 December 2008, the revenue and the operating costs of the Remaining Group were principally denominated in Renminbi dollars. The Remaining Group has not experienced any material difficulties or effects on its operations or liquidity as a result of fluctuation in currency exchange rates during the year ended 31 December 2008. Commitments and contingent liabilities As at 31 December 2008, the Remaining Group had no material commitments and contingent liabilities. 5. FINANCIAL AND TRADING PROSPECTS OF THE REMAINING GROUP The Remaining Group will continue to expand and to focus on the PRC domestic market. The fourth CMS production line will start its commercial operation within first half of 2011, where the output is expected to increase by 40,000 tons of CMS products and 60,000 dry tons of sodium hydroxide, as such the total annual production capacity will reach 160,000 tons of CMS products, 220,000 dry tons of sodium hydroxide and 120,000 tons of hydrogen peroxide. As to the new product, the Remaining Group plans to develop perchloroethylene to broaden its product range. The Remaining Group plans to construct a pier next to its production plant in Jiangsu Province of the PRC for its own use to further lower its logistic costs. Moreover, the Remaining Group has entered into a project agreement with the Ruichang City Government to acquire a piece of land of approximately 827,333 square meters at Ruichang City, Jiangxi Province of the PRC for the business development in the next five years. Successful implementation of the business development plan could have a positive impact to the future profitability of the Remaining Group.
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The management of the Remaining Group will execute step-by-step the established market policies and strategies for business development and be fully devoted to generate favourable returns for the Shareholders.
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APPENDIX II
SUMMARY OF THE PRINCIPAL TERMS OF THE NEW LISTCO SHARE OPTION SCHEME
This Appendix summarises the principal terms of the New Listco Share Option Scheme and does not form, nor is intended to be, part of the New Listco Share Option Scheme nor should it be taken as affecting the interpretation of the rules of the New Listco Share Option Scheme. THE NEW LISTCO SHARE OPTION SCHEME The following is a summary of the principal terms of the New Listco Share Option Scheme proposed to be approved and adopted by ordinary resolution of the Shareholders at the EGM and shareholders of the New Listco. (a) Purposes of the scheme The purpose of the New Listco Share Option Scheme is to enable the Spin-off Group to grant options to selected participants as incentives or rewards for their contribution to the Spin-off Group. The Directors consider the New Listco Share Option Scheme, with its broad basis of participation, will enable the Spin-off Group to reward the employees, the directors of the New Listco and other selected participants of the Spin-off Group for their contributions to the Spin-off Group after completion of the Proposed Spin-off. Given that the directors of the New Listco are entitled to determine any performance targets to be achieved as well as the minimum period that an option must be held before an option can be exercised on a case by case basis, and that the exercise price of an option cannot in any event fall below the price stipulated in the Listing Rules or such higher price as may be fixed by the directors of the New Listco, it is expected that grantees of an option will make an effort to contribute to the development of the Spin-off Group so as to bring about an increased market price of the New Listco Shares in order to capitalise on the benefits of the options granted. (b) Who may join The directors of the New Listco (which expression shall, for the purpose of this paragraph, include a duly authorised committee thereof) may, at its absolute discretion, invite any person belonging to any of the following classes of participants, to take up options to subscribe for the New Listco Shares: (aa) any employee the (Eligible Employee) (whether full-time or part-time including any executive director but excluding any non-executive director) of the New Listco, any of its subsidiaries or any entity (Invested Entity) in which the Spin-off Group holds any equity interest; (bb) any non-executive directors (including independent non-executive directors) of the New Listco, any of its subsidiaries or any Invested Entity; (cc) any supplier of goods or services to any member of the Spin-off Group or any Invested Entity; (dd) any customer of any member of the Spin-off Group or any Invested Entity;
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APPENDIX II
(ee) any person or entity that provides research, development or other technological support to the Spin-off Group or any member of any Invested Entity; (ff) any shareholder of any member of the Spin-off Group or any Invested Entity or any holder of any securities issued by any member of the Spin-off Group or any Invested Entity; (gg) any advisor (professional or otherwise) or consultant to any area of business or business development of any member of the Spin-off Group or any Invested Entity; and (hh) any other Spin-off Group or classes of participants who have contributed or may contribute by way of joint venture, business alliance or other business arrangement to the development and growth of the Spin-off Group, and, for the purposes of the New Listco Share Option Scheme, the offer (the Offer) for the grant of an option (the Option) to subscribe for the New Listco Shares granted pursuant to the New Listco Share Option Scheme options may be made to any company wholly-owned by one or more persons belonging to any of the above classes of participants. For avoidance of doubt, the grant of any options by the New Listco for the subscription of the New Listco Shares or other securities of the Spin-off Group to any person who falls within any of the above classes of participants shall not, by itself, unless the directors of the New Listco otherwise determined, be construed as a grant of Option under the New Listco Share Option Scheme. The eligibility of any of the above class of participants to an Offer shall be determined by the directors of the New Listco from time to time on the basis of the directors option as to his contribution to the development and growth of the Spin-off Group. (c) Maximum number of the New Listco Shares (aa) The maximum number of the New Listco Shares which may be allotted and issued upon the exercise of all outstanding Options granted and yet to be exercised under the New Listco Share Option Scheme and any other share option scheme adopted by the Spin-off Group must not in aggregate exceed 30% of the share capital of the New Listco in issue from time to time. (bb) The total number of the New Listco Shares which may be issued upon exercise of all options (excluding, for this purpose, options which have lapsed in accordance with the terms of the New Listco Share Option Scheme and any other share Option scheme of the Spin-off Group) to be granted under the New Listco Share Option Scheme and any other share option scheme of the Spin-off Group must not in aggregate exceed 10% of the New Listco Shares in issue at time dealing in the New Listco Shares commence on the Stock Exchange (General Scheme Limit). Based on the total number of issued New Listco Shares as at the date of this
