THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited 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.
If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other licensed
securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional advisers.
If you have sold or transferred all your shares in Huafeng Group Holdings Limited, you should at once hand this circular to the
purchaser(s) or the transferee(s) or to the licensed securities dealer or registered institution in securities, bank, stockbroker or other
agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).
This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for
any securities of the Company.
Huafeng Group Holdings Limited
華豐集團控股有限公司
(Incorporated in the Cayman Islands with limited liability)
(Stock Code: 364)
(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION;
(2) PROPOSED GRANT OF SPECIFIC MANDATE TO ISSUE SHARES;
(3) PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL;
(4) APPLICATION FOR WHITEWASH WAIVER; AND
(5) NOTICE OF EXTRAORDINARY GENERAL MEETING
Financial Adviser to Huafeng Group Holdings Limited
Joint Independent Financial Advisers to the Independent Board Committee and
the Independent Shareholders
Unless the context otherwise requires, all capitalized terms used in this circular shall bear the meanings set out in the section headed
“Definitions” of this circular.
A letter from the Board is set out on pages 19 to 201 of this circular and a letter from the Independent Board Committee, containing
the recommendations to the Independent Shareholders, is set out on pages 202 to 203 of this circular. A letter from the Joint
Independent Financial Advisers containing their advice to the Independent Board Committee and the Independent Shareholders is set
out on pages 204 to 257 of this circular.
A notice convening the EGM to be held at 11:00 a.m. on Monday, 22 July 2013 at Room 2105, West Tower, Shun Tak Centre, 200
Connaught Road Central, Hong Kong is set out on pages EGM – 1 to EGM – 4 of this circular. A form of proxy for use at the EGM
is enclosed with this circular.
Whether or not you are able to attend the EGM, please complete and return the enclosed form of proxy in accordance with the
instructions printed thereon to Union Registrars Limited, the share registrar and transfer office of the Company in Hong Kong, at
18/F, Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong as soon as practicable and in any event not
less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the
form of proxy will not preclude you from attending and voting at the EGM or any adjournment thereof should you so desire.
28 June 2013
TABLE OF CONTENTS
Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
LETTER FROM THE BOARD
1.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.
The Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.
Reasons for the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.
Financial impact of the Acquisition on the Group . . . . . . . . . . . . . . . . . . . .
5.
Effect of the Acquisition on the shareholding structure of the Company . . . .
6.
The financing of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.
Proposed increase in authorized share capital . . . . . . . . . . . . . . . . . . . . . . .
8.
Listing Rules implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A.
Very substantial acquisition and connected transaction . . . . . . . . . . .
B.
Continuing connected transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.
Takeovers Code implications and application for Whitewash Waiver . . . . . .
10.
Information of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A.
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B.
Business of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C.
Industry overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D.
Regulatory overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
E.
Senior management of the Target Group . . . . . . . . . . . . . . . . . . . . . .
F.
Management discussion and analysis of the Target Group . . . . . . . . .
11.
Information of the Group and the Enlarged Group . . . . . . . . . . . . . . . . . . .
A.
Information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B.
Prospect of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C.
Employees of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D.
Risk Management and Corporate Governance . . . . . . . . . . . . . . . . . .
12.
Extraordinary general meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
20
44
46
47
52
52
53
53
54
54
57
57
83
135
158
170
173
196
196
196
198
198
199
201
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . .
202
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS . . . . . . . .
204
APPENDIX I
– FINANCIAL INFORMATION OF THE GROUP . . . . . . . . . . .
I–1
APPENDIX II
– ACCOUNTANTS’ REPORT OF THE TARGET GROUP . . . . .
II – 1
APPENDIX III
– UNAUDITED PRO FORMA FINANCIAL INFORMATION
OF THE ENLARGED GROUP . . . . . . . . . . . . . . . . . . . . . . . .
III – 1
– VALUATION REPORTS OF THE PROPERTIES,
MACHINERIES AND EQUIPMENT OF THE GROUP
AND RELATED LETTER . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IV – 1
– VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . .
V–1
– COMFORT LETTERS IN RELATION TO
THE VALUATION REPORT OF THE TARGET GROUP . . .
VI – 1
APPENDIX VII – TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP . . . . . . . . . . . . . . . . . . .
VII – 1
APPENDIX VIII – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIII – 1
APPENDIX IV
APPENDIX V
APPENDIX VI
NOTICE OF THE EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EGM – 1
–i–
DEFINITIONS
In this circular, the following expressions have the meanings set out below unless the context
requires otherwise.
“Acquisition”
the acquisition of the Sale Shares in accordance with the
Sale and Purchase Agreement
“acting in concert”
has the meaning given to it under the Takeovers Code
“Additional Forest Lands”
the new cultivation bases of not less than 8 ,500 mu
economical forest lands to be contracted for use by the
Target Group under the New Contracting Agreement
“Additional Forest Lands
Approval”
with respect to the Additional Forest Lands, collectively,
the approval whereby (i) the relevant village committees
agree to the transfers of the land use rights of the
A d d i t i o n a l Fo r e s t L a n d s u n d e r t h e N ew Tr a n s f e r
Agreements , the ownership and the use rights of the
tea trees thereon; and (ii) the villagers under the same
collective economic organization （集體經濟組織） do
not object to such transfers or exercise their right of first
refusal to purchase the relevant parcels of the Additional
Forest Lands during the stipulated period as required under
the published notice of such transfers
“Additional Forest Rights
Certificates”
the new forest rights certificates for the Additional Forest
Lands
“Ample Gold”
Ample Gold International Limited（碩高國際有限公司）, a
company incorporated in the BVI with limited liability on
8 November 2007 and is wholly-owned by Mr. Wong Hung
Yu. Its principal business is investment holding
“Announcement”
the announcement of the Company dated 17 January 2013
in relation to, among other things, the Acquisition and the
Whitewash Waiver
“Anxi MOFCOM”
Anxi County Department of Foreign Trade and Economic
Co-operation（安溪縣對外貿易經濟合作廳）
–1–
DEFINITIONS
“AQSIQ”
General Administration of Quality Supervision, Inspection
and Quarantine of the PRC（國家質量監督檢驗檢疫總局）
“associate(s)”
has the meaning given to it under the Listing Rules
“Board”
the board of Directors
“BVI”
the British Virgin Islands
“Business Day(s)”
a day (other than a Saturday or a Sunday) on which banks
in Hong Kong are generally open for normal banking
business
“CAGR”
compound annual growth rate
“Call Option”
the option granted by the Covenantors to the Company
under the Deed of Non-Competition whereby the Company
has the right to purchase the Additional Forest Lands during
the Option Period at a price with reference to the prevailing
market price as determined by an independent valuation
company mutually selected by the Covenantors and the
Company
“Capital Increase”
the proposed increase of the authorized share capital of the
Company to HK$200,000,000 divided into 20,000,000,000
Shares of HK$0.01 each
“Chadu Customers”
customers at the China Chadu Anxi Wholesale Tea Market
（中國茶都安溪茶葉批發市場）in Anxi County, Quanzhou
City, Fujian Province, the PRC to whom the Target Group
sells its raw teas on a wholesale basis
“China Tea BVI”
China Tea Holdings (BVI) Limited, a company incorporated
in the BVI with limited liability on 27 July 2010 and a
wholly-owned subsidiary of the Target Company
“Chongqing Shengfang”
重慶盛芳茶葉有限公司 ( C h o n g q i n g S h e n g fa n g Te a
Company Limited*), a company established in the PRC
with limited liability on 24 May 2011 and an indirect
wholly-owned subsidiary of the Target Company
–2–
DEFINITIONS
“Citiasia”
Citiasia International Limited （豐亞國際有限公司）, a
company incorporated in Hong Kong with limited liability
on 17 April 2007 and a wholly-owned subsidiary of China
Tea BVI
“Companies Ordinance”
the Companies Ordinance (Chapter 32 of the Laws of Hong
Kong) (as amended, supplemented or otherwise modified
from time to time)
“Company”
Huafeng Group Holdings Limited, a company incorporated
in the Cayman Islands with limited liability, whose Shares
are listed on the Main Board of the Stock Exchange.
“Completion”
the completion of the Acquisition
“Concert Group”
Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng, Ms. Ng,
Exalt Wealth, Smart Fujian, Shine Strategy, Sincere Young,
Greatlink Investment, other Directors (namely Mr. Cai
Zhenying, Mr. Cai Yangbo, Mr. Choi Wing Toon, Mr.
Lawrence Gonzaga, Ms. Choy So Yuk, JP , Mr. Wong Chi
Hung, Stanley) and parties acting in concert with any of
them
“connected person(s)”
has the meaning given to it under the Listing Rules
“Consideration”
the consideration in the aggregate amount of HK$2,487.48
million payable in respect of the Acquisition pursuant to the
Sale and Purchase Agreement to be settled partly in cash,
and partly by the allotment and issue of the Consideration
Shares and the issue of the Convertible Bonds
“Consideration Shares”
an aggregate of 9,495,834,903 Shares to be allotted
and issued by the Company to the Vendors as partial
Consideration for the sale and purchase of the Sale Shares
“Contracting Agreements”
with respect to the 29.5K mu Economical Forest Lands
and the 8K mu Ecological Forest Lands, collectively, the
contracting agreements, supplemental agreements and the
amended and restated contracting agreements entered into
between Fujian Daping and the relevant village committees
–3–
DEFINITIONS
“controlling shareholder(s)”
has the meaning given to it under the Listing Rules
“Conversion Price”
initially HK$ 0.1768 per Conversion Share, subject to
adjustment in accordance with the terms and conditions of
the Convertible Bonds
“Conversion Share(s)”
an aggregate of 3,477,186,869 Shares to be allotted and
issued by the Company to the Vendors on conversion of the
Convertible Bonds as partial Consideration for the sale and
purchase of the Sale Shares
“Convertible Bonds”
HK$614.77 million zero/4% coupon convertible bonds to
be issued by the Company pursuant to the terms of the Sale
and Purchase Agreement
“Corporate Concert Group”
Exalt Wealth, Smart Fujian, Shine Strategy, Sincere Young,
Greatlink Investment and companies acting in concert with
any of them
“Covenantors”
the Target Group Controlling Shareholders and Mr.
Cai Zhenying or any person nominated by the Target
Group Controlling Shareholders under the Deed of NonCompetition
“Deed of Acting in Concert”
the deed of acting in concert dated 30 September 2011
entered into between Mr. Cai Zhenyao, Mr. Ng and Ms. Ng
“Deed of Indemnity”
the deed of indemnity to be made by the Target Group
Controlling Shareholders as indemnifiers in favour of the
Company, the Purchaser and the Target Company on its own
behalf and as the trustee of each of the other companies
of the Target Group as indemnified parties in respect of
the indemnity of all claims, damages, losses and costs
arising from, among others, (i) the legal defects of the
8K mu Ecological Forest Lands, and (ii) any and all noncompliances of the applicable laws by the Target Group,
including but not limited to the Target Group’s failure to
obtain the required licenses, permits or registrations of
certain subsidiaries and outlets in the PRC
–4–
DEFINITIONS
“Deed of Non-Competition”
the deed of non-competition to be made by the Target
Group Controlling Shareholders and Mr. Cai Zhenying or
any person nominated by the Target Group Controlling
Shareholders in favour of the Company, the Purchaser and
the Target Company on its own behalf and as the trustee of
each of the other companies of the Target Group, pursuant
to which the Target Group Controlling Shareholders and
Mr. Cai Zhenying or any person nominated by the Target
Group Controlling Shareholders shall undertake not to
engage in any business which competes or may compete
with the business of the Target Group, and shall grant the
Call Option and the Right of First Refusal to the Company
to acquire the land use rights of the Additional Forest
Lands, the ownership and the use rights of the tea trees
thereon
“Director(s)”
the director(s) of the Company
“Direct Sales Customers”
customers which place bulk purchase orders of refined
teas directly with the Target Group (other than third-party
retailers or through the Target Group’s retail outlets)
“ecological forest lands”
a category of forest lands which comprises, among others,
the protective forests（防護林）which the 8K mu Ecological
Forest Lands falls under
“economical forest lands”
a category of forest lands in respect of which the allowed
plantations thereon are mainly used for production of fruits,
edible oils, beverage ingredients, condiments, industrial raw
materials and medicinal materials
“EGM”
the extraordinary general meeting of the Company to be
convened for the purpose of considering and, if thought
fit, approving, among other things, the Sale and Purchase
Agreement, the transactions contemplated thereunder
(including but not limited to the Acquisition, the issue
of the Convertible Bonds, the allotment and issue of the
Consideration Shares and the Conversion Shares, the
transactions under the New Transfer Agreements and the
New Contracting Agreement), the Whitewash Waiver and
the Capital Increase
“EIT”
the PRC Enterprise Income Tax
–5–
DEFINITIONS
“EIT Regulations”
the Regulations on Implementation of the Enterprise
Income Tax Law of the PRC（《中華人民共和國企業所
得稅法實施條例》）issued on 6 December 2007 and was
effective on 1 January 2008
“Enlarged Group”
the Group and the Target Group
“Euromonitor International”
Euromonitor International Limited, a company established
in England in 1972 that provides business intelligence on
industries, countries and consumers, an Independent Third
Party
“Euromonitor International
Report”
the report dated March 2013 prepared by Euromonitor
International in relation to the tea market in China
“Exalt Wealth”
Exalt Wealth Limited （昇鑫有限公司）, a company
incorporated in the BVI with limited liability on 6 July
2011 which is wholly-owned by Mr. Cai Zhenyao, the sole
director of the company. Its principal business is investment
holding
“Executive”
the Executive Director of the Corporate Finance Division of
the SFC or any delegate of the Executive Director
“Financial Adviser”
Oriental Patron Asia Limited, a corporation licensed under
the SFO to carry on Type 1, Type 6 and Type 9 regulated
activities as defined under the SFO
“Financial Investors”
collectively, Teya, Templeton and Great Vantage
“forest rights certificate(s)”
the certificate issued by the relevant Governmental
Authorities indicating the permissible use of the forest
lands, the ownership and the land use rights of the forest
lands, the ownership and use right of the forest thereon, the
type of the plantation allowed on the forest lands and the
term of the certificate
“Forestry Law Regulation”
the Regulation on the Implementation of the Forestry Law
of the PRC（中華人民共和國森林法實施條例）
“Fujian Daping”
福建省安溪縣大坪綠色食品工程有限公司 (Fujian Anxi
Daping Green Food Technology Company Limited*), a
company established in the PRC with limited liability on 13
March 1998 and an indirect wholly-owned subsidiary of the
Target Company
–6–
DEFINITIONS
“Fujian Huidian”
福 建 匯 典 包 裝 有 限 公 司 ( F u j i a n H u i d i a n Pa c k a g i n g
Company Limited*), a company established in the PRC
with limited liability on 18 January 2011 and an indirect
wholly-owned subsidiary of the Target Company
“Fujian MOFCOM”
Fujian Provincial Department of Foreign Trade and
Economic Co-operation（福建省對外貿易經濟合作廳）
“Fujian Nature”
福 建 大 自 然 茶 業 科 技 有 限 公 司 ( F u j i a n N a t u r e Te a
Industry Technology Co., Ltd.), a company established
in the PRC with limited liability on 25 May 2007 and an
indirect wholly-owned subsidiary of the Target Company
“g”
gramme, a unit of mass, equal to one thousandth of a
kilogramme
“GDP”
gross domestic product
“Governmental Authority(ies)”
any national, provincial, municipal or local government,
administrative or regulatory body or department, court,
tribunal, arbitrator or any body that exercises the function
of a regulator
“Greatlink Investment”
G r e a t l i n k I nve s t m e n t G r o u p L i m i t e d , a c o m p a ny
incorporated in the BVI with limited liability on 23
February 2011 and is wholly-owned by the Greatlink Trust.
The director of Greatlink Investment is Regula Limited
“Greatlink Trust”
an irrevocable discretionary trust established under the
laws of the Cayman Islands on 13 May 2011 for the
benefit of Ms. Ng who is the settlor, protector and the sole
beneficiary. Greatlink Investment is wholly-owned by the
Greatlink Trust
“Great Vantage”
G r e a t Va n t a g e I nv e s t m e n t s L i m i t e d , a c o m p a n y
incorporated in the BVI with limited liability and is
indirectly wholly-owned by China Merchant Securities Co.,
Ltd., a company listed on the Shanghai Stock Exchange
(SHA: 600999). Great Vantage ’s principal business is
investment holding
–7–
DEFINITIONS
“Group”
the Company and its subsidiaries
“HK$”
Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong”
the Hong Kong Special Administrative Region of the PRC
“IAS”
International Accounting Standards
“IFRS”
International Financial Reporting Standards, which are
standards and interpretations adopted by the International
A c c o u n t i n g S t a n d a r d s B o a r d . T h ey c o m p r i s e : ( a )
International Financial Reporting Standards; (b) IAS; and
(c) Interpretations developed by the International Financial
Reporting Interpretations Committee or the former Standing
Interpretations Committee
“Independent Board Committee”
the independent board committee, comprising all the
i n d e p e n d e n t n o n - exe c u t ive D i r e c t o r s , n a m e l y M r.
Lawrence Gonzaga, Ms. Choy So Yuk, JP and Mr. Wong
Chi Hung, Stanley, established by the Company to advise
the Independent Shareholders in relation to the Sale
and Purchase Agreement , the transactions contemplated
thereunder (including but not limited to the Acquisition, the
issue of the Convertible Bonds, the allotment and issue of
the Consideration Shares and the Conversion Shares, the
transactions under the New Transfer Agreements and the
New Contracting Agreement) and the Whitewash Waiver
“Independent Shareholders”
the Shareholders other than (i) Mr. Cai Zhenrong, parties
acting in concert with him and their respective associates,
and (ii) parties who are connected, involved in or interested
in the Sale and Purchase Agreement , the transactions
contemplated thereunder (including but not limited to
the Acquisition, the issue of the Convertible Bonds, the
allotment and issue of the Consideration Shares and the
Conversion Shares, the transactions under the New Transfer
Agreements and the New Contracting Agreement) and/or
the Whitewash Waiver
–8–
DEFINITIONS
“Independent Third Parties”
third parties that to the best knowledge, information
and belief of the Directors, having made all reasonable
enquiries, are independent of the Company and connected
persons (as defined under the Listing Rules) of the
Company, each an “Independent Third Party”
“Joint Independent
Financial Advisers”
collectively, AsiaVest Partners Limited, a corporation
licensed to carry on Type 4, Type 6 and Type 9 regulated
activities and RaffAello Capital Limited, a corporation
licensed to carry on Type 6 regulated activity
“kg”
kilogramme, a unit of mass, equal to 1,000 grammes
“Korean Resident”
any private person who has domicile or residence in the
Republic of Korea, and any juristic person whose main
office is located in the Republic of Korea
“Last Trading Day”
16 January 2013, being the last trading day before the date
of the Announcement
“Latest Practicable Date”
27 June 2013, being the latest practicable date prior to
the printing of this circular for ascertaining information
contained herein
“Liaoning Pingshan”
遼寧坪山茶業有限公司 (Liaoning Pingshan Tea Company
Limited*), a company established in the PRC with limited
liability on 28 February 2011 and an indirect wholly-owned
subsidiary of the Target Company
“Listing Committee”
the Listing Committee of the Stock Exchange
“Listing Rules”
the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited
“Long Stop Date”
31 August 2013 (or such other date as the Purchaser, the
Company and the Vendors may agree)
“M&A Provisions”
the Provisions on the Merger and Acquisition of Domestic
Enterprises by Foreign Investors（《關於外國投資者併
購境內企業的規定》）issued by six PRC Governmental
Authorities, being effective on 8 September 2006 and
revised on 22 June 2009 (as amended, supplemented or
otherwise modified from time to time)
–9–
DEFINITIONS
“Main Board”
the stock market operated by the Stock Exchange prior
to the establishment of the GEM (excluding the options
market) and which continues to be operated by the Stock
Exchange in parallel with the GEM
“Maximum Levels of
Contaminants”
the Maximum Levels of Contaminants in Foods GB27622 0 0 5《食品中污染物限量》p r o m u l g a t e d b y t h e P R C
government
“MOFCOM”
the Ministry of Commerce of the PRC（中華人民共和國
商務部）, or its predecessor, the Ministry of Foreign Trade
and Economic Cooperation of the PRC（中華人民共和國
對外貿易經濟合作部）, as appropriate to the context
“Mr. Cai Yangbo”
Mr. Cai Yangbo（蔡揚波）, a Director, a son of Mr. Cai
Zhenrong, a nephew of Mr. Cai Zhenyao and Mr. Cai
Zhenying and the elder brother of Mr. Cai Yanghang
“Mr. Cai Yanghang”
Mr. Cai Yanghang（蔡揚杭）, a senior management of
the Target Company and Fujian Nature, a son of Mr. Cai
Zhenrong, the nephew of Mr. Cai Zhenyao and Mr. Cai
Zhenying, the husband of Ms. Ng, a cousin of Mr. Ng and
the younger brother of Mr. Cai Yangbo
“Mr. Cai Zhenrong”
Mr. Cai Zhenrong（蔡振榮）, the Chairman, an executive
Director and the controlling shareholder of the Company
holding approximately 29.72% of the issued Shares as at
the Latest Practicable Date
“Mr. Cai Zhenyao”
Mr. Cai Zhenyao（蔡振耀）, an executive Director, a
director of the Target Company, the younger brother of Mr.
Cai Zhenrong and the elder brother of Mr. Cai Zhenying
and an uncle of Mr. Cai Yanghang, Mr. Cai Yangbo and Mr.
Ng Shui Yu
“Mr. Cai Zhenying”
Mr. Cai Zhenying（蔡 振英）, an executive Director, the
younger brother of Mr. Cai Zhenrong and Mr. Cai Zhenyao,
an uncle of Mr. Cai Yangbo and a cousin of Mr. Choi Wing
Toon
– 10 –
DEFINITIONS
“Mr. Choi Wing Toon”
Mr. Choi Wing Toon（蔡永團）, an executive Director and a
cousin of Mr. Cai Zhenrong, Mr. Cai Zhenyao and Mr. Cai
Zhenying
“Mr. Ng”
Mr. Ng Shui Yu（吳瑞瑜）, a director of the Target
Company and a nephew of Mr. Cai Zhenrong , Mr. Cai
Zhenyao and Mr. Cai Zhenying
“Ms. Ng”
Ms. Ng Yuen Nei（ 吳婉鈮）, a former director of the Target
Company and China Tea BVI, a daughter-in-law of Mr. Cai
Zhenrong and the wife of Mr. Cai Yanghang
“mu”
a traditional unit of land area in the PRC, which is
equivalent to approximately 0.0667 hectare or 666.667
sq.m.
“National Bureau of Statistics”
the National Bureau of Statistics of China（中華人民共和
國國家統計局）
“New Contracting Agreement”
the contracting agreement whereby Mr. Cai Zhenying
or any other person nominated by the Target Group
Controlling Shareholders agrees to contract the New Rights
to Fujian Daping
“New Maximum Levels of
Contaminants”
the Maximum Levels of Contaminants in Foods GB27622 0 1 2《食品中污染物限量》p r o m u l g a t e d b y t h e P R C
government and took effect on 1 June 2013
“New Rights”
the rights of the Target Group pursuant to the New
Contracting Agreement whereby the Target Group has
the rights to operate all the plantations on the Additional
Forest Lands and to derive the incomes therefrom at nil
consideration until the earlier of the date when the relevant
forest rights certificates of the 8K mu Ecological Forest
Lands are issued to the Target Group or the expiry date of
the duration of the respective Contracting Agreements
– 11 –
DEFINITIONS
“New Transfer Agreements”
tea plantation contracting rights transfer agreements
whereby the relevant individual villagers agree to transfer
the land use rights of the Additional Forest Lands, the
ownership and the use rights of the tea trees thereon to Mr.
Cai Zhenying or any person nominated by the Target Group
Controlling Shareholders
“NPC”
the National People’s Congress of the PRC（中華人民共和
國全國人民代表大會）
“Option Period”
the period commencing from the date on which the relevant
forest rights certificates of the 8K mu Ecological Forest
Lands are issued to the Target Group and expiring on the
date on which the Covenantors cease to be interested in the
Additional Forest Lands
“Other Convertible Bonds”
collectively, the first tranche of convertible bonds issued by
the Company on 11 February 2010 in aggregate principal
amount of HK$60,000,000 and the second tranche of
convertible bonds issued by the Company on 20 April
2010 in aggregate principal amount of HK$90,000,000,
both of which will be due on 11 February 2016 and could
be fully converted into approximately 833,333,333 new
Shares at the conversion price of HK$0.18. As at the
Latest Practicable Date, the Company has outstanding
convertible bonds which are convertible into approximately
722,222,222 Shares
“Outstanding Share Options”
the share options granted by the Company which
remain unexercised as at the Latest Practicable Date
and the maximum number of Shares to be allotted or
issued pursuant to the exercise of such share options is
362,260,000 Shares
“PBOC”
the People’s Bank of China（中國人民銀行）, the central
bank of the PRC
– 12 –
DEFINITIONS
“person”
any individual, firm, corporation, joint venture, enterprise,
partnership, trust, unincorporated association, limited
liability company, Governmental Authority or other
entity of any kind, whether or not having separate legal
personality
“PRC” or “China”
the People’s Republic of China , which shall, for the
purpose of this circular exclude Hong Kong, the Macau
Special Administrative Region and Taiwan
“PRC Government” or “State”
the central government of the PRC, including all
governmental subdivisions (including provincial, municipal
and other regional or local government entities) and their
instrumentalities or, where the context requires, any of
them
“PRC Legal Advisers”
Grandall Law Firm (Beijing), the PRC legal advisers of the
Company
“protective forests”
the forests, trees and shrubberies that mainly serve the
purpose of forest lands protection, including forests for the
purposes of conservation of water supply, prevention of
soil erosion, wind-breaking and sandfixation, protection of
farmland, pasture, embankments and roads
“Purchaser”
Wide Lucky Asia Pacific Limited, a company incorporated
in the BVI with limited liability on 31 July 2012 and a
wholly-owned subsidiary of the Company
“Quanzhou Pingshan”
泉州坪山茶業有限公司 (Quanzhou Pingshan Tea Company
Limited*), a company established in the PRC with limited
liability on 10 December 2010 and an indirect whollyowned subsidiary of the Target Company
“Relevant Securities”
has the meaning given to it under Note 4 to Rule 22 of the
Takeovers Code
“retail outlet(s)”
collectively, the retail outlet(s) operated by either the
Target Company or any third-party retailers at which the
Ping Shan Famous Tea brand products and other tea related
products are sold
– 13 –
DEFINITIONS
“Right of First Refusal”
the right of the Company, under the Deed of NonCompetition whereby if Mr. Cai Zhenying or any person
nominated by the Target Group Controlling Shareholders
receives any offer to purchase the whole or any part of the
Additional Forest Lands from any third party during the
Option Period, the Convenantors would first offer to the
Company the right to purchase the whole of the Additional
Forest Lands on the same terms and conditions as offered
by such third party
“RMB”
Renminbi, the lawful currency of the PRC
“SAFE”
the State Administration of Foreign Exchange of the PRC
（中華人民共和國國家外匯管理局）
“SAIC”
the State Administration for Industry and Commerce of the
PRC（中華人民共和國國家工商行政管理總局）
“Sale and Purchase Agreement”
the conditional sale and purchase agreement dated 17
January 2013 entered into between , among others, the
Purchaser, the Company as guarantor and the Vendors in
relation to the sale and purchase of the Sale Shares
“Sale Shares”
132,278,632 ordinary shares of HK$0.1 each in the share
capital of the Target Company, representing its entire issued
share capital
“SAT”
the State Administration of Taxation of the PRC（中華人民
共和國國家稅務總局）
“SFC”
Securities and Futures Commission of Hong Kong
“SFO”
the Securities and Futures Ordinance (Chapter 571 of the
Laws of Hong Kong)
“Shaanxi Pingshan”
陝西坪山茶業有限公司 (Shaanxi Pingshan Tea Company
Limited*), a company established in the PRC with limited
liability on 6 May 2011 and an indirect wholly-owned
subsidiary of the Target Company
– 14 –
DEFINITIONS
“Share(s)”
ordinary share(s) of HK$0.01 each in the share capital of
the Company
“Shareholder(s)”
holder(s) of the Shares
“Shine Strategy”
Shine Strategy Limited（輝策有限公司）, a company
incorporated in the BVI with limited liability on 21 June
2011 and is wholly-owned by Mr. Ng, the sole director of
the company. Its principal business is investment holding
“Sincere Young”
Sincere Young Limited（誠揚有限公司）, a company
incorporated in the BVI with limited liability on 4 March
2011 and is wholly-owned by Greatlink Investment. The
directors of Sincere Young are Mr. Cai Yanghang and Ms.
Ng
“Smart Fujian”
Smart Fujian Group Limited, a company incorporated in the
BVI with limited liability on 27 July 2010 and is whollyowned by Sincere Young. Sincere Young, in turn, is whollyowned by Greatlink Investment which is wholly-owned by
the Greatlink Trust. The Greatlink Trust is an irrevocable
discretionary trust with Ms. Ng named as the sole
beneficiary. Ms. Ng holds the shares of the Target Company
as well as any shares of the holding companies of the Target
Company on trust and for the benefit of Mr. Cai Zhenrong.
Accordingly, Mr. Cai Zhenrong is the sole ultimate
beneficial owner of the shares of the Target Company held
by Smart Fujian. The sole director of Smart Fujian is Ms.
Ng. Its principal business is investment holding
“Specific Mandate”
a specific mandate to be considered, and, if thought fit,
granted by the Independent Shareholders at the EGM to
allot and issue new Shares to satisfy the allotment and issue
of the Consideration Shares and the Conversion Shares
– 15 –
DEFINITIONS
“sq.m.”
square meters
“State Council”
the State Council of the PRC（中華人民共和國國務院）
“Stock Exchange”
The Stock Exchange of Hong Kong Limited
“substantial shareholder(s)”
shall have the meaning given to it under the Listing Rules
“Takeovers Code”
the Code on Takeovers and Mergers
“Target Company”
China Natural Tea Holdings Company Limited（中國大
自然茶業控股有限公司）, a company incorporated in the
Cayman Islands with limited liability on 27 July 2010
“Target Group”
the Target Company and its subsidiaries
“Target Group Controlling
Shareholders”
collectively, Smart Fujian, Exalt Wealth, Shine Strategy,
Mr. Cai Zhenrong, Ms. Ng, Mr. Cai Zhenyao and Mr. Ng,
being the controlling shareholders of the Target Group
“Templeton”
Templeton Strategic Emerging Markets Fund III, LDC,
a limited duration company incorporated in the Cayman
Islands. Its principal business is to make strategic
investments in emerging markets
“Teya”
Teya Holdings Limited, a company incorporated in the BVI
with limited liability and is a wholly-owned subsidiary of
CCB International Asset Management Limited, which is,
in turn, a wholly-owned subsidiary of CCB International
(Holdings) Limited, a wholly-owned subsidiary indirectly
held by China Construction Bank Corporation. Teya’s
principal business is investment holding
“Third Party Occurrence”
the circumstances where a bona fide third party obtains
the forest rights certificates with regard to the 8K mu
Ecological Forest Lands before the Target Group does
“third-party retailer(s)”
third-party retailer(s) authorized by the Target Company to
sell its Ping Shan Famous Tea brand products and other tea
related products at the retail outlet(s)
– 16 –
DEFINITIONS
“Threshold Level”
the threshold level of rare earth prescribed under the
Maximum Levels of Contaminants
“tonne”
a unit of mass, equal to 1,000 kilogrammes
“Track Record Period”
the three financial years ended 31 December 2012
“Transfer Agreements”
collectively, the various tea plantation contracting rights
transfer agreements and supplemental agreements entered
into between Fujian Daping and individual villagers and
village committees whereby the Target Group acquired the
land use rights of the 29.5K mu Economical Forest Lands,
the ownership and the use rights of the tea trees thereon
“US$”
US dollars, the lawful currency of the United States of
America
“VAT”
value-added tax
“Vendors”
Ample Gold, Exalt Wealth, Great Vantage, Shine Strategy,
Smart Fujian, Templeton and Teya
“Voluntary Testing”
the voluntary product testing of samples of raw teas and
refined teas of the Target Group in the external testing
centres
“Whitewash Waiver”
a waiver by the Executive pursuant to Note 1 on
dispensations from Rule 26 of the Takeovers Code from
the obligation of Mr. Cai Zhenrong and parties acting in
concert with him to make a mandatory general offer for
all the issued Shares and other securities of the Company
that are not already owned or agreed to be acquired by
them as a result of the Company allotting and issuing the
Consideration Shares to Mr. Cai Zhenrong and/or parties
acting in concert with him
“WFOE”
wholly foreign-owned enterprise established in the PRC
– 17 –
DEFINITIONS
“Xiamen Pingshan”
廈門 泙山茶業有限公司 (Xiamen Pingshan Tea Company
Limited*), a company established in the PRC with limited
liability on 15 December 2010 and an indirect whollyowned subsidiary of the Target Company
“%”
per cent
“8K mu Ecological Forest
Lands”
ecological forest lands of an area of approximately 8,479.3
mu in respect of which the Target Group, through Fujian
Daping, entered into the Contracting Agreements to acquire
the rights to operate and derive income or benefits from the
plantation thereon
“29.5K mu Economical Forest
Lands”
economical forest lands of an area of approximately
29,520.7 mu in respect of which the Target Group, through
Fujian Daping, entered into the Contracting Agreements
and the Transfer Agreements to acquire the land use rights,
the ownership and use rights of the tea trees thereon
“29.5K mu Forest Rights
Certificates”
a total of 126 relevant forest rights certificates issued by the
government of Anxi County in respect of the entire 29.5K
mu Economical Forest Lands obtained by the Target Group
in 2011
“770 mu Forest Lands”
forest lands of an area of 770 mu comprising 72 mu
economical forest lands and 698 mu protective forest
lands in respect of which Fujian Daping, before becoming
a subsidiary of the Target Group, entered into an asset
transfer agreement with the then sole shareholder of Fujian
Daping to acquire, among others, the land use rights of such
land
“770 mu Forest Rights
Certificate”
the relevant forest rights certificate in respect of the entire
770 mu Forest Lands issued by the relevant Government
Authority
* The English translation is for identification purposes only.
For illustration purpose only, unless otherwise indicated, amounts denominated in US$ and
RMB in this circular have been translated into HK$ at the rate of US$1 = HK$7.8 and RMB1 =
HK$1.223, respectively. Such translations should not be construed as a representation that the
amounts in question have been, could have been or could be converted at any particular rate at all.
– 18 –
LETTER FROM THE BOARD
Huafeng Group Holdings Limited
華豐集團控股有限公司
(Incorporated in the Cayman Islands with limited liability)
(Stock Code: 364)
Executive Directors:
Mr. Cai Zhenrong (Chairman)
Mr. Cai Zhenyao
Mr. Cai Zhenying
Mr. Cai Yangbo
Mr. Choi Wing Toon
Registered office:
Cricket Square
Hutchins Drive
P.O. Box 2681
Grand Cayman KY1-1111
Cayman Islands
Independent Non-Executive Directors:
Ms. Choy So Yuk JP
Mr. Lawrence Gonzaga
Mr. Wong Chi Hung, Stanley
Principal place of business
in Hong Kong:
Room 2105, West Tower
Shun Tak Centre
200 Connaught Road Central
Hong Kong
28 June 2013
To the Shareholders
Dear Sirs or Madams,
(1) VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION
(2) PROPOSED GRANT OF SPECIFIC MANDATE TO ISSUE SHARES
(3) PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL
(4) APPLICATION FOR WHITEWASH WAIVER
AND
(5) NOTICE OF EXTRAORDINARY GENERAL MEETING
1.
INTRODUCTION
Reference is made to the Announcement of the Company dated 17 January 2013 in relation to
the very substantial acquisition and connected transaction regarding the Acquisition, the proposed
grant of the Specific Mandate to issue Shares, the proposed increase in authorized share capital of
the Company, the application of the Whitewash Waiver and the trading halt and the resumption of
trading.
– 19 –
LETTER FROM THE BOARD
On 17 January 2013, the Company and the Vendors, among others, entered into the Sale and
Purchase Agreement pursuant to which the Company has conditionally agreed to purchase from
the Vendors, and the Vendors have conditionally agreed to sell to the Company, the Sale Shares,
representing the entire issued share capital of the Target Company, at a total Consideration of
HK$2,487.48 million, which will be satisfied partly in cash and partly by the allotment and issue of
the Consideration Shares and the issue of the Convertible Bonds. Subject to and in accordance with
the terms and conditions of the Sale and Purchase Agreement, the Target Company shall become a
wholly-owned subsidiary of the Company upon completion of the Acquisition.
The purpose of this circular is to provide you with, among others, (i) further information
regarding the Acquisition contemplated under the Sale and Purchase Agreement; (ii) the proposed
grant of the Specific Mandate ; (iii) the proposed increase in authorized share capital of the
Company; (iv) the application for the Whitewash Waiver; (v) a letter from the Independent Board
Committee; (vi) a letter of advice from the Joint Independent Financial Advisers to the Independent
Board Committee and the Independent Shareholders; and (vii) a notice of the EGM.
2.
THE ACQUISITION
The Sale and Purchase Agreement
Date:
17 January 2013
Parties
Purchaser:
Wide Lucky Asia Pacific Limited, a wholly-owned subsidiary of the Company
Guarantor:
the Company
Vendors:
1)
Ample Gold, which holds 3,968,359 shares of the Target Company as at the Latest
Practicable Date, representing approximately 3% of the total issued share capital of
the Target Company as at the Latest Practicable Date;
2)
Exalt Wealth, which holds 17,285,695 shares of the Target Company as at the Latest
Practicable Date, representing approximately 13.07% of the total issued share capital
of the Target Company as at the Latest Practicable Date;
– 20 –
LETTER FROM THE BOARD
3)
Great Vantage, which holds 8,445,833 shares of the Target Company as at the Latest
Practicable Date, representing approximately 6.38% of the total issued share capital of
the Target Company as at the Latest Practicable Date;
4)
Shine Strategy, which holds 12,003,955 shares of the Target Company as at the Latest
Practicable Date, representing approximately 9.07% of the total issued share capital of
the Target Company as at the Latest Practicable Date;
5)
Smart Fujian, which holds 60,266,852 shares of the Target Company as at the Latest
Practicable Date, representing approximately 45.57% of the total issued share capital
of the Target Company as at the Latest Practicable Date;
6)
Templeton, which holds 10,102,646 shares of the Target Company as at the Latest
Practicable Date, representing approximately 7.64% of the total issued share capital of
the Target Company as at the Latest Practicable Date; and
7)
Teya, which holds 20,205,292 shares of the Target Company as at the Latest
Practicable Date, representing approximately 15.27% of the total issued share capital
of the Target Company as at the Latest Practicable Date.
Other parties:
1)
The Target Company;
2)
China Tea BVI, a subsidiary of the Target Company;
3)
Citiasia, a subsidiary of the Target Company;
4)
Mr. Cai Zhenrong;
5)
Ms. Ng;
6)
Mr. Cai Zhenyao;
7)
Mr. Ng; and
8)
Mr. Cai Yangbo.
– 21 –
LETTER FROM THE BOARD
Exalt Wealth is wholly-owned by Mr. Cai Zhenyao, a Director and a director of the Target
Company; Shine Strategy is wholly-owned by Mr. Ng, a nephew of both Mr. Cai Zhenrong (the
controlling shareholder of the Company and a Director) and Mr. Cai Zhenyao; and Ms. Ng, a
daughter-in-law of Mr. Cai Zhenrong, indirectly holds the entire issued share capital of Smart
Fujian. Ms Ng, in turn, holds shares in the Target Company through Smart Fujian by acting as the
sole beneficiary of the Greatlink Trust. Ms. Ng and Mr. Cai Zhenrong entered into a declaration
of trust dated 9 October 2012. Under such arrangement, Ms. Ng holds the shares of the Target
Company as well as any shares of the holding companies of the Target Company on trust and for the
benefit of Mr. Cai Zhenrong. Mr. Cai Zhenrong is, therefore, the sole ultimate beneficial owner of
the shares of the Target Company held by Smart Fujian. Accordingly, Exalt Wealth, Shine Strategy,
Smart Fujian, Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng and Ms. Ng are connected persons of the
Company. Save as disclosed above, to the best of the Directors’ knowledge, information and belief
and having made all reasonable enquiries, each of the Vendors, each of the Target Group companies
and their respective ultimate beneficial owners are Independent Third Parties.
Subject matter
The Sale and Purchase Agreement sets out the terms and conditions upon which the
Purchaser has conditionally agreed to purchase from the Vendors, and the Vendors have
conditionally agreed to sell to the Purchaser, the Sale Shares, representing the entire issued
share capital of the Target Company.
Consideration
The Consideration is in aggregate HK$ 2,487.48 million being an amount based
on a profit earning ratio of approximately 10.5 times ( being the result of the arm’s
length commercial negotiations among the Purchaser, the Company and the Vendors with
reference to the profit earning ratios of listed peer companies on the Main Board of the
Stock Exchange (namely, Tenfu (Cayman) Holdings Company Limited (stock code: 6868)
and Longrun Tea Group Company Limited) (stock code: 2898) at the relevant time) of the
audited net profit attributable to the equity shareholders of the Target Company for the year
ended 31 December 2011, representing approximately HK$18.8 per Sale Share, of which
approximately HK$1,684.10 million is payable to Exalt Wealth, Smart Fujian and Shine
Strategy (representing approximately 67.70% of the Consideration ) and approximately
HK$803.38 million is payable to the Financial Investors and Ample Gold (representing
approximately 32.30% of the Consideration).
– 22 –
LETTER FROM THE BOARD
The Consideration payable by the Purchaser to each of the Vendors is listed as
follows:
Vendors
Exalt Wealth
Smart Fujian
Shine Strategy
Teya
Templeton
Great Vantage
Ample Gold
Total
Amount of
Consideration
to be settled
in cash
Amount of
Consideration
to be settled
by the issue
of
the Consideration
Shares
Amount of
Consideration
to be settled
by the issue of
the Convertible
Bonds
Total
Consideration
(approximately
HK$ million)
(approximately
HK$ million)
(approximately
HK$ million)
(approximately
HK$ million)
–
–
–
91.68
45.84
38.32
18.01
260.04
906.65
180.59
156.82
78.41
65.55
30.80
65.01
226.66
45.15
131.45
65.73
54.95
25.82
325.05
1,133.31
225.74
379.95
189.98
158.82
74.63
193.85
1,678.86
614.77
2,487.48
The Consideration will be satisfied in the following manner:
(a)
for Teya, Templeton, Great Vantage and Ample Gold, an aggregate of
approximately HK$193.85 million of their portion of the Consideration shall be
paid in cash and their remaining portion of the Consideration will be settled by
the issue of the Consideration Shares and Convertible Bonds. The portion of the
Consideration to be settled in cash (approximately HK$193.85 million) will be
paid in two installments to Teya, Templeton, Great Vantage and Ample Gold,
being calculated on the basis of the proportion of their respective shareholding
in the Target Company. The first installment which represents 50% of the
cash Consideration will be settled at the completion of the Acquisition and
the second installment which represents 50% of the cash Consideration will
be settled six months after the completion of the Acquisition together with an
interest at a simple interest rate of 4% per annum; and
(b)
for Exalt Wealth, Shine Strategy and Smart Fujian, their portion of the
Consideration will be settled by the issue of the Consideration Shares and
Convertible Bonds.
– 23 –
LETTER FROM THE BOARD
The Company has unconditionally and irrevocably guaranteed to the Vendors the due
and punctual payment of all amounts payable by the Purchaser under the Sale and Purchase
Agreement, including but not limited to its obligation to settle the Consideration.
Further details of the Consideration Shares and the Convertible Bonds are set out in
the section headed “Information on the Consideration Shares and Convertible Bonds” below.
For the avoidance of doubt, after completion of the Acquisition, the Vendors shall have
all rights, benefits, interests and privileges attaching to the Consideration Shares and the
Conversion Shares, credited as fully paid, to be issued and allotted upon the exercise of the
conversion rights of the Convertible Bonds.
The Directors would like to draw the attention of the Shareholders that, the value of
the biological assets of the Target Group of approximately RMB272.4 million as at 31 March
2013 (which has been prepared in accordance with International Accounting Standard 41 –
Agriculture, the details of which is set out in Appendix V to this circular), represented the
fair value of the tea trees growing on the cultivation bases of the Target Group, as opposed
to the business value of the Target Group as a whole. The cultivation bases, along with the
production facilities, established brand and extensive retail network, collectively form a
vertically integrated business model of the Target Group, which contributes to the Target
Group’s historical performance and future prospects. In light of this, when determining the
Consideration, the value of biological assets of the Target Group does not constitute the sole
factor. The Consideration was arrived at after arm’s length negotiations among the Purchaser,
the Company and the Vendors having regard to a number of factors including the historical
profitability, financial performance and operational track record of the Target Group, the
industry prospects in which the Target Group operates in, and the reasons and benefits for the
Acquisition as described below.
Original purchase cost and purchase date of the Sale Shares
The Vendors have acquired the Sale Shares as a result of the reorganization undergone
by the Target Group or by subscription of the shares of the Target Group. The investment cost
paid by each of the Vendors is summarized as follows:
Vendors
Investment cost
Date of purchase
Exalt Wealth
Shine Strategy
Smart Fujian
Approximately
HK$45.635 million (note 1)
23 April 2007,
21 December 2009,
7 September 2010 and
22 August 2011 (note 1)
Teya
US$18.779 million (note 2)
4 October 2010 (note 2)
Templeton
US$9.389 million (note 2)
4 October 2010 (note 2)
Great Vantage
US$15.000 million (note 1)
22 August 2011
Ample Gold
(note 3)
1 April 2011 (note 3)
– 24 –
LETTER FROM THE BOARD
Note 1: The first Target Group company, namely Citiasia was incorporated on 17 April 2007 and on 23
April 2007 one subscriber share was transferred to and 99 new shares were issued to Lian Bi
Yu, who held the shares on trust and for the benefit of Mr. Cai Zhenyao, Mr. Ng and Ms. Ng.
Immediately after the allotment of 99,900 shares on 21 December 2009 and the transfer of 100
shares on 22 December 2009, Citiasia was owned as to 69.5%, 18%, and 12.5% by Ms. Ng, Mr.
Cai Zhenyao and Mr. Ng, respectively. The then total issued share capital of Citiasia was HK$0.1
million. On 7 September 2010, Ms. Ng, Mr. Cai Zhenyao, Mr. Ng, China Tea BVI and Citiasia
entered into a deed of assignment for the assignment and transfer of a debt (“Debt”) in the sum
of HK$20,000,000 (owed by Citiasia to them) to China Tea BVI. On the same day, the Debt was
capitalized for the allotment and issue of 20,000,000 ordinary shares of HK$1.00 each in Citiasia to
China Tea BVI. As a result of the capitalization, the total issued share capital of Citiasia amounted
to HK$20.1 million. After that, as a result of the reorganization undergone by the Target Group,
investment by Teya, Templeton and Great Vantage in the Target Group and transfer of shares in the
Target Company from Smart Fujian to Ample Gold, the Target Group was owned as to 45.57%,
13.07% and 9.07% by Ms. Ng, Mr. Cai Zhenyao and Mr. Ng through their respective wholly-owned
companies, namely Smart Fujian, Exalt Wealth and Shine Strategy.
Immediately before investment of Great Vantage, the aggregate number of shares of the Target
Company owned by Exalt Wealth, Shine Strategy and Smart Fujian was 96,031,641, which
represents investment cost in the Target Company of Exalt Wealth, Shine Strategy and Smart Fujian
of approximately HK$0.209 per share calculated based on the original investment cost of HK$20.1
million set out in this note 1. On 5 August 2011, Ms. Ng, Mr. Cai Zhenyao, Mr. Ng, Smart Fujian,
the Target Company, China Tea BVI, Citiasia, Exalt Wealth, Shine Strategy and Great Vantage
entered into a sale and purchase agreement (the “Agreement”) in relation to Great Vantage’s
purchase of 8,445,833 shares in the Target Company (the “Purchase Shares”) from Smart Fujian
for an aggregate purchase price of US$15,000,000, i.e. at a price of US$1.776 (or equivalent to
approximately HK$13.85) per Purchase Share. Such transfer was completed on 22 August 2011.
On 22 August 2011, Smart Fujian acquired 1,313,796 shares and 656,898 shares in the Target
Company from Teya and Templeton respectively for a total consideration of US$3.5 million,
representing approximately US$1.776 (or equivalent to approximately HK$13.85) per share of the
Target Company. Accordingly, the total investment costs incurred by Exalt Wealth, Shine Strategy
and Smart Fujian in the Target Company of HK$20.1 million were reduced by approximately
HK$1.765 million (being the number of shares of the Target Group sold to Great Vantage by Smart
Fujian multiplied by the investment cost of approximately HK$0.209 per Purchase Share by Exalt
Wealth, Shine Strategy and Smart Fujian) and increased by US$3.5 million, and arrive at the sum of
approximately HK$45.635 million.
– 25 –
LETTER FROM THE BOARD
Note 2: On 4 October 2010, Teya and Templeton subscribed for 21,519,088 shares and 10,759,544 shares
(collectively, the “Subscription Shares”) in the Target Company, respectively, for US$20 million
and US$10 million, which represents the investment costs of approximately US$0.9294 per share
(or equivalent to approximately HK$7.25 per share). On 22 August 2011, Teya and Templeton
disposed 1,313,796 shares and 656,898 shares (collectively, the “Disposed Shares”) in the Target
Company, respectively, to Smart Fujian for a consideration of US$2,333,333 and US$1,166,667.
Accordingly, the total investment costs incurred by Teya and Templeton in the Target Company of
US$20 million and US$10 million respectively were reduced by approximately US$1,221,042 and
approximately US$610,521 respectively (being the number of the Disposed Shares multiplied by
the investment cost of approximately US$0.9294 per Subscription Share by Teya and Templeton)
and arrive at the sum of approximately US$18,778,958 and approximately US$9,389,479,
respectively.
The purpose of the investment in the Target Company by the Financial Investors is to seek
acceptable returns on their financial investment. The sale of the Target Company’s shares by Teya
and Templeton is driven from the commercial decision to partially realize their financial investment.
Note 3: On 1 April 2011, 3,968,359 shares in the Target Company, representing 3% of the then issued
share capital of the Target Company was transferred to Ample Gold by Smart Fujian in recognition
of the arrangement by Mr. Wong Hung Yu (“Mr. Wong”), the sole shareholder of Ample Gold,
of the investment by Teya and Templeton into the Target Company. Ample Gold, an independent
third party to the Target Group, the other Vendors and the Company, introduced to Smart Fujian
the Financial Investors for investment in the Target Company. Ample Gold does not give any
advice to Smart Fujian in respect of the investment by the Financial Investors nor in relation to the
shareholdings held by Smart Fujian. There is no service agreement signed between Ample Gold and
Smart Fujian. After the investment by Teya and Templeton has been completed, Smart Fujian agreed
to transfer 3% of the issued share capital of the Target Company as consideration with reference
to the value of the investment brought into the Target Group. As confirmed by Mr. Wong and Mr.
Cai Zhenrong, Mr. Wong is a social acquaintance of Mr. Cai Zhenrong. To the best knowledge of
the Board, having made all reasonable enquiries, save as disclosed in this Note 3, Mr. Wong has no
other relationships with any directors, senior management, substantial or controlling shareholders
of the Target Group. As Mr. Wong is familiar with the investment environment in the Fujian
Province and has broad connection with investment banks, Mr. Cai Zhenrong asked Mr. Wong to
introduce financial investors to the Target Group.
To the best of the Directors’ knowledge, information and belief and having made
all reasonable enquires, the respective original acquisition cost per share of the Target
Company of Smart Fujian and Great Vantage in 2011 was arrived at after arm’s length
negotiations between the parties of the respective agreements thereof. The Directors are
aware of the considerable premium when comparing the consideration per Sale Share
of approximately HK$18.8 for the Acquisition with the original cost per share of Target
Company of approximately HK$13.85 paid by Smart Fujian and Great Vantage. However, the
Directors are of the view that the respective original acquisition cost per share of the Target
Company of Smart Fujian and Great Vantage in 2011 is irrelevant to the determination of the
– 26 –
LETTER FROM THE BOARD
Consideration which was the result of the arm’s length negotiations among the Purchaser,
the Company and the Vendors having regard to a number of factors including the historical
profitability, financial performance and operational track record of the Target Group, the
industry prospects in which the Target Group operates, and the reasons and benefits for the
Acquisition as described below. Taking into account the aforesaid, the Directors are of the
view that the Acquisition is fair and reasonable.
Conditions precedent
Completion of the sale and purchase of the Sale Shares is conditional upon, among
other things, the satisfaction (or, if applicable, the waiver) of certain conditions precedent.
Such conditions precedent include the following:
(a)
the approval of the Independent Shareholders at the EGM of (i) the terms of
the Sale and Purchase Agreement; (ii) the proposal for grant of the Specific
Mandate to allot and issue Shares to satisfy the allotment and issue of the
Consideration Shares and the Conversion Shares which fall to be issued upon
conversion of the Convertible Bonds; and (iii) the Whitewash Waiver having
been obtained;
(b)
completion of legal, financial, accounting, tax, and business due diligence of
the Target Group by the Purchaser, its legal counsel and other professional
advisers to the satisfaction of the Purchaser;
(c)
completion of legal, financial, accounting, tax, technical and business due
diligence of the Purchaser and the Company by the Vendors, their legal counsel
and other professional advisers to the satisfaction of the Vendors;
(d)
the Target Company, the Purchaser and the Company having obtained all
required governmental and third party approvals, consents and waivers in
connection with the Acquisition, if any;
(e)
key members of the existing management of the Target Group, namely Mr.
Cai Yanghang, Mr. Cai Zhenyao, Ms. Xu Jing and Mr. Huang Chuansheng,
continuing to be employed by the Target Group at completion of the
Acquisition;
(f)
no material adverse change having occurred to the business, assets, financial
position, performance, operations, properties or conditions (financial or
otherwise) of the Target Group, the Purchaser and the Company;
(g)
approval by the board of directors of each of the Target Company, the Purchaser
and the Company having been obtained;
(h)
approval by the Financial Investors’ respective investment committee (where
applicable) having been obtained;
– 27 –
LETTER FROM THE BOARD
(i)
the warranties on the Company given by the Purchaser, the Company, Mr. Cai
Zhenrong and Mr. Cai Yangbo being true and accurate when made, and being
true and accurate on and as of the date of completion of the Acquisition;
(j)
the warranties on the Target Company given by the Target Company, Mr. Cai
Zhenrong, Smart Fujian, China Tea BVI, Citiasia, Exalt Wealth, Shine Strategy,
Ms. Ng, Mr. Cai Zhenyao and Mr. Ng being true and accurate when made, and
being true and accurate on and as of the date of completion of the Acquisition;
(k)
the Listing Committee having unconditionally granted the listing and
permission to deal in the Consideration Shares and the Conversion Shares on
the Main Board of the Stock Exchange and such permission not subsequently
being revoked or withdrawn;
(l)
the Whitewash Waiver having been granted by the Executive to Mr. Cai
Zhenrong and such waiver not having been revoked or withdrawn;
(m)
Mr. Cai Zhenying, a Director and a brother of Mr. Cai Zhenrong, or any
other person nominated by the Target Group Controlling Shareholders,
having executed the New Transfer Agreements with the relevant individual
villagers to the satisfaction of the Purchaser, the Company and the Target
Group Controlling Shareholders for the acquisition of the land use rights of
the Additional Forest Lands and the ownership and use rights of the tea trees
thereon, and having obtained the Additional Forest Lands Approval;
(n)
Mr. Cai Zhenying or any other person nominated by the Target Group
Controlling Shareholders having executed the New Contracting Agreement with
Fujian Daping in form and substance to the satisfaction of the Purchaser, the
Company and the Target Group Controlling Shareholders;
(o)
the Purchaser having received the Deed of Indemnity duly executed by the
Target Group Controlling Shareholders; and
(p)
the Purchaser having received the Deed of Non-Competition duly executed by
the Target Group Controlling Shareholders and Mr. Cai Zhenying or any other
person nominated by the Target Group Controlling Shareholders.
– 28 –
LETTER FROM THE BOARD
The above conditions precedent are required to be fulfilled or waived on or before the
Long Stop Date. The above conditions precedent (a), (d), (g), (h), (k), (l), (m) and (n) cannot
be waived. The Purchaser is entitled to exercise its discretion to waive the fulfillment of the
above conditions precedent (b), (e), (f) (in respect of the business, assets, financial position
and performance of the Target Company), (j), (o) and (p). As part of the above conditions, the
Purchaser is entitled to conduct legal, financial, accounting, tax and business due diligence
of the Target Group, which includes but is not limited to obtaining and reviewing of (1)
business scope under the business licenses; (2) material contracts; (3) taxation, (4) litigation
and (5) the audited financial report covering 3 years financial period ended 31 December
2011. Therefore, the Group has engaged the PRC legal advisers, auditors and valuers to
perform the legal and accounting (including the biological assets) due diligence works
on the Target Group and they are in the process of obtaining and reviewing the business,
legal and financial documents/information of the Target Group. As at the Latest Practicable
Date, the Purchaser has no intention to waive any of such conditions. The waiver of such
conditions is subject to the findings of the due diligence and/or the status of the Target
Group as at the date of the completion of the Acquisition, which is sought for the purpose
that the Acquisition will not fall through as a result of insignificant divergence from such
conditions. In the event that such conditions could not be fully satisfied, the waiver of any
of such conditions is to be determined by the Purchaser after consideration of the interests
of the Purchaser, the Company and the Shareholders as a whole. The Board is of the view
that the term entitling the Purchaser to exercise its discretion to waive such conditions is fair
and reasonable and in the interests of the Purchaser, the Company and the Shareholders as a
whole.
The Vendors are entitled to exercise their discretion to waive the fulfillment of the
above conditions precedent (c), (f) (in respect of the business, assets, financial position and
performance of the Purchaser and the Company) and (i). If the above conditions precedent
(a) to (p) have not been fulfilled (or, if applicable, waived) on or before the Long Stop Date,
(1) the completion of the Acquisition shall be deferred to a later date, (2) the completion
of the Acquisition shall be proceeded so far as practicable but subject to such conditions
as agreed by the parties to the Sale and Purchase Agreement in writing and in any event
the conditions precedents (a), (d), (g), (h), (k), (l), (m) and (n) shall not be waived, or (3)
the Sale and Purchase Agreement shall terminate. In the event that the Sale and Purchase
Agreement terminates, it shall be of no further effect and all rights and obligations of the
parties to the Sale and Purchase Agreement shall cease and lapse without prejudice to the
rights of any parties in respect of certain continuing provisions or any antecedent breach of
the Sale and Purchase Agreement.
As at the Latest Practicable Date, none of the above conditions precedent have been
fulfilled.
– 29 –
LETTER FROM THE BOARD
Each of Templeton, Teya, Great Vantage and Ample Gold has not provided any
warranties on the Target Company except for the warranties relating to confidentiality based
on the following reasons:
(a)
each of Templeton, Teya and Great Vantage is a passive financial investor who
has not and will not participate in the day-to-day management and operations of
the Target Group in any respect;
(b)
although each of Templeton and Teya has nominated its representative to the
board of the Target Company as non-executive director, Mr. Cai Zhenyao and
Mr. Ng are the executive directors of the Target Group. Mr. Cai Zhenyao and
Mr. Ng are responsible for the day-to-day management of the Target Group and
they are in a better position to give warranties on the Target Company; and
(c)
Ample Gold is not entitled to nominate any representative on the board of
the Target Company and is therefore a passive minority shareholder with
no participation in the day-to-day management and operations of the Target
Group in any respect. Accordingly, Ample Gold is not in the capacity to give
warranties on the Target Company.
Completion
Completion is scheduled to take place on the business day when all the conditions
precedent to which Completion is subject have been fulfilled (or, if applicable, waived) or
such other day to be agreed by the parties to the Sale and Purchase Agreement.
Lock-up Undertakings
In respect of the Consideration Shares
Each of Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng, Ms. Ng, Exalt Wealth, Smart
Fujian and Shine Strategy has undertaken to the Purchaser and the Company that he/she/it
will not (a) dispose of nor (b) enter into any agreement to dispose of or (c) otherwise create
any encumbrances in respect of any direct or indirect interest in the Consideration Shares at
any time during the 12-month period starting from the Completion.
Each of Teya, Templeton, Great Vantage and Ample Gold has undertaken to the
Purchaser and the Company that it will not (a) dispose of nor (b) enter into any agreement
to dispose of or (c) otherwise create any encumbrances in respect of any direct or indirect
interest in the Consideration Shares at any time during the first six-month period starting
from the Completion.
– 30 –
LETTER FROM THE BOARD
Each of the Vendors undertakes that:
a)
at the time of the issuance date of the Consideration Shares and within one year
thereof, it shall not directly transfer the Consideration Shares to any person
who is, to the Vendor’s actual knowledge, a Korean Resident based on public
information available to the Vendor or confirmation by the transferee of the
Consideration Shares; and
b)
if any of the Consideration Shares are deposited in an officially recognized
depository, the relevant depository contract shall contain the condition that
such Consideration Shares shall not be withdrawn or transferred to any Korean
Resident (to the Vendor’s actual knowledge based on public information
available to the Vendor or confirmation by the transferee of the Consideration
Shares) within one year from the date of issuance of the Consideration Shares.
In respect of the Convertible Bonds
Each of Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng, Ms. Ng, Exalt Wealth, Smart
Fujian and Shine Strategy has undertaken to the Purchaser and the Company that he/she/it
will not (a) exercise his/her/its rights to convert all or any part of the outstanding principal
amount of the Convertible Bonds into Conversion Shares (i) at any time during the 12-month
period starting from the issue date of the Convertible Bonds, and (ii) at any time if such
conversion will result in the Company not being able to comply with the minimum public
float requirement under the Listing Rules; or (b) assign or transfer all or any part of the
outstanding principal amount of the Convertible Bonds to any third parties at any time during
the 12-month period starting from the issue date of the Convertible Bonds.
Each of Teya, Templeton, Great Vantage and Ample Gold has undertaken to the
Purchaser and the Company that it will not (a) exercise its rights to convert all or any part
of the outstanding principal amount of the Convertible Bonds into Conversion Shares at any
time during the first six-month period starting from the issue date of the Convertible Bonds
(the “First Six-Month Period”); or (b) assign or transfer all or any part of the outstanding
principal amount of the Convertible Bonds to any third parties at any time during the First
Six-Month Period.
– 31 –
LETTER FROM THE BOARD
At any time starting from the expiry of the First Six-Month Period, if Teya intends to
exercise its rights to convert all or any part of the Convertible Bonds into Conversion Shares
and the sum of (i) Consideration Shares then being held by Teya and (ii) the maximum
number of Conversion Shares that could be issued and allotted to Teya upon the exercise of
its rights to convert all or any part of the then principal amount of the Convertible Bonds
being held by Teya into Conversion Shares represents at least 10% of the then total issued
share capital of the Company, Teya shall, subject to compliance with the applicable laws,
first dispose of such number of Shares then held (the number of which shall be equivalent
to the number of the Conversion Shares to be issued and allotted upon the exercise of the
conversion rights of the respective Convertible Bonds) to Independent Third Parties in order
to help the Company to satisfy the public float requirement at all times as long as Teya is the
holder of any Convertible Bonds.
The Company has undertaken that, at the time of the issuance of the Convertible
Bonds and within one year thereof, if any part of the Convertible Bonds is converted into
Conversion Shares, such Conversion Shares shall not be subdivided or subject to any share
split.
Each of the Vendors has undertaken that:
a)
at the time of the issuance of the Convertible Bonds and within one year
thereof, if any part of the Convertible Bonds is converted into Conversion
Shares, the Vendor shall not directly transfer the Conversion Shares to any
person who is, to the Vendor’s actual knowledge, a Korean Resident based on
public information available to the Vendor or confirmation by the transferee of
the Conversion Shares; and
b)
if any of the Conversion Shares are deposited in an officially recognized
depository, the relevant depository contract shall contain the condition that
such Conversion Shares shall not be withdrawn or transferred to any Korean
Resident (to the Vendor’s actual knowledge based on public information
available to the Vendor or confirmation by the transferee of the Conversion
Shares) within one year from the date of issuance of the Convertible Bonds.
The undertaking of the Vendors in respect of the non-transfer of the Consideration
Shares and/or the Conversion Shares to any Korean Resident during the relevant period is
to prevent the issue and allotment of the Consideration Shares and/or the Conversion Shares
from falling under the criteria prescribed and publicly notified by the Financial Services
Commission of Korea for resale and being deemed a public offering of such securities
in Korea. As the Group has successfully procured the Vendors to make the aforesaid
undertaking in the Sale and Purchase Agreement, to the best knowledge of the Directors, (i)
the issue and allotment of the Consideration Shares and/or the Conversion Shares shall not
be deemed to fall under the criteria prescribed and publicly notified by the Financial Services
Commission of Korea for resale and shall not be deemed a public offering of such securities
in Korea; and (ii) even if any of the Vendors fails to comply with the aforesaid undertaking,
the Group will not be subject to any regulatory actions taken by the relevant Korean
authorities as long as the Group has no involvement or participation in such non-compliance.
The aforesaid lock-up undertakings in respect of the Consideration Shares and the
Convertible Bonds have been included in the Sale and Purchase Agreement.
– 32 –
LETTER FROM THE BOARD
Information on the Consideration Shares and Convertible Bonds
(1)
Consideration Shares
The Consideration Shares to be allotted and issued by the Company pursuant to the
Sale and Purchase Agreement represent (i) approximately 609.51% of the total Shares in
issue as at the Latest Practicable Date, (ii) approximately 85.91% of the total Shares in issue
as enlarged by the allotment and issue of the Consideration Shares but before conversion
or exercise of any convertible bonds (including the Convertible Bonds) or share options
outstanding as at the Latest Practicable Date, (iii) approximately 65.35 % of the total
Shares in issue as enlarged by the issue of the Consideration Shares and Conversion Shares
(assuming full conversion of the Convertible Bonds) but before conversion or exercise of any
Other Convertible Bonds or Outstanding Share Options, and (iv) approximately 62.25% of
the total Shares in issue as enlarged by the issue of the Consideration Shares and Conversion
Shares (assuming full conversion of the Convertible Bonds) and upon conversion of all Other
Convertible Bonds but before exercise of any Outstanding Share Options. Further details of
the effect of the Acquisition on the shareholding structure of the Company are set out in the
section headed “Effect of the Acquisition on the Shareholding Structure of the Company”
below.
The Consideration Shares shall rank pari passu with all other Shares in issue as at the
date of their allotment. Application will be made by the Company to the Stock Exchange for
the listing of, and permission to deal in, the Consideration Shares. The issue and allotment of
the Consideration Shares are subject to the approval by the Independent Shareholders at the
EGM.
The issue price of the Consideration Shares was arrived at after arm’s length
negotiations among the parties to the Sale and Purchase Agreement, taking into account of
the following principal factors:
(a)
effect of the volatility and fluctuations of the closing price of the Share; and
(b)
the total number of Shares to be adjusted on an as-converted and fully
diluted basis, taking into account of all the convertible bonds (other than the
Convertible Bonds) issued by the Company;
and was determined with reference to a 19% discount to the price per Share of the
Company to be calculated based on the average market capitalization of the issued
Shares of the Company on “in the money”1 basis for the 90 trading days immediately
preceding the signing date of the Sale and Purchase Agreement.
1
It is assumed that all the existing convertible bonds issued by the Company (other than the
Convertible Bonds to be issued as part of the Acquisition) have been fully converted.
– 33 –
LETTER FROM THE BOARD
The gross reference price before the 19% discount based on the above calculation is
approximately HK$0.2182 per Share. The gross reference price is determined among the
Purchaser, the Company and the Vendors after arm’s length negotiations and on normal
commercial terms, taking into account of the aforesaid principal factors.
The issue price of HK$0.1768 per Consideration Share represents:
(a)
a discount of approximately 1.78% to the closing price of HK$0.1800 per Share
as quoted on the Stock Exchange on the Latest Practicable Date (27 June 2013);
(b)
a discount of approximately 29.28% to the closing price of HK$0.2500 per
Share as quoted on the Stock Exchange on the Last Trading Day (16 January
2013);
(c)
a discount of approximately 29.28% to the average of the closing prices of
approximately HK$0.2500 per Share as quoted on the Stock Exchange for the 5
consecutive trading days up to and including the Last Trading Day (10 January
2013 to 16 January 2013);
(d)
a discount of approximately 29.56% to the average of the closing prices of
approximately HK$0.2510 per Share as quoted on the Stock Exchange for
the 10 consecutive trading days up to and including the Last Trading Day (3
January 2013 to 16 January 2013); and
(e)
a discount of approximately 80.51% to the net asset value per Share as of 30
September 2012.
The Directors consider that in order to maintain the financial flexibility of the Group,
the issue of the Consideration Shares or Convertible Bonds to the Vendors is the more
efficient way than alternate types of fund raising (such as placing or bank borrowings) in
terms of the cost of fundraising for the Group. Having considered the current unfavorable
market conditions, relatively thin trading volume of the Shares and the amount of the
Consideration, the Board is of the view that, in order to enhance the willingness of the
Vendors to receive the Consideration Shares as part of the Consideration, the issue price
of HK$0.1768 per Consideration Share is fair and reasonable and in the interests of the
Company and the Shareholders as a whole.
– 34 –
LETTER FROM THE BOARD
(2)
Convertible Bonds
The principal terms of the Convertible Bonds are set out as follows:
Principal Amount:
The aggregate principal amount of the Convertible
Bonds to be issued is approximately HK$614.77
million, of which approximately HK$65.01 million,
shall be issued to Exalt Wealth, approximately
HK$45.15 million shall be issued to Shine Strategy,
approximately HK$226.66 million shall be issued
to Smart Fujian, approximately HK$131.45 million
shall be issued to Teya, approximately HK$65.73
million shall be issued to Templeton, approximately
HK$54.95 million shall be issued to Great Vantage
and approximately HK$25.82 million shall be issued
to Ample Gold.
Maturity:
The maturity date of the Convertible Bonds issued to
each of Teya, Templeton, Great Vantage and Ample
Gold is the earlier of (i) the date falling on the expiry
of the thirty (30)-month period commencing from the
issue date of the respective Convertible Bonds, or (ii)
31 December 2015.
The maturity date of the Convertible Bonds issued
to each of Exalt Wealth, Shine Strategy and Smart
Fujian is the date falling on the fourth anniversary of
the issue date of the respective Convertible Bonds.
– 35 –
LETTER FROM THE BOARD
Upon the maturity date of the Convertible Bonds,
subject to the minimum public float requirement
under the Listing Rules and the restrictions that
no holder of the Convertible Bonds could exercise
its rights of conversion if such conversion would
trigger any mandatory offer obligation under Rule
26 of the Takeovers Code, each of the holders of
the Convertible Bonds shall, at its sole discretion,
convert all or part of the outstanding principal
amount of the Convertible Bonds into Conversion
Shares and the balance of the outstanding principal
amount of the Convertible Bonds not being converted
into Conversion Shares shall be settled by way of
cash by the Company at price equal to 100% of the
outstanding principal and outstanding interest (if
any) of the Convertible Bonds.
Coupon and conversion price:
The Convertible Bonds issued to each of Teya,
Templeton, Great Vantage and Ample Gold are
issued at the interest rate of 4% per annum, payable
semi-annually, and the Convertible Bonds issued
to each of Exalt Wealth, Shine Strategy and Smart
Fujian are issued at zero coupon and the conversion
price of the Convertible Bonds is the same as the
issue price of the Consideration Shares, subject
to adjustments in certain events, including but not
limited to consolidation, or sub-division of Shares
or capitalization issues. If and whenever there shall
be an alteration to the nominal value of the Shares
as a result of consolidation, or subdivision, the
conversion price shall be adjusted by multiplying the
conversion price in force immediately before such
alteration by the following fraction:
A
B
– 36 –
LETTER FROM THE BOARD
Where:
A
is the nominal amount of one Share
immediately after such alteration; and
B
is the nominal amount of one Share
immediately before such alteration.
For the avoidance of doubt, no adjustment to the
Conversion Price is necessary for a change in the
nominal value of the Shares resulting from the
capital reorganization which will not lead to any
adjustment of the market price of one Share quoted
on the Stock Exchange.
No adjustment shall be made which would result
in the Conversion Price being reduced to below
the nominal value of a Share and in such case an
adjustment shall be made to the effect that the
Conversion Price will be reduced to the nominal
value of a Share.
Conversion rights and
transferability:
Subject to the lock-up undertakings as mentioned in
the section headed “Lock-up Undertakings” above,
each of Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng,
Ms. Ng, Exalt Wealth, Smart Fujian, Shine Strategy,
Teya, Templeton, Great Vantage and Ample Gold
shall be entitled, at his/her/its sole discretion, to
exercise his/her/its rights to convert all or any part of
the outstanding principal amount of the Convertible
Bonds into Conversion Shares at any time; and/or
assign or transfer all or any part of the outstanding
principal amount of the Convertible Bonds to any
third parties at any time.
The Company is entitled not to allow the holder
of the Convertible Bonds to exercise its right of
conversion if it would trigger any mandatory offer
obligation under Rule 26 of the Takeovers Code.
– 37 –
LETTER FROM THE BOARD
Redemption and repurchase:
Holders of Convertible Bonds are not entitled to
request the Company to redeem any Convertible
Bonds before the maturity date.
The Company may not elect to redeem the whole or
part of the Convertible Bonds before the maturity
date.
The Company may not at any time and from time
to time purchase the Convertible Bonds or any part
thereof at any price as agreed between the Company
and the holders of the Convertible Bonds.
Dividend entitlement:
Holders of Convertible Bonds are not entitled to
participate pari passu in any dividends payable to
holders of Shares on a pro rata as-if-converted basis.
Voting rights:
Holders of Convertible Bonds will not be entitled to
receive notices of, attend or vote at any meetings of
the Company by reason only of it being a holder of
any of the Convertible Bonds.
Ranking:
The Conversion Shares to be issued upon conversion
of the Convertible Bonds shall rank pari passu
in all respects with all other Shares in issue and
the Convertible Bonds shall rank pari passu in all
respects with (i) all other convertible bonds of the
Company outstanding on the date of issue and (ii)
all other present and future direct, unsubordinated,
unconditional and unsecured obligations of the
Company. Without prior written consent from
the Financial Investors (whose consent cannot be
unreasonably withheld or delayed), the Company
shall not incur any additional secured or unsecured
obligations that rank prior or senior to the
Convertible Bonds.
– 38 –
LETTER FROM THE BOARD
Listing:
No application will be made for the listing of the
Convertible Bonds on the Stock Exchange or any
other stock exchange. However, application will be
made by the Company to the Listing Committee
for the listing of, and permission to deal in, the
Conversion Shares to be issued upon conversion of
the Convertible Bonds.
Events of default:
Holders of any of the Convertible Bonds may give
notice to the Company that such Convertible Bond is
immediately due and payable at its principal amount
then outstanding plus any interest payment if any of
the events of default as stipulated in the terms and
conditions of such Convertible Bond occurs which
includes but are not limited to:
(i)
any failure by the Company to deliver
Shares as and when the Shares are required
to be delivered following conversion of the
Convertible Bonds;
(ii)
the Company does not perform or comply with
one or more of its other obligations under the
Convertible Bonds or the Sale and Purchase
Agreement or the default is not remedied
within 30 days after written notice of such
default shall have been given to the Company
by the holders of the Convertible Bonds;
(iii)
the Company or any of its subsidiaries is
insolvent or bankrupt or unable to pay its
debts;
(iv)
an administrator or liquidator of the Company
or any of its subsidiaries or the whole or any
part of the assets and turnover of the Company
or any of its subsidiaries is appointed;
– 39 –
LETTER FROM THE BOARD
(v)
any other present or future indebtedness
(whether actual or contingent), guarantee
or indemnity of the Company or any of its
subsidiaries for or in respect of moneys
borrowed or raised of an aggregate amount
which equals or exceeds the relevant threshold
amount becomes due and payable prior to
its stated maturity by reason of any actual or
potential default or event of default or is not
paid when due;
(vi)
a distress, attachment, execution, seizure
before judgment or other legal process is
levied, enforced or sued out on or against
any material part of the property, assets
or turnover of the Company or any of its
subsidiaries and is not discharged or stayed
within 90 days;
(vii)
an order is made or an effective resolution
passed for the winding-up or dissolution or
administration of the Company or any of its
subsidiaries (except for a members’ voluntary
solvent winding-up), or the Company or
any of its subsidiaries ceases or threatens to
cease to carry on all or substantially all of
its business or operations and except for the
purpose of and followed by a reconstruction,
amalgamation, reorganization, merger or
consolidation;
(viii) (a) any step is taken by any Governmental
Authority which is likely to result in seizure,
compulsory acquisition, expropriation or
nationalization of all or a material part of
the assets of the Company or any of its
subsidiaries; or (b) the Company or any of
its subsidiaries is prevented from exercising
normal control over all or any substantial part
of its property, assets and turnover;
– 40 –
LETTER FROM THE BOARD
(ix)
any action, condition or thing (including
the obtaining or effecting of any necessary
consent, approval or authorization, exemption,
filing, licence, order, recording or registration)
at any time required to be taken, fulfilled
or done in order (a) to enable the Company
lawfully to enter into, exercise its rights and
perform and comply with its obligations
under the Convertible Bonds and the Sale
and Purchase Agreement and (b) to ensure
that those obligations are legally binding and
enforceable and (c) to make the Convertible
Bonds and the Sale and Purchase Agreement
admissible in evidence in the courts of the
Cayman Islands or Hong Kong is not taken,
fulfilled or done;
(x)
it is or will become unlawful for the Company
to perform or comply with any one or more
of its obligations under any of the Convertible
Bonds or the Sale and Purchase Agreement;
(xi)
if the trading of the Shares on the Stock
Exchange is suspended as a result of any
reason and such suspension continues for 20
consecutive trading days;
(xii)
the Shares cease to be listed or admitted to
trading on the Stock Exchange;
(xiii) if there is, or is agreed to be, any transfer
of all or substantially all of the assets of the
Group as a whole; and
(xiv) any event occurs which under the laws of any
relevant jurisdiction has an analogous effect
to any of the events referred to in any of the
foregoing paragraphs.
– 41 –
LETTER FROM THE BOARD
Public float:
The Company shall at all times ensure that the
minimum public float requirement under the Listing
Rules is complied with, and in the event that
such requirement is not complied with upon the
conversion of any part of the Convertible Bonds, the
Company is entitled not to allow the holder of the
Convertible Bonds to exercise its right of conversion.
The Convertible Bonds issued to Teya, Templeton, Great Vantage and Ample Gold
bear a different coupon rate and maturity dates as compared with those Convertible Bonds
issued to Exalt Wealth, Shine Strategy and Smart Fujian. The different coupon rates and
maturity dates of the Convertible Bonds among the Vendors are entirely based on the
commercial decision among the Purchaser, the Company and the Vendors. Teya, Templeton,
Great Vantage and Ample Gold, being the passive shareholders without any participation
in the day-to-day management and operations of the Target Group, seek to find acceptable
return from their shareholdings in the Target Company by realizing their investment partially
in the form of interest in the short run. Since the Consideration payable to the Financial
Investors and Ample Gold is settled by way of cash, the Consideration Shares and the
Convertible Bonds, Teya, Templeton, Great Vantage and Ample Gold consider that their
investment in the Target Company is realized in part by receiving cash and interest accrued
on the Convertible Bonds. For Exalt Wealth, Shine Strategy and Smart Fujian, being the
controlling shareholders of the Target Company, the parties acting in concert of the Target
Group and the shareholding vehicles of the two executive directors of the Target Company,
namely Mr. Cai Zhenyao and Mr. Ng who participate in the day-to-day management and
operations of the Target Company, seek to find return in the form of dividends and/or the
capital gains from the increased value of the Target Company arising from a combination of
organic growth and/or mergers and acquisitions in the longer run. Although the holders of
the Convertible Bonds are not entitled to any dividends payable to the Shareholders, as the
Consideration payable to Exalt Wealth, Shine Strategy and Smart Fujian is settled by way
of the Consideration Shares and the Convertible Bonds, Exalt Wealth, Shine Strategy and
Smart Fujian, being the controlling shareholders of the Group after the completion of the
Acquisition, are seeking the return of their investment in the Target Company in the longer
run, mainly in the form of dividends arising from the holding of the Consideration Shares
and the Conversion Shares when they exercise their rights to convert the Convertible Bonds
and in the form of capital gains upon the disposal of Shares after the respective lock-up
period has been passed.
– 42 –
LETTER FROM THE BOARD
(3)
Conversion Shares
The Conversion Shares to be allotted and issued by the Company pursuant to the Sale
and Purchase Agreement represent (i) approximately 223.19% of the total Shares in issue
as at the Latest Practicable Date, (ii) approximately 31.46% of the total Shares in issue
as enlarged by the allotment and issue of the Consideration Shares but before conversion
or exercise of any convertible bonds (including the Convertible Bonds) or share options
outstanding as at the Latest Practicable Date, (iii) approximately 23.93% of the total
Shares in issue as enlarged by the issue of the Consideration Shares and Conversion Shares
(assuming full conversion of the Convertible Bonds) but before conversion or exercise of any
Other Convertible Bonds or Outstanding Share Options, and (iv) approximately 22.80% of
the total Shares in issue as enlarged by the issue of the Consideration Shares and Conversion
Shares (assuming full conversion of the Convertible Bonds) and upon conversion of all Other
Convertible Bonds but before exercise of any Outstanding Share Options. Further details of
the effect of the Acquisition on the shareholding structure of the Company are set out in the
section headed “Effect of the Acquisition on the Shareholding Structure of the Company”
below.
The Conversion Price of the Conversion Shares represents:
(a)
a discount of approximately 1.78% to the closing price of HK$0.1800 per Share
as quoted on the Stock Exchange on the Latest Practicable Date (27 June 2013);
(b)
a discount of approximately 29.28% to the closing price of HK$0.2500 per
Share as quoted on the Stock Exchange on the Last Trading Day (16 January
2013);
(c)
a discount of approximately 29.28% to the average of the closing prices of
approximately HK$0.2500 per Share as quoted on the Stock Exchange for the 5
consecutive trading days up to and including the Last Trading Day (10 January
2013 to 16 January 2013);
(d)
a discount of approximately 29.56% to the average of the closing prices of
approximately HK$0.2510 per Share as quoted on the Stock Exchange for
the 10 consecutive trading days up to and including the Last Trading Day (3
January 2013 to 16 January 2013); and
(e)
a discount of approximately 80.51% to the net asset value per Share as of 30
September 2012.
– 43 –
LETTER FROM THE BOARD
The Conversion Price of the Conversion Shares is the same as the issue price of the
Consideration Shares and was arrived at after arm’s length negotiations among the parties
to the Sale and Purchase Agreement and was determined with reference to the same basis in
determining the issue price of the Consideration Shares as mentioned above. Accordingly,
the Board is of the view that the Conversion Price of the Conversion Shares is fair and
reasonable and in the interests of the Company and the Shareholders as a whole.
(4)
Guarantee given by the Company
The Company irrevocably and unconditionally:
3.
a)
guarantees to each Vendor the punctual performance by the Purchaser all of
its obligations under the Sale and Purchase Agreement and other transaction
documents in relation to the Acquisition (the “Transaction Documents”);
b)
undertakes with each Vendor that whenever the Purchaser does not pay any
amount when due under or in connection with any Transaction Document, that
the Company shall immediately on demand pay that amount as if it was the
principal obligor; and
c)
indemnifies each Vendor immediately on demand against any cost, loss or
liability suffered by that Vendor if any obligation guaranteed by it (or anything
which would have been an obligation if not unenforceable, invalid or illegal)
is or becomes unenforceable, invalid or illegal. The amount of the cost, loss or
liability shall be equal to the amount which that Vendor would otherwise have
been entitled to recover.
REASONS FOR THE ACQUISITION
As disclosed in the 2011 annual report of the Company, the Group had been confronted with
unfavourable operating challenges for the year ended 30 September 2011 arising from significant
increase of raw material and purchase costs coupled with increasing market competition. It was also
reported in the 2011 and 2012 annual reports of the Company that the Group would proactively
search for potential favourable expansion, merger and acquisitions and realize its long-term
business diversification strategy.
– 44 –
LETTER FROM THE BOARD
The Group is expected to benefit from the Acquisition for the following principal reasons:
(a)
the Acquisition will allow the Group to realize its long term business diversification
strategy by entering into the tea industry, being a business with potential, so as
to further enhance its revenue sources as well as to bring maximum return to its
Shareholders;
(b)
the Target Group has strong profitability historically and high turnover and would be
able to bring positive contribution to the Group; and
(c)
Mr. Cai Zhenyao, an executive Director, is also an executive director of the Target
Company since its incorporation. He is also the director of Citiasia and China Tea
BVI, the two subsidiaries of the Target Company. Mr. Cai Zhenyao is responsible
for the day-to-day management of the Target Group and leads substantially the
same board of directors and senior management team of the Target Group. Mr.
Cai Zhenyao has no intention to resign from the directorships of the Target Group
and the dual directorship will remain after the Completion. In addition, the entire
executive management team of the Target Company will remain unchanged after
the Completion . Accordingly, the Directors consider that with such experienced
management team, the Group will have sufficient management expertise and qualified
personnel at operational level to operate the business of the Target Group.
Having considered the historical profitability, prospects and management expertise of the
Target Group, the Directors are of the view that the Acquisition represents a good opportunity for
the Group to realize its long-term business diversification strategy. The Directors are of the view
that the terms of the Sale and Purchase Agreement, which have been agreed after arm’s length
negotiations among the Purchaser, the Company and the Vendors, are on normal commercial terms
and are fair and reasonable and that the Acquisition is in the interests of the Company and its
Shareholders as a whole.
The Company intends to continue its existing business while it will realize its long term
business diversification strategy by entering into the tea industry through the Acquisition. The
audited net profit attributable to the owners of the Target Group achieved a CAGR of approximately
22.7% for the three financial years ended 31 December 2012 and the Target Group attained an
audited net profit for the year ended 31 December 2012 of approximately RMB190.6 million as
compared with the Group’s audited net loss after taxation for the year ended 30 September 2012 of
approximately HK$190.8 million.
– 45 –
LETTER FROM THE BOARD
Accordingly, the Directors are of the view that despite the legal defects of the 8K mu
Ecological Forest Lands, the terms of the Sale and Purchase Agreement, which have been agreed
after arm’s length negotiations among the Purchaser, the Company and the Vendors, are on normal
commercial terms and are fair and reasonable and that the Acquisition is in the interests of the
Company and its Shareholders as a whole.
As at the Latest Practicable Date, the Company has no intention to change the composition of
the Board as a result of the Acquisition.
4.
FINANCIAL IMPACT OF THE ACQUISITION ON THE GROUP
Following the Completion, members of the Target Group will become subsidiaries of the
Company.
Assets and liabilities
The unaudited consolidated total assets and total liabilities of the Group as at 31
March 2013, as extracted from the 2013 interim report of the Company, were approximately
HK$1,825.6 million and HK$511.2 million respectively. As set out in Appendix III to this
circular, assuming Completion had taken place on 31 March 2013, the pro-forma total assets
and total liabilities of the Enlarged Group would have been increased to approximately
HK$4,296.2 million and HK$1,130.0 million respectively.
Earnings
Following the Completion, members of the Target Group will become subsidiaries of
the Company and the Group will be able to consolidate revenue and costs from the Target
Group. The audited net loss of the Group for the financial year ended 30 September 2012 as
extracted from the 2012 annual report of the Company was approximately HK$190.8 million.
According to the unaudited pro-forma income statement of the Enlarged Group as if the
Acquisition had been completed on 1 January 2012, the pro-forma net loss of the Enlarged
Group would have been approximately HK$22.4 million.
– 46 –
LETTER FROM THE BOARD
5.
EFFECT OF THE ACQUISITION ON THE SHAREHOLDING STRUCTURE OF THE
COMPANY
The following table illustrates the shareholding structure of the Company (i) as at the Latest
Practicable Date; (ii) upon issue and allotment of the Consideration Shares but before conversion
or exercise of any convertible bonds (including the Convertible Bonds) or share options outstanding
as at the Latest Practicable Date; (iii) upon issue and allotment of the Consideration Shares and
the Conversion Shares (assuming full conversion of the Convertible Bonds) but before conversion
or exercise of any Other Convertible Bonds or Outstanding Share Options; (iv) upon issue and
allotment of the Consideration Shares and the Conversion Shares (assuming full conversion of
the Convertible Bonds and Teya only holds 9.99% of the issued share capital of the Company)
but before conversion or exercise of any Other Convertible Bonds or Outstanding Share Options;
( v) upon issue and allotment of the Consideration Shares and Conversion Shares (assuming
full conversion of the Convertible Bonds) and upon conversion of all Other Convertible Bonds
but before exercise of any Outstanding Share Options; and (vi) upon issue and allotment of the
Consideration Shares and Conversion Shares (assuming full conversion of the Convertible Bonds
and Teya only holds 9.99% of the issued share capital of the Company) and upon conversion of all
Other Convertible Bonds but before exercise of any Outstanding Share Options:
Upon allotment and issue of the
Consideration Shares and
Conversion Shares but before
Upon allotment and issue of
conversion or exercise of
the Consideration Shares
any Other Convertible
but before conversion or
Bonds or Outstanding
exercise of any outstanding
Share Options
convertible bonds (including the
As at the Latest Practicable Date Convertible Bonds) or share options
(Note 4)
Number of
Approximate
Number of
Approximate
Number of
Approximate
Shares
%
Shares
%
Shares
%
Mr. Cai Zhenrong
(Notes 1 and 2)
Mr. Cai Zhenyao
Mr. Cai Yangbo
Exalt Wealth (Note 2)
Smart Fujian
(Notes 1 and 2)
Shine Strategy (Note 2)
Other Directors
Sub-Total (Mr. Cai
Zhenrong and
parties acting in
concert with him)
Mr. Wong Siu Hong
(Note 5)
Upon allotment and issue of the
Consideration Shares and
Conversion Shares but before
conversion or exercise of
any Other Convertible
Bonds or Outstanding
Share Options
(if Teya maintains its
shareholding in the Company
at 9.99%)
(Note 4)
Number of
Approximate
Shares
%
Upon allotment and issue of
the Consideration Shares and
conversion of all outstanding
convertible bonds
(including the Convertible
Bonds) but before exercise of
any Outstanding
Share Options
(Note 4)
Number of
Approximate
Shares
%
Upon allotment and issue of
the Consideration Shares and
conversion of all outstanding
convertible bonds
(including the Convertible
Bonds) but before exercise of
any Outstanding
Share Options
(if Teya maintains its
shareholding in the Company
at 9.99%)
(Note 4)
Number of
Approximate
Shares
%
463,041,000
45,252,000
14,270,000
–
29.72%
2.90%
0.92%
0.00%
463,041,000
45,252,000
14,270,000
1,470,836,758
4.19%
0.41%
0.13%
13.31%
463,041,000
45,252,000
14,270,000
1,838,545,947
3.19%
0.31%
0.10%
12.65%
463,041,000
45,252,000
14,270,000
1,838,545,947
3.19%
0.31%
0.10%
12.65%
463,041,000
45,252,000
14,270,000
1,838,545,947
3.04%
0.30%
0.09%
12.05%
463,041,000
45,252,000
14,270,000
1,838,545,947
3.04%
0.30%
0.09%
12.05%
–
–
1,000,000
0.00%
0.00%
0.06%
5,128,095,873
1,021,414,427
1,000,000
46.39%
9.24%
0.01%
6,410,119,840
1,276,768,034
1,000,000
44.11%
8.79%
0.01%
6,410,119,840
1,276,768,034
1,000,000
44.11%
8.79%
0.01%
6,410,119,840
1,276,768,034
1,000,000
42.02%
8.37%
0.01%
6,410,119,840
1,276,768,034
1,000,000
42.02%
8.37%
0.01%
523,563,000
33.60%
8,143,910,058
73.68%
10,048,996,821
69.16%
10,048,996,821
69.16%
10,048,996,821
65.88%
10,048,996,821
65.88%
1,200,000
0.08%
1,200,000
0.01%
1,200,000
0.01%
1,200,000
0.01%
1,200,000
0.01%
1,200,000
0.01%
Teya (Note 3)
Templeton (Note 3)
Great Vantage (Note 3)
Ample Gold (Note 3)
Other Public
Shareholders
(Note 3), (Note 7)
–
–
–
–
0.00%
0.00%
0.00%
0.00%
887,005,857
443,502,929
370,769,368
174,209,691
8.02%
4.01%
3.35%
1.58%
1,630,525,473
815,262,737
681,561,338
320,238,403
11.22%
5.61%
4.69%
2.20%
1,451,644,049
815,262,737
681,561,338
320,238,403
9.99%
5.61%
4.69%
2.20%
1,630,525,473
815,262,737
681,561,338
320,238,403
10.69%
5.34%
4.47%
2.10%
1,523,794,049
815,262,737
681,561,338
320,238,403
9.99%
5.34%
4.47%
2.10%
1,033,186,686
66.32%
1,033,186,686
9.35%
1,033,186,686
7.11%
1,212,068,110
8.34%
1,755,408,908
11.51%
1,862,140,332
12.21%
Sub-Total of the Public
Shareholders
1,033,186,686
66.32%
2,908,674,531
26.31%
4,480,774,637
19.61
4,480,774,637
30.83%
5,202,996,859
23.42
5,202,996,859
34.11%
Total:
1,557,949,686
100.00%
11,053,784,589
100.00%
14,530,971,458
100.00%
14,530,971,458
100.00%
15,253,193,680
100.00%
15,253,193,680
100.00%
The Acquisition will not result in change of control in the Company. Mr. Cai Zhenrong
and parties acting in concert with him intend to maintain as the controlling shareholders in the
Company.
– 47 –
LETTER FROM THE BOARD
Notes:
1)
Ms. Ng and Mr. Cai Zhenrong entered into a declaration of trust dated 9 October 2012. Under such
arrangement, Ms. Ng holds the shares of the Target Company as well as any shares of the holding
companies of the Target Company on trust and for the benefit of Mr. Cai Zhenrong. Smart Fujian is,
therefore, ultimately, wholly and beneficially owned and controlled by Mr. Cai Zhenrong and the aggregate
interest in the Company held by Mr. Cai Zhenrong and Smart Fujian is 50.58% upon the Completion,
allotment and issue of the Consideration Shares but before conversion or exercise of any outstanding
convertible bonds (including the Convertible Bonds) or Outstanding Share Options.
2)
Mr. Cai Zhenrong, Exalt Wealth, Smart Fujian, Shine Strategy, Mr. Cai Zhenyao, Mr. Cai Yangbo, Mr. Ng,
Ms. Ng, and other Directors are regarded as parties acting in concert under the Takeovers Code and their
aggregate interest in the Company amounts to 73.68% upon the Completion, allotment and issue of the
Consideration Shares but before conversion or exercise of any outstanding convertible bonds (including the
Convertible Bonds) or Outstanding Share Options.
3)
None of Teya, Templeton, Great Vantage or Ample Gold is a party to the Deed of Acting in Concert, and
each of them is an independent third party acting independently of the other Vendors, Mr. Cai Zhenrong and
the parties acting in concert with him. In addition, the Financial Investors are passive financial investors
of the Target Group, and Ample Gold is a passive minority shareholder with no participation in the day-today management and operations of the Target Company in any respect. Each of the Financial Investors is
owned and managed by different entities without any cross ownership or management amongst them. No
consensus building process was adopted to arrive at voting or business decisions by the Financial Investors
in respect of the Target Company, and there is no understanding or arrangement (formal or otherwise)
that the Financial Investors would vote in any coordinated manner. Ample Gold is wholly-owned by Mr.
Wong who is an independent third party of the Target Group, the Company, the Financial Investors and the
other Vendors. Ample Gold exercises its voting rights independently without the concurrence of the other
Vendors including Mr. Cai Zhenrong and parties acting in concert with him and there is no understanding
or arrangement (formal or otherwise) that Ample Gold would vote in any coordinated manner. None of
Teya, Templeton, Great Vantage and Ample Gold falls within any of the 9 classes of the definition of acting
in concert under the Takeovers Code with (1) Mr. Cai Zhenrong and (2) parties acting in concert with him
under the Takeovers Code. In addition, none of Teya, Templeton, Great Vantage or Ample Gold is, as a
matter of fact, a party acting in concert with (1) Mr. Cai Zhenrong and (2) parties acting in concert with
him. As none of Teya, Templeton, Great Vantage or Ample Gold is a party acting in concert with (1) Mr. Cai
Zhenrong and (2) parties acting in concert with him, and each of them holds, and will at all times hold, less
than 10% of the issued share capital of the Company, their shareholding in the Company constitutes public
float.
– 48 –
LETTER FROM THE BOARD
4)
For illustration purpose only, pursuant to the terms of the Convertible Bonds, each of Mr. Cai Zhenrong,
Mr. Cai Zhenyao, Mr. Ng, Ns. Ng, Exalt Wealth, Smart Fujian and Shine Strategy has undertaken, amongst
other matters, not to exercise his/her/its rights to convert all or part of the outstanding principal amount of
the Convertible Bonds into Conversion Shares at any time if such conversion will result in the Company
not being able to comply with the minimum public float requirement under the Listing Rules. Teya
has undertaken that, in the event that Teya intends to exercise its rights to convert all or any part of the
Convertible Bonds into Conversion Shares at any time after the expiry of the First Six-Month Period, and
the sum of (i) Consideration Shares then being held by Teya and (ii) the maximum number of Conversion
Shares that could be issued and allotted to Teya upon the exercise of its rights to convert all or any part of
the then principal amount of the Convertible Bonds being held by Teya into Conversion Shares represents
at least 10% of the then total issued share capital of the Company, Teya would, subject to applicable laws,
first dispose of such number of Shares then held (the number of which shall be equivalent to the number of
the Conversion Shares to be issued and allotted upon the exercise of the conversion rights of the respective
Convertible Bonds) to Independent Third Parties in order to help the Company to satisfy the public float
requirement under the Listing Rules at all times as long as Teya is the holder of any Convertible Bonds.
5)
Mr. Wong Siu Hong, a former Director, resigned from the position with effect from 31 July 2012.
6)
Assuming that only Mr. Cai Zhenrong exercises his rights to convert his respective Convertible Bonds in
full into Conversion Shares and there is no change in the issued share capital of the Company other than
the issue and allotment of the Consideration Shares and the issue and allotment of the Conversion Shares
resulting from the aforesaid conversion commencing from the Latest Practicable Date to the earliest date
when Mr. Cai Zhenrong is entitled to exercise his rights to convert his respective Convertible Bonds into
Conversion Shares (i.e. the date falling immediately after 12 months from the issue date of the Convertible
Bonds, (the “Earliest Exercise Date”)), the maximum potential controlling shareholding of voting rights
when Mr. Cai Zhenrong exercises his rights to convert his respective Convertible Bonds in full into
Conversion Shares will be amounted to approximately 55.72% of the issued Shares as at the Earliest
Exercise Date.
7)
Other public shareholders include Shareholders whose Shares were issued upon conversion of Other
Convertible Bonds.
– 49 –
LETTER FROM THE BOARD
Shareholding structure of the Target Group before and after the Completion
The following diagram illustrates the shareholding structure of the Target Group immediately
before the Completion:
Ms. Ng (Note)
100%
The Greatlink
Trust
100%
Greatlink Investment
100%
Mr. Cai
Zhenyao
100%
Templeton
7.64%
Teya
15.27%
Exalt
Wealth
13.07%
Sincere
Young
Mr. Ng
100%
Smart
Fujian
100%
Shine
Strategy
45.57%
Ample
Gold
Great
Vantage
9.07%
3%
6.38%
100%
100%
100%
100%
The Target Company (Cayman Islands)
100%
China Tea BVI
(British Virgin Islands)
100%
Citiasia
(Hong Kong)
100%
Fujian Nature
(PRC)
100%
Liaoning
Pingshan
(PRC)
Note:
100%
Quanzhou
Pingshan
(PRC)
100%
Fujian Daping
(PRC)
100%
Xiamen
Pingshan
(PRC)
Fujian Huidian
(PRC)
Chongqing
Shengfang
(PRC)
Shaanxi
Pingshan
(PRC)
Ms. Ng holds the shares in the Target Company through Smart Fujian by acting as the sole beneficiary of the
Greatlink Trust. Ms. Ng and Mr. Cai Zhenrong entered into a declaration of trust dated 9 October 2012. Under such
arrangement, Ms. Ng holds the shares of the Target Company as well as any shares of the holding companies of the
Target Company on trust and for the benefit of Mr. Cai Zhenrong. Mr. Cai Zhenrong is, therefore, the sole ultimate
beneficial owner of the shares of the Target Company held by Smart Fujian.
– 50 –
LETTER FROM THE BOARD
The following diagram illustrates the shareholding structure of the Target Group immediately
after the Completion and upon the allotment and issue of the Consideration Shares but before the
conversion or exercise of any outstanding convertible bonds (including the Convertible Bonds) or
Outstanding Share Options:
Ms. Ng
(Note 1)
100%
The Greatlink
Trust
100%
Greatlink Investment
100%
Mr. Cai
Zhenyao
Other
Directors
Mr. Cai
Zhenrong
4.19%
0.01%
0.41%
13.31%
Shine
Strategy
46.39%
Ample
Gold
Templeton
0.01%
100%
Smart
Fujian
Exalt
Wealth
Mr. Wong
Siu Hong
(Note 2)
Mr. Ng
100%
100%
Mr. Cai
Yangbo
0.13%
Sincere
Young
4.01%
Great
Vantage
Teya
8.02%
9.24%
1.58%
Other
public
shareholders
(Note 3)
3.35%
9.35%
The Company
100%
The Purchaser
100%
The Target Company (Cayman Islands)
100%
China Tea BVI
(BVI)
100%
Citiasia
(Hong Kong)
100%
Fujian Nature
(PRC)
100%
Liaoning
Pingshan
(PRC)
Note 1:
100%
Quanzhou
Pingshan
(PRC)
100%
Fujian
Daping
(PRC)
100%
Xiamen
Pingshan
(PRC)
100%
Fujian
Huidian
(PRC)
100%
Chongqing
Shengfang
(PRC)
100%
Shaanxi
Pingshan
(PRC)
Ms. Ng holds the shares in the Target Company through Smart Fujian by acting as the sole beneficiary of the
Greatlink Trust. Ms. Ng and Mr. Cai Zhenrong entered into a declaration of trust dated 9 October 2012. Under
such arrangement, Ms. Ng holds the shares of the Target Company as well as any shares of the holding companies
of the Target Company on trust and for the benefit of Mr. Cai Zhenrong. Mr. Cai Zhenrong is, therefore, the sole
ultimate beneficial owner of the shares of the Target Company held by Smart Fujian.
Note 2 :
Note 3:
Mr. Wong Siu Hong, a former Director, resigned from the position with effect from 31 July 2012.
Other public shareholders include Shareholders whose Shares were issued upon conversion of Other Convertible
Bonds.
– 51 –
LETTER FROM THE BOARD
6.
THE FINANCING OF THE ACQUISITION
The Consideration will be satisfied partly in cash and partly by the allotment and issue of
the Consideration Shares and the issue of the Convertible Bonds. The portion of the Consideration
to be settled in cash will be satisfied by the internal resources of the Group and/or proceeds from
possible fund raising activities as may be conducted by the Company, such as placing of new Shares
to Independent Third Parties, loan or other credit facilities to be extended to the Company, or a
combination of any of the above which the Board considers as appropriate and in the best interest
of the Company and Shareholders under the then market condition. Taking into account of the
financial position of the Group and the Target Group as at the Latest Practicable Date, the Target
Group will become a subsidiary of the Company after the Completion, and the payment schedule
for the cash Consideration (i.e. 50% of the cash Consideration payable upon the Completion and
50% of the cash Consideration payable six months after the Completion together with an interest
at a simple interest rate of 4% per annum), the Directors are of the view that, as at the Latest
Practicable Date, the Group has enough cash to settle the cash Consideration as scheduled and
the Group is able to proceed with the Acquisition without any fund raising activities. As at the
Latest Practicable Date, the Company has not identified any fund raising activities, signed any
fund raising contract or had any discussion or negotiation for any fund raising activities in relation
to the Acquisition and the transactions contemplated thereunder. Should the Directors agree to
conduct any fund raising activities in relation to the Acquisition and the transactions contemplated
thereunder, the Company will publish an announcement where required under the Listing Rules.
The Company did not conduct any equity fund raising activities in the past 12 months
immediately before the Latest Practicable Date.
7.
PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL
As at the Latest Practicable Date, the authorized share capital of the Company is
HK$100,000,000 divided into 10,000,000,000 Shares of HK$0.01 each. At the EGM, the Company
will seek the approval of the Shareholders to increase the authorized share capital of the Company
to HK$200,000,000 divided into 20,000,000,000 Shares of HK$0.01 each so that there will be
adequate authorized share capital to issue the Consideration Shares and the Conversion Shares.
– 52 –
LETTER FROM THE BOARD
8.
LISTING RULES IMPLICATIONS
A.
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION
As one or more of the applicable percentage ratios under Rule 14.07 of the Listing Rules in
respect of the Acquisition exceeds 100%, the Acquisition constitutes a very substantial acquisition
for the Company under Chapter 14 of the Listing Rules. In addition, Exalt Wealth, Shine Strategy
and Smart Fujian, each being one of the Vendors, holds 13.07%, 9.07% and 45.57% of the issued
share capital of the Target Company, respectively, as at the Latest Practicable Date. Exalt Wealth
is wholly-owned by Mr. Cai Zhenyao, a Director and a director of the Target Company; Shine
Strategy is wholly-owned by Mr. Ng, nephew of both Mr. Cai Zhenrong (the controlling shareholder
of the Company and a Director) and Mr. Cai Zhenyao; and Ms. Ng, the daughter-in-law of Mr.
Cai Zhenrong, indirectly holds the entire issued share capital of Smart Fujian. Ms Ng, in turn,
holds shares in the Target Company through Smart Fujian by acting as the sole beneficiary of the
Greatlink Trust. Ms. Ng and Mr. Cai Zhenrong entered into a declaration of trust dated 9 October
2012. Under such arrangement, Ms. Ng holds the shares of the Target Company as well as any
shares of the holding companies of the Target Company on trust and for the benefit of Mr. Cai
Zhenrong. Mr. Cai Zhenrong is, therefore, the sole ultimate beneficial owner of the shares of the
Target Company held by Smart Fujian. Accordingly, Exalt Wealth, Shine Strategy, Smart Fujian,
Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng and Ms. Ng are connected persons of the Company,
and the Acquisition constitutes a connected transaction for the Company under Rule 14A.13(1)(a)
of the Listing Rules.
In light of the aforesaid, the Acquisition is subject to the reporting, announcement and
Independent Shareholders’ approval requirements under the Listing Rules. The Company will seek
the approval of the Independent Shareholders at the EGM by way of poll for approving, among
others, the Sale and Purchase Agreement and the transactions contemplated thereunder. Mr. Cai
Zhenrong, Mr. Cai Zhenyao and their respective associates are required to abstain from voting on
the relevant resolutions to be proposed at the EGM.
In addition, as Mr. Cai Zhenrong and Mr. Cai Zhenyao who are both Directors and the
ultimate beneficial owners of Smart Fujian and Exalt Wealth respectively, they are regarded to have
a material interest in the Sale and Purchase Agreement and transactions contemplated thereunder,
and the Whitewash Waiver and shall be abstained from voting in respect of the board resolutions
of the Company approving the Sale and Purchase Agreement and transactions contemplated
thereunder, and the Whitewash Waiver.
– 53 –
LETTER FROM THE BOARD
B.
CONTINUING CONNECTED TRANSACTIONS
After the execution of the New Transfer Agreements and the obtaining of the Additional
Forest Lands Approval, the Target Group Controlling Shareholders would procure Mr. Cai Zhenying
or any person nominated by the Target Group Controlling Shareholders to enter into the New
Contracting Agreement, pursuant to which the Target Group will acquire the right to operate all the
plantations on the Additional Forest Lands and will be entitled to the incomes derived therefrom at
nil consideration until the earlier of the date when the relevant forest rights certificates of the 8K
mu Ecological Forest Lands are issued to the Target Group or the expiry date of the same duration
of the respective Contracting Agreements. As the Target Group Controlling Shareholders (among
whom Mr. Cai Zhenrong holds approximately 29.72% and Mr. Cai Zhenyao holds approximately
2.90% of the issued share capital of the Company, respectively, as at the Latest Practicable Date)
and Mr. Cai Zhenying or any person nominated by the Target Group Controlling Shareholders
are connected persons of the Company, the contemplated transactions will constitute continuing
connected transactions of the Group upon the completion of the Acquisition. The applicable
percentage ratios under Rule 14.07 of the Listing Rules for the contemplated transactions are
expected to be less than 0.1% and they will be exempted from the requirements of reporting,
announcement and independent shareholders’ approval under the Rule 14A.33(3)(a) of the Listing
Rules.
9.
TAKEOVERS CODE IMPLICATIONS AND APPLICATION FOR WHITEWASH
WAIVER
In relation to the Target Group, Mr. Cai Zhenyao, Mr. Ng and Ms. Ng had entered into the
Deed of Acting in Concert on 30 September 2011. As Mr. Cai Zhenrong frequently travels out of
Hong Kong, he would not be able to execute agreements or to conduct filings promptly in Hong
Kong when necessary. In order to facilitate Mr. Cai Zhenrong to exercise his rights in the capacity
of a shareholder of Citiasia (including but not limited to voting and share transfers arising from
the reorganization undergone by the Target Group), Mr. Cai Zhenrong appointed Ms. Ng, who is
ordinarily resident in Hong Kong, to assist the execution of the necessary documents and filing
in Hong Kong. Ms. Ng and Mr. Cai Zhenrong entered into a declaration of trust dated 9 October
2012. Under such arrangement, Ms. Ng holds the shares of the Target Company as well as any
shares of the holding companies of the Target Company on trust and for the benefit of Mr. Cai
Zhenrong. Ms. Ng holds the shares of the Target Company through Smart Fujian by acting as the
sole beneficiary of the Greatlink Trust. Mr. Cai Zhenrong is, therefore, the sole ultimate beneficial
– 54 –
LETTER FROM THE BOARD
owner of the shares of the Target Company held by Smart Fujian. Accordingly, Mr. Cai Zhenrong,
Mr. Cai Zhenyao, Mr. Ng and Ms. Ng are acting in concert in relation to the Target Group.
Immediately after the Completion, Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng and Ms. Ng will
become Shareholders through the Shares held by Mr. Cai Zhenrong himself, Exalt Wealth, Shine
Strategy and Smart Fujian, respectively. Ms. Ng will continue to hold the Shares on trust and for the
benefit of Mr. Cai Zhenrong who, in turn, controls the voting rights of the Shares to be acquired by
Smart Fujian. Accordingly, Mr. Cai Zhenrong, Exalt Wealth, Shine Strategy, Smart Fujian, Mr. Cai
Zhenyao, Mr. Ng and Ms. Ng are considered as parties acting in concert in the context of the Group.
In addition, the Directors are presumed to be the parties acting in concert with Mr. Cai Zhenrong.
None of Teya, Templeton, Great Vantage or Ample Gold is a party to the Deed of Acting in
Concert, and each of them is an independent third party acting independently of the other Vendors,
Mr. Cai Zhenrong and the parties acting in concert with him. In addition, the Financial Investors are
passive financial investors, and Ample Gold is a passive minority shareholder with no participation
in the day-to-day management and operations of the Target Company in any respect. Each of the
Financial Investors is owned and managed by different entities without any cross ownership or
management amongst them. No consensus building process was adopted to arrive at voting or
business decisions by the Financial Investors in respect of the Target Company, and there is no
understanding or arrangement (formal or otherwise) that the Financial Investors would vote in
any coordinated manner. Ample Gold is wholly-owned by Mr. Wong who is an independent third
party of the Target Group, the Company, the Financial Investors and the other Vendors. Ample
Gold exercises its voting rights independently without the concurrence of the other Vendors and
their associates including Mr. Cai Zhenrong and there is no understanding or arrangement (formal
or otherwise) that Ample Gold would vote in any coordinated manner. None of Teya, Templeton,
Great Vantage, and Ample Gold falls under any of the category of the definition of acting in concert
with (1) Mr. Cai Zhenrong and (2) parties acting in concert with him under the Takeovers Code.
Accordingly, none of Teya, Templeton, Great Vantage or Ample Gold is considered as a party acting
in concert with (1) Mr. Cai Zhenrong and (2) parties acting in concert with him in the context of the
Group.
As at the Latest Practicable Date, Mr. Cai Zhenrong and parties acting in concert with him,
in aggregate, hold 523,563,000 Shares, representing approximately 33.60% of the total Shares in
issue. Immediately following the allotment and issue of the Consideration Shares to the Vendors,
the aggregate shareholding of Mr. Cai Zhenrong and parties acting in concert with him will increase
to approximately 73.68% of the total Shares in issue as enlarged by the allotment and issue of the
Consideration Shares but before the exercise of any Convertible Bonds, Other Convertible Bonds
and Outstanding Share Options. Under Rule 26.1 of the Takeovers Code, Mr. Cai Zhenrong and
parties acting in concert with him would be required to make an unconditional mandatory general
offer for all the issued Shares and other securities of the Company not already owned or agreed to
be acquired by Mr. Cai Zhenrong and parties acting in concert with him, unless a waiver from strict
compliance with Rule 26.1 of the Takeovers Code has been obtained from the Executive.
– 55 –
LETTER FROM THE BOARD
After the Completion, Mr. Cai Zhenrong and parties acting in concert with him will hold in
aggregate, more than 50% of the issued shares. As such, any further acquisition of interest in the
Company by Mr. Cai Zhenrong and parties acting in concert with him may not be subject to the
obligations to make a general offer under the Takeovers Code.
An application has been made by Mr. Cai Zhenrong to the Executive for the Whitewash
Waiver pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code. The Whitewash
Waiver, if granted, will be subject to, among other things, (i) approval of the Independent
Shareholders in respect of the Acquisition and the Whitewash Waiver at the EGM where voting
on the relevant resolutions shall be taken by poll, and (ii) Mr. Cai Zhenrong and parties acting in
concert with him not having any acquisitions or disposals of voting rights of the Company between
the date of the Announcement and completion of the issue of the Consideration Shares to the
Vendors unless with the prior consent of the Executive.
Except for the disposal of 1,000,000 Shares by Mr. Choi Wing Toon (a cousin of Mr. Cai
Zhenrong) on 20 July 2012 through the market, each of Mr. Cai Zhenrong and parties acting in
concert with him has not acquired any voting rights of the Company, and there have been no
dealings in any Relevant Securities by any of them during the period commencing on the date
falling six months prior to the date of the Announcement and up to and including the Latest
Practicable Date.
On 21 December 2012, 7 January 2013, 23 January 2013 and 25 February 2013, an aggregate
principal amount of HK$20 million of the Other Convertible Bonds was converted and 111,111,106
new Shares were issued upon such conversion. The Company confirms that all the holders of the
Other Convertible Bonds and the new Shares which fall to be issued are Independent Third Parties
and no such holders are related to Mr. Cai Zhenrong and parties acting in concert with him in any
respect.
The Acquisition and the Whitewash Waiver are subject to approval by the Independent
Shareholders at the EGM. Each of Mr. Cai Zhenrong and parties acting in concert with him and
their respective associates together with those who are interested in, or involved in, the Sale and
Purchase Agreement, the transactions contemplated thereunder (including but not limited to the
Acquisition, the issue of the Convertible Bonds, the allotment and issue of the Consideration Shares
and the Conversion Shares, the transactions under the New Transfer Agreements and the New
Contracting Agreement), and/or the Whitewash Waiver are required to abstain from voting on the
Sale and Purchase Agreement, the transactions contemplated thereunder (including but not limited
to the Acquisition, the issue of the Convertible Bonds, the allotment and issue of the Consideration
Shares and the Conversion Shares, the transactions under the New Transfer Agreements and the
New Contracting Agreement) and the Whitewash Waiver at the EGM.
The Executive may or may not grant the Whitewash Waiver. It is one of the conditions
precedent to Completion that the Whitewash Waiver has been obtained. In the event that
the Whitewash Waiver is not granted by the Executive or approved by the Independent
Shareholders, the Sale and Purchase Agreement will lapse and the Acquisition will not
proceed.
– 56 –
LETTER FROM THE BOARD
10.
INFORMATION OF THE TARGET GROUP
A.
RISK FACTORS
Shareholders and investors should be aware that the Acquisition will increase the level of risk
exposure of the Enlarged Group and should consider carefully the risk factors set out below:
RISKS RELATING TO THE TARGET GROUP
The Target Group relies on the quality of tea plants and tea leaves produced at its
cultivation bases which are located in Fujian Province, the PRC to generate revenue.
The success of the Target Group’s business principally depends on the ability to obtain
sufficient quantities of quality tea leaves from its cultivation bases. For each of the financial years
ended 31 December 2010, 2011 and 2012, a substantial part of the Target Group’s revenue was
attributable to the sale of raw teas and refined teas.
The cultivation of the Target Group’s tea plants at its cultivation bases is subject to the risks
associated with natural disasters and adverse weather conditions, such as earthquake, droughts, fire,
floods, typhoons, hailstorms, frost and rainstorms. Due to the unfavourable cold weather conditions
in March 2010, drought in April 2011 and heavy rainfall in the second quarter of 2012, the quantity
and quality of tea leaves harvest were adversely affected.
The quality of tea leaves and the growth and development of tea plants varies from time to
time depending on the soil quality, drainage at the cultivation bases, weather conditions, natural
disaster or external factors such as fertilisers and pesticides applied. The occurrence of any natural
disasters, air, water and soil pollution, any diseases (such as fungal, bacterial or viral infections)
or pests (such as moths, worms, caterpillars, beetles and mites), or any incident that affects the
soil quality and drainage, in close proximity to, or at, any of the cultivation bases, may damage the
Target Group’s cultivation bases and the tea plants thereon, thereby affecting the productivity and
quality of tea leaves produced from the tea plants. As a result, the Target Group’s business, financial
condition and operating results may be materially and adversely affected.
If the Target Group is unable to obtain the forest rights certificate in respect of the land
forming part of its cultivation bases, it may be unable to enforce its rights against certain
third parties and would lose dominant control over the respective forest lands; and until such
forest rights certificates have been obtained, the tea leaves output derived from the Additional
Forest Lands may not be the same as that from the 8K mu Ecological Forest Lands.
– 57 –
LETTER FROM THE BOARD
The Target Group, through Fujian Daping, its wholly-owned subsidiary, entered into the
Contracting Agreements, pursuant to which, the Target Group agreed to purchase from the relevant
village committees the use rights of the tea trees and plantations at a fixed rate and the land use
rights at an annual fee for the entire contracting period in respect of its cultivation bases.
Among the Target Group’s cultivation bases, the Target Group is yet to obtain the relevant
forest rights certificates of the 8K mu Ecological Forest Lands. For historical reasons, which are
unknown to the Target Group, the 8K mu Ecological Forest Lands had been converted into tea
plantation without the relevant government approval well before the execution of the Contracting
Agreements. In order to impose better control over the use of the 8K mu Ecological Forest
Lands and restrict any third party (including the villagers or farmers) from mis-using the 8K mu
Ecological Forest Lands which would adversely affect the nearby cultivations bases in future,
the Target Group contracted for use the 8K mu Ecological Forest Lands from the relevant village
committees.
According to Article 52 of the Contract Law of the PRC, a contract will be held
unenforceable and void if the contract violates any mandatory rules under the relevant laws or
administrative regulations. The approval for the conversion of the 8K mu Ecological Forest Lands
into economical forest lands which must be granted by the relevant Governmental Authorities of
the provincial and State Council level has not been obtained in accordance with the related forest
law while the village committees entered into the Contracting Agreements with the Target Group in
respect of the 8K mu Ecological Forest Lands. As such, the Contracting Agreements may be held
unenforceable and void by the People’s Court. Similarly, according to Article 6 of the Property
Law of the PRC, the creation, change, transfer of the rights of non-movable properties requires
registration. Without the registration of the land use rights of the 8K mu Ecological Forest Lands,
the ownership and the use rights of the trees thereon, the Target Group is not protected against any
bona fide third party in the event of Third Party Occurrence.
With respect to the revenue and profit attributable to the 8K mu Ecological Forest Lands,
to the best estimate of the directors of the Target Group, albeit the difficulties in segregating from
each other the amount and type of tea leaves extracted from the 8K mu Ecological Forest Lands
and the 29.5K mu Economical Forest Lands, the maximum impact on the revenue in respect of
the 8K mu Ecological Forest Lands for the three years ended 31 December 2012 is estimated
to be approximately RMB 51.8 million , RMB 70.6 million and RMB 70.9 million, respectively,
representing approximately 16.7%, 17.3% and 18.2% of the total turnover of the Target Group for
the same periods. The net profit in respect of the 8K mu Ecological Forest Lands for the three years
ended 31 December 2012 is estimated to be approximately RMB24.3 million, RMB34.0 million
and RMB33.0 million, respectively representing approximately 19.2%, 17.5% and 17.3% of the net
profit of the Target Group for the same periods.
– 58 –
LETTER FROM THE BOARD
To the knowledge of the Target Group, in order to comply with the PRC laws and regulations,
the relevant village committees have submitted their application for the land use conversion of the
8K mu Ecological Forest Lands and the relevant forest rights certificates to the Bureau of Forestry
of the Anxi County which will seek approval from higher level of Governmental Authorities. After
the approval of such conversion is granted, the relevant village committees and the Target Group
will apply for the forest rights certificates, pursuant to which tea plantation will be allowed on
the 8K mu Ecological Forest Lands. The approval of the land use conversion and the grant of the
relevant forest rights certificates in respect of the 8K mu Ecological Forest Lands are under the
sole discretion of the relevant Governmental Authorities and the actual implementation practices on
forest land planning.
In the event that the Contracting Agreements were held unenforceable and void or there
would be any Third Party Occurrence or the relevant forest rights certificates were not obtained,
the Target Group shall return the respective 8K mu Ecological Forest Lands to the relevant village
committees or to any bona fide third party; and the village committees shall return the contracting
consideration to the Target Group. The Target Group would lose its dominant control over the 8K
mu Ecological Forest Lands to serve the purpose of better management and protection of the nearby
cultivation bases.
Furthermore, the Group intends not to proceed with the tea leaves harvest on the 8K mu
Ecological Forest Lands after the completion of the Acquisition, until and unless the relevant
forest rights certificates have been obtained. Accordingly, during the intervening period between
the completion of the Acquisition and before the relevant forest rights certificates of the 8K mu
Ecological Forest Lands are obtained, the New Contracting Agreement would become effective with
the New Rights being contracted to the Target Group at nil consideration. As the volume and quality
of the tea leaves harvested on the Additional Forest Lands vary from time to time depending on
the weather conditions, soil quality, natural disaster or other external factors such as the fertilizers
and pesticides applied, there is no assurance that the tea leaves output derived from the Additional
Forest Lands is the same as that from the 8K mu Ecological Forest Lands.
As at the Latest Practicable Date, with respect to the Target Group’s cultivation bases,
the Target Group has yet to obtain the relevant forest rights certificates in respect of the 8K mu
Ecological Forest Lands. For details, please refer to the section headed “Business of the Target
Group – Production – Cultivation bases – 8K mu Ecological Forest Lands.”
A substantial portion of the Target Group’s sales is generated from the sale of raw
teas on a wholesale basis. Failure to maintain relationships with its existing wholesalers may
materially and adversely affect its business, financial condition and operating results.
The Target Group sells on a wholesale basis a portion of its raw teas to wholesalers and
Chadu Customers, during the tea leaves harvest seasons throughout the year. For each of the
financial years ended 31 December 2010, 2011 and 2012, sales to the Target Group’s wholesalers
accounted for 55.2%, 48.0% and 63.5% of its total revenue, respectively. For each of the financial
years ended 31 December 2010, 2011 and 2012, sales to the Chadu Customers accounted for 22.8%,
27.2% and 14.9% of the Target Group’s total revenue, respectively.
– 59 –
LETTER FROM THE BOARD
Although the Target Group has entered into framework agreements with all of its current
wholesalers, these framework agreements are generally for a term of one year, and do not require
its wholesalers to purchase a minimum amount of its raw teas. The Target Group’s wholesalers may
from time to time place bulk purchase orders for raw teas with it. If it fails to maintain relationships
with its wholesalers or that its Chadu Customers fail to place orders at or above historical levels
or at all, its business, financial condition and operating results may be materially and adversely
affected.
The Target Group relies on its tea farmers who provide cultivation support.
The Target Group has entered into service contracts with tea farmers under which the tea
farmers are responsible for the cultivation of tea plants in designated zones at its cultivation bases,
harvesting of tea leaves and processing of tea leaves to become raw teas. The service contracts are
in general for a term of three years. The Target Group pays the tea farmers a service fee directly,
which is primarily based on the quantity and quality of raw teas that the tea farmers return to it
during each harvest season and by reference to the area of their responsible cultivation bases.
As at the Latest Practicable Date, the Target Group has entered into service contracts with
1,110 tea-farmer households.
For each of the financial years ended 31 December 2010, 2011 and 2012, the total service
fees for tea farmers (other than the salaries payable to the zone supervisors) amounted to
approximately RMB123.2 million, RMB153.1 million and RMB147.8 million, respectively, and
accounted for 81.3%, 81.4% and 73.5% of the Target Group’s total cost of sales, respectively,
during the same periods.
The termination or non-renewal of the service contracts with the Target Group’s tea farmers,
the failure of the tea farmers to provide the services under the service contracts, or the failure of the
tea farmers to cultivate quality tea leaves will have a material adverse effect on the Target Group’s
business, financial condition and operating results.
If the service fees for the tea farmers substantially increase, the Target Group may not be
able to pass on the additional costs to its customers. In addition, if the tea farmers terminate or the
Target Group fails to renew the service contracts with the tea farmers, the Target Group may not be
able to identify replacement tea farmers, at acceptable service fees, or at all. The occurrence of any
of these events will have a material adverse effect on its business, financial condition and operating
results.
– 60 –
LETTER FROM THE BOARD
Certain tea leaves products in 2011 did not pass the Target Group’s voluntary product
testing. There can be no assurance that there will not be any claims against the Target Group.
During each of the three years ended 31 December 2010, 2011 and 2012, the relevant
Governmental Authorities have arranged random product tests by taking samples of raw tea leaves
and refined tea leaves from the Target Group. All the results of the product testing arranged by
the relevant Governmental Authorities showed that the samples of the raw teas and refined teas of
the Target Group are in compliance with the relevant product quality and technical standards. In
addition to such random testing, as a part of the quality control procedure, the Target Group has
initiated Voluntary Testing itself. The test results of the Voluntary Testing are generally satisfactory
except that the test results of certain tea leave samples in 2011 reported that the level of rare earth
exceeded the Threshold Level. However, the tea water made from the samples examined based on
normal drinking habit and recommended usage of tea did not show any trace of rare earth. With
respect to the test results of the Voluntary Testing in 2012, the level of rare earth of all the samples
is below the Threshold Level. To the knowledge of the directors of the Target Group, rare earth is
water insoluable. This notion is supported by the product testing on the tea water of the samples
in 2011 which did not detect any traces of rare earth. According to the New Maximum Levels of
Contaminants which will take effect on 1 June 2013, the national limit on the level of rare earth
contained in food shall be the same as that prescribed under the Maximum Levels of Contaminants.
For further details regarding product testing, please refer to the section headed “B. Business of the
Target Group – Legal proceedings and compliance – Product testing” in this circular.
Our PRC Legal Advisers have advised that under the Food Safety Law of the PRC（《中華
人民共和國食品安全法》）, producers and business operators of products containing substances
which exceed the prescribed levels may be ordered to recall the products, suspend their business
operations or pay fines, or the PRC authorities may revoke their licenses or confiscate their income
derived from producing or selling such products. Our PRC Legal Advisers have also advised that as
at the Latest Practicable Date, the National Industrial Production Permit for Teas*（全國工業產品
生產許可證）of Fujian Nature and the Food Circulation Permits*（食品流通許可證）or the Food
Hygiene Permits*（食品衛生許可證）of the retail outlets which are operated by the Target Group
remain valid and that such permits have not been revoked.
Notwithstanding that the Target Group has received confirmations from the relevant
Governmental Authorities indicating that the products of the Target Group are in compliance
with the relevant national standards, there can be no assurance that such confirmations will not
be challenged by a PRC Governmental Authority of a higher level or any of the consumers who
have consumed the Target Group’s products in the past will not make any claims against the
Target Group. Further, there is no assurance that the level of rare earth in the tea leaves of the
Target Group will not exceed the relevant limit prescribed under the New Maximum Levels of
Contaminants. If such confirmations mentioned above are challenged by a PRC Governmental
Authority of a higher level, a claim is made against the Target Group by any of the consumers of its
products, or the level of rare earth in the tea leaves of the Target Group exceeds the relevant limit
prescribed by the PRC government in the future, the Target Group’s business, financial condition,
operating results and prospects may be materially and adversely affected.
– 61 –
LETTER FROM THE BOARD
The Target Group may not be successful in maintaining an effective quality control
system.
The quality of Target Group’s products is crucial to the success of its business. The Target
Group’s product quality depends significantly on the effectiveness of its quality control system and
its coverage on its production and sales procedures, both internally and externally, which, in turn,
depends on a number of factors, including the design and implementation of the Target Group’s
quality control policies and guidelines. Any significant failure or deterioration of the Target Group’s
quality control system may seriously damage product quality and have a material adverse effect on
its reputation in the market among current or prospective customers, which may, in turn, lead to
fewer orders in the future, materially and adversely affecting the Target Group’s business, financial
condition and operating results.
The Target Group’s results may fluctuate due to revaluation gains or losses on its
biological assets.
Revaluation gains or losses on the Target Group’s biological assets can significantly impact
its profits as part of its profits consists of changes in the fair value of such assets. Under IAS 41, the
Target Group is required to assess the fair value of its biological assets less costs to sell with any
change therein recognised as profit or loss at the end of each reporting period. The changes were
mainly due to the changes in the selling price of its raw teas and refined teas achieved by itself and
the increased maturity of tea plants at its cultivation bases.
The fair value of the Target Group’s biological assets is derived from many assumptions. We
have engaged a Valuer, an Independent Third Party, to assess the fair value of the Target Group’s
biological assets at the end of each reporting period. In line with the requirements of IAS 41, the
Valuer undertook an income approach and developed a valuation model of the net present value of
expected future economic benefits from the Target Group’s biological assets discounted at a current
market-determined rate based on certain historic information about the plantations and using a
number of key assumptions. These key assumptions include, among other things, the discount rate,
market prices of tea leaves, production yield of fresh tea leaves per mu and production costs. The
key assumptions on market prices of tea leaves and production yield of fresh tea leaves per mu used
in valuing the Target Group’s biological assets were based on estimates prepared by the Valuer’s
agricultural consultant. Changes in these assumptions may result in an increase or a decrease in fair
value.
– 62 –
LETTER FROM THE BOARD
Key assumptions on the valuation of the Target Group’s biological assets may vary from
time to time when more updated information is available. These factors would impact the fair value
of the Target Group’s biological assets and result in fluctuations of its results due to revaluation
gains or losses. Therefore, the Target Group’s operating results for each period may vary due to
revaluation gains or losses from change in fair value of biological assets required to be calculated
under IAS 41, reflecting fluctuations in prevailing market conditions. There can be no assurance
that the fair value of its biological assets will not decrease in the future. Any such decrease in the
fair value of the Target Group’s biological assets less estimated costs to sell may have a material
adverse effect on its operating results and profits.
Shareholders and investors should be aware that the Target Group’s profits are subject to
changes in fair value arising from any changes in the discount rates applied in assessing the fair
value of its biological assets and that there is no assurance that such revision in discount rates will
not have any material adverse impact on its profits. For details of the discount rates, please refer to
the section headed “Discount rate” under Appendix V to this circular.
In addition, the aggregate gain or loss arising from the initial recognition of the biological
assets and from the change in the fair value of the biological assets less estimated costs to sell is
recognized in the Target Group’s income statement as profit or loss. The net gain on change in fair
value of biological assets shown on the Target Group’s financial statement reflects only unrealised
revaluation gain on its biological assets during the respective financial year and does not generate
any actual cash inflow unless such biological assets are disposed of at such revalued amounts.
The Target Group’s operating results are subject to seasonal fluctuations and other
variations. Disruptions in its operations during or near the harvest seasons may have a
material adverse effect on its business, financial condition and operating results.
The Target Group’s business and operating results are subject to seasonal fluctuations. For its
raw teas business, it typically experiences higher sales volume during the tea leaves harvest seasons
in Anxi County, when tea leaves are harvested, processed into raw teas and sold to its raw teas
customers. The higher sales volume mainly reflect an increase in purchase orders for raw teas made
by the Target Group’s wholesalers and Chadu Customers.
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LETTER FROM THE BOARD
In relation to its refined teas business, the Target Group typically experiences higher sales
volume at the end of the spring and autumn harvest seasons. Sales of refined teas also follow
traditional seasonal shopping patterns for the retail business in the PRC with higher sales volume
during holidays , when products are purchased for consumption or as corporate/business gifts
or personal gifts. The Target Group’s sales can also fluctuate during the course of the year for
a number of other reasons, including weather conditions that may impact the quality, quantity
and timing of its harvest, the timing of the expansion of its new retail outlets and the timing of
advertising and promotional campaigns.
If there is any substantial disruption in the Target Group’s operations during or near the
tea leaves harvest seasons, for instance, as a result of natural disasters, this may have a material
adverse effect on the production of its tea products or if there is any change in consumers’ shopping
patterns, which may, in turn, materially and adversely affect its business, financial condition and
operating results.
The Target Group’s revenue is generated substantially from the sale of a single product.
The Target Group’s revenue is generated substantially from the sale of oolong teas. For
each of the financial years ended 31 December 2010, 2011 and 2012, the Target Group’s revenue
generated from the sale of oolong teas (including both raw teas and refined teas) accounted for a
substantial part of its total revenue during the same periods. The Target Group’s source of income
depends on, and will continue to depend on, the sale of oolong teas. The Target Group has a
strong market position as a dedicated oolong tea producer in China. According to the Euromonitor
International Report, the Target Group was the largest raw tea leaves producer in China in terms
of sales value and the second largest raw tea leaves producer in China in terms of sales volume in
2010 and 2011, and one of the top 10 refined oolong tea producers in China in terms of retail sales
volume in 2011. In terms of product range, the Target Group primarily sells a range of oolong teas,
in the form of both raw teas（毛茶）and refined teas（精製茶）, and to a lesser extent, refined teas
which are processed using Dahongpao（大紅袍）raw teas as well as other tea-related products such
as tea utensils, snacks and foods. For details of the product range, please refer to the section headed
“Business of the Target Group – Products” in this circular. Failure to improve or maintain the Target
Group’s market position or to diversify its product range and expand its product offerings, or a
shift in market preference for oolong teas, or the occurrence of any other factors (such as weather
conditions) that affects the sale of the Target Group’s oolong teas may have a material adverse
effect on its business, financial condition, operating results and growth prospects.
– 64 –
LETTER FROM THE BOARD
Failure to effectively promote or maintain the Target Group’s brand, Ping Shan
Famous Tea（坪山名茶）, may materially and adversely affect its business, financial condition,
operating results and future success.
The Target Group seeks to position its Ping Shan Famous Tea brand as a high quality brand
in China. The Ping Shan Famous Tea brand could be critical to the Target Group’s success in
the Chinese tea market in China. For each of the financial years ended 31 December 2010, 2011
and 2012, revenue attributable to the sale of refined teas under the Ping Shan Famous Tea brand
accounted for 17.9%, 23.3% and 21.0% of the Target Group’s total revenue, respectively.
The Target Group has implemented multi-faceted marketing strategies to promote its Ping
Shan Famous Tea brand and brand image. The Target Group launched a multi-media advertising
campaign, involving advertising on television, outdoor billboards and magazines. It has appointed
Mr. Li Lianjie（李連杰）(also known as Mr. Jet Li) (a Chinese martial artist, actor, film producer,
martial arts champion, and international film star) as the spokesman of the Ping Shan Famous Tea
brand for a period from 10 December 2010 to 9 December 2013, during which time the Target
Group is entitled to broadcast television advertisements featuring Mr. Li Lianjie and to use the
image of Mr. Li Lianjie on its products.
The Target Group has incurred, and expected to continue to incur, significant costs and
expenses in respect of its brand-building and marketing activities. For each of the financial years
ended 31 December 2010, 2011 and 2012, the Target Group spent RMB7.8 million, RMB9.1
million and RMB5.9 million, respectively, on advertising and promotion activities, representing
2.5%, 2.2% and 1.5% of its total revenue for the same periods, respectively.
If the Target Group’s brand-building and marketing activities are not successful or do not
create the desired results, it may not be able to recover costs and expenses related to the above
activities. If its image and brand representative attracts any negative publicity arising from market
perception over which it has no control, market perception and consumer acceptance of the brand
may suffer. As a result, the Target Group’s business, financial condition, operating results and future
success may be materially and adversely affected.
– 65 –
LETTER FROM THE BOARD
The Target Group may not be successful in expanding its sales network and promoting
or maintaining its Ping Shan Famous Tea brand, and may not be able to manage the rapid
growth of the sales network for its refined teas effectively.
Under the sales network business model, the Target Group mainly sells refined teas to
customers at retail outlets, which are operated either by itself or third-party retailers. It is difficult
for the Target Group to identify all the difficulties that it may encounter in the continued operation
of its sales network in the PRC.
In light of the Target Group’s sales network business model in the branded oolong tea
industry in the PRC, the Target Group’s past expansion in its sales network and its operating results
in the past may not be a good indication of its future performance. If the Target Group is unable to
successfully handle these risks and difficulties, its business, financial condition, operating results
and prospects may be materially and adversely affected.
The Target Group has expanded the sales network for its refined teas rapidly in recent years.
One of its strategies for growth is expanding the sales network for refined teas. As at 31 December
2010, 2011, 2012 and the Latest Practicable Date, the Target Group had 60, 142, 146 and 144 retail
outlets, respectively, operated either by itself or by third-party retailers. The management expertise
required to manage a sales network that includes retail outlets located across the country may
be different from the expertise required to manage a more centrally located network. The Target
Group’s expansion plans may lead to an increase in the amount of costs, thereby causing liquidity
constraints on its business. There is no assurance that the Target Group will succeed in sustaining
its growth of the sales network of refined teas. If the Target Group fails to effectively manage
its expansion plans, its business, financial condition and operating results may be materially and
adversely affected.
– 66 –
LETTER FROM THE BOARD
The Target Group has not obtained approvals from Fujian MOFCOM for certain
existing retail outlets and, accordingly, it may be subject to fine or other administrative
penalties.
Pursuant to the Measures for the Administration on Foreign Investment in Commercial Fields
（《外商投資商業領域管理辦法》）and the Notice on Decentralization of the Authority to Examine
and Approve Foreign-invested Commercial Enterprises（《關於下放外商投資商業企業審批事項的
通知》）, foreign-invested commercial enterprises, who intend to establish new retail subsidiaries
and retail outlets in respect of the tea business in the PRC, shall obtain approval from competent
commerce departments at the provincial level. The Target Group has commenced the operations of
retail subsidiaries and retail outlets in the PRC without obtaining the relevant approvals from Fujian
MOFCOM, the competent authority to approve establishment of retail subsidiaries and retail outlets
by the Target Group. As at the Latest Practicable Date, the Target Group had not obtained such
approvals for all of its retail subsidiaries and retail outlets in the PRC, namely 5 retail subsidiaries
and 25 retail outlets (either operated under the retail subsidiaries or the branch of the retail
subsidiaries).
The Target Group once applied for the approval for the establishment of its retail subsidiaries
and retail outlets in the PRC to Anxi MOFCOM, but Anxi MOFCOM, after consultation with the
Fujian MOFCOM, replied that such approval was not required. In order to reconfirm the issue, the
Target Group visited Fujian MOFCOM in September 2011 and was verbally advised by the staff
of Fujian MOFCOM (who is a director at the Fujian MOFCOM) that such approval is not a prerequisite and will not be issued. Our PRC Legal Advisers have also verbally consulted the staff
of Fujian MOFCOM and were informed that the approval of Fujian MOFCOM was not necessary
for the establishment of new retail subsidiaries and retail outlets of Fujian Nature in the PRC and
it would be sufficient if all registration with industrial and commercial administration authorities
has been complied with. In addition, as advised by the PRC Legal Advisers, the relevant PRC laws
and regulations do not specify the legal consequence for establishing retail subsidiaries and retail
outlets in the PRC without approval from competent commerce departments at the provincial level.
The staff from Fujian MOFCOM have also informed our PRC Legal Advisers that they will not
shut down Fujian Nature’s current retail subsidiaries and retail outlets in the PRC or impose fine on
Fujian Nature due to lack of such approval from Fujian MOFCOM.
Fujian Nature has tried to ask Fujian MOFCOM to issue a written confirmation, but the
Fujian MOFCOM replied that it is not their practice to issue a written confirmation of such kind.
As at the Latest Practicable Date, the Target Group has not received any notice of penalty or
punishment owing to the lack of approval for the establishment of its retail subsidiaries and retail
outlets in the PRC. In light of the aforesaid, the PRC Legal Advisers are of the view that both the
risk of closure of all of the Target Group’s retail subsidiaries and retail outlets in the PRC and the
risk of the Target Group being sanctioned due to the lack of approval from Fujian MOFCOM is
remote.
– 67 –
LETTER FROM THE BOARD
However, as advised by our PRC Legal Advisers, the verbal confirmations of Fujian
MOFCOM are inconsistent with the relevant provisions under the existing PRC laws and
regulations, and as a result the Target Group cannot assure that it will not be subject to any
penalties arising from the lack of such approval from Fujian MOFCOM. In the event that the
Target Group is subject to fine or other administrative penalties, its reputation, business, financial
condition and operating results may be materially and adversely affected.
The Target Group relies mainly on third-party retailers to sell its refined teas, and
failure of the third-party retailers to perform to expectations of the Target Group may have
a material adverse effect on the Target Group’s business, financial condition and operating
results.
A substantial portion of the Target Group’s refined teas are sold to consumers through the
retail outlets, which are operated either by it or third-party retailers. For each of the financial years
ended 31 December 2010, 2011 and 2012, sales to third-party retailers, in aggregate, accounted for
10.7%, 7.4% and 7.0% of the Target Group’s total revenue, respectively.
The Target Group has entered into retail sales agreements with the third-party retailers. The
termination or non-renewal of the retail sales agreements, failure of third-party retailers to adhere
to the terms of such agreements or sales and marketing policies or to offer quality services to
consumers, or failure of third-party retailers to place orders at or above historical levels, or at all,
may have a material adverse effect on its business, financial condition and operating results.
The Target Group may not be able to accurately track the sales and inventory levels
of third-party retailers and its respective retail outlets, which could cause it to predict sales
trends incorrectly.
The Target Group’s third-party retailers may be unable or unwilling to provide us with
information in relation to their inventory levels and daily sales in a timely manner, or at all. As
it does not control the inventory and sales data belonging to third-party retailers, it relies on
information provided to it by third-party retailers. As a result, its ability to accurately track the sales
of its products by and the inventory level at the retail outlets operated by third-party retailers is
limited. The Target Group’s sales to third-party retailers may not be reflective of actual sales trends
to consumers, and it may not be able to timely gather sufficient information and data regarding the
market acceptance of its products and consumers’ preferences for its products. Failure to accurately
track sales and inventory levels of third-party retailers and the Target Group’s respective retail
outlets and to timely gather market information may cause it to incorrectly predict sales trends and
impede us to quickly align the Target Group’s marketing and product strategies to market changes.
– 68 –
LETTER FROM THE BOARD
The sales management system which the Target Group is in the process of launching
may not enable the Target Group to accurately monitor inventory levels of its retail outlets
which are operated by it, or gauge consumer preferences and needs in a timely manner, or at
all.
The Target Group is in the process of launching a sales management system (such as
ordering, inventory level and sales information) that allows for the integration of operating
information between it and its retail outlets which are operated by it. Upon launching, the Target
Group intends to extend the sales management system to additional retail outlets operated by it. As
the computerised sales management system will be relatively new to it, the Target Group may not be
able to envisage all the difficulties that it may encounter for the implementation of the system and
whether the system can be successfully implemented. In addition, the accuracy and completeness of
the information on sales and inventory depend on the accurate and complete input of the data. As
such, the Target Group may not be able to accurately monitor inventory levels of the retail outlets
which are operated by it, or gauge consumer preferences and needs in a timely manner, or at all. In
addition, the Target Group may not be able to extend the system to additional retail outlets operated
by it and the integration may not be successful. Therefore, its business, financial condition and
operating results may be materially and adversely affected.
The Target Group’s success depends on its ability to gain market acceptance and
market share for its products and its growth strategy to achieve this may not prove successful.
The Target Group’s success depends on its ability to offer products that satisfy consumer
preferences and needs. Consumer preferences and needs for Chinese teas are constantly changing.
The Target Group’s growth plan may be affected by preferences of consumers in the PRC market,
including any increase in the popularity of other varieties of Chinese teas (other than oolong teas)
or tea related beverages over traditional Chinese teas. There can be no assurance that its current
line of tea products will be able to satisfy changes in consumer preferences and needs or that it
will be able to promptly and commercially develop and produce new products that satisfy such
preferences and needs. There can also be no assurance that the Target Group will be able to gain
market acceptance and market share for its products. Furthermore, competitors of the Target Group
may be able to introduce products that appeal to consumer preferences and needs more effectively
or efficiently. As a result, the Target Group’s business, financial condition and operating results may
be materially and adversely affected.
– 69 –
LETTER FROM THE BOARD
During the Track Record Period, the Target Group sold principally oolong raw teas. The
Target Group intends to continue expanding its product offerings (including other Chinese teas).
However, the Target Group may not be able to obtain the regulatory approvals for new products
required for it to market and sell such new products. In addition, the development and sale of
new products may require more time, incur more expenses and be less successful than what is
anticipated. Therefore, there can be no assurance that it will be successful in the development and
sale of such new products.
The Target Group may not always be able to obtain additional cultivation bases that are
in proximity to the existing cultivation bases and can be used for tea plantations.
The Target Group employs a vertically integrated operating model in which the Target Group
directly controls key aspects of the value chain from cultivation, production to sales and marketing.
Its revenue is principally derived from the tea leaves picked at its cultivation bases and processed
into raw teas or refined teas for sale. Accordingly, the Target Group must maintain or increase its
cultivation bases with sufficient size and appropriate scope of usage in strategic locations at an
appropriate pace in order to ensure sustainable business growth. The Target Group has entered into
a memorandum of understanding for the purchase of contracting rights in respect of additional
forest lands with a view to increasing its cultivation bases. However, no definitive agreement
has been entered into as at the Latest Practicable Date. Accordingly, the transaction may or may
not proceed. For further details please refer to the section headed “Management Discussion and
Analysis of the Target Group – Tentative Purchase of Contracting Rights of New Forest Lands” in
this circular.
The land in China (including those in Anxi County, Quanzhou City, Fujian Province, the
PRC) which may be used for cultivating tea plants could be limited. If the Target Group requires
additional cultivation bases because of a challenge to its rights in respect of its existing cultivation
bases or because of its failure to acquire additional cultivation bases in the future on terms
acceptable to it, the Target Group’s production capacity for tea plants will be limited and the
Target Group’s business, financial condition and operating results may as a result be materially and
adversely affected.
The Target Group may be unable to obtain financing on favourable terms, or at all, to
fund its continuing business operations, existing and future capital expenditure requirements,
acquisition and investment plans and other funding requirements.
To fund the Target Group’s continuing business operations, existing and future capital
expenditure requirements, acquisition and investment plans and other funding requirements, the
Target Group needs sufficient internal sources of liquidity or access to additional financing from
external sources. The Target Group’s ability to obtain external financing in the future is subject to a
variety of uncertainties, including:
•
the necessary regulatory approvals being obtained to raise financing in the domestic or
international markets;
•
the Target Group’s future financial condition, operating results and cash flow;
– 70 –
LETTER FROM THE BOARD
•
the condition of the global and domestic financial markets; and
•
changes in the monetary policy of the PRC Government with respect to bank interest
rates and lending practices and conditions.
If adequate funding is not available to the Target Group on favourable terms, or at all, it may
materially and adversely affect its ability to fund its operations, or develop or expand its business.
Delivery delays or disruptions by transport operators may have a material adverse
effect on the Target Group’s business, financial condition and operating results.
In general, the Target Group relies on transport operators to deliver products to its customers.
Delivery disruptions for various reasons beyond its control, including weather conditions, political
turmoil, social unrest and strikes, may result in delayed or lost deliveries, which may have a
material adverse effect on the Target Group’s business, financial condition and operating results.
The Target Group did not comply with the PRC regulations for export of refined teas
into Hong Kong.
In respect of the operations of the Target Group’s retail outlet in Hong Kong, during the
Track Record Period, approximately 123.5 kg of refined teas have been exported to Hong Kong
from the PRC. As advised by our PRC Legal Advisers, the Target Group failed to (i) complete the
required reporting procedures as required under the Customs Law of the PRC, (ii) complete the
required sanitary registration or enrolment as required under the Regulations on Administration of
Sanitary Registration and Enrollment for Establishments of Food for Export（《出口食品生產企
業衛生注冊登記管理規定》）and (iii) manufacture exported food with the raw materials sourced
from registered cultivation bases in compliance with the relevant PRC laws. The Target Group is in
the process of preparing the required reports and filing the registration as well as applying for the
relevant certificates.
Our PRC Legal Advisers have also advised us that the said non-compliance with export
customs regulations in the PRC may subject the Target Group to a fine, being the sum of (i) not less
than RMB1,000 but not more than RMB30,000 pursuant to the Regulation on the Implementation of
Customs Administrative Sanction（《海關行政處罰實施條例》）, (ii) not less than 10% but not more
than 50% of the value of the exported food pursuant to the Supervision and Management Measures
on Inspection and Quarantine of Imported and Exported Food（《進出口食品檢驗檢疫監督管理
辦法》）for failure to complete the required sanitary registration for enterprises manufacturing
exported food and (iii) not less than 5 times but not more than 10 times the value of the exported
food pursuant to the same measures, and forfeiture of all of its income derived from the sales of its
tea which were exported without complying with the relevant laws and regulations.
– 71 –
LETTER FROM THE BOARD
The Target Group’s directors estimate that the total value of the refined teas that it exported
to Hong Kong, since the commencement of the business of the Target Group’s retail outlet in Hong
Kong in August 2010, without complying with the above PRC customs laws and regulations, was
approximately RMB0.02 million. As confirmed by the Target Group’s directors, since November
2012, the Hong Kong retail outlet has been used to promote the Target Group’s brand, Ping Shan
Famous Tea, in Hong Kong and no sales of refined teas has been conducted. Accordingly, no sales
proceeds were generated from refined teas since November 2012. Our PRC Legal Advisers have
advised that the maximum penalty to which the Target Group may be subject in respect of such
non-compliance amount to approximately RMB0.3 million, representing approximately 0.2% of the
net profit after taxation of the Target Group for the year ended 31 December 2012.
The Target Group did not comply with the PRC regulations relating to social security
insurance and housing fund.
Shaanxi Pingshan, one of the subsidiaries of the Target Group, completed registration with
the local authorities for the social security insurance on 1 March 2013. Prior to such registration,
Shaanxi Pingshan has not paid the social security insurance premiums of approximately RMB0.05
million for its employees. As advised by our PRC Legal Advisers, prior to 1 March 2013, the
maximum penalty for such non-payment of the social security insurance amounted to approximately
RMB0.2 million, representing approximately 0.1% of the net profit after taxation of the Target
Group for the year ended 31 December 2012.
Prior to 31 December 2009, Fujian Nature and Fujian Daping have only contributed social
security insurance for some of their employees; and prior to December 2010, Fujian Nature and
Fujian Daping have not contributed housing funds for their employees. Nevertheless, the Target
Group has received confirmations from the relevant Governmental Authorities which indicated that
(i) the relevant Bureau could not retrospectively accept any payment of social security insurance
outstanding from Fujian Nature or Fujian Daping for the year(s) prior to 2010 and that no penalty
will be imposed on Fujian Nature or Fujian Daping for such non-payment and (ii) Fujian Nature
and Fujian Daping have duly made housing fund contributions for their employees since December
2010. For details, please refer to the section headed “B. Business of the Target Group – Legal
proceedings and compliance – Social security insurance and housing fund” in this circular.
Our PRC Legal Advisers have also advised that 28.3%, 78.7% and 43.2% of the employees
as at 30 April 2013 of each of Fujian Nature, Fujian Daping and Fujian Huidian, respectively have
waived their benefit to social security insurance and/or housing fund contribution from Fujian
Nature, Fujian Daping or Fujian Huidian, and have undertaken not to pursue any claims in this
regard against each of them, respectively.
However, as advised by our PRC Legal Advisers, such waivers and undertakings from
the employees would not absolve Fujian Nature, Fujian Daping or Fujian Huidian from their
obligations to contributing social security insurance and (unless the employee of Fujian Nature,
Fujian Daping or Fujian Huidian is registered as rural household for whom a company is not
required to contribute housing funds under the PRC laws) housing funds for such employee; in
the event of dispute, the People’s Court could request them to re-pay such contributions in order
to protect the employee’s rights and may order them to pay a fine for any late contributions or
penalties.
– 72 –
LETTER FROM THE BOARD
The Target Group has not obtained the statistics registration certificate as required
under the PRC law and it may be subject to a fine.
The Target Group has not obtained the statistics registration certificates（統計登記証）as
required under the Statistics Law of the PRC. As advised by the PRC Legal Adviser, it is normal
administrative practice for the National Bureau of Statistics or its local statistics department
to require registered enterprises to provide statistical data for national economic and social
development analysis. The statistics registration certificates are issued to the enterprises when the
registration with the relevant statistics departments has been duly completed. As further advised
by our PRC Legal Advisers, the National Bureau of Statistics at a higher level, namely at the
Fujian Province and Quanzhou City, had verbally confirmed that the said statistics registration is
required. However, when the Target Group has submitted applications to the relevant local statistics
departments of the National Bureau of Statistics at the county level in the PRC in respect of the
statistics registration certificates（《統計登記証》）of the respective subsidiaries of the Target Group
in the PRC, such departments have verbally replied that such applications are not required or they
have refused to accept such applications. Given the fact that the National Bureau of Statistics at the
county level is the competent governmental authority for the application of statistics registration
certificates and the rights to grant such approval is vested in the relevant local departments of the
National Bureau of Statistics at the county level, as opposed to National Bureau of Statistics at
the Fujian Province and Quanzhou City, the Target Group is yet to obtain such certificates as at
the Latest Practicable Date. As advised by our PRC Legal Advisers, such statistics registration
certificates are not the requisite licences for the business operation of the Target Group and the lack
of such certificates has no material adverse legal impact on the business operations of the Target
Group.
Our PRC Legal Advisers have further advised that if, however, in the future the said
statistics departments change their attitude in respect of such statistics registration applications
and request the Target Group to complete such registration, and the Target Group would not be
able to make such registration in time, pursuant to the Rules on Statistical Work Management of
Fujian Province*（《福建省統計工作管理辦法》）, the Regulations on Statistical Management of
Liaoning Province*（《遼寧省統計管理條例》）, the Rules on Implementation of the PRC Statistics
Law of Shaanxi Province*（《陝西省實施<中華人民共和國統計法>辦法》）and the Regulations
on Statistical Management of Chongqing City*（《重慶市統計管理條例》）, the Target Group may
be subject to a fine of up to RMB0.9 million for such non-compliance representing approximately
0.5% of the net profit for the year ended 31 December 2012 of the Target Group.
– 73 –
LETTER FROM THE BOARD
Part of the Target Group’s production centre and research centre are built on a parcel
of granted land and the land premium in respect of which is yet to be settled .
The Target Group has a state-owned land use certificate in respect of a parcel of land
with an area of approximately 6,333 sq.m. and a property ownership certificate in respect of two
buildings, with an aggregate gross floor area of approximately 1,737.42 sq.m., at Pingzhou Village,
Daping Township, Anxi County, Fujian Province, the PRC, which is mainly used as the Target
Group’s production and research centre. The type of tenure under the aforesaid state-owned land
use certificate is allocated land use rights（劃撥 土地使用權）. However, the industry in which
the Target Group operates does not fall within the Catalogue of Allocated Land（劃撥用地目錄）
which became effective on 22 October 2001. Therefore, the Target Group applied for the conversion
of the allocated land use rights to granted land use rights（出讓地使用權）and obtained approval
for such application from Anxi County Bureau of Land and Resources（安溪縣國土資源局）on
21 September 2011. However, the Target Group needs to pay the land premium of approximately
RMB0.4 million, otherwise the Target Group may not be able to continue to use such land. Our
PRC Legal Advisers have advised that given the Target Group has obtained the approval on its
application for conversion of the allocated land use rights, the procedures which the Target Group
would take to obtain the state-owned land use certificate with the proper type of tenure (i.e. granted
land use rights) are only administrative in nature and there is no legal impediment to convert the
allocated land to granted land.
The Target Group’s leases of some of its leased properties in the PRC have not been
registered with the relevant PRC authorities; and it has not been able to ascertain whether
the lessors of some of its retail outlets in the PRC have legal and valid titles and whether the
leases of such retail outlets have been registered with the relevant PRC authorities. There is
no assurance that the leases of Target Group’s retail outlets in the PRC will be renewed upon
expiry of the lease term or will be renewed with favorable or otherwise acceptable terms and
conditions.
As at the Latest Practicable Date, the Target Group leased 31 properties in the PRC, 25 of
which were used as retail outlets operated by it, and the remaining were used by the Target Group
mainly as office premises, warehouses and staff canteen. The leases of such leased properties have
not been registered with the relevant PRC authorities, except for two of them.
The Target Group is in the process of contacting lessors to initiate the registration process
of its leases in respect of the above mentioned leased properties in the PRC. However, since
the registration process requires the co-operation of the lessors, there is no guarantee that the
registration process will be completed. Pursuant to the Administrative Measures for Commodity
House Leasing （《 商品房屋租賃管理辦法》）, the parties to the leases of the leased properties
in the PRC who failed to register with the relevant PRC authorities within 30 days of the date of
the leases may be subject to a fine of RMB1,000 and up to RMB10,000 for each leased property
if he/she fails to remedy his/her non-compliance by any deadline imposed by the relevant PRC
authorities. As advised by our PRC Legal Advisers, the use of Target Group’s leased properties
may be challenged by bona fide third parties and in which case, the Target Group may need to
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LETTER FROM THE BOARD
relocate its business operation in the said leased properties. As a result, the Target Group may
incur additional costs relating to such relocations as well as business interruption. There can be
no assurance that the Target Group can relocate to its comparable alternative premises without any
material adverse effect on its business, financial condition and operating results. Nevertheless, as
advised by our PRC Legal Advisers, such non-registration will not affect the effectiveness of the
leases of the said leased properties. Our PRC Legal Advisers have also advised that the lessors of 13
of the said leased properties have each provided a letter of undertaking to undertake that if, due to
ownership reasons, the right of the Target Group to use the said leased properties is compromised,
such lessors shall indemnify the Target Group for all related loss. As the annual rental of the said
leased properties owned by such lessors amounted to a minimum of approximately RMB1.5 million,
such lessors will be able to indemnify the Target Group’s losses arising from the unregistered leases
to that extent. If the rental from each unregistered property is not sufficient to cover all losses
arising from such unregistered leased property, the Target Group Controlling Shareholders will
indemnify the Target Group for any such losses.
As at the Latest Practicable Date, the lessors of 25 of the said leased properties lack, or
refuse to provide, the relevant title certificates to the Target Group. Our PRC Legal Advisers have
advised that if (i) the said leased properties are owned by third party, (ii) prior to the signing of the
leases, encumbrance was charged over the leased properties or the leased properties were seized
by the People’s Court in the PRC, or (iii) the lessors had no legal right to lease the said leased
properties to the Target Group, and the related right holder of the leased properties (such as the
legal owner or former lessor) do not ratify or grant to the lessors the right of disposition to the
said leased properties and decide to repossess the leased properties, the Target Group has no right
to object. Our PRC Legal Advisers have further advised that the Target Group may claim for any
remedy on grounds of breach of contract under the terms of the leases, or terminate the leases and
claim for any indemnification under the PRC laws. However, there is no assurance that no third
party or court will seek to assert its rights against the Target Group or the lessors in the future.
Should disputes arise due to the above mentioned circumstances regarding such properties, the
Target Group may encounter difficulties in leasing or occupying such properties, and it may be
required to relocate its business operations from the said leased properties.
As at the Latest Practicable Date, the Target Group had 144 retail outlets, either operated
by itself or by third-party retailers, in the PRC. All the retail outlets which are operated by the
Target Group are located at leased properties. All or some of the retail outlets operated by thirdparty retailers may be located at leased properties. There is no assurance that the leases of the retail
outlets of the Target Group will be renewed upon expiry of the lease term or will be renewed with
favorable or otherwise acceptable terms and conditions.
As the Target Group is not a party to the leases of the retail outlets which are operated by
third-party retailers, it is not able to ascertain whether the lessors have legal and valid titles and
whether the leases of such retail outlets have been registered with the relevant PRC authorities.
If the lessors of the retail outlets of the Target Group do not have legal and valid titles or
the leases of such retail outlets have not been registered with the relevant PRC authorities, or if the
leases are terminated or are not renewed or are renewed with less favorable terms and conditions,
the Target Group’s business, financial condition and operating results may be materially and
adversely affected.
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LETTER FROM THE BOARD
The Target Group relies on its key personnel and its ability to attract and retain
qualified personnel. If it is unable to attract, motivate or retain such qualified personnel, its
business may be materially and adversely affected.
The success of the Target Group’s business has been, and will continue to be, heavily
dependent upon the continuing service of its key employees. In particular, the Target Group relies
on the expertise and experience of the director of the Target Company, Mr. Cai Zhenyao, the general
manager of the Fujian Nature’s production department, Mr. Zhou Dongwen（周東文）, the general
manager of Fujian Daping, Ms. Xu Jing（徐靜）, and the Target Group’s zone supervisors for
cultivation bases.
If the Target Group loses the services of any of these key persons or a substantial number of
its zone supervisors and cannot hire suitable replacements in a timely manner, its business, financial
condition and operating results may be materially and adversely affected.
In addition, the Target Group’s success depends on its ability to attract and retain talented
personnel and in particular the Target Group’s team of personnel. The Target Group may not be
able to attract or retain all the personnel it needs. It may also need to offer superior compensation
and other benefits to attract and retain key personnel and therefore, there is no assurance that the
Target Group will have the resources to fully achieve its staffing needs. The Target Group’s failure
to attract and retain competent personnel and any increase in staffing costs to retain such personnel
may have a negative impact on its ability to maintain its competitive position and to grow its
business. As a result, the Target Group’s business, financial condition and operating results may be
materially and adversely affected.
The Target Group may experience a shortage of labor, especially with respect to tea
production, and its labor costs may increase.
The tea industry in the PRC is labor intensive. For each of the financial years ended 31
December 2010, 2011 and 2012, the labor costs accounted for 3.1%, 2.8% and 2.3%, respectively,
of the Target Group’s total cost of sales. Labor costs in China have been increasing and may
continue to increase in the future. There can be no assurance that the Target Group will not
experience any shortage of labor. The Target Group’s labor costs may continue to increase in the
future. If the Target Group experiences a shortage of labor, especially with respect to tea leaves
production, the Target Group may not be able to maintain or expand its operations. If labor costs
increase, the Target Group’s operating costs will also increase and it may not be able to pass on
these additional costs to its customers due to competitive pricing pressures. In such circumstances,
the Target Group’s business, financial condition and operating results may be materially and
adversely affected.
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LETTER FROM THE BOARD
Disputes between the Target Group and its business partners may adversely affect the
Target Group’s business.
In the course of the Target Group’s business, it has in the past formed, and may in the
future form, business cooperative relationships with third parties to jointly engage in certain
business activities. Such business partners may have economic or business interests or goals that
are inconsistent with those of the Target Group’s, or that they may be unable or unwilling to fulfill
their obligations under the relevant cooperative arrangements or agreements. Dispute with such
business partners may result in the loss of business opportunities, disruption to or termination of
related business venture or lead to potential litigation or other legal proceedings. As a result, the
Target Group’s reputation, business, results of operations and financial condition may be materially
adversely affected.
The Target Group’s historical financial performance may not be an accurate indicator
of its future financial performance and it may fail to continue to grow and perform at
historical rates.
The Target Group’s vertically integrated operating model and competitive cost structure
could enable it to enjoy higher profit margins. For each of the financial years ended 31 December
2010, 2011 and 2012, the Target Group’s gross profit margin was 51.2%, 53.9% and 48.3%,
respectively. There can be no assurance that the Target Group will continue to maintain its profit
margins if its cost structure changes as a result of, among other things, increased labor, production,
raw material or packaging material costs. The Target Group’s profit margin may also be materially
and adversely affected if it, in the face of increasing competition, needs to provide more favorable
terms to third-party retailers. In addition, if it is unable to sustain its brand recognition and a
positive public perception of its brand, it may not be able to continue to enjoy the premium pricing
for its products. There can be no assurance that the Target Group will be successful in implementing
other strategies for growth or that its strategies for growth will, even if successfully implemented,
result in expected growth in financial performance.
The Target Group’s internal control policies and procedures may be inadequate or
ineffective.
The Target Group has established risk management and internal control systems consisting
of organizational framework policies, procedures and risk management methods that its directors
believe are appropriate for its business operations. The Target Group seeks to continue to enhance
its risk management and internal control systems from time to time. However, there can be no
assurance that the Target Group’s risk management and internal control systems will be sufficiently
effective to identify and prevent all such risks.
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LETTER FROM THE BOARD
The Target Group has begun implementing measures to enhance its internal controls. The
Target Group’s risk management and internal control policies and procedures depend on the
implementation by its employees. There is no assurance that all of the Target Group’s employees
will adhere to the Target Group’s policies and procedures, and the implementation of such policies
and procedures may involve human errors or mistakes. Moreover, the Target Group’s growth and
expansion may affect its ability to implement and maintain stringent risk management and internal
controls as its business evolves. Any material deficiency in the Target Group’s risk management
and internal control policies or procedures may expose it to significant operational risk, which
may, in turn, have a material adverse effect on the Target Group’s business, financial condition and
operating results.
The Target Group may fail to implement strategies for future growth or maintain
its growth rate if it cannot adequately increase internal resources to manage its expanded
business.
The success of the Target Group in the future will depend on, among other things, its ability
to implement its strategies for future growth. The successful implementation of such strategies may
be affected by a number of factors which may or may not be within the Target Group’s control.
These factors include fluctuations in demand, changes in consumer preference and demand, the
availability of cultivation bases suitable for its future diversification, increasing competition, and
expansion of its sales network. The Target Group also requires additional funds from time to time to
pursue its future strategies. The future growth will impose significant additional responsibilities on
its management and resources, including the need to identify, recruit, train and integrate additional
employees, oversee the expansion of the sales network, and manage and oversee new relationships
with retailers.
There can be no assurance that the Target Group’s strategies can be implemented successfully
and the funds required to implement the strategies will be available. If the funds are not available
or the terms of funding are not acceptable, the Target Group may not be able to pursue its strategies
and this may materially and adversely affect Target Group’s future growth and profitability. The
Target Group’s ability to manage its operations and growth will require it to continue to improve
its operational, financial and management controls, reporting system and procedures. If the Target
Group is unable to manage its growth effectively, it may be difficult for the Target Group to execute
its business strategies.
The Target Group faces possible infringement of its trademarks and other intellectual
property rights and possible counterfeiting of its products and it may infringe third-party
intellectual property rights.
The Target Group’s brand recognition and reputation have been vital to the success and
growth of its business. The Target Group may not always be successful in securing protection for its
trade secrets, know-how, trademarks and other intellectual property rights. Protections offered by
the PRC intellectual property laws and the enforcement of these protections may not be as effective
as in some other countries. The Target Group may need to resort to litigation in the future to enforce
its intellectual property rights. Any such litigation may result in substantial costs and a diversion
of the Target Group’s resources. The Target Group’s failure to protect and enforce its intellectual
property rights may have a material adverse effect on the Target Group’s business, financial
condition and operating results.
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LETTER FROM THE BOARD
Counterfeiting and imitation have occurred in the past in the PRC for many products. There
is no assurance that counterfeiting and imitation of the Target Group’s products will not occur in the
future. If this occurs, the Target Group may not be able to detect it and deal with it effectively. Any
occurrence of counterfeiting or imitation may have negative impact on the Target Group’s brand
reputation and brand name. In addition, counterfeit and imitation products may cause a decline
in the Target Group’s revenue and increase the Target Group’s administrative costs in respect of
product testing and prosecution.
During the course of the Target Group’s operations, it may infringe third-party intellectual
property rights, as a result of which other parties may initiate litigation or other proceedings against
it. Responding to and defending these proceedings may require substantial costs and diversion of
resources, and the result of these proceedings may be uncertain. The Target Group’s reputation may
also be materially and adversely affected. If any of the Target Group’s employees (including its
former employees) infringes intellectual property rights of any third party or violates his obligations
of confidentiality to any third party, during his term of employment with the Target Group, the
relevant employee may be held liable and the Target Group may also be held liable for the conduct
of such employee and the damages incurred.
The Target Group may be subject to product liability claims if its products are found to
be unfit for consumption or cause illness.
The Target Group may be subject to product liability claims if its products are found to be
unfit for consumption or cause illness. Products may be rendered unfit for consumption or cause
illness due to contamination of ingredients, whether intentional or not, and illegal tampering. As
the Target Group does not exercise any direct control over the operations of its external contract
manufacturers, it is not able to ensure their compliance with applicable laws, regulations and rules
including laws, regulations and rules in respect of food safety, production, labor, workplace safety
and environment protection. If any of external contract manufacturers violates any applicable
laws, regulations and rules and supply products to the Target Group which are found to be unfit
for consumption or cause illness, the Target Group may be exposed to product liability claims in
respect of such products provided by its external contract manufacturers.
The occurrence of any of the above incidents may result in recalls of the Target Group’s
products and significant damage to the brand reputation of the Target Group. There is no assurance
that such incidents will not occur in the future. The Target Group may incur legal liabilities and
have to compensate consumers for any loss or damage it suffer in respect of valid product liability
claims. In addition, the Target Group may also be subject to administrative or other government
sanctions or penalties. In addition, adverse publicity from these types of concerns, whether valid
or not, may discourage customers from purchasing its products. If customers lose confidence in its
brand, the Target Group may experience long term declines in sales, which may have a material
adverse effect on its business, financial condition and operating results.
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LETTER FROM THE BOARD
The Target Group may not have insurance coverage that is adequate to cover potential
liabilities or losses.
The Target Group does not maintain insurance on its properties, machinery, equipment,
inventories and biological assets, third-party liability, product liability or business interruption
insurance. The Target Group or its directors or senior management may be exposed to claims for
which no insurance policies have been maintained by it. In addition, although the Target Group
maintains work-related injury insurance for employees as required under PRC law and insurance on
the Target Group’s motor vehicles, there may be circumstances for which it would not be covered
adequately, or at all. If the Target Group incurs substantial losses or liabilities and its insurance
coverage is unavailable or inadequate to cover such losses or liabilities, business, financial
condition and operating results may be materially and adversely affected.
RISKS RELATING TO TEA INDUSTRY
The Target Group operates in a highly competitive market.
The Chinese tea market in which the Target Group operates could be considered as highly
competitive and fragmented, and the competition is expected to continually increase. Many of
the Target Group’s competitors sell products that are similar to the Target Group’s products, and
the Target Group’s ability to compete against them is significantly dependent on its ability to
distinguish its products from those of its competitors and demonstrate product quality. In addition,
consumer preferences and needs may change quickly and frequently, creating opportunities for
new competitors to enter the market and for existing competitors to take away the market share of
the Target Group. The Target Group’s growth plan may be affected by preferences of consumers in
the PRC market, including any increase in the popularity of other varieties of Chinese teas (other
than oolong teas) or tea related beverages over traditional Chinese teas. Many of the existing and
potential competitors may have competitive advantages over the Target Group in terms of financial,
technical and marketing resources. There can be no assurance that the Target Group’s existing or
potential competitors will not provide products comparable or superior to those it provides or adapt
more quickly than the Target Group to evolving market trends or changing market requirements.
Significant consolidation of the Chinese tea industry among its competitors may occur, which could
result in an increase of the market share of some of the Target Group’s competitors. The Target
Group’s competitors may successfully expand their business upstream in cultivation of tea plants,
which may enable them to better control the price and quality of tea leaves used to make their
products, thereby enhancing their competitiveness. Increased competition may reduce the Target
Group’s sales volume, prices and margins. As its business, financial condition and operating results
may be materially and adversely affected, there is no assurance that the Target Group will be able to
compete effectively against its existing and potential competitors.
– 80 –
LETTER FROM THE BOARD
Adverse publicity concerning tea products may affect the Target Group’s business
performance or damage its reputation, and its societal impact may lead to additional
government regulations.
The Target Group is highly dependent on consumers’ perception of the quality and safety
of its products. As a result, adverse publicity about contamination in Chinese tea products or test
findings about Chinese teas having residual pesticides or fertilisers, lead or other metals may affect
public confidence in Chinese tea products produced in the PRC, including the Target Group’s
products. The occurrence of any of these events may have a material adverse effect on the Target
Group’s business, financial condition and operating results.
The PRC Government food safety and food production laws and regulations may
become more onerous, and the Target Group’s related certificates or other certificates,
licenses and permits may be revoked, or may not be renewed or extended.
Domestic producers of tea products are required to comply with certain food safety and food
production laws and regulations in the PRC including the New Maximum Levels of Contaminants.
These laws and regulations establish standards on food and food additives, packaging and
containers, and disclosure of information on packaging, as well as setting out requirements on
food safety, production, sites, facilities and equipment used for the transportation and sale of tea
products. However, if the PRC Government increases the stringency of such laws or regulations,
the Target Group’s production and sales costs may increase, and it may be unable to pass these
additional costs on to its customers, which may materially and adversely affect its business,
financial condition and operating results.
Our PRC Legal Advisers have advised that , the Target Group has obtained, and is in
compliance with, the necessary licenses, permits and certificates relating to food safety and food
production laws and regulations in the PRC, including the National Industrial Production Permit
for Teas*（全國工業產品生產許可證）of Fujian Nature, the Food Circulation Permits*（食品 流通
許可證）or the Food Hygiene Permits*（食品衛生許可證）of the retail outlets which are operated
by the Target Group. These licenses, permits and certificates are subject to renewal or extension to
carry on the business of food production processing and circulation. If any of the Target Group’s
licenses, permits or certificates is revoked, not renewed or not extended, it may not be able to
produce or process its products and its customers may lose confidence in its products, which may
have a material adverse effect on its business, financial condition and operating results.
– 81 –
LETTER FROM THE BOARD
The Target Group may be subject to higher compliance costs if PRC environmental
protection laws and regulations become more onerous.
The Target Group operates in an industry which is subject to PRC environmental protection
laws and regulations. These laws and regulations require enterprises which produce certain
environmental waste to effectively manage and treat such waste prior to disposal. Enterprises that
fail to comply with such requirements may be subject to fines. Our PRC Legal Advisers have
advised that Fujian Nature and Fujian Daping have each received a confirmation letter dated 22
February 2013 issued by the Environmental Protection Bureau of Anxi County（安溪縣環境保護
局）confirming that in the preceding three years prior to the date of such confirmation letter (i) the
environmental waste produced by Fujian Nature and Fujian Daping complied with the PRC national
standard in respect of environmental waste; and (ii) the Bureau had not levied any penalty or fine
against any of them as a result of breach of laws or regulations relating to environmental protection.
Our PRC Legal Advisers have also advised that Fujian Huidian has also received a confirmation
letter dated 11 March 2013 issued by the Environmental Protection Bureau of Tong’an Branch of
Xiamen City（廈門市環境保護局同安分局）that, among others, (i) Fujian Huidian completed the
environmental impact assessment and declared and paid the required environmental waste emission
charge, and (ii) the Bureau had not identified any breach of the laws or regulations relating to
environmental protection by Fujian Huidian as of the date of such confirmation. However, there is
no assurance that the PRC Government will not change the existing laws or regulations or impose
additional or stricter laws and regulations, compliance with which may increase the Target Group’s
production costs in ways that may materially and adversely affect its business, financial condition
and operating results.
– 82 –
LETTER FROM THE BOARD
B.
BUSINESS OF THE TARGET GROUP
OVERVIEW
The Target Group is a dedicated oolong tea producer in the PRC. With its tea cultivation
bases, production facilities, established brand and extensive sales network, the Target Group has
developed a vertically integrated business model. The Target Group was the largest raw tea leaves
producer in China in terms of sales value, the second largest raw tea leaves producer in China in
terms of sales volume in 2010 and 2011, and one of the top 10 refined oolong tea producers in
China in terms of retail sales volume in 2011 (Note) .