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APPENDIX II
circular and assuming that no New Listco Shares will be issued before the date of the EGM, the maximum number of New Listco Shares to be issued under the General Scheme Limit is 82,500,000. (cc) Subject to (aa) above but without prejudice to (dd) below, the New Listco may issue a circular to its shareholders and seek approval of its shareholders in general meeting to refresh the General Scheme Limit provided that the total number of the New Listco Shares which may be allotted and issued upon exercise of all Options to be granted under the New Listco Share Option Scheme and any other share option schemes of the Spin-off Group must not exceed 10% of the New Listco Shares in issue as at the date of approval of the limit and for the purpose of calculating the limit, options (including those outstanding, cancelled, lapsed or exercised in accordance with the New Listco Share Option Scheme and any other share option scheme of the Spin-off Group) previously granted under the New Listco Share Option Scheme and any other share option scheme of the Spin-off Group will not be counted. The circular sent by the New Listco to its shareholders shall contain, among other information, the information required under Rule 17.02(2)(d) of the Listing Rules and the disclaimer required under Rule 17.02(4) of the Listing Rules. (dd) Subject to (aa) above and without prejudice to (cc) above, the New Listco may seek separate shareholders approval in general meeting to grant Options under the New Listco Share Option Scheme beyond the General Scheme Limit or, if applicable, the extended limit referred to in (cc) above to participants specifically identified by the New Listco before such approval is sought. In such event, the New Listco must send a circular to its shareholders containing a general description of the specified participants who may be granted such options, the number and terms of options to be granted, the purpose of granting options to the specified participants with an explanation as to how the terms of the options serve such purpose and such other information required under Rule 17.02(2)(d) of the Listing Rules and the disclaimer required under Rule 17.02(4) of the Listing Rules. (d) Maximum entitlement of each participant The total number of the New Listco Shares issued and which may fall to be issued upon exercise of the Options and any other share option scheme of the Spin-off Group (including both exercised or outstanding options) to each participant in any 12-month period shall not exceed 1% of the issued share capital of the New Listco for the time being (Individual Limit). Any further grant of Options in excess of the Individual Limit in any 12-month period up to and including the date of such further grant shall be subject to the issue of a circular to the shareholders of the New Listco and the shareholders approval in general meeting of the New Listco with such participant and his associates abstaining from voting. In such event, the New Listco must send a circular to its shareholders containing with disclosure in the identity of the participants, the number and terms of options to be granted (and options previously granted to such participant), and such other information required under Rule 17.02(2)(d) of the Listing
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APPENDIX II
Rules and the disclaimer required under Rule 17.02(4) of the Listing Rules. The number and terms (including the exercise price) of options to be granted to such participant must be fixed before shareholders approval and the date of board meeting for proposing such further grant should be taken as the date of grant for the purpose of calculating the exercise price under note (1) to Rule 17.03(9) of the Listing Rules. (e) Grant of options to connected persons (aa) Any grant of Options to a director, chief executive or substantial shareholder of the New Listco or any of their respective associates (as defined under the Listing Rules) must be approved by independent any non-executive directors of the New Listco (excluding independent non-executive director who or whose associate is the grantee of the Options). (bb) Where any grant of Options to a substantial shareholder of the New Listco or an independent non-executive director of the New Listco or any of their respective associates, would result in the New Listco Shares issued and to be issued upon exercise of all Options already granted and to be granted (including Options exercised, cancelled and outstanding) to such person in the 12-month period up to and including the date of such grant: (i) representing in aggregate over 0.1% of the New Listco Shares in issue; and
(ii) having an aggregate value, based on the closing price of the New Listco Shares at the offer date of each offer made to the participants, in excess of HK$5 million; such further grant of options must be approved by the shareholders of the New Listco in general meeting. The New Listco must send a circular to its shareholders. All connected persons of the New Listco must abstain from voting at such general meeting, except that any connected person may vote against the relevant resolution at the general meeting. Any vote taken at the meeting to approve the grant of such options must be taken on a poll. Any change in the terms of Options granted to a substantial shareholder of the New Listco or an independent non-executive director of the New Listco or any of their respective associates must be approved by the shareholders of the New Listco in general meeting. (f) Time of acceptance and exercise of option An option may be accepted by a participant within 21 days from the date of the offer of grant of the option. An option may be exercised in accordance with the terms of the New Listco Share Option Scheme at any time during a period (Option Period) to be determined and notified by the directors of the New Listco to each grantee, which period may commence on a day after the date upon which the offer for the grant of options is made but shall end in any event not later than 10 years from the offer date of the
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APPENDIX II