According to the Euromonitor International Report, oolong tea is the second most popular
refined tea consumed in China, representing approximately 13.3% of China’s total refined tea
consumption in terms of retail sales volume in 2011. Of all the sub-varieties of oolong tea, Tie
Guan Yin（鐵觀音）is the most significant sub-variety, representing approximately 74.8% of the
refined oolong tea sector in terms of retail sales value in 2011.
Cultivation and production
The Target Group’s tea cultivation bases comprise the 770 mu Forest Lands, 29.5K mu
Economical Forest Lands and 8K mu Ecological Forest Lands.
The Target Group’s cultivation bases are all strategically located in Da Ping（大坪）and Xi
Ping（西坪）, Anxi County, Quanzhou City, Fujian Province, the PRC. With its favourable climate,
soil and geographic conditions (or its “terroir”) for the growing of oolong tea plants, Anxi County
is well-known for being the source of origin of Tie Guan Yin and home to premier Tie Guan Yin
and other sub-varieties of oolong teas. The Target Group’s directors consider that the strategic
location of the cultivation bases in Anxi County has a significant bearing on the Target Group’s
level of productivity and the quality of its tea leaves, which distinguishes the Target Group from
its competitors. Please refer to the section headed “Business of the Target Group – Production –
Cultivation bases” in this circular for further details on the cultivation bases.
As at the Latest Practicable Date, in addition to its own staff, the Target Group engaged
1,110 tea-farmer households to provide cultivation and production services on its tea farms under
the supervision of zone supervisors. The tea farmers are responsible for cultivating tea plants,
harvesting tea leaves and processing tea leaves to become raw teas（毛茶）.
Note:
Source: Euromonitor International Report
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LETTER FROM THE BOARD
In the tea leaves harvest seasons, fresh tea leaves are picked at the Target Group’s cultivation
bases and processed to become raw teas. A select portion of its raw teas are then further processed
into refined teas（精製茶）by removing visible impurities, fine powder and small broken tea leaves
before being packaged by the Target Group.
The Target Group currently provides four sub-varieties of oolong teas, namely, Tie Guan
Yin, Mao Xie（毛蟹）, Huangjin Gui（ 黃金桂）and Ben Shan（本山）. The Target Group has a
team of certified tea tasters, who use organoleptic means to judge and appraise the characteristics
and qualities of its raw teas and grade them according to their external appearance and innate
quality (such as aroma, taste, tea colour and appearance of tea remainings). Furthermore, the tea
tasters choose the top-grade Tie Guan Yin raw teas and blend them in various proportions to make
premium refined Tie Guan Yin tea with the signature characteristics of the Target Group’s brand.
Sales and marketing
The Target Group adopts a two-prong strategy in the sales of its tea products to focus
not only on the production and sales of raw teas, but also on the development of its branded tea
business by implementing various initiatives to promote its Ping Shan Famous Tea（坪山名茶）
brand.
The Target Group sells a majority of its raw teas on a wholesale basis, and sells on a retail
basis its refined Tie Guan Yin under its Ping Shan Famous Tea（坪山名茶）brand. A small portion
of the Target Group’s refined teas are also sold non-branded to the Direct Sales Customers. In
addition, the Target Group provides, to a lesser extent, other tea-related products such as tea
utensils, and snacks and foods.
For the sale of raw teas, as at the Latest Practicable Date, the Target Group has 20
wholesalers. The Target Group has entered into framework agreements with all of them for the
sale of its raw teas. The Target Group also sells its raw teas to Chadu Customers at the tea fairs
during the four tea harvest seasons throughout the year. China Chadu Anxi Wholesale Tea Market
is a wholesale market approved by the Ministry of Agriculture of the PRC. At China Chadu Anxi
Wholesale Tea Market, Chadu Customers place purchase orders with the Target Group directly.
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LETTER FROM THE BOARD
For the retail sale of its refined teas, the Target Group has established an extensive sales
network comprising 25 retail outlets operated by the Target Group and 119 retail outlets operated by
third-party retailers as at the Latest Practicable Date.
The Target Group has implemented certain marketing approaches to promote its Ping
Shan Famous Tea brand and its brand image. The Target Group launched multi-media advertising
activities, involving advertising on television, internet, magazines, and outdoor billboards. The
Target Group has appointed Mr. Li Lianjie（李連杰）(also known as Mr. Jet Li) as the spokesman of
its Ping Shan Famous Tea brand for a period from 10 December 2010 to 9 December 2013, during
which time the Target Group is entitled to broadcast television advertisements featuring Mr. Li
Lianjie and to use the image of Mr. Li Lianjie on its products.
The Target Group’s track record
The Target Group’s directors believe that the Target Group’s vertically integrated operating
model affords the Target Group better control over the supply and quality of tea and distinguishes
the Target Group from its competitors which do not have their own cultivation bases. With the
Target Group’s multi-faceted marketing and sales strategies, the Target Group is able to enhance its
brand recognition.
The table below sets out the Target Group’s turnover for the periods indicated:
Year ended 31 December
2010
2011
2012
RMB
(thousands)
% of total
turnover
RMB
(thousands)
% of total
turnover
RMB
(thousands)
% of total
turnover
Raw teas
Wholesalers
Chadu Customers
171,265
70,895
55.2
22.8
196,183
110,952
48.0
27.2
247,204
57,922
63.5
14.9
Sub-total
242,160
78.0
307,135
75.2
305,126
78.4
Refined teas and other
related products
Own retail outlets
Third-party retail outlets
Direct Sales Customers
13,057
33,166
21,975
4.2
10.7
7.1
29,599
30,413
41,094
7.3
7.4
10.1
20,411
27,200
36,310
5.3
7.0
9.3
Sub-total
68,198
22.0
101,106
24.8
83,921
21.6
310,358
100.0
408,241
100.0
389,047
100.0
Total
– 85 –
LETTER FROM THE BOARD
For each of the financial years ended 31 December 2010, 2011 and 2012, the Target Group
generated turnover of approximately RMB 310.4 million , RMB 408.2 million and RMB 389.0
million, respectively, representing a CAGR of approximately 12.0 %. The Target Group’s net
profit for each of the financial years ended 31 December 2010, 2011 and 2012 was approximately
RMB126.6 million, RMB194.2 million and RMB190.6 million, respectively, representing a CAGR
of approximately 22.7%.
COMPETITIVE STRENGTHS
The Target Group’s directors believe that the Target Group’s historical success and future
prospects are underpinned by a combination of competitive strengths including:
Strategically located cultivation bases
The Target Group’s tea cultivation bases comprise the 770 mu Forest Lands, 29.5K
mu Economical Forest Lands and 8K mu Ecological Forest Lands, which are all strategically
located in Da Ping（大坪）and Xi Ping（西坪）, Anxi County, Quanzhou City, Fujian
Province, the PRC. The Target Group’s directors believe that since tea leaves is the most
important raw materials of the Target Group, the cultivation bases enable the Target Group to
exercise better control over quality from the initial stage of plantation and this competitive
advantage distinguishes the Target Group from its competitors which do not have their own
cultivation bases for tea plants.
The Target Group’s directors also consider that the strategic location of the cultivation
bases in Anxi County, a well-known location for growing quality Tie Guan Yin and the
source of origin of Tie Guan Yin, has a significant bearing on the Target Group’s level of
productivity and the quality of its tea leaves, which distinguishes the Target Group from its
competitors. For further details on the cultivation bases, please refer to the section headed
“Business of the Target Group – Production – Cultivation bases” in this circular.
Proven vertically integrated operating model
The Target Group employs a vertically integrated operating model in which the Target
Group directly controls key aspects of the value chain, including cultivation, production
(including processing and packaging), and sales and marketing.
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LETTER FROM THE BOARD
The Target Group relies on its own staff and the tea farmers to cultivate tea plants,
harvest tea leaves from its cultivation bases and process them into raw teas. As at the
Latest Practicable Date, the Target Group engaged 1,110 tea-farmer households to provide
cultivation and services on its tea farms under the supervision of zone supervisors. The tea
farmers are responsible for cultivating tea plants, harvesting tea leaves and processing tea
leaves to become raw teas. For further details on the tea farmers, please refer to the section
headed “Business of the Target Group – Production – Tea farmers” in this circular.
The Target Group then uses its own in-house refining and packaging facilities to
further process the raw teas into refined teas.
The Target Group has established its own brand and a broad customer base comprising
wholesalers, Chadu Customers, Direct Sales Customers and third-party retailers, to sell its
products.
The Target Group’s directors believe that the Target Group’s vertically integrated
operating model enables it to fully utilise its resources and to better control the quality of its
products. The capability to produce and sell both raw teas and refined teas at different grades
allows it flexibility to deal with various situations in terms of harvest output and market
conditions.
Extensive sales network and a two-prong marketing strategy
As at the Latest Practicable Date, the Target Group established an extensive sales
network, which spans across 22 provinces, autonomous regions and municipalities in the
PRC, and Macau, and applied a two-prong marketing strategy of promoting the sales of
both raw teas and branded refined teas to maximise the return from the natural output. To
promote its brand, Ping Shan Famous Tea, the Target Group adopted multi-faceted marketing
initiatives.
The Target Group sells a majority of its raw teas on a wholesale basis and at the
tea fairs at China Chadu Anxi Wholesale Tea Market（ 中國茶都安溪茶葉批發市場）, a
wholesale market approved by the Ministry of Agriculture of the PRC. As at the Latest
Practicable Date, the Target Group had 20 wholesalers. The Target Group has entered into
framework agreements with all of them for the sale of its raw teas. At China Chadu Anxi
Wholesale Tea Market, Chadu Customers place purchase orders with the Target Group
directly. In 2012, sales of raw teas comprised 78.4% of its total sales.
– 87 –
LETTER FROM THE BOARD
The Target Group has also established an extensive sales network for the retail sale
of its refined teas, comprising 25 retail outlets operated by the Target Group and 119 retail
outlets operated by third-party retailers as at the Latest Practicable Date. The Target Group is
still in the process of expanding this retail network. In 2012, sales of refined teas and other
related products accounted for 21.6% of the Target Group’s total sales.
The Target Group has implemented multi-faceted marketing initiatives to promote its
Ping Shan Famous Tea brand and its brand image. The Target Group launched multi-media
advertising activities, involving advertising on television, internet, magazines and outdoor
billboards. The Target Group has appointed Mr. Li Lianjie（李連杰）(also known as Mr. Jet
Li) as the spokesman of its Ping Shan Famous Tea brand for a period from 10 December
2010 to 9 December 2013, further details of which are set out in the section headed
“Business of the Target Group – Sales and Marketing – Marketing and promotional activities
– Image and brand representative” in this circular.
The Target Group’s directors believe that the highly fragmented Chinese tea market
in China has not been dominated by market leaders with strong brand recognition and that
Chinese tea producers have traditionally tended to focus on the types, quality and sources of
their tea products in their sales and marketing. The Target Group’s directors consider that,
based on the Target Group’s access to and control over upstream supply of quality raw teas,
the Target Group has the strategic advantage to develop the downstream business of retail of
branded tea products. The Target Group’s directors believe that, through the Target Group’s
vigorous marketing efforts that focus on branding and extensive sales network, the Target
Group is well-positioned to enhance its brand recognition and reputation and to compete
effectively in the highly fragmented PRC market.
Sound track record and high growth during the Track Record Period
During the Track Record Period, the Target Group achieved high growth and a sound
track record. For each of the financial years ended 31 December 2010, 2011 and 2012, the
Target Group generated turnover of approximately RMB310.4 million, RMB408.2 million
and RMB389.0 million, respectively, representing a CAGR of approximately 12.0%. The
Target Group’s net profit for each of the financial years ended 31 December 2010. 2011 and
2012 was approximately RMB126.6 million, RMB194.2 million and RMB190.6 million,
respectively, representing a CAGR of approximately 22.7%.
– 88 –
LETTER FROM THE BOARD
Furthermore, according to the Euromonitor International Report, the Target Group was
the largest raw tea leaves producer in China in terms of sales value, the second largest raw
tea leaves producer in China in terms of sales volume in 2010 and 2011, and one of the top
10 refined oolong tea producers in China in terms of retail sales volume in 2011.
The Target Group operates in a high-growth sector. According to the Euromonitor
International Report, the retail sales value of refined teas and refined oolong teas in China
has been growing at a CAGR of approximately 22.0% and 26.2%, respectively, from 2007 to
2011, and is estimated to grow at a CAGR of approximately 9.0% and 11.7%, respectively,
from 2012 to 2014. In addition, the manufacturers’ sales value of raw tea leaves and raw
oolong tea leaves in China has been growing at a CAGR of approximately 20.3% and 25.7%,
respectively, from 2007 to 2011, and is estimated to grow at a CAGR of approximately
15.1% and 17.7%, respectively, from 2012 to 2014.
In addition, the Target Group’s turnover of raw tea leaves and refined teas has been
growing at a CAGR of approximately 12.3% and 10.9%, respectively, from 2010 to 2012. In
comparison, the growth rate of the Target Group’s turnover of raw tea leaves is considered
to be in line with the sales value of the overall tea industry sector, but the growth rate of the
Target Group’s turnover of refined teas is much higher than the sales value of the overall tea
industry sector.
In light of the above, the Target Group’s directors and the Directors consider that, with
the Target Group’s vertically integrated operating model and established brand recognition
and sales network, the Target Group has been able to capture the high-growth opportunities
presented by the industry and achieve growth at a similar or higher rate than that of the
overall tea industry sector from 2010 to 2012.
Experienced management team
The Target Group’s management has strong and extensive experience in business or
the Chinese tea industry in the PRC and is dedicated to the production and marketing of its
tea products.
The Target Group’s management team has on average over 10 years of work
experience. The Target Group’s Chairman, Mr. Cai Zhenyao, who is primarily responsible for
the strategic development of the Target Group, has extensive experience in strategic planning
and general management.
The Target Group has a dedicated technical and production management team
comprising Mr. Zhou Dongwen（周東文）, the general manager of the production department
of Fujian Nature, who has extensive experience in tea tasting, blending and manufacturing
and is qualified as First Level National Tea Tasting Master（ 國家一級評茶師）which was
issued by the Ministry of Human Resources and Social Security of the PRC（中華人民共
– 89 –
LETTER FROM THE BOARD
和國人力資源和社會保障部）, and Ms. Xu Jing（徐靜）, the General Manager of Fujian
Daping, who has extensive experience in the tea industry, including tea plantation production
and management, research and development, and application and renewal of relevant
certificates and licences. Mr. Zhou and Ms. Xu are supported by a team of zone supervisors
working on cultivation, production and quality control to provide high quality products.
The Target Group’s directors believe that the Target Group’s management team has the
requisite knowledge and experience to steer the continued growth of the Target Group.
BUSINESS STRATEGIES
The Target Group’s overall business objective is to become a leading vertically integrated
producer of oolong teas in China, with established brand recognition. To achieve this objective, the
Target Group has formulated the following major business strategies:
Expand the Target Group’s cultivation bases and product offerings
The Target Group considers that its vertically integrated operating model enables
it to better control the cost and quality of the teas produced at its cultivation bases and
distinguishes it from its competitors which do not have their own cultivation bases for tea
plants. In addition to the right to exercise the Call Option and Right of First Refusal under
the Deed of Non-Competition to acquire the land use rights of the Additional Forest Lands,
the Target Group will also consider other opportunities for the acquisition of additional
cultivation bases or opportunities to enter into joint ventures, whether for Tie Guan Yin or
other Chinese teas, to expand its cultivation bases as necessary. The Target Group has entered
into a memorandum of understanding for the purchase of contracting rights in respect of
additional forest lands with a view to increasing its cultivation bases. However, no definitive
agreement has been entered into as at the Latest Practicable Date. For further details please
refer to the section headed “Management Discussion and Analysis of the Target Group –
Tentative Purchase of Contracting Rights of New Forest Lands” in this circular. In addition,
the Target Group intends to expand the range and type of its tea products to include other
varieties of oolong teas. This may be achieved by acquiring additional parcels of cultivation
bases, whether for Tie Guan Yin or other Chinese teas.
Reinforce and expand the Target Group’s sales network in the PRC and strengthen
management of its retail outlets
The Target Group believes that there is great potential with its retail business. For
each of the financial years ended 31 December 2010, 2011 and 2012, the sale of refined
teas and other related products amounted to approximately RMB68.2 million, RMB101.1
million and RMB83.9 million, respectively, representing a CAGR of approximately 10.9%.
– 90 –
LETTER FROM THE BOARD
As at the Latest Practicable Date, the Target Group had 144 retail outlets, which span across
22 provinces, autonomous regions and municipalities in the PRC, and Macau. For each
of the financial years ended 31 December 2010, 2011 and 2012, the turnover of refined
teas and other related products through the Target Group’s and third-party retail outlets, in
aggregate, amounted to approximately RMB46.2 million, RMB60.0 million and RMB47.6
million, respectively, representing a CAGR of approximately 1.5%. The Directors consider
that the Target Group has established an extensive sales network in the PRC and developing
the Target Group’s retail business would promote its Ping Shan Famous Tea brand and brand
image and should continue to be its strategic focus.
The Target Group’s extensive sales network is crucial to the success of its business.
The Target Group intends to explore opportunities in areas of the PRC not currently covered
by its sales network where the Target Group sees potential demand for its tea products.
The Target Group intends to continue to expand the Target Group’s retail sales network by
establishing by itself or through third-party retailers. The Target Group plans to increase the
number of the Target Group’s outlets and to further enhance the Target Group’s sales network
in key cities in the PRC.
After the Completion, the Enlarged Group will continue to develop its retail business
and expand its retail sales network for refined teas. To expand the retail sales network
through third-party retailers, the Enlarged Group will incur additional advertising expenses
to attract third-party retailers to sell its refined teas. On the other hand, the Enlarged Group
intends to invest in opening and operating additional retail outlets in different cities and
provinces of China. Taking into account of the financial position of the Enlarged Group as at
the Latest Practicable Date, the Enlarged Group will be able to provide the capital investment
for the expansion of the retail sales network of refined teas after the Completion. In the
event that the Enlarged Group is unable to provide the adequate capital investment for such
expansion after the Completion, the Enlarged Group may conduct fund raising activities to
finance the said expansion, such as placing of new Shares to Independent Third Parties or
loan or other credit facilities to be extended to the Company. As at the Latest Practicable
Date, the Enlarged Group has not had any discussion or negotiation in connection with any
fund raising activities for the expansion of its retail sales network for refined teas after the
Completion.
The Target Group also intends to extend its sales management system, which the
Target Group is in the process of launching, to additional retail outlets to be opened and
operated by the Target Group.
– 91 –
LETTER FROM THE BOARD
Further increase brand awareness
The Target Group intends to continue to implement multi-faceted marketing strategies
and to launch various marketing and promotional activities to further increase its brand
awareness.
BUSINESS MODEL
The Target Group employs a vertically integrated business model through which it operates
and manages its cultivation bases for tea plants, production (including processing and packaging)
and sales and marketing its tea products.
The following diagram illustrates its current business model in simplified form:
Cultivation and
processing
Production
Sales
Packaging
Refining
Raw teas
Tea leaves
Retail outlets operated
by Target Group
Third-party retailers
Direct Sales Customers
Wholesale (wholesalers and
Chadu Customers)
•
Cultivation and
processing
–
The Target Group operates and manages its cultivation
bases in Da Ping（大坪）and Xi Ping（西坪）, Anxi
County, Quanzhou City, Fujian Province, the PRC, and
has obtained or contracted for the relevant forest land
use rights in respect of its cultivation bases pursuant to
the relevant forest rights certificates or the Contracting
Agreements, respectively. The Target Group has entered
into service contracts with tea-farmer households
pursuant to which the tea farmers are responsible
for cultivating the tea plants at its cultivation bases.
Meanwhile, the Target Group also relies on its own staff
to cultivate the tea plants at its cultivation bases to a
lesser extent.
– 92 –
LETTER FROM THE BOARD
–
Tea leaves are picked and processed by the staff of the
Target Group or the tea farmers to become raw teas. The
tea farmers then return the raw teas to the Target Group.
•
Production
–
Upon receipt of the raw teas, the Target Group classifies
the raw teas into different grades. The raw teas are then
processed by the Target Group or an external processing
contractor to become refined teas. The Target Group’s
refined teas are then packaged by the Target Group.
•
Sales
–
The Target Group mainly sells its refined teas under
its Ping Shan Famous Tea（坪山名茶）brand name to
(i) customers at its own retail outlets, (ii) third-party
retailers and (iii) Direct Sales Customers. The Target
Group also sells a small portion of its refined teas as
non-branded teas to the Direct Sales Customers.
–
The Target Group sells its raw teas on a wholesale basis
to wholesalers. In addition, the Target Group sells its
raw teas to Chadu Customers at the tea fairs at China
Chadu Anxi Wholesale Tea Market（ 中國茶都安溪茶葉
批發市場）held in Anxi County, Quanzhou City, Fujian
Province, the PRC, during the four tea harvest seasons
throughout the year.
– 93 –
LETTER FROM THE BOARD
PRODUCTS
Overview
The Target Group produces and sells a range of oolong teas, in the form of both raw teas（毛
茶）and refined teas（精製茶）.
Chinese teas are broadly classified into six major varieties based on the different methods or
processes used in processing tea leaves and the characteristics of the tea produced, namely, green
teas, white teas, yellow teas, oolong teas, dark teas and black (or red) teas. There are a number of
sub-varieties within the oolong tea variety. Currently, the Target Group sells on a wholesale basis
raw teas of four sub-varieties of oolong teas: Tie Guan Yin（鐵觀音）, Mao Xie（毛蟹）, Huangjin
Gui（ 黃金桂）and Ben Shan（本山）. A portion of the Target Group’s Tie Guan Yin raw teas is sold
on a retail basis after being further processed and packaged to become currently seven different
product series of refined teas under its Ping Shan Famous Tea brand, representing approximately
17.9%, 22.9% and 20.3% of the Target Group’s turnover for each of the financial years ended 31
December 2010, 2011 and 2012, respectively.
To a lesser extent, the Target Group also sells refined teas under its Ping Shan Famous Tea
brand which are processed using Dahongpao（大紅袍）raw teas, which are sourced from thirdparty suppliers. A small portion of its Tie Guan Yin, Mao Xie, Huangjin Gui and Ben Shan is sold,
after being further processed, as non-branded teas to the Direct Sales Customers, representing
approximately 4.1%, 1.5% and 0.6% of the Target Group’s turnover for each of the financial years
ended 31 December 2010, 2011 and 2012, respectively.
In addition, to provide a comprehensive tea related product offering, the Target Group
sells, to a lesser extent, other products such as tea utensils. Starting from August 2011, the Target
Group began to sell snacks and foods manufactured by external contract manufacturers (which are
independent third parties to the Target Group) at its retail outlets.
– 94 –
LETTER FROM THE BOARD
The table below sets out the Target Group’s turnover by product segment for the periods
indicated:
Year ended 31 December
2010
2011
2012
RMB
(thousands)
% of total
turnover
RMB
(thousands)
% of total
turnover
RMB
(thousands)
% of total
turnover
Raw teas
Refined teas and
other related products
242,160
78.0
307,135
75.2
305,126
78.4
68,198
22.0
101,106
24.8
83,921
21.6
Total
310,358
100.0
408,241
100.0
389,047
100.0
Raw teas
The raw teas of the Target Group comprise the following four sub-varieties of oolong teas:
Tie Guan Yin（鐵觀音）, Mao Xie（毛蟹）, Huangjin Gui（ 黃金桂）and Ben Shan（本山）.
These four sub-varieties vary from each other in taste, appearance and aroma.
Refined teas
The refined teas of the Target Group under its Ping Shan Famous Tea brand are processed by
using Tie Guan Yin raw teas and are classified into the following seven product series:
•
PS (Ping Shan) Ecological Series (mild, natural and refreshing type)（ PS生態系列清
香型）
•
Xiang, Shan, Qing, Yi Series（鄉、山、情、義系列）
•
Ecological Brand Series（自然生態品牌系列）
•
Green and Organic Series（綠色有機系列）
•
Pure, Elegance, Courtesy, Harmony Series（純、雅、禮、和系列）
•
Selenium-enriched Tea Series（富硒茶系列）
•
Top Kung Fu Series（最工夫系列）
– 95 –
LETTER FROM THE BOARD
There are three basic flavours of the Target Group’s refined teas (other than Zens Series（悟
系列）):
•
Mild, natural and refreshing（清香型）: such as PS (Ping Shan) Ecological Series
(mild, natural and refreshing type)（ PS生態系列清香型）, Ecological Brand Series
（自然生態品牌系列）and Pure, Elegance, Courtesy, Harmony Series（純、雅、禮、和
系列）
•
Smooth and long-lingering aftertaste（韻香型）: such as Green and Organic Series（綠
色有機系列）
•
Rich and mellow（濃香型）: such as Xiang, Shan, Qing, Yi Series（鄉、山、情、義
系列）, Selenium-enriched Tea Series（富硒茶系列）and Top Kung Fu Series（最工夫
系列）
The Target Group also has the following refined teas under its Ping Shan Famous Tea brand
which are processed using Dahongpao（大紅袍）raw teas, which are sourced from third-party
suppliers:
•
Zens Series（悟系列）
The shelf life of the refined teas under the Target Group’s Ping Shan Famous Tea brand is 18
months.
The following pictures show some of the Target Group’s selected Ping Shan Famous Tea
brand products:
PS (Ping Shan) Ecological Series
(mild, natural and refreshing type)
（PS生態系列清香型）
Xiang, Shan, Qing, Yi Series
（鄉、山、情、義系列）
– 96 –
LETTER FROM THE BOARD
Ecological Brand Series
（自然生態品牌系列）
Green and Organic Series
（綠色有機系列）
Pure, Elegance, Courtesy, Harmony Series
（純、雅、禮、和系列）
Selenium-enriched Tea Series
（富硒茶系列）
Top Kung Fu Series
（最工夫系列）
Zens Series
（悟系列）
The Target Group sells a small portion of its Tie Guan Yin, Mao Xie, Huangjin Gui and
Ben Shan raw teas, after being further processed, as non-branded refined teas to the Direct Sales
Customers.
– 97 –
LETTER FROM THE BOARD
Other related products
The Target Group sells tea utensils (such as teapots and teacups). In addition, starting from
August 2011, the Target Group began to sell snacks and foods (such as tea flavoured almonds（綠
茶香杏仁）, kernels（綠茶瓜仁酥）and salty olive（鹽津橄欖）) manufactured by external contract
manufacturers (which are independent third parties to the Target Group) at its retail outlets.
SALES AND MARKETING
Sales
Raw teas
Wholesalers
The Target Group sells a majority of its raw teas to 20 wholesalers in the PRC as at the
Latest Practicable Date. The Target Group has entered into framework agreements with all of its
current wholesalers. These framework agreements are generally for a term of one year, and set
out the ordering process, delivery terms and payment terms. Each framework agreement may be
terminated either by agreement between the wholesaler and the Target Group or by notice from the
non-defaulting party if the agreement is breached in any material respect by the other party and the
purpose of the agreement cannot be achieved as a result of the breach. The wholesalers may from
time to time place bulk purchase orders for raw teas with the Target Group. The purchase orders set
out the order quantities, purchase prices, method of delivery and time for delivery. In general, the
Target Group requires its wholesalers to pay half of the purchase price as a deposit within two days
after the Target Group confirms the relevant purchase order and the remaining half before the Target
Group delivers its raw teas to them. Sales payments are normally settled through bank transfers or
cheques. The Target Group recognises its sales to the wholesalers when the Target Group delivers
its raw teas to them and the title to such raw teas passes to them without recourse. The Target
Group’s directors have confirmed that the Target Group does not provide any subsidies or sales
rebates to its wholesalers.
No minimum annual purchase amount or purchase price for the Target Group’s wholesalers
is set out in these framework agreements. There are no restrictions on the locations where its
wholesalers can on-sell the Target Group’s raw teas.
– 98 –
LETTER FROM THE BOARD
The Target Group’s directors have confirmed that its five largest wholesalers for the financial
year ended 31 December 2012 with whom the Target Group has entered into framework agreements
are independent third parties to the Target Group.
For each of the financial years ended 31 December 2010, 2011 and 2012, 55.2%, 48.0% and
63.5% of its total turnover, respectively, were made to its wholesalers. For each of the financial
years ended 31 December 2010, 2011 and 2012, the Target Group had 26, 20 and 20 wholesalers.
The Target Group’s directors have confirmed that all of the Target Group’s wholesalers in the Track
Record Period and as at the Latest Practicable Date were independent third parties to the Target
Group.
China Chadu Anxi Wholesale Tea Market（ 中國茶都安溪茶葉批發市場）
Apart from selling its raw teas to wholesalers, the Target Group also sells its raw teas to
Chadu Customers at the tea fairs at China Chadu Anxi Wholesale Tea Market（ 中國茶都安溪茶葉
批發市場）during the four tea harvest seasons throughout the year. China Chadu Anxi Wholesale
Tea Market is a wholesale market approved by the Ministry of Agriculture of the PRC. At China
Chadu Anxi Wholesale Tea Market, Chadu Customers place purchase orders with the Target Group
directly.
Through participation at the tea fairs at China Chadu Anxi Wholesale Tea Market during the
tea harvest seasons, the Target Group is able to develop key account wholesalers and collect market
information and the production information of its competitors as well as enhance its exposure to the
industry.
For each of the financial years ended 31 December 2010, 2011 and 2012, 22.8%, 27.2%
and 14.9% of the Target Group’s total turnover, respectively, was generated from purchase orders
received by the Target Group at the tea fairs at China Chadu Anxi Wholesale Tea Market.
– 99 –
LETTER FROM THE BOARD
Refined teas
The Target Group mainly sells its refined teas to (i) customers at its own retail outlets, (ii)
third-party retailers, and (iii) the Direct Sales Customers.
As at 31 December 2010, 2011 and 2012, the Target Group had 60, 142 and 146 retail
outlets, respectively. As at 31 December 2010, 2011 and 2012, 13, 36 and 27 retail outlets were
operated by the Target Group, whereas 47, 106 and 119 retail outlets were operated by third-party
retailers. Further details on the third-party retailers are set out in the section headed “Business of
the Target Group – Sales and Marketing – Sales – Refined Teas – Retail outlets operated by thirdparty retailers” in this circular.
The retail outlets operated by the Target Group are speciality stores at which the Target
Group sells its refined teas and other tea products exclusively.
The Target Group intends to continue to expand its retail sales network, further details of
which are set out in the section headed “Business of the Target Group – Business Strategies –
Reinforce and expand the Target Group’s sales network in the PRC and strengthen management of
its retail outlets” in this circular.
For each of the financial years ended 31 December 2010, 2011 and 2012, 14.9%, 14.7% and
12.3% of the Target Group’s total turnover, respectively, was generated from retail sales.
Retail outlets operated by third-party retailers
The third party retailers are granted the rights to sell the Target Group’s refined teas under
Ping Shan Famous Tea brand for a specified period of time. As at 31 December 2010, 2011 and
2012, the Target Group had 47, 106 and 119 retail outlets operated by third-party retailers in the
PRC, respectively.
The Target Group’s directors have confirmed that all the third-party retail outlets in the Track
Record Period and as at the Latest Practicable Date were operated by independent third parties to
the Target Group.
– 100 –
LETTER FROM THE BOARD
Principal terms of retail sales agreements with third-party retailers
The Target Group enters into retail sales agreements with each of the third-party retailers
whereby the Target Group grants them the right to sell the Target Group’s refined teas under its Ping
Shan Famous Tea brand for a specified period of time. The retail sales agreements generally include
the following principal terms:
•
Duration – Each retail sales agreement generally has a term of three years subject to
renewal by mutual agreement within one month before its expiry.
•
Product exclusivity – The third-party retailers selling the Target Group’s refined teas
are not permitted to sell other brands of Tie Guan Yin products.
•
Payment and credit terms – The Target Group generally requires third-party retailers
to make payments before the Target Group delivers its refined teas to them.
•
Return of products – The Target Group prohibits third-party retailers from returning
the Target Group’s refined teas to it other than for quality defects, which are assessed
by the Target Group’s quality control department.
•
Termination rights – The Target Group has the right to terminate each retail sales
agreement if the relevant third-party retailer (i) breaches any of the terms of the
relevant retail sales agreement or the Target Group’s sales and marketing policies;
(ii) uses the Target Group’s trademark other than for the purpose of the retail sales
agreement or licenses the right to use the Target Group’s trademark to third parties
without the Target Group’s written consent; or (iii) sells counterfeit products or thirdparty tea products or seriously harms the image of the Target Group or its products. In
addition, each retail sales agreement can be terminated by mutual agreement between
the parties.
– 101 –
LETTER FROM THE BOARD
Sales returns policies
The Target Group’s sales returns policies do not allow its customers to return any products
(including any excess stock purchased) to it other than for incorrect types or quantity of products
or quality defects, which are assessed by the Target Group’s sales department and/or production
department. The Target Group’s directors have confirmed that the Target Group did not receive any
requests for the return of defective products from its customers during the Track Record Period. The
Target Group does not have any arrangements with its customers in respect of obsolete stock.
Customers of the Target Group
The following table sets out a breakdown of the Target Group’s revenue by customer
category during the Track Record Period:
Year ended 31 December
2010
2011
2012
RMB
(thousands)
% of total
turnover
RMB
(thousands)
% of total
turnover
RMB
(thousands)
% of total
turnover
Raw teas
Wholesalers
Chadu Customers
171,265
70,895
55.2
22.8
196,183
110,952
48.0
27.2
247,204
57,922
63.5
14.9
Sub-total
242,160
78.0
307,135
75.2
305,126
78.4
Refined teas and
other related products
Own retail outlets
Third-party retail outlets
Direct Sales Customers
13,057
33,166
21,975
4.2
10.7
7.1
29,599
30,413
41,094
7.3
7.4
10.1
20,411
27,200
36,310
5.3
7.0
9.3
Sub-total
68,198
22.0
101,106
24.8
83,921
21.6
310,358
100.0
408,241
100.0
389,047
100.0
Total
For each of the financial years ended 31 December 2010, 2011 and 2012, the Target Group’s
single largest customer accounted for 4.2%, 6.9% and 6.9% of the Target Group’s total turnover,
respectively, and its five largest customers, in aggregate, accounted for 18.5%, 17.9% and 22.4%
of its total turnover, during the same periods, respectively. None of the Target Group’s directors or
shareholders (which to the knowledge of the Target Group’s directors owns more than 5% of the
issued share capital of the Target Company), or their respective associates, had any interest in any
of the Target Group’s five largest customers during the Track Record Period.
– 102 –
LETTER FROM THE BOARD
Marketing
The Ping Shan Famous Tea brand
The Target Group markets its refined teas under its Ping Shan Famous Tea（坪山名茶）brand
name and the logo of
. The Target Group seeks to position its refined teas as a high quality brand
in China. The Target Group’s directors believe that the Target Group’s Ping Shan Famous Tea brand
is critical to its success in the Chinese tea market in China.
The Ping Shan Famous Tea brand name indicates that the Target Group’s refined teas are
sourced from tea plants at its cultivation bases in Da Ping（大坪）and Xi Ping（西坪）, Anxi
County, Fujian Province, the PRC. With its terroir including a cool climate, adequate rainfall, high
frequency of cloud and mist, fertile soil, suitable acidity of soil, moderate sunshine and huge daynight temperature differences, all of which help the accumulation of the products of photosynthesis,
Anxi County is a well-known location for growing quality Tie Guan Yin and is the source of origin
of Tie Guan Yin. According to the Regulations on the Management and Use of Identification Label
on Anxi Tikuanyin Tea（《安溪鐵觀音證明商標使用管理規則》）, enterprises or individuals who
produce and sell Tie Guan Yin from recognised sources of production (which include Da Ping
and Xi Ping) and who satisfy the requirements relating to picking and processing techniques and
the quality of Tie Guan Yin have the right to apply for the use of the Identification Label on Anxi
Tikuanyin Tea（安溪鐵觀音證明商標）(a geographic mark（中國地理標誌）) on their Tie Guan
Yin products. The Target Group has been granted by the Head Office of the Anxi Tea Industry,
Fujian（安溪縣茶葉總公司）, an enterprise established by the Anxi County People’s Government,
the right to use the Identification Label on Anxi Tikuanyin Tea（安溪鐵觀音證明商標）on its Tie
Guan Yin products until December 2013.
The Target Group’s logo has a dragon on both sides and the number 1725, which together
symbolise the strategic location of its cultivation bases in China and the year to which the origin of
Tie Guan Yin can be traced. It has been suggested that Tie Guan Yin tea plants were first discovered
in Anxi County, Quanzhou City, Fujian Province, the PRC, in the 18th century.
The Target Group has implemented multi-faceted marketing strategies to promote its Ping
Shan Famous Tea brand and its brand image, further details of which are set out in the section
headed “Business of the Target Group – Sales and Marketing – Marketing and promotional
activities” in this circular.
– 103 –
LETTER FROM THE BOARD
Marketing and promotional activities
The Target Group’s marketing and promotional activities generally include the following:
Image and brand representative
The Target Group has entered into an arrangement for the appointment of Mr. Li
Lianjie（李連杰）(also known as Mr. Jet Li) (a Chinese martial artist, actor, film producer,
martial arts champion, and international film star) as the spokesman of its Ping Shan Famous
Tea brand for a period from 10 December 2010 to 9 December 2013. Under the arrangement,
the Target Group is entitled to have Mr. Li Lianjie participate in the production of one
television commercial and to hold press conference on one occasion with the participation
of Mr. Li Lianjie. The Target Group is also entitled to broadcast television advertisements
featuring Mr. Li Lianjie and to use the image of Mr. Li Lianjie for the promotion of its
Ping Shan Famous Tea brand during such period. The Target Group’s directors believe that
Mr. Li Lianjie’s fame, healthy image and significant popularity project the desired image
that the Target Group wants to be associated with its Ping Shan Famous Tea brand. The
Target Group’s directors further believe that the use of a celebrity as its image and brand
representative is effective in attracting certain target consumer groups to its Ping Shan
Famous Tea brand, which may result in increased market awareness and acceptance of its
brand.
Television advertising
The Target Group’s directors believe that television commercials are generally
considered to be the most effective medium for mass-market advertising. The Target Group
primarily advertises its Ping Shan Famous Tea brand on television networks.
Outdoor advertising
In order to increase mass appeal of its Ping Shan Famous Tea brand, the Target
Group markets and promotes its Ping Shan Famous Tea brand through the use of outdoor
advertising, such as billboards along highways and on buses.
– 104 –
LETTER FROM THE BOARD
Other media advertising
The Target Group also advertises its Ping Shan Famous Tea brand on Internet
websites.
For each of the financial years ended 31 December 2010, 2011 and 2012, the Target
Group spent approximately RMB 7.8 million, RMB 9.1 million and RMB 5.9 million,
respectively, on advertising and promotional activities, representing 2.5%, 2.2% and 1.5% of
its total turnover for the same periods, respectively.
COMPETITION
The Target Group faces competition in many aspects of its business. The Target Group’s
directors consider that the Target Group competes against domestic and international producers of
oolong teas based on product range, brand recognition and reputation, product quality and price, as
well as the coverage and effectiveness of the sales network.
The Target Group’s directors believe that, as consumers have more choices when it comes to
teas and beverages and become more conscious of the quality of food and beverages in the PRC,
quality and brand reputation are becoming increasingly important for competing successfully in
the oolong tea market in China. The Target Group’s directors consider that the strategic location of
its cultivation bases in Da Ping and Xi Ping enables it to produce quality oolong tea products with
certain characteristics to meet consumer demand.
The oolong tea market in China is highly fragmented. The Target Group’s directors believe
that the Target Group’s vertically integrated business model enables it to better control the cost and
quality of the teas produced at its cultivation bases and distinguishes the Target Group from some
of its competitors which do not have their own cultivation bases for tea plants. In addition, the
Target Group’s directors believe that the highly fragmented oolong tea market in China has not been
dominated by market leaders with strong brand reputation. The Target Group’s directors consider
that, through its vigorous marketing efforts and extensive sales network, the Target Group is wellpositioned to enhance its brand recognition and reputation and to compete effectively in the PRC
market.
– 105 –
LETTER FROM THE BOARD
RAW MATERIALS AND SUPPLIERS
Raw materials
The principal raw materials used by the Target Group are fertilisers, pesticides, and
packaging materials and certain raw teas for the production of higher grades of refined teas. For
each of the financial years ended 31 December 2010, 2011 and 2012, raw materials costs accounted
for 13.6%, 12.7% and 12.6% of the Target Group’s total cost of sales, respectively.
The Target Group’s directors have confirmed that, during the Track Record Period, the
Target Group did not experience any shortage of supply of raw materials that affected its normal
operation. Since the raw materials used by the Target Group are widely available in the market,
the Target Group’s directors consider that there is no material risk of supply shortage. The Target
Group’s directors believe that the Target Group can replace one supplier with another with no undue
difficulty and may opt to purchase from a wide range of suppliers.
Suppliers
The Target Group’s suppliers include suppliers of raw materials, as well as (i) tea farmers
who have entered into service contracts with the Target Group to provide cultivation services, and
(ii) an external processing contractor which is engaged by the Target Group to remove stems from
its raw teas. The external processing contractor is an independent third party to the Target Group.
Under the processing agreement, the Target Group provides the raw tea leaves to the processing
contractor, which returns the processed tea leaves to the Target Group in return for service fees.
The service fees are determined on a case-by-case basis and stipulated in the manufacturing orders
and are payable within 20 days after delivery of the processed tea leaves. The Target Group’s
directors have confirmed that the Target Group can replace the processing contractor with no undue
difficulty.
For each of the financial years ended 31 December 2010, 2011 and 2012, the Target Group’s
single largest supplier accounted for 9.4%, 11.7% and 10.6% of the Target Group’s total cost of
sales, respectively, and its five largest suppliers, in aggregate, accounted for 14.1%, 13.4% and
12.2% of its total cost of sales, during the same periods, respectively. None of the Target Group’s
directors or shareholders (which to the knowledge of the Target Group’s directors owns more than
5% of the issued share capital of the Target Company), or their respective associates, had any
interest in any of its five largest suppliers during the Track Record Period.
– 106 –
LETTER FROM THE BOARD
PRODUCTION
Cultivation bases
The Target Group’s cultivation bases are all strategically located in Da Ping（大坪）and Xi
Ping（西坪）, Anxi County, Quanzhou City, Fujian Province, the PRC. With its terroir including
a cool climate, adequate rainfall, high frequency of cloud and mist, fertile soil, suitable acidity
of soil, moderate sunshine and huge day-night temperature differences, all of which help the
accumulation of the products of photosynthesis, Anxi County is a well-known location for growing
quality Tie Guan Yin and is the source of origin of Tie Guan Yin. The Target Group’s directors
consider that the strategic location of the Target Group’s cultivation bases has a significant bearing
on the level of productivity and the quality of tea leaves.
When selecting cultivation bases, the Target Group considered the proximity to its existing
cultivation bases, centralised locations, optimal cultivation environment for tea plants (including
climate, soil quality, drainage and irrigation), quality and varieties of tea plants and adequate supply
of labor of tea farmers.
The Target Group’s Tie Guan Yin（鐵觀音）and Ben Shan（本山）tea plants are mainly
cultivated at its cultivation base in Da Ping and Xi Ping, while its Mao Xie（毛蟹）and Huangjin
Gui（ 黃金桂）tea plants are mainly cultivated at its cultivation base in Da Ping.
770 mu Forest Lands
The Target Group started its tea cultivation business upon the establishment of its major
subsidiary, Fujian Nature, in 2007. On 20 September 2007, Fujian Nature and Mr. Cai Yanghang
acquired 80% and 20% of the equity interests in Fujian Daping from the then sole shareholder of
Fujian Daping (an independent third party to the Target Group and the Group) for a consideration of
RMB960,000 and RMB240,000, respectively, based on the then registered capital of Fujian Daping.
On 23 August 2008, Fujian Nature acquired the remaining 20% equity interests in Fujian Daping
from Mr. Cai Yanghang for a consideration of RMB240,000, which was equal to 20% of the then
registered capital of Fujian Daping. After the transfer, Fujian Daping was wholly-owned by Fujian
Nature.
In June 2007, before Fujian Daping became a subsidiary of the Target Group, Fujian
Daping entered into an asset transfer agreement with the then sole shareholder of Fujian Daping
(an independent third party to the Target Group and the Group) to acquire, among others, the land
use rights of the 770 mu Forest Lands for a consideration of RMB1.46 million. The Target Group
acquired the land use rights of the 770 mu Forest Lands when Fujian Daping became a subsidiary of
the Target Group in 2007. In 2008, the Target Group obtained the 770 mu Forest Rights Certificate
– 107 –
LETTER FROM THE BOARD
issued by the government of Anxi County in respect of the entire 770 mu Forest Lands, of which
72 mu falls under the economical forest lands and 698 mu falls under protective forest lands（防
護林）, and derived its incomes, among others, from the tea cultivation on the 72 mu economical
forest lands since then. Under the 770 mu Forest Rights Certificate, the Target Group is allowed to
conduct tea plantation and tea leaves harvest on the 72 mu economical forest lands only whereas
for the 698 mu protective forest lands, the Target Group is responsible for the preservation of
the plantations for the purposes of protection of the forest lands as opposed to tea leaves harvest.
Pursuant to the 770 mu Forest Rights Certificate, the Target Group owns the land use rights, the
ownership and use right of the trees on the entire 770 mu Forest Lands while the relevant villagers
collectively own the 770 mu Forest Lands under the name of the relevant village. The duration of
the 770 mu Forest Rights Certificate is 40 years and will expire in the year 2048. As advised by
our PRC Legal Advisers, there are no restrictions which would interfere with the Target Group’s
land use rights, the ownership and use rights of the tea trees thereon, but the Target Group shall
not unilaterally change the use of the forest lands without the prior approval of the relevant
Governmental Authorities. The Target Group has its own staff to operate the tea plantation on the 72
mu economical forest lands while the Target Group does not employ the 698 mu protective forest
lands for tea leaves harvest. Since the Target Group uses the 770 mu Forest Lands in accordance
with the 770 mu Forest Rights Certificate, the current use of the 770 mu Forest Lands complies
with the applicable laws and regulations in the PRC and does not constitute any unilateral change of
the use of the forest lands without the relevant government approval.
In addition to the above lands, the Target Group’s tea cultivation bases comprise two
categories of collectively-owned forest lands, namely the 29.5K mu Economical Forest Lands and
8K mu Ecological Forest Lands.
29.5K mu Economical Forest Lands
The Target Group, through Fujian Daping, its wholly-owned subsidiary, entered into the
Contracting Agreements with the relevant village committees, pursuant to which, the Target
Group agreed to purchase from the relevant village committees the use rights of the tea trees and
plantations at a fixed rate and the land use rights at an annual fee for the entire contracting period in
respect of the 29.5K mu Economical Forest Lands and the 8K mu Ecological Forest Lands, before
the Target Group obtained the 29.5K mu Forest Rights Certificates in 2011.
In order to apply for the 29.5K mu Forest Rights Certificates, the Target Group, through
Fujian Daping, entered into the Transfer Agreements, pursuant to which the Target Group acquired
the land use rights of the 29.5K mu Economical Forest Lands, the ownership and use rights of the
tea trees thereon by paying a fixed rate for the use rights of the tea trees and plantations and an
annual fee for the land use rights. Upon the execution of the Transfer Agreements, the provisions
under the Contracting Agreements in relation to the 29.5K mu Economical Forest Lands are
– 108 –
LETTER FROM THE BOARD
invalid and severed from the Contracting Agreements while the provisions in relation to the 8K
mu Ecological Forest Lands remain in full force and effect and will not be affected by the invalid
provisions or by their severance from the Contracting Agreements. Such remaining effective
provisions were then set out in the amended and restated contracting agreements. In accordance
with the 29.5K mu Forest Rights Certificates, the Target Group owned the land use rights, and the
ownership and use rights of tea trees and the Target Group is allowed to plant tea trees on the 29.5K
mu Economical Forest Lands. Accordingly, the Target Group has the legal rights to use the 29.5K
mu Economical Forest Lands for tea cultivation purposes. The duration of the 29.5K mu Forest
Rights Certificates is 30 years and will expire in the year 2041. The forest land ownership rights
（林地所有權）are collectively owned by the villagers under the name of the relevant villages. As
advised by our PRC Legal Advisers, there are no restrictions which would interfere with the Target
Group’s land use rights, the ownership and use rights of the tea trees thereon, but the Target Group
shall not unilaterally change the use of the forest land without the prior approval of the relevant
Governmental Authorities. The Target Group uses the 29.5K mu Economical Forest Lands for tea
cultivation purposes which are consistent with and in compliance with the 29.5K mu Forest Rights
Certificates and do not constitute any unilateral change of the use of the forest lands without the
prior approval of the relevant Governmental Authorities.
Before the 29.5K mu Forest Rights Certificates were issued under the name of Fujian
Daping, pursuant to the Contracting Agreements and the Transfer Agreements, the Target Group
acquired the land use rights of the 29.5K mu Economical Forest Lands, the ownership and use
rights of the tea trees, harvested the tea leaves thereon and processed them for sale. Accordingly,
the Target Group derived its income from the tea cultivation on the 29.5K mu Economical Forest
Lands. After the 29.5K mu Forest Rights Certificates were issued under the name of Fujian
Daping, the Target Group recognized the tea trees on the 29.5K mu Economical Forest Lands as its
biological assets and derives incomes from the sales of tea leaves thereon.
– 109 –
LETTER FROM THE BOARD
8K mu Ecological Forest Lands
With respect to the 8K mu Ecological Forest Lands, the Contracting Agreements contain,
among others, the following major terms and conditions:–
Dates of the
Contracting Agreements
2 July 2007, 13 September 2009,
28 September 2011,
24 October 2012 (Note 3) ,
21 December 2012 (Note 4)
Location
Contracting parties
Pingzhou Village
（萍州村）
Pingzhou Village
Committee and
Fujian Daping
30 June 2008, 13 September 2009,
28 September 2011,
24 October 2012 (Note 3) ,
21 December 2012 (Note 4)
Area
(mu)
Duration range
1,462.0
1 July 2007 –
30 June 2048
7,310
1,907.0
1 July 2008 –
30 June 2048
9,535
Contracting fees for
the land use rights of
the cultivation land
(Notes 1 & 2)
RMB8 per mu per
RMB80 per mu payable in
three installments, namely by annum payable by
31 December each year
31 December 2009,
30 June 2010 and
31 December 2015
RMB8 per mu per
RMB80 per mu payable in
three installments, namely by annum payable by
31 December each year
31 December 2009,
30 June 2010 and
31 December 2015
13 March 2010 –
12 March 2060
6,435
10 March 2011 –
9 March 2060
9,035
RMB8 per mu per
RMB80 per mu payable in
three installments, namely by annum payable by
31 December each year
31 March 2011,
30 June 2011 and
31 December 2011
Da Ping Village
（大坪村）
Daping Village
Committee and
Fujian Daping
2,016.3
1 January 2009 –
31 December 2038
13 March 2010, 10 March 2011,
28 September 2011,
25 October 2012,
21 December 2012 (Note 4)
Chishui Village
（赤水村）
Chishui Village
Committee and
Fujian Daping
1,287.0
1,807.0
Note 1:
Contracting fees for
the use of tea trees and
plantations (Notes 1 & 2)
10,081.5
25 December 2008,
13 September 2009,
28 September 2011,
24 October 2012 (Note 3) ,
21 December 2012 (Note 4)
Total
Consideration for
applying for forest
lands certificates
(Note 2)
RMB’000
8,479.3
42,396.5
Pursuant to the Contracting Agreements, the relevant villagers collectively own the 8K mu Ecological
Forest Lands under the name of the relevant villages and the Target Group acquired the rights to operate
and derive incomes or benefits from the plantation on the 8K mu Ecological Forest Lands by paying
the contracting fees which are charged separately for the use of the tea trees and plantations as well
as the use of the cultivation land itself. During the term of Contracting Agreements, with respect to
the contracting fees for the use of the tea trees and plantation, the Target Group can use the tea trees
without any further payments after the full settlement of the three installments. With respect to the
contracting fees for the use of the cultivation land itself, the Target Group has agreed to pay annual
contracting fees for the use of such cultivation lands.
Note 2:
The consideration and the contracting fees which have become due have been paid in full to the relevant
village committees in accordance with each of the Contracting Agreements.
– 110 –
LETTER FROM THE BOARD
Note 3:
The contracting agreements dated 2 July 2007, 30 June 2008 and 25 December 2008 were superseded
by the contracting agreements dated 13 September 2009. The aforesaid contracting agreements were
executed in order to formalize and confirm the contracting arrangement previously agreed between
the Target Group and the relevant village committees, among which, the contracting period under
the contracting agreement dated 2 July 2007 commenced one day earlier than the date of the said
contracting agreement.
Note 4:
The amended and restated contracting agreements dated 21 December 2012 superseded all the previous
contracting agreements in order to formalize and confirm the contracting agreements previously agreed
between the Target Group and the relevant village committees.
Under each of the Contracting Agreements above, the Target Group has the right to operate
all the plantations on the forest lands and is entitled to the incomes derived therefrom. Upon
the expiry of the term, the Target Group is entitled to the right of first refusal to the contracting
rights. The relevant village committee has agreed to compensate the Target Group for all the losses
(including expected profits) arising from the fact that the relevant forest rights certificates have
not been obtained, the Governmental Authority demands the return of the forest lands, or without
the prior consent from the Target Group, the relevant village committee has contracted, leased,
transferred or otherwise to a third party such that the Target Group is unable to use the respective
lands to exercise its rights to operate（經營權）and to derive incomes or benefits therefrom（收益
權）.
For the 8K mu Ecological Forest Lands, since it is in close proximity to the 29.5K mu
Economical Forest Lands, it is used for better management and protection of the 29.5K mu
Economical Forest Lands, as opposed to tea leaves harvest, and to prevent the land from being used
by third parties in ways that would adversely affect the 29.5K mu Economical Forest Lands. For
historical reasons, which are unknown to the Target Group, the 8K mu Ecological Forest Lands
had been converted into tea plantation without the relevant government approval well before the
execution of the Contracting Agreements. In order to impose better control over the use of the
8K mu Ecological Forest Lands and restrict any third party (including the villagers or farmers)
from mis-using the 8K mu Ecological Forest Lands which would adversely affect the 29.5K mu
Economical Forest Lands in future, the Target Group acquired the land use rights of the 8K mu
Ecological Forest Lands from the relevant village committees.
Pursuant to the Contracting Agreements, the contracting fees for the use of tea plantation and
the land use rights of the cultivation land payable every year is less than 1% of the Target Group’s
profit for each of the years ended 31 December 2010, 2011 and 2012. The Company is fully aware
of the fees under the Contracting Agreements since the commencement of the negotiations among
the Purchaser, the Company and the Vendors in respect of the Acquisition, and the Consideration
was arrived at after arm’s length negotiations thereof. Before the issue of relevant forest right
certificates of the 8K mu Ecological Forest Lands, such lands are intended to be used by the
Group for their original purpose being better management and protection of the entire cultivation
– 111 –
LETTER FROM THE BOARD
bases and to prevent the land from being used by third parties in ways that would adversely affect
the 29.5K mu Economical Forest Lands. Should forest rights certificates be obtained for the 8K
mu Ecological Forest Lands, the Group will proceed with the tea leaves harvest on the 8K mu
Ecological Forest Lands and will be entitled to income derived therefrom. In consideration of the
relatively low amount of the contracting fees, the protective use of the 8K mu Ecological Forest
Lands and potential incomes derived therefrom, the Board is of the view that the Consideration is
still fair and reasonable even if the Group has to continue bearing the fees under the Contracting
Agreements.
To the knowledge of the Target Group, the related village committees have not obtained
government approvals for conversion of the 8K mu Ecological Forest Lands to the use of tea
plantation and the corresponding forest rights certificates. The relevant village committees have
submitted their applications for the conversion of land use and the corresponding forest rights
certificates to the Bureau of Forestry of the Anxi County which will seek the approval from higher
level of Governmental Authorities. This will take a considerable amount of time which is difficult to
estimate at this stage.
Legal implication in relation to the Contracting Agreements
According to Article 52 of the Contract Law of the PRC, a contract will be held
unenforceable and void if the contract violates any mandatory rules under the relevant laws or
administrative regulations. The approval for the conversion of the 8K mu Ecological Forest Lands
into economical forest lands which must be granted by the relevant Governmental Authorities of
the provincial and State Council level has not been obtained in accordance with the relevant forest
law while the village committees entered into the Contracting Agreements with the Target Group in
respect of the 8K mu Ecological Forest Lands. As such, the Contracting Agreements may be held
unenforceable and void by the People’s Court. Similarly, according to Article 6 of the Property
Law of the PRC, the creation, change or transfer of the rights of non-movable properties requires
registration. Without the registration of the land use rights of the 8K mu Ecological Forest Lands,
the ownership and the use rights of the trees thereon, the Target Group is not protected against a
bona fide third party in the event of a Third Party Occurrence.
In the event that the Contracting Agreements were held unenforceable and void or there
would be any Third Party Occurrence, the Target Group shall return the respective 8K mu
Ecological Forest Lands to the relevant village committees or the bona fide third party and the
village committees shall return the contracting consideration to the Target Group.
– 112 –
LETTER FROM THE BOARD
Legal consequences and risks in relation to the Target Group’s operations
In accordance with Article 48 of Law of the PRC on the Contracting of Rural Land《中華人
民共和國農村土地承包法》, where the contract-letting party（發包方）contracts rural land to units
or individuals other than those of the collective economic organization（集體經濟組織）concerned,
the prior consent of not less than two-thirds of the members at a villagers assembly, or not less than
two-thirds of the villagers’ representatives of the collective economic organization concerned, and
the approval of the township (town) government shall be obtained.
As advised by our PRC Legal Advisers, according to the Contracting Agreements, which
have been approved by more than two thirds of the members of relevant village committees and the
township government of such village, the Target Group has the rights to operate and is entitled to
the incomes derived from the 8K mu Ecological Forest Lands until the Contracting Agreements are
held unenforceable and void or the Third Party Occurrence occurs. With respect to the Third Party
Occurrence, the approval of the conversion of use of the 8K mu Ecological Forest Lands must first
be obtained before the grant of the relevant forest rights certificate. To the best knowledge of the
Target Group, the approval of the conversion of the land use of the 8K mu Ecological Forest Lands
into tea plantation has not been obtained by any third party, and it is unlikely that any third party
had obtained the forest rights certificates in respect of the 8K mu Ecological Forest Lands before
the Target Group does. Accordingly, the risk of the Third Party Occurrence would be remote. As at
the Latest Practicable Date, the Contracting Agreements have not been held unenforceable and void
and the Third Party Occurrence has not occurred. As advised by our PRC Legal Advisers, the sales
of tea leaves obtained thereon by the Target Group before the occurrence of the aforesaid events has
not violated any PRC rules or regulations.
Furthermore, as advised by our PRC Legal Advisers, according to the forest rights
certificates provided by the relevant village committees, the 8K mu Ecological Forest Lands are
collectively owned by such relevant village committees. As such, the relevant village committees
shall be responsible for any unilateral conversion of use of the 8K mu Ecological Forest Lands
without the required government approval under the Forestry Law Regulation.
As further advised by our PRC Legal Advisers, the relevant village committees should be
the parties who will be directly challenged by the relevant Governmental Authorities and therefore
should be directly responsible for the legal defects of the 8K mu Ecological Forest Lands. In other
words, the business operation of the Target Group will not be directly challenged by the relevant
Governmental Authorities which, in turn, will not directly compel Fujian Daping to terminate
its contracting and operation rights under the Contracting Agreements in respect of the 8K mu
Ecological Forest Lands.
– 113 –
LETTER FROM THE BOARD
According to Article 58 of the Contract Law of the PRC, after a contract becomes void or
is rescinded, any property acquired pursuant to the contract shall be returned. If it is impossible
or unnecessary to return the property, compensation shall be made at an estimated price. The
defaulting party, which are held to contribute to the contract being void or rescinded, shall
compensate the other party for the losses caused by the default. If both parties are in default,
they shall bear their respective responsibilities. As advised by our PRC Legal Advisers, since the
unapproved conversion of the land use of the 8K mu Ecological Forest Lands into tea plantation is
the basis of the unenforceability and voidance of the Contracting Agreements, the relevant village
committees are likely to be held by the People’s Court to be the defaulting parties and shall return
the contracting consideration to the Target Group. If the Target Group has incurred any losses
arising from the Contracting Agreements being held unenforceable and void, the relevant village
committees should be fully responsible for the said losses. In light of the aforesaid, as further
advised by our PRC Legal Advisers, the Target Group should not be regarded as the defaulting party
contributing to the Contracting Agreements being unenforceable and void, albeit this depends on
the ruling of the People’s Court.
In addition, the directors of the Target Group have confirmed that there are no penalties
imposed or court orders received in respect of the 8K mu Ecological Forest Lands as at the Latest
Practicable Date. In view of that the impact of the 8K mu Ecological Forest Lands to the Target
Group’s business and operation is not material and the 8K mu Ecological Forest Lands are not
recognized as biological assets owing to the relevant forest rights certificates yet to be obtained, the
8K mu Ecological Forest Lands and the benefits arising therefrom are not regarded as a substantial
part of the property, assets and turnover. Accordingly, the probable loss of the rights over the 8K mu
Ecological Forest Lands would not lead to an event of default under the Convertible Bonds.
In view of the above, the Directors consider that it is unlikely to have any legal consequences
that would materially affect the operation of the Target Group.
Possible financial and operational impact arising from the legal defects of the 8K mu
Ecological Forest Lands
To the best knowledge of the Directors, there is sufficient supply of raw tea leaves near the
cultivation bases of the Target Group. Notwithstanding that the Contracting Agreements may be
held unenforceable and void or not, the Target Group can purchase the raw tea leaves from the
farmers nearby as an alternative source.
– 114 –
LETTER FROM THE BOARD
As raw tea leaves are considered homogeneous within the same category and when picked
from nearby cultivation bases, the Target Group is of the view that the raw tea leaves grown on the
8K mu Ecological Forest Lands are comparable with the raw tea leaves provided by tea farmers
from other cultivation bases nearby. Assuming the operating capacity of the Target Group and
market condition remain the same as those in 2012, based on the composition of each kind of tea
leaves cultivated on the 8K mu Ecological Forest Lands, the directors of the Target Group estimate
that a maximum additional cost of approximately RMB9.8 million per annum will be incurred,
representing approximately 2.5% and 5.2% of the total turnover and net profit after taxation of the
Target Group for the year ended 31 December 2012, respectively.
With respect to the turnover and profit attributable to the 8K mu Ecological Forest Lands,
to the best estimate of the directors of the Target Group, albeit the difficulties in segregating
from each other the amount and type of tea leaves extracted from the 8K mu Ecological Forest
Lands and 29.5K mu Economical Forest Lands, the maximum impact on the turnover in respect
of the 8K mu Ecological Forest Lands for the three years ended 31 December 2012 is estimated
to be approximately RMB51.8 million , RMB70.6 million and RMB70.9 million, respectively,
representing approximately 16.7%, 17.3% and 18.2% of the total turnover of the Target Group for
the same periods. The net profit in respect of the 8K mu Ecological Forest Lands for the three years
ended 31 December 2012 is estimated to be approximately RMB24.3 million, RMB34.0 million
and RMB33.0 million, respectively, representing approximately 19.2%, 17.5% and 17.3% of the net
profit of the Target Group for the same periods.
In the event that the Contracting Agreements were held unenforceable and void and the
8K mu Ecological Forest Lands are returned to the relevant village committees, the Target Group
would have lost its dominant control over the 8K mu Ecological Forest Lands. However, since
the nature of the 8K mu Ecological Forest Lands is protective forest lands, the relevant village
committees shall maintain the 8K mu Ecological Forest Lands in a condition not to be detrimental
to both the 8K mu Ecological Forest Lands and the 29.5K mu Economical Forest Lands which
are in close proximity to each other. Such arrangement would still serve the original purpose of
acquiring the 8K mu Ecological Forest Lands being better management and protection of the
29.5K mu Economical Forest Lands though the Target Group may have attained a passive role. The
operational effect arising from the legal defects is considered immaterial.
As advised by our PRC Legal Advisers, the Target Group could seek recourse against the
relevant village committees to request compensation for all the losses arising from the legal defects
in the 8K mu Ecological Forest Lands. Such compensation arrangement agreed by the relevant
village committees relating to the losses arising from the legal defects of the 8K mu Ecological
Forest Lands was included in the terms of the Contracting Agreements. In the event that the
Contracting Agreements are held unenforceable and void by the People’s Court, the Target Group
can pursue to claim compensation from the relevant village committees in accordance with Article
58 of the Contract Law of the PRC as described above.
– 115 –
LETTER FROM THE BOARD
In the event that the People’s Court does not accept the Target Group’s complaint（ 訴狀）
against the relevant village committees or gives rulings in favour of the relevant village committees
or the relevant village committees are not able to pay for the compensation, the Target Group
Controlling Shareholders have agreed to provide indemnities in favour of the Company on a joint
and several basis for all claims, damages, losses and costs arising from the legal defects of the
8K mu Ecological Forest Lands (including but not limited to penalties and fines imposed by the
relevant Governmental Authorities).
In addition, the Target Group Controlling Shareholders would procure Mr. Cai Zhenying or
any person nominated by the Target Group Controlling Shareholders to execute the New Transfer
Agreements to acquire the land use rights of the Additional Forest Lands with the relevant forest
rights certificates granted by the relevant Governmental Authority, the ownership and the use rights
of the tea trees thereon. The Target Group Controlling Shareholders would further procure Mr. Cai
Zhenying or any person nominated by the Target Group Controlling Shareholders to apply for the
Additional Forest Rights Certificates from the relevant Governmental Authority, pursuant to which
Mr. Cai Zhenying or any person nominated by the Target Group Controlling Shareholders will own
the land use rights of the Additional Forest Lands, the ownership and the use rights of the tea trees
thereon. As advised by our PRC Legal Advisers, based on the forest rights certificates provided by
the Target Group, the Additional Forest Lands are all economical forest lands. If the New Transfer
Agreements are duly executed and delivered and the Additional Forest Lands Approval is obtained,
there is no significant legal impediment for Mr. Cai Zhenying or any person nominated by the
Target Group Controlling Shareholders to obtain the Additional Forest Rights Certificates. Upon the
New Transfer Agreements being effective and before the Additional Forest Rights Certificates are
issued, Mr. Cai Zhenying or any person nominated by the Target Group Controlling Shareholders is
entitled to utilize the Additional Forest Lands and derive incomes therefrom in accordance with the
New Transfer Agreements and the applicable laws and regulations in the PRC.
The Target Group Controlling Shareholders would also procure Mr. Cai Zhenying or any
person nominated by the Target Group Controlling Shareholders to enter into the New Contracting
Agreement, pursuant to which the Target Group will acquire the right to operate all the plantations
on the Additional Forest Lands and will be entitled to the incomes derived therefrom at nil
consideration until the earlier of the date when the relevant forest rights certificates of the 8K mu
Ecological Forest Lands are issued or the expiry date of the duration of the respective Contracting
Agreements. As the volume and quality of the tea leaves harvested on the Additional Forest Lands
vary from time to time depending on the weather conditions, soil quality, natural disaster or other
external factors such as fertilizers and pesticides applied, there is no assurance that the tea leaves
output derived from the Additional Forest Lands is the same as that from the 8K mu Ecological
Forest Lands.
– 116 –
LETTER FROM THE BOARD
If the relevant forest rights certificates of the 8K mu Ecological Forest Lands are obtained
by the Target Group in future, the Company will have the Call Option and the Right of First
Refusal granted by the Covenantors to acquire the land use rights of the Additional Forest Lands,
the ownership and the use rights of the tea trees thereon. Under the Call Option, the Company
has, during the Option Period, the right to purchase the Additional Forest Lands at the price with
reference to the prevailing market price as determined by an independent valuation company
mutually selected by the Covenantors and the Company. Under the Right of First Refusal, during
the Option Period, if Mr. Cai Zhenying or any person nominated by the Target Group Controlling
Shareholders receives any offer to purchase the whole or any part of the Additional Forest Lands
from any third party, the Covenantors would first offer to the Company the right to purchase the
whole of the Additional Forest Lands on the same terms and conditions as offered by such third
party. If the Company decides not to purchase the Additional Forest Lands, the Covenantors
may proceed to sell such part of the Additional Forest Lands to the third party on terms no more
favorable than the terms offered to the Company. Mr. Cai Zhenying or any person nominated by
the Target Group Controlling Shareholders would undertake that he or it will not and each of the
Target Group Controlling Shareholders would undertake to procure Mr. Cai Zhenying or any person
nominated by the Target Group Controlling Shareholders will not, sell, transfer, encumber or
otherwise dispose of his interests in the Additional Forest Lands except pursuant to the terms under
the Call Option and the Right of First Refusal.
The Call Option and the Right of First Refusal are available upon the issue of the relevant
forest rights certificates of the 8K mu Ecological Forest Lands to the Target Group. The intention of
granting such rights to the Company is to give the Company the right to elect to expand its capacity
by acquiring the land use rights of the Additional Forest Lands, the ownership and the use rights
of the tea trees thereon through the exercise of the Call Option or the Right of First Refusal. After
completion of the Acquisition, the Group intends not to proceed with the tea leaves harvest on the
8K mu Ecological Forest Lands until and unless the relevant forest rights certificates have been
obtained. Accordingly, during the intervening period between the completion of the Acquisition and
before the relevant forest rights certificates of the 8K mu Ecological Forest Lands are obtained, the
New Contracting Agreement would become effective with the New Rights being contracted to the
Target Group at nil consideration. After the issue of the relevant forest rights certificates and the
legal defects of the 8K mu Ecological Forest Lands have been rectified, the Company can choose
to expand the Group’s capacity by acquiring the land use rights of the Additional Forest Lands, the
ownership and the use rights of the tea trees thereon through the exercise of the Call Option or the
Right of First Refusal.
– 117 –
LETTER FROM THE BOARD
As the execution of the New Transfer Agreements and the New Contracting Agreement
which shall be in form and substance to the satisfaction of the Purchaser, the Company and the
Target Group Controlling Shareholders (the major terms for the New Transfer Agreements are
namely Mr. Cai Zhenying or any person nominated by the Target Group Controlling Shareholders
would acquire the land use rights of the Additional Forest Lands, the ownership and the use rights
of the tea trees thereon and for the New Contracting Agreement are namely the Target Group
would acquire the right to operate all the plantations on the Additional Forest Lands and would be
entitled to the incomes derived therefrom at nil consideration until the earlier of the date when the
relevant forest rights certificates of the 8K mu Ecological Forest Lands are issued or the expiry
date of the duration of the respective Contracting Agreements) and the obtaining of the Additional
Forest Lands Approval are conditions precedent of the Acquisition, all the Target Group Controlling
Shareholders, the Purchaser and the Company will have control over the terms of the New Transfer
Agreements and the New Contracting Agreement. In the event that the transactions under the New
Transfer Agreements and the New Contracting Agreement are not materialized or the Additional
Forest Lands Approval could not be obtained, the Company will not proceed with the Acquisition.
Given that (1) the maximum additional cost incurred for purchasing the raw tea leaves from
other alternative sources to substitute the tea leaves from the 8K mu Ecological Forest Lands only
accounted for approximately 2.5% and 5.2% of the total turnover and the net profit after taxation
of the Target Group for the year ended 31 December 2012, respectively; (2) the relevant village
committees are likely to be the defaulting parties for the Contracting Agreements being held
unenforceable and void and they should be fully responsible for the compensation; (3) the Target
Group Controlling Shareholders agreed to compensate the Company for all losses arising from the
legal defects of the 8K mu Ecological Forest Lands in the event that the People’s Court does not
accept the Target Group’s complaint against the relevant village committees or gives rulings in
favour of the relevant village committees or the relevant village committees are unable to pay the
compensation as well as to acquire the land use rights of the Additional Forest Lands, the ownership
and the use rights of the tea trees thereon and to contract the New Rights at nil consideration to the
Target Group until the earlier of the date when the relevant forest rights certificates of the 8K mu
Ecological Forest Lands are issued or the expiry date of the duration of the respective Contracting
Agreements; and (4) the management and protection of the 29.5K mu Economical Forest Lands
would still be maintained by the Target Group, the Directors are of the view that there is no
material financial and operational impact on the Group arising from the legal defects of the 8K mu
Ecological Forest Lands after the Acquisition.
– 118 –
LETTER FROM THE BOARD
Application for the relevant forest rights certificates of the 8K mu Ecological Forest Lands
To the knowledge of the Target Group, in order to comply with the PRC laws and regulations,
the relevant village committees have submitted their applications for the land use conversion of the
8K mu Ecological Forest Lands and the relevant forest rights certificates to the Bureau of Forestry
of Anxi County which will seek approval from higher level of Governmental Authorities. After
the approval of such conversion is granted, the relevant village committees and the Target Group
will apply for the forest rights certificates, pursuant to which tea plantation will be allowed on the
8K mu Ecological Forest Lands. As at the Latest Practicable Date, the approval of the land use
conversion is still in progress and yet to be granted. As advised by our PRC Legal Advisers, if all
the conditions and requirements as specified by relevant laws and regulations for such conversion
and issuance of forest rights certificates are fulfilled, there is no legal impediment for the village
committees and the Target Group to obtain the approvals and the forest rights certificates. Such
conditions and requirements mainly include, among others, that the land use conversion shall
conform to forest land plan of the relevant area, the village committee can produce the original
approval regarding the protective forest lands. The approval of the land use conversion and the grant
of the relevant forest rights certificates in respect of the 8K mu Ecological Forest Lands are under
the sole discretion of the relevant Governmental Authorities and the actual implementation practices
on the forest land planning. It is impracticable to predict the outcome of the application.
The Company will not proceed with any tea leaves harvest on the 8K mu Ecological Forest
Lands after completion of the Acquisition unless and until the relevant forest rights certificates of
the 8K mu Ecological Forest Lands have been obtained. If forest rights certificates are obtained for
the 8K mu Ecological Forest Lands and if the Company has exercised the Call Option or the Right
of First Refusal, the Company will, in addition to the Additional Forest Lands, proceed with the tea
leaves harvest on the 8K mu Ecological Forest Lands and be entitled to income derived therefrom.
Biological assets
As at the Latest Practicable Date, a total of 29,592.7 mu tea trees have been recognized
by the Target Group as its biological assets. A valuation report of the biological assets of the
Target Group has been prepared by Jones Lang Lasalle Corporate Appraisal and Advisory Limited
(the “Valuer”), a valuer and an independent third party of the Enlarged Group, and is set out in
Appendix V to this circular. Based on the valuation report, the fair value of the biological assets of
the Target Group as at 31 March 2013 is approximately RMB272.4 million.
– 119 –
LETTER FROM THE BOARD
The Directors have noted and reviewed the assumptions made by the Valuer in determining
the fair value of the biological assets of the Target Group. The key assumptions include, among
others, the lifecycle of tea trees and inflation rate. Also, the Directors have noted that the Valuer
has relied on the opinion from the expert consultants appointed by the Valuer (the “Expert
Consultants”) in compiling the valuation report.
Taking into account of (i) that the discount rate used in the valuation of the biological
assets is yielded with reference to the generally accepted basis for marketplace valuations; (ii) that
independent field inspections have been conducted by the Valuer and the Expert Consultants, which
comprise, among others, the visit of all cultivation bases and detailed inspection and measurement
on a list of 14 randomly picked cultivation bases (representing forest lands corresponding to 14
forest rights certificates out of a total of 127 forest rights certificates which, in turn, represents over
10% in terms of the total number of forest rights certificates and above 10% in terms of total area
of the cultivation bases covered by 127 forest rights certificates owned by the Target Group as at the
Latest Practicable Date) to verify the data and descriptions of tea trees provided by the Company
(please refer to the section headed “Field Inspection” in Appendix V to this circular for detail);
(iii) that the valuation is conducted by the Valuer in accordance with IAS 41 and with reference
to International Valuation Standards issued by the International Valuation Standards Committee;
(iv) the qualification and experience of the Valuer in valuation of biological assets as disclosed
in Appendix V to this circular; (v) the background and experience of the Expert Consultants as
disclosed in the section headed “Appointment of Tea Expert” in Appendix V to this circular; and
(vi) the basis of the assumptions made by the Valuer as disclosed in the section headed “Valuation
Assumptions” in Appendix V to this circular, the Directors consider that (a) the discount rate is
appropriate for the valuation report; (b) the scope of the field inspection is fair and reasonable; (c)
the opinions from the Expert Consultants are reliable; (d) the assumptions are fair and reasonable;
and (e) the valuation of the biological assets of the Target Group is fair and reasonable.
Tea farmers
The Target Group has entered into service contracts with tea farmers under which the
tea farmers are responsible for cultivating tea plants in designated zones at the Target Group’s
cultivation bases, harvesting tea leaves and processing tea leaves to become raw teas. The service
contracts are in general for a term of three years. The Target Group pays the tea farmers a service
fee directly, which is primarily based on the quantity and quality of raw teas that they return to the
Target Group during each tea leaves harvest season and the acreage of their responsible cultivation
bases. The service fee is payable in cash to the relevant tea farmer. The Target Group provides them
with the required fertilisers and pesticides for free.
As at the Latest Practicable Date, the Target Group entered into service contracts with 1,110
tea-farmer households.
– 120 –
LETTER FROM THE BOARD
In addition, the Target Group employs certain tea farmers as zone supervisors. They are
mainly responsible for supervising the cultivation work of other tea farmers, and the quality of
the tea plants, within their designated cultivation zones. The Target Group enters into employment
contracts with the zone supervisors and pays them a monthly salary which is in addition to the fees
payable to them as tea farmers. From time to time, the Target Group offers, or engages external
consultants to offer, training to the zone supervisors to enhance their knowledge of the use of
pesticides and fertilisers, tea processing quality and safety. The zone supervisors will then in turn
pass on the knowledge to tea farmers under their supervision.
Apart from the salaries payable to the zone supervisors, the fees payable to the tea farmers,
and the provision of pesticides and fertilisers for free, the Target Group’s directors have confirmed
that (i) the Target Group does not provide any subsidies or loans to the tea farmers, (ii) the Target
Group does not manage the tea farmers as its employees and its internal policies and rules relating
to employees do not apply to the tea farmers, and (iii) the tea farmers are independent third parties
to the Target Group. Our PRC Legal Advisers have advised us that except for its own employees,
the tea farmers under the aforesaid households are not regarded as the Target Group’s employees
and, as such, the Target Group is not required to maintain social security insurance and housing
funds for the tea farmers. However, to provide better working conditions for the tea farmers, the
Target Group has maintained (through the relevant villagers’ committees（村民委員會）) rural cooperative medical insurance plans（農村合作醫療保險）) for the tea farmers.
For each of the financial years ended 31 December 2010, 2011 and 2012, the total service
fees for tea farmers (other than the salaries payable to the zone supervisors) amounted to
approximately RMB123.2 million, RMB153.1 million and RMB147.8 million, respectively, and
accounted for 81.3%, 81.4% and 73.5% of the Target Group’s total cost of sales, respectively,
during the same periods.
SEASONALITY
The Target Group’s sales are subject to seasonality. The Target Group typically experiences
higher sales volume of its raw teas during the tea leaves harvest seasons. The higher sales volume
are mainly reflected by an increase in purchase orders made by its wholesalers and Chadu
Customers. For its refined teas business, the Target Group typically experiences higher sales volume
at the end of the spring and autumn harvest seasons when a selected portion of its Tie Guan Yin
raw teas are further processed into Tie Guan Yin refined teas for sale. Sales of its refined teas also
follow traditional seasonal shopping patterns for the retail business in the PRC with higher sales
volume during holidays, when its products are purchased for consumption or as corporate/business
gifts or personal gifts. The Target Group’s sales can also fluctuate during the course of the year
for a number of other reasons, including weather conditions that may impact the quality, quantity
and timing of its harvest, the timing of the expansion of its new retail outlets and the timing of
advertising and promotional campaigns.
– 121 –
LETTER FROM THE BOARD
QUALITY CONTROL
The Target Group has adopted various quality control measures throughout its production
process:
•
Cultivation bases: The Target Group engages certain tea farmers as zone supervisors
who are responsible for supervising the cultivation work of other tea farmers, and the
quality of the tea plants, within their designated cultivation zones. In addition, the
Target Group selects its suppliers for pesticides and fertilisers from those with the
necessary qualifications and who have provided the Target Group with the formulae
and testing reports of their pesticides and/or fertilisers.
•
Raw teas: The Target Group’s tea tasters and zone supervisors inspect the general
appearance of the raw teas delivered by the tea farmers. The Target Group has a
team of certified tea tasters, who use organoleptic means to judge and appraise the
characteristics and qualities of the raw teas. Raw teas are classified into different
grades according to their external appearance and innate quality (such as aroma, taste,
tea colour and appearance of tea leaves after making tea).
•
Refined teas: After removal of stems by the Target Group or the external processing
contractor, the Target Group’s quality control team inspects the general appearance of
the refined teas. In addition, the Target Group from time to time sends samples of its
refined teas to external testing centers to test for compliance with the National Food
Standards which are relevant to teas. The Target Group stores its raw teas and refined
teas at temperatures which are appropriate to the respective tea leaves.
INTELLECTUAL PROPERTY RIGHTS
The brand of the Target Group, Ping Shan Famous Tea（坪山名茶）, has been registered as
trademark in Hong Kong and the PRC. As at the Latest Practicable Date, the Target Group owns
15 trademarks which have all been registered in the PRC and 1 trademark (with 9 classes) which
has been registered in Hong Kong. The registered trademark will not be transferred to the Group
and will remain under the name of the Target Group. If the sale and purchase of the Sale Shares is
completed, the Company will become the ultimate beneficial owner of these trademarks.
Further, the Target Group has been granted by the Head Office of the Anxi Tea Industry,
Fujian（安溪縣茶業總公司）, an enterprise established by the Anxi County People’s Government,
the right to use the Identification Label on Anxi Tikuanyin Tea （安溪鐵觀音證明商標）( a
geographic mark（中國地理標誌）) on its Tie Guan Yin products until December 2013.
– 122 –
LETTER FROM THE BOARD
The Target Group’s directors have confirmed that during the Track Record Period no claim
or dispute was brought against the Target Group in relation to any infringement of the trademarks,
copyrights, patents or other intellectual property rights of third parties.
EMPLOYEES
The Target Group’s relationship with employees
The Target Group’s directors believe that the Target Group’s employees are among the most
valuable assets of the Target Group and have contributed to the success of the Target Group. The
Target Group offers in-house training, as well as training conducted by external consultants, to its
employees to enhance their knowledge of tea and their sales and marketing skills.
During the Track Record Period, the Target Group did not experience any disruption to its
business operations due to labor disputes. The Target Group’s directors consider that the Target
Group has maintained good relations with its employees.
Full-time employees
As at 31 December 2010, 2011 and 2012, the Target Group had a total of 264, 497 and
373 full-time employees, respectively, and the staff costs were approximately RMB9.6 million,
RMB15.9 million and RMB15.8 million, respectively.
The Target Group’s emolument policies are based on the performance of individual
employees and the salary trend in the PRC.
For the employees in Hong Kong, the Target Group maintains employee compensation
insurance that includes work injury under the regulatory requirements in Hong Kong.
For details on social security insurance and housing fund paid by the Target Group for its
employees in the PRC, please refer to the section headed “Business of the Target Group – Legal
Procedings and Compliance – Social security insurance” in this circular.
Temporary employees and tea farmers
The cultivation and production of the Target Group’s tea products are seasonal. To meet
the intensive seasonal demand for labor, the Target Group from time to time employs additional
workers on a temporary basis to harvest tea leaves from its cultivation bases during the tea leaves
harvest seasons. Our PRC Legal Advisers have advised us that except for work-related injury
insurance, the Target Group is not required to take out other social security insurance in respect of
temporary employees.
– 123 –
LETTER FROM THE BOARD
For details on tea farmers, please refer to the section headed “Business of the Target Group –
Production – Tea Farmers” in this circular.
INSURANCE
The Target Group maintains insurance on its motor vehicles. However, the Target Group does
not maintain insurance on its properties, machinery, equipment, inventories and biological assets
or third-party liability, product liability or business interruption insurance. The Target Group’s
directors have confirmed that it is not the general industry practice in the PRC to maintain such
insurances (other than insurances on properties). The Target Group’s directors consider that the cost
of taking out product liability insurance in the PRC is high. The Target Group has a strict quality
control system over its production. Please refer to the section headed “Business of the Target Group
– Quality control” in this circular for further details on its quality control system. In addition, the
Target Group’s directors have confirmed that during the Track Record Period the Target Group
did not experience any product dispute, product recall or return of products which may have had a
material adverse effect on its financial condition or operating results and that the Target Group did
not receive any material claim from customers or consumers relating to any liability arising from or
relating to the consumption or use of its tea products which have had a significant negative impact
on its brand image. The Target Group’s directors have further confirmed that during the Track
Record Period, none of its tea products was subject to any government sanctions relating to quality.
For the above reasons, the Target Group’s directors do not consider it necessary to maintain product
liability insurance.
LAND AND BUILDINGS
Hong Kong leases
As at the Latest Practicable Date, the Target Group leased one property in Hong Kong and
is currently used as an advertising and promotion media for their tea products in Hong Kong. The
Target Group will use such property for retail purposes after full compliance with the applicable
PRC regulations for the export of refined teas into Hong Kong, further details of which are set out
in the section headed “Risk Factors – Risks relating to the Target Group – The Target Company did
not comply with the PRC regulations for export of refined teas into Hong Kong”.
– 124 –
LETTER FROM THE BOARD
PRC property interests
Besides its rights to use the cultivation bases for its tea plants located in Da Ping（大坪）
and Xi Ping（西坪）, Anxi County, Fujian Province, the PRC, the Target Group has a state-owned
land use certificate in respect of a parcel of land with a site area of approximately 6,333 sq.m. and
a property ownership certificate in respect of two buildings, with an aggregate gross floor area of
approximately 1,737.42 sq.m., at Pingzhou Village, Daping Township, Anxi County, Quanzhou City,
Fujian Province, the PRC, which is mainly used as its production and research centre. The type of
tenure under the aforesaid state-owned land use certificate is allocated land use rights（劃撥土地使
用權）. However, the industry in which the Target Group operates does not fall within the Catalogue
of Allocated Land（劃撥用地目錄）which became effective on 22 October 2001. Therefore, the
Target Group applied for the conversion of the allocated land use rights to granted land use rights
（出讓地使用權）and obtained approval for such application from the Anxi County Bureau of Land
and Resources（安溪縣國土資源局）on 21 September 2011. However, the Target Group needs to
pay the land premium of approximately RMB0.4 million, otherwise the Target Group may not be
able to continue to use such land. Our PRC Legal Advisers have advised that given the Target Group
has obtained the approval on its application for conversion of the allocated land use rights, the
procedures which the Target Group would take to obtain the state-owned land use certificate with
the proper type of tenure (i.e. granted land use rights) are only administrative in nature and there is
no legal impediment to the conversion of the allocated land to granted land.
In order to provide for future expansion of its production capacity, the Target Group
has obtained a land use rights certificate in respect of a parcel of land located at Lot A13 of
Guoxi Village, Anxi County, Quanzhou City, Fujian Province, the PRC, with a total site area of
approximately 33,362 sq.m. The Target Group intends to build four buildings on this parcel of
land as its new production and packaging centres, office and staff dormitories, with an aggregate
gross floor area of approximately 44,755 sq.m., and relocate its production centre and office
to this building by the end of 2013, the construction of which requires further approvals by the
relevant Governmental Authorities. The Target Group had commenced construction on this parcel
of land. For such construction, the Target Group has obtained the Planning Permit for the Land
Used for Construction（建設用地規劃許可證）and the approval of the Development and Reform
Commission of Anxi County（安溪縣發展和改革局）.
The Target Group has applied to the Housing, Planning and Construction Bureau of Anxi
County（安溪縣住房和城鄉規劃建設局）for the Planning Permit for Construction Engineering
（建 設工程規劃 許可證）and the Commencement Permit for Construction Project（ 建築工程施工
許可證）. Pursuant to a confirmation issued by the Housing, Planning and Construction Bureau of
Anxi County dated 17 January 2013, the Anxi County Housing, Planning and Construction Bureau
confirmed receipt of the Target Group’s application for such permits, approved the project planning
and commencement of construction, and confirmed that no penalty will be imposed on Fujian
Nature for having commenced construction before obtaining the relevant permits.
– 125 –
LETTER FROM THE BOARD
As at the Latest Practicable Date, the Target Group leased 31 properties in the PRC, which
were mainly used as retail outlets operated by the Target Group, and the remaining were used by the
Target Group mainly as office premises, warehouses and staff canteen.