Option subject to the provisions for early termination thereof. Unless otherwise determined by the directors of the New Listco and stated in the Offer to a grantee, there is no minimum period required under the New Listco Share Option Scheme for the holding of an option before it can be exercised. (g) Performance targets Unless the directors of the New Listco otherwise determined and stated in the Offer to a grantee, a grantee is not required to achieve any performance targets before any options granted under the New Listco Share Option Scheme can be exercised. (h) Subscription price for the New Listco Shares and consideration for the option The subscription price for any Options under the New Listco Share Option Scheme will be a price at the discretion of by the directors of the New Listco, but shall not be less than the highest of (i) the closing price of the New Listco Shares as stated in the Stock Exchanges daily quotations sheet for trade in one or more board lots of the New Listco Shares on the date of the Offer, which must be a business day; (ii) the average closing price of the New Listco Shares as stated in the Stock Exchanges daily quotations for the five trading days immediately preceding the date of the Offer; and (iii) the nominal value of New Listco Share. An Offer shall have been accepted by a participant with a remittance in favour of the New Listco of $1.00 by way of consideration for the grant thereof is received by the New Listco within such time as may be specified in the Offer (which shall not be later than 21 days from the date of Offer). (i) Ranking of the New Listco Shares (aa) The New Listco Shares to be allotted and issued upon the exercise of an Option will be subject to all the provisions of the articles of association of the New Listco and will rank pari passu in all respects with the then existing fully paid New Listco Shares in issue on the date on which the option is duly exercised or, if that date falls on a day when the register of members of the New Listco is closed, the first day of the reopening of the register of members (Exercise Date) and accordingly will entitle the holders thereof to participate in all dividends or other distributions paid or made on or after the Exercise Date other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the record date therefor shall be before the Exercise Date. A New Listco Share allotted and issued upon the exercise of an Option shall not carry voting rights until the grantee has been duly entered on the register of members of the New Listco as the holder thereof.
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APPENDIX II
(bb) Unless the context otherwise requires, references to New Listco Shares in this paragraph include references to shares in the ordinary equity share capital of the New Listco of such nominal amount as shall result from a subdivision, consolidation, re-classification or reduction of the share capital of the New Listco from time to time. (j) Restrictions on the time of grant of options No Offer may be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information has been announced in accordance with the requirements of the Listing Rules. In particular, during the period commencing one month immediately preceding the earlier of (aa) the date of the meeting of the board of directors of the New Listco as such date is first notified to the Stock Exchange under the Listing Rules for the approval of the New Listcos results for any year, half-year, quarterly or any other interim period (whether or not required under the Listing Rules); and (ii) the deadline for the New Listco to publish an announcement of its results for any year, half-year, quarterly or any other interim period (whether or not required under the Listing Rules), and ending on the date of the announcement of the results, no Offer may be made. The directors of the New Listco may not make an Offer to a participant who is a director of the New Listco during the periods or times in which directors are prohibited from dealing in shares pursuant to the Model Code for Securities Transactions by Directors of Listed Companies prescribed by the Listing Rules or any corresponding code or securities dealing restrictions adopted by the New Listco. (k) Period of the New Listco Share Option Scheme The New Listco Share Option Scheme will remain in force for a period of 10 years commencing on the date on which the New Listco Share Option Scheme is adopted. (l) Rights on ceasing employment If the grantee of an option is an Eligible Employee and ceases to be an Eligible Employee for any reason other than his death, ill-health or retirement in accordance with his contract of employment or terminate of his employment on one or more of the grounds referred to in sub-paragraph (n) below before exercising his option in full, the option (to the extent not already exercised) will lapse on the date of cessation and shall not be exercisable unless the directors of the New Listco otherwise determine in which event the grantee may exercise the option (to the extent not already exercised) in whole or in part within such period as the directors of the New Listco may determine following the date of such cessation or termination, which will be taken to be the last day on which the grantee was actually at work with the Spin-off Group or the Invested Entity whether salary is paid in lieu of notice or not.
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APPENDIX II
(m) Rights on death, ill-health or retirement If the grantee of an Option is an Eligible Employee and ceases to be an Eligible Employee by reason of his death, ill-health or retirement in accordance with his contract of employment before exercising the Option in full, his personal representative(s), or, as appropriate, the grantee may exercise the Option (to the extent not already exercised) in whole or in part within a period of 12 months following the date of cessation of employment which date shall be the last day on which the grantee was at work with the Spin-off Group or the Invested Entity whether salary is paid in lieu of notice or not or such longer period as the directors of the New Listco may determine. (n) Rights on dismissal If the grantee of an option is an Eligible Employee and ceases to be an Eligible Employee by reason termination of his employment on the ground that he has been guilty of persistent or serious misconduct or has committed any act of bankruptcy or has become insolvent or has made any arrangements or composition with his creditors generally, or has been convicted of any criminal offence (other than an offence which in the opinion of the directors of the New Listco does not bring the grantee or any member of the Spin-off Group or the Invested Entity into disrepute), the Option Period shall automatically terminate and his Option will lapse automatically an Eligible Employee. (o) Rights on breach of contract If the directors of the New Listco shall at their absolute discretion determine that (aa) (1) the grantee of any option (other than an Eligible Employee) or his associate has committed any breach of any contract entered into between the grantee or his associate on the one part and any member of the Spin-off Group or any Invested Entity on the other part; or (2) that the grantee has committed any act of bankruptcy or has become insolvent or is subject to any winding-up, liquidation or analogous proceedings or has made any arrangement or composition with his creditors generally; or (3) the grantee could no longer make any contribution to the growth and development of any member of the Spin-off Group by reason of the cessation of its relations with the Spin-off Group or by other reason whatsoever; and (bb) the Option shall lapse as a result of (1), (2) or (3) above, the Option Period shall automatically terminate and his option will lapse automatically. (p) Rights on a general offer, a compromise or arrangement If a general or partial offer, whether by way of take-over offer, share repurchase offer, or scheme of arrangement or otherwise in like manner is made to all the holders of the New Listco Shares, or all such holders other than the offeror and/or any person controlled by the offeror and/or any person acting in association or concert with the offeror, the New Listco shall use all reasonable endeavours to procure that such offer is extended to all the grantees on the same terms, mutatis mutandis, and assuming that
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APPENDIX II
they will become, by the exercise in full of the options granted to them, shareholders of the New Listco. If such offer becomes or is declared unconditional or such scheme of management is formally proposed to shareholders of the New Listco, a grantee shall be entitled to exercise his option (to the extent not already exercised) to its full extent or to the extent specified in the grantees notice to the New Listco in exercise of his option at any time before the close of such offer (or any revised offer) or the record date for entitlements under such scheme of arrangement, as the case may be. Subject to the above, an option will lapse automatically (to the extent not exercised) on the date on which such offer (or, as the case may be, revised offer) closes or the relevant record date for entitlements under the scheme of arrangement, as the case may be. (q) Rights on winding up In the event of a resolution being proposed for the voluntary winding-up of the New Listco during the Option Period, the grantee may, subject to the provisions of all applicable laws, by notice in writing to the New Listco at any time not less than two business days before the date on which such resolution is to be considered and/or passed, exercise his Option (to the extent not already exercised) either to its full extent or to the extent specified in such notice in accordance with the provisions of the New Listco Share Option Scheme and the New Listco shall allot and issue to the grantee the New Listco Shares in respect of which such grantee has exercised his Option not less than one business day before the date on which such resolution is to be considered and/ or passed whereupon the grantee shall accordingly be entitled, in respect of the New Listco Shares allotted and issued to him in the aforesaid manner, to participate in the distribution of the assets of the New Listco available in liquidation pari passu with the holders of the New Listco Shares in issue on the day prior to the date of such resolution. Subject thereto, all options then outstanding shall lapse and determine on the commencement of the winding-up of the New Listco. (r) Grantee being a company wholly-owned by eligible participants If the grantee is a company wholly-owned by one or more eligible participants: (i) sub-paragraphs (l), (m), (n) and (o) shall apply to the grantee and to the Options granted to such grantee, mutatis mutandis, as if such options had been granted to the relevant eligible participant, and such options shall accordingly lapse or fall to be exercisable after the event(s) referred to in sub-paragraphs (l), (m), (n) and (o) shall occur with respect to the relevant eligible participant; and
(ii) the options granted to the grantee shall lapse and determine on the date the grantee ceases to be wholly-owned by the relevant eligible participant provided that the directors of the New Listco may in their absolute discretion decide that such options or any part thereof shall not so lapse or determine subject to such conditions or limitations as they may impose.
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APPENDIX II
(s)
Adjustments to the subscription price In the event of a capitalisation of profits or reserves, rights issue, subdivision or consolidation of the New Listco Shares or reduction of the share capital of the New Listco whilst an option remains exercisable, such corresponding alterations (if any) certified by the auditor for the time being of or an independent financial advisor to the New Listco as fair and reasonable will be made to the number or nominal amount of the New Listco Shares to which the New Listco Share Option Scheme or any option relates (so far as it is/they are unexercised) and/or the subscription price of the Option concerned and/or the number of shares comprised in an Option granted under the New Listco Share Option Scheme, provided that (i) any adjustments shall give a grantee the same proportion of the issued share capital to which he was entitled prior to such alteration; (ii) the issue of the New Listco Shares or other securities of the Spin-off Group as consideration in a transaction may not be regarded as a circumstance requiring adjustment; (iii) no adjustment be made the effect of which would be to enable a New Listco Share to be issued at less than its nominal value and (iv) any adjustment so made shall be in compliance with the Listing Rules and such applicable guidance and/or interpretation of the Listing Rules from time to time promulgated by the Stock Exchange (including, without limitation, the Supplemental Guidance on Main Board Listing Rules 17.03(13) and the Note immediately after the Rule attached to the letter from the Stock Exchange dated 5 September 2005 to all issuers relating to share option scheme). In addition, in respect of any such adjustments, other than any made on a capitalisation issue, such auditor or independent financial advisor must confirm to the directors of the New Listco in writing that the adjustments satisfy the requirements of the relevant provision of the Listing Rules.
(t)
Cancellation of options Any cancellation of options granted but not exercised must be subject to the prior written consent of the relevant grantee and the approval of the directors of the New Listco. When the New Listco cancels any Option granted to a grantee but not exercised and issues new Option(s) to the same grantee, the issue of such new option(s) may only be made with available unissued Options (excluding the options so cancelled) within the General Scheme Limit or the new limits approved by the shareholders of the New Listco pursuant sub-paragraphs (c) (cc) and (dd) above.
(u)
Termination of the New Listco Share Option Scheme The New Listco may by resolution in general meeting at any time terminate the operations of the New Listco Share Option Scheme and in such event no further Options shall be offered but in all other respects the provisions of the New Listco Share Option Scheme shall remain in force to the extent necessary to give effect to the exercise of any Options (to the extent not already exercised) granted prior to the termination or otherwise as may be required in accordance with the provisions of the
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APPENDIX II