LEGAL PROCEEDINGS AND COMPLIANCE
Legal proceedings
As at the Latest Practicable Date, the Target Group was not engaged in any litigation,
arbitration or claim of material importance, and there was no litigation, arbitration or claim known
to the Target Group’s directors to be pending or threatened by or against the Target Group which
was likely to have a material adverse effect on its business, financial condition or operating results.
Compliance
Our PRC Legal Advisers have advised us that the Target Group has obtained all necessary
licences, permits or certificates required for the operation of its business and that, save for the
matters disclosed in the section headed “Risk Factors” in this circular, the Target Group has
complied with all relevant PRC laws, regulations and rules that are applicable to its business during
the Track Record Period.
Laws and regulations relating to the food industry
Each of Fujian Nature, Fujian Daping and the Chadu branch of Fujian Daping obtained
a confirmation dated 22 March 2013 from the Administration for Industry & Commerce of
Anxi County, and Quanzhou Pingshan obtained a confirmation dated 11 April 2013 from the
Administration for Industry & Commerce of Jinjiang City, confirming that since their incorporation
until the date of the relevant confirmation, each of them (i) has complied with national and local
laws, regulations and provisions in relation to quality supervision and administration during product
circulation; (ii) has carried out its business legally without any illegal operation; (iii) has complied
with the product quality standard for the products sold; (iv) did not experience any property loss or
bodily injury due to product quality issues; (v) has not violated any laws, regulations or provisions
in respect of product quality or been imposed any penalty or fine; and (vi) had no dispute with such
Governmental Authority regarding product quality.
– 126 –
LETTER FROM THE BOARD
Liaoning Pingshan obtained a confirmation dated 25 March 2013 from the Administration
for Industry & Commerce of Anshan City, confirming that since its incorporation until 25 March
2013, (i) it has complied with national and local laws, regulations and provisions in relation to
quality supervision and administration during product circulation; (ii) it has carried out its business
legally without any illegal operation; (iii) it has complied with the product quality standard for the
products sold; (iv) it did not experience any property loss due to product quality issues; and (v) it
has not violated any laws, regulations or provisions in respect of product quality or been imposed
any penalty or fine.
Each of Fujian Nature, Fujian Daping and the Chadu branch of Fujian Daping obtained a
confirmation dated 22 March 2013 from Public Health Bureau of Anxi County（安溪縣衛生局）,
confirming that since their incorporation until 22 March 2013, each of them (i) has complied with
national and local laws, regulations, statutes and provisions in relation to food hygiene supervision
and administration during production and operation; (ii) has carried out its business legally without
any illegal act; (iii) has complied with the food hygiene standard for the products sold; (iv) did not
experience any property loss or bodily injury due to food hygiene issues; (v) has not violated any
laws, regulations or provisions in respect of food hygiene or been imposed any penalty or fine; and
(vi) had no dispute with such Governmental Authority regarding food hygiene.
Each of Fujian Nature, Fujian Daping and the Chadu branch of Fujian Daping obtained a
confirmation dated 22 March 2013 from Quality and Technical Supervision Bureau of Anxi County
（安溪縣質量技術監督局）, confirming that since their incorporation until 22 March 2013, each of
them (i) has complied with national and local laws, regulations, statutes and provisions in relation
to quality and technical supervision and administration during the production process; (ii) has
carried out its business legally without any illegal operation; (iii) has complied with the quality
and technical supervision standard for the products manufactured or sold; (iv) did not experience
any property loss or bodily injury due to product quality issues; (v) has not violated any laws,
regulations or provisions in respect of product quality and technical supervision or been imposed
any penalty or fine; and (vi) had no dispute with such Governmental Authority regarding product
quality and technical supervision.
Shaanxi Pingshan obtained a confirmation dated 26 March 2013 from the Branch of
Development Zone of High-tech Industry of the Quality and Technical Supervision Bureau of
Xi’an City, confirming that from May 2011 to March 2013, such Governmental Authority had not
received any complaint or report in relation to the product quality of Shaanxi Pingshan, and Shaanxi
Pingshan had not been subject to any punishment from such Governmental Authority.
As at the Latest Practicable Date, our PRC Legal Advisers are not aware of any noncompliance of the Target Group with respect to the relevant laws and regulations in relation to food
industry.
– 127 –
LETTER FROM THE BOARD
Social security insurance and housing funds
Pursuant to the laws of the PRC regarding labour matters, both the employees and the
employers shall contribute to the social security insurance and housing fund.
Social security insurance is mainly regulated by the PRC Social Insurance Law of the
People’s Republic of China（《中華人民共和國社會保險法》）, which requires that employers and
employees within the PRC shall subscribe and contribute to social security insurance including
the basic retirement pension insurance, basic medical insurance, occupational injury insurance,
unemployment insurance, and maternity insurance pursuant to relevant laws.
Housing fund is mainly regulated by The Regulation on Management of the Housing Fund
（《住房公積金管理條例》）, pursuant to which, enterprises in the PRC shall register with the
housing fund management centre and then maintain housing fund accounts with designated banks
for their employees and contribute to the fund jointly with their employees pursuant to the relevant
law.
Shaanxi Pingshan, one of the subsidiaries of the Target Group, completed registration with
the local authorities for the social security insurance on 1 March 2013. Prior to such registration,
Shaanxi Pingshau has not paid the social security insurance premiums of approximately RMB0.05
million for its employees. As advised by our PRC Legal Advisers, prior to 1 March 2013, the
maximum penalty for such non-payment of the social security insurance amounted to approximately
RMB0.2 million, representing approximately 0.1% of the net profit after taxation of the Target
Group for the year ended 31 December 2012.
Prior to 1 January 2010, Fujian Nature and Fujian Daping contributed social security
insurance for a small number of its employees. On 3 September 2010, Fujian Nature and Fujian
Daping have each received a confirmation letter from the Social Labour Insurance Management
Bureau of Anxi County（安溪縣社會勞動保險管理中心）confirming that the Bureau could not
retrospectively accept any payment of social security insurance outstanding for the year(s) prior
to 2010 and that no penalty will be imposed on Fujian Nature or Fujian Daping for such nonpayment. Pursuant to confirmation letters dated 21 January 2013 and 22 February 2013 from the
Human Resources and Social Security Bureau of Anxi County（安溪縣人力資源和社會保障局）,
Fujian Nature and Fujian Daping have paid all relevant social security insurance for their employees
since 1 January 2010 and the Bureau was not aware of any non-compliance with any labour law or
regulation in the PRC.
– 128 –
LETTER FROM THE BOARD
Prior to December 2010, Fujian Nature and Fujian Daping did not pay housing fund
for their employees. On 5 March 2013, Fujian Nature and Fujian Daping have each received a
confirmation letter from Anxi County Administration Department（ 安溪縣管理部）of the Housing
Fund Management Office of Quanzhou City（泉州市住房公積金管理中心）confirming that Fujian
Nature and Fujian Daping have each duly paid housing fund for its employees since December
2010.
Fujian Huidian has duly made housing fund contributions and social security insurance
contributions for its employees since its incorporation in 2011, except for those employees
who have waived their benefits to social security insurance and/or housing fund contribution as
mentioned below.
Our PRC Legal Advisers have advised that 28.3%, 78.7% and 43.2% of the employees as
at 30 April 2013 of each of Fujian Nature, Fujian Daping and Fujian Huidian have waived their
benefits to have social security insurance and/or housing fund contribution from Fujian Nature,
Fujian Daping or Fujian Huidian, and have undertaken not to pursue any claims in this regard
against each of them, respectively.
As advised by our PRC Legal Advisers, the above confirmations would not absolve Fujian
Nature, Fujian Daping and Fujian Huidian from their obligations to contribute social security
insurance and housing funds for such employees unless the employee of Fujian Nature, Fujian
Daping or Fujian Huidian is registered as rural household for whom a company is not required to
contribute housing funds under PRC laws. In the event of dispute, the People’s Court could request
them to re-pay such contributions in order to protect the employee’s rights and they may be subject
to penalty or fines for any late contributions.
Product testing
During each of the three years ended 31 December 201 2, the relevant Governmental
Authorities have arranged random product tests by taking samples of raw tea leaves and refined
tea leaves from the Target Group. In addition to the random testing, as a part of the quality control
procedure, the Target Group has initiated the Voluntary Testing itself. The quality of the tea leaves
varies from time to time depending on the weather conditions, soil quality, natural disaster or other
external factors such as fertilizers and pesticides applied.
– 129 –
LETTER FROM THE BOARD
All the results of the product testing arranged by the relevant Governmental Authorities
showed that the samples of the raw tea leaves and refined tea leaves of the Target Group are
in compliance with the relevant product quality and technical standards. The test results of the
Voluntary Testing are generally satisfactory except that the test results of certain tea leave samples
in 2011 reported that the level of rare earth exceeded the Threshold Level prescribed under the
Maximum Levels of Contaminants. However, the tea water of the samples examined did not show
any trace of rare earth. With respect to the test results of the Voluntary Testing in 2012, the level of
rare earth of all the samples is below the Threshold Level.
To the knowledge of the directors of the Target Group, rare earth is water insoluable. This
notion is supported by the product testing on the tea water of the samples in 2011 which did not
detect any traces of rare earth. On 4 August 2010, the Ministry of Health of the PRC（中華人民共
和國衛生部）issued a consultation paper, which proposed that the limit on the level of rare earth
in respect of foods should be removed from the Maximum Levels of Contaminants. As explained
by the Ministry of Health of the PRC in the notes for the said consultation paper, one of the
reasons for the proposed removal is that there are no specifications on the level of rare earth in any
foods in the standards adopted by Codex Alimentarius Commission, Australia, Japan, U.S.A. and
Taiwan. Further, pursuant to a confirmation dated 28 July 2011 issued by the Quality and Technical
Supervision Bureau of Anxi County（安溪縣質量技術監督局）, which is the direct government
authority which oversees the quality control of the Target Group’s operations, and a confirmation
dated 10 December 2012 issued by the Public Health Bureau of Anxi County（安溪縣衛生局）,
before the implementation of the new Maximum Levels of Contaminants, the product tests arranged
by either of them will exclude the tests for rare earth level in tea leave products and no penalty or
fines will be imposed in this regard.
According to the New Maximum Levels of Contaminants which took effect on 1 June 2013,
the limit on the level of rare earth in respect of foods shall be the same as that prescribed under
the Maximum Levels of Contaminants. As advised by our PRC Legal Advisers, the Quality and
Technical Supervision Bureau of Anxi County and other relevant PRC authorities may start to
arrange random product tests (including tests in respect of rare earth) by taking samples of tea
leaves from the Target Group and penalize it for any non-compliance. However, as all the results
of the product testing arranged by the relevant Governmental Authorities as well as the test results
of Voluntary Testing in 2012 showed that the level of rare earth of samples of raw tea leaves and
refined tea leaves of the Target Group is below the Threshold Level, as advised by our PRC Legal
Advisers, the implementation of the New Maximum Levels of Contaminants will not affect the
production or the sale of teas by the Target Group in any respect.
– 130 –
LETTER FROM THE BOARD
A confirmation dated 16 November 2012 has been obtained from the Quality and Technical
Supervision Bureau of Anxi County（安溪縣質量技術監督局）addressed to Fujian Nature, and
confirmations dated 13 June 2012 have been obtained from the Agriculture, Tea and Fruit Bureau
of Anxi County（安溪縣農業與茶果局）(collectively, the “Bureaux”) addressed to each of
Fujian Nature, Fujian Daping and the Chadu branch of Fujian Daping, confirming that (i) since
their incorporation, their production process has complied with the national and local laws and
regulations in relation to the product quality and/or technical supervision and/or that each of them
has been operating lawfully; (ii) their products produced or sold are in compliance with the relevant
product quality and/or technical standards; (iii) the Bureaux are not aware of any instance of
property loss or bodily injury occurred due to the product quality; (iv) Fujian Nature and/or Fujian
Daping and/or Chadu branch of Fujian Daping has/have not violated any laws or regulations in
respect of product quality and/or technical supervision or been imposed by the Bureaux any penalty
or fine as a result of the violation of the same; and (v) there was no dispute between the Bureaux
and Fujian Nature and/or Fujian Daping and/or Chadu branch of Fujian Daping regarding product
quality and/or technical supervision.
In light of the above, the Directors are of the view that the samples in 2011 are isolated cases
and do not represent the entire range of products of the Target Group. The favorable test results
as conducted by the Governmental Authorities on a random basis and the Voluntary Testing in
2012 reinforce that the samples in 2011 are not representative of the product quality of the Target
Group as a whole. The confirmations from the Bureaux have indicated that the products of the
Target Group are in compliance with the relevant national standards and no penalty or fines have
been imposed on the Target Group in this regard. Besides, as confirmed by the directors of the
Target Group, there are no claims or complaints from any person in relation to product quality and
there are no traces of rare earth detected in the tea water examined. Accordingly, the Directors are
confident that the Target Group’s products meet the food safety requirements as a whole.
Non-compliance with PRC regulations for export of refined teas into Hong Kong
In respect of the operations of its retail outlet in Hong Kong, during the Track Record Period,
the Target Group did not obtain the relevant certificate and fulfil the necessary registration, filing
or declaration requirements and procedures under the PRC law with regard to the products sold in
its retail store in Hong Kong. For further details, please refer to the section headed “Risk Factors –
Risks relating to the Target Group – The Target Company did not comply with the PRC regulations
for export of refined teas into Hong Kong” in this circular.
– 131 –
LETTER FROM THE BOARD
The Target Group’s directors estimate that the total value of the refined teas that the Target
Group exported to Hong Kong, since the commencement of the business of its retail outlet in Hong
Kong in August 2010, without complying with the above PRC customs laws and regulations was
approximately RMB0.02 million. As confirmed by the Target Group’s directors, since November
2012, the Hong Kong retail outlet has been used to promote the Target Group’s brand, Ping Shan
Famous Tea, in Hong Kong and no sales of refined teas has been conducted. Accordingly, no sales
proceeds were generated from refined teas since November 2012. Our PRC Legal Advisers have
advised that the maximum penalty to which the Target Group may be subject should not exceed
RMB0.3 million, representing approximately 0.2% of the net profit after taxation of the Target
Group for the year ended 31 December 2012. As at the Latest Practicable Date, the Target Group
has not received any notice of penalty or punishment in this regard.
The Target Group’s directors have further confirmed that since 25 October 2010 the Target
Group no longer exports its refined teas into Hong Kong and will resume sales of its refined
teas at its retail outlet in Hong Kong only in full compliance with the above PRC customs laws
and regulations. The Target Group Controlling Shareholders have agreed to jointly and severally
indemnify the Company, the Purchaser and any member of the Target Group against any loss and
damage suffered by the Target Group due to non-compliance with the PRC customs laws and
regulations. The Target Company is in the process of applying for such certificate of hygiene and
making the respective filing and registration.
The Target Group has been registered with the Food and Environmental Hygiene Department
in Hong Kong as a food importer/food distributor since December 2011. On 19 November 2012,
Citiasia has lodged two import declarations with, and paid the applicable late penalty to, the Hong
Kong Customs and Excise Department regarding its import of refined teas into Hong Kong on
10 August 2010 and 25 October 2010. However, according to regulation 4(6) of the Import and
Export (Registration) Regulations (Chapter 60E of the Laws of Hong Kong), Citiasia, by failing
or neglecting to lodge the import declaration within 14 days after the date of import without
reasonable excuse, may be liable to an offence and on summary conviction to a fine of HK$1,000.
As at Latest Practicable Date, the directors of the Target Company confirmed that Citiasia has not
imported any tea into Hong Kong since its last import of refined tea made on 25 October 2010.
Environmental matters
The Target Group is subject to PRC environmental laws, regulations and rules relating to
air, water and solid waste pollution, the use of agricultural pesticides and the restricted use of
agricultural land to dump or store solid waste. For further information on the laws and regulations
in respect of environmental protection which are applicable to the Target Group, please refer to the
section headed “Regulatory Overview – Laws and regulations relating to environmental protection”
in this circular.
– 132 –
LETTER FROM THE BOARD
The Target Group’s directors have confirmed that the Target Group did not receive any notice
of non-compliance with environmental laws and regulations during the Track Record Period. In
addition, our PRC Legal Advisers have advised that Fujian Nature and Fujian Daping have each
received a confirmation letter dated 22 February 2013 issued by the Environmental Protection
Bureau of Anxi County（安溪縣環境保護局）confirming that in the preceding three years, (i) the
environmental waste produced by Fujian Nature and Fujian Daping had complied with the PRC
national standard in respect of environmental waste; and (ii) the Bureau had not levied any penalty
or fine against any of them as a result of breach of laws or regulations relating to environmental
protection. Our PRC Legal Advisers have also advised that Fujian Huidian has also received a
confirmation letter dated 11 March 2013 issued by the Tong’an Branch of the Environmental
Protection Bureau of Xiamen City（廈門市環境保護局同安分局）, among others, that (i) it
completed the environmental impact assessment and declared and paid the required environmental
waste emission charge, and (ii) the Bureau had not identified any breach of the laws or regulations
relating to environmental protection by Fujian Huidian as of the date of such confirmation.
Workplace safety
The Target Group is subject to various PRC laws, regulations and rules relating to workplace
safety. For further information on the laws and regulations relating to production safety which are
applicable to the Target Group, please refer to the section headed “Regulatory Overview – Laws and
regulations relating to production safety” in this circular.
The Target Group’s directors have confirmed that during the Track Record Period, the Target
Group was not involved in any accident causing death or serious bodily injury in the course of its
operations. Fujian Nature and Fujian Daping have each received a confirmation letter dated 13
June 2012 issued by the Work Safety Supervision Bureau of Anxi County（安溪縣安全生產監督
管理局）confirming that in the preceding three years, (i) the Bureau had not identified any breach
by Fujian Nature and Fujian Daping of the laws and regulations relating to work safety or their
involvement in any production safety accidents; and (ii) the Bureau has not levied any penalty or
fine against any of them. Fujian Huidian has received a confirmation letter dated 12 August 2011
issued by the Work Safety Supervision Bureau of Xike Town（西柯鎮安監局）that, among others,
(i) the Bureau had not identified any breach of the laws or regulations relating to work safety by
Fujian Huidian or any potential safety hazard since its registration with the Bureau, and (ii) Fujian
Huidian had not had any production safety accidents.
– 133 –
LETTER FROM THE BOARD
Statistics registration certificates
As advised by our PRC Legal Advisers, it is normal administrative practice for the
National Bureau of Statistics or its local statistics department to require registered enterprises
to provide statistical data for national economic and social development analysis. The statistics
registration certificates are issued to the enterprises when the registration with the relevant statistics
departments has been duly completed. As advised by our PRC Legal Advisers, the National
Bureau of Statistics at a higher level, namely at the Fujian Province and Quanzhou City level, had
verbally confirmed that the said statistics registration is required. However, when the Target Group
submitted applications for the statistics registration certificates of the respective subsidiaries of
the Target Group in the PRC to the relevant local statistics departments of the National Bureau of
Statistics at the county level, such departments have verbally replied that such applications are not
required or they have refused to accept such applications. Given the fact that the National Bureau
of Statistics at the county level is the competent Governmental Authority for the application of
statistics registration certificates and the rights to grant such approval is vested in the relevant local
departments of the National Bureau of Statistics at the county level, as opposed to the National
Bureau of Statistics of Fujian Province and Quanzhou City, the Target Group is yet to obtain
such certificates as at the Latest Practicable Date. The Target Company has undertaken to the
Purchaser and the Company that it will procure its subsidiaries in the PRC to apply for the statistics
registration as and when required by the National Bureau of Statistics at the county level. As further
advised by our PRC Legal Advisers, the statistics registration certificates are not the requisite
licenses for the business operation of the Target Group, and the lack of such statistics registration
certificates has no material adverse legal impact on the business operations of the Target Group. As
further advised by our PRC Legal Advisers, if, in the future, the said statistics departments change
their attitude and request the Target Group to complete such registration and the Target Group is
not able to complete the registration in time, the Target Group may be subject to a fine of up to
RMB 0.9 million for such non-compliance, representing approximately 0.5% of the net profit of the
Target Group for the year ended 31 December 2012. In light of the aforesaid, the Directors are of
the view that the Enlarged Group’s business, financial condition and operating results will not be
materially and adversely affected.
– 134 –
LETTER FROM THE BOARD
C.
INDUSTRY OVERVIEW
This section contains information, forecast and statistics relating to the economy in China
and the industry in which the Target Group operates. The Directors believe that the sources
of the information are appropriate sources for such information and the Directors have taken
reasonable care in extracting and reproducing such information. The Directors have no reason
to believe that such information is false or misleading or that any fact has been omitted that will
render such information false or misleading in any material respect. The Directors have derived
such information and data partly from publicly available governmental and official sources as
well as a report the Company commissioned from Euromonitor International, an Independent
Third Party, which have not been independently verified by the Company, the Financial Adviser,
the Joint Independent Financial Advisers, nor any of their or our directors, affiliates, advisers
or any other parties involved in the Acquisition. Furthermore, the information derived from
governmental sources in the PRC may not be consistent with the information compiled within
or outside of China by third parties. The Directors make no representation as to the correctness
or accuracy of governmental or official information contained in this circular. Accordingly, such
information should not be unduly relied upon. The Directors have, however, taken such care as
they considered reasonable in the reproduction and extraction of such information.
THE PRC ECONOMY
Strong growth of the PRC economy
China’s economy has expanded rapidly since the adoption of reform and market liberalisation
policies by the PRC Government in the late 1970’s. China’s economy has demonstrated strong
and steady growth over the last three decades and has become one of the largest economies in
the world. From 2007 to 2011, according to the National Bureau of Statistics, the nominal GDP
in China increased from RMB26.6 trillion to RMB47.3 trillion and its GDP per capita grew
from RMB20,169.0 to RMB35,181.0, representing a CAGR of approximately 17.1% and 16.5%,
respectively. The following chart illustrates the nominal GDP and GDP per capita growth in China
from 2007 to 2011.
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LETTER FROM THE BOARD
Nominal GDP and GDP per capita in China
Nominal GDP
(RMB trillion)
Per capita GDP
(RMB)
50.0
35,181.0
45.0
35.0
30.0
23,708.0
30,000.0
25,608.0
25,000.0
20,169.0
20,000.0
25.0
47.3
20.0
15.0
10.0
35,000.0
30,015.0
40.0
34.1
31.4
15,000.0
40.2
10,000.0
26.6
5,000.0
5.0
0.0
40,000.0
2007
2008
2009
Nomial GDP of China
2010
2011
0.0
GDP per capita of China
Source: National Bureau of Statistics
Rapid urbanisation and increasing disposable income
Industrialisation and economic growth in China have resulted in rapid urbanisation through
the migration of rural populations to urban areas and the development of towns into cities.
According to the National Bureau of Statistics, the total urban population in China increased from
606.3 million in 2007 to 690.8 million in 2011, representing an increase of 12.2% over this fouryear period. During the same period, the urban population as a percentage of the total population
increased from 45.9% to 51.3%, and is projected to continue to increase rapidly over the next
decade. The following chart illustrates the total urban population and the urban population as a
percentage of the total population in China as at the end of the periods indicated.
– 136 –
LETTER FROM THE BOARD
Population in China
Urban population as a %
of total population (%)
Urban population
(million)
760.0
60.0%
740.0
720.0
51.3%
700.0
680.0
660.0
45.9%
47.0%
49.9%
669.8
690.8
50.0%
645.1
640.0
620.0
48.3%
624.0
40.0%
606.3
600.0
580.0
560.0
540.0
30.0%
2007
2008
Urban population
2009
2010
2011
Urban population as a % of total population
Source: National Bureau of Statistics
Along with China’s rapid economic growth, disposable income levels have grown
significantly. According to the National Bureau of Statistics, from 2007 to 2011, the per capita
annual disposable income of urban households in China increased from RMB 13,786.0 to
RMB21,810.0, representing a CAGR of 12.2%. During the same period, the per capita annual
disposable income of rural households in China increased from RMB4,140.0 to RMB6,977.0,
representing a CAGR of 13.9%. The following chart sets out the per capita annual disposable
income of urban households and its year-on-year growth rate, as well as the per capita annual
disposable income of rural households in China from 2007 to 2011.
– 137 –
LETTER FROM THE BOARD
Per capita annual disposable income of urban households and
its year-on-year growth rate; per capita annual disposal income of
rural households in China
RMB
growth %
30.0%
25,000
21,809.8
20,000
19,109.4
17,174.7
20.0%
15,780.8
15,000
13,785.8
14.5%
14.1%
11.3%
10,000
8.8%
5,000
5,153.2
4,760.6
4,140.4
6,977.3
5,919.0
10.0%
0.0%
0
2007
2008
2009
2010
2011
Per Capita Annual Disposable Income of Urban Households
Growth Rate
Per Capita Annual Disposable Income of Rural Households
Source: National Bureau of Statistics
According to the Fujian Bureau of Statistics, Fujian’s total population reached 37.2
million in 2011. The following chart illustrates the total urban population in Fujian and the urban
population in Fujian as a percentage of the total population in Fujian as at the end of the periods
indicated.
Population in Fujian
Fujian urban population as a %
of total population in Fujina (%)
Fujian urban population
(million)
65.0%
24.5
23.5
57.1%
22.5
55.1%
21.5
20.5
51.4%
21.6
55.0%
20.2
19.3
19.5
18.5
21.1
53.0%
58.1%
18.6
45.0%
17.5
16.5
15.5
35.0%
2007
2008
Urban population
2009
2010
2011
Urban population as a % of total population
Source: Fujian Bureau of Statistics
– 138 –
LETTER FROM THE BOARD
According to the National Bureau of Statistics and Fujian Bureau of Statistics, the per
capita annual disposable incomes of both urban and rural households in Fujian are greater
than the national level. From 2007 to 2011, the per capita annual disposable income of urban
households in Fujian increased from RMB15,505.0 to RMB24,907.0. During the same period, the
per capita annual disposable income of rural households in Fujian increased from RMB5,467.0
to RMB8,779.0. The following chart sets out the per capita annual disposable income of urban
households and its year-on-year growth rate, as well as the per capita annual disposable income of
rural households in Fujian from 2007 to 2011.
Per capita annual disposable income of urban households and
its year-on-year growth rate; per capita annual disposable income of
rural households in Fujian
RMB
growth %
30.0%
30,000
24,907.0
24,000
21,781.0
20.0%
19,577.0
17,961.0
15.8%
18,000
15,505.0
14.4%
11.3%
12,000
10.0%
9.0%
6,000
5,467.0
6,196.0
6,680.0
7,427.0
8,779.0
0.0%
0
2007
2008
2009
2010
2011
Per Capita Annual Disposable Income of Urban Households
Growth Rate
Per Capita Annual Disposable Income of Rural Households
Sources: National Bureau of Statistics and Fujian Bureau of Statistics
Strong consumption growth
Rising personal income and rapid urbanisation have driven strong consumer spending in
China. According to the National Bureau of Statistics, total retail sales of consumer goods in
China increased from RMB9.4 trillion in 2007 to RMB18.4 trillion in 2011, representing a CAGR
of 18.4%, while per capita consumption expenditure of urban households in China increased
from RMB9,997.5 to RMB15,160.9 during the same period, representing a CAGR of 11.0%.
The following charts illustrate the total retail sales of consumer goods in China and per capita
consumption expenditure of urban households in China from 2007 to 2011.
– 139 –
LETTER FROM THE BOARD
Total retail sales of consumer goods in China and per capita consumption
expenditure of urban households in China
RMB (trillion)
RMB (trillion)
20.0
18.4
17.7
10,000
11.5
11.1
8.8
12,264.5
12,000
13.3
13.3
15,160.9
13,471.5
14,000
15.7
15.5
16,000
9.4
11,242.9
9,997.5
8,000
6.6
6,000
4.4
4,000
2.2
2,000
0.0
0
2007
2008
2009
2010
2011
2007
Total Retail Sales of Consumer Goods
2008
2009
2010
2011
Per Capita Consumption Expenditure
of Urban Households
Source: National Bureau of Statistics
CHINESE TEA INDUSTRY IN CHINA
Chinese tea industry can be broadly divided into the following two main categories: raw teas
（毛茶）and refined teas（精製茶）.
Raw teas: tea leaves are picked and processed by the tea farmers to become raw teas.
Refined teas: the raw teas are processed by removing visible impurities, fine powder and
small broken tea leaves to become refined teas.
Raw teas
(i)
Market overview
According to the Euromonitor International Report, sales value of raw teas in China
increased from RMB22,556.5 million in 2007 to RMB47,292.8 million in 2011, representing a
CAGR of 20.3%. Similarly, sales volume of raw teas in China increased from 797,800.0 tonnes in
2007 to 1,162,900.0 tonnes in 2011, representing a CAGR of 9.9%.
– 140 –
LETTER FROM THE BOARD
The following charts illustrate the market size and the year-on-year growth rate of raw tea
market in China from 2007 to 2011 by sales value and sales volume, respectively.
Historical (2007-2011) market size and year-on-year growth rate of
raw tea market in China by sales value
Raw tea sales value
(RMB million)
growth %
30.0%
54,000.0
47,292.8
48,000.0
42,000.0
39,405.8
32,427.8
21.5%
20.0%
36,000.0
17.8%
28,000.0
24,000.0
22.1%
20.0%
26,562.7
22,556.5
10.0%
18,000.0
12,000.0
6,000.0
0.0%
–
2007
2008
2009
Raw Tea Sales Value
2010
2011
Growth Rate
Source: Euromonitor International
Historical (2007-2011) market size and year-on-year growth rate of
raw tea market in China by sales volume
Raw tea sales volume
(’000 tonnes)
growth %
1,200.0
1,162.9
30.0%
1,074.7
985.6
1,000.0
800.0
895.1
797.8
600.0
20.0%
12.2%
10.1%
9.0%
400.0
8.2%
10.0%
200.0
0.0%
–
2007
2008
2009
Raw Tea Sales Volume
Source: Euromonitor International
– 141 –
2010
Growth Rate
2011
LETTER FROM THE BOARD
Oolong tea represents the second largest portion of sales of raw teas in China in 2011, by
both sales value and sales volume. The total market share of oolong raw teas in China by sales value
increased from 13.2% in 2007 to 15.8% in 2011, reaching a sales value of RMB7,453.8 million in
2011. Similarly, sales volume of oolong raw teas in China increased from 102,800.0 tonnes in 2007
to 158,100.0 tonnes in 2011, representing a CAGR of 11.4%. The following charts illustrate the
market size and the year-on-year growth rate of oolong raw tea market in China from 2007 to 2011
by sales value and sales volume, respectively.
Historical (2007-2011) market size and year-on-year growth rate of
oolong raw tea market in China by sales value
Oolong raw tea sales value
(RMB million)
growth %
7,800.0
7,453.8
30.0%
29.7%
23.7%
6,500.0
27.2%
22.5%
5,816.2
5,200.0
20.0%
4,517.8
3,900.0
3,652.4
2,981.4
10.0%
2,600.0
1,300.0
0.0%
–
2007
2008
2009
Oolong Raw Tea Sales Value
Source: Euromonitor International
– 142 –
2010
2011
Oolong Raw Tea Growth Rate
LETTER FROM THE BOARD
Historical (2007-2011) market size and year-on-year growth rate of
oolong raw tea market in China by sales volume
Oolong raw tea sales volume
(’000 tonnes)
growth %
30.0%
180.0
158.1
160.0
142.8
140.0
120.0
130.8
119.9
102.8
20.0%
16.6%
100.0
80.0
60.0
9.1%
9.2%
2009
2010
10.7%
10.0%
40.0
20.0
0.0%
–
2007
2008
Oolong Raw Tea Sales Volume
2011
Oolong Raw Tea Growth Rate
Source: Euromonitor International
Of the five sub-varieties of oolong teas, namely, Tie Guan Yin（鐵觀音）, Mao Xie（毛蟹）,
Huangjin Gui（ 黃金桂）, Ben Shan（本山）and others, Tie Guan Yin is the major sub-variety in
terms of sales value and Mao Xie in the major sub-variety in terms of sales volume. Tie Guan Yin
represents 30.3% of the oolong tea industry by sales value and the total market size of Tie Guan Yin
in the oolong tea industry by sales value amounted to RMB2,255.2 million in 2011. Sales volume of
Mao Xie increased from 45,900.0 tonnes in 2007 to 70,800.0 tonnes in 2011, representing 44.8% of
the oolong tea industry.
– 143 –
LETTER FROM THE BOARD
The charts below illustrate the market shares of the five sub-varieties of oolong teas in China,
based on sales value and sales volume in 2011, respectively.
Percentage of each sub-variety of oolong tea by sales value, 2011
Others
28.6%
Tie Guan Yin
30.3%
Ben Shan
6.1%
Huangjin Gui
5.4%
Mao Xie
29.6%
Source: Euromonitor International
Percentage of each sub-variety of oolong tea by sales volume, 2011
Tie Guan Yin
22.3%
Mao Xie
44.8%
Others
21.4%
Huangjin Gui Ben Shan
5.3%
6.2%
Source: Euromonitor International
– 144 –
LETTER FROM THE BOARD
(ii)
Outlook
Based on the trends and facts mentioned above, according to the Euromonitor International
Report, the market in China for raw teas is expected to reach RMB74,237.5 million in terms of
sales value and 1,454,500.0 tonnes in terms of sales volume by the end of 2014. The CAGR in
sales value and sales volume from 2012 to 2014 is estimated at approximately 15.1% and 7.5%,
respectively.
The following charts illustrate the outlook of the market size and the year-on-year growth
rate of raw tea market in China from 2012 to 2014 by sales value and sales volume, respectively.
Market size and year-on-year growth rate of raw tea market
in China by sales value
Raw tea sales value
(RMB million)
growth %
80,000.0
74,237.5
70,000.0
60,000.0
64,816.7
56,023.4
20.0%
50,000.0
40,000.0
30.0%
18.5%
15.7%
30,000.0
14.5%
10.0%
20,000.0
10,000.0
–
0.0%
2012(E)
2013(E)
Raw Tea Sales Value
Source: Euromonitor International
– 145 –
2014(E)
Raw Tea Growth Rate
LETTER FROM THE BOARD
Market size and year-on-year growth rate of raw tea market
in China by sales volume
Raw tea sales volume
(’000 tonnes)
growth %
30.0%
1,800.0
1,600.0
1,400.0
1,454.5
1,355.3
1,258.2
20.0%
1,200.0
1,000.0
800.0
600.0
8.2%
7.7%
7.3%
2012(E)
2013(E)
2014(E)
10.0%
400.0
200.0
0.0%
–
Raw Tea Sales Volume
Raw Tea Growth Rate
Source: Euromonitor International
The market for oolong raw teas is expected to reach RMB12,646.2 million in terms of
sales value and 208,400.0 tonnes in terms of sales volume by 2014. The CAGR in sales value and
in sales volume from 2012 to 2014 is estimated at approximately 17.7% and 9.4%, respectively.
Euromonitor International believes that oolong tea will continue to constitute the second largest
portion of sales of raw teas in China in 2014, by both sales value and sales volume.
In terms of sales value, the major sub-category of oolong tea, Tie Guan Yin, is expected to
increase during the forecast period with a CAGR in sales value of approximately 18.4% from 2012
to 2014, reaching RMB3,805.5 million in 2014. In terms of sales volume, the major sub-category of
oolong tea, Mao Xie, is also expected to increase during the forecast period with a CAGR in sales
volume of 7.6% from 2012 to 2014, reaching 87,800.0 tonnes in 2014.
– 146 –
LETTER FROM THE BOARD
The following charts illustrate the outlook of the market size and the year-on-year growth
rate of oolong raw tea in China from 2012 to 2014 by sales value and sales volume, respectively.
Market size and year-on-year growth rate of oolong raw tea market
in China by sales value
Oolong raw tea sales value
(RMB million)
growth %
14,000.0
12,000.0
10,000.0
12,646.2
22.5%
10,851.8
9,133.6
18.8%
30.0%
20.0%
16.5%
8,000.0
6,000.0
10.0%
4,000.0
2,000.0
0.0%
–
2012(E)
2013(E)
Oolong Tea Sales Value
2014(E)
Oolong Tea Growth Rate
Source: Euromonitor International
Market size and year-on-year growth rate of oolong raw tea market
in China by sales volume
Oolong raw tea sales volume
(’000 tonnes)
growth %
30.0%
250.0
208.4
200.0
191.3
174.2
20.0%
150.0
100.0
10.2%
9.8%
2012(E)
2013(E)
8.9%
10.0%
50.0
0.0%
–
Oolong Tea Sales Volume
Source: Euromonitor International
– 147 –
2014(E)
Oolong Tea Growth Rate
LETTER FROM THE BOARD
Refined teas
(i)
Market overview
With China’s rising economy and growing awareness of health benefits derived from teas,
the refined tea market in China has been experiencing a growing trend in market size from 2007 to
2011. According to the Euromonitor International Report, the retail sales value of refined teas in
China increased from RMB18,191.3 million in 2007 to RMB40,237.7 million in 2011, representing
a CAGR of 22.0%. Similarly, the retail sales volume of refined teas in China increased from
183,900.0 tonnes in 2007 to 306,300.0 tonnes in 2011, representing a CAGR of 13.6%.
The following charts illustrate the market size and the year-on-year growth rate of refined tea
market in China from 2007 to 2011 by retail sales value and retail sales volume, respectively.
Historical (2007-2011) market size and year-on-year growth rate of
refined tea market in China by retail sales value
Retail sales value
(RMB million)
growth %
42,000.0
40,237.7
36,000.0
21.5%
30,000.0
24,000.0
18,000.0
22.8%
32,820.0
27,135.2
20.9%
30.0%
22.6%
20.0%
22,096.3
18,191.3
10.0%
12,000.0
6,000.0
0.0%
–
2007
2008
2009
Retail Sales Value
Source: Euromonitor International
– 148 –
2010
Refined Tea Growth Rate
2011
LETTER FROM THE BOARD
Historical (2007-2011) market size and year-on-year growth rate of
refined tea market in China by retail sales volume
Retail sales volume
(’000 tonnes)
growth %
360.0
30.0%
306.3
300.0
271.2
243.8
240.0
180.0
20.0%
216.1
183.9
17.5%
12.8%
12.9%
11.2%
120.0
10.0%
60.0
–
0.0%
2007
2008
2009
Retail Sales Volume
2010
2011
Refined Tea Growth %
Source: Euromonitor International
According to the Euromonitor International Report, refined oolong tea is the second most
heavily consumed tea products in China following green tea, representing approximately 13.2% of
China’s total refined teas consumption in 2011. The retail sales value of refined oolong tea in China
increased from RMB2,092.0 million in 2007 to RMB5,309.5 million in 2011, representing a CAGR
of 26.2%. Similarly, the retail sales volume of refined oolong tea in China increased from 20,500.0
tonnes in 2007 to 40,800.0 tonnes in 2011, representing a CAGR of 18.7%.
Similar to the market for raw teas in China, refined Tie Guan Yin is a major sub-category of
oolong tea, representing 74.8% of the Chinese market for refined oolong tea in 2011 by retail sales
value. The total market size of refined Tie Guan Yin in China by retail sales value amounted to
RMB3,973.3 million in 2011, whereas the retail sales volume amounted to 25,400.0 tonnes in 2011.
– 149 –
LETTER FROM THE BOARD
The following charts illustrate the market size and the year-on-year growth rate of refined
oolong tea market in China from 2007 to 2011 by retail sales value and retail sales volume,
respectively.
Historical (2007-2011) market size and year-on-year growth rate of refined
oolong tea market in China by retail sales value
Refined oolong tea retail sales value
(RMB million)
growth %
40.0%
6,000.0
5,309.5
33.0%
5,000.0
4,409.5
26.7%
4,000.0
3,527.6
30.0%
25.0%
20.4%
2,651.6
3,000.0
20.0%
2,092.0
2,000.0
10.0%
1,000.0
–
0.0%
2007
2008
2009
Refined Oolong Tea Retail Sales Value
2010
2011
Refined Oolong Tea Growth Rate
Source: Euromonitor International
Historical (2007-2011) market size and year-on-year growth rate of refined
oolong tea market in China by retail sales volume
Refined oolong tea retail sales volume
(’000 tonnes)
growth %
60.0
30.0%
50.0
22.4%
18.6%
40.0
17.4%
29.5
30.0
34.9
40.8
20.0%
16.6%
24.1
20.0
20.5
10.0%
10.0
0.0
0.0%
2007
2008
2009
Refined Oolong Tea Retail Sales Volume
Source: Euromonitor International
– 150 –
2010
2011
Refined Oolong Tea Growth Rate
LETTER FROM THE BOARD
(ii)
Market drivers
The market for Chinese refined tea has been driven by a combination of factors, some of
which are set out below:
(iii)
•
growth of refined teas is primarily attributable to the rapid economic growth and
a growing middle class population (households with annual incomes between
RMB60,000.0 and RMB500,000.0 in China). China’s middle-class population is
becoming the largest segment customers for refined teas and this has resulted in
growth of refined tea market;
•
many Chinese consumers believe that tea has health benefits. As Chinese consumers
become more urbanised and their disposable incomes increase, they are increasingly
purchasing refined tea products in an attempt to address certain health concerns; and
•
consumers are placing increasingly higher requirements on the quality and market
positioning of gift tea products, there is an increasing trend of affluent consumers
giving premium packaged/branded consumer products as corporate/business gifts or
personal gifts for special occasions, which has also contributed to the growth of the
refined tea market.
Outlook
Based on the trends and facts mentioned above, according to the Euromonitor International
Report, the market for refined tea in China is expected to reach RMB66,527.7 million in terms
of retail sales value and 401,000.0 tonnes in terms of retail sales volume by the end of 2014. The
CAGR in retail sales value and in retail sales volume from 2012 to 2014 are estimated at 17.6% and
9.0%, respectively.
– 151 –
LETTER FROM THE BOARD
The following charts illustrate the outlook of the estimated market size and the year-on-year
growth rate of refined tea market in China from 2012 to 2014 by retail sales value and retail sales
volume, respectively.
Estimated market size and year-on-year growth rate of refined tea market
in China by retail sales value
Refined tea retail sales value
(RMB million)
growth %
70,000.0
66,527.7
60,000.0
30.0%
56,947.1
50,000.0
48,142.5
40,000.0
19.6%
20.0%
18.3%
16.8%
30,000.0
10.0%
20,000.0
10,000.0
–
0.0%
2012(E)
2013(E)
Refined Tea Retail Sales Value
2014(E)
Refined Tea Growth Rate
Source: Euromonitor International
Estimated market size and year-on-year growth rate of refined tea market
in China by retail sales volume
Refined tea retail sales volume
(’000 tonnes)
growth %
450.0
30.0%
401.0
400.0
350.0
369.0
337.5
300.0
20.0%
250.0
200.0
10.2%
150.0
9.3%
8.7%
2013(E)
2014(E)
10.0%
100.0
50.0
–
0.0%
2012(E)
Refined Tea Retail Sales Volume
Source: Euromonitor International
– 152 –
Refined Tea Growth Rate
LETTER FROM THE BOARD
Along with the popularity of oolong tea, according to the Euromonitor International Report,
the market for refined oolong tea is expected to reach RMB9,056.7 million in terms of sales value
and 57,800.0 tonnes in terms of retail sales volume by 2014. The CAGR in retail sales value and in
retail sales volume from 2012 to 2014 is estimated at 19.1% and 11.7%, respectively.
The major sub-category of oolong tea, Tie Guan Yin, is also expected to increase during
the forecast period with a CAGR in retail sales value of approximately 21.2% from 2012 to 2014,
reaching RMB7,200.7 million in 2014, and a CAGR in retail sales volume of 12.4% from 2012 to
2014, reaching 36,400.0 tonnes in 2014.
The following charts illustrate the outlook of the estimated market size and the year-on-year
growth rate of refined oolong tea market in China from 2012 to 2014 by retail sales value and retail
sales volume, respectively.
Estimated market size and year-on-year growth rate of refined oolong tea market
in China by retail sales value
Refined oolong tea retail sales value
(RMB million)
growth %
9,056.7
9,000.0
8,000.0
30.0%
7,615.0
7,000.0
6,000.0
20.2%
19.4%
6,380.0
18.9%
20.0%
5,000.0
4,000.0
3,000.0
10.0%
2,000.0
1,000.0
–
0.0%
2012(E)
2013(E)
Refined Oolong Tea Retail Sales Value
Source: Euromonitor International
– 153 –
2014(E)
Refined Oolong Tea Growth Rate
LETTER FROM THE BOARD
Estimated market size and year-on-year growth rate of refined oolong tea market
in China by retail sales volume
Refined oolong tea retail sales volume
(’000 tonnes)
growth %
80.0
57.8
30.0%
52.0
70.0
46.3
60.0
20.0%
50.0
40.0
13.5%
12.3%
30.0
11.2%
10.0%
20.0
10.0
–
0.0%
2012(E)
2013(E)
Refined Oolong Tea Retail Sales Volume
2014(E)
Refined Oolong Tea Growth Rate
Source: Euromonitor International
REFINED TEA DISTRIBUTION CHANNEL IN CHINA
China’s urban consumers are placing more emphasis on convenience when making retail
purchases. As a result, distribution channels for refined tea products such as hypermarkets, tea
speciality stores and independent small tea grocers are gaining in popularity. According to the
Euromonitor International Report:
•
speciality tea stores are the dominant distribution channel for refined tea products.
57.0% of refined tea products were sold from speciality tea stores in 2011.
Euromonitor International believes that as more tea producers focus on the refined and
brand tea industry, it is estimated that speciality tea stores will further increase their
market share;
•
traditional distribution channels, such as independent small grocery stores, still take
a significant market share of sales of refined teas. In 2009, traditional distribution
channels represented approximately 37.0% of the market share, but which was
decreased to 34.0% in 2011; and
•
Internet is also becoming an emerging channel for sales of refined teas. The market
share of sales of refined tea on Internet increased from 1.0% in 2009 to 2.2% in 2011,
with a CAGR of 80.6%. According to Euromonitor International, tea producers have
or will have online channels for the sales of their refined tea products.
– 154 –
LETTER FROM THE BOARD
The following chart illustrates sales of refined teas in China by various distribution channels
from 2009 to 2011.
Refined tea distribution channels in China
RMB (million)
25,000.0
22,935.5
22,500.0
20,000.0
18,379.2
17,500.0
14,897.2
15,000.0
12,500.0
10,000.0
7,500.0
7,444.0
6,235.8
5,427.0
5,000.0
2,500.0
6,236.8
5,251.2
3,700
542.7
1,641.0
1,383.9
656.4
271.4
656.4
804.8
1,931.4
885.2
0.0
2009
2010
Supermarket/hypermarket
Counter/store-in-store
Convenience stores
Independent small grocers
2011
Specialist tea stores
Others
Source: Euromonitor International
•
According to the Euromonitor International Report, 43.0% of refined teas were sold
through the manufacture-distributor-wholesaler-retailer channels in 2011. This is in
contrast to the manufacturer-retailer model which only took a 24.0% market share in
2011. Euromonitor International believes that the manufacturer-retailer model is often
limited by its large investment costs.
The following chart illustrates the market share of the different refined tea distribution model
in China in 2011.
Sales value in refined tea market in China in 2011
Manufacturerretailer
24.0%
Manufacturerdistributor-retailer
33.0%
Source: Euromonitor International
– 155 –
Manufacturerdistributorwholesaler-retailer
43.0%
LETTER FROM THE BOARD
COMPETITION IN CHINESE TEA INDUSTRY IN CHINA
Market share of leading players in raw tea market
According to the Euromonitor International Report, the Target Group ranked second among
the raw teas producers in China in terms of sales value in 2009 ranked first in 2010 and 2011. In
terms of sales volume, the Target Group ranked first among the raw tea producers in China in 2009
and ranked second among the raw tea producers in China in 2010 and 2011.
As the numbers indicate, the raw tea market in China is a fragmented market. The directors
of the Target Company believe that with approximately 96.8% of the retail sales value in 2011
constituted by a large number of small players, the Target Company’s position and competitive
advantage (including strategically located cultivation bases in Anxi County, Fujian Province, the
PRC, which is a well-known location for growing quality Tie Guan Yin and is the source of origin
of Tie Guan Yin; quality product from the vertically integrated operating model it adopted, which
enables it to directly control key aspects of the value chain, including cultivation, production, and
sales and marketing; established brand recognition and reputation of its quality Tie Guan Yin; and
extensive sales network and multi-faceted marketing strategies) over these other players will enable
the Target Company to capture an increasing portion of the market share in the raw tea market in
China, which will reinforce its market position and increase its returns.
Market share of leading players in refined tea market
The refined tea market in China has become increasingly competitive over the last several
years. Although the Target Group was not among the top 10 refined tea producers in China from
2009 to 2011, according to the Euromonitor International Report, it was one of the top 10 refined
oolong tea producers in China in terms of sales volume in 2009, 2010 and 2011. The Target Group
was also one of the top 10 refined Tie Guan Yin tea producers in China in terms of sales volume in
2009, 2010 and 2011.
– 156 –
LETTER FROM THE BOARD
The top 10 refined tea producers only constituted approximately 18.9% of the retail sales
value, or 5.8% of the retail sales volume in 2011. The directors of the Target Company believe
that with approximately 81% of the retail sales value of refined tea in 2011 constituted by a large
number of small players, the Target Company’s position and competitive advantage (including
strategically located cultivation bases in Anxi County, Fujian Province, the PRC, which is a wellknown location for growing quality Tie Guan Yin and is the source of origin of Tie Guan Yin;
quality product from the vertically integrated operating model it adopted, which enables it to
directly control key aspects of the value chain, including cultivation, production, and sales and
marketing; established brand recognition and reputation of its quality Tie Guan Yin; and extensive
sales network and multi-faceted marketing strategies) over these other players will enable the Target
Company to capture an increasing portion of the market share in the refined tea market in China,
which will reinforce its market position and increase its returns.
EUROMONITOR INTERNATIONAL REPORT
Euromonitor International was commissioned to conduct an analysis of the Chinese tea
market in China and prepare the Euromonitor International Report. The Euromonitor International
Report includes information on the Chinese tea market in China such as sales value, sales volume,
market share of leading Chinese tea producers, and the outlook of the Chinese tea market in China,
which have been quoted and/or extracted in this circular. Euromonitor International has been
engaged in a number of market assessment projects covering PRC consumer products industries in
particular. The Euromonitor International Report had been prepared by Euromonitor International
independent of the Company’s influence. The Directors are of the view that the Euromonitor
International Report is considered independent and reliable.
Euromonitor International’s independent analysis was undertaken through primary and
secondary research obtained from various sources. Primary research includes interviewing Chinese
tea companies, distributors and retailers for opinions and insights as well as tea industry trade
associations, governmental and semi-public organisations and other observers of tea market.
Secondary research involves gathering, refining and confirming information from multiple and
relevant published data sources. Projected market size by sales value and sales volume were based
on a comprehensive and in-depth review over the historical market development and a cross check
with established industry figures or trade interviews.
Euromonitor International made the following major assumptions in the preparation of the
Euromonitor International Report:
•
the research conducted covers the sale of Chinese teas through all retail channels in
China and does not include the sale of Chinese teas for industrial use; and
•
all sales values are based on retail sales prices.
– 157 –
LETTER FROM THE BOARD
D.
REGULATORY OVERVIEW
The Target Group are principally engaged in the production, marketing and sale of a wide
range of oolong teas and our operations are subject to relevant PRC laws, regulations and rules.
With respect to the Target Group’s current business operations, set out below is a summary of the
significant PRC laws, regulations and rules applicable to the Target Group:
RULES RELATING TO THE FOREIGN-INVESTED INDUSTRY
Tea Products
Guidance on the foreign investment industry in the PRC can be found in the Catalogue for
the Guidance of Foreign Investment Industries (2011 version)（《外商投資產業指導目錄（ 2011年
修訂）》）(the “2011 Guidance Catalogue”), which took effect on 30 January 2012. Under the 2011
Guidance Catalogue, the processing of green tea and special tea（特種茶）, including renowned
tea and black tea, with traditional techniques is listed as a business which foreign investment is
prohibited. On 24 October 2011, Fujian MOFCOM confirmed that “production, processing and
sales of oolong tea ” as contained in the business scope of the Fujian Nature does not fall in the
limited or prohibited activities of the said catalogue.
Commercial Sector
MOFCOM issued the Measures for the Administration on Foreign Investment in Commercial
Sectors（《外商投資商業領域管理辦法》）(the “Measures”), on 16 April 2004, which regulate
foreign investment in commercial sectors such as wholesale, retail, commission agency and
franchising. The Measures permit foreign investors to engage in the operation of distribution
services on a wholly-owned basis from 11 December 2004. According to the Measures, starting
from 11 December 2004, restrictions on the geographical coverage for the establishment of
foreign invested retail enterprises and the operation of retail stores by them were abolished. In
terms of requirements for foreign invested commercial enterprises to establish retail stores, the
Measures stipulate that foreign investors can either: (i) incorporate the foreign invested commercial
enterprises first before opening retail stores, or (ii) establish the foreign invested commercial
enterprises and the retail stores at the same time.
PRC LAWS ON OWNERSHIP OF FOREST
The PRC Property Law（《中華人民共和國物權法》）, promulgated by the NPC on 16
March 2007 and took effect on 1 October 2007, forms the legal framework of property right in
the PRC. According to Article 9 of the PRC Property Law, unless otherwise provided by law, the
creation, alteration, transfer and extinction of right to immovable property shall become valid upon
registration in accordance with relevant law.
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LETTER FROM THE BOARD
The PRC Forestry Law（《中華人民共和國森林法》）, promulgated by the Standing
Committee of the NPC on 20 September 1984 and amended on 29 April 1998, took effect on 1
July 1998 to protect the cultivation of forest resources and to ensure the reasonable use of such
resources. It also governs the afforestation, cultivation, felling, utilisation, management and
administration of forests within the PRC. Article 3 of the PRC Forestry Law provides that the
forests, trees and forest land owned by the State and by collectives, as well as the trees owned and
forest land used by individuals, shall be registered with the local people’s governments at or above
the county level, which shall issue certificates of right of ownership or usage to the registered entity
or person.
PRC RURAL LAND CONTRACTING LAW
The PRC Rural Land Contracting Law（《中華人民共和國農村土地承包法》）was
promulgated by the Standing Committee of the NPC on 29 August 2002 and became effective on 1
March 2003. The PRC Rural Land Contracting Law deals with the contractual management rights
（土地承包經營權）of rural land. Where a piece of rural land is owned by a collective economic
organisation（集體經濟組織）, the owner is not a single peasant individual, but the collective unit
of peasants in the village where they belong to. The collective unit or its committee will decide
the assignment of contractual management rights in accordance with certain procedures and
principles. Whoever obtains the contractual management rights shall use the land for agricultural
purpose only, unless otherwise approved by the relevant authorities. For forestland, the term
of the contractual management rights may range from 30 to 70 years. The collective unit or its
committee shall grant the contractual management rights to peasants within the village in the
form of household contract, while land in rural areas, such as barren mountains, gullies, hills and
beaches, not suitable to the form of household contract may be contracted in forms as bid invitation,
auction and public consultation. Organisations or individuals outside the village can also obtain
contractual management rights. The grant of such land use rights must have the consent of no less
than two-thirds of the members of the peasants’ assembly or no less than two-thirds of the peasants’
representatives. In addition, the local government at the town level must also approve the grant of
such land use rights. With respect to household contract, a written contract shall be adopted and
such contract shall become effective and the recipient shall obtain the contractual management
rights on the date of conclusion of the contract. The peasants may re-assign the contractual
management rights to another party (the “Recipient”) by means of subcontract, lease, exchange,
transfer or by other ways in accordance with relevant PRC laws and regulations. When re-assigning
the contractual management rights, the peasants shall sign a written contract with the Recipient
and shall, as the case may be, inform for record or obtain the consent from the collective unit or its
committee.
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LETTER FROM THE BOARD
LAWS AND REGULATIONS RELATING TO THE FOOD INDUSTRY
Food Safety
The Food Safety Law of the PRC（《中華人民共和國食品安全法》）, which was adopted by
the Standing Committee of the NPC on 28 February 2009 and became effective on 1 June 2009,
stipulates that food safety standards are compulsory and shall include the following:
•
maximum limits relating to the level of pathogenic micro-organisms, pesticide residue,
veterinary medicine residue, heavy metals, contaminants, and other substances
hazardous to human health in food and food-related products;
•
types, scope of application and dosage of food additives;
•
nutritional requirements of staple and supplementary food exclusively for infants and
toddlers and other special groups of people;
•
requirements for labels, identification and instructions relevant to food safety and
nutrition;
•
hygiene requirements for food production and operation;
•
quality requirements relating to food safety;
•
methods and procedures for food inspection and testing; and
•
other particulars proposed to be developed as food safety standards.
According to Article 2 of the Food Safety Law of the PRC, food production and processing
are referred to as “food production” while food circulation and catering services are referred to as
“food operation”. If there is any contravention of the Food Safety Law of the PRC, which includes
the following:
•
use non-food raw materials and/or recycled raw materials for the production of food
products, or adding chemical substances and/or other harmful substances other than
food additives;
•
engage in the production and/or operation of food products which the contents of
pathogenic micro-organisms, pesticide residues, veterinary medicine residues, heavy
metals, contaminants, and other substances hazardous to human health are higher than
the relevant food-safety standard limits;
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LETTER FROM THE BOARD
•
engage in the production and/or operation of food products for certain consumer
groups (e.g. infants and children) which the nutritional ingredients fail to meet
relevant food-safety standards;
•
engage in the operation of putrid, spoiled, moldy, unclean, impure, contaminated,
adulterated food products, or food products with abnormal organoleptic properties;
•
engage in the operation of meat of animals (including poultry, livestock, beasts and
aquatic animals) which die from diseases, poisoning or unknown causes and/or food
products processed therefrom;
•
engage in the production or operation of meat (products) which have not been
quarantined by animal hygienic supervision organisations or have failed the inspection
test;
•
engage in the operation of food products which have run out of shelf life;
•
engage in the production and/or operation of food products which are prohibited by
the State due to disease-prevention considerations;
•
engage in the production of food products by using new raw materials, or the
production of new categories of food additives or new categories of food-related
products, without going through relevant food-safety assessments first; or
•
ignore the competent authorities’ order to recall or suspend operation of certain food
products which do not meet the food-safety standards,
the relevant authority will (i) forfeit the illegal income, food products, equipment and
raw materials used in the illegal production and operation activities, (ii) impose a fine, which is
equivalent to a sum between RMB2,000 and RMB50,000 if the prices of the food products are less
than RMB10,000 or a sum which is equivalent to five to ten times of the prices of the food products
if the prices of the food products are RMB10,000 or more, and (iii) revoke the violater’s licence in
serious cases.
According to the Regulations for the Implementation of the Food Safety Law of the PRC
（《中華人民共和國食品安全法實施條例》）, which were promulgated and became effective
on 20 July 2009, food production operators should engage in production operation activities
in accordance with relevant PRC laws, regulations and food safety standards, establish sound
food safety management systems and adopt effective measures to ensure that food is safe. Food
production operators should be responsible for the safety of the food which they produce and trade,
be responsible to the public, and assume social responsibility.
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LETTER FROM THE BOARD
Food Hygiene
According to the Food Safety Law of the PRC（《中華人民共和國食品安全法》）, food
production operations shall comply with the following hygiene requirements:
•
appropriate facilities shall be available for treating raw materials for food and for
processing, packaging and storing food, based on the variety and quantity of food
produced; such facilities shall be kept tidy and clean; and appropriate distance shall be
maintained between such facilities and toxic or hazardous elements or other sources of
contamination;
•
appropriate equipment and facilities shall be available for food production,
disinfection, workplace dress changes, cleaning, lighting, illumination, ventilation,
anti-corrosion, dust-proofing, fly-proofing, rat-proofing, insect-proofing, cleansing
and treating waste water, rubbish and other waste storage;
•
technical professionals and management personnel in the field of food safety and a
regulated system to ensure food safety shall be available;
•
equipment and production lines shall be arranged in a practical way to prevent crosscontamination between food that is pending processing and food that is ready-to-eat
and between raw materials and finished products, and to avoid contact between food
and toxic or unclean substances;
•
tableware, drinking utensils and containers for ready-to-eat food shall be cleaned and
disinfected prior to use, and cooking utensils and other utensils shall be washed after
use and kept clean;
•
containers, utensils and equipment used for storage, transportation, loading and
unloading of food shall be safe, harmless and kept clean to prevent food contamination
and shall conform to specifications such as maintaining temperature at the level
required to ensure food safety; food shall be transported separately from toxic and
hazardous substances;
•
ready-to-eat food shall be kept in small packaging or use packaging materials and
tableware which are non-toxic and clean;
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LETTER FROM THE BOARD
•
food production and operating staff shall maintain good personal hygiene, wash their
hands thoroughly and wear clean working clothes and headwear while producing and
operating on food; non-toxic and clean tools shall be used while selling ready-to-eat
food without packaging;
•
water used shall comply with the national hygiene standards for drinking water;
•
detergents and disinfectants used shall be safe and harmless for the human body; and
•
other requirements specified under relevant PRC laws and regulations.
Food Production Licence
In accordance with the Food Safety Law of the PRC（《中華人民共和國食品安全法》）,
China has implemented a licensing system on food production. Food producers shall obtain food
production licences.
The Measures for the Administration of Food Production Licences（《食品生產許可管理
辦法》）, which were promulgated by the AQSIQ on 7 April 2010 and became effective on 1 June
2010, specify the requirements for food production licence:
•
appropriate facilities shall be available for treating raw materials for food and for
processing, packaging and storing food, based on the variety and quantity of food
produced; such facilities shall be kept tidy and clean; and appropriate distance shall be
maintained between such facilities and toxic or hazardous elements or other sources of
contamination;
•
appropriate equipment and facilities shall be available for food production,
disinfection, workplace dress changes, cleaning, lighting, illumination, ventilation,
anti-corrosion, dust-proofing, fly-proofing, rat-proofing, insect-proofing, cleansing
and treating waste water, rubbish and other waste storage;
•
equipment and production lines shall be arranged in a practical way to prevent crosscontamination between food that is pending processing and food that is ready-to-eat
and between raw materials and finished products, and to avoid contact between food
and toxic or unclean substances;
•
technical professionals and management personnel in the field of food safety shall be
available;
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LETTER FROM THE BOARD
•
a regulated system to ensure food safety, such as training, health management
including employee health check-up and health recording, in-factory examining
records, examining records of ex-factory products, raw material check and acceptance
and production management shall be available; and
•
other relevant PRC laws, regulations and national industrial policies in relation to food
production shall be complied with.
Food Circulation Permits
In accordance with the Measures for the Administration of Food Circulation Permits（《食品
流通許可證管理辦法》）, which were promulgated by the SAIC and became effective on 30 July
2009, food operator in circulation shall obtain the food circulation permit. The food producer who
has obtained the food production licence is not required to have a food circulation permit on the
condition that it sells the food produced by itself within its production facility. Any branch of an
enterprise operating food business shall obtain food circulation permit.
Food Inspection
In accordance with the Food Safety Law of the PRC（《中華人民共和國食品安全法》）,
China has implemented an inspection system relating to food production and operations. Under
the Food Safety Law of the PRC, the state and local food safety supervision and administrative
departments（食品安全監督管理部門）are required to carry out food inspection and may not
exempt any food from inspection. The quality and technical supervision departments, industry
and commerce administrative departments and food and drug supervision and administration
departments at and above the county level shall carry out food inspections by taking samples on
a regular or irregular basis. An enterprise that engages in the production of food, or in business
operations relating to the production of food, may itself inspect the food it produces, or the food
may be inspected by the authorized food inspection agent, in order to test for compliance with the
requirements of the Food Safety Law of the PRC.
– 164 –
LETTER FROM THE BOARD
Food Identification Administration System
Pursuant to the Provisions on the Administration of Food Identification（《食品標識管理
規定》）, which were promulgated by the AQSIQ on 27 August 2007 and became effective on 1
September 2008, and subsequently amended by the AQSIQ on 22 October 2009, food identification
labels shall bear the name of the food, the place and the date of production, the expiry date of the
food, the weight of the net content, any specification required by relevant regulations, the list of
ingredients, the names, addresses and contact information of the producers and product standard
codes implemented by the producers. Food identification labels on the primary and supplementary
food for infants or other specific groups shall state the main nutritional components and their
respective contents. Food labels with wordings such as “nutrition” and “strengthen” in their names
or descriptions are required to disclose the nutrition and calories of such food in accordance with
the relevant national standards and comply with the content and composition standards required
under national standards. Food produced under the production licensing management arrangement
is required to display its food production licence number and quality safety (QS) mark on the food
label. Some contents are prohibited to be indicated on a food label, among other things, including
expression or implication that the food serves the functions of disease prevention or treatment and
that a non-health-care food serves a health care function.
Food Recall
The PRC has established a food recall system as required by the Food Safety Law of the PRC
（《中華人民共和國食品安全法》）. Pursuant to the Provisions on the Administration of Food Recall
（《食品召回管理規定》）, which were issued by the AQSIQ and became effective on 27 August
2007, food recall is categorised into three grades based on the degree of severity of the food safety
hazard. Food may be recalled either voluntarily or upon order of the government.
Voluntary recall
In the case of a voluntary recall under the Provisions on the Administration of Food Recall:
•
the food producer shall immediately cease production and sale of the food identified
as unsafe for human consumption;
•
from the date on which the food has been identified as unsafe and must be recalled,
the relevant sellers shall be notified not to sell, and consumers shall be notified not to
consume, within one day for a grade one recall, within two days for a grade two recall,
and within three days for a grade three recall;
•
information distributed by food producers to the public relating to a food recall shall
be reported to the quality and technical supervision departments of the provincial-level
government or above in accordance with relevant requirements;
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LETTER FROM THE BOARD
•
from the date on which the food has been identified as unsafe and must be recalled,
the producer should submit its food recall plan to the quality and technical supervision
departments of provincial-level through the quality and technical supervision
departments of municipal-level governments where such producers are located and
shall do so within three days for a grade one recall, within five days for a grade two
recall, and within seven days for a grade three recall; and
•
from the date on which the food has been recalled and must be recalled, progress
reports shall be submitted to the quality and technical supervision departments
of provincial-level governments through the quality and technical supervision
departments of municipallevel governments where such producers are located and
shall do so once every three days for a grade one recall, once every seven days for a
grade two recall and once every 15 days for a grade three recall.
Recall by order
In any of the following cases, the AQSIQ will order food producers to recall the relevant
unsafe food and may publish relevant food safety information and consumption warnings or adopt
other measures to avoid any further harm being caused to the public:
•
food producers deliberately concealing the hazards of food safety, or food producers
not taking any recall action where a voluntary recall is appropriate;
•
the harm has expanded or recurred due to the fault of food producers; and
•
hidden problems relating to food safety which may be harmful to human health and
life are discovered during a selective inspection conducted by the nation’s supervisors.
Food producers are required to cease production and sale of the unsafe food immediately
after receiving notice of a recall order.
– 166 –
LETTER FROM THE BOARD
Supervision on the use of food additives
Under the Food Safety Law of the PRC（《中華人民共和國食品安全法》）, no food additive
may be used in food unless it is deemed technically necessary and has been proven safe and
reliable after undergoing risk assessments. The competent health department of the State Council
（國務院衛生主管部門）, on the basis of the technical requirements and the results of the food
safety risk assessments, is responsible for revising the permitted varieties, scope of use and dosage
standards of food additives in a timely manner. A food producer may only use food additives in
accordance with the food safety standards and may not, during the process of food production,
use any chemical substances other than the approved food additives or any other substances which
may potentially cause harm to human health. When purchasing raw materials for producing food,
food additives and food-related products, a producer shall inspect the licence and relevant product
compliance certification document of the supplier. If a supplier is unable to provide the compliance
certification document, the producers are required to carry out an inspection of the raw materials
in accordance with the relevant food safety standards. No raw material for food, food additive or
food-related products may be purchased or used unless it complies with the relevant food safety
standards. A food production enterprise shall establish an inspection record system for the purchase
of raw materials for producing food, food additives and food-related products to record information
such as: (i) the names, specifications and quantities of raw materials for producing food, food
additives and food-related products; (ii) the names and contact information of the suppliers; and
(iii) the date of purchase. Such inspection record shall be true and shall be retained for at least two
years.
The Measures for the Administration of New Varieties of Food Additives（《食品添加劑新品
種管理辦法》）, which were promulgated and became effective on 30 March 2010 by the Ministry
of Health of the PRC, stipulate that:
•
food additives shall not be used to conceal the decomposition or deterioration in food;
•
food additives shall not be used to conceal the quality deficiencies in food or those
arising during the food production process;
•
food additives shall not be used for the purposes of creating counterfeit or fake
products;
•
food additives shall not be used to reduce the nutritional value of food;
•
the use of food additives shall be kept to a minimum amount to achieve the intended
result; and
•
food enterprises shall remove processing substances or aids used in food production
before the completion of the finished products save for the permitted residual
quantities.
– 167 –
LETTER FROM THE BOARD
LAWS AND REGULATIONS RELATING TO ENVIRONMENTAL PROTECTION
Our Group is subject to environmental protection laws, rules and regulations in the PRC.
According to the Environmental Protection Law of the PRC（《中華人民共和國環境保護法》）,
which became effective on 26 December 1989, the state environmental protection authority is
authorized to formulate national environmental quality and discharge standards and monitor the
environmental system at the national level.
The Law of the PRC on the Prevention and Control of Environmental Noise Pollution（《中
華人民共和國環境噪聲污染防治法》）, which became effective on 1 March 1997, stipulates the
supervision and management measures in respect of the prevention and control of environmental
noise pollution, including industrial noise pollution and noise pollution from construction,
transportation and social activities. The law also specifies the relevant legal liabilities. Other major
environmental regulations applicable to our Group include the Law of the PRC on the Prevention
and Control of Water Pollution（《中華人民共和國水污染防治法》）and its related implementation
rules, the Law of the PRC on the Prevention and Control of Air Pollution（《中華人民共和國大
氣污染防治法》）, the Law of the PRC on the Prevention and Control of Solid Waste Pollution
（《中華人民共和國固體廢物污染環境防治法》）, the Regulation regarding the Administration of
Construction Project Environmental Protection（《建設項目環境保護管理條例》）, and the Law of
the PRC on Environmental Impact Assessment（《中華人民共和國環境影響評價法》）. Violation of
these laws, rules or regulations may result in the imposition of fines and penalties, the suspension
of operations, an order to cease operations, or even criminal liability in severe cases.
LAWS AND REGULATIONS RELATING TO THE AGRICULTURAL PRODUCT
The Law of the PRC on Quality and Safety of Agricultural Products（《中華人民共和國農
產品質量安全法》）, promulgated by the Standing Committee of the NPC on 29 April 2006 and
became effective on 1 November 2006, regulates the safety management of agricultural products
and provides that the producers of agricultural products shall reasonably use the fertilizer, pesticide,
veterinary medicine, agricultural film and other chemical products to prevent the pollution of the
land of agricultural products. Enterprises engaging in the production of agricultural products shall
establish production records to record, among other things, the name, source, applying methods,
quantity and the starting and ending dates of the use of the agricultural input（ 農業投入品）.
The records shall be maintained at least for two years. The antistaling agent, preserving agent,
additives and other material applied in the packaging, preservation, restoration and transportation
of agricultural products shall be in compliance with the compulsory technical requirements of the
State.
– 168 –
LETTER FROM THE BOARD
According to the Notice regarding the Printing and Distribution of the Guiding Opinions
on Registration of Food Operating Entities（《關於印發食品經營主體登記指導意見的通知》）,
which was promulgated by Quanzhou Branch of the SAIC on 26 March 2010, the sale of edible
agricultural products does not require food circulation permit and the scope of edible agricultural
products in the circulation area shall be in accordance with Notice of the MOFCOM, the Ministry
of Finance and the SAT on Carrying out Pilot Chain Operations of Agricultural Products（《商務
部、財政部、國家稅務總局關於開展農產品連鎖經營試點的通知》）. According to this notice,
tea-green（茶青）and primarily processed tea（初製茶）are edible agricultural products whilst
refined tea（精製茶）, border-sale tea（邊銷茶）, drug-mixed tea and tea beverages are not.
LAWS AND REGULATIONS RELATING TO PRODUCTION SAFETY
Pursuant to the PRC Labor Law（中華人民共和國勞動法）, an employer should establish
and enhance its system for labor safety. Strictly abide by the PRC rules and standards on labor
safety, educate employees to prevent occupational injury, and provide employees with labor safety
conditions meeting the government regulations and necessary articles of labor protection.
The PRC Production Safety Law（《中華人民共和國安全生產法》）, which became
effective on 1 November 2002, is the principal law governing the supervision and administration
of production safety in the PRC. This law requires production entities to meet the relevant legal
requirements, such as providing its staff with training and a handbook on production safety and
providing safe working conditions in compliance with relevant laws, rules and regulations. Any
production entities which is unable to provide the required safe working conditions may not engage
in production activities. Violation of the PRC Production Safety Law may result in the imposition
of fines and penalties, the suspension of operations, an order to cease operations, or even criminal
liability in severe cases.
LAWS ON TRADEMARK
The Trademark Law of the PRC（中華人民共和國商標法）which was promulgated on
23 August 1982, amended on 22 February 1993 and on 27 October 2001, seeks to improve the
administration of trademarks, protect the right to exclusive use of trademarks and encourage
producers and operators to guarantee the quality of their goods and services and maintain the
reputation of their trademarks, so as to protect the interests of consumers and of producers and
operators. Under this law, any of the following acts shall be an infringement upon the right to
exclusive use of a registered trademark: (i) using a trademark which is identical with or similar
to the registered trademark on the same kind of commodities or similar commodities without a
licence from the registrant of that trademark; (ii) selling the commodities that infringe upon the
right to exclusive use of a registered trademark; (iii) forging, manufacturing without authorisation
the marks of a registered trademark of others, or selling the marks of a registered trademark
forged or manufactured without authorisation; (iv) changing a registered trademark and putting the
commodities with the changed trademark into the market without the consent of the registrant of
that trademark; and (v) causing other damage to the right to exclusive use of a registered trademark
of another person. In the event of any abovementioned acts which infringe upon the right to the
exclusive use of a registered trademark, the infringer would be imposed a fine, ordered to stop the
infringement acts immediately, and give the infringed party compensation.
– 169 –
LETTER FROM THE BOARD
E.
SENIOR MANAGEMENT OF THE TARGET GROUP
As at the Latest Practicable Date, the directors and senior management of the Target
Company are set out below:
Name
CAI Zhenyao（蔡振耀）
CAI Rongxu（蔡榮旭）
NG Shui Yu（吳瑞瑜）
CAI Yanghang（蔡揚杭）
HUANG Chuansheng（黃傳盛）
IP Wai Sing（葉偉勝）
ZHOU Dongwen（周東文）
XU Jing（徐靜）
Age
59
41
39
27
30
45
48
46
Position
Chairman, executive director
Executive director
Executive director
Chief executive officer
Assistant chief executive officer
Chief financial officer
General manager of production department
General manager of Fujian Daping
Directors of the Target Company
Mr. CAI Zhenyao（蔡振耀）, aged 59, is a director of the Target Company and the
founder of the Target Group. Mr. Cai was appointed as a director of the Target Company
on 27 July 2010. Mr. Cai has primarily been responsible for the strategic development of
the Target Group since 2007. Prior to founding the Target Group, Mr. Cai Zhenyao was the
factory and operations manager in Fujian Province Shishi City Hanjiang Liantang Plastic
and Metal Manufactory during the period from 1985 to 1988, and was the deputy general
manager of Fujian Province Shishi City Hanjiang Liantang Xinda Knitting Manufactory
during the period from 1988 to 1992. Mr. Cai has been working for the Group since 1993 and
has been an executive Director since 2002. Mr. Cai has been working for the Target Group
since 2007 and has been responsible for the Target Group’s overall organisational and finance
systems management. Mr. Cai is the brother of Mr. Cai Zhenrong and Mr. Cai Zhenying and
an uncle of Mr. Cai Yanghang, Mr. Cai Yangbo and Mr. Ng Shui Yu.
Mr. CAI Rongxu（蔡榮旭）, aged 41, is a director of the Target Company. He joined
the Target Group in 2007 and was appointed as a director on 8 September 2010. Mr. Cai is
also the executive director of the Target Company’s subsidiaries, Fujian Nature and Fujian
Daping and the legal representative of Fujian Nature. Mr. Cai is primarily responsible
for business development and operation and cultivation bases of the Target Group. Mr.
Cai joined our Group and was a deputy general manager of Huafeng Knitting Co., Ltd.
Shishi City, Fujian（福建省石獅市華豐針織有限公司）(“Huafeng Knitting”), one of our
Group’s subsidiaries, from 1999 to 2007. Mr. Cai graduated from Fujian Jinjiang Zimaoshan
Secondary School（ 福建省晉江縣紫帽山中學）in 1989. Mr. Cai Rongxu is not related by
consanguinity to Mr. Cai Zhenyao or Mr. Cai Yanghang.
– 170 –
LETTER FROM THE BOARD
Mr. NG Shui Yu（吳瑞瑜）, aged 39, is a director of the Target Company. He joined
the Target Group in 2007 and was appointed as a director on 27 July 2010. He is primarily
responsible for the Target Group’s business in Hong Kong. Mr. Ng has over 10 years of
experience in agricultural products industry. Prior to joining the Target Group, from 2000 to
2011, he worked as a general manager in Million Trading Company（萬隆貿易公司）, the
business nature of which is retailing of gifts and accessories. Mr. Ng obtained a bachelor’s
degree of commerce from University of Windsor in Canada in 1997. Mr. Ng is a nephew of
Mr. Cai Zhenrong, Mr. Cai Zhenyao and Mr. Cai Zhenying.
Senior management
Mr. CAI Yanghang（蔡揚杭）, aged 27, is the chief executive officer of the Target
Company. He joined the Target Group in 2007. Mr. Cai is primarily responsible for the daily
management of the business of the Target Company. Prior to joining the Target Group, he
worked in Huafeng Knitting, as a manager in the procurement department from 2004 to 2006
and a manager in the business department from 2006 to 2007, respectively. Mr. Cai studied in
Quanzhou Knitting Garment College（泉州紡織服裝職業學院）in China from 2002 to 2004.
Mr. Cai Yanghang is a son of Mr. Cai Zhenrong, a nephew of Mr. Cai Zhenyao and Mr. Cai
Zhenying, the husband of Ms. Ng Yuen Nei and a cousin of Mr. Ng Shui Yu and the younger
brother of Mr. Cai Yangbo.
Mr. HUANG Chuansheng（黃傳盛）, aged 30, is the assistant chief executive officer
of the Target Company. He joined the Target Group in 2007. He is primarily responsible
for the daily operation of the Target Group’s business. Prior to joining the Target Group, he
worked in Xiamen Hualiantong Logistics Co., Ltd.（ 廈門華聯通物流有限公司）from 2006
to 2007. Mr. Huang obtained a bachelor’s degree in marketing from Huaqiao University（華
僑大學）in China in 2007.
Mr. IP Wai Sing（葉偉勝）, aged 45, is the chief financial officer of the Target
Company. Prior to joining the Target Group in March 2011, he worked as a staff accountant,
senior accountant, manager and later a senior manager at Ernst & Young from 1994 to
2005. He was the assistant director of Hong Kong Institute of Certified Public Accountants
from 2005 to 2006. After that, he served as an investment analyst in Blue Pool Capital
Limited from 2007 to 2009. Mr. Ip obtained a bachelor’s degree of commerce from The
Australian National University in 1993 and a master’s degree of business administration
from The Chinese University of Hong Kong in 2001. He is an associate member of the Hong
Kong Institute of Certified Public Accountants (formerly known as Hong Kong Society of
Accountants).
– 171 –
LETTER FROM THE BOARD
Mr. ZHOU Dongwen（周東文）, aged 48, is the general manager of production
department of Fujian Nature. He joined the Target Group in 2007. He is responsible for tea
processing and quality control. Mr. Zhou has extensive experience in tea tasting, blending
and manufacturing. Prior to joining the Target Group, he worked in various positions in
Fujian Anxi Tea Co., Ltd.（ 福建省安溪茶廠有限公司）including tea assessor, tea blending
officer（拼配員）and manager from 1987 to 2006. He graduated from Quanzhou Technical
School（泉州市技工學校）with his major in tea-making in 1987 and he is qualified as First
Level National Tea Tasting Master（ 國家一級評茶師）which was issued by the Ministry of
Human Resources and Social Security of the PRC（中華人民共和國人力資源和社會保障
部）in 2010. Mr. Zhou is honored as the Tea Processing Master of Anxi Tie Guan Yin（安
溪鐵觀音制茶大師）by People’s Government of Anxi County in October 2012. He was
qualified as an assistant engineer in tea engineering by Quanzhou Human Resources Bureau
（泉州市人事局）in 1996.
Ms. XU Jing（徐靜）, aged 46, is the general manager of Fujian Daping. She has
approximately 13 years of experience in tea industry, including tea plantation production and
management, research and development, and application and renewal of relevant certificates
and licences. In 1997, Ms. Xu joined Fujian Daping as a deputy manager before Fujian
Daping was acquired by Fujian Nature. She was then promoted to general manager in 2007
when Fujian Daping became a subsidiary of the Target Group. Ms. Xu was graduated from
Shishou Xinchang Secondary School（ 石首新廠鎮中學）in June 1984.
– 172 –
LETTER FROM THE BOARD
F.
MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP
ANALYSIS OF THE OPERATING RESULTS
The following table sets forth the Target Group’s operating results for the periods indicated.
Year ended 31 December
Turnover
Cost of sales
2010
2011
2012
RMB’000
RMB’000
RMB’000
310,358
(151,533)
408,241
(188,135)
389,047
(201,071)
Gross profit
Changes in fair value of biological assets
less cost to sell during the year
Other income
Selling and distribution expenses
158,825
220,106
187,976
189
79
(12,555)
33,383
1,083
(25,922)
38,602
5,058
Administrative expenses
Other expenses
(14,253)
(844)
(21,488)
(1,555)
(20,131)
(13,317)
(506)
Profit from operations
Finance costs
131,441
(181)
205,607
(866)
197,682
(510)
Profit before taxation
Income tax expense
131,260
(4,632)
204,741
(10,493)
197,172
(6,618)
Profit for the year and attributable to
equity shareholders of
the Target Company
126,628
194,248
190,554
40.8%
47.6%
49.0%
Net profit margin
– 173 –
LETTER FROM THE BOARD
DESCRIPTION OF PRINCIPAL COMPONENTS OF THE INCOME STATEMENT ITEMS
Turnover
Turnover represents the net invoiced value of the Target Group’s tea products less returns and
trade discounts. For the three years ended 31 December 2010, 2011 and 2012, the Target Group’s
turnover was RMB310.4 million, RMB408.2 million and RMB389.0 million, respectively.
The following table sets forth the Target Group’s turnover by business segment and the
respective percentage of the total turnover for the periods indicated.
Year ended 31 December
2010
Raw teas
Refined teas and other related
products
2011
2012
RMB’000
% of total
turnover
RMB’000
% of total
turnover
RMB’000
% of total
turnover
242,160
78.0
307,135
75.2
305,126
78.4
68,198
22.0
101,106
24.8
83,921
21.6
310,358
100.0
408,241
100.0
389,047
100.0
The growth in the Target Group’s turnover for the year ended 31 December 2010 to the
year ended 31 December 2011 was primarily due to (i) the increase in the total cultivable area for
the Target Group’s tea plantation from 25,399.7 mu in 2010 (of which the relevant forest rights
certificate is issued in respect of 72 mu forest lands being recognised as biological assets in
2009 and the rights to use the forest lands in respect of 25,327.7 mu are obtained pursuant to the
Contracting Agreements) to 29,592.7 mu in 2011 and as at 31 December 2012 (the relevant forest
rights certificates of the entire 29,592.7 mu forest lands have been issued and the entire 29,592.7
mu forest lands has been recognised as biological assets in 2011 and 2012) and (ii) the expansion of
the Target Group’s retail sales network from 60 retail outlets as at 31 December 2010 to 146 retail
outlets as at 31 December 2012. The decrease in turnover from approximately RMB408.2 million
for the year ended 31 December 2011 to approximately RMB389.0 million for the year ended 31
December 2012 was primarily due to the decrease in turnover of refined teas and other related
products. The sales volume of refined teas is generally high around one month before Chinese New
Year when refined teas are purchased for consumption, business gifts or personal gifts. The Chinese
New Year in 2012 was in the third week of January 2012 whereas in 2011, the Chinese New Year
was in the first week of February 2011. As such, the turnover in January 2012 was lower than that
in January 2011 and this contributed to the decrease of turnover for the year ended 31 December
2012. In addition, the turnover of non-branded refined teas decreased for the same period as a result
of more sales effort was dedicated to promote the refined teas under the Target Group’s brand, Ping
Shan Famous Tea.
– 174 –
LETTER FROM THE BOARD
Cost of Sales
For the financial years ended 31 December 2010, 2011 and 2012, the Target Group’s total
cost of sales was RMB151.5 million, RMB188.1 million and RMB201.1 million, respectively. The
Target Group’s cost of sales for raw teas primarily comprises cultivation service fees, fertilisers and
pesticides cost and labor cost.
Gross Profit
Gross profit represents turnover less cost of sales. The Target Group’s gross profit for the
years ended 31 December 2010, 2011 and 2012 was RMB158.8 million, RMB220.1 million and
RMB188.0 million, respectively. The following table sets forth the Target Group’s gross profit
margin by business segment for the periods indicated.
Year ended 31 December
2010
2011
2012
Raw teas
Refined teas and other related products
45.9%
69.9%
47.7%
72.8%
42.2%
Overall
51.2%
53.9%
48.3%
70.4%
The increase in the Target Group’s overall gross profit margin from 51.2% for the year
ended 31 December 2010 to 53.9% for the year ended 31 December 2011 was primarily due to the
expansion of the Target Group’s total cultivable area. The Target Group was able to produce higher
quality Tie Guan Yin raw teas which, in turn, also allowed the Target Group to manufacture and
sell premium Tie Guan Yin refined teas at higher gross profit margins. The decrease in the Target
Group’s overall gross profit margin from 53.9% for the year ended 31 December 2011 to 48.3%
for the year ended 31 December 2012 was primarily due to the increase in the fair value of the
inventories when the tea leaves were harvested from the biological assets. In accordance with the
accounting policy of the Target Group, when the tea leaves are harvested from the tea trees on the
forest lands in respect of which the relevant forest rights certificates have been issued to the Target
Group, the value of the tea leaves are measured at its fair value less costs to sell at the point of
harvest. The fair value less costs to sell at the time of harvest is deemed as the cost of the tea leaves.
The increase in fair value of the tea leaves, in turn, resulted in an increase in cost of sales in 2012
and the gross profit margin was decreased accordingly.
– 175 –
LETTER FROM THE BOARD
Changes in Fair Value of Biological Assets less Cost to Sell during the Year
The Target Group’s biological assets comprise tea plants on the Target Group’s cultivation
bases for which the Target Group have received the related forest rights certificates. During
the Track Record Period, the Target Group obtained, in aggregate, 127 forest rights certificates
with respect to 29,592.7 mu of the Target Group’s cultivable area which is entirely used for tea
plantation, and changes in the fair value of the Target Group’s biological assets during the Track
Record Period relate only to such portion of the Target Group’s cultivable area used for tea
plantation.
Biological assets are stated at their fair value on each financial position date. The fair value
of the Target Group’s biological assets is determined independently by professional valuers based
on certain assumptions and estimates. Gains or losses arising from changes in the fair value of the
Target Group’s biological assets less costs to sell are included in the Target Group’s consolidated
income statements in the year in which they arise. For the years ended 31 December 2010, 2011 and
2012, the Target Group recognised a gain from changes in fair value of biological assets less costs
to sell amounted to RMB0.2 million, RMB 33.4 million and RMB38.6 million, respectively.
Other Income
Other income primarily include bank interest income and government grant.
Selling and Distribution Expenses
Selling and distribution expenses primarily include expenses relating to the Target Group’s
own retail outlets, such as staff cost, rental expenses, decoration fees, travelling expenses and
advertising and promotional expenses.
Administrative Expenses
Administrative expenses primarily include staff costs of the Target Group’s administrative
personnel, general office, entertainment and travelling expenses, professional fees, depreciation and
amortization expenses.
Other Expenses
Other expenses primarily include foreign exchange losses, donations and bank charges.
Finance Costs
Finance cost primarily include interest on bank borrowings.
– 176 –
LETTER FROM THE BOARD
Income Tax Expense
The Target Group’s income tax expense for a given year include EIT, provisions for
withholding tax and deferred tax.
Year Ended 31 December 2012 Compared to Year Ended 31 December 2011
Turnover
The Target Group’s turnover decreased by 4.7% from RMB408.2 million for year ended 31
December 2011 to RMB389.0 million for the year ended 31 December 2012. This decrease was
primarily due to the decrease in the turnover of both raw teas and refined teas and other related
products.