New Listco Share Option Scheme. Options (to the extent not already exercised) granted prior to such termination shall continue to be valid and exercisable in accordance with the New Listco Share Option Scheme. (v) Rights are personal to the grantee An option is personal to the grantee and shall not be transferable or assignable. (w) Lapse of option An option shall lapse automatically (to the extent not already exercised) on the earliest of: (aa) the expiry of the Option Period; and (bb) the expiry of the periods or dates referred to in paragraph (l), (m), (n), (o), (p), (q) and (r). (x) Others (aa) The New Listco Share Option Scheme is conditional on the (i) Listing Committee granting the listing of and permission to deal in, such number of the New Listco Shares to be allotted and issued by the New Listco pursuant to the exercise of any Options in accordance with the terms and conditions of the New Listco Share Option Scheme, such number being not less than that of the General Scheme Limit; and (ii) the passing of the necessary resolution to approve and adopt the New Listco Share Option Scheme in general meeting or by way of written resolution of the shareholder(s) of the New Listco. (bb) The terms and conditions of the New Listco Share Option Scheme relating to the matters set out in Rule 17.03 of the Listing Rules shall not be altered to the advantage of grantees of the options except with the prior sanction of a resolution of the shareholders of the New Listco in general meeting. (cc) Any alterations to the terms and conditions of the New Listco Share Option Scheme which are of a material nature must be approved by the shareholders in general meeting, except where the alterations take effect automatically under the existing terms of the New Listco Share Option Scheme. (dd) The amended terms of the New Listco Share Option Scheme or the options shall comply with the relevant requirements of Chapter 17 of the Listing Rules. (ee) Any change to the authority of the directors of the New Listco or the scheme administrators in relation to any alteration to the terms of the New Listco Share Option Scheme shall be approved by the shareholders of the New Listco in general meeting.
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APPENDIX II
(ff) None of the Directors are trustees of the New Listco Share Option Scheme or have any direct or indirect interests in such trustees. Present status of the New Listco Share Option Scheme (a) Approval of the Listing Committee required
The New Listco Share Option Scheme is conditional on the Listing Committee granting the listing of, and permission to deal in, such number of the New Listco Shares to be issued pursuant to the exercise of any options which may be granted under the New Listco Share Option Scheme, such number being not less than that of the General Scheme Limit. (b) Application for approval
Application has been made to the Listing Committee for the listing of and permission to deal in the New Listco Shares to be issued within the General Scheme Limit pursuant to the exercise of any options which may be granted under the New Listco Share Option Scheme. (c) Grant of option
As at the date of this circular, no options have been granted or agreed to be granted under the New Listco Share Option Scheme. (d) Value of options
The Directors consider it inappropriate to disclose the value of options which may be granted under the New Listco Share Option scheme as if they had been granted as at the Latest Practicable Date. Any such valuation will have to be made on the basis of certain option pricing model or other methodology, which depends on various assumptions including, the exercise price, the exercise period, interest rate, expected volatility and other variables. As no options have been granted, certain variables are not available for calculating the value of options. The Directors believe that any calculation of the value of options as at the Latest Practicable Date based on a number of speculative assumptions would not be meaningful and would be misleading to investors.
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APPENDIX III
1. RESPONSIBILITY STATEMENT
GENERAL INFORMATION
This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best 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 or this circular misleading. 2. DISCLOSURE OF INTERESTS BY DIRECTORS As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives of the Company in the shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which (i) 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 and short positions which they were taken or deemed to have under such provisions of the SFO); or (ii) were required, pursuant to section 352 of the SFO, to be entered in the register maintained by the Company referred to therein; or (iii) were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers contained in the Listing Rules, to be notified to the Company and the Stock Exchange were as follows:
Name of Group member/ associated corporation The Company
Name of Director Mr. Norman Lee
Capacity/ Nature of interest Interest of a controlled corporation Beneficial owner
No. and class of securities held (Note 1) 618,750,000 (L)(Note 2)
Percentage of shareholding 75%
82,500,000 (L)(Note 3) 45(L) 45%
10%
(Note 4)
Fortune Star
Notes: 1.
Beneficial owner
The letter L denotes the persons long position in the shares of the Company or the relevant associated corporation. These Shares are held by Fortune Star, which is owned as to 45% by Mr. Norman Lee. These Shares were Shares which would be allotted and issued upon the exercise in full of the options granted under the share option scheme of the Company. These options are exercisable at the subscription price of HK$6.69 per Share during a period of four years commencing from and including 23 April 2011 to 22 April 2015. All of the issued ordinary shares of Fortune Star are held as to 45% by Mr. Norman Lee and 55% by Mr. Lee Wan Keung.
2. 3.
4.
Save as disclosed above, as at the Latest Practicable Date, none of the Directors and the chief executive of the Company had any interest or short position in the Shares, underlying shares or debentures of the Company or any of its associated corporations
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APPENDIX III
GENERAL INFORMATION
(within the meaning of Part XV of the SFO) 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, to be entered in the register referred to therein, or were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers to be notified to the Company and the Stock Exchange. As at the Latest Practicable Date, none of the Directors was a director or an employee of a company which has an interest or short positions in the Shares and underlying shares of the Company which would fall to be disclosed to the Company under the provision of Division 2 and 3 of Part XV of the SFO. 3. DISCLOSABLE INTEREST UNDER DIVISIONS 2 AND 3 OF PART XV OF THE SFO AND SUBSTANTIAL SHAREHOLDERS So far as is known to the Directors or chief executive of the Company, as at the Latest Practicable Date, the following persons (other than a Director or chief executive of the Company) had an interest or a short position in the Shares and underlying Shares in the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO:
Capacity/ Nature of interest Beneficial owner Interest of a controlled corporation
3)
Name of Shareholder Fortune Star Mr. Lee Wan Keung
No. and class of securities held (Note 1) 618,750,000 (L) 618,750,000 (L)(Note 2)
Percentage of shareholding 75% 75%
Mrs. Lee Wong Wai Kuen(Note