•
Raw teas. The Target Group’s turnover from raw teas decreased by 0.7 % from
RMB307.1 million for the year ended 31 December 2011 to RMB305.1 million for
the year ended 31 December 2012. This decrease was primarily due to the decrease
in average selling price of raw teas from approximately RMB60.3 per kg for the
year ended 31 December 2011 to approximately RMB 57.1 per kg for the year
ended 31 December 2012. The decrease was partially offset by the increase in sales
volume from approximately 5.1 million kg for the year ended 31 December 2011 to
approximately 5.3 million kg for the year ended 31 December 2012.
•
Refined teas and other related products. The Target Group’s turnover from refined teas
and other related products decreased by 17.0% from RMB101.1 million for the year
ended 31 December 2011 to RMB83.9 million for the year ended 31 December 2012.
This decrease was primarily due to the decrease in turnover of the branded refined
teas in January 2012 as compared with that in January 2011 and the decrease in nonbranded refined teas. The sales volume of refined teas is generally high around one
month before Chinese New Year when refined teas are purchased for consumption,
business gifts or personal gifts. The Chinese New Year in 2012 was in the third week
of January 2012 whereas in 2011, the Chinese New Year was in the first week of
February 2011. As such, the turnover in January 2012 was lower than that in January
2011 and this contributed to the decrease in the turnover during the year ended
31 December 2012. In addition, the turnover of non-branded refined teas decreased for
the same period as a result of more sales effort was dedicated to promote the refined
teas under the Target Group’s brand, Ping Shan Famous Tea.
– 177 –
LETTER FROM THE BOARD
Cost of Sales
The Target Group’s cost of sales increased by 6.9% from RMB188.1 million for the year
ended 31 December 2011 to RMB201.1 million for the year ended 31 December 2012. This
increase was primarily due to the increase in the fair value of the inventories when the tea leaves
was harvested from the biological assets. In accordance with the accounting policy of the Target
Group, when the tea leaves are harvested from the tea trees on the forest lands in respect of which
the relevant forest rights certificates have been issued to the Target Group, the value of the tea
leaves are measured at its fair value less costs to sell at the point of harvest. The fair value less costs
to sell at the time of harvest is deemed as the cost of the tea leaves.
Gross Profit
The Target Group’s gross profit decreased by 14.6% from approximately RMB220.1 million
for the year ended 31 December 2011 to approximately RMB188.0 million for the year ended 31
December 2012. The Target Group’s gross profit margin decreased from 53.9% for the year ended
31 December 2011 to 48.3% for the year ended 31 December 2012. The Target Group’s gross profit
margin in both the raw teas and refined teas and other related products decreased for the same year.
•
Raw teas. The gross profit margin for the Target Group’s raw teas decreased from
47.7 % for the year ended 31 December 201 1 to 42.2 % for the year ended 31
December 2012. This decrease was primarily due to the increase in the fair value
of the inventories when the tea leaves was harvested from the biological assets. In
accordance with the accounting policy of the Target Group, when the tea leaves are
harvested from the tea trees on the forest lands in respect of which the relevant forest
rights certificates have been issued to the Target Group, the value of the tea leaves
are measured at its fair value less costs to sell at the point of harvest. The fair value
less costs to sell at the time of harvest is deemed as the cost of the tea leaves. This, in
turn, resulted in an increase in cost of sales of the raw teas in 2012 and the gross profit
margin of raw teas was decreased accordingly.
•
Refined teas and other related products. The gross profit margin for the Target Group’s
refined teas and other related products decreased from 72.8% for the year ended 31
December 2011 to 70.4% for the year ended 31 December 2012. This decrease was
primarily due to the increase in the fair value of the inventories when the tea leaves
was harvested from the biological assets. The increase in fair value of the tea leaves,
in turn, resulted in an increase in cost of sales of the refined teas in 2012 and the gross
profit margin of the refined teas was decreased accordingly.
– 178 –
LETTER FROM THE BOARD
Changes in Fair Value of Biological Assets less Costs to Sell during the Year
The Target Group had fair value gains from biological assets less costs to sell of
approximately RMB 33.4 million and approximately RMB 38.6 million for the year ended 31
December 2011 and 2012, respectively. The increase was primarily due to the revaluation of the
biological assets for the year ended 31 December 2012. For details, please refer to the valuation
report as set out in Appendix V to this circular.
Other Income
The Target Group’s other income and gains increased from approximately RMB1.1 million
for the year ended 31 December 2011 to approximately RMB5.1 million for the year ended 31
December 2012. This increase was primarily due to the increase in bank interest income and
government grant.
Selling and Distribution Expenses
The Target Group’s selling and distribution expenses decreased by 22.3 % from
approximately RMB25.9 million for the year ended 31 December 2011 to approximately RMB20.1
million for the year ended 31 December 2012. This decrease was primarily due to the decrease in
advertising and promotion expenses and the decrease in salaries to sales staff in 2012.
Administrative Expenses
The Target Group’s administrative expenses decreased by 38.0 % from approximately
RMB21.5 million for the year ended 31 December 2011 to approximately RMB13.3 million for the
year ended 31 December 2012. This decrease was primarily due to the decrease in professional fees
in connection with the Target Group’s reorganization which took place in 2010 and 2011.
Other Expenses
The Target Group’s other expenses decreased by 67.5% from approximately RMB1.6 million
for the year ended 31 December 2011 to approximately RMB0.5 million for the year ended 31
December 2012. This decrease was primarily due to the decrease in exchange loss owing to the
decrease in deposits which were denominated in HKD and USD during the year ended 31 December
2012.
– 179 –
LETTER FROM THE BOARD
Finance Costs
The Target Group’s finance costs decreased from approximately RMB0.9 million for the year
ended 31 December 2011 to RMB0.5 million for the year ended 31 December 2012. This decrease
was primarily due to the full repayment of bank borrowings in 2011 and additional bank borrowings
of RMB34 million was made in 2012.
Profit before Taxation
As a result of the above factors, the Target Group’s profit before tax decreased by 3.7%
from approximately RMB204.7 million for the year ended 31 December 2011 to approximately
RMB197.2 million for the year ended 31 December 2012.
Income Tax Expense
The Target Group’s income tax expenses decreased by 36.9% from approximately RMB10.5
million for the year ended 31 December 2011 to approximately RMB6.6 million for the year ended
31 December 2012. This decrease was primarily due to the decrease in taxable profit and deferred
tax arising from the revaluation of biological assets for the year.
Profit for the Year
As a result of the above factors, the Target Group’s profit for the year decreased by 1.9%
from approximately RMB194.2 million for the year ended 31 December 2011 to approximately
RMB190.6 million for the year ended 31 December 2012.
– 180 –
LETTER FROM THE BOARD
Year Ended 31 December 2011 Compared to Year Ended 31 December 2010
Turnover
The Target Group’s turnover increased by 31.5% from RMB310.4 million for the year ended
31 December 2010 to RMB408.2 million for the year ended 31 December 2011. This increase was
primarily due to (i) the increase in the production volume of the Target Group’s raw teas, from
approximately 5.3 million kg in 2010 to approximately 5.5 million kg in 2011, for sale and for
further processing into the Target Group’s refined teas for sale and (ii) an increase in the average
selling price of the Target Group’s raw teas from approximately RMB48.2 per kg in 2010 to
approximately RMB60.3 per kg in 2011.
•
Raw teas. The Target Group’s turnover from raw teas increased by 26.8 % from
approximately RMB 242.2 million for the year ended 31 December 2010 to
approximately RMB 307.1 million for the year ended 31 December 2011. This
increase was primarily due to (i) an increase in the sales volume of the Target
Group’s Tie Guan Yin raw teas, from approximately 0.3 million kg in 2010 to
approximately 0.6 million kg in 2011, as a result of the increase in production
volume of the Target Group’s Tie Guan Yin raw teas from approximately 0.5 million
kg in 2010 to approximately 0.8 million kg in 2011 which, in turn, was mainly
driven from the additional 4,193 mu cultivable area contracted for tea plantation in
the first half of 2011; and (ii) an increase in the average selling prices of the Target
Group’s Mao Xie and Ben Shan raw teas from approximately RMB37.4 per kg and
approximately RMB56.0 per kg, respectively, in 2010 to approximately RMB43.7 per
kg, approximately RMB78.7 per kg respectively, in 2011. The increase was partially
offset by (i) the decrease in sales volume of Mao Xie raw teas from approximately 4.2
million kg in 2010 to approximately 3.8 million kg in 2011, which was attributable
to the decrease in production volume of Mao Xie raw teas from approximately 4.2
million kg in 2010 to approximately 3.8 million kg in 2011 which, in turn, was
primarily due to the drought in Anxi County in April 2011; (ii) a decrease of the
average selling price of Tie Guan Yin raw teas from approximately RMB212.9 per kg
to approximately RMB167.5 per kg, mainly due to that the drought in Anxi County
in April 2011 affected the quality of Tie Guan Yin tea leaves resulting in the lower
average selling price in 2011 while a certain proportion of premium Tie Guan Yin raw
teas were reserved for processing into refined teas for sale.
•
Refined teas and other related products. The Target Group’s turnover from refined
teas increased by 48.3% from approximately RMB68.2 million for the year ended 31
December 2010 to approximately RMB101.1 million for the year ended 31 December
2011. This increase was primarily due to the Target Group’s strategy to increase the
sales of the refined teas by increasing promotion of the Target Group’s brand and
expanding the retail sales network from 60 retail outlets as at 31 December 2010 to
142 retail outlets as at 31 December 2011.
– 181 –
LETTER FROM THE BOARD
Cost of Sales
The Target Group’s cost of sales increased by 24.2% from approximately RMB151.6 million
for the year ended 31 December 2010 to approximately RMB188.1 million for the year ended
31 December 2011. The increase was primarily in line with the increase in sales owing to the
expansion of the cultivable area from 25,399.7 mu (of which the relevant forest rights certificate
is issued in respect of 72 mu forest lands being recognised as biological assets since 2009 and the
rights to use the forest lands in respect of 25,327.7 mu are obtained pursuant to the Contracting
Agreements) in 2010 to 29,592.7 mu (the relevant forest rights certificates of the entire 29,592.7
mu forest lands have been issued and the entire 29,592.7 mu forest lands has been recognised as
biological assets) in 2011.
Gross Profit
The Target Group’s gross profit increased by 38.6% from approximately RMB158.8 million
for the year ended 31 December 2010 to approximately RMB220.1 million for the year ended 31
December 2011. The Target Group’s gross profit margin increased from 51.2% for the year ended
31 December 2010 to 53.9% for the year ended 31 December 2011. This increase in the Target
Group’s gross profit margin was primarily due to the increase in gross profit margins of both raw
teas and refined teas.
•
Raw teas. The gross profit margin for the Target Group’s raw teas increased from
45.9 % for the year ended 31 December 2010 to 47.7 % for the year ended 31
December 2011. This increase was primarily due to the additional 4,193 mu cultivable
area (the rights to use the entire 4,193 mu forest lands are obtained pursuant to the
Contracting Agreements) which produce premium Tie Guan Yin raw teas with a higher
gross profit margin and the change in product mix with a higher proportion of Tie
Guan Yin raw teas.
•
Refined teas and other related products. The gross profit margin for the Target Group’s
refined teas increased from 69.9% for the year ended 31 December 2010 to 72.8%
for the year ended 31 December 2011. This increase in the gross profit margin for the
Target Group’s refined teas was primarily due to the additional 4,193 mu cultivable
area which produce Tie Guan Yin raw teas of a higher quality which, in turn, produce
premium Tie Guan Yin refined tea with a higher gross profit margin.
– 182 –
LETTER FROM THE BOARD
Changes in Fair Value of Biological Assets less Costs to Sell during the Year
The Target Group had fair value gains from biological assets less costs to sell of
approximately RMB 0.2 million and approximately RMB 33.4 million for the years ended 31
December 2010 and 2011, respectively. The increase in fair value gains from biological assets was
primarily due to the issue of the 29.5K mu Forest Rights Certificates in 2011.
Other Income
The Target Group’s other income increased from approximately RMB0.1 million for the year
ended 31 December 2010 to approximately RMB1.1 million for the year ended 31 December 2011.
This increase was primarily due to the increase in bank interest income and government grant.
Selling and Distribution Expenses
The Target Group’s selling and distribution expenses increased by 106.5 % from
approximately RMB12.6 million for the year ended 31 December 2010 to approximately RMB25.9
million for the year ended 31 December 2011. This increase was primarily due to an increase in the
number of retail outlets operated by the Target Group and third-party retailers from 60 retail outlets
as at 31 December 2010 to 142 retail outlets as at 31 December 2011 and an increase in advertising
and promotional activities for the Target Group’s Ping Shan Famous Tea brand.
Administrative Expenses
The Target Group’s administrative expenses increased by 50.8 % from approximately
RMB14.3 million for the year ended 31 December 2010 to approximately RMB21.5 million for
the year ended 31 December 2011. This increase was primarily due to the increase in professional
fees in connection with the Target Group’s reorganization and the increase in staff costs and fringe
benefits as a result of the business expansion.
Other Expenses
The Target Group’s other expenses increased by 84.2% from approximately RMB0.8 million
for the year ended 31 December 2010 to approximately RMB1.6 million for the year ended 31
December 2011. This increase was primarily due to the foreign exchange loss of approximately
RMB1.5 million in 2011 owing to the decline in the Renminbi value of the Target Group’s proceeds
from a private placement of shares to the Financial Investors denominated in Hong Kong dollars as
a result of the appreciation of the Renminbi against Hong Kong dollar in 2011.
– 183 –
LETTER FROM THE BOARD
Finance Costs
Finance costs increased by 378.5% from approximately RMB0.2 million for the year ended
31 December 2010 to approximately RMB0.9 million for the year ended 31 December 2011. This
increase was primarily due to interest payments on bank loans in the amount of approximately
RMB29.5 million made in 2011.
Profit before Taxation
As a result of the above factors, the Target Group’s profit before tax increased by 56.0%
from approximately RMB131.3 million for the year ended 31 December 2010 to approximately
RMB204.7 million for the year ended 31 December 2011.
Income Tax Expenses
The Target Group’s income tax expenses increased by 126.5% from approximately RMB4.6
million for the year ended 31 December 2010 to approximately RMB10.5 million for the year
ended 31 December 2011. This increase was primarily due to the increase in deferred tax expenses
primarily arising from the fair value changes of the biological assets.
Profit for the Year
As a result of the above factors, the Target Group’s profit for the year increased by 53.4%
from approximately RMB126.6 million for the year ended 31 December 2010 to approximately
RMB194.2 million for the year ended 31 December 2011.
– 184 –
LETTER FROM THE BOARD
SELECTED ITEMS FROM THE CONSOLIDATED STATEMENTS OF FINANCIAL
POSITION
Inventories
The Target Group’s inventories comprise raw teas (used for processing into the Target
Group’s refined teas), refined teas and packaging materials. The following table sets forth a
breakdown of the Target Group’s inventories as at the dates indicated.
As at 31 December
Raw materials – raw teas for refining
Finished goods – refined teas and other
related products
2010
2011
2012
RMB’000
RMB’000
RMB’000
5,729
13,011
16,059
2,250
2,806
3,532
7,979
15,817
19,591
In the Target Group’s raw teas business, the Target Group sell substantially all of the Target
Group’s raw teas shortly after the tea leaves are harvested from the Target Group’s cultivable area
and processed into the Target Group’s raw teas by the Target Group’s tea farmers and staff. The
substantial increase in the Target Group’s inventory balance as at 31 December 2011 was primarily
due to the stock up of high quality Tie Guan Yin raw teas for further processing into refined teas in
order to ensure adequate supplies of the refined teas for the expansion of the Target Group’s retail
sales network since 2011. The increase in the Target Group’s inventory balance as at 31 December
2012 was primarily due to the increase in the fair value of the inventories when the tea leaves was
harvested from the biological assets.
– 185 –
LETTER FROM THE BOARD
The following table sets forth the Target Group’s inventory turnover days for the periods
indicated.
Year ended 31 December
Inventory turnover days
2010
2011
2012
19.2
30.7
35.6
Inventory turnover days are derived by dividing the ending balance of inventories for the
relevant periods by cost of sales and multiplying by 365 days. Inventory turnover days for the
three years ended 31 December 2010, 2011 and 2012 were 19.2 days, 30.7 days and 35.6 days,
respectively. The increase in the Target Group’s inventory turnover days from 19.2 days for the year
ended 31 December 2010 to 30.7 days for the year ended 31 December 2011 was primarily due to
the stock up of high quality Tie Guan Yin raw teas to be used for further processing into refined
teas in order to ensure adequate supplies of the refined teas for the expansion of the Target Group’s
retail sales network since 2011. The increase in inventory turnover days from 30.7 days for the year
ended 31 December 2011 to 35.6 days for the year ended 31 December 2012 was primarily due to
the increase in the inventories balance which, in turn, was due to the increase in the fair value of the
inventories when the tea leaves was harvested from the biological assets.
Trade Receivables
The Target Group generally require the Target Group’s customers to pay for the Target
Group’s products before delivery. The following table sets forth the Target Group’s trade
receivables balance as at the dates indicated:
As at 31 December
2010
2011
2012
RMB’000
RMB’000
RMB’000
Trade receivables
278
2,588
5,724
Trade receivables turnover days (days)
0.3
2.3
5.4
– 186 –
LETTER FROM THE BOARD
As a percentage of revenue, the Target Group’s trade receivables balance was less than 2%
during Track Record Period. As at 31 December 2010, 2011 and 2012, the age of the substantial
balance of the Target Group’s trade receivables was within 6 months. Trade receivables turnover
days are derived by dividing the ending balance of the trade receivables for the relevant periods
by turnover and multiplying by 365 days. During the Track Record Period, the trade receivables
turnover days were minimal.
Prepayments, Deposits and Other Receivables
As at 31 December
Deposits
Prepayments
Current portion of long term assets:–
Prepaid land lease payments
Prepayment of promotion expenses
Prepayments for subcontracting
charges for cultivation
Other receivables:–
Amount due from related parties
Advance to staff
Others
Bills receivable
2010
2011
2012
RMB’000
RMB’000
RMB’000
655
588
1,271
2,778
882
2,589
13
5,250
150
5,250
150
5,250
78
78
78
106,235
–
729
–
37
1,092
843
–
4,995
1,794
816
40,000
113,548
11,499
56,554
The Target Group’s prepayments, deposits and other receivables comprise principally (i)
the prepayment of the promotion expenses in relation to the advertising campaign in television
and product packaging design. Such expenses are amortised over the term of the promotion period
under the respective agreement, namely three years commencing from 2010; and (ii) the amount
due from related parties which were interest-free, unsecured and repayable on demand. An amount
of approximately RMB106.2 million was repaid in 2011. As at 31 December 2012, approximately
RMB5.0 million was due from related parties and bills receivable of RMB40 million was the result
of the bills drawn by Fujian Nature in favour of Fujian Daping. Such bills of RMB40 million was
yet to be presented to the bank as at 31 December 2012. The corresponding bills drawn by Fujian
Nature was recorded in the other payables and accruals account. As the counterparties of the bills
receivable and bills payable are different, the two balances (bills receivable and bills payable) were
not offset in the consolidated accounts and were separately disclosed.
– 187 –
LETTER FROM THE BOARD
Trade Payables
The Target Group’s trade payables principally comprise cultivation service fees and payables
to the Target Group’s raw materials, fertilisers and packaging materials suppliers. The following
table sets forth the Target Group’s trade payable balance as at the dates indicated:
As at 31 December
2010
2011
2012
RMB’000
RMB’000
RMB’000
Trade payables
269
4,568
1,815
Trade payables turnover days (days)
0.6
8.9
3.3
The increase in the Target Group’s trade payables balance as at 31 December 2011 was
primarily due to the trade payables balance in Fujian Huidian which was set up in 2011 and is
principally engaged in the production and sale of packaging products and packaging design. The
trade payables balance related to the payables of the packaging materials at the year end preparing
for the expansion of retail sales network since 2011. As at 31 December 2010, 2011 and 2012, the
age of the Target Group’s trade payables was within 3 months and the Target Group’s trade payables
were non-interest bearing. Trade payables turnover days are derived by dividing the ending balance
of the trade payables for the relevant periods by cost of sales and multiplying by 365 days. During
the three years ended 31 December 2012, the trade payables turnover days were minimal.
– 188 –
LETTER FROM THE BOARD
Other Payables and Accruals
As at 31 December
Deposits received
Rental payable
Staff payroll and welfare payables
Other taxes payable and surcharges
Construction cost payable
Legal and professional fee
Shares issue expenses
Amount due to a related party
Bills payable
Interest payable
Other payables
2010
2011
2012
RMB’000
RMB’000
RMB’000
3,591
407
5,632
7,516
3,701
5,638
8,028
604
–
–
61
1,758
705
6,148
7,047
8,627
2,295
3,950
918
–
–
2,318
1,294
1,570
6,037
7,610
13,027
4,173
–
–
60,000
360
3,953
35,178
33,766
98,024
The Target Group’s other payables and accruals comprise principally (i) deposits received
in relation to the refined teas sold to the Direct Sales Customers; (ii) payroll and fringe benefits
payables to staff; (iii) other taxes payable and surcharges which relates to the provision of social
security and housing insurance; (iv) construction cost payable which relates to the construction of
new production and packaging centres, office and staff dormitories; (v) the share issue expenses in
relation to the fees payable to the financial adviser for the private placement of shares of the Target
Company to the Financial Investors; (vi) payables in relation to the professional fees arising from
the reorganization undergone by the Target Group; and (vii) the bills payable of RMB60 million
in relation to the deposit paid for the purchase of contracting rights of additional 21,500 mu forest
lands and the bills drawn by Fujian Nature in favour of Fujian Daping. The bills payable of RMB60
million was secured by pledged deposits of the Target Group of RMB37.5 million, certain Tea
Forest (as defined in Appendix II to this circular) of the Target Group of approximately RMB42.1
million as at 31 December 2012 in respect of 4,598 mu cultivable area and guarantees jointly
provided by Mr. Cai Yanghang and Mr. Cai Rongxu for an aggregate amount of RMB25 million. For
details, please refer to the sections headed “Tentative purchase of contracting rights of new forest
lands” in this circular and “Indebtedness of the Enlarged Group” in Appendix I to this circular.
– 189 –
LETTER FROM THE BOARD
LIQUIDITY AND CAPITAL RESOURCES
The Target Group’s principal sources of liquidity and capital resources have been, and are
expected to be, cash from the Target Group’s operating activities and various forms of financing,
including bank borrowings and equity financings.
Cash Flows
The following table sets forth certain information regarding the Target Group’s consolidated
statements of cash flow for the periods indicated:
Year ended 31 December
Net cash from operating activities
Net cash used in investing activities
Net cash from/(used in) financing
activities
2010
2011
2012
RMB’000
RMB’000
RMB’000
127,810
(109,532)
155,261
(65,280)
181,421
(39,437)
191,755
3,607
210,033
93,588
134,384
Cash and cash equivalents at the
beginning of each year
64,247
271,045
363,605
Effect of foreign exchange rate
changes, net
(3,235)
Net increase in cash and
cash equivalents
Cash and cash equivalents
at end of each year
271,045
– 190 –
(1,028)
363,605
(7,600)
(84)
497,905
LETTER FROM THE BOARD
Cash Flows from Operating Activities
The Target Group’s net cash inflows from operating activities primarily represent the Target
Group’s profit before taxation adjusted for non-cash items and movements in working capital.
For the year ended 31 December 2012, the Target Group’s net cash inflow from operating
activities was approximately RMB181.4 million. This net cash inflow was primarily due to a profit
before taxation of approximately RMB197.2 million and adjusted for an increase in other payables
and accruals of approximately RMB8.4 million and a decrease in prepayments, deposits and other
receivables of approximately RMB5.1 million. Such increase was partially offset by a decrease
in trade payables of approximately RMB2.8 million, an increase in inventories of approximately
RMB3.8 million and an increase in trade receivables of approximaetly RMB3.1 million.
For the year ended 31 December 2011, the Target Group’s net cash inflow from operating
activities was approximately RMB155.3 million. This net cash inflow was primarily due to a
profit before taxation of approximately RMB204.7 million and adjusted for an increase in trade
payables of approximately RMB4.3 million and partially offset by (i) an increase in inventories
of approximately RMB7.8 million, (ii) an increase in trade receivables of approximately RMB2.3
million and (iii) an increase in prepayments, deposits and other receivables of approximately
RMB6.2 million.
For the year ended 31 December 2010, the Target Group’s net cash inflow from operating
activities was approximately RMB127.8 million. This net cash inflow was primarily due to a profit
before taxation of approximately RMB131.3 million and adjusted for an increase in other payables
and accruals of approximately RMB12.8 million and partially offset by (i) an increase in inventories
of approximately RMB2.8 million, (ii) an increase in trade receivables of approximately RMB0.3
million and (iii) an increase in prepayments, deposits and other receivables of approximately
RMB10.2 million.
Cash Flows from Investing Activities
For the year ended 31 December 2012, the Target Group’s net cash used in investing
activities was approximately RMB39.4 million. This net cash outflow was primarily due to the
deposit payment to acquire biological assets of RMB35 million and the advances to related parties
of approximately RMB5.0 million. Such cash outflow was partially offset by the interest received of
approximately RMB2.9 million.
– 191 –
LETTER FROM THE BOARD
For the year ended 31 December 2011, the Target Group’s net cash used in investing
activities was approximately RMB65.3 million. This net cash outflow was primarily due to the
payments to acquire biological assets of approximately RMB157.1 million in connection with
the Target Group’s application for the relevant forest rights certificates with respect to the Target
Group’s cultivation bases and payments to purchase property, plant and equipment of approximately
RMB14.5 million mainly in connection with the construction of Target Group’s new production
and packaging centres, office and staff dormitories in Anxi County, Fujian Province, the PRC. The
payments were partially offset by the repayment of related parties of approximately RMB106.2
million.
For the year ended 31 December 2010, the Target Group’s net cash used in investing
activities was approximately RMB109.5 million. This net cash outflow was primarily due to (i)
payment for biological assets of approximately RMB64.1 million in connection with the Target
Group’s application for the relevant forest rights certificates with respect to the Target Group’s
cultivation bases, (ii) purchase of property, plant and equipment of approximately RMB41.5 million
mainly in connection with the construction of the Target Group’s new production and packaging
centres, office and staff dormitories in Anxi County, Fujian Province, the PRC, and (iii) prepayment
for land use right of approximately RMB3.0 million in connection with the construction of the
Target Group’s new processing facilities and office building in Anxi County, Fujian Province, the
PRC.
Cash Flows from Financing Activities
For the year ended 31 December 2012, the Target Group had net cash used in financing
activities of approximately RMB 7.6 million. This net cash outflow was primarily due to the
pledged time deposits of RMB37.5 million for the bills drawn of RMB60 million in relation to the
deposits paid to purchase the contracting rights of additional 21,500 mu forest lands and the bills
drawn by Fujian Nature in favour of Fujian Daping. For details, please refer to the sections headed
“Tentative purchase of contracting rights of new forest lands” in this circular and “Indebtedness of
the Enlarged Group” in Appendix I to this circular. Such cash outflow was partially offset by the
proceeds from bank loans of RMB34 million.
For the year ended 31 December 2011, the Target Group had net cash inflow from financing
activities of approximately RMB 3.6 million, which was primarily due to the bank loans of
approximately RMB29.5 million and the decrease in pledged time deposits for bank loans of
approximately RMB48.6 million. This was partially offset by the repayment of bank loans of
approximately RMB69.5 million and the payment of share issue expenses in relation to the fees
payable to the financial adviser for the private placement of shares of the Target Company to the
Financial Investors.
– 192 –
LETTER FROM THE BOARD
For the year ended 31 December 2010, the Target Group had net cash inflow from financing
activities of RMB191.8 million, which was primarily due to proceeds from (i) a private placement
of shares to the Financial Investors of approximately RMB201.4 million and (ii) bank loans of
approximately RMB40.0 million; and this was partially offset by an increase in pledged time
deposits for bank loans of approximately RMB48.6 million.
CAPITAL STRUCTURE
The share capital of the Target Group as at the dates indicated:
As at 31 December
Share Capital
2010
2011
2012
RMB’000
RMB’000
RMB’000
11,488
11,488
11,488
INDEBTEDNESS, CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
Bank Borrowings and Charge on Assets of the Target Group
The bank borrowings and gearing ratio (expressed as the ratio of the total liabilities to total
equity) of the Target Group as at the dates indicated:
As at 31 December
2010
2011
2012
RMB’000
RMB’000
RMB’000
Bank borrowings
40,000
–
34,000
Gearing ratio
17.1%
7.6%
17.4
As at 31 December 2010, there was an outstanding secured short-term bank loan with
weighted-average interest rate of 5.10% per annum. The loan was secured by pledged deposits (with
total amounts of approximately RMB48.6 million as at 31 December 2010) and guarantees given by
key management personnel. The loan was fully paid in 2011. As at 31 December 2012, there was
a bank loan of RMB34 million which was secured by the land use rights held by the Target Group,
the biological assets of approximately RMB63.2 million with cultivable area of 6,906 mu and
guarantee from key management personnel.
– 193 –
LETTER FROM THE BOARD
Capital Commitments
Capital commitments of the Target Group in respect of property, plant and equipment and
biological assets outstanding at the end of each reporting period not provided for in its audited
accounts as at the dates indicated:–
At 31 December
Contracted, but not provided for
– buildings
– cultivation bases of tea plants
2010
2011
2012
RMB’000
RMB’000
RMB’000
24,492
125,915
23,018
–
22,218
57,500
150,407
23,018
79,718
Operating Lease Commitments
As at the dates indicated, the Target Group had total future minimum lease payments under
non-cancellable operating leases payable as follows:–
At 31 December
Within 1 year
After 1 year but within 5 years
After 5 years
2010
2011
2012
RMB’000
RMB’000
RMB’000
4,026
13,498
11,466
4,991
17,110
8,898
5,402
13,808
6,970
28,990
30,999
26,180
The Target Group is the lessee in respect of a number of properties held under operating
leases. The leases typically run for an initial period of one to ten years, with an option to renew the
leases when all the terms are renegotiated.
Contingent Liabilities
As at 31 December 2010, 2011 and 2012, the Target Group had no material contingent
liabilities.
– 194 –
LETTER FROM THE BOARD
CURRENCY RISK
Currency risk is the risk that the fair value or future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates.
The Target Group is exposed to currency risk primarily through pledged deposits and bank
balances that are denominated in currency other than the functional currency of the operations
to which they relate. The currency giving rise to this risk is primarily the HK dollars, which is
relatively stable against the RMB. The Target Group considers that the exposure to the currency risk
is not material and no hedging arrangement has been made.
MATERIAL ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES
The Target Group did not have significant acquisitions or disposals of subsidiaries during the
Track Record Period.
TENTATIVE PURCHASE OF CONTRACTING RIGHTS OF NEW FOREST LANDS
On 28 September 2012, Fujian Nature entered into a memorandum of understanding with
a tea company in Fujian (the “Tea Company”), which is an independent third party to the Target
Group and the Group, for the transfer of the contracting rights to operate the tea plantations
in respect of 21,500 mu forest lands located in Fu’an City（ 福安市）, Fujian Province for a
total consideration of approximately RMB107.5 million. The memorandum of understanding is
effective for one year. The terms of such transfer, including the consideration, will be finalized
in a subsequent definitive transfer agreement to be entered into after the approval of the relevant
Governmental Authority on the aforesaid transfer has been obtained. Fujian Nature has paid a
refundable deposit of approximately RMB53.8 million, which shall be refunded to Fujian Nature
in the event that the approval of the relevant Governmental Authority cannot be obtained, or if
the Tea Company fails to enable Fujian Nature or its designated subsidiaries to obtain the forest
rights certificates in respect of the aforesaid forest lands during the term of the memorandum of
understanding. If a third party offers to purchase the contracting rights at a consideration which
is higher than the consideration payable by Fujian Nature (the “Higher Consideration”), Fujian
Nature has the right of first refusal to purchase the contracting rights at the Higher Consideration.
– 195 –
LETTER FROM THE BOARD
11.
INFORMATION OF THE GROUP AND THE ENLARGED GROUP
A.
INFORMATION OF THE GROUP
The principal activity of the Company is investment holding. The subsidiaries of the Group
are principally engaged in the provision of fabrics processing services, manufacture and sale of
fabrics, yarns and blankets.
B.
PROSPECT OF THE ENLARGED GROUP
Industry Outlook
The overall operating environment for the Chinese textile industry is facing immense
uncertainties due to the unstable investment environment in the PRC, in particular, the
consistent appreciation of RMB which will bring an adverse impact on China’s textile
export. Together with the rising prices of raw materials as well as growing domestic labor
costs, these will bring great challenges to the future development of the Chinese textile
industry. In view of this, the Group will dedicate efforts to maintain a steady development
of its existing business in the domestic market through thorough implementation of flexible
market strategies, capturing opportunities arising from continuous growth of the Chinese
consumption market, so as to promote the long-term stable development of the Group’s
overall business.
With respect to its foreign operations, the Group has established a solid customer base
in the Philippines market, which greatly mitigates the challenges brought by the shrinking
export market of the textile industry in the PRC. In addition, the Group will adopt its strategy
of diversified market development, and will further develop its business in emerging markets.
The Group believes that leveraging on its leading position in the textile industry, it will
be able to effectively cope with the challenges faced by the industry, to grasp the business
opportunities brought by industrial consolidation and to promote continuous business
development. The Group will also actively implement its long-term strategy of diversified
business development, so as to enhance its revenue sources and profitability, and ultimately
maximize the returns for the Shareholders.
– 196 –
LETTER FROM THE BOARD
The details of the outlook for tea industry are set out in the section headed “Industry
Overview” of this circular. Although the year-on-year growth rate of raw tea market,
oolong raw tea market, refined tea market and refined oolong tea market are decreasing or
expected to decrease, the said decrease is very slight and the market size of the same has
been increasing in terms of sales value and sales volume from 2007 to 2011. For each of
the financial years ended 31 December 2010, 2011 and 2012, the Target Group generated a
turnover of approximately RMB310.4 million, RMB408.2 million and RMB389.0 million
respectively, representing a CAGR of approximately 12.0%. In addition, the Target Group’s
net profit for each of the financial years ended 31 December 2010, 2011 and 2012 is
approximately RMB 126.6 million, RMB 194.2 million and RMB190.6 million respectively
representing a CAGR of approximately 22.7%. In consideration of the above, the Directors
believe that the slight decrease of the growth rate of tea market will not affect the fairness
and reasonableness of the terms in the Sale and Purchase Agreement.
Trading and financial prospects of the Enlarged Group
As mentioned under the section headed “Reasons for the Acquisition” in this circular,
the Directors believe that, by entering into the tea industry, the Acquisition will allow the
Group to realize its long term business diversification strategy and enhance its revenue
sources as well as to bring maximum return to its Shareholders.
While pursuing the business of tea industry, Mr. Cai Zhenrong and parties acting in
concert with him have confirmed to the Company that they intend to continue the existing
business of the Group in relation to fabric processing services, manufacture and sale of
fabrics, yarns and blankets. Mr. Cai Zhenrong and parties acting in concert with him have
also confirmed to the Company that they have no intention to introduce any major changes to
the business of the Group, including any redeployment of the fixed assets of the Group. The
Directors are of the view that the tea business carried out by the Target Group would enhance
the overall revenue to the Group in the future.
The key management of the Target Company will remain unchanged after the
Completion. The Directors consider that with such experienced management team, the Group
will have sufficient management expertise and qualified personnel at operational level to
operate the business of the Target Group, and the Group will also be benefited from the cost
and operation efficiency and other synergy effect arising from the sharing of the management
expertise and financial resources between the Group and the Target Group.
In light of the above, the Directors are of the view that the Acquisition will enhance
the performance of the Enlarged Group and the return to the Shareholders as a whole.
– 197 –
LETTER FROM THE BOARD
C.
EMPLOYEES OF THE GROUP
As there is no change of control of the Company, Mr. Cai Zhenrong and parties acting in
concert with him have no intention to make any major changes to the continued employment of the
employees of the Group after the Completion.
D.
RISK MANAGEMENT AND CORPORATE GOVERNANCE
In view of the risks relating to the Target Group and tea industry identified in this circular
and non-compliance of the regulations and laws of the PRC by the Target Group, the Directors
proposed and the directors of the Target Group agreed to implement the following measures to cure
or minimize those risks and non-compliance before the Completion:
(i)
conducting a review of the effectiveness of the Target Group’s internal control system
and corporate governance measures, especially for those risks identified in this
circular, and resolving internal control and corporate governance defects accordingly;
(ii)
engaging an internal control expert to enhance the internal control system and
corporate governance measures of the Target Group;
(iii)
providing the training and continuous professional development of directors and
senior management of the Target Group in respect of the said internal control system
and corporate governance measures; and
(iv)
establishing a compliance committee to monitor the implementation of and the
compliance with the internal control policies and procedures and corporate governance
measures by the Enlarged Group.
After the Completion, the Directors will conduct annual review of the effectiveness of the
internal control system and corporate governance measures of the Enlarged Group and report to
the Shareholders in the corporate governance report in compliance with Appendix 14 of the Listing
Rules.
The proposed internal control and corporate governance measures provide independent
check and balance of the risks identified. The Enlarged Group can leverage on the expertise of the
internal control professional of the Company to improve the internal control system and strengthen
the corporate governance. Accompanied with the compliance committee and annual review, the
effectiveness of the implementation of such measures can be continuously monitored.
– 198 –
LETTER FROM THE BOARD
If the implementation of the above internal controls is set as a condition precedent to the
Acquisition, it may impose a business risk of losing this acquisition opportunity to the Company
because the effectiveness of the internal control measures would take time to show apparent
results and this is an ongoing improvement process with necessary adjustments in response to the
changing circumstances. This, in turn, will render the Acquisition timetable unpredictable, and
the professional fees and any other expenses incurred by the Company for the Acquisition will be
increased accordingly. Taking into account of this risk, the Directors are of the view that the costs
and risks of extending the Completion would outweigh the benefits of implementing the internal
control before the Completion.
The Directors have reviewed and considered the risks relating to the Target Group and tea
industry identified in this circular. Taking into account of the possibility and financial impact
of those risks, the proposed measures to cure or minimize those risks and the reasons for the
Acquisition as set out in the section headed “Reasons for the Acquisition” of this circular, the
Directors are of the view that the terms of the Sale and Purchase Agreement and the transactions
thereunder are fair and reasonable and are in the interest of the Company and the Shareholders as a
whole and recommend the Independent Shareholders to vote in favour of the relevant resolutions to
be proposed at the EGM.
12.
EXTRAORDINARY GENERAL MEETING
A notice convening the EGM is set out on pages EGM – 1 to EGM – 4 of this circular which
will be held at Room 2105, West Tower, Shun Tak Centre, 200 Connaught Road Central, Hong
Kong on Monday, 22 July 2013 at 11:00 a.m, at which resolutions will be proposed to approve,
among other things, (1) an increase in the authorized share capital of the Company; (2) the Sale and
Purchase Agreement and the transactions contemplated thereunder (including the Acquisition, the
issue of the Convertible Bonds, the allotment and issue of the Consideration Shares and Conversion
Shares and the transactions under the New Transfer Agreements and the New Contracting
Agreement); and (3) the Whitewash Waiver.
The abovementioned increase in the authorized share capital of the Company is subject
to the approval by the Shareholders at the EGM to be taken by way of a poll. Meanwhile, the
Sale and Purchase Agreement and the transactions contemplated thereunder (including the
Acquisition, the issue of the Convertible Bonds, the allotment and issue of the Consideration Shares
and Conversion Shares and the transactions under the New Transfer Agreements and the New
Contracting Agreement) and the Whitewash Waiver are subject to, among other things, the approval
by the Independent Shareholders at the EGM to be taken by way of a poll. Mr. Cai Zhenrong and
parties acting in concert with him and their associates together with those who are interested in, or
involved in, the Sale and Purchase Agreement, the transactions contemplated thereunder (including
but not limited to the Acquisition, the issue of the Convertible Bonds, the allotment and issue
– 199 –
LETTER FROM THE BOARD
of the Consideration Shares and the Conversion Shares, the transactions under the New Transfer
Agreements and the New Contracting Agreement) and/or the Whitewash Waiver shall abstain from
voting for the relevant resolutions at the EGM due to their interest in the concerned transactions.
Other than the above, to the best of the Directors’ knowledge, information and belief having made
all reasonable enquiries, no other Shareholders have material interest in the above transactions and
will abstain from voting at the EGM.
As at the Latest Practicable Date, Mr. Cai Zhenrong and parties acting in concert with
him (including their associates) are collectively entitled to voting rights of 523,563,000 Shares
(representing approximately 33.60 % of the total voting rights of the holders of the Shares) and
Mr. Cai Zhenrong and parties acting in concert with him (including their respective associates)
control or are entitled to control over the entire voting right in respect of their respective Shares.
There is (i) no voting trust or other agreement or arrangement or understanding entered into by or
binding upon Mr. Cai Zhenrong and parties acting in concert with him (including their respective
associates); and (ii) no obligation or entitlement of Mr. Cai Zhenrong and parties acting in concert
with him (including their respective associates) as at the Latest Practicable Date, whereby they
have or may have temporarily or permanently passed control over the exercise of the voting right in
respect of their respective Shares to a third party, either generally or on a case-by-case basis.
A form of proxy for the EGM is enclosed. Whether or not you wish to attend the EGM, you
are requested to complete the form of proxy and return the same to the office of the Company’s
branch share registrar and transfer office in Hong Kong, Union Registrars Limited, at 18th Floor,
Fook Lee Commercial Centre, Town Place, 33 Lockhart Road, Wanchai, Hong Kong in accordance
with the instructions printed thereon not less than 48 hours before the time appointed for the
meeting (or any adjourned meeting). Completion and delivery of the form of proxy will not
preclude you from attending and voting at the meeting (or any adjourned meeting) if you so wish.
Shareholders and potential investors are reminded that the Sale and Purchase
Agreement is subject to, among other things, fulfillment of certain conditions set out in the
paragraphs headed “Conditions Precedent” above. There is no assurance by the Company
that any of the conditions to the Sale and Purchase Agreement will be fulfilled, and the Sale
and Purchase Agreement may or may not proceed. Shareholders and potential investors
should exercise caution when dealing in the Shares.
– 200 –
LETTER FROM THE BOARD
13.
RECOMMENDATIONS
The Independent Board Committee has been established to advise the Independent
Shareholders whether the Sale and Purchase Agreement and the transactions contemplated
thereunder (including the Acquisition , the issue of the Convertible Bonds, the allotment and
issue of the Consideration Shares and Conversion Shares and the transactions under the New
Transfer Agreements and the New Contracting Agreement) and the Whitewash Waiver are fair and
reasonable so far as the Independent Shareholders are concerned.
The Joint Independent Financial Advisers, namely AsiaVest Partners Limited and RaffAello
Capital Limited have been appointed to advise the Independent Board Committee and the
Independent Shareholders in that connection.
The text of the letters from AsiaVest Partners Limited and RaffAello Capital Limited
containing their respective advice to the Independent Board Committee and the Independent
Shareholders are set out on pages 204 to 257 of this circular and the text of the letter from the
Independent Board Committee to the Independent Shareholders is set out on pages 202 to 203 of
this circular.
The Independent Board Committee, having taken into account the advice of the Joint
Independent Financial Advisers, is of the opinion that the terms of the Sale and Purchase
Agreement and the transactions contemplated thereunder (including the Acquisition, the issue of
the Convertible Bonds, the allotment and issue of the Consideration Shares and Conversion Shares
and the transactions under the New Transfer Agreements and the New Contracting Agreement)
and the Whitewash Waiver are fair and reasonable and are in the interest of the Company and the
Shareholders as a whole and recommends the Independent Shareholders to vote in favour of the
relevant resolutions to be proposed at the EGM.
The Board considers that the Sale and Purchase Agreement and the transactions contemplated
thereunder (including the Acquisition , the issue of the Convertible Bonds, the allotment and
issue of the Consideration Shares and Conversion Shares and the transactions under the New
Transfer Agreements and the New Contracting Agreement) and the Whitewash Waiver are fair and
reasonable and in the interests of the Company and the Shareholders as a whole and recommends
the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM.
Yours faithfully,
By Order of the Board of
HUAFENG GROUP HOLDINGS LIMITED
Cai Yangbo
Executive Director
– 201 –
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
Huafeng Group Holdings Limited
華豐集團控股有限公司
(Incorporated in the Cayman Islands with limited liability)
(Stock Code: 364)
28 June 2013
To the Independent Shareholders
Dear Sir or Madam,
(1) VERY SUBSTANTIAL ACQUISITION AND
CONNECTED TRANSACTION;
(2) PROPOSED GRANT OF SPECIFIC MANDATE TO ISSUE SHARES;
(3) PROPOSED INCREASE IN AUTHORIZED SHARE CAPITAL;
AND
(4) APPLICATION FOR WHITEWASH WAIVER
We refer to the circular of the Company dated 28 June 2013 (the “Circular”), of which this
letter forms part. Unless the context requires otherwise, capitalised terms used herein shall have the
same meanings as those defined in the Circular.
We have been appointed by the Board as members of the Independent Board Committee to
advise you on the terms of the Sale and Purchase Agreement and the transactions contemplated
thereunder (including the Acquisition, the issue of the Convertible Bonds, the allotment and issue
of the Consideration Shares and Conversion Shares and the transactions under the New Transfer
Agreements and the New Contracting Agreement) and the Whitewash Waiver. AsiaVest Partners
Limited and RaffAello Capital Limited have been appointed as the Joint Independent Financial
Advisers to advise you and us in this regard. Details of their advice, together with the principal
factors and reasons they have taken into consideration in giving such advice, are set out on pages
204 to 257 of this circular. Your attention is also drawn to the “Letter from the Board” in this
circular and the additional information set out in the appendices thereto.
– 202 –
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
Having considered the terms of the Sale and Purchase Agreement and the Whitewash Waiver,
and taking into account the advice of the Joint Independent Financial Advisers, in particular
the principal factors, reasons and recommendation as set out in their letter, we consider that
the entering into of the Sale and Purchase Agreement and the performance of the transactions
contemplated thereunder and the Whitewash Waiver are in the interests of the Group and the
Independent Shareholders as a whole, and the terms of the Sale and Purchase Agreement are on
normal commercial terms and are fair and reasonable so far as the Independent Shareholders are
concerned.
We therefore recommend you to vote in favour of the ordinary resolutions to be proposed at
the EGM to approve the Sale and Purchase Agreement and the transactions contemplated thereunder
and the Whitewash Waiver.
Lawrence Gonzaga
Yours faithfully
the Independent Board Committee
Choy So Yuk, JP
Independent non-executive
Director
Independent non-executive
Director
– 203 –
Wong Chi Hung, Stanley
Independent non-executive
Director
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
The following is the full text of a letter of advice from the Joint Independent Financial
Advisers to the Independent Board Committee and the Independent Shareholders in respect of the
Sale and Purchase Agreement, the transactions contemplated thereunder, the Acquisition, the issue
of the Convertible Bonds, the allotment and issue of the Consideration Shares and the Conversion
Shares and the transactions under the New Transfer Agreements and the New Contracting
Agreement and the Whitewash Waiver prepared for the purpose of inclusion in this circular.
Rm 1302, Tower One, Lippo Centre,
89 Queensway, Admiralty, Hong Kong
Room 2605, 26/F Universal Trade Centre,
3-5A Arbuthnot Road, Central, Hong Kong
28 June 2013
To the Independent Board Committee and the Independent Shareholders of
Huafeng Group Holdings Limited
Dear Sirs,
VERY SUBSTANTIAL ACQUISITION; CONNECTED TRANSACTION
AND
APPLICATION FOR WHITEWASH WAIVER
INTRODUCTION
We refer to our appointment, pursuant to Rule 2.1 of Takeovers Code and approved by the
Independent Board Committee, to advise the Independent Board Committee and the Independent
Shareholders in respect of the fairness and the reasonableness of the terms of the Sale and Purchase
Agreement, the transactions contemplated thereunder, the Acquisition, the issue of the Convertible
Bonds, the allotment and issue of the Consideration Shares and the Conversion Shares and the
transactions under the New Transfer Agreements and the New Contracting Agreement and the
Whitewash Waiver, details of which are set out in the circular to the Shareholders dated 28 June
2013 (the “Circular”), of which this letter forms part. Terms used in this letter have the same
meanings as defined in the Circular unless the context requires otherwise.
– 204 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
On 17 January 2013, the Purchaser, a wholly-owned subsidiary of the Company, the
Company as the Purchaser’s guarantor and the Vendors, among others, entered into the Sale and
Purchase Agreement pursuant to which the Purchaser has conditionally agreed to purchase from
the Vendors, and the Vendors have conditionally agreed to sell to the Purchaser, the Sale Shares,
representing the entire issued share capital of the Target Company, at a total Consideration of
HK$2,487.48 million, which will be satisfied partly in cash and partly by the allotment and issue of
the Consideration Shares and the issue of the Convertible Bonds.
As one or more of the applicable percentage ratios under Rule 14.07 of the Listing Rules in
respect of the Acquisition exceeds 100%, the Acquisition constitutes a very substantial acquisition
for the Company under Chapter 14 of the Listing Rules. In addition, Exalt Wealth, Shine Strategy
and Smart Fujian, each being one of the Vendors, and their respective associates (including Mr. Cai
Zhenrong, Mr. Cai Zhenyao, Mr. Ng and Ms. Ng) are connected persons of the Company, and the
Acquisition constitutes a connected transaction for the Company under Rule 14A.13(1)(a) of the
Listing Rules. Therefore, the Acquisition is subject to the reporting, announcement and Independent
Shareholders’ approval requirements under the Listing Rules.
As at the Latest Practicable Date, Mr. Cai Zhenrong and parties acting in concert with
him holds 523,563,000 Shares representing approximately 33.60% of the total Shares in issue.
Immediately following the allotment and issue of the Consideration Shares to the Vendors, the
aggregate shareholding of Mr. Cai Zhenrong and parties acting in concert with him will increase
to approximately 73.68% of the total Shares in issue as enlarged by the allotment and issue of
the Consideration Shares but before conversion or exercise of any Convertible Bonds, Other
Convertible Bonds and Outstanding Share Options. Under Rule 26.1 of the Takeovers Code, Mr.
Cai Zhenrong and parties acting in concert with him would be required to make an unconditional
mandatory general offer for all the issued Shares and other securities of the Company not already
owned or agreed to be acquired by Mr. Cai Zhenrong and parties acting in concert with him, unless
a waiver from strict compliance with Rule 26.1 of the Takeovers Code has been obtained from the
Executive.
After the Completion, Mr. Cai Zhenrong and parties acting in concert with him will hold
in aggregate, more than 50% of the voting rights of the Company. As such, Mr. Cai Zhenrong
and parties acting in concert with him may increase their holding without incurring any further
obligation under Rule 26 of the Takeovers Code to make a general offer.
– 205 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
An application has been made by Mr. Cai Zhenrong to the Executive for the Whitewash
Waiver pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code. The Whitewash
Waiver, if granted, will be subject to, among other things, (i) approval of the Independent
Shareholders in respect of the Acquisition and the Whitewash Waiver at the EGM where voting
on the relevant resolutions shall be taken by poll, and (ii) each member of Mr. Cai Zhenrong and
parties acting in concert with him not having any acquisitions or disposals of voting rights of the
Company between the date of the Announcement and completion of the issue of the Consideration
Shares to the Vendors unless with the prior consent of the Executive.
JP
The Independent Board Committee, comprising Mr. Lawrence Gonzaga, Ms. Choy So Yuk,
and Mr. Wong Chi Hung, Stanley, being all the independent non-executive Directors, has been
established to advise the Independent Shareholders as to whether the terms of the Sale and Purchase
Agreement, the transactions contemplated thereunder, the Acquisition, the issue of the Convertible
Bonds, the allotment and issue of the Consideration Shares and the Conversion Shares, and the
transactions under the New Transfer Agreements and the New Contracting Agreement and the
Whitewash Waiver are fair and reasonable and as to voting in respect thereof at the EGM.
BASIS OF OUR OPINION
In formulating our opinion and advice, we have relied upon accuracy of the information
and representations contained in the Circular and information provided to us by the Company,
the Director(s) and the management. We have assumed that all statements, information and
representations made or referred to in the Circular and all information and representations which
have been provided by the Company, the Director(s) and the management, for which they are solely
and wholly responsible, were true at the time they were made and continue to be true as at the date
of the EGM. We have also assumed that all statements of belief, opinion and intention made by the
Director(s) in the Circular were reasonably made after due and careful enquiry and were based on
honestly-held opinions. If we come to know material changes, if any, to the statements, information
and/or representations contained in the Circular prior to the EGM, we will inform the Shareholders
of such changes as soon as possible.
We have no reason to doubt the truth, accuracy and completeness of the information and
representations provided to us by the Director(s) and have been confirmed by the Director(s) that
no material facts and representations the omission of which would make any statement in the
Circular, including this letter, misleading. We have not, however, conducted any independent indepth investigation into the business affairs, financial position or future prospects of the Group, nor
have we carried out any independent verification of the information provided by the Director(s) and
management of the Company.
– 206 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
PRINCIPAL FACTORS AND REASONS CONSIDERED
In giving our recommendation to the Independent Board Committee and the Independent
Shareholders in respect of the fairness and reasonableness of the Sale and Purchase Agreement,
the transactions contemplated thereunder, the Acquisition, the issue of the Convertible Bonds, the
allotment and issue of the Consideration Shares and the Conversion Shares, the transactions under
the New Transfer Agreements and the New Contracting Agreement and the Whitewash Waiver, we
have taken into consideration the following factors and reasons:
A.
The Acquisition
1.
Information on the Target Group
The Target Company was incorporated in the Cayman Islands and through
different wholly-owned subsidiaries, engages principally in the production, marketing
and sale of tea in the PRC. The major operating subsidiary of the Target Company is a
wholly foreign owned enterprise which was established in the PRC in 2007.
The Target Group is principally engaged in the production and sale of a range
of oolong teas, in the form of both raw teas, where fresh tea leaves are picked at
the cultivation bases and processed into raw teas, and refined teas, where a selected
portion of the raw teas are further processed into refined teas by removing visible
impurities, fine powder and small broken tea leaves.
As set out in the letter from the board in the Circular (the “Board Letter”), the
Target Group is a dedicated oolong tea producer in the PRC. With its tea cultivation
bases, production facilities, established brand and extensive sales network, the Target
Group has developed a vertically integrated business model. The raw teas are sold on
a wholesale basis to Chadu Customers and wholesalers and a majority of the refined
teas are sold on a retail basis through an established retail network. A small portion
of the refined teas are sold on a non-branded basis to Direct Sales Customers. All
the wholesalers, Chadu Customers and Direct Sales Customers are independent third
parties to the Target Group and the Company.
– 207 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
The brand of the Target Group is Ping Shan Famous Tea（坪山名茶）, which
has been registered as trademark in Hong Kong and the PRC. As at the Latest
Practicable Date, the Target Group owns 15 trademarks which have all been registered
in the PRC and 1 trademark (with 9 classes) which has been registered in Hong Kong.
The registered trademark will not be transferred to the Group and will remain under
the name of the Target Group. If the sale and purchase of the Sale Shares is completed,
the Company will become the ultimate beneficial owner of these trademarks. As
disclosed in the Circular, as at the Latest Practicable Date, the Target Group’s tea
cultivation bases comprise 770 mu Forest Lands, 29.5K mu Economical Forest Lands
and 8K mu Ecological Forest Lands and the Target Group has 5 retail subsidiaries and
25 retail outlets. Further details in relation to, among others, the tea cultivation bases
and retail subsidiaries and retail outlets of the Target Group have been set out under
the section headed “10. INFORMATION OF THE TARGET GROUP” in the Board
Letter.
The audited net asset value of the Target Group as at 31 December 2011 was
approximately RMB676.64 million and the audited net asset value of the Target Group
as at 31 December 2012 was approximately RMB867.11 million. After the issue of
29.5K mu Forest Rights Certificates under the name of Fujian Daping in 2011, the
Target Group recognized the tea trees on the 29.5K mu Economical Forest Lands as
its biological assets. We note from the valuation report of the biological assets of the
Target Group which is set out in the Appendix V to the Circular that the fair value
of the biological assets of the Target Group as at 31 March 2013 is approximately
RMB272.4 million.
– 208 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
The net profit before and after taxation of the Target Group for each of the
three years ended 31 December 2012 prepared in accordance with the International
Financial Reporting Standards are set out below:
For the year ended
31 December 2010
(audited)
For the year ended
31 December 2011
(audited)
For the year ended
31 December 2012
(audited)
(Approximately
RMB’ million)
(Approximately
RMB’ million)
(Approximately
RMB’ million)
310.36
131.26
126.63
408.24
204.74
194.25
389.05
197.17
190.55
Turnover
Net profits before taxation
Net profits after taxation
The Target Company will become a wholly-owned subsidiary of the Company
and the financial information of the Target Group will be consolidated into the
accounts of the Group upon completion of the Acquisition.
As illustrated above, the Target Group has recorded a net profit after taxation
of approximately RMB194.25 million for the year ended 31 December 2011,
representing an increase of approximately 53.40% as compared with that of the year
ended 31 December 2010 of approximately RMB126.63 million. As advised by the
Target Company, the increase in profit was mainly attributable to the increase in
revenue from raw teas and refined teas as a result of expansion of cultivable area and
retail outlets. In addition, the increase in fair value gain of biological assets less cost
to sell of approximately RMB33.38 million also contributed to the increase in profit.
The Target Group has recorded a net profit after taxation of approximately
RMB190.55 million for the year ended 31 December 2012, representing a slight
decrease of approximately 1.90% as compared with the net profit during the
corresponding period in the previous year of approximately RMB194.25 million.
– 209 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
2.
Background and Financial information of the Group
The Group is principally engaged in the provision of fabrics processing services
and the manufacture and sale of fabrics, yarns and blankets. The Group has built up
a customer base of garment manufacturers, wholesalers, distributors and importers
of fabrics items in the PRC, the Philippines, Africa, Australia, North America and
Taiwan, etc.
(i)
Financial year ended 30 September 2011
According to the annual report of the Group for the year ended 30
September 2011 (the “AR 2011”), the turnover of the Group was approximately
HK$727.27 million for the year ended 30 September 2011, which represented
a decrease of approximately 5.96% as compared to the turnover for the year
ended 30 September 2010 of approximately HK$773.38 million. As advised by
the Company, such decrease in turnover was mainly attributable to the decrease
in demand from oversea markets as a result of (i) a significant increase of raw
material and production costs attributable to rising inflation rate in China; (ii)
the consistent appreciation of the RMB against the United States dollar; (iii)
the impact of the debt crisis in Europe and the US; and (iv) the increasing
market competition from the textile enterprises in other countries for the
reasons set out from (i) to (iii) above. The Group recorded a loss attributable
to Shareholders of approximately HK$138.46 million for the year ended 30
September 2011 whilst it recorded a profit attributable to Shareholders of
approximately HK$68.47 million for the year ended 30 September 2010. As
advised by the Company, the loss in 2011 was mainly because the Group
recorded a loss on disposal of subsidiaries of approximately HK$140.16 million
for the year ended 30 September 2011 whereas the Group did not have such loss
for the year ended 30 September 2010.
(ii)
Financial year ended 30 September 2012
According to the annual report of the Group for the year ended 30
September 2012 (the “AR 2012”), the turnover of the Group was approximately
HK$539.12 million for the year ended 30 September 2012, which represented
a decrease of approximately 25.87% as compared to the turnover for the year
ended 30 September 2011 of approximately HK$727.27 million. As advised
by the Company, such decrease in turnover was mainly attributable to (i)
China’s economic slowdown and the weakened domestic consumption; and
(ii) the decrease in demand from oversea markets as a result of the consistent
– 210 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
appreciation of the RMB against the United States dollar and the global
economic downturn. The Group recorded a loss attributable to Shareholders
of approximately HK$190.78 million for the year ended 30 September 2012,
which represented an increase in loss of approximately 37.79% as compared
to that of approximately HK$138.46 million for the year ended 30 September
2011. As advised by the Company, the increase in loss in 2012 was mainly
because the Group recorded an impairment loss on property, plant and
equipment of approximately HK$ 114.38 million and a loss on disposal of
investment properties of approximately HK$48.19 million for the year ended 30
September 2012 while the Group did not have those losses for the year ended
30 September 2011.
3.
Reasons for the Acquisition
As disclosed in the AR 2011, the Group had been confronted with unfavourable
operating challenges for the year ended 30 September 2011 arising from significant
increase of raw material costs coupled with increasing market competition. It was
also reported in the AR 2011 and AR 2012 that the Group would proactively search
for potential favourable expansion, merger and acquisitions and realize its long-term
business diversification strategy.
Business Diversification
The Group is expected to benefit from the Acquisition for the following
principal reasons:
(a)
the Acquisition will allow the Group to realize its long term
business diversification strategy by entering into the tea industry,
being a business with potential, so as to further enhance its
revenue sources as well as to bring maximum return to its
Shareholders;
(b)
the Target Group has strong profitability historically and high
turnover and would be able to bring positive contribution to the
Group; and
– 211 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(c)
Mr. Cai Zhenyao, an executive Director, is also an executive
director of the Target Company since its incorporation. He is also
the director of Citiasia and China Tea BVI, the two subsidiaries of
the Target Company. Mr. Cai Zhenyao is responsible for the dayto-day management of the Target Group and leads substantially
the same board of directors and senior management team of the
Target Group. Mr. Cai Zhenyao has no intention to resign from
the directorships of the Target Group and the dual directorship
will remain after the Completion. In addition, the entire executive
management team of the Target Company will remain unchanged
after the Completion. Accordingly, the Directors consider that
with such experienced management team, the Group will have
sufficient management expertise and qualified personnel at
operational level to operate the business of the Target Group.
As noted from the Board Letter, the Company intends to
continue its existing business while it will realize its long term business
diversification strategy by entering into the tea industry through the
Acquisition. As set out in the AR 2011 of the Company, the yarn and
blanket business resulted in an increase of loss from approximately
HK$9.34 million in 2010 to approximately HK$23.69 million in 2011
while the profit of the fabric business declined from approximately
HK$138.83 million in 2010 to approximately HK$83.96 million in
2011. Further, as set out in the AR 2012 of the Company, the loss
of the yarn and blanket business further increased to approximately
HK$49.55 million in 2012 while the profit of the fabric business further
decreased to approximately HK$36.46 million in 2012. The audited
net profit attributable to the owners of the Target Group for the year
ended 31 December 2012 achieved approximately RMB190.55 million
(equivalent to approximately HK$233.04 million) as compared with the
Group’s net loss after taxation for the year ended 30 September 2012 of
approximately HK$190.8 million.
Having considered the historical profitability, prospects and
management expertise of the Target Group, the Directors are of the
view that the Acquisition represents a good opportunity for the Group to
realize its long-term business diversification strategy. The Directors are
of the view that the terms of the Sale and Purchase Agreement, which
– 212 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
have been agreed after arm’s length negotiations among the Purchaser,
the Company and the Vendors, are on normal commercial terms and are
fair and reasonable and that the Acquisition is in the interests of the
Company and its Shareholders as a whole. In view of the deterioration of
the Group’s existing business and the historical profitability of the Target
Group’s tea business, we concur with the view of the Directors that the
Acquisition represents a good opportunity for the Group to realize its
long-term business diversification strategy.
Proven Tea Market
We noted from the website of National Bureau of Statistics of China
（中華人民共和國國家統計局）(www.stats.gov.cn), the total retail sales of
consumers goods in China for the year 2012 reached RMB20,716.7 billion,
representing an increase of approximately 14.3% as compared with that in the
previous year. The retail sales of grain, oil, foodstuff, beverage, tobacco and
liquor of enterprises (units) above the designated size1 recorded an income of
approximately RMB1,240.6 billion, representing an increase of approximately
17.9% as compared with that in the previous year. In view of that tea products,
being the principal product of the Target Group, are within the category of
grain, oil, foodstuff, beverage, tobacco and liquor and is a type of consumer
goods, we consider the abovementioned growing retail sales statistics is also
relevant to the tea market in the PRC, indicating growing sales in the market.
We have also reviewed a publication “The release of 2012 the Chinese oolong
industry development report” dated 26 December 2012 (the “Publication”)
from the website of 中國茶葉網 (www.e-chinatea.cn, the “Tea Website”), a
national wide website, which is hosted by the Tea Research Institute of Chinese
Academy of Agricultural Sciences（中國農業科學院茶葉研究所）, a research
institute under Chinese Academy of Agricultural Sciences（中國農業科學院）
which in turn is a research organization under the Ministry of Agriculture of
the People’s Republic of China（中華人民共和國農業部）, and 國家茶葉產
業技術體系 (National Tea Industry Technology System, being the unofficial
English translation), a research system consisting of technology research and
development centers and test stations and used for providing statistical service
1
As stated in the website of National Bureau of Statistics of China（中華人民共和國國家統計局）, a governmental
organization established under the State Council（ 國務院）, the basis of the survey methods is that all enterprises
(units) in China above the designated size are surveyed, while the data of enterprises (units) below the designated
size are collected by sampling survey. Enterprises (units) above designated size refer to those wholesale enterprises
(units) with an annual revenue from primary business of RMB20 million and above, those retail enterprises (units)
with an annual revenue from primary business of RMB5 million and above, and those hotel and catering enterprises
(units) with an annual revenue from primary business of RMB2 million and above.
– 213 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
to the PRC government for its decision making as one of its main tasks. As
noted from the Publication, in 2011, the national tea production reached 1.62
million tons, represented an increase of approximately 9.9% as compared with
previous year. In addition, according to a publication dated 15 March 2013 from
the Tea Website, the national tea production reached approximately 1.92 million
tons in 2012, represented an increase of approximately 15.20% as compared
with the national tea production in 2011. As also noted from the Publication,
the level of China’s domestic tea consumption is rising in terms of volume. Set
out below is the chart for the national sales of tea (in 10 thousand tons) during
the period from 2001 to 2011 extracted from the Publication:
The national sales of tea (’0000 tons)
140
118
120
110
100
100
90
87.6
74.1
80
64.8
60
46.5
50
47.7
52.5
40
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
20
01
0
Figure 8: National sales of tea from 2001 to 2011 (in 10 thousand tonnes)
Note:
The above chart is extracted from the Publication. According to the Publication,
the data in the above chart is sourced from China Tea Marketing Association 中國
茶葉流通協會 2 (CTMA) and National Bureau of Statistics of China.
As shown above, the national sales of tea has demonstrated an increasing
trend from 2001 to 2011. In 2011, the national sales of tea is approximately
1.18 million tons, represented an increase of approximately 7.3% as compared
with year 2010.
2
The China Tea Marketing Association (CTMA), an organization registered with the Ministry of Civil Affairs of the
People’s Republic of China（中華人民共和國民政部）(the “Ministry of Civil Affairs”) and recognized by the PRC
government, was found in 1992. It is a trans-regional, trans-department and trans-ownership national organization
composed of enterprises, institutions, social groups and individuals in the tea production, processing, operation,
management, research and teaching fields. It is under the guidance and supervision of the All China Federation of
Supply and Marketing Cooperatives（ 中華全國供銷合作總社）and the Ministry of Civil Affairs, and belongs to a
4A-class industry association. The standard of 4A-class is set-by the Ministry of Civil Affairs.
– 214 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Unsatisfactory Performance of the Group
As set out in AR 2012, the volatility of the global economy, the
fluctuations in raw material prices, the consistent appreciation of RMB, and
the increasing labor wages and other production costs caused by inflation
will generate tremendous operating pressures to China’s textile industry.
In addition, competition in the textile exports market becomes increasingly
intensive as other countries (such as India and Vietnam) enjoy stronger export
competitiveness due to lower raw material costs and labor wages. As noted
from AR 2012, the turnover of the Group has been decreasing for the two
years ended 30 September 2012. As also noted from AR 2011 and AR 2012,
the turnover from geographical locations other than the PRC have dropped by
approximately 20.38% from approximately HK$323.64 million for the year
ended 30 September 2010 to approximately HK$257.68 million for the year
ended 30 September 2011 and by approximately 7.95% from approximately
HK$257.68 million for the year ended 30 September 2011 to approximately
HK$237.20 million for the year ended 30 September 2012. In addition, the
Group has recorded a loss attributable to Shareholders for the two years ended
30 September 2012.
Analysis of legal defects and non-compliance on the Target Group
We are aware of the legal defects and/or non-compliance in respect of
(i) the Forest Rights Certificate of the 8K mu Ecological Forest Lands; (ii)
the Approval for the Establishment of New Retail Subsidiaries and Outlets;
(iii) the Statistical Registration Certificate; (iv) the Social Security Insurance
and Housing Fund Contribution; (v) the Product Testing; (vi) the Exports of
Refined Tea into Hong Kong and (vii) the Registration of Leased Properties. We
understand from the Company that:–
(i)
Forest Rights Certificate
the 8K mu Ecological Forest Lands is used for better management
and protection of the 29.5K mu Economical Forest Lands, as opposed
to tea leaves harvest, and to prevent the land from being used by third
parties in ways that would adversely affect the 29.5K mu Economical
Forest Lands before the relevant forest rights certificates be obtained.
The Target Group is yet to obtain the relevant forest rights certificates
of the 8K mu Ecological Forest Lands. The relevant village committees
have submitted their application for the land use conversion of the 8K
mu Ecological Forest Lands and the relevant forest rights certificates
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
to the Bureau of Forestry of the Anxi County which will seek approval
from higher level of Governmental Authorities. After the approval of
such conversion is granted, the relevant village committees and the
Target Group will apply for the forest rights certificates, pursuant to
which tea plantation will be allowed on the 8K mu Ecological Forest
Lands. As at the Latest Practicable Date, the approval of the land use
conversion is still in progress and yet to be granted. If the Target Group
is unable to obtain the forest rights certificates in respect of the 8K mu
Ecological Forest Lands, it may be unable to enforce its rights against
bona fide third parties who had obtained the forest rights certificates in
respect of the 8K mu Ecological Forest Lands before the Target Group
does and would lose its dominant control over the 8K mu Ecological
Forest Lands. Given that (1) the maximum additional cost incurred
for purchasing the raw tea leaves from other alternative sources to
substitute the tea leaves from the 8K mu Ecological Forest Lands only
accounted for approximately 2.45% and 5.2% of the total turnover and
the net profit after taxation of the Target Group for the year ended 31
December 2012, respectively; (2) the relevant village committees are
likely to be the defaulting parties for the Contracting Agreements being
held unenforceable and void and they should be fully responsible for the
compensation; (3) the Target Group Controlling Shareholders agreed to
indemnify the Company for all losses arising from the legal defects of
the 8K mu Ecological Forest Lands in the event that the People’s Court
does not accept the Target Group’s complaint（ 訴狀）against the relevant
village committees or gives rulings in favour of the relevant village
committees or the relevant village committees are unable to pay the
compensation as well as to acquire the land use rights of the Additional
Forest Lands, the ownership and the use rights of the tea trees thereon
and to contract the New Rights at nil consideration to the Target Group
until the earlier of the date when the relevant forest rights certificates
of the 8K mu Ecological Forest Lands are issued or the expiry date
of the duration of the respective Contracting Agreements; and (4) the
management and protection of the 29.5K mu Economical Forest Lands
would still be maintained by the Target Group, the Directors are of the
view that there is no material financial and operational impact on the
Group arising from the legal defects of the 8K mu Ecological Forest
Lands after the Acquisition. In addition, the 8K mu Ecological Forest
Lands are not recognized as biological assets owing to the relevant forest
rights certificates yet to be obtained, the 8K mu Ecological Forest Lands
and the benefits arising therefrom are not regarded as a substantial part
of the property, assets and turnover of the Target Group. Therefore,
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
the probable loss of the rights over the 8K mu Ecological Forest Lands
would not lead to an event of default under the Convertible Bonds. The
directors of the Target Group confirm that there are no penalties imposed
or court orders received in respect of the 8K mu Ecological Forest
Lands as at the Latest Practicable Date. In addition, the Company will
not proceed with any tea leaves harvest on the 8K mu Ecological Forest
Lands after completion of the Acquisition unless and until the relevant
forest rights certificates of the 8K mu Ecological Forest Lands have been
obtained.
Although it is impracticable to estimate the time when relevant
forest rights certificates of the 8K mu Ecological Forest Lands will
be granted because of the fact that such approval are under the sole
discretion of the relevant Governmental Authorities and the actual
implementation practices on the forest land planning, in view of the
above, the Company consider that it is unlikely to have any legal
consequences that would materially affect the operation of the Target
Group.
Upon Completion, the Target Group Controlling Shareholders will
receive Convertible Bonds of a total principal amount of approximately
HK$336.8 million and Consideration Shares of approximately
HK$1,347.3 million upon the Completion. The Directors are of the view
that the Target Group Controlling Shareholders have sufficient funds or
financial resources, pursuant to the Deed of Indemnity, to indemnify the
Purchaser, the Company and the Target Group for all losses arising from
the legal defects of the 8K mu Ecological Forest Lands and any noncompliance of the Target Group. Pursuant to the Deed of Indemnity, the
Target Group Controlling Shareholders are legally bound to indemnify
the Purchaser, the Company and the Target Group for any such losses.
In consideration of (i) the Company’s intended use of the 8K mu
Ecological Forest Lands after the Completion; (ii) the legal and financial
consequences, especially the aforesaid arrangement (the details of such
arrangement and our view thereon have been set out in the paragraph
head “transactions under the New Transfer Agreements and the New
Contracting Agreement” in this letter), in respect of the legal defects
of the 8K mu Ecological Forest Lands; and (iii) the indemnity to be
provided by the Target Group Controlling Shareholders in favour of
the Company, the Purchaser and the Target Company on its own behalf
and as the trustee of each of the group companies of the Target Group
for all claims, damages, losses and costs arising from among others,
the legal defects of the 8K mu Ecological Forest Lands under the Deed
of Indemnity3 to be entered on the date of the Completion without
3
The receipt of a duly signed copy of the Deed of Indemnity by the Purchaser is a condition precedent to the
Acquisition.
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
any condition, we are of the view that the Enlarged Group’s business,
financial condition and operating results will not be materially and
adversely affected by the legal defects of the 8K mu Ecological Forest
Lands after the Completion.
(ii)
Approval for the Establishment of New Retail Subsidiaries and
Outlets
Pursuant to the Measures for the Administration on Foreign
Investment in Commercial Fields（《外商投資商業領域管理辦法》）and
the Notice on Decentralization of the Authority to Examine and Approve
Foreign-invested Commercial Enterprises（《關於下放外商投資商業企
業審批事項的通知》）, foreign-invested commercial enterprises, which
intend to establish new retail subsidiaries and retail outlets in respect
of the tea business in the PRC, shall obtain approval from competent
commerce departments at the provincial level. The Target Group has
commenced the operations of retail subsidiaries and retail outlets in the
PRC without obtaining the relevant approvals from Fujian MOFCOM,
the competent authority to approve establishment of retail subsidiaries
and retail outlets by the Target Group. The Target Group once applied
for the approval for the establishment of its retail subsidiaries and
retail outlets in the PRC to Anxi MOFCOM, but Anxi MOFCOM, after
consultation with the Fujian MOFCOM, replied that such approval was
not required. Although the Target Group has not obtained the approval
from Fujian MOFCOM for the establishment of its retail subsidiaries and
retail outlets in the PRC, the Target Group was verbally advised by the
staff of Fujian MOFCOM (who is a director at the Fujian MOFCOM)
that such approval is not a prerequisite and will not be issued. In
addition, the staff from Fujian MOFCOM have also informed the PRC
Legal Advisers that they will not shut down Fujian Nature’s current retail
subsidiaries and retail outlets in the PRC or impose fine on Fujian Nature
due to lack of such approval from Fujian MOFCOM. As at the Latest
Practicable Date, the Target Group has not received any notice of penalty
or punishment owing to the lack of approval for the establishment of its
retail subsidiaries and retail outlets in the PRC. As advised by the PRC
Legal Advisers, the relevant PRC laws and regulations do not specify the
legal consequence for establishing retail subsidiaries and retail outlets
in the PRC without approval from competent commerce departments
at the provincial level. As further advised by the PRC Legal Advisers,
the verbal confirmations of Fujian MOFCOM are inconsistent with the
relevant provisions under the existing PRC laws and regulations and as
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
a result there is no assurance that the Target Group will not be subject
to any penalties arising from the lack of such approval from Fujian
MOFCOM. Nevertheless, given that Fujian MOFCOM is the competent
provincial authority of the MOFCOM, the PRC Legal Advisers are of
the view that both the risk of closure of all of the Target Group’s retail
subsidiaries and retail outlets in the PRC and the risk of sanction due
to the lack of approval from Fujian MOFCOM is remote. As disclosed
in the section headed “10. Information of the Target Group – A. Risk
Factors – Risks relating to the Target Group” in the Board Letter, in the
event that the Target Group is subject to fine or other administrative
penalties, its reputation, business, financial condition and operating
results may be materially and adversely affected. However, after
considering the legal opinion from the PRC Legal Advisers, we believe
that (i) there is no immediate threat of any penalty or punishment on
the Target Group owing to the lack of approval for the establishment of
its retail subsidiaries and retail outlets in the PRC; (ii) Fujian Nature’s
current retail subsidiaries and retail outlets in the PRC will not be shut
down or penalized by the Fujian MOFCOM due to lack of such approval
from Fujian MOFCOM; and (iii) both the occurrence of closure of
Fujian Nature’s current retail subsidiaries and retail outlets in the PRC
and the occurrence of sanction due to the lack of approval from Fujian
MOFCOM are unlikely.
(iii)
Statistical Registration Certificate
As advised by the PRC Legal Adviser, it is normal administrative
practice for the National Bureau of Statistics or its local statistics
department to require registered enterprises to provide statistical data
for national economic and social development analysis. The statistics
registration certificates are issued to the enterprises when the registration
with the relevant statistics departments has been duly completed. As
advised by the PRC Legal Advisers, the National Bureau of Statistics
at a higher level, namely at the Fujian Province and Quanzhou City,
had verbally confirmed that the said statistics registration is required.
However, when the Target Group has submitted applications for the
statistics registration certificates of the respective subsidiaries of the
Target Group in the PRC to the relevant local statistics departments of
the National Bureau of Statistics at the county level, such departments
have verbally replied that such applications are not required or that
they have refused to accept such applications. Given the fact that
the National Bureau of Statistics at the county level is the competent
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
governmental authority for the application of statistics registration
certificates and the rights to grant such approvals is vested in the relevant
local departments of the National Bureau of Statistics at the county level,
as opposed to National Bureau of Statistics at the Fujian Province and
Quanzhou City, the Target Group is yet to obtain such certificates as at
the Latest Practicable Date. The Target Company has undertaken to the
Purchaser and the Company that it will procure its subsidiaries in the
PRC to apply for the statistics registration as and when required by the
National Bureau of Statistics at the county level. As further advised by
the PRC Legal Adviser, the statistics registration certificates are not the
requisite licenses for the business operation of the Target Group, and the
lack of such statistics registration certificates has no material adverse
legal impact on the business operations of the Target Group. As further
advised by the PRC Legal Advisers, if, in the future, the said statistics
departments change their attitude and request the Target Group to
complete such registration and the Target Group is not able to complete
the registration in time, the Target Group may be subject to a fine up to
RMB0.9 million for such non-compliance, representing approximately
0.5% of the net profit for the year ended 31 December 2012 of the Target
Group. In light of the aforesaid, the Directors are of the view that the
Enlarged Group’s business, financial condition and operating results will
not be materially and adversely affected.
In addition, the Target Group Controlling Shareholders agreed
to provide an indemnity in favour of the Company, the Purchaser and
the Target Company on its own behalf and as the trustee of each of the
group companies of the Target Group for all claims, damages, losses and
costs arising from among others, all non-compliances of the applicable
laws by the Target Group under the Deed of Indemnity, and the receipt
of a duly signed copy of the Deed of Indemnity by the Purchaser is a
condition precedent to the Acquisition. The Target Group Controlling
Shareholders will receive Convertible Bonds of a total principal amount
of approximately HK$336.8 million and Consideration Shares of
approximately HK$1,347.3 million upon the Completion and would have
sufficient funds for the indemnity. Therefore, based on the information
as set out in the section headed “10. Information of the Target Group
– A. Risk Factors – Risks relating to the Target Group” in the Board
Letter, we consider that the lack of the said approval and certificate is
considered immaterial to the Target Group’s operation and business.
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(iv)
Social Security Insurance and Housing Fund Contribution
Pursuant to the laws of the PRC regarding labor matters, both
the employees and the employers shall contribute to the social security
insurance and housing fund.
Social security insurance is mainly regulated by the PRC Social
Insurance Law of the People’s Republic of China（《中華人民共和國社
會保險法》）, which requires that employers and employees within the
PRC shall subscribe and contribute to social security insurance including
the basic retirement pension insurance, basic medical insurance,
occupational injury insurance, unemployment insurance, and maternity
insurance pursuant to relevant laws.
Housing fund is mainly regulated by The Regulation on
Management of the Housing Fund（《住房公積金管理條例》）, pursuant
to which, enterprises in the PRC shall register with the housing fund
management centre and then maintain housing fund accounts with
designated banks for their employees and contribute to the fund jointly
with their employees pursuant to the relevant law.
Shaanxi Pingshan completed registration with the local authorities
for the social security insurance on 1 March 2013. Prior to such
registration, Shaanxi Pingshan has not paid the social security insurance
premium of approximately RMB0.05 million for its employees. the
Company has been advised by the PRC Legal Advisers, prior to 1 March
2013, the maximum penalty for the non-payment of the social security
insurance by Shaanxi Pingshan amounts to approximately RMB0.2
million, representing approximately 0.1% of the net profit after taxation
of the Target Group for the year ended 31 December 2012.
In addition on 1 January 2010, Fujian Nature and Fujian
Daping had only contributed social security insurance for a small
number of their employees; and prior to December 2010, Fujian
Nature and Fujian Daping did not contribute housing funds for their
employees. The Target Group has received confirmations from the
relevant Governmental Authorities which indicated that (i) the relevant
Bureau could not retrospectively accept any payment of social security
insurance outstanding from Fujian Nature or Fujian Daping for the
year(s) prior to 2010 and that no penalty will be imposed on Fujian
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Nature or Fujian Daping for such non-payment and (ii) Fujian Nature
and Fujian Daping have duly made housing fund contributions for their
employees since December 2010. Fujian Huidian has duly made housing
fund contributions and social security insurance contributions for their
employees since its incorporation in 2011, except for those employees
who have waived their benefits to social security insurance and/or
housing fund contribution as mentioned below. The PRC Legal Advisers
have also advised that 28.3%, 78.7% and 43.2% of the employees as
at 30 April 2013 of each of Fujian Nature, Fujian Daping and Fujian
Huidian, respectively have waived their benefits to social security
insurance and/or housing fund contribution from Fujian Nature, Fujian
Daping or Fujian Huidian, and have undertaken not to pursue any claims
(including all the previous outstanding amounts of the social security
insurance and/or housing fund contribution since their employment
with the respective companies) in this regard against each of them,
respectively. Accordingly, based on the information as set out in the
section headed “10. Information of the Target Group – B. Business of
the Target Group – Legal Proceedings and compliance – Social security
insurance and housing fund” in the Board Letter, we consider that the
total impact for the aforesaid non-compliance on the operation and
business is considered immaterial to the Target Group.
(v)
Product Testing
All the results of the product testing on samples of raw tea leaves
and refined tea leaves from the Target Group arranged by the relevant
Governmental Authorities during each of the three years ended 31
December 2011 showed that such samples are in compliance with the
relevant product quality and technical standards. The test results of the
Voluntary Testing are generally satisfactory except that the test results
of certain tea leave samples in 2011 reported that the level of rare earth
exceeded the Threshold Level prescribed under the Maximum Levels
of Contaminants. However, the tea water of the samples examined did
not show any trace of rare earth. With respect to the test results of the
Voluntary Testing in 2012, the level of rare earth of all the samples is
below the Threshold Level. The Directors are of the view that the tea
leave samples in the Volunteer Testing in 2011, whose level of rare earth
exceeded the Threshold Level, are isolated cases and do not represent the
entire range of products of the Target Group. The favourable test results
as conducted by the Governmental Authorities on a random basis and
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
the Voluntary Testing conducted by the Target Group for the samples
in 2012 reinforce that the samples in 2011 are not representative to the
product quality of the Target Group as a whole. Confirmations have
been obtained from the Quality and Technical Supervision Bureau of
Anxi County（安溪縣質量技術監督局）and the Agriculture, Tea and
Fruit Bureau of Anxi County（安溪縣農業與茶果局）indicating that the
products of the Target Group are in compliance with the relevant national
standards and no penalty or fines have been imposed on the Target
Group in this regard. Besides, as confirmed by the directors of the Target
Group, there are no claims or complaints from any person in relation to
the product quality and there are no traces of rare earth detected in the
tea water examined. Accordingly, the Directors are confident that the
Target Group’s products meet the food safety requirements as a whole.
As noted from the legal opinion from the PRC Legal Advisers, they have
confirmed that as at the Latest Practicable Date, the National Industrial
Production Permit for Teas*（全國工業產品生產許可證）of Fujian
Nature and the Food Circulation Permits*（食品流通許可證）or the
Food Hygiene Permits*（食品衛生許可證）of the retail outlets which are
operated by the Target Group remain valid and that such permits have
not been revoked and they are not aware of any non-compliance of the
Target Group with respect to the relevant laws and regulations in relation
to food industry. Therefore, we concur with the view of the PRC Legal
Advisers and the Directors that (i) the risk of the Target Group being
penalized by the Governmental Authority which oversees quality control
would be remote; and (ii) the Target Group’s products meet the food
safety requirements as a whole.
(vi)
Exports of Refined Tea into Hong Kong
During the Track Record Period, the Target Group did not obtain
the relevant certificate and fulfill the necessary registration, filing or
declaration requirements and procedures under the PRC law with regards
to the products sold in its retail outlet in Hong Kong. The Target Group’s
directors estimate that the total value of the refined teas that it exported
to Hong Kong, since the commencement of the business of the Target
Group’s retail outlet in Hong Kong in August 2010, without complying
with the PRC customs laws and regulations, was approximately HK$0.02
million. As confirmed by the Target Group’s directors, since November
2012, the Hong Kong retail outlet has been used to promote the Target
Group’s brand, Ping Shan Famous Tea, in Hong Kong and no sales of
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
refined teas has been conducted. Accordingly, no sales proceeds were
generated from refined teas in Hong Kong since November 2012. The
Target Group’s directors have further confirmed that since 25 October
2010, the Target Group no longer exports its refined teas into Hong
Kong and will resume sales of its refined teas at its retail outlet in Hong
Kong only in full compliance with the relevant PRC customs laws and
regulations. The PRC Legal Advisers have advised that the maximum
penalty to which the Target Group may be subject in respect of such
non-compliance amount to approximately RMB0.3 million, representing
approximately 0.2% of the net profit after taxation of the Target Group
for the year ended 31 December 2012. As at the Latest Practicable Date,
the Target Group has not received any notice of penalty or punishment
in this regard. As such, based on the information as set out in the
section headed “Non-compliance with PRC regulations for export of
refined teas into Hong Kong” in the Board Letter, we consider that the
financial impact of such non-compliance on the operation and business is
considered immaterial to the Target Group.
(vii)
Registration of Leased Properties
As at the Latest Practicable Date, the Target Group leased 31
properties in the PRC, 25 of which were used as retail outlets operated
by it, and the remaining are used by the Target Group mainly as office
premises, warehouses, and staff canteen. The leases of such leased
properties have not been registered with the relevant PRC authorities,
except for two of them. Pursuant to the Administrative Measures for
Commodity House Leasing（《商品房屋租賃管理辦法》）, the parties
to the leases of the leased properties in the PRC who failed to register
with the relevant PRC authorities within 30 days of the date of the
leases may be subject to a fine of RMB1,000 and up to RMB10,000
for each leased property and thus the maximum potential penalty will
be RMB290,000 in aggregate, if he/she fails to remedy his/her noncompliance by any deadline imposed by the relevant PRC authorities.