Notes: 1.
Interest of spouse
618,750,000 (L)
75%
The letter L denotes the persons long position in the shares of the Company or the relevant associated corporation. These Shares are held by Fortune Star, which is owned as to 55% by Mr. Lee Wan Keung. Mrs. Lee Wong Wai Kuen is the spouse of Mr. Lee Wan Keung.
2. 3.
Save as disclosed above, as at the Latest Practicable Date and so far as is known to the Directors or chief executive of the Company, there was no other person (other than a Director or chief executive of the Company) who had an interest or short position in shares or underlying shares in the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO. 4. SERVICE AGREEMENTS As at the Latest Practicable Date, none of the Directors had entered or proposed to enter into a service contract with any member of the Group which is not determinable by the employer within one year without payment of compensation (other than statutory compensation). III-2
APPENDIX III
5. COMPETING INTEREST
GENERAL INFORMATION
As at the Latest Practicable Date, none of the Directors and their respective associates was interested in any business apart from the business of the Group, which competed or was likely to compete, either directly or indirectly, with that of the Group. 6. INTEREST IN ASSETS AND CONTRACT As at the Latest Practicable Date, none of the Directors or OSK had any interest, direct or indirect, in any asset which has since 31 December 2010, being the date to which the latest published audit financial statements of the Group were made up, been acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group. None of the Directors was materially interested in any contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date which was significant in relation to the business of the Group. 7. EXPERT AND CONSENT The qualifications of the expert who has given opinions in this circular are as follows: Name OSK Capital Hong Kong Limited Qualification a corporation licensed to carry out business in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO
OSK had no shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group as at the Latest Practicable Date. OSK has given and has not withdrawn its written consents to the issue of this circular with the inclusion of its reports and/or letters and/or the reference to its name included herein in the form and context in which it is respectively included. 8. LITIGATION As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was engaged in any litigation or arbitration of material importance and there was no litigation or claim of material importance known to the Directors to be pending or threatened by or against either the Company or any of its subsidiaries.
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APPENDIX III
9. MATERIAL CONTRACTS
GENERAL INFORMATION
There were no contracts (not being contracts in the ordinary course of business) which had been entered into by any member of the Group within two years immediately preceding the date of this circular and up to the Latest Practicable Date which are or may be material. 10. DOCUMENTS AVAILABLE FOR INSPECTION Copies of the following documents are available for inspection during normal business hours from 9:00 a.m. to 5:00 p.m. (except Saturday, Sunday and public holidays) at the offices of Chiu & Partners at 40th Floor, Jardine House, 1 Connaught Place, Central, Hong Kong from the date of this circular up to and including the date of the EGM: (a) (b) the memorandum of association and Articles of the Company; the audited consolidated accounts of the Group for the two years ended 31 December 2010; the letter from the Independent Board Committee, the text of which is set out on pages 33 to 34 of this circular; the letter from OSK to the Independent Board Committee and the Shareholders, the text of which is set out on pages 35 to 52 of this circular; the letter of consent from OSK referred to in the paragraph headed Expert and consent above; and the rules of the New Listco Share Option Scheme.
(c)
(d)
(e)
(f) 11.
MISCELLANEOUS (a) The secretary of the Company is Ms. Wong Yuet Ming, who is a fellow member of The Association of Chartered Certified Accountants and an associate member of the Hong Kong Institute of Certified Public Accountants. The registered office of the Company is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. The principal place of business of the Company is 8th Floor, Liven House, 61-63 King Yip Street, Kwun Tong, Kowloon, Hong Kong. The Hong Kong branch share registrar and transfer office of the Company is Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queens Road East, Wanchai, Hong Kong. The English text of this circular shall prevail over the Chinese text in case of inconsistency.
(b)
(c)
(d)
III-4
NOTICE OF EGM