The PRC Legal Advisers advised that such non-registration will not
affect the effectiveness of the leases of the said leased properties but the
use of Target Group’s leased properties may be challenged by bona fide
third parties in which case, the Target Group may need to relocate its
business operation in the said leased properties. The PRC Legal Advisers
have also advised that the lessors (the “13 Lessors”) of 13 of the said
leased properties have each provided a letter of undertaking to undertake
that if, due to ownership reasons, the right of the Target Group to use the
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
said leased properties is compromised, such lessors shall indemnify the
Target Group for all related loss. We note in the letter from the board of
the Circular that the Target Group is in the process of contacting lessors
to initiate the registration process of its leases in respect of the above
mentioned leased properties in the PRC, Since the registration process
requires the co-operation of the lessors, there is no guarantee that the
registration process will be completed. As at the Latest Practicable
Date, the Target Group is yet to obtain the co-operation of any lessor to
complete the registration. As the annual rental of the leased properties
owned by the 13 Lessors amounted to a minimum of approximately
RMB1.5 million, the 13 Lessors will be able to indemnify the Target
Group’s losses arising from the unregistered lease to that extent. If
the rental from each unregistered property is not sufficient to cover all
losses arising from such unregistered leased property, the Target Group
Controlling Shareholders will indemnify the Target Group for any such
losses. In consideration of the undertaking from the lessors and the
indemnity to be provided by the Target Group Controlling Shareholders
in favour of the Company, the Purchaser and the Target Company on
its own behalf and as the trustee of each of the group companies of the
Target Group for all claims, damages, losses and costs arising from,
among others, any and all non-compliances of the applicable laws by
the Target Group under the Deed of Indemnity, we consider that the
business, financial condition and operating results of the Target Group
will not be materially and adversely affected by non-registration of said
leases after the Completion.
After our review of the legal opinion from the PRC Legal Adviser for
the above items (i) to (vii), we consider the abovementioned defects and/or
non-compliance to be (a) unlikely to have any legal consequences that would
materially affect the operation of the Enlarged Group; (b) immaterial in terms
of the financial impact on the Enlarged Group given that the maximum potential
exposure which can be estimated in respect of items (iii) Statistical Registration
Certificate, (iv) Social Security and Hosing Fund Contribution, (vi) Export of
Refined Tea to Hong Kong and (vii) Registration of Leased Properties amounts
to approximately RMB1.7 million in aggregate for assessable items, represents
approximately 0.9% of the total profit attributable to the equity shareholders of
the Target Company for the year ended 31 December 2012; and (c) immaterial
to the Enlarged Group’s operation and business after the Completion, though
there may be a possible negative impact on the reputation of the Enlarged group
Having considered (1) the profit-making track records, the existing cultivation
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
bases, and the established brand and sales network of the Target Group; (2) the
Acquisition which enables the Company to diversify its business and enhance
its revenue by consolidating the accounts of the Target Group with that of the
Group given the Group has suffered from loss and decreasing turnover for the
two financial years ended 30 September 2012; (3) the increase of total retail
sales of consumers goods in the PRC and the increasing trend of national sales
of tea; (4) the Acquisition which is aligned with the business strategy as set
out in AR 2012; (5) the Company’s proposed internal control and corporate
government measures to cure or minimize the defects of the Target Group;
(6) the potential legal and financial consequence for the aforesaid defects; (7)
the indemnity to be provided by the Target Group Controlling Shareholders
in favour of the Company, the Purchaser and the Target Company on its own
behalf and as the trustee of each of the group companies of the Target Group
for all claims, damages, losses and costs arising from, among others, (aa) the
legal defects of the 8K mu Ecological Forest Lands; and (bb) any and all noncompliances of the applicable laws by the Target Group under the Deed of
Indemnity, we consider that taking into account the costs and benefits and the
Company will, after Completion, adopt ongoing control measures to cure or
minimize the risks associated as and when necessary and the Enlarged Group
will be indemnified by the Target Group’s Controlling Shareholders if it suffers
any loss from the said defects and/or non-compliance, the abovementioned legal
defects and non-compliance will be immaterial to the business of the Enlarged
Group.
In addition, for item (i) the Forest Rights Certificates of the 8K mu
Ecological Forest Lands, as advised by the PRC Legal Advisers, it is not
possible to ascertain the maximum potential exposure if the People’s court does
not accept the Target Group’s complaint（ 訴狀）against the relevant village
committees or gives rulings in favour of the relevant village committees or
the relevant village committees are unable to pay the compensation. However,
the relevant village committees of the 8K mu Ecological Forest Lands are
likely to be the defaulting parties for the Contracting Agreements being
held unenforceable and void and they should be fully responsible for the
compensation. For item (ii) the Approval for the establishment of new retail
subsidiaries and outlets, since the relevant laws and regulations do not specify
the legal consequences arising from such legal defects, as advised by the PRC
Legal Advisers, there is no legal basis to quantify the respective maximum
potential exposure. We are of the view that, having considered that the Target
Group Controlling Shareholders will become the holders of approximately
73.68% of the total issued share capital of the Enlarged Group and Convertible
Bonds of a total principal amount of approximately HK$336.8 million upon
the Completion, the Target Group Controlling Shareholders are the most
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
appropriate persons who are likely to have sufficient funds to indemnify the
Purchaser, the Company and the Target Group for the losses arising from
the above mentioned legal defects and non-compliance. Since the maximum
potential exposure of items (i) and (ii) cannot be quantified, the Independent
Shareholders should pay particular attention to the risk factors as set out in
the section headed “Risk Factors” in the Board Letter when you consider your
voting decision.
In view of the risks relating to the Target Group and tea industry and
non-compliance of the regulations and laws of the PRC by the Target Group as
set out in the Circular, the Directors proposed and the directors of the Target
Group agreed to implement the following measures to cure or minimize those
risks and non-compliance before Completion:
(i)
conducting a review of the effectiveness of the Target Group’s
internal control system and corporate governance measures,
especially for those risks identified above , and resolving internal
control and corporate governance defects accordingly;
(ii)
engaging an internal control professional to enhance the internal
control system and corporate governance measures of the Target
Group;
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LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(iii)
providing the training and continuous professional development
of directors and senior management of the Target Group in respect
of the said internal control system and corporate governance
measures; and
(iv)
establishing a compliance committee to monitor the implementation
of and the compliance with the internal control policies and
procedures and corporate governance measures by the Enlarged
Group.
After Completion, the Directors will conduct conducting annual review
of the effectiveness of the internal control system and corporate governance
measures of the Enlarged Group and report to the Shareholders in the corporate
governance report in compliance with Appendix 14 of the Listing Rules.
The proposed internal control and corporate governance measures
provide independent check and balance of the risks identified. The Enlarged
Group can leverage on the expertise of the internal control professional of the
Company to improve the internal control system and strengthen the corporate
governance. Accompanied with the compliance committee and annual review,
the effectiveness of the implementation of such measures can be continuously
monitored.
As mentioned aforesaid, we consider that the abovementioned defects
and/or non-compliance are unlikely to have any legal consequences that would
materially affect the operation of the Enlarged Group. If the implementation of
the above internal controls is set as a condition precedent to the Acquisition,
it may impose a business risk of losing this acquisition opportunity to the
Company because the effectiveness of the internal control measures would take
time to show apparent results and this is an ongoing improvement process with
necessary adjustments in response to the changing circumstances. This, in turn,
will render the Acquisition timetable unpredictable, and the professional fees
and any other expenses incurred by the Company for the Acquisition will be
increased accordingly. Taking into account of this risk, the Directors are of the
view that the costs and risks of extending the Completion would outweigh the
benefits of implementing the internal control before the Completion. We concur
with the views of the Directors that the implementation of the above internal
controls shall not be a condition precedent to the Acquisition.
– 228 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Upon the fulfillment of the proposed measures, we consider that the
Enlarged Group will manage to address and minimize the defects, risks and
non-compliance of the Target Group as disclosed in the Circular. We consider
the risk associated with the defects is acceptable in view of the nature of the
operation and concur with the Directors in respect of the disclosures made
in relating to the associated risk for Shareholders’ information in the section
headed “10. Information of the Target Group – A. Risk Factors” in the Circular.
Accordingly, the Acquisition is in the interests of the Company and the
Independent Shareholders as a whole.
4.
Consideration for the Acquisition
(a)
Consideration
The Consideration is in aggregate HK$2,487.48 million, representing
approximately HK$18.8 per Sale Share, of which approximately HK$1,684.10
million is payable to Exalt Wealth, Smart Fujian and Shine Strategy,
representing approximately 67.70% of the Consideration, and approximately
HK$803.38 million is payable to the Financial Investors and Ample Gold,
representing approximately 32.30% of the Consideration, being an amount
based on a profit earnings ratio (the “PER”) of approximately 10.5 times
(the “Acquisition PER”) of the audited net profit attributable to the equity
shareholders of the Target Company for the year ended 31 December 2011. The
Consideration will be satisfied in the following manner:
(a)
for Teya, Templeton, Great Vantage and Ample Gold, an aggregate
of approximately HK$193.85 million of their portion of the
Consideration shall be paid in cash and their remaining portion of
the Consideration will be settled by the issue of the Consideration
Shares and Convertible Bonds. The portion of the Consideration
to be settled in cash (approximately HK$193.85 million) will be
paid in two installments to Teya, Templeton, Great Vantage and
Ample Gold, calculated based on the proportion of their respective
shareholding in the Target Company. The first installment which
represents 50% of the cash Consideration will be settled at the
completion of the Acquisition and the second installment which
represents 50% of the cash Consideration will be settled six
months after the completion of the Acquisition together with an
interest at a simple interest rate of 4% per annum; and
– 229 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(b)
for Exalt Wealth, Shine Strategy and Smart Fujian, their portion of
the Consideration will be settled by the issue of the Consideration
Shares and Convertible Bonds.
(c)
The audited net assets of the Target Group as at 31 December
2012 is approximately RMB867.11 and the fair value of the
biological assets of the Target Group as at 31 March 2013 is
approximately RMB272.4 million. We consider that such value of
the biological assets represented only the fair value of the tea trees
growing on the cultivation bases of the Target Group, as opposed
to the business value of the Target Group as a whole.
As set out in the Board Letter, the Consideration was arrived at after
arm’s length negotiations among the Purchaser, the Company and the Vendors
having regard to a number of factors including the historical profitability,
financial performance and operational track record of the Target Group, the
prospects of the industry in which the Target Group operates in, and the reasons
and benefits for the Acquisition as described in the Board Letter.
To assess the fairness and reasonable of the Consideration, we have taken
the following into consideration:
(i)
Comparable Analysis
PER
In order to assess the fairness and reasonableness of the
Acquisition PER, we have searched for listed companies engaging
in businesses similar to those of the Target Group, including
production, marketing and sale of tea as the principal product
with target customers mainly in the Greater China region for
comparison purpose. We have altogether identified 6 comparables
(the “Tea Comparables”), 3 listed on the Stock Exchange and
other 3 listed in Taiwan, being the exhaustive list of the listed
companies based on the aforesaid selection criteria, by searching
through information on the Bloomberg.com (“Bloomberg
Information”) which is the world leading marketing data provider
in 2012. Though 3 comparables are listed in Taiwan instead of
Hong Kong, their principal place of business and target market
– 230 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
are located in the Greater China Region and they also have similar
business model as the selected comparables in Hong Kong.
Therefore, we consider the 3 comparables from Taiwan serve well
as appropriate and relevant comparables for our comparison. The
PERs are based on their respective market capitalizations as at 17
January 2013, being the date of the Sale and Purchase Agreement,
and the profit attributable to the equity holders as set out in their
latest annual reports before 17 January 2013.
Tea Comparables
(Stock code)
Principal business
PER (times)
Besunyen Holdings Company Limited
(926) (Note 1)
Manufacture and sales of
therapeutic tea products.
Not available
because of
loss-making
Longrun Tea Group Company Limited
(2898) (Note 1)
Trading, manufacture
and distribution of
pharmaceutical products,
trading and distribution
of tea and other food
products.
14.48
Tenfu (Cayman) Holdings Company
Limited (6868) (Note 1)
Sale and marketing of a
comprehensive range
of tea products and the
development of product
concepts, tastes and
packaging designs.
La Kaffa International
Co Ltd (2732) (Note 2)
Exporter of tea
Tait Marketing and Distribution
Company Limited (5902) (Note 2)
Consumer goods
distributions, logistics
from manufacturing to
sales points for branded
tea products.
3,655
(Note 4)
Ten Ren Tea Co Ltd (1233) (Note 2)
Manufacturing, marketing
of Chinese tea products
and the development of
chain store.
17.70
– 231 –
14.81
(Note 3)
13.61
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Tea Comparables:
Maximum
Minimum
Mean
17.70
13.61
15.15
Acquisition PER
Price/Earning Ratio
10.50
Note 1: Source: website of the Stock Exchange (www.hkex.com.hk) for
listed companies in HK
Note 2: Source: Bloomberg.com/markets/companies/tea for listed
companies in Taiwan
Note 3: For calculation purposes, the profit attributable to equity holders
recorded in RMB will be converted into HK$ under the exchange
rate of HK$1.2368 to RMB1.0
Note 4: The PER of Tait Marketing and Distribution Company Limited
(code 5902) is an extreme case and is excluded from the analysis.
As indicated in the above table, the Acquisition PER, being
10.50 times, falls below the PERs of the Tea Comparables ranging
from approximately 13.61 times to approximately 17.70 times and
below the mean 15.15 times.
– 232 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
P/B
While PER is a more accurate measurement and one of
the most commonly used valuation ratio, it is unable to price
loss-making companies, or companies experiencing unusually
low profit which create exaggerated ratios. Price/book ratio (“P/B
Ratio”), on the other hand, remains a tried and tested method
for finding low-priced stocks that the market has neglected or
avoiding over-priced stocks and is widely adopted to assess
whether the Acquisition is over-priced. As such, we further
examine the P/B of the Tea Comparables, which comprises the
exhaustive list of the listed companies based on the selection
criteria for the Tea Comparables as set out below:
Tea Comparables
(Stock code)
Principal business
Besunyen Holdings Company Limited
(926) (Note 1)
Manufacture and sales of
therapeutic tea products.
0.416
Longrun Tea Group Company Limited
(2898) (Note 1)
Trading, manufacture
and distribution of
pharmaceutical products,
trading and distribution
of tea and other food
products.
1.25
Tenfu (Cayman) Holdings Company
Limited (6868) (Note 1)
Sale and marketing of a
comprehensive range
of tea products and the
development of product
concepts, tastes and
packaging designs.
2.38
La Kaffa International Co Ltd
(2732) (Note 2)
Exporter of tea
7.60
Tait Marketing and Distribution
Co Limited (5902) (Note 2)
Consumer goods
distributions, logistics
from manufacturing to
sales points for branded
tea products.
2.17
Ten Ren Tea Co Ltd (1233) (Note 2)
Manufacturing, marketing
of Chinese tea products
and the development of
chain store.
2.61
– 233 –
P/B Ratio (times)
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Tea Comparables:
Maximum
Minimum
Mean
Acquisition P/B
i.e. Price/Book Ratio of
the Target Group
7.60
0.416
2.74
2.33
(Note 3)
Note 1: Source: website of the Stock Exchange (www.hkex.com.hk) for
listed companies in Hong Kong
Note 2: Source: Bloomberg.com/markets/companies/tea for listed
companies in Taiwan
Note 3: Acquisition P/B = Consideration/NAV = HK$2,487.48million/
(RMB865.04 million * 1.2368)
As indicated in the above table, the Acquisition P/B
being 2.33 times, falls below the mean 2.74 times and within
the range of the P/B ratio of the Tea Comparables ranging
from approximately 0. 416 times to approximately 7.60 times.
We considered the Consideration is fair and reasonable to the
Company.
(ii)
Valuation
As at the Latest Practicable Date, a total of 29,592.7 mu tea trees
have been recognized by the Target Group as its biological assets. A
valuation report of the biological assets of the Target Group has been
prepared by Jones Lang Lasalle Corporate Appraisal and Advisory
Limited, a valuer and an independent third party of the Enlarged Group,
and is set out in Appendix V to this circular. Based on the valuation
report, the fair value of the biological assets of the Target Group as at 31
March 2013 is approximately RMB272.4 million.
– 234 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
We have reviewed the valuation report and discussed with the
valuer, the auditors and the financial advisers of the Company in
connection with the valuation report and the comfort letters shown in
Appendix V and Appendix VI to the Circular. We have reviewed the
valuation assumptions, basis and/or work made by all the valuer, the
auditor and the financial adviser. We note that the valuer has made
reference to the independent survey reports provided by the expert
consultants for adoption of certain assumptions and the valuer has also
explained the basis and/or methodology of certain assumptions. We are
satisfied with the valuation basis (i.e. the income approach), accounting
standard, the reliance on the expertise and opinion of expert consultants
by the valuer and assumptions adopted by the valuer in considering the
continuous development by the Target Group. We have also reviewed
the qualification and experience of the valuer and the expert consultants
and are of the view that their opinion is reliable. We have no reason to
believe that any of the information as set out in the valuation report is
not true or omits a material fact. Most importantly, we have discussed
with the auditors regarding the business prospects, assumptions, and
computation and are of the opinion that the valuation of the biological
assets demonstrates the current and future operation of the Target Group.
Therefore, we consider that the computation with the assumptions and
basis are properly compiled.
According to the Valuation Report, the value of the biological
assets is the Target Group of approximately RMB272.4 million as at 31
March 2013. We consider that such value represented only the fair value
of the tea trees growing on the cultivation bases of the Target Group,
as opposed to the business value of the Target Group as a whole. The
cultivation bases, along with the production facilities, established brand
and extensive retail network, collectively form a vertically integrated
business model of the Target Group, which contributes to the Target
Group’s historical performance and future prospects.
In determining the Consideration, the Company and the Vendors
have considered a number of factors including the historical profitability,
financial performance and operational track record of the Target Group,
the industry prospects in which the Target Group operates, and the
reasons and benefits for the Acquisition as described in the Board
Letter. Taking into account the abovementioned, the Directors are of
the view that the Consideration is fair and reasonable. The Company
– 235 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
considers the Acquisition could provide vast opportunity in subsequent
brand building as a tea product leader and sales network development.
After taking into account of that the Consideration is determined on the
basis of the aforesaid factors after the arm’s length negotiation among
the Purchaser, the Company and the Vendors, the Directors are of the
view that the original acquisition cost per share of the Target Company
of Smart Fujian and Great Vantage is irrelevant to the determination of
Consideration. In addition, we noted that the original acquisition of the
Target Company of Smart Fujian and Great Vantage represented a past
transaction, which was based on a lower profitability of the Target Group
(approximately RMB126.6 million for the year ended 31 December
2010 compared with RMB194.2 million for the year ended 31 December
2012) and a greater uncertainty regarding, the legal titles of 29.5K mu
Economical Forest Lands (namely, at the time of such acquisition in
August 2011, among the 29.5K mu Economical Forest Lands, the Target
Group only obtained the forest rights certificates in respect of 12,703
mu of forest lands). To that end, we concur with the Directors’ view
that such original acquisition cost per share of the Target Company of
Smart Fujian and Great Vantage is irrelevant to the determination of the
Consideration.
Having considered (i) the Consideration represents a PER which
is below the mean and lower bound of the range of PERs of the Tea
Comparables thereof, whereas a P/B ratio which is within the range of
the P/B ratios of the Tea Comparables and below the mean thereof; (ii)
the profit making track records of the Target Group; (iii) the increasing
trend of the national sales of tea as mentioned under the above section
headed “Reasons for the Acquisition”; and (iv) the consideration per
Sale Share of HK$18.8 is applied to all Vendors including Vendors who
are Independent Third Parties, we consider the Consideration is fair
and reasonable so far as the Independent Shareholders are concerned
notwithstanding the respective original acquisition cost per share of
the Target Company paid by Smart Fujian and Great Vantage in 2011
represent a premium to the consideration per Sale Share.
– 236 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(b)
Settlement
We noted that the cash Consideration in aggregate of approximately
HK$193.85 million to be paid to Teya, Templeton, Great Vantage and Ample
Gold will be paid in two installments. The first installment which represents
50% of the cash Consideration will be settled at the completion of the
Acquisition and the second installment which represents 50% of the cash
Consideration will be settled six months after the completion of the Acquisition
together with an interest at a simple interest rate of 4% per annum.
In view of that (i) the 4% per annum interest rate is less than the best
lending rate of 5% per annum on 17 January 2013 quoted from The Hongkong
and Shanghai Banking Corporation Limited; and (ii) the second installment
cash Consideration arrangement will reduce the Company’s immediate cash
outflow upon Completion given the loss-making performance of the Company
for the two financial years ended 30 September 2012, we consider the interest
rate of 4% is acceptable.
In addition, as noted from the Board Letter that the Directors consider
that in order to maintain the financial flexibility of the Group, the issue of the
Consideration Shares or Convertible Bonds to the Vendors is more efficient
than alternate types of fund raising (such as placing or bank borrowings) in
terms of the fundraising cost for the Group. We are of the view that (i) the
Consideration Shares and the Convertible Bonds will reduce the cash outflow
of the Company and allow the Company to maintain its financial flexibility for
its future development; (ii) the Convertible Bonds will reduce the immediate
dilution effect to the Independent Shareholders; (iii) the Consideration Shares
and the first installment cash Consideration arrangement will reduce the interest
expense and liability of the Company; (iv) placing or right issue/open offer will
incur commission expense; (v) banking borrowings will incur interest expense
and may take a longer time for approval; and (vi) the settlement arrangement
of the Consideration is under arm’s length negotiation among the Vendors, the
Purchaser and the Company. We considered the settlement of the Consideration
by way of cash, Consideration Shares and Convertible Bonds is fair and
reasonable.
– 237 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(c)
Consideration Shares
Pursuant to the Sale and Purchase Agreement, approximately
HK$1,678.86 million shall be payable by the Purchaser by procuring the
Company to allot and issue the Consideration Shares at the issue price of
HK$0.1768 per Consideration Share (the “Issue Price”).
The Issue Price represents:
a)
a discount of approximately 29.28% to the closing price of
HK$0.2500 per Share as quoted on the Stock Exchange on the
Last Trading Day (16 January 2013);
b)
a discount of approximately 29.28% to the average of the closing
prices of approximately HK$0.2500 per Share as quoted on the
Stock Exchange for the 5 consecutive trading days up to and
including the Last Trading Day (10 January 2013 to 16 January
2013);
c)
a discount of approximately 29.56% to the average of the closing
prices of approximately HK$0.2510 per Share as quoted on the
Stock Exchange for the 10 consecutive trading days up to and
including the Last Trading Day (3 January 2013 to 16 January
2013);
d)
a discount of approximately 80.51% to the net asset value per
Share as of 30 September 2012; and
e)
a discount of approximately 1.78% to the closing price of
HK$0.18 per Share as quoted on the Stock Exchange on the Latest
Practicable Date.
As set out in the Board Letter, the Issue Price was arrived at after arm’s
length negotiations among the parties to the Sale and Purchase Agreement,
taking into account of the following principal factors:
(a)
effect of the volatility and fluctuations of the closing price of the
Share; and
(b)
the total number of Shares to be adjusted on an as-converted and
fully diluted basis, taking into account of all the convertible bonds
(other than the Convertible Bonds) issued by the Company;
– 238 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(i)
Historical Price Performance
For the purpose of assessing the fairness and reasonableness of the
Issue Price, we review the closing price levels of the Shares during the
period from 17 January 2012 (being the 12 calendar-month period, being
a reasonable period for share price observation, prior to the date of the
Sale and Purchase Agreement) up to 17 January 2013, being the date of
the Sale and Purchase Agreement (the “Review Period”), as illustrated in
the graph below. We consider that the 12 calendar-month period is being
a reasonable period for share price observation, prior to the date of the
Sale and Purchase Agreement.
Closing Price (HK$)
Issue Price = HK$0.1768
2
2
2
2
2
2
2
3
2
2
2
2
2
01 201 201
01 201
01 201 201 /201 /201 /201 /201 /201
2
2
/
/
/
/
/
/
/
2
/
/2 /3
/9
/4
/5
/8
/7
/6
10 7/11
/1 17/1
17 17 17
17 17/
17 17
17
17
17
1
17
2
1/
Source: website of the Stock Exchange (www.hkex.com.hk)
Note:
Share price up to 17 January 2013 being the date of Sale and Purchase
Agreement
– 239 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
During the Review Period, the Issue Price represents a discount
of approximately 19.45% to the average closing price of the Shares of
approximately HK$0.2195 during the Review Period which covers 249
share trading days. The lowest closing price of the Shares of HK$0.157
per Share was recorded on 31 January 2012, 1 February 2012 and 3
February 2012 and the highest closing price of HK$0.29 was recorded
on 12 December 2012 . The Issue Price represented a premium of
approximately 12.61% and a discount of approximately 39.03% over/to
such lowest closing price and highest closing price respectively.
(ii)
Share Lock-Up Arrangement
As noted from the Board Letter, each of Mr. Cai Zhenrong, Mr.
Cai Zhenyao, Mr. Ng, Ms. Ng, Exalt Wealth, Smart Fujian and Shine
Strategy has undertaken to the Purchaser and the Company that he/she/
it will not (a) dispose of nor (b) enter into any agreement to dispose
of or (c) otherwise create any encumbrances in respect of any direct
or indirect interest in the Consideration Shares at any time during the
12-month period starting from the Completion. Each of Teya, Templeton,
Great Vantage and Ample Gold has undertaken to the Purchaser and the
Company that it will not (a) dispose of nor (b) enter into any agreement
to dispose of or (c) otherwise create any encumbrances in respect of
any direct or indirect interest in the Consideration Shares at any time
during the first 6-month period starting from the Completion (altogether
with the lock-up arrangement in respect of the Consideration Shares
undertaken by Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng, Ms. Ng,
Exalt Wealth, Smart Fujian and Shine Strategy, the “Share Lock-Up
Arrangement”).
– 240 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(iii)
Issue Price Analysis
In order to address the fairness of the discount of the Issue Price,
we further carry out the following analysis:
Pursuant to the Sales and Purchase Agreement, the Consideration
will be settled by (i) the Consideration Shares which will be issued at the
Issue Price HK$0.1768 for 9,495,814,480 Shares giving a consideration
of HK$1,678,860,000; (ii) the Conversion Shares which will be
issued at HK$0.1768 for 3,477,205,882 (assumed fully converted)
giving a Convertible Bond at a consideration of HK$614,770,000;
and (iii) together with cash amount HK$193,850,000. The aggregate
consideration arrives at HK$2,487,480,000.
In this analysis, to address the fairness of the Issue Price’s
discount, we observed the average closing prices of the Shares up to
17 January 2012, i.e. one whole year prior to the announcement of the
Acquisition during the Review Period. The Issue Price also represents
discount of approximately 19.45% to the average closing price of the
Shares of approximately HK$ 0.2195 during the Review Period of
which covers 249 share trading days. Further, we readjust Issue Price
and the Conversion Price from HK$0.1768 to HK$0.25 (the “5-day
Price”), i.e. the average Share closing price of the last five trading
days prior to the date on announcement and also the closing price
of the Share while keeping the number of Consideration Shares and
Conversion Shares constant. (i.e. 9,495,814,480 and 3,477,205,882
respectively). Under such circumstance, the Acquisition will be settled
by (i) Consideration Shares issued at HK$0.25 for 9,495,814,480 Shares
giving a share consideration of HK$2,373,953,620; (ii) the Conversion
Shares with conversion price at HK$0.25 for 3,477,205,882 Shares
(assumed fully converted) giving a Conversion Bond consideration at
HK$869,301,471; and (iii) together with cash amount HK$193,850,000.
The aggregate consideration arrives at HK$3,437,105,090 (the
“Supposed Consideration”). The Supposed Consideration arrives a PER
(the “Supposed PER”) and P/B (the “Supposed P/B”) of 14.46 times
and 3.48 times respectively. We then compare the Supposed PER and
Supposed P/B ratio with these of the Tea Comparables, as shown in Part
4(a) of this letter.
– 241 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
The Supposed PER, being 14.46 times, falls within the range of
the PERs of the Tea Comparables ranging from approximately 13.61
times to approximately 17.70 times and below the mean 15.15 times.
The Supposed P/B ratio, being 3.48 times, is slightly above the mean
2.74 times and within the range of the P/B ratio of the Tea Comparables
ranging from approximately 0.416 times to approximately 7.60 times.
The analysis above shows that even if the Issue Price and Conversion
Price are readjusted to HK$0.250, the price level without any discount
to the Share closing price as at the date of announcement, the Supposed
Consideration is still at an acceptable level.
To examine the overall fairness of the Consideration, we have
also revisited the above analysis by including the potential financial
impact arising from the non-compliances of the Target Group on
the Consideration. Taking into account of the maximum loss which
can be estimated of approximately RMB 1.7 million (equivalent to
approximately HK$2.1 million) which may arise from the defects
and/or non-compliances as stated in the section headed “Analysis of
legal defects and non-compliance on the Target Group”, we add the
aforementioned financial impact of approximately RMB1.7 million to the
Supposed Consideration, which results in an aggregate consideration of
HK$3,439,205,090 (the “Adjusted Consideration”), in order to assess
the fairness of the discount of the Issue Price and the Consideration.
The Adjusted Consideration arrives a PER (the “Adjusted PER”) and P/
B (the “Adjusted P/B”) of 14.48 times and 3.49 times respectively. We
then compare the Adjusted PER and Adjusted P/B ratio with those of the
Tea Comparables, as shown in Part 4(a) of this letter.
The Adjusted PER, being 14.48 times, falls within the range of
the PERs of the Tea Comparables ranging from approximately 13.61
times to approximately 17.70 times and below the mean 15.15 times.
The Adjusted P/B ratio, being 3.49 times, is slightly above the mean
2.74 times and within the range of the P/B ratio of the Tea Comparables
ranging from approximately 0.416 times to approximately 7.60 times.
The analysis above shows that even in the circumstances that (i) the
Issue Price and Conversion Price are readjusted to HK$0.250, the price
level without any discount to the Share closing price as at the date of
Announcement; and (ii) the maximum loss arising from the defects and/
or non-compliances of the Target Group which can be estimated is added
to the Consideration, the Adjusted Consideration is still at an acceptable
level in terms of computed Tea Comparable PER and Tea Comparable
P/B in Section 4 above, and therefore the Consideration is fair and
reasonable.
– 242 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Having considered that (i) the same Issue Price was offered to
all the Vendors including those Vendors who are Independent Third
Parties; (ii) under the Share Lock-Up Arrangement, Vendors will bear the
uncertainty risks of the Shares during the Share Lock-Up Arrangement
period given the fluctuation of the closing prices of the Shares during the
Review Period and the Issue Price represent a premium over the lowest
closing price of the Shares during the Review Period; (iii) the Company
has been loss making for the two financial years ended 30 September
2012; (iv) the substantial size of the Consideration Shares relative to the
Company’s current market capitalization; and (iv) the continuous loss
making performance of the Group, (v) the increasing competition of the
textile market from textile enterprises oversea; (vi) the Group’s heavy
loss from fixed asset wearing and disposal in the current operation; (vii)
the profit making track records of the Target Group; (viii) the growing
trend of the tea market in the PRC as mentioned under the above
section headed “Reasons for the Acquisition”; and (ix) there will be no
immediate cash outlay for the Company to settle the Consideration, we
consider the discount represented by the Issue Price of approximately
19.45% to the average closing price of the Shares of approximately
HK$0.2195 during the Review Period which covers 249 share trading
days is acceptable, and the Issue Price is fair and reasonable so far as the
Independent Shareholders are concerned.
(d)
Convertible Bonds
(i)
Conversion Price Analysis
Pursuant to the Sale and Purchase Agreement, approximately
HK$614.77 million shall be payable by the Purchaser by procuring the
Company to issue to the Vendors (or its nominees) the Convertible Bonds
with the initial conversion price of HK$0.1768 per Conversion Share (the
“Conversion Price”).
The Conversion Price is the same as the Issue Price and was
arrived at after arm’s length negotiations among the parties to the Sale
and Purchase Agreement and was determined with reference to the same
basis in determining the Issue Price. Accordingly, the Board is of the
view that the Conversion Price is fair and reasonable and in the interests
of the Company and the Shareholders as a whole.
– 243 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Given that the Conversion Price is the same as the Issue Price,
and was arrived at after arm’s length negotiations among the parties to
the Sale and Purchase Agreement and with reference to the same basis in
determining the Issue Price, we consider the discount of the Conversion
Price can be analysed with the same approach as the Issue Price of the
Consideration Shares, i.e. both at HK$0.1768. (Please refer to the section
headed “Issue Price Analysis” above.)
As noted from the Board Letter, each of Mr. Cai Zhenrong, Mr.
Cai Zhenyao, Mr. Ng, Ms. Ng, Exalt Wealth, Smart Fujian and Shine
Strategy has undertaken to the Purchaser and the Company that he/
she/it will not (a) exercise his/her/its rights to convert all or any part
of the outstanding principal amount of the Convertible Bonds into
Conversion Shares (i) at any time during the 12-month period starting
from the issue date of the Convertible Bonds, and (ii) at any time if such
conversion will result in the Company not being able to comply with
the minimum public float requirement under the Listing Rules; or (b)
assign or transfer all or any part of the outstanding principal amount
of the Convertible Bonds to any third parties at any time during the
12-month period starting from the issue date of the Convertible Bonds.
Each of Teya, Templeton, Great Vantage and Ample Gold has undertaken
to the Purchaser and the Company that it will not (a) exercise its rights
to convert all or any part of the outstanding principal amount of the
Convertible Bonds into Conversion Shares at any time during the first
six-month period starting from the issue date of the Convertible Bonds
(the “First Six-Month Period”); or (b) assign or transfer all or any part
of the outstanding principal amount of the Convertible Bonds to any third
parties at any time during the First Six-Month Period (altogether with
the lock-up arrangement in respect of the Convertible Bonds undertaken
by Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng, Ms. Ng, Exalt Wealth,
Smart Fujian and Shine Strategy, the “CB Lock-Up Arrangement”).
– 244 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
We are aware of that the Conversion Price represented a discount
to the closing price of the Shares on the Last Trading Day and to
the average closing price of the Share for the five trading days up to
and including the Last Trading Day. However, in view of that (i) the
same Conversion Price was offered to all the Vendors including those
Vendors who are Independent Third Parties; (ii) under the CB LockUp Arrangement, Vendors will bear the uncertainty risks of the Shares
during the CB Lock-Up Arrangement period given the fluctuation of the
closing prices of the Shares during the Review Period and the Conversion
Price represented a premium over the lowest closing price of the Shares
during the Review Period; (iii) the Company had made loss for the two
financial years ended 30 September 2012; and (iv) the Conversion Price
is equal to the Issue Price of which we consider is fair and reasonable,
we consider the Conversion Price is fair and reasonable so far as the
Independent Shareholders are concerned.
(ii)
Maturity and Interest
The maturity date of the Convertible Bonds issued to each of Teya,
Templeton, Great Vantage and Ample Gold is the earlier of (i) the date
falling on the expiry of the thirty (30)-month period commencing from
the issue date of the respective Convertible Bonds, or (ii) 31 December
2015. The maturity date of the Convertible Bonds issued to each of Exalt
Wealth, Shine Strategy and Smart Fujian is the date falling on the fourth
anniversary of the issue date of the respective Convertible Bonds.
The Convertible Bonds issued to each of Teya, Templeton, Great
Vantage and Ample Gold are issued at the interest rate of 4% per annum
(the “Interest”), payable semi-annually, and the Convertible Bonds
issued to each of Exalt Wealth, Shine Strategy and Smart Fujian are
issued at zero coupon and the conversion price of the Convertible Bonds
is the same as the issue price of the Consideration Shares, subject to
adjustments in certain events, including but not limited to consolidation,
or sub-division of Shares or capitalization issues.
– 245 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
As set out in the Board Letter, the Convertible Bonds issued to
Teya, Templeton, Great Vantage and Ample Gold bear a different coupon
rate and maturity dates as compared with those Convertible Bonds issued
to Exalt Wealth, Shine Strategy and Smart Fujian. The different coupon
rates and maturity dates of the Convertible Bonds among the Vendors
are entirely based on the commercial decision among the Purchaser, the
Company and the Vendors. Teya, Templeton, Great Vantage and Ample
Gold, being the passive shareholders without any participation in the
day-to-day management and operations of the Target Group, seek to find
acceptable return from their shareholdings in the Target Company by
realizing their investment partially in the form of interest in the short
run. Since the Consideration payable to the Financial Investors and
Ample Gold is settled by way of cash, the Consideration Shares and the
Convertible Bonds, Teya, Templeton, Great Vantage and Ample Gold
consider that their investment in the Target Company is realized in part
by receiving cash and interest accrued on the Convertible Bonds. For
Exalt Wealth, Shine Strategy and Smart Fujian, being the controlling
shareholders of the Target Company, the parties acting in concert of
the Target Group and the shareholding vehicles of the two executive
directors of the Target Company, namely Mr. Cai Zhenyao and Mr. Ng
who participate in the day-to-day management and operations of the
Target Company, seek to find return in the form of dividends and/or the
capital gains from the increased value of the Target Company arising
from a combination of organic growth and/or mergers and acquisitions
in the longer run. Although the holders of the Convertible Bonds
are not entitled to any dividends payable to the Shareholders, as the
Consideration payable to Exalt Wealth, Shine Strategy and Smart Fujian
is settled by way of the Consideration Shares and the Convertible Bonds,
Exalt Wealth, Shine Strategy and Smart Fujian, being the controlling
shareholders of the Group after the completion of the Acquisition, are
seeking the return of their investment in the Target Company in the
longer run, mainly in the form of dividends arising from the holding of
the Consideration Shares and the Conversion Shares when they exercise
their rights to convert the Convertible Bonds and in the form of capital
gains upon the disposal of Shares after the respective lock-up period has
been passed.
– 246 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Having considered (i) the Interest is less than the best lending
rate of 5% per annum as at the date of the Sale and Purchase Agreement
quoted from The Hongkong and Shanghai Banking Corporation Limited;
(ii) the Convertible Bonds to be issued to those Vendors who are
connected person to the Company are non-interest bearing and have a
longer maturity as compared with the Financial Investors and Ample
Gold, in other words, the terms to the Vendors who are connected
persons to the Company is not more favourable than those offered to the
Vendors who are Independent Third Parties; and (iii) Teya, Templeton,
Great Vantage and Ample Gold are passive investors who would like to
realise in part their investment return on the Target Group in the form
of interest payment, we consider the Interest and the maturity terms of
the Convertible Bonds are fair and reasonable and in the interests of the
Company and the Independent Shareholders as a whole.
(e)
Guarantee given by the Company
The Company irrevocably and unconditionally:
(a)
guarantees to each Vendor the punctual performance by the
Purchaser all of its obligations under the Sale and Purchase
Agreement and other transaction documents in relation to the
Acquisition (the “Transaction Documents”);
(b)
undertakes with each Vendor that whenever the Purchaser does
not pay any amount when due under or in connection with any
Transaction Document, that the Company shall immediately on
demand pay that amount as if it was the principal obligor; and
(c)
indemnifies each Vendor immediately on demand against any
cost, loss or liability suffered by that Vendor if any obligation
guaranteed by it (or anything which would have been an
obligation if not unenforceable, invalid or illegal) is or becomes
unenforceable, invalid or illegal. The amount of the cost, loss or
liability shall be equal to the amount which that Vendor would
otherwise have been entitled to recover.
Given that the Purchaser is a wholly-owned subsidiary of the Company
and the abovementioned guarantee is not uncommon in the market, we consider
the abovementioned guarantee is in normal commercial terms and is fair and
reasonable.
– 247 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(f)
The transactions under the New Transfer Agreements and the New
Contracting Agreement
As stated in the Board Letter, the Target Group Controlling Shareholders
would procure Mr. Cai Zhenying or any person nominated by the Target
Group Controlling Shareholders to execute the New Transfer Agreements with
the relevant individual villagers to acquire the land use rights of additional
parcels of cultivation bases of the Additional Forest Lands with the relevant
forest rights certificates granted by the relevant Governmental Authority,
the ownership and the use rights of the tea trees thereon. The Target Group
Controlling Shareholders would further procure Mr. Cai Zhenying or any
person nominated by the Target Group Controlling Shareholders to apply
for the Additional Forest Rights Certificates from the relevant Governmental
Authority, pursuant to which Mr. Cai Zhenying or any person nominated by
the Target Group Controlling Shareholders will own the land use rights of
the Additional Forest Lands, the ownership and the use rights of the tea trees
thereon. The Company has been advised by Grandall, based on the forest rights
certificates provided by the Target Group, the Additional Forest Lands are all
economical forest lands. If the New Transfer Agreements are duly executed
and delivered, the relevant village committees agree to such transfers and the
villagers under the same collective economic organization do not object such
transfers or exercise their right of first refusal to purchase the relevant parcels
of the Additional Forest Lands during the stipulated period as required under
the published notice of such transfers, there is no significant legal impediment
for Mr. Cai Zhenying or any person nominated by the Target Group Controlling
Shareholders to obtain the Additional Forest Rights Certificates. Upon the New
Transfer Agreements being effective and before the Additional Forest Rights
Certificates are issued, Mr. Cai Zhenying or any person nominated by the Target
Group Controlling Shareholders is entitled to utilize the Additional Forest
Lands and derive incomes therefrom in accordance with the New Transfer
Agreements and the applicable laws and regulations in the PRC.
– 248 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
The Target Group Controlling Shareholders would also procure Mr.
Cai Zhenying or any person nominated by the Target Group Controlling
Shareholders to enter into the New Contracting Agreement, pursuant to which
the Target Group will acquire the right to operate all the plantations on the
Additional Forest Lands and will be entitled to the incomes derived therefrom
at nil consideration until the earlier of the date when the relevant forest rights
certificates of the 8K mu Ecological Forest Lands are issued or the expiry date
of the duration of the respective Contracting Agreements. As the volume and
quality of the tea leaves harvested on the Additional Forest Lands vary from
time to time depending on the weather conditions, soil quality, natural disaster
or other external factors such as fertilizers and pesticides applied. There is no
assurance that the tea leaves output derived from the Additional Forest Lands is
the same as that from the 8K mu Ecological Forest Lands.
If the relevant forest rights certificates of the 8K mu Ecological Forest
Lands are obtained by the Target Group in future, the Company will have
the Call Option and the Right of First Refusal granted by the Covenantors to
acquire the land use rights of the Additional Forest Lands, the ownership and
the use rights of the tea trees thereon. Under the Call Option, the Company has
the right to purchase the Additional Forest Lands at the price with reference to
the prevailing market price as determined by an independent valuation company
mutually selected by the Covenantors and the Company during the period
commencing from the date on which the relevant forest rights certificates of the
8K mu Ecological Forest Lands are issued and expiring on the date on which
the Covenantors cease to be interested in the Additional Forest Lands. Under
the Right of First Refusal, during the Option Period, if Mr. Cai Zhenying or
any person nominated by the Target Group Controlling Shareholders receives
any offer to purchase the whole or any part of the Additional Forest Lands
from any third party, the Covenantors would first offer to the Company the
right to purchase the whole of the Additional Forest Lands on the same terms
and conditions as offered by such third party. If the Company decides not to
purchase the Additional Forest Lands, the Covenantors may proceed to sell
such part of the Additional Forest Lands to the third party on terms no more
favourable than the terms offered to the Company.
– 249 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
As the execution of the New Transfer Agreements and the New
Contracting Agreement which shall be in form and substance to the
satisfaction of the Purchaser, the Company and the Target Group Controlling
Shareholders (the major terms for the New Transfer Agreements are namely
Mr. Cai Zhenying or any person nominated by the Target Group Controlling
Shareholders would acquire the land use rights of the Additional Forest Lands,
the ownership and the use rights of the tea trees thereon and for the New
Contracting Agreement are namely the Target Group would acquire the right to
operate all the plantations on the Additional Forest Lands and would be entitled
to the incomes derived therefrom at nil consideration until the earlier of the
date when the relevant forest rights certificates of the 8K mu Ecological Forest
Lands are issued or the expiry date of the duration of the respective Contracting
Agreements) and the obtaining of the Additional Forest Lands Approval are
conditions precedent of the Acquisition, all the Target Group Controlling
Shareholders, the Purchaser and the Company will have control over the terms
of the New Transfer Agreements and the New Contracting Agreement. In the
event that the transactions under the New Transfer Agreements and the New
Contracting Agreement are not materialized or the Additional Forest Lands
Approval could not be obtained, the Company will not proceed with the
Acquisition.
Having considered that (i) the New Transfer Agreements and the New
Contracting Agreement will allow the Target Group to operate all plantations
on Additional Forest Lands and enjoy the income derived therefrom at nil
consideration before the relevant forest rights certificates of the 8K mu
Ecological Forest Lands are issued; (ii) the Call Option and the Right of First
Refusal would provide a right to the Company to elect to expand its capacity
by acquiring the land use rights of the Additional Forest Lands at the prevailing
market price; and (iii) the execution of New Transfer Agreements and the
New Contracting Agreement are condition precedents of the Acquisition, of
which we considered is in the interests of the Company and the Independent
Shareholders, we are of the view that the transactions under the New Transfer
Agreements and the New Contracting Agreement are fair and reasonable and in
the interests of the Company and the Independent Shareholders as whole.
– 250 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
5.
Financial effect of the Acquisition
(i)
Net asset value
The unaudited net asset value of the Group as at 31 March 2013, as
extracted from the 2013 interim report of the Company, was approximately
HK$1,314.33 million. As set out in the pro forma financial information in
Appendix III to the Circular, assuming the completion has taken place on
31 March 2013, the net assets of the Group will increase to approximately
HK$3,151.68 million.
(ii)
Earnings
As set out in the Board Letter, following the Completion, members of
the Target Group will become subsidiaries of the Company and the Group will
be able to consolidate revenue and costs from the Target Group. The audited
net loss of the Group for the financial year ended 30 September 2012 as
extracted from the AR 2012 was approximately HK$190.77 million. According
to the unaudited pro-forma income statement of the Enlarged Group as if the
Acquisition had been completed on 1 January 2012, the pro-forma net loss
of the Enlarged Group would have been approximately reduced to HK$22.43
million. Taking into account the historically profitability and turnover during
the Track Record Period of the Target Group, the Directors consider that the
Acquisition should bring contribution to the Group.
In view of the increasing trend of national sales of tea as mentioned
in the section headed “3. Reasons for the Acquisition” of this letter and the
profit-making track records of the Target Group, we consider that it is a fair
expectation that the Acquisition will have a contribution on the financial
position of the Group upon completion of the Acquisition.
Accordingly, in view of the PERs and P/B ratio with Tea Comparables
we consider the Acquisition is fair and reasonable and is in the interests of the
Company and the Independent Shareholders a whole.
– 251 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
6.
Potential Dilution of Shareholding
The table showing the effect of the Acquisition on the shareholding
structure of the Company has been set out under the section headed “EFFECT
OF THE ACQUISITION ON THE SHAREHOLDING STRUCTURE OF THE
COMPANY” in the Board Letter. As shown in the said table, the shareholding of
the public Shareholders will reduce from approximately 66.32% as at the Latest
Practicable to approximately 26.31 % immediately following issue and allotment
of the Consideration Shares but before conversion or exercise of any convertible
bonds (including the Convertible Bonds) or the Outstanding Share Options. Such
shareholding will be further decreased to approximately 19.61 % immediately
following the allotment and issue of the Consideration Shares and Conversion Shares
but before the conversion or exercise of any Other Convertible Bonds or Outstanding
Share Options.
However, each of Mr. Cai Zhenrong, Mr. Cai Zhenyao, Mr. Ng, Ms. Ng, Exalt
Wealth, Smart Fujian and Shine Strategy has undertaken to the Purchaser and the
Company that he/she/it will not exercise his/her/its rights to convert all or any part
of the outstanding principal amount of the Convertible Bonds into Conversion Shares
at any time if such conversion will result in the Company not being able to comply
with the minimum public float requirement under the Listing Rules. In addition, at
any time starting from the expiry of the first six-month period starting from the issue
date of the Convertible Bonds (the “First Six-Month Period”), if Teya intends to
exercise its rights to convert all or any part of the Convertible Bonds into Conversion
Shares and the sum of (i) Consideration Shares then being held by Teya and (ii) the
maximum number of Conversion Shares that could be issued and allotted to Teya upon
the exercise of its rights to convert all or any part of the then principal amount of the
Convertible Bonds being held by Teya into Conversion Shares represents at least 10%
of the then total issued share capital of the Company, Teya shall, subject to compliance
with the applicable laws, first dispose of such number of Shares then held (the number
of which shall be equivalent to the number of the Conversion Shares to be issued
and allotted upon the exercise of the conversion rights of the respective Convertible
Bonds) to Independent Third Parties in order to help the Company to satisfy the public
float requirement at all times as long as Teya is the holder of any Convertible Bonds.
It is also a term of the Convertible Bonds that the Company shall at all times ensure
that the minimum public float requirement under the Listing Rules is complied with,
and in the event that such requirement is not complied with upon the conversion of any
part of the Convertible Bonds, the Company is entitled not to allow the holder of the
Convertible Bonds to exercise its right of conversion.
– 252 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
As shown in the said table, assuming full conversion of the Convertible
Bonds and Teya only holds 9.99% of the issued share capital of the Company, the
shareholding of the public Shareholders will be 30.83% immediately following the
issue and allotment of the Consideration Shares and the Conversion Shares but before
conversion or exercise of any Other Convertible Bonds or Outstanding Share Options.
As such, percentage of public float after the Acquisition would fulfill the
minimum requirement on the percentage of public float of 25% under the Listing
Rules.
Having considered:
(i)
the substantial amount of the Consideration of HK$2,487.48 million
and the liquidity position of the Group with bank and cash balances of
approximately HK$261.00 million as at 30 September 2012;
(ii)
the profit-making track records, the existing cultivation bases and the
established brand and sales network of the Target Group;
(iii)
the Acquisition which enables the Company to diversify its business
and enhances its revenue and profit by consolidating the accounts of the
Target Group with that of the Group given that the Group has been lossmaking for the two financial years ended 30 September 2012 and has
reported decreasing turnover for the two years ended 30 September 2012;
(iv)
the increase of total retail sales of consumers goods in the PRC and the
increasing trend of national sales of tea;
(v)
the Acquisition which is aligned with the business strategy as set out in
AR 2012;
(vi)
the Consideration Shares and the Convertible Bonds which would reduce
the cash outflow of the Company and hence, would allow the Company
to maintain its financial flexibility for its business development;
(vii)
the Acquisition PER which is below the mean and falls within the range
of the PERs of the Tea Comparables whereas the Acquisition P/B which
is below the mean and within the range of the P/B ratios of the Tea
Comparables;
– 253 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
(viii) the discount represented by the Issue Price and the Conversion Price
being approximately 19.45% discount to the average closing price of the
Shares during the Review Period;
(ix)
the 5-day Price of HK$0.250 for the Consideration Shares and
Convertible Bonds without any discount to the closing price of the
Share, the Supposed PER falls below the mean of the PER of the Tea
Comparables and the Supposed P/B ratio falls within the range of the P/B
ratio of the Tea Comparables.
(x)
the New Transfer Agreements and the New Contracting Agreement which
will allow the Target Group to operate all plantations on Additional
Forest Lands and enjoy the income derived therefrom at nil consideration
before the relevant forest rights certificates of the 8K mu Ecological
Forest Lands are issued;
(xi)
the Call Option and the Right of First Refusal which would provide a
right to the Company to elect to expand its capacity by acquiring the land
use rights of the Additional Forest Lands at the prevailing market price;
(xii)
the allotment and issue of the Consideration Shares and the Convertible
Bonds to the Financial Investors and Ample Gold which would enhance
the Shareholder base of the Company; and
(xiii) the minimum public float requirement as required under the Listing
Rules is being fulfilled;
we consider the dilution effects is acceptable.
7.
Risk Factors
Shareholders and investors should be aware that the Acquisition will increase
the level of risk exposure of the Enlarged Group and should consider carefully the risk
factors set out in the section headed “Risk Factors” in the Board Letter.
– 254 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
Particularly for the risk relating to the fluctuation due to revaluation gains or
losses, we would like to draw the attention of the Independent Shareholders to the
statement provided in the HKEx Guidance Letter in December 2012 that the risks in
biological assets are high as they are perishable and their valuation is usually subject
to high uncertainty due to the complex and not easily verifiable assumptions adopted.
However, we have made discussion with the valuer and the auditors of the Company
on the valuation report shown in Appendix V of the Circular. We have reviewed the
assumptions, basis and working made by both the valuer and the auditors. We consider
that the computation are properly compiled.
B.
Whitewash Waiver
As at the Latest Practicable Date, Mr. Cai Zhenrong and parties acting in concert
with him holds 523,563,000 Shares, representing approximately 33.60% of the total Shares
in issue. Immediately following the allotment and issue of the Consideration Shares to the
Vendors, the aggregate shareholding of Mr. Cai Zhenrong and parties acting in concert
with him will increase to approximately 73.68% of the total Shares in issue as enlarged
by the allotment and issue of the Consideration Shares but before conversion or exercise
of any Convertible Bonds, Other Convertible Bonds and Outstanding Share Options of the
Company. Under Rule 26.1 of the Takeovers Code, Mr. Cai Zhenrong and parties acting in
concert with him would be required to make an unconditional mandatory general offer for
all the issued Shares and other securities of the Company not already owned or agreed to
be acquired by Mr. Cai Zhenrong and parties acting in concert with him, unless a waiver
from strict compliance with Rule 26.1 of the Takeovers Code has been obtained from the
Executive.
After the Completion, Mr. Cai Zhenrong and parties acting in concert with him will
hold in aggregate, more than 50% of the voting rights of the Company. As such, any further
acquisition of interest in the Company by Mr. Cai Zhenrong and parties acting in concert
with him may increase their holding without incurring any further obligation under Rule 26
of the Takeovers Code to make a general offer.
– 255 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
An application has been made by Mr. Cai Zhenrong to the Executive for the
Whitewash Waiver pursuant to Note 1 on dispensations from Rule 26 of the Takeovers Code.
The Whitewash Waiver, if granted, will be subject to, among other things, (i) approval of
the Independent Shareholders in respect of the Acquisition and the Whitewash Waiver at the
EGM where voting on the relevant resolutions shall be taken by poll, and (ii) each member
of Mr. Cai Zhenrong and parties acting in concert with him not having any acquisitions
or disposals of voting rights of the Company between the date of the Announcement and
completion of the issue of the Consideration Shares to the Vendors unless with the prior
consent of the Executive.
Except for the disposal of 1,000,000 Shares by Mr. Choi Wing Toon (who is a cousin
of Mr. Cai Zhenrong) on 20 July 2012 through the market, each member of Mr. Cai Zhenrong
and parties acting in concert with him has not acquired any voting rights of the Company,
and there have been no dealings in any Relevant Securities by any of them during the period
commencing on the date falling six months prior to the date of the Announcement and up to
and including the Latest Practicable Date.
On 21 December 2012, 7 January 2013, 23 January 2013 and 25 February 2013, an
aggregate principal amount of HK$20 million of the Other Convertible Bonds was converted
and 111,111,106 new Shares were issued upon such conversion. The Company confirms that
all the holders of the Other Convertible Bonds and the new Shares which fall to be issued are
Independent Third Parties and no such holders are related to Mr. Cai Zhenrong and parties
acting in concert with him in any respect.
Based on our analysis of the Acquisition, we consider that the Acquisition is in the
interests of the Company and the Independent Shareholders as a whole. If the Whitewash
Waiver is not approved by the Independent Shareholders at the EGM, the Acquisition will
not proceed and the Company will lose all the benefits that are expected to be brought by
the completion of the Acquisition. Accordingly, we are of the view that for the purposes of
implementing the Acquisition, we consider the Whitewash Waiver is fair and reasonable and
in the interests of the Company and the Independent Shareholders as a whole.
– 256 –
LETTER FROM THE JOINT INDEPENDENT FINANCIAL ADVISERS
C.
Recommendation
Having considered the above-mentioned principal factors and reasons, we consider (i)
the terms of the Sale and Purchase Agreement and the transactions contemplated thereunder
(including the Acquisition, the issue of the Convertible Bonds, the allotment and issue of
the Consideration Shares and the Conversion Shares, and the transactions under the New
Transfer Agreements and the New Contracting Agreement) are on normal commercial terms
and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii)
the Sale and Purchase Agreement, the transactions contemplated thereunder (including the
Acquisition, the issue of the Convertible Bonds, the allotment and issue of the Consideration
Shares and the Conversion Shares, and the transactions under the New Transfer Agreements
and the New Contracting Agreement) and the terms thereof are in the interests of the
Company and the Independent Shareholders as a whole. We would therefore recommend
the Independent Shareholders and advise the Independent Board Committee to recommend
the Independent Shareholders to vote in favour of the resolutions approving the Sale and
Purchase Agreement, the transactions contemplated thereunder (including the Acquisition,
the issue of the Convertible Bonds, the allotment and issue of the Consideration Shares and
the Conversion Shares and the transactions under the New Transfer Agreements and the New
Contracting Agreement) to be proposed at the EGM.
The Acquisition is conditional upon the approval of the Whitewash Waiver. If
the Whitewash Waiver is not approved, the Acquisition will not proceed. Having taken
into account our recommendation on the Acquisition above, we consider the Whitewash
Waiver is fair and reasonable so far as the Independent Shareholders are concerned and the
Whitewash Waiver is in the interests of the Company and the Independent Shareholders as
a whole. Accordingly, we would recommend the Independent Shareholders and advise the
Independent Board Committee to recommend the Independent Shareholders to vote in favour
of the resolution approving the Whitewash Waiver to be proposed at the EGM.
Yours faithfully
For and on behalf of
RaffAello Capital Limited
AsiaVest Partners Limited
Sam Lum
Raymond Lo
Executive Director
Managing Director
– 257 –
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
A.
SUMMARY OF THE FINANCIAL INFORMATION
1.
FINANCIAL SUMMARY
The following information has been extracted from the annual reports of the Company for
2012 and 2011 and the interim report of the Company for the six months ended 31 March 2013 in
respect of the consolidated financial information of the Group for each of the three years ended 30
September 2012 and the six months ended 31 March 2013:
RESULTS
Six months
ended
31 March 2013
HK$’000
(Unaudited)
TURNOVER
Year ended 30 September
2012
2011
HK$’000
HK$’000
(Audited)
(Audited)
2010
HK$’000
(Audited)
223,750
539,118
727,266
773,383
(13,214)
(23,625)
6,252
75,682
–
(114,383)
–
–
–
–
(48,189)
(2,386)
–
(140,155)
–
–
–
(1,943)
–
–
(LOSS)PROFIT AFTER
EXCEPTIONAL ITEMS
BEFORE TAX
Income tax expense
(13,214)
(534)
(190,526)
(249)
(133,903)
(4,553)
75,682
(7,213)
(LOSS)PROFIT BEFORE
NON-CONTROLLING
INTERESTS
Non-controlling interests
(13,748)
–
(190,775)
–
(138,456)
–
68,469
–
(LOSS)PROFIT FOR THE YEAR
ATTRIBUTABLE TO OWNERS
OF THE COMPANY
(13,748)
(190,775)
(138,456)
68,469
(HK0.9 cents) (HK13.19 cents)
N/A
N/A
(HK9.57 cents)
N/A
HK4.97 cents
HK4.10 cents
(LOSS)PROFIT BEFORE
EXCEPTIONAL ITEMS
– impairment loss on property,
plant and equipment
– loss on disposal of investment
properties
– loss on disposal of subsidiaries
– loss on modifications of
convertible bonds
(LOSS)EARNINGS PER SHARE
Basic
Diluted
I–1
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
ASSETS AND LIABILITIES
As at
31 March 2013
HK$’000
(Unaudited)
2012
HK$’000
(Audited)
NON-CURRENT ASSETS
CURRENT ASSETS
1,013,441
812,119
1,033,382
694,271
1,091,308
830,635
1,233,512
842,513
TOTAL ASSETS
1,825,560
1,727,653
1,921,943
2,076,025
CURRENT LIABILITIES
NON-CURRENT LIABILITIES
(276,834)
(234,398)
(268,318)
(147,168)
(287,285)
(162,833)
(434,720)
(154,237)
TOTAL LABILITIES
(511,232)
(415,486)
(450,118)
(588,957)
1,314,328
1,312,167
1,471,825
1,487,068
NET ASSETS
As at 30 September
2011
2010
HK$’000
HK$’000
(Audited)
(Audited and
restated)
Note 1: No dividend was declared for the three years ended 30 September 2012 and the six months ended 31 March
2013.
Note 2: The summary of the results, assets, liabilities and non-controlling interests of the Group for the years
ended 30 September 2010, 2011 and 2012 and the six months ended 31 March 2013 are extracted from the
Company’s annual reports 2011 and 2012 prepared in accordance with International Financial Reporting
Standards and the Company’s 2013 interim report prepared in accordance with International Accounting
Standard 34 “Interim Financial Reporting”, with restatement made to the assets and liabilities figures as at
30 September 2010 to reflect the effect of adoption of new and revised accounting policies in 2011.
Note 3: Save as disclosed above, there are no other exceptional items because of size, nature and incidence.
I–2
APPENDIX I
2.
FINANCIAL INFORMATION OF THE GROUP
AUDITED FINANCIAL STATEMENTS
The following is the unqualified audited financial statements of the Group for the year ended
30 September 2012 together with accompanying notes as extracted from the Company’s 2012
annual report.
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2012
Note
6
TURNOVER
Cost of services rendered and cost of sales
GROSS PROFIT
Other income
Selling and distribution expenses
Administrative expenses
Fair value change on investment properties
Impairment loss on property,
plant and equipment
Loss on disposal of investment properties
Other operating expenses
7
16
15
(LOSS)/PROFIT FROM OPERATIONS
Finance costs
Loss on modifications of convertible bonds
Loss on disposal of subsidiaries
10
26
34
LOSS BEFORE TAX
2012
HK$’000
2011
HK$’000
539,118
727,266
(478,493)
(616,170)
60,625
111,096
9,145
(20,468)
(55,311)
–
12,421
(22,390)
(66,782)
3,290
(114,383)
(48,189)
(6,392)
–
–
(13,776)
(174,973)
23,859
(11,224)
(1,943)
(2,386)
(17,607)
–
(140,155)
(190,526)
(133,903)
Income tax expense
11
(249)
(4,553)
LOSS FOR THE YEAR
ATTRIBUTABLE TO
OWNERS OF THE COMPANY
12
(190,775)
(138,456)
LOSS PER SHARE
14
(HK13.19 cents)
(HK9.57 cents)
Basic
Diluted
N/A
I–3
N/A
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2012
Note
LOSS FOR THE YEAR
Other comprehensive income:
Exchange differences on translating
foreign operations
Exchange differences reclassified
to profit or loss upon
disposal of subsidiaries
Gains on property revaluation
Deferred tax relating to gains
on property revaluation
OTHER COMPREHENSIVE INCOME
FOR THE YEAR, NET OF TAX
TOTAL COMPREHENSIVE LOSS FOR
THE YEAR ATTRIBUTABLE TO
OWNERS OF THE COMPANY
I–4
2012
HK$’000
2011
HK$’000
(190,775)
(138,456)
8,893
102,444
34
(5,631)
6,040
(20,215)
24,788
27(a)
(1,511)
(5,920)
7,791
(182,984)
101,097
(37,359)
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 30 September 2012
Note
At 30 September
2012
2011
HK$’000
HK$’000
NON-CURRENT ASSETS
Property, plant and equipment
Investment properties
Intangible assets
Available-for-sale financial assets
Deposits paid for acquisition of
long-term assets
Other receivable and prepayment
15
16
17
18
957,971
–
6,201
1,290
909,591
51,606
7,398
1,281
19
20
–
67,920
68,232
53,200
1,033,382
1,091,308
21
22
63,122
154,688
56,208
152,147
23
60,195
155,262
261,004
109,947
154,901
357,432
694,271
830,635
30,469
223,878
–
13,971
30,243
194,626
48,000
14,416
268,318
287,285
425,953
543,350
1,459,335
1,634,658
123,323
23,845
137,328
25,505
147,168
162,833
1,312,167
1,471,825
14,468
1,297,699
14,468
1,457,357
1,312,167
1,471,825
CURRENT ASSETS
Inventories
Trade receivables
Prepayments, deposits and
other receivables
Fixed bank deposits
Bank and cash balances
CURRENT LIABILITIES
24
Trade payables
Other payables and accruals
Interest-bearing borrowings
Current tax liabilities
25
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT
LIABILITIES
NON-CURRENT LIABILITIES
26
27
Convertible bonds
Deferred tax liabilities
NET ASSETS
CAPITAL AND RESERVES
28
32
Share capital
Reserves
TOTAL EQUITY
I–5
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 September 2012
Share
capital
HK$’000
Share
premium
HK$’000
(note 32(c)(i))
Properties
revaluation
reserve
HK$’000
(note 32(c)(ii))
14,468
500,524
45,123
2,149
28,057
21,383
–
–
18,868
–
–
–
–
–
–
–
–
–
(97)
(997)
–
–
–
14,468
500,524
62,897
–
–
26
–
26
Note
At 1 October 2010
Total comprehensive loss
for the year
Recognition of share-based
payments
Disposal of subsidiaries
Disposal of properties
30
At 30 September 2011 and
1 October 2011
Total comprehensive loss
for the year
Derecognition upon modification of
convertible bonds
Recognition upon modification of
convertible bonds
Lapse of share options granted in
prior years
Lapse of warrants issued in
prior years
Disposal of subsidiaries
At 30 September 2012
Note:
Share-based
Warrants
payment
reserve
reserve
HK$’000
HK$’000
(note 29) (note 32(c)(iii))
Convertible
bonds
Translation
reserve
reserve
HK$’000
HK$’000
(note 26) (note 32(c)(iv))
Retained
profits
HK$’000
Total
equity
HK$’000
144,298
731,066
1,487,068
–
82,229
(138,456)
(37,359)
22,116
–
–
–
–
–
–
–
–
–
97
997
22,116
–
–
2,149
50,173
21,383
226,527
593,704
1,471,825
4,529
–
–
–
3,262
(190,775)
(182,984)
–
–
–
–
(21,383)
–
21,383
–
–
–
–
–
–
23,326
–
–
23,326
–
–
–
–
(1,618)
–
–
1,618
–
–
–
–
–
–
(5,523)
(2,149)
–
–
–
–
–
–
–
2,149
5,523
–
–
14,468
500,524
61,903
–
48,555
23,326
229,789
433,602
1,312,167
The share premium account of the Group includes:
(i)
(ii)
the premium arising from the issue of new shares; and
the difference between the nominal value of the share capital of the subsidiaries acquired over
the nominal value of the share capital of the Company issued in exchange therefor pursuant to
a reorganisation scheme (“the Group Reorganisation”) to rationalise the structure of the Group
in preparation for the public listing of the Company’s shares on the Main Board of The Stock
Exchange of Hong Kong Limited on 30 August 2002. Further details of the Group Reorganisation
and the subsidiaries acquired pursuant thereto are set out in Appendix IV “Statutory and General
Information” in the Company’s prospectus dated 20 August 2002.
I–6
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 September 2012
Note
2012
HK$’000
2011
HK$’000
(190,526)
(133,903)
(2,850)
888
8,128
2,208
70,614
2,386
(3,195)
1,500
8,311
7,796
82,497
140,155
CASH FLOWS FROM OPERATING
ACTIVITIES
Loss before tax
Adjustments for:
Bank interest income
Interest expense on convertible bonds
Imputed interest on convertible bonds
Other finance costs
Depreciation
Loss on disposal of subsidiaries
Impairment loss on property,
plant and equipment
Loss on disposals of property,
plant and equipment
Loss on modification of convertible
bonds
Amortisation of technical know-how
Fair value change on investment
properties
Loss on disposals of investment
properties
Property, plant and equipment
written off
Equity-settled share-based payments
114,383
–
5,423
4,867
1,943
1,226
–
1,175
–
Operating profit before working capital
changes
(Increase)/decrease in inventories
Increase in trade receivables
Decrease in prepayments, deposits and
other receivables
Increase/(decrease) in trade payables
Increase in other payables and accruals
Cash generated from operations
Income tax paid
48,189
–
527
–
8,711
22,116
62,539
(6,914)
(2,541)
136,740
6,372
(25,300)
34,337
288
28,373
76,433
(10,983)
48,929
116,082
232,191
(2,484)
Net cash generated from operating
activities
(3,290)
(5,159)
113,598
227,032
(172,415)
(131,355)
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property, plant and equipment
Proceeds from disposals of property,
plant and equipment
Proceeds from disposals of investment
properties
Net proceeds from disposal of subsidiaries
Increase in fixed bank deposits
Interest received
Net cash used in investing activities
34
1,359
2,150
3,679
3,220
(361)
3,545
–
46,767
–
1,259
(160,973)
I–7
(81,179)
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Note
2012
2011
HK$’000
HK$’000
CASH FLOWS FROM FINANCING
ACTIVITIES
Bank loans raised
Repayment of bank loans
Convertible bond interest paid
Other finance costs paid
–
(48,000)
(752)
(2,207)
54,900
(98,567)
(1,453)
(7,796)
Net cash used in financing activities
(50,959)
(52,916)
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS
(98,334)
92,937
Effect of foreign exchange rate changes
1,906
20,685
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
357,432
243,810
CASH AND CASH EQUIVALENTS AT
END OF YEAR
261,004
357,432
261,004
357,432
ANALYSIS OF CASH AND
CASH EQUIVALENTS
Bank and cash balances
I–8
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 September 2012
1.
General information
The Company was incorporated in the Cayman Islands as an exempted company
with limited liability under the Companies Law of the Cayman Islands. The address of its
registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY11111, Cayman Islands. The address of its principal place of business is Room 2105, West
Tower, Shun Tak Centre, 200 Connaught Road Central, Hong Kong. The Company’s shares
are listed on the Main Board of The Stock Exchange of Hong Kong Limited (the “Stock
Exchange”) and the Korea Exchange under the Korea Depository Receipts Programme.
The Company is an investment holding company. The principal activities of its
principal subsidiaries are set out in note 33 to the consolidated financial statements.
2.
Basis of preparation
(a)
Statement of compliance
These consolidated financial statements have been prepared in accordance with
all applicable International Financial Reporting Standards (“IFRSs”), which collective
term includes all individual International Financial Reporting Standards, International
Accounting Standards (“IASs”) and Interpretations issued by the International
Accounting Standards Board (“IASB”) and the disclosure requirements of the Hong
Kong Companies Ordnance. These consolidated financial statements also comply with
the applicable disclosure provisions of the Rules Governing the Listing of Securities
of The Stock Exchange of Hong Kong Limited (the “Listing Rules”).
(b)
Initial application of IFRSs
In the current year, the Group initially applied the following new or revised
standards and amendments (“New IFRSs”) issued by IASB, which are effective for the
Group’s financial year beginning on 1 October 2011:–
IAS 24 (Revised)
Amendments to IFRIC 14
Related Party Disclosures
Prepayments of a Minimum Funding
Requirement
Amendments to IFRS 7
Disclosures – Transfers of Financial Assets
Improvements to IFRSs (2010) Amendments to IFRS 7, IAS 1 and IFRIC 13
The adoption of the New IFRSs had no material impact on the Group’s
consolidated financial statements for the current or prior accounting periods.
I–9
APPENDIX I
(c)
FINANCIAL INFORMATION OF THE GROUP
IFRSs in issue but not yet effective
The following IFRSs in issue at 30 September 2012 have not been applied in
the preparation of the Group’s consolidated financial statements for the year then
ended since they were not yet effective for the annual period beginning on 1 October
2011:–
IAS 19 (2011)
Employee Benefits2
IAS 27 (2011)
IAS 28 (2011)
Separate Financial Statements2
Investments in Associates and Joint Ventures2
IFRS 9
Financial Instruments4
IFRS 10
IFRS 11
Consolidated Financial Statements2
Joint Arrangements2
IFRS 12
Disclosure of Interests in Other Entities2
IFRS 13
IFRIC 20
Fair Value Measurement2
Stripping Costs in the Production Phase of
a Surface Mine2
Amendments to IAS 1
Presentation of Items of Other
Comprehensive Income1
Deferred Tax: Recovery of Underlying
Assets2
Offsetting Financial Assets and Financial
Liabilities3
Amendments to IAS 12
Amendments to IAS 32
Amendments to IFRS 7
Disclosures – Offsetting Financial Assets and
Financial Liabilities2
Annual improvements to
IFRSs (2009 – 2011)
Amendments to IAS 1, IAS 16 and IAS 322
1
Effective for annual periods beginning on or after 1 October 2012
2
Effective for annual periods beginning on or after 1 October 2013
3
Effective for annual periods beginning on or after 1 October 2014
4
Effective for annual periods beginning on or after 1 October 2015
The Group is in the process of making an assessment of what the impact
of above IFRSs is expected to be in the period of initial application. So far it is
concluded that the adoption of them is unlikely to have a significant impact on the
Group’s consolidated financial statements.
I – 10
APPENDIX I
3.
FINANCIAL INFORMATION OF THE GROUP
Significant accounting policies
These financial statements have been prepared under the historical cost convention, as
modified by the revaluation of buildings and investment properties which are carried at their
fair values.
The preparation of financial statements in conformity with IFRSs requires the use
of certain key assumptions and estimates. It also requires the directors to exercise its
judgements in the process of applying the accounting policies. The areas involving critical
judgements and areas where assumptions and estimates are significant to these financial
statements, are disclosed in note 4 to the consolidated financial statements.
The significant accounting policies applied in the preparation of these financial
statements are set out below.
(a)
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and its subsidiaries controlled by the Company. Control is achieved
where the Company has the power to govern the financial and operational policies of
an entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year included in
the profit or loss from the date that control commenced or up to the date that control
ceased. When the Group loses control of a subsidiary, it is accounted for as a disposal
of the entire interest in that subsidiary, with a resulting gain or loss being recognised
in profit or loss. Any interest retained in that former subsidiary at that date when
control is lost is recognised at fair value and this amount is regarded as the fair value
on initial recognition of an investment in an associate or jointly controlled entity or
other investments.
Changes in the Group’s interests in a subsidiary that do not result in a loss of
control are accounted for as equity transactions, whereby adjustments are made to
the amounts of controlling and noncontrolling interest within consolidated equity to
reflect the change in relative interests, but no adjustments are made to goodwill and no
gain or loss is recognised.
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring their accounting policies in line with those used by other
members of the Group.
I – 11
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
All intra-group transaction, balances, income and expenses are eliminated on
consolidation.
Non-controlling interests represent the equity or deficiency in a subsidiary
not attributable directly or indirectly to the Company, and in respect of those interest
that meets the definition of a financial liability. For each business combination, the
Group can elect to measure any non-controlling interest either at fair value or at their
proportionate share of the subsidiary’s net identifiable assets.
Non-controlling interests are presented in the consolidated statement of
financial position within equity, separately from equity attributable to owners of
the Company. Non-controlling interests in the results of the Group are presented on
the face of the consolidated statement of comprehensive income as an allocation of
the total profit or loss and total comprehensive income or loss for the year between
noncontrolling interests and the owners of the Company. Loans from holders of noncontrolling interests and other contractual obligations towards these holders are
presented as financial liabilities in the consolidated statement of financial position.
(b)
Business combination and goodwill
Business combinations are accounted for using the acquisition method. The
consideration transferred is measured at the acquisition date fair value which is the
sum of the acquisition date fair values of assets transferred to the Group, liabilities
assumed by the Group from the former owners of the acquiree and the equity interests
issued by the Group in exchange for control of the acquiree. For each business
combination, the acquirer measures the non-controlling interests in the acquiree either
at fair value or at the proportionate share of the acquiree’s identifiable net assets.
Acquisition costs are expensed as incurred.
When the Group acquires a business, it assesses the financial assets and
liabilities assumed for appropriate classification and designation in accordance
with the contractual terms, economic circumstances and pertinent conditions as at
the acquisition date. This includes the separation of embedded derivatives in host
contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value
of the acquirer’s previously held equity interest in the acquiree is remeasured to fair
value as at the acquisition date through profit or loss.
I – 12
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Any contingent consideration to be transferred by the acquirer is recognised
at fair value at the acquisition date. Subsequent changes to the fair value of the
contingent consideration which is deemed to be an asset or liability is recognised in
accordance with IAS 39 either in profit or loss or as a change to other comprehensive
income. If the contingent consideration is classified as equity, it shall not be
remeasured until it is finally settled within equity.
Goodwill is initially measured at cost being the excess of the aggregate of the
consideration transferred, the amount recognised for non-controlling interests and
any fair value of the Group’s previously held equity interests in the acquiree over the
identifiable assets acquired and liabilities assumed. If the sum of this consideration
and other items is lower than the fair value of the net assets of the subsidiary acquired,
the difference is, after reassessment, recognised in profit or loss as a gain on bargain
purchase.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is tested for impairment annually or more frequently if
events or changes in circumstances indicate that the carrying value may be impaired.
The Group performs its annual impairment test of goodwill as at 30 September. For
the purpose of impairment testing, goodwill acquired in a business combination is,
from the acquisition date, allocated to each of the Group’s cash-generating units, or
groups of cash-generating units, that are expected to benefit from the synergies of
the combination, irrespective of whether other assets or liabilities of the Group are
assigned to those units or groups of units.
Impairment is determined by assessing the recoverable amount of the cashgenerating unit (group of cash-generating units) to which the goodwill relates. Where
the recoverable amount of the cash-generating unit (group of cash-generating units) is
less than the carrying amount, an impairment loss is recognised. An impairment loss
recognised for goodwill is not reversed in a subsequent period.
Where goodwill forms part of a cash-generating unit (group of cash-generating
units) and part of the operation within that unit is disposed of, the goodwill associated
with the operation disposed of is included in the carrying amount of the operation
when determining the gain or loss on disposal of the operation. Goodwill disposed of
in this circumstance is measured based on the relative values of the operation disposed
of and the portion of the cash-generating unit retained.
I – 13
APPENDIX I
(c)
FINANCIAL INFORMATION OF THE GROUP
Foreign currency translation
The consolidated financial statements are presented in Hong Kong dollar, which
is also the Company’s functional currency. The functional currency of the Company
or its subsidiaries is the currency of the primary economic environment in which the
Company or its subsidiaries operates.
Foreign currency transactions of the Company or its subsidiaries are initially
recorded in the functional currency using the exchange rates prevailing at the dates
of the transactions. At the end of reporting period, monetary items denominated
in foreign currencies are translated at the rates prevailing at the end of reporting
period and the exchange differences arising are recognised in the profit or loss. Nonmonetary items carried at fair value denominated in foreign currencies are translated
at the rates prevailing at the date when the fair value was determined and the exchange
differences arising are recognised in the profit or loss, except for the exchange
component of a gain or loss that is recognised directly in equity.
For the purposes of presenting the consolidated financial statements, the assets
and liabilities of the Company’s foreign operations are translated into the presentation
currency of the Company at the rate of exchange prevailing at the end of reporting
period, and their income and expenses are translated at the average exchange rates
for the year, unless exchange rates fluctuate significantly during the period, in which
case, the exchange rates prevailing at the dates of transactions are used. Exchange
differences arising are recognised as a separate component of equity. Such translation
differences are recognised in the profit or loss for the year in which the foreign
operation is disposed of.
(d)
Property, plant and equipment
Buildings comprise mainly factories and offices. Buildings are carried at fair
values, based on periodic valuations by external independent valuers, less subsequent
depreciation and impairment losses. Any accumulated depreciation at the date of
revaluation is eliminated against the gross carrying amount of the asset and the net
amount is restated to the revalued amount of the asset. All other property, plant and
equipment are stated at cost less accumulated depreciation and impairment losses.
Subsequent costs are included in the asset’s carrying amount or recognised
as a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Group and the cost of the item can
be measured reliably. All other repairs and maintenance are recognised in profit or loss
during the period in which they are incurred.
I – 14
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Revaluation increases of buildings are recognised in profit or loss to the
extent that the increases reverse revaluation decreases of the same asset previously
recognised in profit or loss. All other revaluation increases are credited to the
properties revaluation reserve as other comprehensive income. Revaluation decreases
that offset previous revaluation increases of the same asset remaining in the properties
revaluation reserve are charged against the properties revaluation reserve as other
comprehensive income. All other decreases are recognised in profit or loss. On the
subsequent sale or retirement of a revalued building, the attributable revaluation
increases remaining in the properties revaluation reserve is transferred directly to
retained profits.
Depreciation of property, plant and equipment is calculated at rates sufficient
to write off their costs or revalued amounts, less their residual values, if any, on a
straight-line basis over their estimated useful lives as follows:
Leasehold land
Buildings
Plant and machinery
Furniture, fixtures, office equipment and
motor vehicles
Over the lease terms
The shorter of the lease terms
and 10 to 40 years
5 – 15 years
5 – 10 years
The residual values, useful lives and depreciation method are reviewed and
adjusted, if appropriate, at the end of each reporting period.
Construction in progress represents buildings under construction and plant
and machinery pending for installation, and is stated at cost less impairment losses.
Depreciation begins when the relevant assets are available for use.
The gain or loss on disposal of property, plant and equipment is the difference
between the net sales proceeds and the carrying amount of the relevant asset, and is
recognised in profit or loss.
(e)
Investment properties
Investment properties are land and/or buildings which are owned or held
under a leasehold interest (see note 3(f)) to earn rental income and/or for capital
appreciation. These include land held for a currently undetermined future use and
property that is being constructed or developed for future use as investment property.
I – 15
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Investment properties are stated at fair value, unless they are still in the course
of construction or development at the end of the reporting period and their fair value
cannot be reliably determined at that time. Any gain or loss arising from a change in
fair value or from the retirement or disposal of an investment property is recognised in
profit or loss. Rental income from investment properties is accounted for as described
in note 3(n).
When the Group holds a property interest under an operating lease to earn
rental income and/or for capital appreciation, the interest is classified and accounted
for as an investment property on a property-by-property basis. Any such property
interest which has been classified as an investment property is accounted for as if
it were held under a finance lease (see note 3(f)), and the same accounting policies
are applied to that interest as are applied to other investment properties leased under
finance leases. Lease payments are accounted for as described in note 3(f).
(f)
Leases
An arrangement, comprising a transaction or a series of transactions, is or
contains a lease if the Group determines that the arrangement conveys a right to use a
specific asset or assets for an agreed period of time in return for a payment or a series
of payments. Such a determination is made based on an evaluation of the substance of
the arrangement and is regardless of whether the arrangement takes the legal form of a
lease.
(i)
Classification of assets leased to the Group
Assets that are held by Group under leases which transfer to the Group
substantially all the risks and rewards of ownership are classified as being held
under finance leases. Leases which do not transfer substantially all the risks and
rewards of ownership to the Group are classified as operating leases, with the
following exceptions:
–
property held under operating leases that would otherwise meet
the definition of an investment property is classified as investment
property on a property-by-property basis and, if classified as
investment property, is accounted for as if held under a finance
lease (see note 1(e)) ; and
I – 16
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
–
(ii)
land held for own use under an operating lease, the fair value
of which cannot be measured separately from the fair value of a
building situated thereon at the inception of the lease, is accounted
for as being held under a finance lease, unless the building is also
clearly held under an operating lease. For these purposes, the
inception of the lease is the time that the lease was first entered
into by the Group, or taken over from the previous lessee.
Assets acquired under finance leases
Where the Group acquires the use of assets under finance leases, the
amounts representing the fair value of the leased asset, or, if lower, the present
value of the minimum lease payments, of such assets are included in fixed
assets and the corresponding liabilities, net of finance charges, are recorded as
obligations under finance leases. Depreciation is provided at rates which write
off the cost or valuation of the assets over the term of the relevant lease or,
where it is likely the Group will obtain ownership of the asset, the life of the
asset, as set out in note 3(d). Impairment losses are accounted for in accordance
with the accounting policy as set out in note 3(u). Finance charges implicit in
the lease payments are charged to profit or loss over the period of the leases
so as to produce an approximately constant periodic rate of charge on the
remaining balance of the obligations for each accounting period. Contingent
rentals are charged to profit or loss in the accounting period in which they are
incurred.
(iii)
Operating lease charges
Where the Group has the use of assets held under operating leases,
payments made under the leases are charged to profit or loss in equal
instalments over the accounting periods covered by the lease term, except
where an alternative basis is more representative of the pattern of benefits to be
derived from the leased asset. Lease incentives received are recognised in profit
or loss as an integral part of the aggregate net lease payments made. Contingent
rentals are charged to profit or loss in the accounting period in which they are
incurred.
The cost of acquiring land held under an operating lease is amortised on
a straight-line basis over the period of the lease term except where the property
is classified as an investment property (see note 3(e)) .
I – 17
APPENDIX I
(g)
FINANCIAL INFORMATION OF THE GROUP
Technical know-how
Technical know-how acquired by the Group is stated at cost less accumulated
amortisation and impairment losses.
Amortisation is charged to profit or loss on a straight-line basis over the
estimated useful lives of technical know-how. Technical know-how are amortised from
the date they are available for use and the estimated useful lives are ten years from the
date they are available for use according to the agreements entered by the Group for
acquisition of the technical know-how.
(h)
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the weighted average basis. The cost of finished goods and work in
progress comprises raw materials, direct labour and an appropriate proportion of all
production overhead expenditure, and where appropriate, subcontracting charges. Net
realisable value is the estimated selling price in the ordinary course of business, less
the estimated costs of completion and the estimated costs necessary to make the sale.
(i)
Recognition and derecognition of financial instruments
Financial assets and financial liabilities are recognised in the statement of
financial position when the Group becomes a party to the contractual provisions of the
instruments.
Financial assets are derecognised when the contractual rights to receive cash
flows from the assets expire; the Group transfers substantially all the risks and rewards
of ownership of the assets; or the Group neither transfers nor retains substantially
all the risks and rewards of ownership of the assets but has not retained control on
the assets. On derecognition of a financial asset, the difference between the asset’s
carrying amount and the sum of the consideration received and the cumulative gain or
loss that had been recognised in other comprehensive income is recognised in profit or
loss.
Financial liabilities are derecognised when the obligation specified in the
relevant contract is discharged, cancelled or expires. The difference between the
carrying amount of the financial liability derecognised and the consideration paid is
recognised in profit or loss.
I – 18
APPENDIX I
(j)
FINANCIAL INFORMATION OF THE GROUP
Investments
Investments are recognised and derecognised on a trade date basis where the
purchase or sale of an investment is under a contract whose terms require delivery
of the investment within the timeframe established by the market concerned, and are
initially measured at fair value, plus directly attributable transaction costs.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets
not classified as trade and other receivables. Available-for-sale financial assets
are subsequently measured at fair value. Gains or losses arising from changes
in fair value of these investments are recognised in other comprehensive
income, until the investments are disposed of or there is objective evidence
that the investments are impaired, at which time the cumulative gains or losses
previously recognised in other comprehensive income are recognised in profit
or loss.
Impairment losses recognised in profit or loss for equity investments
classified as available-for-sale financial assets are not subsequently reversed
through profit or loss. Impairment losses recognised in profit or loss for debt
instruments classified as available-for-sale financial assets are subsequently
reversed and recognised in profit or loss if an increase in the fair value of
the instruments can be objectively related to an event occurring after the
recognition of the impairment loss.
For available-for-sale equity investments that do not have a quoted
market price in an active market and whose fair value cannot be reliably
measured and derivatives that are linked to and must be settled by delivery
of such unquoted instruments, they are measured at cost less any identified
impairment losses at the end of each reporting period.
I – 19
APPENDIX I
(k)
FINANCIAL INFORMATION OF THE GROUP
Trade and other receivables
Trade and other receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and are recognised
initially at fair value and subsequently measured at amortised cost using the effective
interest method, less allowance for impairment. An allowance for impairment of
trade and other receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due according to the original terms of
receivables. The amount of the allowance is the difference between the receivables’
carrying amount and the present value of estimated future cash flows, discounted at
the effective interest rate computed at initial recognition. The amount of the allowance
is recognised in profit or loss.
Impairment losses are reversed in subsequent periods and recognised in profit
or loss when an increase in the receivables’ recoverable amount can be related
objectively to an event occurring after the impairment was recognised, subject to the
restriction that the carrying amount of the receivables at the date the impairment is
reversed shall not exceed what the amortised cost would have been had the impairment
not been recognised.
(l)
Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash equivalents
represent cash at bank and on hand, demand deposits with banks and other financial
institutions, and short-term highly liquid investments which are readily convertible
into known amounts of cash and subject to an insignificant risk of change in value,
having been within three months of maturity at acquisition. Bank overdrafts which are
repayable on demand and form an integral part of the Group’s cash management are
also included as a component of cash and cash equivalents.
I – 20
APPENDIX I
(m)
FINANCIAL INFORMATION OF THE GROUP
Financial liabilities and equity instruments
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into and the definitions of a
financial liability and an equity instrument under IFRSs. An equity instrument is any
contract that evidences a residual interest in the assets of the Group after deducting all
of its liabilities. The accounting policies adopted for specific financial liabilities and
equity instruments are set out below:
Borrowings
Borrowings are recognised initially at fair value, net of transaction costs
incurred, and subsequently measured at amortised cost using the effective
interest method.
Borrowings are classified as current liabilities unless the Group has an
unconditional right to defer settlement of the liability for at least 12 months
after the reporting period.
Financial guarantee contract liabilities
Financial guarantee contract liabilities are measured initially at their fair
values and are subsequently measured at the higher of:
–
the amount of the obligations under the contracts, as determined
in accordance with IAS 37 “Provisions, Contingent Liabilities and
Contingent Assets”; and
–
the amount initially recognised less cumulative amortisation
recognised in profit or loss on a straight-line basis over the terms
of the guarantee contracts.
I – 21
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Convertible bonds
Convertible notes that can be converted to equity share capital at the
option of the holder, where the number of shares that would be issued on
conversion and the value of the consideration that would be received at that
time do not vary, are accounted for as compound financial instruments which
contain both a liability component and an equity component. At the date of
issue, the fair value of the liability component is estimated using the prevailing
market interest rate for similar non-convertible debt. The difference between
the proceeds of issue of the convertible bonds and the fair value assigned to the
liability component, representing the embedded option for the holder to convert
the bonds into equity of the Group, is included in equity as convertible bonds
reserve.
The liability component is carried as a liability at amortised cost using
the effective interest method until extinguished on conversion or redemption.
The equity component, representing the option to convert the liability
component into ordinary shares of the Company, will remain in convertible
bonds equity reserve until the embedded option is exercised (in which case the
balance stated In convertible bonds equity reserve will be transferred to share
premium). Where the option remains unexercised at the expiry date, the balance
stated in convertible bonds equity reserve will be released to the accumulated
profits. No gain or loss is recognised in the profit or loss upon conversion or
expiration of the option.
Transaction costs are apportioned between the liability and equity
components of the convertible bonds based on their relative carrying amounts
at the date of issue. The portion relating to the equity components is charged
directly to equity.
The liability component (or part of the liability component) of the
convertible bonds is derecognised when, and only when, it is extinguished –
i.e. when the obligation specified in the contract is discharged or cancelled or
expired.
I – 22
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
A significant modification of the terms of the convertible bond
is accounted for as a recognition of a new compound instrument and an
extinguishment of the original compound instrument before maturity. The
difference between the carrying amount of the original liability component
extinguished and its fair value at the date of modification is recognised in profit
or loss. The difference between the fair value at the date of modification of
the original liability component extinguished and the fair value of the newly
recognised liability component is recognised in the equity/convertible bond
reserve. The carrying amount of the equity component of the original compound
instrument extinguished is released from convertible bond reserve to retained
profits.
Trade and other payables
Trade and other payables are stated initially at their fair value and
subsequently measured at amortised cost using the effective interest method
unless the effect of discounting would be immaterial, in which case they are
stated at cost.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds
received, net of direct issue costs.
(n)
Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and is recognised when it is probable that the economic benefits will flow
to the Group and the amount of revenue can be measured reliably.
Revenue from the provision of fabric processing services is recognised when
the services are rendered.
Revenue from the sales of manufactured goods is recognised on the transfer of
significant risks and rewards of ownership, which generally coincides with the time
when the goods are delivered and the title has passed to the customers.
Interest income is recognised on a time-proportion basis using the effective
interest method.
I – 23
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Subcontracting fee income is recognised when the subcontracting services are
rendered.
Rental income is recognised on a straight-line basis over the lease term.
(o)
Employee benefits
(i)
Employee leave entitlements
Employee entitlements to annual leave and long service leave are
recognised when they accrue to employees. A provision is made for the
estimated liability for annual leave and long service leave as a result of services
rendered by employees up to the end of the reporting period.
Employee entitlements to sick leave and maternity leave are not
recognised until the time of leave.
(ii)
Pension obligations
The Group contributes to defined contribution retirement schemes which
are available to all employees. Contributions to the schemes by the Group and
employees are calculated as a percentage of employees’ basic salaries. The
retirement benefit scheme cost charged to profit or loss represents contributions
payable by the Group to the funds.
(iii)
Termination benefits
Termination benefits are recognised when, and only when, the Group
demonstrably commits itself to terminate employment or to provide benefits
as a result of voluntary redundancy by having a detailed formal plan which is
without realistic possibility of withdrawal.
I – 24
APPENDIX I
(p)
FINANCIAL INFORMATION OF THE GROUP
Share-based payments
The Group issues equity-settled share-based payments to certain directors
and employees. Equity-settled share-based payments are measured at the fair
value (excluding the effect of non market-based vesting conditions) of the equity
instruments at the date of grant. The fair value determined at the grant date of the
equity-settled share-based payments is expensed on a straight-line basis over the
vesting period, based on the Group’s estimate of shares that will eventually vest and
adjusted for the effect of non market-based vesting conditions.
Equity-settled share-based payments to those persons that provide the nature
of business development to the Group are measured at the fair value of the services
received or if the fair value of the services rendered cannot be reliably measured, at
the fair value of the equity instruments granted. The fair value is measured at the date
the Group receives the services and recognised as expenses.
(q)
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a substantial
period of time to get ready for their intended use or sale, are capitalised as part of
the cost of those assets, until such time as the assets are substantially ready for their
intended use or sale. Investment income earned on the temporary investment of
specific borrowings pending their expenditure on qualifying assets is deducted from
the borrowing costs eligible for capitalisation.
To the extent that funds are borrowed generally and used for the purpose of
obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation
is determined by applying a capitalisation rate to the expenditures on that asset. The
capitalisation rate is the weighted average of the borrowing costs applicable to the
borrowings of the Group that are outstanding during the period, other than borrowings
made specifically for the purpose of obtaining a qualifying asset.
All other borrowing costs are recognised in profit or loss in the period in which
they are incurred.
I – 25
APPENDIX I
(r)
FINANCIAL INFORMATION OF THE GROUP
Government grants
A government grant is recognised when there is reasonable assurance that
the Group will comply with the conditions attaching to it and that the grant will be
received.
Government grants relating to income are deferred and recognised in profit or
loss over the period to match them with the costs they are intended to compensate.
(s)
Taxation
Income tax represents the sum of the current tax and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit
differs from profit recognised in profit or loss because it excludes items of income
or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for current tax is calculated
using tax rates that have been enacted or substantively enacted by the end of the
reporting period.
Deferred tax is recognised on differences between the carrying amounts of
assets and liabilities in the financial statements and the corresponding tax bases used
in the computation of taxable profit. Deferred tax liabilities are generally recognised
for all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible
temporary differences, unused tax losses or unused tax credits can be utilised. Such
assets and liabilities are not recognised if the temporary difference arises from
goodwill or from the initial recognition (other than in a business combination) of
other assets and liabilities in a transaction that affects neither the taxable profit nor the
accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising
on investments in subsidiaries except where the Group is able to control the reversal
of the temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each
reporting period and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be recovered.
I – 26
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised, based on tax rates that have
been enacted or substantively enacted by the end of the reporting period. Deferred
tax is recognised in profit or loss, except when it relates to items recognised in other
comprehensive income or directly in equity, in which case the deferred tax is also
recognised in other comprehensive income or directly in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable
right to set off current tax assets against current tax liabilities and when they relate to
income taxes levied by the same taxation authority and the Group intends to settle its
current tax assets and liabilities on a net basis.
(t)
Related parties
(a)
(b)
A person, or a close member of that person’s family, is related to the
Group if that person:
(i)
has control or joint control over the Group;
(ii)
has significant influence over the Group; or
(iii)
is a member of the key management personnel of the Group or the
Group’s parent.
An entity is related to the Group if any of the following conditions
applies:
(i)
The entity and the Group are members of the same group (which
means that each parent, subsidiary and fellow subsidiary is related
to the others).
(ii)
One entity is an associate or joint venture of the other entity (or
an associate or joint venture of a member of a group of which the
other entity is a member).
(iii)
Both entities are joint ventures of the same third party.
(iv)
One entity is a joint venture of a third entity and the other entity is
an associate of the third entity.
I – 27
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
(v)
The entity is a post-employment benefit plan for the benefit of
employees of either the Group or an entity related to the Group.
(vi)
The entity is controlled or jointly controlled by a person identified
in (a).
(vii)
A person identified in (a)(i) has significant influence over the
entity or is a member of the key management personnel of the
entity (or of a parent of the entity).
Close members of the family of a person are those family members who
may be expected to influence, or be influenced by, that person in their dealings
with the entity.
(u)
Impairment of assets
At the end of each reporting period, the Group reviews the carrying amounts of
its tangible and intangible assets except goodwill, investments, investment properties,
inventories and receivables to determine whether there is any indication that those
assets have suffered an impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of any impairment
loss. Where it is not possible to estimate the recoverable amount of an individual
asset, the Group estimates the recoverable amount of the cash-generating unit to which
the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset.
If the recoverable amount of an asset or cash-generating unit is estimated to be
less than its carrying amount, the carrying amount of the asset or cash-generating unit
is reduced to its recoverable amount. An impairment loss is recognised immediately in
profit or loss, unless the relevant asset is carried at a revalued amount, in which case
the impairment loss is treated as a revaluation decrease.
I – 28
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Where an impairment loss subsequently reverses, the carrying amount of the
asset or cash-generating unit is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined (net of amortisation or depreciation) had no
impairment loss been recognised for the asset or cash-generating unit in prior years.
A reversal of an impairment loss is recognised immediately in profit or loss, unless
the relevant asset is carried at a revalued amount, in which case the reversal of the
impairment loss is treated as a revaluation increase.
(v)
Provisions and contingent liabilities
Provisions are recognised for liabilities of uncertain timing or amount when
the Group has a present legal or constructive obligation arising as a result of a past
event, it is probable that an outflow of economic benefits will be required to settle
the obligation and a reliable estimate can be made. Where the time value of money
is material, provisions are stated at the present value of the expenditures expected to
settle the obligation.
Where it is not probable that an outflow of economic benefits will be required,
or the amount cannot be estimated reliably, the obligation is disclosed as a contingent
liability, unless the probability of outflow is remote. Possible obligations, whose
existence will only be confirmed by the occurrence or non-occurrence of one or more
future events are also disclosed as contingent liabilities unless the probability of
outflow is remote.
(w)
Segment reporting
Operating segments, and amounts of each segment item reported in the
consolidated financial statements, are identified from the financial information
provided regularly to the Group’s most senior executive management for the purposes
of allocating resources to, and assessing the performance of, the Group’s various lines
of business and geographical locations.
Individually material operating segments are not aggregated for financial
reporting purposes unless the segments have similar economic characteristics and
are similar in respect of the nature of products and services, the nature of production
processes, the type or class of customers, the methods used to distribute the products
or provide the services, and the nature of the regulatory environment. Operating
segments which are not individually material may be aggregated if they share a
majority of these criteria.
I – 29
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
A segment is a distinguishable component of the Group that is engaged either in
providing products or services (business segment), or in providing products or services
within a particular economic environment (geographical segment), which is subject to
risks and rewards that are different from those of other segments.
Segment revenue, expenses, results, assets and liabilities include items directly
attributable to a segment as well as those that can be allocated on a reasonable basis
to that segment. Segment revenue, expenses, assets and liabilities are determined
before intra-group balances and intra-group transactions are eliminated as part of
the consolidation process, except to the extent that such intragroup balances and
transactions are between group enterprises within a single segment.
Segment assets included all tangible, intangible, non-current and current assets
with the exception of corporate assets. Segment liabilities included current and noncurrent liabilities attributable to the individual segments.
Segment capital expenditure is the total cost incurred during the year to acquire
segment assets (both tangible and intangible) that are expected to be used for more
than one year.
Unallocated items may comprise financial and corporate assets, interestbearing loans, other income, corporate and financing expenses, loss on modification
of convertible bonds, loss on disposal of investment properties, and loss on disposal of
subsidiaries.
(x)
Events after the reporting period
Events after the reporting period that provide additional information about the
Group’s position at the end of the reporting period or those that indicate the going
concern assumption is not appropriate are adjusting events and are reflected in the
financial statements. Events after the reporting period that are not adjusting events are
disclosed in the notes to the consolidated financial statements when material.
I – 30
APPENDIX I
4.
FINANCIAL INFORMATION OF THE GROUP
Critical judgements and key estimates
Critical judgements in applying accounting policies
In the process of applying the accounting policies, the directors have made the
following judgements that have the most significant effect on the amounts recognised
in the financial statements apart from those involving estimations, which are dealt
with below.
Legal titles of buildings and leasehold land the PRC
As stated in note 15 to the consolidated financial statements, the ownership
certificates of certain buildings and leasehold land located in the PRC were not
issued to the Group as at 30 September 2012. Despite the fact that the Group has not
obtained the relevant ownership certificates, the directors determine to recognise those
buildings and leasehold land located in the PRC as property, plant and equipment
and investment properties on the grounds that they expect the transfer of legal titles
in future should have no major difficulties and the Group is in substance controlling
those buildings and leasehold land located in the PRC.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of causing
a material adjustment to the carrying amounts of assets and liabilities within the next
financial year, are discussed below.
(a)
Property, plant and equipment and depreciation, technical know-how and
amortisation
The Group determines the estimated useful lives and related depreciation
charges and amortisation charges for the Group’s property, plant and equipment and
technical know-how based on the historical experience of the actual useful lives and
residual values of property, plant and equipment and technical know-how of similar
nature and functions. The Group will revise the depreciation charges and amortisation
charges where useful lives and residual values are different to those previously
estimated, or it will write-off or write-down technically obsolete or non-strategic
assets that have been abandoned or sold.
I – 31
APPENDIX I
(b)
FINANCIAL INFORMATION OF THE GROUP
Impairment of goodwill and property, plant and equipment
Determining whether goodwill and property, plant and equipment are impaired
requires an estimation of the value in use of the cash-generating units to which these
items have been allocated. The value in use calculation requires the Group to estimate
the future cash flows expected to arise from the cash-generating unit and a suitable
discount rate in order to calculate the present value.
(c)
Impairment loss for bad and doubtful debts
The Group makes impairment loss for bad and doubtful debts based on
assessments of the recoverability of the trade and other receivables, including the
current creditworthiness and the past collection history of each debtor. Impairments
arise where events or changes in circumstances indicate that the balances may not be
collectible. The identification of bad and doubtful debts requires the use of judgement
and estimates. Where the actual result is different from the original estimate, such
difference will impact the carrying value of the trade and other receivables and
doubtful debt expenses in the year in which such estimate has been changed. If the
financial conditions of the debtors were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
(d)
Allowance for slow-moving inventories
Allowance for slow-moving inventories is made based on the ageing and
estimated net realisable value of inventories. The assessment of the allowance
amount involves judgement and estimates. Where the actual outcome in future is
different from the original estimate, such difference will impact the carrying value of
inventories and allowance charge/write-back in the period in which such estimate has
been changed.
(e)
Fair values of buildings and investment properties
The Group appointed an independent professional valuer to assess the fair
values of the buildings and investment properties. In determining the fair values,
the valuer has utilised a method of valuation which involves certain estimates.
The directors have exercised their judgements and are satisfied that the method of
valuation is reflective of the current market conditions.
I – 32
APPENDIX I
(f)
FINANCIAL INFORMATION OF THE GROUP
Fair value of the liability component of convertible bonds
A suitable discount rate is determined by the directors in order to calculate the
fair value of the liability component of convertible bonds. The directors have exercised
their judgements and estimates with reference to the current market conditions. If
different discount rate is adopted, the fair value of liability component of convertible
bonds will change.
(g)
Fair values of share options granted
The Group appointed an independent professional valuer to assess the fair
values of the share options granted. In determining the fair values, the valuer has
utilised a method of valuation which involves certain estimates. The directors have
exercised their judgements and are satisfied that the method of valuation is reflective
of the current market conditions.
5.
Financial risk management
The Group’s activities expose it to a variety of financial risks: foreign currency
risk, credit risk, liquidity risk and interest rate risk. The Group’s overall risk management
programme focuses on the unpredictability of financial markets and seeks to minimise
potential adverse effects on the Group’s financial performance.
(a)
Foreign currency risk
Currency risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates.
The Group has exposure to foreign currency risk as most of its business
transactions, assets and liabilities are principally denominated in HKD, RMB and
Macau Pataca (“MOP”) which are the functional currencies of the principal operating
entities of the Group. The Group currently does not have a foreign currency hedging
policy in respect of foreign currency transactions, assets and liabilities. The Group
will monitor its foreign currency exposure closely and will consider hedging
significant foreign currency exposure should the need arise.
I – 33
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The following table details the Group’s exposure at the end of reporting period
to currency risk arising from recognised assets or liabilities denominated in a currency
other than the functional currency of the entity to which they relate. The exposure
arising from the current accounts among the Company and its subsidiaries which are
form part of net investment in foreign operations is excluded.
HKD
HK$’000
Bank and cash balances
Fixed bank deposits
Trade receivables
Deposits and other receivables
Due from a fellow subsidiary
Trade payables
Other payables
Interest-bearing borrowings
2012
USD
RMB
HK$’000 HK$’000
Total
HK$’000
HKD
HK$’000
2011
USD
RMB
HK$’000 HK$’000
Total
HK$’000
1,245
–
–
30,093
–
–
–
–
25
155,262
53,588
1,472
–
(13,690)
–
–
–
–
–
–
99,569
(3,707)
–
–
1,270
155,262
53,588
31,565
99,569
(17,397)
–
–
54
–
–
38,118
–
–
(207)
(48,000)
66
154,901
60,916
2,167
–
(11,779)
–
–
–
–
–
–
67,429
(3,757)
–
–
120
154,901
60,916
40,285
67,429
(15,536)
(207)
(48,000)
31,338
196,657
95,862
323,857
(10,035)
206,271
63,672
259,908
Since HKD is pledged to USD and MOP, material fluctuations in the exchange
rates between HKD, USD and MOP are remote.
The following table summarise the currencies that the Group is exposed to
currency risk after excluding those financial assets and liabilities which have remote
exchange effect as per above paragraph:
HKD
USD
RMB
2012
HK$’000
2011
HK$’000
1,223
10
95,862
8
–
63,672
97,095
63,680
The net financial assets denominated in HKD and USD are held by subsidiaries
of which the functional currencies are RMB. The net financial assets denominated in
RMB are held by a subsidiary of which the functional currency is MOP.
I – 34
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Should RMB and MOP at 30 September 2012 devalue by 10% against all
foreign currencies, the carrying amount of the net financial assets exposed to currency
risk at 30 September 2012 would be increased, and hence the equity at 30 September
2012 would be increased, by HK$9,710,000 (2011: HK$6,368,000); and the loss
for the year ended 30 September 2012 would be decreased by HK$9,710,000 (2011:
HK$6,368,000).
(b)
Credit risk
Credit risk is the risk that a party to a financial instrument will cause a financial
loss for the Group by failing to discharge an obligation. The Group has a credit policy
in place and exposure to the credit risk is monitored on an ongoing basis.
The carrying amounts of financial assets as at 30 September 2011 and 2012,
which represented the Group’s significant exposure to credit risk, are as follows:–
Trade receivables
Deposits and other receivables
Fixed bank deposits
Bank balances
2012
2011
HK$’000
HK$’000
154,688
96,084
155,262
257,406
152,147
104,780
154,901
352,776
663,440
764,604
In respect of trade receivables, individual credit evaluations are performed on
all customers requiring credit over a certain amount. These evaluations focus on the
customer’s past history of making payments when due and current ability to pay, and
may take into account information specific to the customer as well as pertaining to the
economic environment in which the customer operates. Debtors are due within 30 to
120 days from the date of billing. Normally, the Group does not obtain collateral from
customers.
The directors consider that the credit risk from fixed bank deposits and bank
balances is minimal as the balances are placed with financial institutions with high
credit ratings.
The directors consider that the credit risk from deposits and other receivable
is minimal as there are no indications for deterioration of creditworthiness of counter
parties and the recoverability are reasonably assured.
I – 35
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The Group’s exposure to credit risk is influenced mainly by the individual
characteristics of each customer.
Except for the financial guarantee given by the Group as set out in note 36, the
Group does not provide any other guarantees which would expose the Group to credit
risk. The maximum exposure to credit risk in respect of the financial guarantee at the
end of the reporting period is disclosed in note 36.
(c)
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting
obligations associated with financial liabilities. The Group manage liquidity risks
by monitoring its liquidity position through periodic preparation of cash flows and
cash balances forecasts and periodic evaluation of the ability of the Group to meet its
financial obligations, measured by the debt-to-adjusted capital ratio.
Maturities of the financial liabilities of the Group as at 30 September 2011 and
2012 were as follows:
Carrying
amount
HK$’000
Trade payables
Other payables and accruals
Convertible bonds
2 to 5 years
HK$’000
30,469
223,878
123,323
30,469
223,878
150,000
30,469
223,878
–
–
–
–
–
–
150,000
377,670
404,347
254,347
–
150,000
At 30 September 2011
Total
contractual
undiscounted
Within
cash flow
1 year
1 to 2 years
HK$’000
HK$’000
HK$’000
2 to 5 years
HK$’000
Carrying
amount
HK$’000
Trade payables
Other payables and accruals
Interest bearing borrowings
Convertible bonds
Financial guarantee contracts
At 30 September 2012
Total
contractual
undiscounted
Within
cash flow
1 year
1 to 2 years
HK$’000
HK$’000
HK$’000
30,243
194,626
48,000
137,828
–
30,243
194,626
48,672
152,966
12,200
30,243
194,626
48,672
1,500
12,200
–
–
–
151,466
–
–
–
–
–
–
410,697
438,707
287,241
151,466
–
I – 36
APPENDIX I
(d)
FINANCIAL INFORMATION OF THE GROUP
Interest rate risk
The Group’s interest rate risk arises primarily from interest-bearing borrowings,
liability component of convertible bonds, fixed bank deposits, other long-term
receivable and bank balances. Except for the interest bearing borrowings, liability
component of convertible bonds, fixed bank deposits and other long-term receivable
which are held at fixed interest rates, all bank balances are held at variable rates.
The Group does not use financial derivatives to hedge against the interest rate
risk. However, the interest rate profile of the Group is closely monitored by the
management and may enter into appropriate swap contracts, when it is considered
significant and cost-effective, to manage the interest rate risk.
In respect of income-earning financial assets and interest-bearing financial
liabilities, the following table indicates their effective interest rates as at 30 September
2011 and 2012:
2012
Effective
interest
rate
%
Fixed rate financial assets
Other long-term receivable
Fixed bank deposits
Fixed rate financial liabilities
Interest-bearing borrowings
Convertible bonds
– liability component
Variable rate financial assets
Bank balances
HK$’000
2011
Effective
interest
rate
%
HK$’000
1.75%
1.20%
53,200
155,262
1.75%
1.20%
53,200
154,901
–
–
3.41%
(48,000)
5.90%
(123,323)
7.32% –
7.85%
(137,328)
0.01% –
0.35%
257,025
0.01% –
0.35%
353,035
342,164
375,808
It is estimated that a general increase of 100 basis points in interest rates, with
all other variables held constant, the Group’s loss for the year ended 30 September
2012 and respective accumulated losses would be decreased by approximately
HK$2,570,000 (2011: HK$3,530,000).
I – 37
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The sensitivity analysis above has been determined based on the exposure to
interest rate for both derivatives and non-derivative instruments at the end of reporting
period. The analysis is prepared assuming the amount of asset and liability outstanding
at the end of reporting period was outstanding for the whole year. 100 basis points
increase are used when reporting interest rate risk internally to key management
personnel and represent management’s assessment of the reasonable possible change
in interest rates.
(e)
Fair value
The carrying amounts of the Group’s financial assets and financial liabilities
as reflected in the consolidated statement of financial position approximate their
respective fair values.
6.
Turnover
The Group’s turnover represents the net invoiced value of services rendered and goods
sold to customers, after allowances for trade discounts and returns.
Provision of fabric processing services
Sale of goods
7.
2012
HK$’000
2011
HK$’000
429,219
109,899
582,840
144,426
539,118
727,266
2012
HK$’000
2011
HK$’000
2,850
515
1,968
2,301
–
1,511
3,195
1,974
387
2,892
3,587
386
9,145
12,421
Other income
Bank interest income
Subcontracting income
Government grants
Rental income
Waiver of debt by other creditor
Others
I – 38
APPENDIX I
8.
FINANCIAL INFORMATION OF THE GROUP
Segment information
The Group has two reportable segments as follows:
–
Provision of fabric processing services and manufacture and sale of fabrics
–
Manufacture and sale of yarns and blankets
The Group’s reportable segments are strategic business units that offer different
products and services. They are managed separately because each business requires different
technology and marketing strategies.
The accounting policies of the operating segments are the same as those described
in note 3 to the consolidated financial statements. Segment profits or losses do not
include unallocated other income, unallocated corporate expenses, finance costs, loss on
modification of convertible bonds, loss on disposal of investment properties, loss on disposal
of subsidiaries and impairment loss on property, plant and equipment. Segment assets
do not include investment properties, bank and cash balances and unallocated corporate
assets. Segment liabilities do not include interest-bearing borrowings, current tax liabilities,
deferred tax liabilities, convertible bonds and unallocated corporate liabilities.
I – 39
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Provision of fabric
processing services
and manufacture and
sale of fabrics
2012
2011
HK$’000
HK$’000
REVENUE
Revenue from external customers
Manufacture and sale of
yarns and blankets
2012
2011
HK$’000
HK$’000
Consolidated
2012
2011
HK$’000
HK$’000
444,228
600,073
94,890
127,193
539,118
727,266
36,455
83,955
(49,550)
(23,693)
(13,095)
60,262
(114,383)
–
(48,189)
9,145
(8,451)
–
12,421
(48,824)
(Loss)/profit from operations
Finance costs
Loss on modification of
convertible bonds
Loss on disposal of subsidiaries
(174,973)
(11,224)
23,859
(17,607)
(1,943)
(2,386)
–
(140,155)
Loss before tax
Income tax expense
(190,526)
(249)
(133,903)
(4,553)
Loss for the year
(190,775)
(138,456)
Segment profit/(loss)
Impairment loss on property,
plant and equipment
Loss on disposal of
investment properties
Unallocated other income
Unallocated corporate expenses
Provision of fabric
processing services
and manufacture and
sale of fabrics
2012
2011
HK$’000
HK$’000
ASSETS
Segment assets
749,893
743,143
Manufacture and sale of
yarns and blankets
2012
2011
HK$’000
HK$’000
507,262
560,379
Consolidated
2012
2011
HK$’000
HK$’000
1,257,155
1,303,522
470,498
618,421
1,727,653
1,921,943
250,886
222,424
Unallocated liabilities
164,600
227,694
Consolidated total liabilities
415,486
450,118
Unallocated assets
Consolidated total assets
LIABILITIES
Segment liabilities
185,968
164,878
I – 40
64,918
57,546
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Provision of fabric
processing services
and manufacture and
sale of fabrics
2012
2011
HK$’000
HK$’000
Manufacture and sale of
yarns and blankets
2012
2011
HK$’000
HK$’000
Unallocated
2012
2011
HK$’000
HK$’000
Consolidated
2012
2011
HK$’000
HK$’000
Other segment information:
Additions to segment
non-current assets
155,673
81,605
16,742
50,211
–
9
172,415
131,825
Depreciation and amortisation
45,545
58,930
26,232
24,670
63
72
71,840
83,672
Property, plant and equipment
written off
527
8,587
–
124
–
–
527
8,711
Loss on disposals of property,
plant and equipment
5,423
4,867
–
–
–
–
5,423
4,867
Impairment loss on property,
plant and equipment
68,945
–
45,438
–
–
–
114,383
–
Geographical information:
Turnover by geographical location is as below:–
2012
HK$’000
2011
HK$’000
The Philippines
The PRC
Australia
United States of America
Canada
Republic of Mozambique
Taiwan
191,826
301,921
9,851
14,751
4,054
–
16,715
197,412
469,582
4,598
19,335
8,315
2,965
25,059
Consolidated total
539,118
727,266
In presenting the geographical information, revenue is based on the locations of
the customers. All of the Group’s non-current assets are located in the PRC.
I – 41
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Revenue from major customers:
There are no major customers contributing over 10% of the Group’s revenue for
the years ended 30 September 2011 and 2012.
9.
Directors’ emoluments and five highest paid employees
Details of emoluments of the directors of the Company disclosed pursuant to the
Listing Rules and section 161 of the Hong Kong Companies Ordinance are as follows:
For the year ended 30 September 2012
Name of director
Fees
HK$’000
Retirement
Salaries,
benefits
allowances
scheme
and benefits Discretionary
in kind
bonus contributions
HK$’000
HK$’000
HK$’000
Total
emoluments
HK$’000
Executive directors
Mr. Cai Zhenrong
Mr. Cai Zhenyao
Mr. Cai Zhenying
Mr. Cai Yangbo
Mr. Choi Wing Toon
–
–
–
–
–
360
304
304
1,800
324
–
–
–
–
27
–
–
–
–
13
360
304
304
1,800
364
120
120
–
–
–
–
–
–
120
120
100
–
–
–
100
20
–
–
–
20
360
3,092
27
13
3,492
Independent non-executive
directors
Ms. Choy So Yuk, JP
Mr. Lawrence Gonzaga
Mr. Wong Siu Hong
(resigned on 31 July 2012)
Mr. Wong Chi Hung Stanley
(appointed on 31 July 2012)
Total
I – 42
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
For the year ended 30 September 2011
Name of director
Fees
HK$’000
Retirement
Salaries,
benefits
allowances
scheme
and benefits Discretionary
in kind
bonus contributions
HK$’000
HK$’000
HK$’000
Total
emoluments
HK$’000
Executive directors
Mr. Cai Zhenrong
Mr. Cai Zhenyao
Mr. Cai Zhenying
Mr. Cai Yangbo
Mr. Choi Wing Toon
–
–
–
–
–
450
304
304
1,800
318
20
–
–
–
25
–
–
–
–
12
470
304
304
1,800
355
Ms. Choy So Yuk, JP
Mr. Lawrence Gonzaga
Mr. Wong Siu Hong
120
120
120
–
–
–
–
–
–
–
–
–
120
120
120
Total
360
3,176
45
12
3,593
Independent non-executive
directors
There was no arrangement under which a director waived or agreed to waive any
emoluments during the years ended 30 September 2011 and 2012.
The five highest paid individuals in the Group during the year included two (2011:
two) directors whose emoluments are reflected in the analysis presented above. The
emoluments of the remaining three (2011: three) individuals are set out below:
Basic salaries, housing benefits,
other allowances and benefits in kind
Equity-settled share-based payments
Retirement benefits scheme contributions
I – 43
2012
HK$’000
2011
HK$’000
1,583
–
26
1,838
367
24
1,609
2,229
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The emoluments fell within the following bands:
Number of individuals
Nil to HK$1,000,000
2012
2011
3
3
During the years ended 30 September 2011 and 2012, no emoluments were paid
or payable by the Group to any of the directors or five highest paid individuals as an
inducement to join, or upon joining the Group, or as compensation for loss of office.
10.
Finance costs
Interest on bank loans and overdrafts
Interest expense on convertible bonds
Imputed interest on convertible bonds
Bank charges
11.
2012
HK$’000
2011
HK$’000
858
888
8,128
1,350
5,188
1,500
8,311
2,608
11,224
17,607
2012
HK$’000
2011
HK$’000
2,039
–
4,629
26
2,039
(1,790)
4,655
(102)
Income tax expense
Current tax – the PRC enterprise income tax
Provision for the year
Under-provision in prior year
Deferred tax (note 27)
249
4,553
No provision for Hong Kong Profits Tax is required since the Group has no assessable
profit derived from Hong Kong for the years ended 30 September 2011 and 2012.
I – 44
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Tax charge on profits assessable elsewhere have been calculated at the rates of tax
prevailing in the countries in which the Group operates, based on existing legislation,
interpretations and practices in respect thereof.
Under the Law of the People’s Republic of China on Enterprise Income Tax (the “EIT
Law”) and Implementation Regulation of the EIT Law, the tax rate of the PRC subsidiaries is
25% from 1 January 2008 onwards.
A reconciliation between the income tax expense and the product of loss before tax
multiplied by the PRC enterprise income tax rate is as follows:
Loss before tax
Tax at the PRC enterprise income tax
rate of 25%
Tax effect of income that is not taxable
Tax effect of expenses that are not deductible
Tax effect of impairment on property,
plant and equipment
Under-provision in prior year
Effect of different tax rates of subsidiaries
Income tax expense
2012
2011
HK$’000
HK$’000
(190,526)
(133,903)
(47,632)
(60,624)
81,004
(33,476)
(32,020)
64,776
28,596
–
(1,095)
–
26
5,247
249
I – 45
4,553
APPENDIX I
12.
FINANCIAL INFORMATION OF THE GROUP
Loss for the year
The Group’s loss for the year is stated after charging the following:
Amortisation of technical know-how
(included in cost of services provided and
costs of sales)
Auditor’s remuneration
Cost of inventories sold
Depreciation
Exchange loss
Loss on disposals of property, plant and
equipment
Operating lease charges on land and buildings
Staff costs (excluding directors’ remuneration
(note 9) ):
Salaries, bonus and allowances
Retirement benefits scheme contributions
Equity-settled share-based payments
Property, plant and equipment written off
Other equity-settled share-based payments
2012
HK$’000
2011
HK$’000
1,226
1,250
135,670
70,614
274
1,175
1,930
159,231
82,497
574
5,423
1,438
4,867
987
61,273
6,490
–
67,763
527
–
78,538
2,382
520
81,440
8,711
21,596
The cost of inventories sold includes staff costs, depreciation and operating leases
charges of approximately HK$37,321,000 (2011: HK$34,603,000) which are included in the
amounts disclosed separately above.
Note:
The Group operates a mandatory provident fund scheme (the “MPF Scheme”) under the Hong Kong
Mandatory Provident Fund Schemes Ordinance for all qualifying employees in Hong Kong. The Group’s
contributions to the MPF Scheme are calculated at 5% of the salaries and wages subject to a monthly
maximum amount of contribution of HK$1,000 before 1 June 2012 and HK$1,250 on or after 1 June 2012
respectively, per employee and vest fully with employees when contributed into the MPF Scheme.
The employees of the Group’s subsidiaries established in the PRC are members of a central pension scheme
operated by the local municipal government. These subsidiaries are required to contribute certain percentage
of the employees’ basic salaries and wages to the central pension scheme to fund the retirement benefits.
The local municipal government undertakes to assume the retirement benefits obligations of all existing and
future retired employees of these subsidiaries. The only obligation of these subsidiaries with respect to the
central pension scheme is to meet the required contributions under the scheme.
I – 46
APPENDIX I
13.
FINANCIAL INFORMATION OF THE GROUP
Dividends
No dividend has been paid or declared by the Company for the years ended 30
September 2011 and 2012.
14.
Loss per share
The calculation of basic loss per share is based on the following:
2012
HK$’000
2011
HK$’000
(190,775)
(138,456)
Loss
Loss for the purpose of calculating basic loss
per share
Number of shares
Weighted average number of ordinary shares
for the purpose of calculating basic loss per
share
1,446,838,580
1,446,838,580
Diluted loss per share has not been disclosed as the effects of all potential ordinary
shares are anti-dilutive for the years ended 30 September 2011 and 2012.
I – 47
APPENDIX I
15.
FINANCIAL INFORMATION OF THE GROUP
Property, plant and equipment
Furniture,
fixtures,
office
equipment
and motor Construction
vehicles
in progress
HK$’000
HK$’000
Leasehold
land
HK$’000
Buildings
HK$’000
Plant and
machinery
HK$’000
92,868
–
8,225
–
(4,174)
–
–
7,153
462,693
36,614
30,375
–
(163,687)
(7,299)
4,232
36,500
689,689
85,054
3,774
(17,116)
(216,521)
(4,486)
–
48,535
13,833
1,730
110
–
(3,664)
(2,358)
–
961
65,232
8,427
(42,484)
–
–
–
–
3,519
1,324,315
131,825
–
(17,116)
(388,046)
(14,143)
4,232
96,668
At 30 September 2011 and
1 October 2011
Additions
Transfers
Disposals
Disposal of subsidiaries
Write off
Deficit on revaluation
Exchange differences
104,072
68,579
–
–
(3,568)
–
–
1,530
399,428
45,455
–
–
(10,199)
–
(17,411)
2,977
588,929
124,882
887
(23,642)
(12,327)
(1,234)
–
3,664
10,612
43
–
–
(492)
–
–
(6)
34,694
2,170
(887)
–
(71)
–
–
255
1,137,735
241,129
–
(23,642)
(26,657)
(1,234)
(17,411)
8,420
At 30 September 2012
170,613
420,250
681,159
10,157
36,161
1,318,340
At 1 October 2010
Charge for the year
Disposals
Disposal of subsidiaries
Write off
Write-back on revaluation
Exchange differences
6,068
2,403
–
(956)
–
–
541
–
25,056
–
(5,460)
–
(20,556)
960
227,415
53,851
(9,629)
(69,904)
(3,284)
–
14,932
8,347
1,187
–
(1,230)
(2,148)
–
551
–
–
–
–
–
–
–
241,830
82.497
(9,629)
(77,550)
(5,432)
(20,556)
16,984
At 30 September 2011 and
1 October 2011
Charge for the year
Disposals
Disposal of subsidiaries
Write off
Write-back on revaluation
Exchange differences
8,056
3,655
–
(935)
–
–
702
–
23,728
–
(327)
–
(23,451)
50
213,381
42,344
(16,860)
(11,936)
(707)
–
897
6,707
887
–
(456)
–
–
7
–
–
–
–
–
–
–
228,144
70,614
(16,860)
(13,654)
(707)
(23,451)
1,656
11,478
–
227,119
7,145
–
245,742
Total
HK$’000
Cost or valuation
At 1 October 2010
Additions
Transfers
Disposals
Disposal of subsidiaries
Write off
Surplus on revaluation
Exchange differences
Accumulated depreciation
At 30 September 2012
I – 48
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Furniture,
fixtures,
office
equipment
and motor Construction
vehicles
in progress
HK$’000
HK$’000
Leasehold
land
HK$’000
Buildings
HK$’000
Plant and
machinery
HK$’000
At 1 October 2010,
30 September 2011 and
1 October 2011
Impairment loss
Exchange differences
–
–
–
–
–
–
–
114,383
244
–
–
–
–
–
–
–
114,383
244
At 30 September 2012
–
–
114,627
–
–
114,627
At 30 September 2012
159,135
420,250
339,413
3,012
36,161
957,971
At 30 September 2011
96,016
399,428
375,548
3,905
34,694
909,591
Furniture,
fixtures,
office
equipment
and motor Construction
vehicles
in progress
HK$’000
HK$’000
Total
HK$’000
Total
HK$’000
Accumulated impairment
Carrying amount
An analysis of cost or valuation of the above assets is as follows:
Leasehold
land
HK$’000
Buildings
HK$’000
Plant and
machinery
HK$’000
At cost
At valuation
104,072
–
–
399,428
588,929
–
10,612
–
34,694
–
738,307
399,428
At 30 September 2011
104,072
399,428
588,929
10,612
34,694
1,137,735
At cost
At valuation
170,613
–
–
420,250
681,159
–
10,157
–
36,161
–
898,090
420,250
At 30 September 2012
170,613
420,250
681,159
10,157
36,161
1,318,340
I – 49
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
At 30 September 2012, the Group’s buildings, including certain buildings of
approximately HK$190,200,00 (2011: HK$368,956,000) for which the Group are in the
process of obtaining the relevant building ownership certificates, were revalued by BMI
Appraisals Limited, an independent firm of professional valuers, at open market value
of approximately HK$420,250,000 (2011: HK$399,428,000). The resulting revaluation
surplus of approximately HK$6,040,000 (2011: HK$24,788,000) has been credited to the
properties revaluation reserve. The directors do not foresee any major obstacles to issuing the
certificates of the above-mentioned buildings to the Group.
Had the Group’s buildings been stated at cost less accumulated depreciation and
impairment losses, their carrying amounts as at 30 September 2012 would have been
approximately HK$351,097,000 (2011: HK$327,506,000).
The Group’s leasehold land represent land use rights outside Hong Kong under
medium-term leases.
The directors considered that there was an indication of impairment for property, plant
and equipment as the Group’s operating result was worse than expected. An independent
valuer was appointed to assess the recoverable amounts of property, plant and equipment,
which were based on the fair values less costs to sell. As a result, an impairment loss of
HK$114,383,000 was made for the year ended 30 September 2012.
The Group’s leasehold land of approximately HK$83,497,000 (2011: HK$87,408,000)
represent payments for land use rights in the PRC.
The Group’s leasehold land of approximately HK$8,361,000 (2011: HK$8,608,000)
represent leasing a reservoir situated in the PRC from 石獅市鴻山鎮東園村村民委員會.
At 30 September 2012, the Group’s leasehold land, included certain leasehold land
of approximately HK$97,892,000 (2011: HK$40,232,000) for which the Group were in the
process of obtaining the relevant land use rights certificates. The directors do not foresee any
major obstacles to complete the transfer of the legal title of the above-mentioned land use
rights to the Group.
I – 50
APPENDIX I
16.
FINANCIAL INFORMATION OF THE GROUP
Investment properties
HK$’000
At 1 October 2010
Fair value change on investment properties
Exchange differences
44,872
3,290
3,444
At 30 September 2011 and 1 October 2011
Disposals
Exchange differences
51,606
(51,868)
262
At 30 September 2012
–
At 30 September 2012, the Group’s investment properties included certain buildings of
approximately HK$Nil (2011: HK$12,721,000) for which the Group were in the process of
obtaining the relevant building ownership certificates.
The Group’s investment properties were revalued at 30 September 2011 on the open
market value basis by BMI Appraisals Limited, an independent firm of professional valuers.
The Group’s investment properties were located outside Hong Kong with mediumterm leases.
Property leasing revenue includes gross rental income from investment properties of
approximately HK$2,301,000 (2011: HK$2,892,000).
Pursuant to the Sale and Purchase Agreement dated 10 January 2012, the Group’s
investment properties were sold to an independent third party at a consideration of RMB3
million (equivalent to approximately HK$3.6 million) with reference to the valuation report
issued by a PRC Valuer on 11 December 2011. The consideration had been fully settled in
cash on the date of completion. Based on the net book value of the investment properties of
approximately HK$51.8 million at the date of disposal, loss on disposal of the investment
properties of HK$48.2 million is recorded in profit or loss.
I – 51
APPENDIX I
17.
FINANCIAL INFORMATION OF THE GROUP
Intangible assets
Technical
know-how
HK$’000
Goodwill
HK$’000
(Note)
Total
HK$’000
Cost
At 1 October 2010
Disposal of subsidiaries
Exchange differences
11,360
–
842
33,015
(30,133)
–
44,375
(30,133)
842
At 30 September 2011 and
1 October 2011
Exchange differences
12,202
87
2,882
–
15,084
87
At 30 September 2012
12,289
2,882
15,171
At 1 October 2010
Charge for the year
Exchange differences
6,019
1,175
492
–
–
–
6,019
1,175
492
At 30 September 2011 and
1 October 2011
Charge for the year
Exchange differences
7,686
1,226
58
–
–
–
7,686
1,226
58
At 30 September 2012
8,970
–
8,970
At 30 September 2012
3,319
2,882
6,201
At 30 September 2011
4,516
2,882
7,398
Accumulated amortisation
Carrying amount
I – 52
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Note:
Goodwill acquired in a business combination is allocated, at acquisition, to the cash-generating units
(“CGUs”) that are expected to benefit from that business combination. Before recognition of impairment
losses, the carrying amount of goodwill had been allocated as follows:
2012
2011
HK$’000
HK$’000
2,882
2,882
2012
HK$’000
2011
HK$’000
1,290
1,281
Provision of fabric processing services:
United Glory Development Limited
18.
Available-for-sale financial assets
Unlisted equity securities, at cost
Unlisted equity securities with carrying amount of HK$1,290,000 (2011:
HK$1,281,000) were carried at cost as they do not have a quoted market price in an active
market and whose fair value cannot be reliably measured.
19.
Deposits paid for acquisition of long-term assets
HK$’000
At 1 October 2010
Exchange differences
63,534
4,698
At 30 September 2011 and 1 October 2011
Transfer to property, plant and equipment
Exchange differences
At 30 September 2012
68,232
(68,579)
347
–
I – 53
APPENDIX I
20.
FINANCIAL INFORMATION OF THE GROUP
Other receivable and prepayment
Other receivable
Lease prepayment
21.
2012
HK$’000
2011
HK$’000
53,200
14,720
53,200
–
67,920
53,200
(i)
The Group’s other receivable represented the remaining unsettled consideration
for the disposal of its two subsidiaries, Elite League Investment Limited
(“Elite”) and its subsidiary, Lingfeng Dyeing & Wearing Co., Ltd. Shishi City
(“Lingfeng”) on 1 September 2011. The other long-term receivable is secured
by 50% equity interest of Elite, repayable in 3 years and charged at a fixed
interest rate of 1.75% per annum.
(ii)
Lease prepayment represented approximately HK$22,399,000 of total lease
charge paid for a land located in the PRC for production purpose up to August
2015, of which the current portion of approximately HK$7,680,000 was
classified as current assets under prepayments, deposits and other receivable.
Inventories
Consumables
Raw materials
Work in progress
Finished goods
I – 54
2012
HK$’000
2011
HK$’000
30,849
17,378
3,178
11,717
30,502
15,606
2,027
8,073
63,122
56,208
APPENDIX I
22.
FINANCIAL INFORMATION OF THE GROUP
Trade receivables
The Group normally allows credit terms to well-established customers ranging from
30 to 120 days. The Group seeks to maintain strict control over its outstanding receivables.
Overdue balances are reviewed regularly by the directors.
An aging analysis of trade receivables as at the end of reporting period, based on the
date of recognition of the service income or goods sold, is as follows:
0 – 30 days
31 – 60 days
61 – 90 days
Over 90 days
2012
HK$’000
2011
HK$’000
50,076
39,191
35,522
29,899
51,146
42,507
35,401
23,093
154,688
152,147
As of 30 September 2012, trade receivables of approximately HK$8,780,000 (2011:
HK$6,943,000) were past due but not impaired. These relate to a number of independent
customers for whom there is no recent history of default. The aging analysis of these trade
receivables is as follows:
0 – 30 days
31 – 60 days
61 – 90 days
Over 90 days
I – 55
2012
HK$’000
2011
HK$’000
4,959
1,150
964
1,707
4,473
1,131
607
732
8,780
6,943
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The carrying amounts of the Group’s trade receivables are denominated in the
following currencies:
USD
RMB
23.
2012
HK$’000
2011
HK$’000
53,588
101,100
60,916
91,231
154,688
152,147
Bank and cash balances
At 30 September 2012, the bank and cash balances of the Group denominated in RMB
amounted to approximately HK$260 million (2011: HK$357 million). Conversion of RMB
into foreign currencies is subject to the PRC’s Foreign Exchange Control Regulations and
Administration of Settlement, Sale and Payment of Foreign Exchange Regulations.
24.
Trade payables
The Group normally obtains credit terms ranging from 30 to 90 days from its
suppliers.
An aging analysis of the trade payables as at the end of reporting period, based on the
date of receipt of consumables or goods purchased, is as follows:
0 – 30 days
31 – 60 days
61 – 90 days
Over 90 days
I – 56
2012
HK$’000
2011
HK$’000
14,649
9,981
5,212
627
13,645
6,549
6,231
3,818
30,469
30,243
APPENDIX I
25.
FINANCIAL INFORMATION OF THE GROUP
Interest-bearing borrowings
Unsecured bank loans repayable
within one year
2012
HK$’000
2011
HK$’000
–
48,000
At 30 September 2011, according to the terms of unsecured bank loans, Mr. Cai
Zhenrong, Mr. Cai Zhenyao and Mr. Cai Yangbo should own in aggregate, either directly or
indirectly, at least 20% of the total issued share capital of the Company, and remain as the
majority shareholders of the Company during the term of the banking facility. The Group
was also required to comply with certain financial covenants throughout the term life of the
facilities.
The bank loan was fully repaid during the year ended 30 September 2012.
26.
Convertible bonds
On 9 October 2009, the Company and Tanrich Capital Limited (the “Placing Agent”)
entered into a placing agreement in relation to the placing of convertible bonds (the “Placing
Agreement”). Pursuant to the Placing Agreement, the Company issued the three-year 1%
coupon convertible bonds (the “Convertible Bonds”) up to an aggregate principal amount
of HK$150 million. Based upon the initial conversion price of HK$0.28 per conversion
share, a total of 535,714,277 shares (with an aggregate nominal value of approximately
HK$5,357,000) would be allotted and issued upon the exercise of all the conversion rights
attached to the Convertible Bonds.
The placing of the Convertible Bonds in the principal amount of HK$60,000,000 (the
“First Tranche Bonds”) under the Placing Agreement was completed on 11 February 2010.
Based on the conversion price of HK$0.28, a maximum number of 214,285,710 conversion
shares would be allotted and issued upon exercise of the conversion rights attached to the
First Tranche Bonds in full.
The placing of the Convertible Bonds in the principal amount of HK$90,000,000 (the
“Last Tranche Bonds”) under the Placing Agreement was completed on 20 April 2010. Based
on the conversion price of HK$0.28, a maximum number of 321,428,567 conversion shares
would be allotted and issued upon exercise of the conversion rights attached to the Last
Tranche Bonds in full.
I – 57
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Any outstanding amount of the Convertible Bonds can be converted at any time after
the date of issue of the Convertible Bonds at a conversion price of HK$0.28.
Modification of terms
On 10 April 2012, a supplemental deed poll was executed by the Company.
Details of the modification of the First Tranche Bonds and the Last Tranche Bonds
(the “modified Convertible Bonds”) are set out as follows:–
(i)
conversion price was reduced from HK$0.28 to HK$0.18;
(ii)
coupon rate was reduced to 0% per annum; and
(iii)
the final maturity date was extended to 11 February 2016.
The modification resulted in the extinguishment of the financial liability of
First Tranche Bonds and Last Tranche Bonds and the recognition of its new financial
liability and equity components. The fair value of the new liability immediately
following the modification was approximately HK$120,423,000. The financial
liability was determined using an effective interest rate of 5.90%.
As a result of the modification, a loss of approximately HK$1,943,000 was
recognised during the year ended 30 September 2012, which represented the amount
by which the fair value of the original liability component exceeded the carrying
amount of the original liability component derecognised at the date of modification.
I – 58
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The proceeds received from the issue of the Convertible Bonds have been split into the
liability component and equity component as follows:
First Tranche
Bonds
HK$’000
Liability component
at 30 September 2010
Interest expense
Imputed interest
Interest paid
Liability component
at 30 September 2011
Interest expense before
modification
Imputed interest before
modification
Interest paid before modification
Transfer of unpaid interest to
other payables upon modification
Derecognition of original liability
component
Recognition of new liability
component upon modification
Imputed interest after modification
Liability component
at 30 September 2012
I – 59
Last Tranche
Bonds
HK$’000
Total
HK$’000
51,583
600
3,492
(600)
77,387
900
4,819
(853)
128,970
1,500
8,311
(1,453)
55,075
82,253
137,328
355
533
888
2,202
(301)
3,026
(451)
5,228
(752)
(355)
(533)
(888)
(56,976)
(84,828)
(141,804)
48,169
1,160
72,254
1,740
120,423
2,900
49,329
73,994
123,323
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
First Tranche
Bonds
HK$’000
Last Tranche
Bonds
HK$’000
Total
HK$’000
9,286
12,759
22,045
Equity component
at the date of issue
Transaction cost related
to equity component
(279)
Equity component
at 30 September 2011
Derecognition of original equity
component upon modification
Recognition of new equity
component upon modification
Equity component
at 30 September 2012
(383)
(662)
9,007
12,376
21,383
(9,007)
(12,376)
(21,383)
9,331
13,995
23,326
9,331
13,995
23,326
The interest charged of First Tranche Bonds for the year before modification is
calculated by applying an effective interest rate of 7.847% per annum to the liability
component.
The interest charged of Last Tranche Bonds for the year before modification is
calculated by applying an effective interest rate of 7.317% per annum to the liability
component.
The Interest charged of the modified Convertible Bonds for the year is calculated by
applying an effective interest rate of 5.90% per annum to the liability component.
The directors estimate the fair value of the liability component of the modified
Convertible Bonds at 30 September 2012 to be approximately HK$126,354,000 (2011:
HK$141,957,000). This fair value has been calculated by discounting the future cash flows at
the market rate.
I – 60
APPENDIX I
27.
FINANCIAL INFORMATION OF THE GROUP
Deferred tax liabilities
(a)
The following are the major deferred tax liabilities/(assets) recognised by the
Group:
Decelerated
tax
depreciation
HK$’000
Revaluation
of buildings
HK$’000
Investment
properties
HK$’000
Total
HK$’000
(5,336)
–
24,657
5,920
5,946
–
25,267
5,920
(1,199)
–
1,097
(102)
425
(459)
(7,870)
1,842
–
482
(7,445)
1,865
(6,569)
–
24,549
1,511
7,525
–
25,505
1,511
5,772
–
(7,562)
(1,790)
782
15
(2,341)
126
–
37
(1,559)
178
–
23,845
–
23,845
At 1 October 2011
Charge to equity for the year
(Credit)/charge to profit or loss
for the year (note 11)
Disposal of subsidiaries
(note 34(b))
Exchange differences
At 30 September 2011
Charge to equity for the year
Charge/(credit) to profit or loss
for the year (note 11)
Disposal of subsidiaries
(note 34(a))
Exchange differences
At 30 September 2012
(b)
At the end of reporting period, the aggregate amount of temporary differences
associated with undistributed earnings of subsidiaries for which deferred tax
liabilities have not been recognised is HK$5,681,000 (2011: HK$5,018,000).
No liability has been recognised in respect of these differences because the
Group is in a position to control the timing of reversal of the temporary
differences and it is probable that such differences will not reverse in the
foreseeable future.
I – 61
APPENDIX I
28.
FINANCIAL INFORMATION OF THE GROUP
Share capital
Authorised:
10,000,000,000 ordinary shares of
HK$0.01 each
Issued and fully paid:
1,446,838,580 (2011: 1,446,838,580)
ordinary shares of HK$0.01 each
2012
HK$’000
2011
HK$’000
100,000
100,000
14,468
14,468
There are no movements for the issued share capital of the Company during the years
ended 30 September 2011 and 2012.
The Group’s objectives when managing capital are to safeguard the Group’s ability
to continue as a going concern and to maximise the return to the shareholders through the
optimisation of the debt and equity balance.
The Group sets the amount of capital in proportion to risk. The Group manages the
capital structure and makes adjustments to it in the light of changes in economic conditions
and the risk characteristics of the underlying assets.
The Group monitors capital on the basis of the debt-to-adjusted capital ratio. This
ratio is calculated as net debt divided by adjusted capital. Net debt is calculated as total debts
less cash and cash equivalents. Adjusted capital comprises all components of equity (i.e.
share capital, share premium, retained profits and other reserves).
It is the Group’s strategy to keep the net debt-to-adjusted capital ratio as low as
feasible. In order to maintain or adjust the capital structure, the Group may adjust the
payment of dividends, issue new shares, buy-back shares, raise new debts, redeem existing
debts or sell assets to reduce debts.
The only externally imposed capital requirement is that for the Company to maintain
its listing on the Stock Exchange it has to have a public float of at least 25% of the shares.
I – 62
APPENDIX I
29.
FINANCIAL INFORMATION OF THE GROUP
Warrants
On 21 January 2010, the Company and the Placing Agent entered into a placing
agreement pursuant to which the Placing Agent agreed to place, on a best effort basis, up
to 247,900,000 warrants (the “Warrants”). The issue price per warrant is HK$0.01 and the
subscription price is HK$0.385. Upon the exercise of the subscription rights attaching to the
Warrants in full, a maximum of 247,900,000 new shares will be issued and allotted.
The Warrants were placed on 17 March 2010 and the subscription period is from
the date of issue of the Warrants to the expiry of the second anniversary of the issue of the
Warrants. The proceeds from the placing of the Warrants were HK$2,149,000, net of issuance
expenses. During the year ended 30 September 2011, no warrants were exercised. During the
year ended 30 September 2012, all unexercised warrants were lapsed.
30.
Share-based payments
Equity-settled share option schemes
On 24 February 2012, the Company has passed the resolutions in a
shareholders’ meeting for the termination of the share option scheme adopted on 30
August 2002 (the “Terminated Scheme”) and the adoption of an new share option
scheme (the “New Scheme”). Outstanding share options granted under the Terminated
Scheme prior to such termination shall continue to be valid and, subject to the vesting
schedule, exercisable in accordance with the Terminated Scheme.
The Company operates the share option schemes (the “Schemes”) for the
purpose of providing incentives and rewards to eligible participants who contribute
to the success of the Group’s operations. Eligible participants include the Company’s
directors (including independent non-executive directors), employees of the Group,
suppliers of goods or services, customers, persons or entities providing research,
development or other technological support to the Group, and any non-controlling
shareholders in the Company’s subsidiaries. The Schemes, unless otherwise cancelled
or amended, will remain in force for 10 years from that date.
I – 63
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The maximum number of unexercised share options currently permitted to be
granted under the Schemes is an amount equivalent, upon their exercise, to 10% of the
shares of the Company in issue at any time. The maximum number of shares issuable
under share options to each eligible participant in the Schemes within any 12-month
period, is limited to 1% of the shares of the Company in issue at any time. Any further
grant of share options in excess of this limit is subject to shareholders’ approval in a
general meeting.
Share options granted to a director, chief executive or substantial shareholder
of the Company, or to any of their associates, are subject to approval in advance by
the independent non-executive directors. In addition, any share options granted to a
substantial shareholder or an independent non-executive director of the Company, or
to any of their associates, in excess of 0.1% of the shares of the Company in issue at
any time or with an aggregate value (based on the price of the Company’s shares at the
date of the grant) in excess of HK$5 million, within any 12-month period, are subject
to shareholders’ approval in advance in a general meeting.
The offer of a grant of share options may be accepted within 21 days from
the date of the offer, upon payment of a nominal consideration of HK$1 in total by
the grantee. The exercise period of the share options granted is determinable by the
directors, and commences after a certain vesting period and ends on a date which is
not later than 10 years from the date of the grant of the share options or the expiry
date of the Schemes, if earlier.
The exercise price of the share options is determinable by the directors, but
may not be less than the higher of (i) the closing price of the Company’s shares as
stated in the Stock Exchange’s daily quotation sheet on the date of the offer of grant,
which must be a trading day; (ii) the average closing price of the Company’s shares
as stated in the Stock Exchange’s daily quotation sheets for the five trading days
immediately preceding the date of the offer of the grant; and (iii) the nominal value of
the Company’s shares on the date of the offer of the grant.
I – 64
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Details of the specific category of options are as follows:
Category of
options
Date of grant
Vesting date
Exercise period
Exercise
price
HK$
Option 2008
5 December 2008
5 December 2008
5 December 2008 to
4 December 2011
0.125
Option 2009
11 May 2009
11 May 2009
11 May 2009 to
10 May 2014
0.255
Option 2010
1 March 2010
1 March 2010
1 March 2010 to
28 February 2015
0.520
Option 2011
4 April 2011
4 April 2011
4 April 2011 to
3 April 2016
0.400
If the options remain unexercised after an exercise period from the date of
grant, the options expire. Options are forfeited if the employee leaves the Group
before the options vest.
Details of the share options outstanding during the year are as follows:
2012
2011
Number of
share
options
Weighted
average
exercise
price
HK$
Number of
share
options
Weighted
average
exercise
price
HK$
Outstanding at the beginning of
the year
Granted during the year
Lapsed during the year
397,660,000
–
(35,400,000)
0.359
N/A
0.125
253,060,000
144,600,000
–
0.335
0.400
N/A
Outstanding at the end of the year
362,260,000
0.381
397,660,000
0.359
Exercisable at the end of the year
362,260,000
0.381
397,660,000
0.359
I – 65
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The options outstanding at the end of the year have a weighted average
remaining contractual life of 2.58 years (2011: 3.27 years) and the exercise prices
range from HK$0.255 to HK$0.520 (2011: HK$0.125 to HK$0.520).In 2011, options
were granted on 4 April 2011. The estimated fair value of the option granted on 4
April 2011 is approximately HK$22,116,000.
These fair values were calculated using the Binomial Model. The inputs into the
model were as follows:
Option 2011
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
Expected dividend yield
HK$0.40
HK$0.40
75%
5 years
1.88%
0%
Expected volatility was determined by calculating the historical volatility of
the Company’s share price over the previous 5 years for Option 2011. The expected
life used in the model has been adjusted, based on the Group’s best estimate, for the
effects of non transferability, exercise restrictions and behavioral considerations.
In 2011, certain share options granted to those persons that provide the nature
of business development to the Group were incentives for helping the Group expand
its business network, acquire and explore new business projects and opportunities. The
fair value of such benefit could not be estimated reliably and as a result, the fair value
is measured by reference to the fair value of share options granted.
I – 66
APPENDIX I
31.
FINANCIAL INFORMATION OF THE GROUP
Statement of Financial Position of the Company
2012
HK$’000
2011
HK$’000
133,900
1,417,168
430
(629,151)
(123,323)
(3,325)
133,900
1,418,993
895
(618,105)
(137,328)
(2,248)
795,699
796,107
Share capital
Reserves
14,468
781,231
14,468
781,639
TOTAL EQUITY
795,699
796,107
Investments in subsidiaries
Due from subsidiaries (note)
Other current assets
Due to subsidiaries (note)
Convertible bonds
Other current liabilities
NET ASSETS
Capital and reserves
Note:
The amounts due from/(to) subsidiaries are unsecured, interest free and repayable on demand.
I – 67
APPENDIX I
32.
FINANCIAL INFORMATION OF THE GROUP
Reserves
(a)
Group
The amounts of the Group’s reserves and movements therein are presented in
the consolidated statement of comprehensive income and consolidated statement of
changes in equity.
(b)
Company
At 1 October 2010
Total comprehensive loss
for the year
Recognition of share-based
payments
At 30 September 2011 and
1 October 2011
Total comprehensive loss
for the year
Derecognition of original
equity component of
convertible bonds (Note 26)
Recognition of new equity
component upon
modification of
convertible bonds (Note 26)
Lapsed of share options
granted in prior years
Lapsed of warrants issued in
prior years
At 30 September 2012
Share
premium
HK$’000
(note 32
(c)(i))
Warrants
reserve
HK$’000
(note 29)
Share-based
payment
reserve
HK$’000
(note 32
(c)(iii))
Convertible
bonds
reserve
HK$’000
(note 26)
Retained
profits
HK$’000
Total
HK$’000
633,071
2,149
28,057
21,383
115,854
800,514
–
–
–
–
(40,991)
(40,991)
–
–
22,116
–
–
22,116
633,071
2,149
50,173
21,383
74,863
781,639
–
–
–
–
(23,734)
(23,734)
–
–
–
(21,383)
21,383
–
–
–
–
23,326
–
23,326
–
–
(1,618)
–
1,618
–
–
(2,149)
–
–
2,149
–
633,071
–
48,555
23,326
76,279
781,231
Loss attributable to owners of the Company included a loss of approximately
HK$23,734,000 (2011: approximately HK$40,991,000) which has been dealt with in
the financial statements of the Company.
I – 68
APPENDIX I
(c)
FINANCIAL INFORMATION OF THE GROUP
Nature and purpose of reserves
(i)
Share premium
The share premium account of the Company includes: (i) the premium
arising from the new issue of shares; and (ii) the difference between the then
combined net asset value of the subsidiaries acquired pursuant to the Group
Reorganisation, over the nominal value of the share capital of the Company
issued in exchange therefor.
In accordance with the Companies Law of the Cayman Islands, the share
premium account is distributable to the shareholders of the Company provided
that immediately following the date on which the dividend is proposed to be
distributed, the Company will be in a position to pay off its debts as and when
they fall due in the ordinary course of business. The share premium account
may also be distributed in the form of fully paid bonus shares.
(ii)
Properties revaluation reserve
The properties revaluation reserve has been set up and are dealt with in
accordance with the accounting policies adopted for buildings in note 3(d) to
the consolidated financial statements.
(iii)
Share-based payment reserve
The share-based payment reserve of the Company and the Group arise on
the grant of share options to the directors and employees under the Schemes.
Further information about share-based payments to the directors and employees
was set out in note 30 to the consolidated financial statements. The fair value
of the actual or estimated number of unexercised share options granted to
the directors and employees of the Company recognised in accordance with
the accounting policy adopted for share-based payments in note 3(p) to the
consolidated financial statements.
(iv)
Translation reserve
The translation reserve comprises all foreign exchange differences
arising from the translation of the financial statements of foreign operations.
The reserve is dealt with in accordance with the accounting policies set out in
note 3(c) to the consolidated financial statements.
I – 69
APPENDIX I
33.
FINANCIAL INFORMATION OF THE GROUP
Principal subsidiaries
Particulars of the principal subsidiaries as at 30 September 2012 are as follows:
Name
Place of
incorporation/
registration and
operation
Issued and
paid-up capital
Percentage of
ownership
interest/
voting power/
profit sharing
Principal activities
Directly held
Treasure Wealth Assets
Limited
British Virgin Islands
600 ordinary shares of
US$1 each
100%
Investment holding
Huafeng Knitting Co., Ltd.
Shishi City, Fujian#
PRC
Registered capital and
paid-up capital of
RMB105,000,000
100%
Provision of fabric
processing services,
manufacture and sale of
fabrics
Powerful China Development
Limited
Hong Kong
100 ordinary shares of
HK$1 each
100%
Provision of
administrative services
to group companies
Huafeng Trading Macao
Commercial Offshore Limited
Macau
MOP100,000
100%
Provision of fabric
processing services
Fujian Fenghua Textile
Co., Ltd.#
PRC
Registered capital and
paid-up capital of
US$25,000,000
100%
Manufacture and sale of
yarns
Shishi Huarun Knitting &
Dyeing Co., Ltd.#
PRC
Registered capital and
paid-up capital of
HK$55,000,000
100%
Provision of fabric
processing services
Jiangxi Fenghua Textile
Co., Ltd.#
PRC
Registered capital and
paid-up capital of
US$10,000,000
100%
Manufacture and sale of
blankets
Indirectly held
The above list contains the particulars of subsidiaries, in the opinion of the directors,
principally affected the results, assets or liabilities of the Group. To give details of other
subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
#
Wholly-owned foreign enterprises established in the PRC.
I – 70
APPENDIX I
34.
FINANCIAL INFORMATION OF THE GROUP
Disposals of subsidiaries
(a)
On 28 February 2012, the Group disposed of its two subsidiaries, Wealth Key
Investments Ltd. and its subsidiary, Huafeng Textile (Lianyungang) Co., Ltd..
Net assets at the date of disposal were as follows:
HK$’000
Property, plant and equipment
Bank and cash balances
Trade payables
Other payables and accruals
Deferred tax liabilities
13,003
230
(62)
(145)
(1,559)
Net assets disposed of
Release of foreign currency translation reserve
Direct cost to the disposal
Loss on disposal of subsidiaries
11,467
(5,631)
50
(2,386)
Total consideration – satisfied by cash
3,500
Net cash inflow arising on disposal:
Cash consideration received
Cash paid for direct cost
Cash and cash equivalents disposed of
3,500
(50)
(230)
3,220
I – 71
APPENDIX I
(b)
FINANCIAL INFORMATION OF THE GROUP
On 1 September 2011, the Group disposed of its two subsidiaries, Elite and its
subsidiary, Lingfeng.
Net liabilities at the date of disposal were as follows:
HK$’000
Property, plant and equipment
Available-for-sale financial assets
Inventories
Trade receivables
Prepayments, deposits and other receivables
Bank and cash balances
Trade payables
Other payables and accruals
Amount due to the Group
Short term bank loans
Current tax liabilities
Deferred tax liabilities
310,496
3,300
2,998
58,004
8,929
2,860
(7,168)
(82,870)
(158,330)
(54,900)
(1,140)
(7,445)
Net assets disposed of
Release of foreign currency translation reserve
Direct cost to the disposal
Goodwill retained
Waiver of receivables from Elite and Lingfeng
Loss on disposal of subsidiaries
74,734
(20,215)
373
30,133
158,330
(140,155)
Total consideration – satisfied by cash
Net cash inflow arising on disposal:
Cash consideration received
Cash paid for direct cost
Cash and cash equivalents disposed of
103,200
50,000
(373)
(2,860)
46,767
I – 72
APPENDIX I
35.
FINANCIAL INFORMATION OF THE GROUP
Major non-cash transactions
During the year ended 30 September 2012, the Group disposed of its investment
properties. According to the agreement, the Group does not need to refund to the buyer
the rental deposits received in advance from the tenants in the previous financial period
amounted to approximately HK$1,534,000 (2011: HK$Nil). The Group recognised such
amount in profit or loss at the date of disposal.
Included in the addition of property, plant and equipment was an amount of
approximately HK$Nil (2011: HK$470,000) which was acquired through disposal of another
property, plant and equipment as part of the consideration.
36.
Contingent liabilities
Financial guarantees issued
At the end of the reporting period, the Group has issued a guarantee of
approximately HK$Nil (2011: HK$12,200,000 jointly with an executive director of the
Company and two independent third parties to a bank in respect of a banking facility
granted to a former subsidiary.
At the end of the reporting period, the directors do not consider it probable that
a claim will be made against the Group under the above guarantee. The maximum
liability of the Group at the end of the reporting period under the guarantee is
the outstanding amount of the bank loan to the former subsidiary at that date of
approximately HK$Nil (2011: HK$12,200,000).
The fair value of the guarantee at date of inception is not material and is not
recognised in the consolidated financial statements.
I – 73
APPENDIX I
37.
FINANCIAL INFORMATION OF THE GROUP
Commitments
(a)
Operating lease commitments
(i)
As lessee
At the end of reporting period, the Group had total future minimum
lease payments under non-cancellable operating leases for leasehold land and
buildings are payable as follows:
Within one year
In the second to fifth years,
inclusive
2012
2011
HK$’000
HK$’000
1,434
1,444
1,267
1,406
2,701
2,850
Operating lease payments represent rentals payable by the Group for
certain of its offices, factory and warehouse. Leases are negotiated for terms
ranging from 2 to 3 years (2011: 2 to 3 years) and rentals are fixed over the
lease terms and do not include contingent rentals.
(ii)
As lessor
At the end of reporting period, the Group had total future minimum lease
payments under non-cancellable operating leases receivable as follows:
Within one year
In the second to fifth years,
inclusive
I – 74
2012
HK$’000
2011
HK$’000
–
763
–
2,289
–
3,052
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
The Group leases out investment properties under operating leases.
At 30 September 2011, the leases typically run for an initial period of 2 to 5
years. None of the leases include contingent rentals. At 30 September 2012, the
Group did not lease out investment properties as the investment properties were
disposed during the year.
(b)
Capital commitments
At the end of reporting period, the Group had the following capital
commitments:
Contracted but not provided for:
Construction of buildings
Purchase of plant and machinery
Purchase of a parcel of land
(c)
2012
HK$’000
2011
HK$’000
2,012
141
1,317
4,781
7,601
1,308
3,470
13,690
Other commitments
At the end of the reporting period, the Group had outstanding commitment in
respect of purchase of raw materials amounting to HK$Nil (2011: HK$18,910,000).
38.
Related party transactions
During the year, the key management personnel compensation paid by the Group was
disclosed in note 9 to the consolidated financial statements.
39.
Approval of financial statements
The financial statements were approved and authorised for issue by the Board of
Directors on 17 December 2012.
40.
Ultimate controlling party
At 30 September 2012, the directors consider the ultimate controlling party of the
Group to be Mr. Cai Zhenrong, the major shareholder of the Company.
I – 75
APPENDIX I
3.
FINANCIAL INFORMATION OF THE GROUP
UNAUDITED FINANCIAL STATEMENTS
The following is the unaudited financial statements of the Group for the six months ended
31 March 2013 together with accompanying notes as extracted from the Company’s 2013 interim
report.
CONDENSED CONSOLIDATED INCOME STATEMENT
For the six months ended 31 March 2013
Six months ended 31 March
2013
2012
HK$’000
HK$’000
Note
3
REVENUE
Cost of services provided and cost of sales
GROSS PROFIT
4
Other income
Selling and distribution expenses
Administrative expenses
Other operating expenses
(LOSS)/PROFIT FROM OPERATIONS
Finance costs
5
Loss on disposal of investment properties
Loss on disposal of subsidiaries
15
LOSS BEFORE TAX
(unaudited)
(unaudited)
223,750
254,645
(200,630)
(213,293)
23,120
41,352
3,356
(10,962)
(23,696)
(78)
2,887
(10,403)
(20,751)
–
(8,260)
13,085
(4,954)
–
–
(6,526)
(46,656)
(2,386)
(13,214)
(42,483)
Income tax (expense)/credit
6
(534)
LOSS FOR THE PERIOD
ATTRIBUTABLE TO OWNERS
OF THE COMPANY
7
(13,748)
LOSS PER SHARE
9
Basic
Diluted
I – 76
6,432
(36,051)
HK(0.9) cents
HK(2.5) cents
N/A
N/A
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 31 March 2013
Six months ended 31 March
2013
2012
HK$’000
HK$’000
Note
LOSS FOR THE PERIOD
(unaudited)
(13,748)
Other comprehensive income:
Exchange differences on translating
foreign operations
Exchange differences reclassified to profit
or loss upon disposal of subsidiaries
OTHER COMPREHENSIVE
(LOSS)/INCOME FOR THE
PERIOD, NET OF TAX
(825)
15
–
(825)
TOTAL COMPREHENSIVE LOSS
FOR THE PERIOD ATTRIBUTABLE
TO OWNERS OF THE COMPANY
I – 77
(14,573)
(unaudited)
(36,051)
9,296
(5,631)
3,665
(32,386)
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 March 2013
Notes
31 March
2013
HK$’000
30 September
2012
HK$’000
(unaudited)
(audited)
932,112
5,590
1,292
957,971
6,201
1,290
10,357
64,090
–
67,920
1,013,441
1,033,382
NON-CURRENT ASSETS
10
Property, plant and equipment
Intangible assets
Available-for-sale financial assets
Deposits paid for acquisition for property,
plant and equipment
Other receivable and prepayment
CURRENT ASSETS
Inventories
Trade receivables
11
Prepayments, deposits and other receivables
Fixed bank deposits
Bank and cash balances
57,174
63,122
144,164
56,834
155,262
398,685
154,688
60,195
155,262
261,004
812,119
694,271
23,703
239,523
13,608
30,469
223,878
13,971
276,834
268,318
535,285
425,953
1,548,726
1,459,335
CURRENT LIABILITIES
12
Trade payables
Other payables and accruals
Current tax liabilities
NET CURRENT ASSETS
TOTAL ASSETS LESS
CURRENT LIABILITIES
I – 78
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
31 March
2013
30 September
2012
HK$’000
(unaudited)
HK$’000
(audited)
110,023
95,493
23,882
123,323
–
23,845
5,000
–
234,398
147,168
1,314,328
1,312,167
Share capital
Reserves
15,579
1,298,749
14,468
1,297,699
TOTAL EQUITY
1,314,328
1,312,167
Notes
NON-CURRENT LIABILITIES
13
14
Convertible bonds
Debentures
Deferred tax liabilities
Deposit received for subscription of
debenture
NET ASSETS
CAPITAL AND RESERVES
I – 79
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the six months ended 31 March 2013
(Unaudited)
Attributable to owners of the Company
At 1 October 2011
Warrants
reserve
HK$’000
Sharebased
payment
reserve
HK$’000
Convertible
bonds
reserve
HK$’000
Translation
reserve
HK$’000
Retained
profits
HK$’000
Total
equity
HK$’000
Share
capital
HK$’000
Share
premium
HK$’000
Properties
revaluation
reserve
HK$’000
14,468
500,524
62,897
2,149
50,173
21,383
226,527
593,704
1,471,825
Total comprehensive loss for the period
Lapse of share options granted in
prior years
Lapse of warrants issued in prior years
Disposal of subsidiaries
–
–
–
–
–
–
3,665
(36,051)
(32,386)
–
–
–
–
–
–
–
–
(5,521)
–
(2,149)
–
(1,618)
–
–
–
–
–
–
–
–
1,618
2,149
5,521
–
–
–
Changes in equity for the period
–
–
(5,521)
(2,149)
(1,618)
–
3,665
(26,763)
(32,386)
At 31 March 2012
14,468
500,524
57,376
–
48,555
21,383
230,192
566,941
1,439,439
At 1 October 2012
14,468
500,524
61,903
–
48,555
23,326
229,789
433,602
1,312,167
Conversion of convertible bonds
Total comprehensive loss for the period
1,111
–
18,732
–
–
–
–
–
–
–
(3,109)
–
–
(825)
–
(13,748)
16,734
(14,573)
Changes in equity for the period
1,111
18,732
–
–
–
(3,109)
(825)
(13,748)
2,161
15,579
519,256
61,903
–
48,555
20,217
228,964
419,854
1,314,328
At 31 March 2013
I – 80
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended 31 March 2013
Six months ended 31 March
2013
2012
HK$’000
HK$’000
Note
NET CASH GENERATED FROM
OPERATING ACTIVITIES
Purchases of property, plan and equipment
Interest received
Proceeds from disposal of
investment properties
Disposal of subsidiaries
Increase in fixed bank deposits
NET CASH USED IN
INVESTING ACTIVITIES
15
(unaudited)
(unaudited)
44,906
68,279
(5,936)
495
(20,914)
803
–
3,679
–
–
3,220
(361)
(5,441)
Net proceeds from issue of debentures
Increase in deposit received for
subscription of debenture
Repayment of bank loans
Finance costs paid
94,940
(13,573)
–
5,000
–
–
–
(24,000)
(1,398)
99,940
(25,398)
NET INCREASE IN CASH AND
CASH EQUIVALENTS
139,405
29,308
CASH AND CASH EQUIVALENTS
AT BEGINNING OF THE PERIOD
261,004
357,432
NET CASH GENERATED FROM/
(USED IN) FINANCING ACTIVITIES
EFFECT OF FOREIGN EXCHANGE
RATE CHANGES
(1,724)
2,406
CASH AND CASH EQUIVALENTS
AT END OF THE PERIOD,
REPRESENTED BY
Bank and cash balances
398,685
I – 81
389,146
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended 31 March 2013
1.
Basis of preparation
These condensed consolidated financial statements have been prepared in accordance
with International Accounting Standard 34 “Interim Financial Reporting” issued by the
International Accounting Standards Board and the applicable disclosures required by the
Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited.
These condensed consolidated financial statements should be read in conjunction with
the 2012 annual consolidated financial statements. The accounting policies and methods of
computation used in the preparation of these condensed consolidated financial statements are
consistent with those used in the annual consolidated financial statements for the year ended
30 September 2012.
These condensed consolidated financial statements have been prepared under the
historical cost convention, as modified by the revaluation of certain buildings which are
carried at their fair values.
2.
Adoption of new and revised international financial reporting standards
In the current period, the Group has adopted all the new and revised International
Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards
Board that are relevant to its operations and effective for its accounting period beginning on
1 October 2012. IFRSs comprise International Financial Reporting Standards; International
Accounting Standards (“IAS”); and Interpretations. The adoption of these new and revised
IFRSs did not result in significant changes to the Group’s accounting policies, presentation
of the Group’s condensed consolidated financial statements and amounts reported for the
current period and prior periods.
The Group has not applied the new IFRSs that have been issued but are not effective.
The Group has already commenced an assessment of the impact of these new IFRSs but is
not yet in a position to state whether these new IFRSs would have a material impact on its
results of operations and financial position.
I – 82
APPENDIX I
3.
FINANCIAL INFORMATION OF THE GROUP
Segment information
The Group has two reportable segments as follows:
–
Provision of fabric processing services and manufacture and sale of fabrics
–
Manufacture and sale of yarns and blankets
The Group’s reportable segments are strategic business units that offer different
products and services. They are managed separately because each business requires different
technology and marketing strategies.
The accounting policies of the operating segments are the same as those described
in the Group’s consolidated financial statements for the year ended 30 September 2012.
Segment profits or losses do not include unallocated other income, unallocated corporate
expenses, finance costs, loss on disposal of investment properties and loss on disposal of
subsidiaries. Segment assets do not include fixed bank deposits, bank and cash balances
and unallocated corporate assets. Segment liabilities do not include current tax liabilities,
deferred tax liabilities, convertible bonds, debentures and unallocated corporate liabilities.
Provision of fabric
processing services and
manufacture and
sale of fabrics
Six months ended
31 March
2013
2012
HK$’000
HK$’000
(unaudited)
(unaudited)
REVENUE
Revenue from external customers
Manufacture and sale of
yarns and blankets
Six months ended
31 March
2013
2012
HK$’000
HK$’000
(unaudited)
(unaudited)
Consolidated
Six months ended
31 March
2013
2012
HK$’000
HK$’000
(unaudited)
(unaudited)
184,586
213,269
39,164
41,376
223,750
254,645
14,952
31,509
(17,673)
(15,440)
(2,721)
16,069
Unallocated other income
Unallocated corporate expense
3,356
(8,895)
2,887
(5,871)
(Loss)/profit from operations
Finance costs
Loss on disposal of investment properties
Loss on disposal of subsidiaries
(8,260)
(4,954)
–
–
13,085
(6,526)
(46,656)
(2,386)
Loss before tax
Income tax (expense)/credit
(13,214)
(534)
(42,483)
6,432
Loss for the period
(13,748)
(36,051)
Segment profit/(loss)
I – 83
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Provision of fabric
processing services and
manufacture and
sale of fabrics
31 March 30 September
2013
2012
HK$’000
HK$’000
(unaudited)
(audited)
ASSETS
Segment assets
745,484
749,893
Manufacture and sale of
yarns and blankets
31 March 30 September
2013
2012
HK$’000
HK$’000
(unaudited)
(audited)
472,022
507,262
1,217,506
1,257,155
608,054
470,498
1,825,560
1,727,653
259,368
250,886
Unallocated liabilities
251,864
164,600
Consolidated total liabilities
511,232
415,486
Unallocated assets
Consolidated total assets
LIABILITIES
Segment liabilities
4.
Consolidated
31 March 30 September
2013
2012
HK$’000
HK$’000
(unaudited)
(audited)
193,552
185,968
65,816
64,918
Other income
Six months ended 31 March
2013
2012
HK$’000
HK$’000
Bank interest income
Government grants
Rental income
Subcontracting income
Others
I – 84
(unaudited)
(unaudited)
1,466
1,660
–
–
230
1,113
–
767
515
492
3,356
2,887
APPENDIX I
5.
FINANCIAL INFORMATION OF THE GROUP
Finance costs
Six months ended 31 March
2013
2012
HK$’000
HK$’000
Interest on bank loans and overdraft
Interest on convertible bonds
– Actual interest
– Imputed interest
Interest on debentures
Bank charges
Amortisation of issuing costs for debentures
6.
(unaudited)
(unaudited)
–
498
–
3,434
967
–
553
752
4,376
–
900
–
4,954
6,526
Income tax expense/(credit)
Six months ended 31 March
2013
2012
HK$’000
(unaudited)
Current tax – the People’s Republic of
China (the “PRC”) enterprise income tax
Deferred tax
HK$’000
(unaudited)
534
–
1,131
(7,563)
534
(6,432)
No provision for Hong Kong Profits Tax is required since the Group has no assessable
profit during the period (2012: HK$Nil).
Tax charge on profits assessable in the PRC had been calculated at the rates of tax
prevailing in the jurisdictions in which the Group operates, based on existing legislation,
interpretation and practices in respect thereof.
I – 85
APPENDIX I
7.
FINANCIAL INFORMATION OF THE GROUP
Loss for the period
The Group’s loss for the period is arrived at after charging:
Six months ended 31 March
2013
2012
Amortisation of technical know-how
Depreciation
Directors’ remuneration
Fees
Salaries, allowances and benefits in kind
Retirement benefit scheme contributions
8.
HK$’000
(unaudited)
HK$’000
(unaudited)
615
32,711
613
34,744
180
1,561
8
180
1,588
6
1,749
1,774
Dividends
No dividend has been paid or declared by the Company during the period (2012:
HK$Nil).
9.
Loss per share
The calculation of basic and diluted loss per share is based on the following:
Six months ended 31 March
2013
2012
HK$’000
HK$’000
(unaudited)
Loss
Loss for the purpose of calculating
basic loss per share
Number of shares
Weighted average number of ordinary shares
for the purpose of calculating basic loss
per share
(13,748)
1,491,099,873
(unaudited)
(36,051)
1,446,838,580
Diluted loss per share has not been disclosed as the effects of all potential ordinary
shares are anti-dilutive for the six months ended 31 March 2013 and 2012.
I – 86
APPENDIX I
10.
FINANCIAL INFORMATION OF THE GROUP
Property, plant and equipment
During the six months ended 31 March 2013, the Group acquired property, plant and
equipment of approximately HK$5,936,000 (2012: HK$20,914,000).
11.
Trade receivables
The Group normally allows credit terms to well-established customers ranging from
30 to 120 days. The Group seeks to maintain strict control over its outstanding receivables.
Overdue balances are reviewed regularly by the directors.
An aging analysis of trade receivables at the end of reporting period, based on the date
of recognition of the service income or goods sold, is as follows:
0 – 30 days
31 – 60 days
61 – 90 days
91 – 120 days
Over 120 days
12.
31 March
2013
HK$’000
(unaudited)
30 September
2012
HK$’000
(audited)
42,709
18,428
34,404
19,414
29,209
50,076
39,191
35,522
21,333
8,566
144,164
154,688
Trade payables
The Group normally obtains credit terms ranging from 30 to 90 days from its
suppliers.
An aging analysis of the trade payables at the end of reporting period, based on the
date of receipt of consumables or goods purchased, is as follows:
0 – 30 days
31 – 60 days
61 – 90 days
Over 90 days
I – 87
31 March
2013
HK$’000
(unaudited)
30 September
2012
HK$’000
(audited)
12,636
4,856
4,345
1,866
14,649
9,981
5,212
627
23,703
30,469
APPENDIX I
13.
FINANCIAL INFORMATION OF THE GROUP
Convertible bonds
On 9 October 2009, the Company and Tanrich Capital Limited (the “Placing Agent”)
entered into a placing agreement in relation to the placing of convertible bonds (the “Placing
Agreement”). Pursuant to the Placing Agreement, the Company issued the three-year 1%
coupon convertible bonds (the “Convertible Bonds”) up to an aggregate principal amount
of HK$150 million. Based upon the initial conversion price of HK$0.28 per conversion
share, a total of 535,714,277 shares (with an aggregate nominal value of approximately
HK$5,357,000) would be allotted and issued upon the exercise of all the conversion rights
attached to the Convertible Bonds.
The placing of the Convertible Bonds (the “First Tranche Bonds”) in the principal
amount of HK$60,000,000 under the Placing Agreement was completed on 11 February
2010. Based on the conversion price of HK$0.28, a maximum number of 214,285,710
conversion shares will be allotted and issued upon exercise of the conversion rights attached
to the First Tranche Bonds in full.
The placing of the Convertible Bonds (the “Last Tranche Bonds”) in the principal
amount of HK$90,000,000 under the Placing Agreement was completed on 20 April 2010.
Based on the conversion price of HK$0.28, a maximum number of 321,428,567 conversion
shares will be allotted and issued upon exercise of the conversion rights attached to the Last
Tranche Bonds in full.
Any outstanding amount of the Convertible Bonds can be converted at any time after
the date of issue of the Convertible Bonds at a conversion price of HK$0.28.
On 10 April 2012, a supplemental deed poll was executed by the Company. Details
of the modification of the First Tranche Bonds and the Last Tranche Bonds (the “modified
Convertible Bonds”) are set out as follows:–
(i)
conversion price was reduced from HK$0.28 to HK$0.18;
(ii)
coupon rate was reduced to 0% per annum; and
(iii)
the final maturity date was extended to 11 February 2016.
The modification resulted in the extinguishment of the financial liability of First
Tranche Bonds and Last Tranche Bonds and the recognition of its new financial liability
and equity components. The fair value of the new liability immediately following the
modification was approximately HK$120,423,000. The financial liability was determined
using an effective interest rate of 5.90%.
I – 88
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
On 21 December 2012, 7 January 2013, 23 January 2013 and 25 February 2013,
conversion rights attaching to the modified Convertible Bonds of an aggregate principal
amount of HK$20,000,000 were exercised with an aggregate of 111,111,106 shares were
allotted and issued. The outstanding principal amount of the modified Convertible Bonds as
at 31 March 2013 was HK$130,000,000.