*
(incorporated in the Cayman Islands with limited liability) (Stock Code: 746) NOTICE IS HEREBY GIVEN that an extraordinary general meeting of Lee & Man Holding Limited (the Company) will be held at Unit A, 29/F., Admiralty Centre 1, 18 Harcourt Road, Hong Kong at 10:30 a.m. on 13 June 2011 for the purposes of considering and, if thought fit, (with or without amendments) passing the following ordinary resolutions: ORDINARY RESOLUTIONS 1. THAT subject to and conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited (the Stock Exchange) granting approval for the listing of, and permission to deal in, all the shares (the New Listco Shares) of Lee & Man Handbags Holding Limited (the New Listco, together with its subsidiaries, the Spin-off Group): (a) the proposed spin-off of the New Listco and separate listing of the New Listco Shares on the Main Board of the Stock Exchange as more particularly described in the circular of the Company dated 19 May 2011 (the Circular), a copy of which having been produced to the meeting marked A and despatched to the shareholders of the Company (the Shareholders) of which the notice convening this meeting forms part and produced to the meeting and for the purpose of identification signed by the Chairman, subject to any variations or changes which are considered by the Companys directors not to be material (the Listing), which constitutes a deemed disposal (within the meaning under the Rules Governing the Listing of Securities on the Stock Exchange (the Listing Rules)) of the Companys interest in the Spin-off Group and a major transaction (within the meaning under the Listing Rules) of the Company, be and is hereby approved;
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NOTICE OF EGM
(b) a distribution (the Distribution) by the Company of a sum to be determined by the directors (the Directors) of the Company, being part of the amount standing to the credit of the Companys reserve, by way of special interim dividend to the Shareholders whose names appeared on the register of members of the Company on 13 June 2011 (or such later date as the Directors may decide) (the Distribution Record Date) on the basis of one New Listco Share for every one share of the Company (the Share) then held by the Shareholders be and is hereby approved, on the condition that the Distribution is to be satisfied by: (i) procuring the transfer to the Shareholders (other than the Excluded Shareholders (as defined in the Circular)) of such number of New Listco Shares in the proportion of one New Listco Share for every one Share held by them as at the Distribution Record Date, provided that all costs due in respect of the transfer of such New Listco Shares to the Shareholders (other than Excluded Shareholders) shall be borne by the Company; or
(ii) cash payment (after deducting expenses) in Hong Kong dollars to the Excluded Shareholders which equals to the net proceeds of the sale by the Company on their behalf the New Listco Shares to which the Excluded Shareholders would otherwise be entitled to receive under the Distribution after dealings in New Listco Shares commence on the Stock Exchange at the prevailing market price; (c) the directors of the Company be and are hereby authorised to do all such acts and to enter into all such transactions and arrangements as may be necessary or expedient in order to give effect to the Listing and the Distribution.
2.
THAT the rules of the share option scheme of the New Listco (the New Listco Share Option Scheme), a copy of which having been produced to the meeting marked B and summaries of which are set out in the Circular and for the purpose of identification signed by the Chairman, be and are hereby approved and adopted to be the share option scheme of the New Listco and the Directors be and they are hereby authorised to approve any amendments to the rules of the New Listco Share Option Scheme as may be acceptable or not objected to by the Stock Exchange and to do all such acts and to enter into all such transactions and arrangements as may be necessary or expedient in order to give effect to the New Listco Share Option Scheme. Yours faithfully For and on behalf of the board of directors of Lee & Man Holding Limited Wai Siu Kee Chairman
Hong Kong, 19 May 2011
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NOTICE OF EGM
Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands
Notes: 1. A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint one or more proxies to attend and, subject to the provisions of the articles of association of the Company, vote in his stead. A proxy need not be a member of the Company. A form of proxy is enclosed with the circular of the Company dated 19 May 2011. To be valid, the form of proxy together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power or authority must be deposited at the offices of the Companys Hong Kong branch share registrar, Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queens Road East, Wanchai, Hong Kong no later than 48 hours before the time of the meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude a member of the Company from attending and voting in person at the meeting convened or any adjournment thereof and in such event, the authority of the proxy shall be deemed to be revoked. In the case of joint holders of a share, any one of such joint holders may vote, either in person or by proxy, in respect of such shares as if he/she were solely entitled thereto but if more than one of such joint holders are present at the meeting, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For this purpose seniority shall be determined by the order in which the names stand in the register of members of the Company in respect of the joint holding. The register of members of the Company will be closed from Thursday, 9 June 2011 to Monday, 13 June 2011 (both dates inclusive) (or such other date(s) as the Board may determine and announce) for the purpose of determining the entitlement of Shareholders to the Distribution and the eligibility of Shareholders to attend and vote at the EGM. No transfer of Shares may be registered during that period. In order to qualify for the Distribution, all transfer must be lodged with the Companys Hong Kong branch share registrar, Tricor Secretaries Limited at 26th Floor, Tesbury Centre, 28 Queens Road East, Wanchai, Hong Kong by no later than 4:30 p.m. on Wednesday, 8 June 2011(or such later date as the Board may determine and announce).
Principal place of business in Hong Kong 8th Floor, Liven House 61-63 King Yip Street Kwun Tong Kowloon Hong Kong
2.
3.
4.
5.
As at the date of this notice, the Board comprises Ms. Wai Siu Kee, Ms. Poon Lai Ming, Mr. Lee Man Yan and Mr. Kung Phong as executive Directors, and Mr. Wong Kai Tung, Tony, Mr. Wan Chi Keung, Aaron BBS JP, and Mr. Heng Victor Ja Wei as independent non-executive Directors.
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THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

LEE & MAN HOLDING LIMITED

Appendix III General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1 Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N-1

associate Board BVI CAGR CCAON

connected person(s) CTC

GDP Group HKSCC HK$ Hong Kong

Independent Board Committee

Latest Practicable Date

Mr. Norman Lee Ms. Wai

New Listco Share Option Scheme

New Listco Shares

PN15 PRC or China

Shareholder(s) Spin-off Group Stock Exchange substantial shareholder km sq.m. or m2 %

LETTER FROM THE BOARD

LEE & MAN HOLDING LIMITED

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Mr. Lee Wan Keung 55%

Mr. Norman Lee 45%

Public shareholders 25%

Lee & Man Company Limited

Lee & Man Handbag Manufacturing Company Limited

Well Known Associates Limited

Lee & Man Management Company Limited

Lee & Man Luggage Manufacturing Company Limited

Lee & Man Handbag (Thailand) Company Limited

Lee Wai Handbag Manufacturing Company Limited

Catini Bags, Inc.

Catini Bags (Hong Kong) Limited

Dongguan Lee Wai Handbag Company Limited

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

GDP per capita

LETTER FROM THE BOARD

Source: National Bureau of Statistics of China

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Total production volume

Total domestic consumption

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Total fixed asset investments in China

LETTER FROM THE BOARD

Total output of construction industry in China

Total production volume

Total domestic consumption

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

LETTER FROM THE BOARD

Salt + water Brine