The proceeds received from the issue of the Convertible Bonds have been split into the
liability component and equity component as follows:
Liability component at 1 October 2011
Interest expense before modification
Imputed interest before modification
Interest paid before modification
Transfer of unpaid interest to other
payables upon modification
Derecognition of original
liability component
Recognition of new liability
component upon modification
Imputed interest after modification
First Tranche
Bonds
Last Tranche
Bonds
Total
HK$’000
HK$’000
HK$’000
55,075
355
2,202
(301)
82,253
533
3,026
(451)
137,328
888
5,228
(752)
(355)
(533)
(888)
(56,976)
(84,828)
(141,804)
48,169
1,160
72,254
1,740
120,423
2,900
Liability component at 30 September
2012 (audited) and 1 October 2012
49,329
73,994
123,323
Conversion of convertible bonds
Imputed interest
(3,367)
1,433
(13,367)
2,001
(16,734)
3,434
Liability component at 31 March
2013 (unaudited)
47,395
62,628
110,023
I – 89
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
31 March
2013
30 September
2012
HK$’000
(unaudited)
HK$’000
(audited)
110,023
123,323
First Tranche
Bonds
HK$’000
Last Tranche
Bonds
HK$’000
Total
HK$’000
9,007
12,376
21,383
(9,007)
(12,376)
(21,383)
9,331
13,995
23,326
Equity component at 30 September 2012
(audited) and 1 October 2012
Conversion of convertible bonds
9,331
(621)
13,995
(2,488)
23,326
(3,109)
Equity component at 31 March
2013 (unaudited)
8,710
11,507
20,217
Analysed as:
Non-current liabilities
Equity component at 1 October 2011
Derecognition of original equity
component upon modification
Recognition of new equity
component upon modification
The interest charged of First Tranche Bonds for the last period before modification
is calculated by applying an effective interest rate of 7.847% per annum to the liability
component.
The interest charged of Last Tranche Bonds for the last period before modification
is calculated by applying an effective interest rate of 7.317% per annum to the liability
component.
The interest charged of the modified Convertible Bonds for the both periods is
calculated by applying an effective interest rate of 5.90% per annum to the liability
component.
I – 90
APPENDIX I
14.
FINANCIAL INFORMATION OF THE GROUP
Debentures
During the six months ended 31 March 2013, the Company issued unlisted
debentures of HK$101,000,000 to independent third parties at face value with issuing
costs of HK$6,060,000. The debentures are interest bearing at 6% per annum, unsecured
and repayable on the second anniversary of the respective dates of issue. The debentures
were initially recognised at HK$101,000,000 less issuing costs of HK$6,060,000 and are
subsequently measured at amortised cost using the effective interest method.
15.
Note to the condensed consolidated statement of cash flows
Disposal of subsidiaries
On 28 February 2012, the Group disposed of its two subsidiaries, Wealth Key
Investments Ltd. and its subsidiary, Huafeng Textile (Lianyungang) Co., Ltd.
Net assets at the date of disposal were as follows:
HK$’000
(unaudited)
Property, plant and equipment
Bank and cash balances
Trade payables
Accruals and other payables
Deferred tax liabilities
13,003
230
(62)
(145)
(1,559)
Net assets disposed of
Release of foreign currency translation reserve
Direct cost to the disposal
Loss on disposal of subsidiaries
11,467
(5,631)
50
(2,386)
Total consideration – satisfied by cash
3,500
Net cash inflow arising on disposal:
Cash consideration received
Cash paid for direct cost
Cash and cash equivalents disposed of
3,500
(50)
(230)
3,220
I – 91
APPENDIX I
16.
FINANCIAL INFORMATION OF THE GROUP
Contingent liabilities
The Group did not have any significant contingent liabilities at 31 March 2013.
17.
Commitments
The Group had the following commitments:
31 March
2013
30 September
2012
HK$’000
(unaudited)
HK$’000
(audited)
2,014
141
1,319
2,012
141
1,317
3,474
3,470
Contracted but not provided for:
Construction of buildings
Purchase of plant and machinery
Purchase of a parcel of land
18.
19.
Events after the reporting period
(i)
The resolution proposed in relation to the acquisition of the entire issued
share capital of China Natural Tea Holdings Company Limited, a company
incorporated in Cayman Islands, at total consideration of HK$2,487.48 million
was duly passed by way of directors’ meeting of the Company held on 17
January 2013. The Very Substantial Acquisition is set out in the announcement
of the Company dated 17 January 2013. The acquisition is expected to be
completed in July 2013.
(ii)
Subsequent to 31 March 2013 and up to the date of this interim report, the
Company issued HK$30,000,000 debentures to independent third parties at face
value. The debentures are interest bearing at 6% per annum, unsecured and
repayable on the second anniversary of the dates of issue.
Approval of condensed consolidated financial statements
The condensed consolidated financial statements were approved and authorised for
issue by the Board of Directors on 29 May 2013.
I – 92
APPENDIX I
B.
FINANCIAL INFORMATION OF THE GROUP
MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
Set out below is a summary of the management discussion and analysis of the performance
of the Group for the three years ended 30 September 2012 and the six months ended 31 March 2013
as extracted from the annual report of the Company for each of the three years ended 30 September
2012 and the interim report of the Company for the six months ended 31 March 2013. For details,
please refer to the respective annual reports and interim report of the Company.
1.
For the year ended 30 September 2010
Financial performance
During the year ended 30 September 2010, the Group’s consolidated revenue
increased by 8.6% to approximately HK$773.4 million (2009: approximately
HK$712.2 million). Among which, turnover from the fabric processing services,
manufacture and sale of fabrics amounted to approximately HK$678.5 million (2009:
approximately HK$643.3 million), representing 87.7% (2009: 90.3%) of total sales.
Turnover attributable to the manufacture and sale of yarns and blankets segment
amounted to approximately HK$94.9 million (2009: approximately HK$68.9 million),
representing 12.3% (2009: 9.7%) of total sales.
Sales to customers located in the greater China region accounted for 62.3%
(2009: 58.8%) of total sales in 2010. The Philippines market continued to be an
important market for the Group, accounting for 28.9% (2009: 32.3%) of total sales
in 2010. The remaining revenue of 8.8% (2009: 8.9%) was generated from customers
located in Africa, Australia and North America.
During the year ended 30 September 2010, gross profit of the Group increased
by 10.8% to approximately HK$182.6 million (2009: approximately HK$164.9
million) and gross margin slightly increased by 0.5% from 23.1% in 2009 to
23.6% in 2010. Profit after tax attributable to owners of the Company amounted
to approximately HK$68.5 million (2009: approximately HK$132.7 million),
representing a decrease of 48.4% as compared to that of 2009. The profit after tax
decreased as the unwinding of an interest rate swap contract on 22 January 2009
contributed to a gain of approximately HK$70.6 million in 2009, but no such gain was
made during the year ended 30 September 2010.
I – 93
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
During the year ended 30 September 2010, with the rising demand for textile
products, the Group’s turnover continued to achieve steady growth, increasing by
8.6% to approximately HK$773.4 million as compared to last year. With regard to
exports, since the official establishment of the ASEAN-China Free Trade Area on
1 January 2010, the tariffs for more than 7,000 goods between China and ASEAN
members including yarn spinning, fabrics and textile products were reduced to zero,
directly driving the satisfactory growth of the Chinese textile products export industry.
We foresee that we would benefit from such policy in the coming future.
In addition, during the year ended 30 September 2010, Lingfeng Dyeing
& Weaving Co., Ltd. (“Lingfeng”), a wholly-owned subsidiary of the Group,
has completed installation of production machinery and equipment in the newly
established building, and conducted trial production. It has been fully operational
since the second half of 2010, and will enhance the Group’s annual fabric processing
capacity. Furthermore, the Group’s new plant in Jiangxi started trial production in
June 2010 and will focus on blanket production with a target production capacity of
10,950 tons per annum.
Liquidity and financial resources
At 30 September 2010, the Group had current assets of approximately
HK$844.6 million (2009: approximately HK$607.6 million) and current liabilities
of approximately HK$434.7 million (2009: approximately HK$369.1 million). The
current ratio (calculated as current assets to current liabilities) increased from 1.65 as
at 30 September 2009 to 1.94 as at 30 September 2010. The gearing ratio (calculated
as the total bank borrowings and the convertible bonds to total shareholders’ equity)
had increased from 0.14 as at 30 September 2009 to 0.18 as at 30 September 2010.
These ratios were at reasonably adequate levels as at 30 September 2010 while the
Group had sufficient resources in meeting its short-term and long-term obligations.
During the year ended 30 September 2010, the net cash inflow from operating
activities and net cash generated from financing activities were approximately
HK$66.8 million and approximately HK$168.5 million respectively (2009: net
cash inflow of approximately HK$306.8 million and net cash used approximately
HK$178.0 million).
I – 94
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Total bank borrowings decreased by 20.9% to approximately HK$142.8 million
(2009: approximately HK$180.5 million) during the year ended 30 September 2010,
of which approximately HK$142.8 million (2009: approximately HK$118.2 million)
was repayable within one year and HK$Nil (2009: approximately HK$62.3 million)
was repayable more than one year. The total bank borrowings, which subject to
fixed interest rates and floating interest rates, were 0% and 100% respectively. The
Group’s bank borrowings were primarily denominated in Renminbi and Hong Kong
dollars. For the Group’s total bank borrowings as at 30 September 2010, 35.8% of the
balance was denominated in RMB and 64.2% of the balance was denominated in HK$.
There were no seasonal adjustments with respect to the Group’s borrowings. At 30
September 2010, the Group’s bank borrowings were secured by (i) certain buildings of
the Group; and (ii) corporate guarantees given by the Company and its subsidiaries.
Capital structure
The authorized share capital of the Company was increased from
HK$20,000,000 (divided into 2,000,000,000 ordinary shares of HK$0.01 each) to
HK$100,000,000 (divided into 10,000,000,000 shares of HK$0.01 each) by the
creation of 8,000,000,000 new shares of HK$0.01 each of the Company, and that each
such new shares, upon issue, shall rank pari passu in all respects with the existing
shares of the Company. The total number of issued share capital of the Company as at
30 September 2010 was 1,446,838,580 (2009: 1,239,503,580) ordinary shares.
Capital expenditure and material acquisition
During the year ended 30 September 2010, the total capital expenditure and
material acquisition of the Group for the expansion of various plants and erection of
new buildings was approximately HK$161.1 million (2009: approximately HK$333.1
million).
Foreign exchange exposure
Most assets, liabilities and transactions of the Group are denominated in RMB
and HK$, except overseas sales which are denominated in United States dollars. In
view of the currency peg between HK$ and USD and a relatively strong RMB at
HK$1.00 equal to RMB0.88 (as at 30 September 2010), the fluctuations of foreign
currencies did not have a significant impact on the performance of the Group.
I – 95
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Contingent liability
The Group did not have any significant contingent liabilities as at 30 September
2010 (2009: Nil).
Employment information
At 30 September 2010, the total number of employees of the Group in Hong
Kong, Macau and the PRC is 2,324 (2009: 2,287). The Group’s emoluments policies
are based on the performance of individual employees and on the basis of the salary
trends in various regions, and are reviewed periodically.
For the year ended 30 September 2010, the total staff costs (including directors’
emoluments) amounted to approximately HK$96.2 million (2009: approximately
HK$80.3 million), the amount including approximately HK$20.6 million (2009:
approximately HK$16.5 million) related to the equity-settled share-based payments.
The Company maintains a share option scheme for the purpose of providing incentives
and rewards to the eligible participants for their contributions to the Group.
Charges of assets
The Group’s bank borrowings are secured by certain buildings of the Group
with a total carrying value of approximately HK$42.0 million at 30 September 2010
(2009: approximately HK$34.4 million which was secured by prepaid land lease
payments and investment properties of the Group), corporate guarantee given by the
Company and its subsidiaries.
Material acquisitions and disposals of subsidiaries
The Group had no material acquisition or disposal of any subsidiaries of the
Company for the year ended 30 September 2010.
Additional information
Convertible Bonds
A conditional placing agreement dated 9 October 2009 (the “Placing
Agreement”) was entered into between the Company and Tanrich Capital Limited (the
“Placing Agent”) pursuant to which the Placing Agent agreed to place, on a best effort
basis, the three-year 1% coupon convertible bonds (the “1% Coupon Convertible
Bonds”) in an aggregate principal amount of up to HK$150 million.
On 11 February 2010 and 20 April 2010, the 1% Coupon Convertible Bonds
have been subscribed for cash and issued to the subscribers with the amount of HK$60
million and HK$90 million, respectively.
I – 96
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Warrants
On 21 January 2010, the Company and the Placing Agent entered into a placing
agreement pursuant to which the Placing Agent agreed to place, on a best effort
basis, up to 247,900,000 warrants. The issue price per warrant is HK$0.01 and the
subscription price is HK$0.385. Upon the exercise of the subscription rights attaching
to the warrants in full, a maximum of 247,900,000 new shares (with an aggregate
nominal value of HK$2,479,000 of the new shares) will be issued and allotted.
The subscription price and the issue price per warrant (in aggregate) are
HK$0.395. The subscription price is subject to adjustment for subdivision or
consolidation of shares. The Company will publish an announcement upon any
adjustment to the subscription price. The subscription price was determined after
arm’s length negotiations between the Company and the Placing Agent, after
considering the Group’s existing financial position, liquidity of the shares in the
market and number of new shares.
On 17 March 2010, the condition for the placing of the warrants under the
placing agreement was fulfilled and the placing of the warrants has been completed.
The warrant holders have the right to exercise the warrants within 2 years from the
date of the issue of warrants.
In the event the subscription rights attaching to the warrants are exercised, the
placing of the warrants represents a good opportunity to raise capital for the Company
while broadening the shareholder base and capital base of the Company.
2.
For the year ended 30 September 2011
Financial performance
During the year ended 30 September 2011, the Group’s consolidated revenue
decreased by 6.0% to approximately HK$727.3 million (2010: approximately
HK$773.4 million). Among which, turnover from the fabric processing services,
manufacture and sale of fabrics amounted to approximately HK$600.1 million (2010:
approximately HK$678.5 million), representing 82.5% (2010: 87.7%) of total sales.
Turnover attributable to the manufacture and sale of yarns and blankets segment
amounted to approximately HK$127.2 million (2010: approximately HK$94.9
million), representing 17.5% (2010: 12.3%) of total sales.
I – 97
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Sales to customers located in the China region accounted for 64.6% (2010:
62.3%) of total sales in 2011. The Philippines market continued to be an important
market for the Group, accounting for 27.2% (2010: 28.9%) of total sales in 2011. The
remaining revenue of 8.2% (2010: 8.8%) was generated from customers located in
Africa, Australia, North America and Taiwan, etc.
During the year ended 30 September 2011, gross profit of the Group decreased
by 39.2% to approximately HK$111.1 million (2010: approximately HK$182.6
million) and gross margin decreased by 8.3% from 23.6% in 2010 to 15.3% in 2011.
Loss attributable to owners of the Company amounted to approximately HK$138.5
million (2010: profit after tax attributable to owners of the Company approximately
HK$68.5 million). The loss after tax was mainly attributable to a significant loss
of approximately HK$140.2 million resulting from the disposal of Elite League
Investments Limited (“Elite”) and Lingfeng. Excluding this one-off loss, profit
attributable to owners of the Company for the year ended 30 September 2011
amounted to HK$1.7 million, representing a decrease of 97.5% as compared to that of
2010.
The first phase of the Group’s newly established plants in Jiangxi has begun
trial production of blankets and contributed to a revenue of approximately HK$32.7
million during the Year (2010: HK$1.1 million). As the demand for blankets in the
domestic market is increasing, the Company foresaw that the revenue contributed by
the Jiangxi plant will continuously increase in the coming future.
On 2 August 2011, the Group entered into a sale and purchase agreement
with Golden Treasure Star Investments Limited to dispose 100% of the issued share
capital of wholly owned subsidiaries of the Company. The disposal was completed
on 1 September 2011 and constitutes a discloseable transaction for the Company
under Rule 14.06(2) of the Listing Rules on the Stock Exchange. The Board considers
that the disposal was beneficial to the Group because of uncertainties regarding the
financial turnaround of Lingfeng and possible financial burden caused by additional
capital expenditure required to improve product quality in light of the continuous
economic downturn and increasingly intense competition in the provision of the fabric
processing services.
I – 98
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Liquidity and financial resources
At 30 September 2011, the Group had current assets of approximately
HK$830.6 million (2010: approximately HK$842.5 million, as restated) and current
liabilities of approximately HK$287.3 million (2010: approximately HK$434.7
million). The current ratio (calculated as current assets to current liabilities) increased
from 1.94 as at 30 September 2010 to 2.89 as at 30 September 2011. The gearing
ratio (calculated as the total bank borrowings and the convertible bonds to total
shareholders’ equity) had decreased from 0.18 as at 30 September 2010 to 0.13
as at 30 September 2011. These ratios were at reasonably adequate levels as at 30
September 2011 while the Group had sufficient resources in meeting its short-term
and long-term obligations.
During the year ended 30 September 2011, the net cash inflow from operating
activities and net cash used in financing activities were approximately HK$227
million and approximately HK$52.9 million respectively (2010: net cash inflow of
approximately HK$66.8 million and net cash generated from approximately HK$168.5
million respectively). Total bank borrowings decreased by 66.4% to approximately
HK$48 million (2010: approximately HK$142.8 million) during the year ended 30
September 2011, of which approximately HK$ 48.0 million (2010: approximately
HK$142.8 million) was repayable within one year and HK$Nil (2010: approximately
HK$Nil) was repayable more than one year. The total bank borrowings, which subject
to fixed interest rates and floating interest rates, were 0% and 100% respectively.
The Group’s bank borrowing as at 30 September 2011, 100% of the balance was
denominated in Hong Kong dollars. There were no seasonal adjustments with respect
to the Group’s borrowings. At 30 September 2011, the Group’s bank borrowing was
secured by corporate guarantees given by the Company.
Capital structure
During the Year, there were no changes in Capital Structure and the total
number of issued share capital of the Company as at 30 September 2011 was
1,446,838,580 (2010: 1,446,835,580) ordinary shares.
Capital expenditure and material acquisition
During the Year, the total capital expenditure and material acquisition of
the Group for the expansion of various plants and erection of new buildings was
approximately HK$131.8 million (2010: approximately HK$161.1 million).
I – 99
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Foreign exchange exposure
Most assets, liabilities and transactions of the Group are denominated in
RMB and HK$, except overseas sales which are denominated in USD. In view of the
currency peg between HK$ and USD and a relatively strong RMB at HK$1.00 equal
to RMB0.82 (as at 30 September 2011), the fluctuations of foreign currencies did not
have a significant impact on the performance of the Group.
Contingent liabilities
At the end of the reporting period, the Group has issued a guarantee of
approximately HK$12,200,000 (2010: HK$Nil) jointly with an executive director
of the Company and two independent third parties to a bank in respect of a banking
facility granted to a former subsidiary. The maximum liability of the Group at the
end of the reporting period under the guarantee is the outstanding amount of the bank
loan to the former subsidiary at that date of approximately HK$12,200,000 (2010:
HK$Nil).
Employment information
At 30 September 2011, the total number of employees of the Group in Hong
Kong, Macau and the PRC is 1,470 (2010: 2,324). The Group’s emoluments policies
are based on the performance of individual employees and on the basis of the salary
trends in various regions, and are reviewed periodically.
For the year ended 30 September 2011, the total staff costs (including directors’
emoluments) amounted to approximately HK$85.0 million (2010: approximately
HK$96.2 million), the amount including approximately HK$0.52 million related to
the equity-settled share-based payments (2010: approximately HK$20.6 million). The
Company maintains a share option scheme for the purpose of providing incentives and
rewards to the eligible participants for their contributions to the Group.
Charges of assets
The Group’s bank borrowings are secured by certain buildings of the Group
with a total carrying value of approximately HK$Nil at 30 September 2011 (2010:
approximately HK$42.0 million), and corporate guarantees given by the Company and
Nil (2010: two) subsidiaries of the Company.
I – 100
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Material acquisitions and disposals of subsidiaries
On 2 August 2011, Treasure Wealth Assets Limited (“Treasure Wealth”), a
wholly-owned subsidiary of the Company, and Golden Treasure Star Investments
Limited (“Golden Treasure”) entered into an agreement, pursuant to which Treasure
Wealth agreed to sell and Golden Treasure agreed to acquire the entire issued share
capital of Elite and Lingfeng for a total consideration of HK$103.2 million, of
which (i) HK$50 million will be settled by cash upon completion; and (ii) HK$53.2
million will be settled by cash three years from the date of completion. All conditions
precedent under the agreement have been fulfilled and the completion took place on 1
September 2011. The disposal constitutes a discloseable transaction for the Company
under Rule 14.06(2) of the Listing Rules.
Saved as the information stated above, the Group had no material acquisition or
disposal of any subsidiaries of the Company for the year ended 30 September 2011.
3.
For the year ended 30 September 2012
Financial performance
During the year ended 30 September 2012, the Group’s consolidated revenue
decreased by 25.9% to approximately HK$539.1 million (2011: approximately
HK$727.3 million). Among which, turnover from the fabric processing services,
manufacture and sale of fabrics amounted to approximately HK$444.2 million (2011:
approximately HK$600.1 million), representing 82.4% (2011: 82.5%) of total sales.
Turnover attributable to the manufacture and sale of yarns and blankets segment
amounted to approximately HK$94.9 million (2011: approximately HK$127.2
million), representing 17.6% (2011: 17.5%) of total sales.
Sales to customers located in the China region accounted for 56.0% (2011:
64.6%) of total sales in 2012. The Philippines market continued to be an important
market for the Group, accounting for 35.6% (2011: 27.1%) of total sales in 2012. The
remaining revenue of 8.4% (2011: 8.3%) was generated from customers located in
Africa, Australia, North America and Taiwan, etc.
I – 101
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
During the year ended 30 September 2012, gross profit of the Group decreased
by 45.5% to approximately HK$60.6 million (2011: approximately HK$111.1 million)
and gross margin decreased by 4.1 percentage points from 15.3% in 2011 to 11.2%
in 2012. Loss attributable to owners of the Company amounted to approximately
HK$190.8 million (2011: approximately HK$138.5 million). The loss after tax was
mainly attributable to a significant loss of approximately HK$48.2 million resulting
from the disposal of investment properties of a subsidiary and of approximately
HK$114.4 million resulting from the impairment on the plant and machinery of
subsidiaries.
Liquidity and financial resources
As at 30 September 2012, the Group had current assets of approximately
HK$694.3 million (2011: approximately HK$830.6 million) and current liabilities
of approximately HK$268.3 million (2011: approximately HK$287.3 million). The
current ratio (calculated as current assets to current liabilities) decreased from 2.89 as
at 30 September 2011 to 2.59 as at 30 September 2012. The gearing ratio (calculated
as the total bank borrowings and the convertible bonds to total Shareholders’ equity)
had decreased from 0.13 as at 30 September 2011 to 0.09 as at 30 September 2012.
These ratios were at reasonably adequate levels as at 30 September 2012 while the
Group had sufficient resources in meeting its short-term and long-term obligations.
During the year ended 30 September 2012, the net cash generated from
operating activities and net cash used in financing activities were approximately
HK$113.6 million (2011: approximately HK$227.0 million) and approximately
HK$51.0 million (2011: approximately HK$52.9 million) respectively.
Total bank borrowings decreased by 100% to HK$Nil (2011: approximately
HK$48.0 million) during the year ended 30 September 2012, of which HK$Nil (2011:
approximately HK$48.0 million) was repayable within one year.
Capital Structure
During the year ended 30 September 2012, there were no changes in the
capital structure and the total number of issued share capital of the Company as at 30
September 2012 was 1,446,838,580 (2011: 1,446,838,580) ordinary shares.
I – 102
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Capital expenditure and material acquisition
During the year ended 30 September 2012, the total capital expenditure and
material acquisition of the Group for the expansion of various plants and erection of
new buildings was approximately HK$172.4 million (2011: approximately HK$131.8
million).
Contingent liabilities
As at 30 September 2012, the Group has issued a guarantee of approximately
HK$Nil (2011: HK$12,200,000). The maximum liability of the Group at the end of
the year ended 30 September 2012 under the guarantee is the outstanding amount of
the bank loan to the former subsidiary at that date of approximately HK$Nil (2011:
HK$12,200,000).
Employment information
At 30 September 2012, the total number of employees of the Group in Hong
Kong, Macau and the PRC was 1,390 (2011: 1,470). The Group’s emoluments policies
are based on the performance of individual employees and on the basis of the salary
trends in various regions, and are reviewed periodically.
For the year ended 30 September 2012, the total staff costs (including directors’
emoluments) amounted to approximately HK$71.3 million (2011: approximately
HK$85.0 million), the amount including HK$Nil related to the equity-settled
sharebased payments (2011: approximately HK$0.52 million). The Company
maintains a share option scheme for the purpose of providing incentives and rewards
to the eligible participants for their contributions to the Group.
Material acquisitions and disposals of subsidiaries
In February 2012, the Group disposed of its two subsidiaries, Wealth Key
Investments Ltd and its subsidiary, Huafeng Textile (Lianyungang) Co., Ltd for a
cash consideration of HK$3,500,000. Save as the aforesaid disposal, the Group had
no other material acquisition or disposal of subsidiaries during the year ended 30
September 2012.
I – 103
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Additional information
Memorandum of Understanding
On 21 April 2010, the Company entered into a memorandum of understanding
(the “MOU”) with a vendor, an independent third party, in relation to a proposed
acquisition of the entire registered capital in a company (the “BVI Target”). The
BVI Target is incorporated in the British Virgin Islands and is principally engaged in
investment holding and is expected to hold 67.5% effective interest in a gold mine
in Liaoning Province of the PRC. The consideration of the acquisition was RMB400
million. Further details are set out in the Company’s announcement dated 21 April
2010.
On 19 January 2012, the Company had decided not to proceed with the
proposed acquisition and the MOU had been lapsed on 20 January 2012. The lapse
of the MOU did not have any significant adverse effect on the financial position and
business of the Group.
Amendments to certain terms and conditions of the Convertible Bonds
At the extraordinary general meeting of the Company held on 4 May 2012,
the resolution proposed in relation to the proposed amendments to certain terms and
conditions of the convertible bonds due in 2013 of aggregate principal amounts of
HK$150,000,000 created and issued by the Company on 11 February 2010 and 20
April 2010, was duly passed by way of poll.
For further details, please refer to the Company’s announcements dated 5
March 2012, 15 March 2012, 30 March 2012, 17 April 2012 and 4 May 2012 together
with the Company’s circular dated 17 April 2012.
I – 104
APPENDIX I
4.
FINANCIAL INFORMATION OF THE GROUP
For the six months ended 31 March 2013
Financial review
For the six months ended 31 March 2013 (the “Period”), the Group’s
revenue decreased by 12.1% as compared to the corresponding period last year to
approximately HK$223.8 million (2012: approximately HK$254.6 million). Gross
profit for the Period decreased by 44.2% as compared to the corresponding period
last year to approximately HK$23.1 million (2012: approximately HK$41.4 million).
Gross profit margin was approximately 10.3% (2012: approximately 16.2%). The
decrease in revenue was mainly attributable to the decrease in market demand and
more intensive competition in the textiles industry, leading to a decrease in both sales
orders and average selling prices. During the Period, loss attributable to owners of
the Company was approximately HK$13.7 million (2012: approximately HK$36.1
million).
Business review
During the Period, the Company faced a very complex and volatile environment
both domestically and overseas. A variety of adverse factor such as weaken demand
in overseas markets, slowing demand in domestic markets, constant growth in
production costs including raw material costs and labour wages, as well as the
economic slowdown in China undermined market demand and aggravated competition
among China’s textile enterprises, adding difficulties for textile enterprises to pass
on the rising costs to its customers. During the Period, the consistent appreciation of
the Renminbi (“RMB”) against the US dollar (“USD”), the international market for
textile products remained sluggish due to the adverse effects of the weak recovery
in the global economy and the sovereign debt crisis in Europe while competition
became more intense, bringing greater challenges to China’s textile industry. Despite
the challenges from the market and operating environment, the Group maintained
its overall business competitiveness through strict cost control measures, flexible
marketing strategies, as well as consolidation of long-term cooperation with
customers.
I – 105
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
To implement its strategy of diversified business development and to deal
with rising international trade protectionism, the Group has actively looked for
diversified business opportunities during the Period. As at 17 January, 2013, the
Group has announced to intend to acquire the entire issued share capital of China
Natural Tea Holdings Company Limited (“Natural Tea”), and thus enter into the
tea market with significant growth potential. Natural Tea has been engaged in the
production, marketing and sale of tea in the PRC since 2007. Its main businesses are
production and sale of a range of oolong teas in the form of both raw teas and refined
teas. Natural Tea has its own tea cultivation bases, production facilities, established
brand and sales network in Anxi County, Fujian Province, the PRC. A majority of the
raw teas are sold on a wholesale basis and the refined teas are sold on a retail basis
through an established retail network. The brand of Natural Tea is Ping Shan Famous
Tea（坪山名茶）, which has been registered as trademark in Hong Kong and the PRC.
Business prospects
During the Period, as there are still many uncertainties in the global economy,
the international demand for textile exports will be weakened and therefore bring a
more critical textile market condition. At the same time, the decrease in domestic
and the overseas market demand due to slowdown of China’s economy and global
environment will add pressure to the garment enterprises’ inventory consumption,
suppressing the fabric production and processing demand, posing immense challenges
to the development of the domestic textile industry. Besides, the international market
for textile products remained sluggish due to the adverse effects of the weak recovery
in the global economy and the sovereign debt artist in Europe, the fluctuations in raw
material prices, the consistent appreciation of the RMB, the increasing labour wages
and other production costs caused by inflation will generate tremendous operating
pressures to China’s textile industry.
To tackle the difficulties, the Group will dedicate efforts to deploy flexible
market strategies and diversify the business component, steadily expand its client
base and continue to implement its strict cost control measures, in order to maintain
the Group’s overall business competitiveness, pushing ahead its long-term stable
development. In the meantime, the Group will proactively search for potential
favorable expansion, merger and acquisition opportunities, so as to realise the longterm business diversification strategy, and to further enhance its revenue sources and
profitability, bringing maximised returns to the shareholders.
I – 106
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Liquidity and financial resources
At 31 March 2013, the Group had current assets of approximately HK$812.1
million (30 September 2012: approximately HK$694.3 million) and current liabilities
of approximately HK$276.8 million (30 September 2012: approximately HK$268.3
million). The current ratio (calculated as current assets to current liabilities) increased
from 2.59 as at 30 September 2012 to 2.93 as at 31 March 2013. The gearing ratio
(calculated as the total borrowings and the convertible bonds to total shareholders’
equity) had slightly increased from 0.09 as at 30 September 2012 to 0.16 as at 31
March 2013. These ratios were at reasonably adequate levels as at 31 March 2013
while the Group had sufficient resources in meeting its short-term and long-term
obligations.
The Group principally met its funding requirements by cash flows from
operations. During the Period, the net cash generated from operating activities and
net cash generated from financing activities were approximately HK$44.9 million and
approximately HK$99.9 million. The total borrowings increased to approximately
HK$95.5 million (30 September 2012: HK$Nil). At 31 March 2013, the Group had
total borrowings of approximately HK$Nil (30 September 2012: HK$Nil) repayable
within one year and HK$95.5 million (30 September 2012: HK$Nil) repayable more
than one year. The borrowings were subjected to fixed interest rate of 6% per annum.
The Group’s borrowings were denominated in Hong Kong dollars (“HKD”). There are
no seasonal adjustments with respect to the Group’s borrowings.
At 31 March 2013, the borrowings were unsecured.
Capital structure
The total number of issued share capital of the Company as at 31 March 2013
was 1,557,949,686 shares.
Foreign exchange exposure
Most assets, liabilities and transactions of the Group are denominated in RMB
and HKD, except overseas sales which are denominated in USD. In view of the
currency peg between HKD and USD and a relatively strong RMB at HK$1.00 equal
to RMB0.813 (as at 31 March 2013), the fluctuations of foreign currencies did not
have a significant impact on the performance of the Group.
I – 107
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Capital expenditure
During the Period, the total capital expenditure of the Group for acquisition
of property, plant and equipment was approximately HK$5.9 million (2012:
approximately HK$20.9 million).
Contingent liabilities
The Group did not have any significant contingent liabilities as at 31 March
2013 (30 September 2012: HK$Nil).
Material acquisition or disposal of subsidiaries
On 17 January 2013, Wide Lucky Asia Pacific Limited, a wholly-owned
subsidiary of the Company (the “Purchaser”), the Company as the Purchaser’s
guarantor and Ample Gold International Limited, Exalt Wealth Limited, Great Vantage
Investments Limited, Shine Strategy Limited, Smart Fujian Group Limited, Templeton
Strategic Emerging Markets Fund III, LDC and Teya Holdings Limited (collectively
the “Vendors”), among others, entered into a sale and purchase agreement (the “Sale
and Purchase Agreement”) pursuant to which the Purchaser has conditionally agreed
to purchase from the Vendors, and the Vendors have conditionally agreed to sell to the
Purchaser, the entire issued share capital of 132,278,632 ordinary shares of HK$0.1
each of China Natural Tea Holdings Company Limited (the “Target Company”)
(the “Sale Shares”), at a total consideration of HK$2,487.48 million, which will
be satisfied partly in cash and partly by the allotment and issue of an aggregate of
9,495,834,903 shares of the Company (the “Consideration Shares”) and the issue of
HK$614.77 million zero/4% coupon convertible bonds (the “Convertible Bonds”) at
the conversion price of HK$0.1768 per conversion share. Subject to and in accordance
with the terms and conditions of the Sale and Purchase Agreement, the Target
Company shall become a wholly-owned subsidiary of the Purchaser and the Company
upon completion of the acquisition of the Sale Shares (the “Acquisition”).
I – 108
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Proposed Grant of Specific Mandate to Issue Shares
The Company will seek the grant of a specific mandate from the shareholders
of the Company (the “Shareholders”) other than (i) Mr. Cai Zhenrong, parties acting
in concert with him and their respective associates, and (ii) parties who are connected,
involved in or interested in the Acquisition and the transactions contemplated
thereunder, the tea plantation contracting rights transfer agreement (the “New
Transfer Agreements”), the contracting agreement with Fujian Anxi Daping Green
Food Technology Company Limited (the “New Contracting Agreement”) and/or
the Whitewash Waiver (as defined in the paragraph of “Application for Whitewash
Waiver”) (collectively the “Independent Shareholders”) to allot and issue new
ordinary shares of HK$0.01 each in the share capital of the Company (the “Shares”)
to satisfy the allotment and issue of the Consideration Shares and an aggregate of
3,477,186,869 Shares to the Vendors (the “Conversion Shares”) which fall to be
issued upon conversion of the Convertible Bonds.
Proposed Increase in Authorised Share Capital of the Company
As at 17 January 2013, the authorised share capital of the Company is
HK$100,000,000 divided into 10,000,000,000 Shares of HK$0.01 each. At the
extraordinary general meeting of the Company to be convened (the “EGM”) for
the purpose of considering and, if thought fit, approving, among other things, the
Sale and Purchase Agreement, the transactions contemplated thereunder (including
the Acquisition and the allotment and issue of the Consideration Shares and
Conversion Shares), and the Whitewash Waiver, the Company will seek the approval
of the Shareholders to increase the authorised share capital of the Company to
HK$200,000,000 divided into 20,000,000,000 Shares of HK$0.01 each so that there
will be adequate authorised share capital to issue the Consideration Shares and the
Conversion Shares.
I – 109
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Application for Whitewash Waiver
As at 17 January 2013, Mr. Cai Zhenrong and parties acting in concert with
him hold 523,563,000 Shares representing approximately 34.47% of the total Shares
in issue. Immediately following the allotment and issue of the Consideration Shares to
the Vendors, the shareholding of Mr. Cai Zhenrong and parties acting in concert with
him will increase to approximately 73.93% of the total Shares in issue as enlarged by
the allotment and issue of the Consideration Shares but before conversion or exercise
of any Convertible Bonds, outstanding convertible bonds issued by the Company
on 11 February 2010 and 20 April 2010 and outstanding share options granted by
the Company. Under Rule 26.1 of the Code on Takeovers and Mergers issued by
the Securities and Futures Commission of Hong Kong (the “Takeovers Code”), Mr.
Cai Zhenrong and parties acting in concert with him would be required to make an
unconditional mandatory general offer for all the issued Shares not already owned or
agreed to be acquired by Mr. Cai Zhenrong and parties acting in concert with him,
unless a waiver from strict compliance with Rule 26.1 of the Takeovers Code has been
obtained from the executive director of the Corporate Finance Division of the SFC or
any delegate of the executive director (the “Executive”).
An application will therefore be made by Mr. Cai Zhenrong to the Executive for
a waiver (the “Whitewash Waiver”) pursuant to Note 1 on dispensations from Rule
26 of the Takeovers Code from the obligation of Mr. Cai Zhenrong and parties acting
in concert with him to make a mandatory general offer for all the Shares that are not
already owned or agreed to be acquired by them as a result of the Company allotting
and issuing the Consideration Shares to Mr. Cai Zhenrong and/or parties acting in
concert with him. The Whitewash Waiver, if granted, will be subject to, among other
things, (i) approval of the Independent Shareholders in respect of the Whitewash
Waiver at the EGM where voting on the relevant resolutions shall be taken by poll,
(ii) Mr. Cai Zhenrong and parties acting in concert with him not having acquired any
voting rights of the Company for the six months before the execution of the Sale and
Purchase Agreement and up to 29 May 2013, and (iii) Mr. Cai Zhenrong and parties
acting in concert with him not having any acquisitions or disposals of voting rights of
the Company between 29 May 2013 and completion of the issue of the Consideration
Shares to the Vendors unless with the prior consent of the Executive.
I – 110
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
Except for the disposal of 1,000,000 Shares by Mr. Choi Wing Toon on 20
July 2012 through the market, Mr. Cai Zhenrong and parties acting in concert with
him have not acquired any voting rights of the Company or dealt with any relevant
securities with the meaning given under Note 4 to Rule 22 of the Takeovers Code for
the six months before the execution of the Sale and Purchase Agreement and up to 29
May 2013.
The Executive may or may not grant the Whitewash Waiver. It is one of the
conditions precedent to completion of the Acquisition that the Whitewash Waiver has
been obtained. In the event that the Whitewash Waiver is not granted by the Executive
or approved by the Independent Shareholders, the Sale and Purchase Agreement will
lapse and the Acquisition will not proceed.
Despatch of Circular
A circular (the “Circular”) containing, among other things, (i) further details
of the Acquisition; (ii) further information about the Whitewash Waiver; (iii) the
recommendation of the independent board committee established by the Company
to advise the Independent Shareholders in relation to the Acquisition; (iv) a letter of
advice from the joint independent financial advisers comprising AsiaVest Partners
Limited, a corporation licensed to carry on Type 4, Type 6 and Type 9 regulated
activities and RaffAello Capital Limited, a corporation licensed to carry on Type
6 regulated activity to the Independent Board Committee and the Independent
Shareholders in relation to the Acquisition and the transactions contemplated
thereunder, the New Transfer Agreements, the New Contracting Agreement and
the Whitewash Waiver; and (v) the notice of the EGM, would be despatched to
the Shareholders originally on or before 7 February 2013 in accordance with the
Takeovers Code and the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited.
I – 111
APPENDIX I
FINANCIAL INFORMATION OF THE GROUP
However, as additional time is required for the Company to prepare and finalise
the following documents and information (the “Incorporated Information”) to be
included in the Circular, the despatch date of the Circular will be postponed to a date
on or before 30 June 2013:
(1)
a letter from the Joint Independent Financial Advisers;
(2)
an accountant’s report of the Target Group for the last three financial
years ended 31 December 2010, 2011 and 2012;
(3)
the unaudited pro-forma financial information of the enlarged Group;
(4)
valuation reports of the properties, machineries and equipment of the
Group;
(5)
a valuation report on biological assets of the Target Group; and
(6)
a tea plantation resource assessment report of the Target Group.
Details of the above Acquisition were published in the Company’s
announcements dated 17 January 2013, 6 February 2013 and 25 April 2013.
Save as disclosed above, the Group had no material acquisition or disposal of
subsidiaries during the Period.
Employment information
At 31 March 2013, the Group had a total of 1,445 (2012: 1,533) employees in
Hong Kong, Macau and the PRC. The Group’s emoluments policies are based on the
performance of individual employees and on the basis of the salary trends in various
regions, and are reviewed periodically.
For the Period, the total staff costs including directors’ emoluments amounted
to approximately HK$26.4 million (2012: approximately HK$29.0 million). The
Company maintains a share option scheme for the purpose of providing incentives and
rewards to the eligible participants for their contributions to the Group.
I – 112
APPENDIX I
C.
FINANCIAL INFORMATION OF THE GROUP
MATERIAL CHANGE
Save as disclosed in this section below, the Directors confirm that there has been no material
change in the financial or trading position and outlook of the Group since 30 September 2012
(being the date to which the latest published audited consolidated financial statements of the Group
were made up) up to the Latest Practicable Date and there has been no material change in the
financial or trading position and outlook of the Target Group since 31 December 2012 (being the
date to which the latest published audited consolidated financial statements of the Target Group
were made up) up to the Latest Practicable Date:
The Group
(a)
the transactions contemplated under the Sale and Purchase Agreement;
(b)
the Group recorded an unaudited net loss of approximately HK$13.7 million for the
six months ended 31 March 2013 as extracted from the 2013 interim report of the
Group;
(c)
the total fees and expenses in connection with the Sale and Purchase Agreement and
the transactions contemplated thereunder are estimated to be not more than HK$23
million;
(d)
111,111,106 Shares have been issued and allotted as conversion Shares to the holders
of the Other Convertible Bonds of the Company with the then outstanding principal
value of HK$20 million; and
(e)
the Company issued unlisted debentures of HK$166 million to independent third
parties at face value with issuing costs of HK$9.96 million. The debentures are
interest bearing at 6% per annum, unsecured and repayable on the second anniversary
of the respective dates of issue.
The Target Group
(a)
the directors of the Target Group estimate a total sum of RMB50 million in respect
of the outstanding construction costs of the Target Group’s new production and
packaging centres, offices and staff dormitories. Approximately RMB35 million was
paid in the second quarter of 2013 and approximately RMB15 million will be paid in
the third quarter 2013; and
(b)
the directors of the Target Group estimate that approximately RMB53.75 million in
respect of the outstanding amount for the purchase of the contracting rights of new
forest lands will be paid in the third quarter of 2013.
I – 113
APPENDIX I
D.
FINANCIAL INFORMATION OF THE GROUP
INDEBTEDNESS OF THE ENLARGED GROUP
At the close of business on 30 April 2013, being the latest practicable date for the purpose of
preparing this statement of indebtedness prior to the printing of this circular, the indebtedness of the
Enlarged Group was as follows:
(i)
Interest-bearing bank borrowings of approximately RMB34 million (approximately
HK$42.5 million), which is interest bearing at a rate of 110% of benchmark borrowing
rate in the PRC and was secured by certain Tea Forest (as defined in Appendix II to
this circular) of the Target Group of approximately RMB63.2 million (approximately
HK$ 79.0 million) as at 31 December 2012 with total cultivable area of 6,906
Mu and the land use right of the Target Group of approximately RMB7.6 million
(approximately HK$9.5 million) as at 31 December 2012;
(ii)
Convertible Bonds with the aggregate principal amount of approximately HK$130
million which is non interest-bearing;
(iii)
Debenture with the aggregate principal amount of approximately HK$121 million
which is interest-bearing at 6% per annum; and
(iv)
Bills payable of RMB50 million (approximately HK$61.7 million) which was secured
by the Target Group’s pledged deposits of RMB60 million (approximately HK$75
million), certain Tea Forest (as defined in Appendix II to this circular) of the Target
Group of approximately RMB42.1 million (approximately HK$52.6 million) as at 31
December 2012 with total cultivable area of 4,598 Mu and guarantees jointly provided
by Mr. Cai Yanghang and Mr. Cai Rongxu with aggregate amount of RMB25 million
(approximately HK$31.3 million).
For the purpose of the above statement of indebtedness, foreign currency amounts have been
translated into Hong Kong dollars at the approximate exchange rates prevailing at RMB1: HK$1.25.
Save as aforesaid, the Enlarged Group did not have any outstanding bank overdrafts,
loans, debt securities, borrowings or other similar indebtedness, liabilities under acceptances or
acceptance credits, debentures, mortgages, charges, finance lease, hire purchases commitments,
which were either guaranteed, unguaranteed, secured or unsecured, guarantees or other material
contingent liabilities at the close of business on 30 April 2013.
E.
WORKING CAPITAL SUFFICIENCY OF THE ENLARGED GROUP
The Directors, after due and careful enquiry, are of the opinion that taking into account the
financial resources and available banking facilities of the Enlarged Group, its internally generated
funds and the settlement of the Consideration payable in cash, and in the absence of unforeseen
circumstances, the Enlarged Group has available sufficient working capital for its present
requirements for the next twelve months from the date of this circular.
I – 114
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The following is the text of an accountants’ report on the Target Group for the sole purpose
of inclusion in this circular, received from the independent reporting accountants, PKF, Certified
Public Accountants, Hong Kong.
28 June 2013
The Board of Directors
Huafeng Group Holdings Limited
Dear Sirs,
INTRODUCTION
We set out below our report on the financial information of China Natural Tea Holdings
Company Limited (the “Target Company”) and its subsidiaries (hereinafter collectively referred to
as the “Target Group”), including the consolidated income statements, the consolidated statements
of comprehensive income, the consolidated statements of changes in equity and the consolidated
statements of cash flows of the Target Group for each of the years ended 31 December 2010,
2011 and 2012, (the “Relevant Periods”), and the consolidated statements of financial position
of the Target Group and the statements of financial position of the Target Company as at 31
December 2010, 2011 and 2012, together with a summary of significant accounting policies and
other explanatory notes thereto, (the “Financial Information”), for inclusion in the circular of
Huafeng Group Holdings Limited (“Huafeng”) dated 28 June 2013 in connection with the proposed
acquisition of the entire equity interest in the Target Company (the “Circular”).
The Target Company was incorporated as an exempted company with limited liability in
the Cayman Islands on 27 July 2010. The principal activity of the Target Company is investment
holding.
At the date of this report, the Target Company has direct and indirect interests in the
subsidiaries as set out in Note 18 of Section II below. All companies comprising the Target Group
have adopted 31 December as their financial year end date. The statutory financial statements
of the companies now comprising the Target Group were prepared in accordance with the
relevant accounting principles applicable to these companies in the countries in which they were
incorporated or established. Details of their statutory auditors during the Relevant Periods are set
out in Note 18 of Section II below.
II – 1
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
No statutory financial statements have been prepared for the Target Company, as it is not
subject to statutory audit requirements under the relevant rules and regulations in its jurisdiction of
incorporation.
No qualified opinion for the years ended 31 December 2010, 2011 and 2012 was noted.
For the purpose of this report, the directors of the Target Company (the “Directors”) have
prepared the consolidated financial statements of the Target Group for the Relevant Periods in
accordance with International Financial Reporting Standards (“IFRSs”) issued by the International
Accounting Standards Board (the “IASB”) (the “Underlying Financial Statements”). We have
audited the Underlying Financial Statements in accordance with Hong Kong Standards on Auditing
(the “HKSAs”) issued by Hong Kong Institute of Certified Public Accountants (the “HKICPA”).
The Financial Information set out in this report has been prepared by the Directors from the
Underlying Financial Statements with no adjustment made thereon.
No audited financial statements have been prepared for the Target Company or any of its
subsidiaries in respect of any period subsequent to 31 December 2012.
DIRECTORS’ RESPONSIBILITY
The Directors are responsible for the preparation of the Underlying Financial Statements and
the Financial Information that give a true and fair view in accordance with IFRSs, the disclosure
requirements of the Rules Governing the Listing of Securities on the Main Board Market of The
Stock Exchange of Hong Kong Limited (the “Listing Rules”) and the disclosure requirements
of Hong Kong Companies Ordinance, and for such internal control as the Directors determine
is necessary to enable the preparation of the Underlying Financial Statements and the Financial
Information that are free from material misstatement, whether due to fraud or error.
REPORTING ACCOUNTANTS’ RESPONSIBILITY
Our responsibility is to express an opinion on the Financial Information and to report our
opinion to you. For the purpose of this report, we have carried out our procedures in accordance
with HKSAs and such additional procedures as are necessary in accordance with Auditing
Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.
OPINION
In our opinion, the Financial Information, for the purpose of this report, gives a true and
fair view of the state of affairs of the Target Company as at 31 December 2010, 2011 and 2012
and Target Group as at 31 December 2010, 2011 and 2012 and of the results and cash flows of the
Target Group for the Relevant Periods then ended.
II – 2
APPENDIX II
I.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
FINANCIAL INFORMATION OF THE TARGET GROUP
The following is the Financial Information of the Target Group for the Relevant Periods
prepared on the basis set out in Note 2 of Section II:–
1.
Consolidated income statements
Section II
Notes
Turnover
Cost of sales
5(a)
2010
RMB’000
2011
RMB’000
2012
RMB’000
310,358
(151,533)
408,241
(188,135)
389,047
(201,071)
158,825
220,106
187,976
189
79
33,383
1,083
38,602
5,058
(12,555)
(14,253)
(844)
(25,922)
(21,488)
(1,555)
(20,131)
(13,317)
(506)
Gross profit
Changes in fair value of
biological assets less
costs to sell during
the year
Other income
Selling and distribution
expenses
Administrative expenses
Other expenses
16
5(b)
Profit from operations
Finance costs
6
7
131,441
(181)
205,607
(866)
197,682
(510)
8(a)
131,260
(4,632)
204,741
(10,493)
197,172
(6,618)
Profit for the year and
attributable to equity
shareholders of the
Target Company
9
126,628
194,248
190,554
Earnings per share
attributable to equity
shareholders of the
Target Company
Basic and diluted
12
N/A
N/A
N/A
Profit before taxation
Income tax expense
For the Relevant Periods:–
(i)
No dividend was declared; and
(ii)
Except for the items disclosed above in the consolidated income statements, no
any other items that are exceptional in terms of size, nature or incidence.
II – 3
APPENDIX II
2.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Consolidated statements of comprehensive income
2010
RMB’000
2011
RMB’000
2012
RMB’000
126,628
194,248
190,554
(2,764)
(1,028)
(84)
Total comprehensive income
for the year (after tax)
123,864
193,220
190,470
Attributable to:–
Equity shareholders of
the Target Company
123,864
193,220
190,470
Profit for the year
Other comprehensive income
for the year (after tax):–
Exchange differences arising on
translation of financial statements of
foreign operations
II – 4
APPENDIX II
3.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Consolidated statements of financial position
Section II
Notes
2010
RMB’000
2011
RMB’000
2012
RMB’000
29,355
451
1,095
59,885
7,114
255,663
67,737
7,934
270,910
92,645
11,626
51,701
1,200
–
2,197
124,746
334,288
400,479
19
20
7,979
278
15,817
2,588
19,591
5,724
21
22
22
113,548
11,499
56,554
48,551
271,045
–
363,605
37,500
497,905
441,401
393,509
617,274
40,000
269
35,178
7,279
–
4,568
33,766
10,141
34,000
1,815
98,024
10,704
82,726
48,475
144,543
NET CURRENT ASSETS
358,675
345,034
472,731
TOTAL ASSETS LESS
CURRENT LIABILITIES
483,421
679,322
873,210
NON-CURRENT ASSETS
Property, plant and
equipment
Prepaid land lease payments
Biological assets
Deposits and prepayments
Deferred tax assets
14
15
16
17
27(c)
TOTAL NON-CURRENT
ASSETS
CURRENT ASSETS
Inventories
Trade receivables
Prepayments, deposits and
other receivables
Pledged deposits
Cash and cash equivalents
TOTAL CURRENT ASSETS
CURRENT LIABILITIES
Bank loans, secured
Trade payables
Other payables and accruals
Income tax payable
23
24
25
27(a)
TOTAL CURRENT
LIABILITIES
II – 5
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Section II
Notes
2010
RMB’000
2011
RMB’000
2012
RMB’000
–
2,681
6,099
483,421
676,641
867,111
Reserves
11,488
471,933
11,488
665,153
11,488
855,623
TOTAL EQUITY
483,421
676,641
867,111
NON-CURRENT
LIABILITIES
Deferred tax liabilities
27(c)
NET ASSETS
REPRESENTING:–
EQUITY ATTRIBUTABLE
TO OWNERS OF THE
TARGET COMPANY
Share capital
28
II – 6
APPENDIX II
4.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Consolidated statements of changes in equity
Attributable to owners of the Target Company
Share
Section II
capital
Notes RMB’000
Note 29
At 1 January 2010
Profit for the year
Other comprehensive income
for the year:–
Exchange differences on
translation of foreign
operations
Total comprehensive income
for the year
Transfer from retained profit
Effect of the Reorganisation
Issue of shares in connection
with the Reorganisation
Issue of shares
Share issues expenses
Waive of shareholders’ loan
At 31 December 2010
28(a)
28(b)
Share Statutory
Merger Exchange
Other
premium
reserve
reserve
reserve
reserve
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Note 29 Note 30(a) Note 30(b) Note 30(c) Note 30(d)
Retained
profits
RMB’000
Total
RMB’000
88
–
9,595
16
400
–
139,549
149,648
–
–
–
–
–
–
126,628
126,628
–
–
–
–
(2,764)
–
–
(2,764)
–
–
(88)
–
–
–
–
11
–
–
–
88
(2,764)
–
–
–
–
–
126,628
(11)
–
123,864
–
–
8,709
2,779
–
–
192,895
198,667
(8,987)
–
–
–
–
–
(201,604)
–
–
–
–
–
–
–
–
–
–
17,450
–
–
–
–
–
201,446
(8,987)
17,450
11,488
382,575
9,606
(201,500)
(2,364)
17,450
266,166
483,421
Profit for the year
Other comprehensive income
for the year:–
Exchange differences on
translation of foreign
operations
–
–
–
–
–
–
194,248
194,248
–
–
–
–
(1,028)
–
–
(1,028)
Total comprehensive income
for the year
Transfer from retained profits
–
–
–
–
–
333
–
–
(1,028)
–
–
–
194,248
(333)
193,220
–
11,488
382,575
9,939
(201,500)
(3,392)
17,450
460,081
676,641
At 31 December 2011
Profit for the year
Other comprehensive income
for the year:–
Exchange differences on
translation of foreign
operations
–
–
–
–
–
–
190,554
190,554
–
–
–
–
(84)
–
–
(84)
Total comprehensive income
for the year
Transfer from retained profits
–
–
–
–
–
731
–
–
(84)
–
–
–
190,554
(731)
190,470
–
11,488
382,575
10,670
(201,500)
(3,476)
17,450
649,904
867,111
At 31 December 2012
II – 7
APPENDIX II
5.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Consolidated statements of cash flows
Section II
Notes
2010
RMB’000
2011
RMB’000
2012
RMB’000
131,260
204,741
197,172
6(b)
469
2,023
2,693
6(b)
13
82
150
16
5(b)
7
(189)
(13)
181
(33,383)
(917)
866
(15,247)
(2,941)
510
131,721
173,412
182,337
(2,821)
(265)
(7,838)
(2,310)
(3,774)
(3,136)
(10,247)
(6,255)
5,133
(54)
4,299
(2,753)
12,820
(2,297)
8,448
131,154
(3,344)
159,011
(3,750)
186,255
(4,834)
127,810
155,261
181,421
(41,460)
(14,451)
(1,450)
(3,001)
(881)
(970)
(64,085)
(157,100)
(35,000)
(999)
13
106,235
917
(4,958)
2,941
(109,532)
(65,280)
(39,437)
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit before taxation
Adjustments for:–
Depreciation of property,
plant and equipment
Amortisation of prepaid
land lease payments
Changes in fair value of
biological assets less
costs to sell during
the year
Interest income
Finance costs
Operating cash flows before
movements in working capital
Increase in inventories
Increase in trade receivables
(Increase)/decrease in
prepayments, deposits and
other receivables
(Decrease)/increase in trade
payables
Increase/(decrease) in other
payables and accruals
Cash generated from
operations
Income tax paid
27(a)
NET CASH FROM
OPERATING ACTIVITIES
CASH FLOWS FROM
INVESTING ACTIVITIES
Payments to acquire and
deposits for acquisition
of property, plant and
equipment
Payments to acquire and
deposits for acquisition of
land use rights
Payments to acquire and
deposits for acquisition of
biological assets
(Advances to)/repayments
from related parties, net
Interest received
NET CASH USED IN
INVESTING ACTIVITIES
II – 8
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Section II
Notes
2010
RMB’000
2011
RMB’000
2012
RMB’000
201,446
(959)
40,000
–
–
(4,078)
29,500
(69,500)
–
(3,950)
34,000
–
(48,551)
48,551
CASH FLOWS FROM
FINANCING ACTIVITIES
Capital contribution
Share issue expenses paid
Proceeds from bank loans
Repayment of bank loans
(Increase)/decrease in pledged
time deposits for bank loans
Increase in pledged deposits
for bills payable
Interest paid
–
–
(181)
–
(866)
(37,500)
(150)
NET CASH FROM/(USED IN)
FINANCING ACTIVITIES
191,755
3,607
(7,600)
NET INCREASE IN CASH
AND CASH EQUIVALENTS
210,033
93,588
134,384
EFFECT OF FOREIGN
EXCHANGE RATE
CHANGES, NET
(3,235)
(1,028)
(84)
CASH AND CASH
EQUIVALENTS AT
THE BEGINNING OF
THE YEAR
64,247
271,045
363,605
271,045
363,605
497,905
CASH AND CASH
EQUIVALENTS AT
THE END OF
THE YEAR
II – 9
APPENDIX II
6.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Statements of financial position of the Target Company
Section II
Notes
2010
RMB’000
2011
RMB’000
2012
RMB’000
NON-CURRENT ASSETS
Investments in subsidiaries
18
201,603
201,603
201,603
CURRENT ASSETS
Amounts due from
subsidiaries
18
197,362
178,956
170,577
CURRENT LIABILITIES
Other payables and accruals
Amount due to a subsidiary
18
12,433
–
5,936
2,525
1,075
–
12,433
8,461
1,075
NET CURRENT ASSETS
184,929
170,495
169,502
NET ASSETS
386,532
372,098
371,105
11,488
375,044
11,488
360,610
11,488
359,617
386,532
372,098
371,105
Total current liabilities
EQUITY
Share capital
Reserves
28
29(d)
TOTAL EQUITY
II – 10
APPENDIX II
II.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
NOTES TO THE FINANCIAL INFORMATION
1.
Corporate information and group reorganisation
The Target Company was incorporated on 27 July 2010 as an exempted company in
the Cayman Islands with limited liability under the Companies Law of the Cayman Islands.
The registered office of the Target Company is located at Cricket Square, Hutchins Drive,
PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Particulars of the companies now
comprising the Target Group are set out in Note 18 of Section II below.
The Target Company is an investment holding company. During the Relevant Periods,
the Target Group is principally engaged in the operation of sales of raw teas and refined teas
and other related products (the “Target Group’s Business”).
In the opinion of directors, the ultimate controlling shareholders of the Target
Company are Mr. Cai Zhenrong, Mr. Cai Zhenyao and Mr. Ng Shui Yu (the “Controlling
Shareholders”).
Before the formation of the Target Group, the Target Group’s Business was carried
out by the subsidiaries now comprising the Target Group as set out in Note 18 of Section
II below, all of which were collectively controlled by the Controlling Shareholders. For the
purpose of rationalise the group structure, the Target Group underwent the reorganisation
(the “Reorganisation”) for the Target Group’s Business. Upon completion of the
Reorganisation, the Target Company became the holding company of the subsidiaries now
comprising the Target Group on 6 August 2010.
2.
Basis of presentation and preparation
(a)
Basis of presentation
The companies now comprising the Target Group were under the common
control of the Controlling Shareholders before and after the Reorganisation.
Accordingly, the Financial Information has been prepared by applying the principles
of merger accounting as if the Reorganisation had been completed at the beginning of
the Relevant Periods.
II – 11
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The consolidated income statements, consolidated statements of comprehensive
income, consolidated statements of changes in equity and consolidated statements
of cash flows of the Target Group for the Relevant Periods include the results and
cash flows of all companies now comprising the Target Group from the earliest date
presented or since the date when the subsidiaries incorporated or first came under
the common control of the Controlling Shareholders, wherever this is a shorter
period. The consolidated statements of financial position of the Target Group as at 31
December 2010, 2011 and 2012 have been prepared to present the assets and liabilities
of the subsidiaries using the existing book values from the Controlling Shareholders’
perspective. No adjustments are made to reflect fair values, or recognise any new
assets or liabilities as a result of the Reorganisation.
Equity interests in subsidiaries held by parties other than the Controlling
Shareholders, and changes therein, prior to the Reorganisation are presented as noncontrolling interests in equity in applying the principles of merger accounting.
The Financial Information is presented in Renminbi (“RMB”) and all values are
rounded to the nearest thousand except when otherwise indicated.
(b)
Compliance with IFRSs
The Financial Information has been prepared in accordance with all applicable
IFRSs, which collective term includes all applicable individual International Financial
Reporting Standards (“IFRS”), International Accounting Standards (“IAS”) and
Interpretations (“IFRIC-Int”) issued by International Accounting Standards Board and
the disclosure requirements of the Hong Kong Companies Ordinance. This Financial
Information also complies with the applicable disclosure provisions of the Listing
Rules.
(c)
Adoption of new and revised IFRSs
For the purpose of this Financial Information, the Target Group has adopted
all the new and revised IFRSs applicable to the Relevant Periods from the beginning
of the Relevant Periods. The adoption of these IFRSs does not necessitate material
changes in the Target Group’s accounting policies or retrospective adjustments on the
Financial Information.
II – 12
APPENDIX II
(d)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
IFRSs in issue but not yet effective
The following IFRS in issue at 31 December 2012 have not been applied in
the preparation of the Target Group’s Financial Information since they were not yet
effective for the Relevant Periods:–
IAS 19 (2011)
Employee Benefits1
IAS 27 (2011)
IAS 28 (2011)
IFRS 9
Separate Financial Statements1
Investments in Associates and Joint Ventures1
Financial Instruments3
IFRS 10
Consolidated Financial Statements2
IFRS 11
IFRS 12
Joint Arrangements1
Disclosure of Interests in Other Entities1
IFRS 13
Fair Value Measurement1
IFRIC – Int 20
Stripping Costs in the Production Phase of
a Surface Mine1
Presentation of Items of Other
Comprehensive Income1
Amendments to IAS 1
Amendments to IAS 32
Amendments to IFRS 7
Amendments to IFRS 10
Annual improvements to
IFRSs (2009 - 2011)
Offsetting Financial Assets and
Financial Liabilities2
Disclosures – Offsetting Financial Assets and
Financial Liabilities1
Investment Entities2
Amendments to IAS 1, IAS 16 and IAS 321
1
Effective for accounting periods beginning on or after 1 January 2013
2
Effective for accounting periods beginning on or after 1 January 2014
3
Effective for accounting periods beginning on or after 1 January 2015
The Target Group is in the process of making an assessment of what the impact
of these amendments is expected to be in the period of initial application. So far it
has concluded that the adoption of them is unlikely to have a significant impact on the
Target Group’s Financial Information.
II – 13
APPENDIX II
3.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Significant accounting policies
(a)
Measurement basis
The Financial Information is prepared under the historical cost basis as
modified by the revaluation of biological assets which are carried at fair value.
(b)
Basis of consolidation
The Financial Information includes the financial statements of the Target
Company and its subsidiaries for the Relevant Periods. As explained in Note 2 above,
the Reorganisation under common control has been accounted for using merger
accounting.
The merger method of accounting involves incorporating the financial
statement items of the combining entities or businesses in which the common
control combination occurs as if they had been consolidated from the date when
the combining entities or businesses first came under the control of the controlling
party. No amount is recognised in respect of goodwill or the excess of the acquirers’
interest in the net fair value of acquirees’ identifiable assets, liabilities and contingent
liabilities over the cost of investment at the time of common control combination.
The acquisition of subsidiaries other than those under common control has been
accounted for using the acquisition method of accounting.
The financial statements of the subsidiaries are prepared for the same reporting
period as the Target Company, using consistent accounting policies. The results of
subsidiaries are consolidated from the date of acquisition, being the date on which
the Target Group obtains control, and continue to be consolidated until the date that
such control ceases. All intra-group balances, transactions, unrealised gains and losses
resulting from intra-group transactions are eliminated on consolidation in full.
Losses within a subsidiary are attributed to the non-controlling interest even if
that results in a deficit balance.
A change in the ownership interest of a subsidiary, without a loss of control, is
accounted for as an equity transaction.
II – 14
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
If the Target Group loses control over a subsidiary, it derecognises (i) the
assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount
of any non-controlling interest and (iii) the cumulative translation differences
recorded in equity; and recognises (i) the fair value of the consideration received,
(ii) the fair value of any investment retained and (iii) any resulting surplus or deficit
in profit or loss. The Target Group’s share of components previously recognised in
other comprehensive income is reclassified to profit or loss or retained profits, as
appropriate.
(c)
Subsidiaries
A subsidiary is an entity whose financial and operating policies the Target
Company controls, directly or indirectly, so as to obtain benefits from its activities.
(d)
Business combinations and goodwill
Business combinations, other than acquisition of subsidiaries under common
control as explained in Note 2 above, are accounted for using the acquisition method.
The consideration transferred is measured at the acquisition date fair value which is
the sum of the acquisition date fair values of assets transferred by the Target Group,
liabilities assumed by the Target Group to the former owners of the acquiree and the
equity interests issued by the Target Group in exchange for control of the acquiree.
For each business combination, the acquirer measures the non-controlling interest
in the acquiree either at fair value or at the proportionate share of the acquiree’s
identifiable net assets. Acquisition costs are expensed as incurred.
When the Target Group acquires a business, it assesses the financial assets
and liabilities assumed for appropriate classification and designation in accordance
with the contractual terms, economic circumstances and pertinent conditions as at
the acquisition date. This includes the separation of embedded derivatives in host
contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value
of the acquirer’s previously held equity interest in the acquiree is remeasured to fair
value as at the acquisition date through profit or loss.
II – 15
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Any contingent consideration to be transferred by the acquirer is recognised
at fair value at the acquisition date. Subsequent changes to the fair value of
the contingent consideration which is deemed to be an asset or liability will be
recognised in accordance with IAS 39 either in profit or loss or as a change to other
comprehensive income. If the contingent consideration is classified as equity, it shall
not be remeasured until it is finally settled within equity.
Goodwill is initially measured at cost, being the excess of the aggregate of the
consideration transferred, the amount recognised for non-controlling interests and
any fair value of the Target Group’s previously held equity interests in the acquiree
over the net identifiable assets acquired and liabilities assumed. If the sum of this
consideration and other items is lower than the fair value of the net assets of the
subsidiary acquired, the difference is, after reassessment, recognised in profit or loss
as a gain on bargain purchase.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. Goodwill is tested for impairment annually or more frequently if
events or changes in circumstances indicate that the carrying value may be impaired.
The Target Group performs its annual impairment test of goodwill as at 31 December.
For the purpose of impairment testing, goodwill acquired in a business combination
is, from the acquisition date, allocated to each of the Target Group’s cash-generating
units, or groups of cash-generating units, that are expected to benefit from the
synergies of the combination, irrespective of whether other assets or liabilities of the
Target Group are assigned to those units or groups of units.
Impairment is determined by assessing the recoverable amount of the cashgenerating unit (group of cash-generating units) to which the goodwill relates. Where
the recoverable amount of the cash-generating unit (group of cash-generating units) is
less than the carrying amount, an impairment loss is recognised. An impairment loss
recognised for goodwill is not reversed in a subsequent period.
Where goodwill forms part of a cash-generating unit (group of cash-generating
units) and part of the operation within that unit is disposed of, the goodwill associated
with the operation disposed of is included in the carrying amount of the operation
when determining the gain or loss on disposal of the operation. Goodwill disposed of
in this circumstance is measured based on the relative values of the operation disposed
of and the portion of the cash-generating unit retained.
II – 16
APPENDIX II
(e)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Revenue recognition
Turnover is recognised when it is probable that the economic benefits will flow
to the Target Group and when the turnover can be measured reliably, on the following
bases:–
(i)
Turnover from the sale of goods is measured at the fair value of the
consideration received or receivable, net of returns, trade discounts
and volume rebates. Turnover is recognised when persuasive evidence
exists, usually in the form of an executed sales agreement, that the
significant risks and rewards of ownership have been transferred to the
buyer, recovery of the consideration is probable, the associated costs and
possible return of goods can be estimated reliably, there is no continuing
management involvement with the goods, and the amount of turnover can
be measured reliably.
The timing of the transfers of risks and rewards varies depending on the
individual terms of the contract of sale; and
(ii)
(f)
Interest income, on an accrual basis using the effective interest method
by applying the rate that exactly discounts the estimated future cash
receipts through the expected life of the financial instrument or a shorter
period, when appropriate, to the net carrying amount of the financial
asset.
Property, plant and equipment and depreciation
Property, plant and equipment, other than construction in progress, are stated
at cost less accumulated depreciation and any impairment losses. When an item of
property, plant and equipment is classified as held for sale or when it is part of a
disposal group classified as held for sale, it is not depreciated and is accounted for
in accordance with IFRS 5. The cost of an item of property, plant and equipment
comprises its purchase price and any directly attributable costs of bringing the asset to
its working condition and location for its intended use.
II – 17
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Expenditure incurred after items of property, plant and equipment have been put
into operation, such as repairs and maintenance, is normally charged to profit or loss
in the period in which it is incurred. In situations where the recognition criteria are
satisfied, the expenditure for a major inspection is capitalised in the carrying amount
of the asset as a replacement. Where significant parts of property, plant and equipment
are required to be replaced at intervals, the Target Group recognises such parts as
individual assets with specific useful lives and depreciation.
Depreciation is calculated on the straight-line basis to write off the cost of each
item of property, plant and equipment to its residual value over its estimated useful
life. The principal annual rates used for this purpose are as follows:–
Category
Buildings
Machinery
Equipment and furniture
Motor vehicles
Leasehold improvements
Estimated
useful life
Estimated
residual values
10 – 20 years
5 – 10 years
3 – 10 years
3 – 10 years
Over the shorter
of lease terms
and estimated
useful period
3% – 4%
3% – 4%
3% – 4%
3%
–
Where parts of an item of property, plant and equipment have different useful
lives, the cost of that item is allocated on a reasonable basis among the parts and
each part is depreciated separately. Residual values, useful lives and the depreciation
methods are reviewed, and adjusted if appropriate, at least at the end of each reporting
periods.
An item of property, plant and equipment and any significant part initially
recognised is derecognised upon disposal or when no future economic benefits
are expected from its use or disposal. Any gain or loss on disposal or retirement
recognised in profit or loss in the year the asset is derecognised is the difference
between the net sales proceeds and the carrying amount of the relevant asset.
II – 18
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Construction in progress represents property, plant and equipment under
construction and is stated at cost less impairment losses. Cost of self-constructed
items of property, plant and equipment include the cost of materials, direct labour and
an appropriate proportion of production overheads and borrowing costs. Capitalisation
of these costs ceases and the construction in progress is transferred to property, plant
and equipment when substantially all of the activities necessary to prepare the assets
for their intended use are completed.
(g)
Provisions and contingent liabilities
Provisions are recognised for liabilities of uncertain timing or amount when
the Target Group has a legal or constructive obligation arising as a result of a past
event. It is probable that an outflow of economic benefits will be required to settle
the obligation and a reliable estimate can be made. Where the time value of money
is material, provisions are stated at the present value of the expenditures expected to
settle the obligation.
Where it is not probable that an outflow of economic benefits will be required,
or the amount cannot be estimated reliably, the obligation is disclosed as a contingent
liability, unless the probability of outflow is remote. Possible obligations, whose
existence will only be confirmed by the occurrence or non-occurrence of one or more
future events are also disclosed as contingent liabilities unless the probability of
outflow is remote.
(h)
Borrowing costs
Borrowing costs are directly attributable to the acquisition, construction or
production of an asset which necessarily takes a substantial period of time to get
ready for its intended use or sale are capitalised as part of the cost of that asset. Other
borrowing costs are expensed in the period in which they are incurred.
The capitalisation of borrowing costs as part of the cost of a qualifying asset
commences when expenditure for the asset is being incurred. Borrowing costs are
being incurred and activities that are necessary to prepare the asset for its intended use
or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when
substantially all the activities necessary to prepare the qualifying asset for its intended
use or sale are interrupted or completed.
II – 19
APPENDIX II
(i)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Employee benefits
Salaries, annual bonuses and annual leave entitlements are accrued in the period
in which the associated services are rendered by employees of the Target Group.
Termination benefits are recognised when, and only when, the Target Group
demonstrably commits itself to terminate employment or provide benefits as a result
of voluntary redundancy by having a detailed formal plan which is without realistic
possibility of withdrawal.
The employees of the Target Group’s subsidiaries which operate in the People’s
Republic of China (the “PRC”) are required to participate in a central pension scheme
operated by the local municipal government. These subsidiaries are required to
contribute certain percentage of their payroll costs to the central pension scheme. The
contributions are charged to profit or loss as they become payable in accordance with
the rules of the central pension scheme. Details of the central pension scheme are set
out in Note 26 of Section II below.
(j)
Government grants
Government grants are recognised in the statement of financial position initially
when there is reasonable assurance that they will be received and that the Target
Group will comply with the conditions attaching to them. Grants that compensate the
Target Group for expenses incurred are recognised as revenue in profit or loss on a
systematic basis in the same periods in which the expenses are incurred. Grants that
compensate the Target Group for the cost of an asset are deducted from the carrying
amount of the asset and consequently are effectively recognised in profit or loss over
the useful life of the asset by way of reduced depreciation expense.
(k)
Biological assets
Biological assets comprise tea trees in forests, of which the Forestry Right
Certificates have been issued to the Target Group for the purpose of tea plantation,
(“Tea Forest”) involved in the agricultural activities of the transformation of biological
assets into agricultural produce for sale or further processing.
Biological assets are measured at fair value less costs to sell at initial
recognition and at the end of each reporting period, with any change therein
recognised in profit or loss. Costs to sell include all costs that would be necessary to
sell the assets.
Agricultural produce harvested from biological assets is measured at its fair
value less costs to sell at the point of harvest. The fair value less costs to sell at the
time of harvest is deemed as the cost of agriculture produce.
II – 20
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
If an active market exists for a biological asset or agricultural produce with
reference to comparable species, growing condition and expended yield of the crops,
the quoted price in that market is adopted for determining the fair value of that asset.
If an active market does not exist, the Group uses the most recent market transaction
price, provided that there has not been a significant change in economic circumstances
between the transaction date and the end of reporting period, or the market prices for
similar assets adjusted to reflect differences to determine fair values or as determined
by independent professional valuers.
(l)
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
calculated using the weighted average costing and comprises all costs of purchase,
costs of conversion and other costs incurred in bringing the inventories to their present
location and condition.
Net realisable value is the estimated selling price in the ordinary course of
business, less estimates of costs of completion and selling expenses.
When inventories are sold, the carrying amount of those inventories is
recognised as an expense in the period in which the related turnover is recognised.
The amount of any write-down of inventories to net realisable value and all losses
of inventories are recognised as an expense in the period the write down or loss
occurs. The amount of any reversal of any write-down of inventories is recognised
as a reduction in the amount of inventories as an expense in the period in which the
reversal occurs.
(m)
Trade and other receivables
Trade and other receivables are initially recognised at fair value and thereafter
stated at amortised cost using the effective interest method, less allowance for
impairment of doubtful debts, except where the receivables are interest-free loans
made to related parties without any fixed repayment terms or the effect of discounting
would be immaterial. In such cases, the receivables are stated at cost less allowance
for impairment of doubtful debts.
(n)
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less
attributable transaction costs. Subsequent to initial recognition, interest-bearing
borrowings are stated at amortised cost with any difference between cost and
redemption value being recognised in profit or loss over the period of the borrowings,
together with any interest and fees payable, using the effective interest method.
II – 21
APPENDIX II
(o)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Income tax
Income tax for the year comprises current tax and movements in deferred tax
assets and liabilities. Current tax and movements in deferred tax assets and liabilities
are recognised in profit or loss except to the extent that they relate to items recognised
in other comprehensive income or directly in equity, in which case the relevant
amounts of tax are recognised in other comprehensive income or directly in equity,
respectively.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the end of the reporting period, and
any adjustment to tax payable in respect of previous periods.
Deferred tax assets and liabilities arise from deductible and taxable temporary
differences respectively, being the differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their tax bases. Deferred tax assets
also arise from unused tax losses and unused tax credits.
Apart from differences which arose on initial recognition of assets and
liabilities that affect neither accounting nor taxable profit, all deferred tax liabilities,
and all deferred tax assets to the extent that it is probable that future taxable profits
will be available against which the asset can be utilised, are recognised. Future
taxable profits that may support the recognition of deferred tax assets arising from
deductible temporary differences include those that will arise from the reversal of
existing taxable temporary differences, provided those differences relate to the same
taxation authority and the same taxable entity, and are expected to reverse either in
the same period as the expected reversal of the deductible temporary difference or in
periods into which a tax loss arising from the deferred tax asset can be carried back
or forward. The same criteria are adopted when determining whether existing taxable
temporary differences support the recognition of deferred tax assets arising from
unused tax losses and credits, that is, those differences are taken into account if they
relate to the same taxation authority and the same taxable entity, and are expected to
reverse in a period, or periods, in which the tax loss or credit can be utilised.
The amount of deferred tax recognised is measured based on the expected
manner of realisation or settlement of the carrying amount of the assets and liabilities,
using tax rates enacted or substantively enacted at the end of the reporting period.
Deferred tax assets and liabilities are not discounted.
.
II – 22
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The limited exceptions to recognition of deferred tax assets and liabilities are
those temporary differences arising from goodwill not deductible for tax purposes,
the initial recognition of assets or liabilities that affect neither accounting nor
taxable profit (provided they are not part of a business combination), and temporary
differences relating to investments in subsidiaries to the extent that, in the case of
taxable differences, the Target Group controls the timing of the reversal and it is
probable that the differences will not reverse in the foreseeable future, or in the case
of deductible differences, unless it is probable that they will reverse in the future.
The carrying amount of a deferred tax asset is reviewed at the end of each
reporting period and is reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow the related tax benefit to be
utilised. Any such reduction is reversed to the extent that it becomes probable that
sufficient taxable profits will be available.
Additional income taxes that arise from the distribution of dividends are
recognised when the liability to pay the related dividends is recognised in profit or
loss.
Current tax balances and deferred tax balances, and movements therein, are
presented separately from each other and are not offset. Current tax assets are offset
against current tax liabilities, and deferred tax assets against deferred tax liabilities if
the Target Group has the legally enforceable right to set off current tax assets against
current tax liabilities and the following additional conditions are met:–
(i)
In the case of current tax assets and liabilities, the Target Group intends
either to settle on a net basis, or to realise the asset and settle the liability
simultaneously; or
(ii)
in the case of deferred tax assets and liabilities, if they relate to income
taxes levied by the same taxation authority on either:
–
the same taxable entity; or
–
different taxable entities, which, in each future period in which
significant amounts of deferred tax liabilities or assets are
expected to be settled or recovered, intend to realise the current
tax assets and settle the current tax liabilities on a net basis or
realise and settle simultaneously.
II – 23
APPENDIX II
(p)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and on hand, demand deposits
with banks and other financial institutions, and short-term, highly liquid investments
that are readily convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value, having been within three months of maturity at
acquisition. Bank overdrafts that are repayable on demand and form an integral part
of the Target Group’s cash management are also included as a component of cash and
cash equivalents for the purposes of the consolidated statement of cash flows.
(q)
Leases
An arrangement, comprising a transaction or a series of transactions, is or
contains a lease if the Target Group determines that the arrangement conveys a right
to use a specific asset or assets for an agreed period of time in return for a payment
or a series of payments. Such a determination is made based on an evaluation of the
substance of the arrangement and is regardless of whether the arrangement takes the
legal form of a lease.
(i)
Classification of assets leased to the Target Group
Assets that are held by Target Group under leases which transfer to the
Target Group substantially all the risks and rewards of ownership are classified
as being held under finance leases. Leases which do not transfer substantially
all the risks and rewards of ownership to the Target Group are classified as
operating leases, with the following exceptions:
–
property held under operating leases that would otherwise meet
the definition of an investment property is classified as investment
property on a property-by-property basis and, if classified as
investment property, is accounted for as if held under a finance
lease; and
–
land held for own use under an operating lease, the fair value
of which cannot be measured separately from the fair value of a
building situated thereon at the inception of the lease, is accounted
for as being held under a finance lease, unless the building is also
clearly held under an operating lease. For these purposes, the
inception of the lease is the time that the lease was first entered
into by the Target Group, or taken over from the previous lessee.
II – 24
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
(ii)
Assets acquired under finance leases
Where the Target Group acquires the use of assets under finance leases,
the amounts representing the fair value of the leased asset, or, if lower, the
present value of the minimum lease payments, of such assets are included
in fixed assets and the corresponding liabilities, net of finance charges, are
recorded as obligations under finance leases. Depreciation is provided at rates
which write off the cost or valuation of the assets over the term of the relevant
lease or, where it is likely the Target Group will obtain ownership of the asset,
the life of the asset, as set out in note 3(f). Impairment losses are accounted
for in accordance with the accounting policy as set out in note 3(r). Finance
charges implicit in the lease payments are charged to profit or loss over the
period of the leases so as to produce an approximately constant periodic rate of
charge on the remaining balance of the obligations for each accounting period.
Contingent rentals are charged to profit or loss in the accounting period in
which they are incurred.
(iii)
Operating lease charges
Where the Target Group has the use of assets held under operating
leases, payments made under the leases are charged to profit or loss in equal
instalments over the accounting periods covered by the lease term, except
where an alternative basis is more representative of the pattern of benefits to be
derived from the leased asset. Lease incentives received are recognised in profit
or loss as an integral part of the aggregate net lease payments made. Contingent
rentals are charged to profit or loss in the accounting period in which they are
incurred.
The cost of acquiring land held under an operating lease is amortised on
a straight-line basis over the period of the lease term except where the property
is classified as an investment property.
Prepaid land lease payments represent cost of land use rights situated
in the PRC. Prepaid land lease payments are carried at cost less accumulated
amortisation and any impairment losses. Amortisation is calculated on a
straight-line basis over the respective lease terms.
II – 25
APPENDIX II
(r)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Impairment of assets
(i)
Impairment of trade and other receivables
Trade and other receivables that are stated at cost or amortised cost are
reviewed at the end of each reporting period to determine whether there is
objective evidence of impairment. Objective evidence of impairment includes
observable data that comes to the attention of the Target Group about one or
more of the following loss events:–
–
significant financial difficulty of the debtor;
–
a breach of contract, such as a default or delinquency in interest or
principal payments;
–
it becoming probable that the debtor will enter bankruptcy or other
financial reorganisation; and
–
significant changes in the technological, market, economic or legal
environment that have an adverse effect on the debtor.
If any such evidence exists, any impairment loss is determined and
recognised as follows:–
The impairment loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future cash
flows, discounted at the financial asset’s original effective interest rate
(i.e. the effective interest rate computed at initial recognition of these
assets), where the effect of discounting is material. This assessment
is made collectively where these financial assets share similar risk
characteristics, such as similar past due status, and have not been
individually assessed as impaired. Future cash flows for financial assets
which are assessed for impairment collectively are based on historical
loss experience for assets with credit risk characteristics similar to the
collective group.
II – 26
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
If in a subsequent period the amount of an impairment loss
decreases and the decrease can be linked objectively to an event
occurring after the impairment loss was recognised, the impairment loss
is reversed through profit or loss. A reversal of an impairment loss shall
not result in the asset’s carrying amount exceeding that which would
have been determined had no impairment loss been recognised in prior
years.
Impairment losses recognised in respect of trade debtors are
included within trade and other receivables if recovery of the debt is
considered doubtful but not remote. In this case, the impairment losses
for doubtful debts are recorded using an allowance account. When the
Target Group is satisfied that recovery is remote, the amount considered
irrecoverable is written off against trade debtors directly and any
amounts held in the allowance account relating to that debt are reversed.
Subsequent recoveries of amounts previously charged to the allowance
account are reversed against the allowance account. Other changes in
the allowance account and subsequent recoveries of amounts previously
written off directly are recognised in profit or loss.
(ii)
Impairment of other assets
Internal and external sources of information are reviewed at the end of
each reporting period to identify indications that the following assets may be
impaired or an impairment loss previously recognised no longer exists or may
have decreased:–
–
property, plant and equipment;
–
construction in progress;
–
prepaid land lease payments; and
–
non-current deposits and prepayments.
If any such indication exists, the asset’s recoverable amount is estimated.
II – 27
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Calculation of recoverable amount
The recoverable amount of an asset is the greater of its fair value
less cost to sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of time value
of money and the risks specific to the asset. Where an asset does not
generate cash inflows largely independent of those from other assets, the
recoverable amount is determined for the smallest group of assets that
generates cash inflows independently (i.e. a cash generating unit).
Recognition of impairment losses
An impairment loss is recognised in profit or loss whenever the
carrying amount of an asset, or the cash-generating unit to which it
belongs, exceeds its recoverable amount. Impairment losses recognised
in respect of cash-generating units are allocated to reduce the carrying
amount of the other assets in the unit (or group of units) on a pro rata
basis, except that the carrying value of an asset will not be reduced
below its individual fair value less costs to sell, or value in use, if
determinable.
Reversals of impairment losses
An impairment loss is reversed if there has been a favourable
change in the estimates used to determine the recoverable amount. A
reversal of impairment loss is limited to the asset’s carrying amount that
would have been determined had no impairment loss been recognised in
prior years. Reversals of impairment losses are credited to profit or loss
in the year in which the reversals are recognised.
II – 28
APPENDIX II
(s)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Related parties
A person or a close member of that person’s family is related to the Target
Group if:–
(i)
that person has control or a joint control over the Target Group;
(ii)
that person has significant influence over the Target Group; or
(iii)
that person is a member of the key management personnel of the Target
Group or of a parent of the Target Group.
An entity is related to the Target Group if:–
(i)
the entity and the Target Group are members of the same group of
companies;
(ii)
the entity is an associate or a joint venture of either the Target Group or a
member of a group of which the Target Group is a member;
(iii)
the Target Group is an associate or a joint venture of either the entity or a
member of a group of which the entity is a member;
(iv)
the entity and the Target Group are joint ventures of the same third party;
(v)
the entity is a joint venture of a third entity and the Target Group is an
associate of that third entity;
(vi)
the Target Group is a joint venture of a third entity and the entity is an
associate of that third entity;
(vii)
the entity is a post-employment benefit plan for the benefit of employees
of either the Target Group or an entity related to the Target Group;
II – 29
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
(viii) the entity is controlled or jointly controlled by a person related to the
Target Group or a close member of that person’s family;
(t)
(ix)
a person who has control or joint control over the Target Group has
significant influence over the entity; or
(x)
a person who has control or joint control over the Target Group is a
member of the key management personnel of the entity (or of a parent of
the entity).
Foreign currency translation
The Financial Information is presented in RMB. The functional currency
of the Target Company or its subsidiaries is the currency of the primary economic
environment in which the Target Company or its subsidiaries operates.
Foreign currency transactions of the Target Company or its subsidiaries are
initially recorded in the functional currency using the exchange rates prevailing at the
dates of the transactions. At the end of reporting period, monetary items denominated
in foreign currencies are translated at the rates prevailing at the end of reporting
period and the exchange differences arising are recognised in the profit or loss. Nonmonetary items carried at fair value denominated in foreign currencies are translated
at the rates prevailing at the date when the fair value is determined and the exchange
differences arising are recognised in the profit or loss, except for the exchange
component of a gain or loss that is recognised directly in equity.
(u)
Segment reporting
Operating segments, and amounts of each segment item reported in the
Financial Information, are identified from the financial information provided regularly
to the Target Group’s most senior executive management for the purposes of allocating
resources to, and assessing the performance of, the Target Group’s various lines of
business and geographical locations.
II – 30
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Individual material operating segments are not aggregated for financial
reporting purpose unless the segments have similar economic characteristics and are
similar in respect of the nature of products and services, the nature of production
processes, the type or class of customers, the methods used to distribute the products
or provide the services, and the nature of the regulatory environment. Operating
segments which are not individually material may be aggregated if they share a
majority of these criteria.
A segment is a distinguishable component of the Target Group that is engaged
either in providing products or services (business segment), or in providing products
or services within a particular economic environment (geographical segment), which
is subject to risks and rewards that are different from those of other segments.
Inter-segment pricing is based on similar terms as those available to other
external parties.
Segment revenue, expenses, results, assets and liabilities include items directly
attributable to a segment as well as those that can be allocated on a reasonable basis
to that segment. Segment revenue, expenses, assets and liabilities are determined
before intra-group balances and intra-group transactions are eliminated as part of
the consolidation process, except to the extent that such intra-group balances and
transactions are between group enterprises within a single segment.
Segment assets consist primarily of biological assets, fixed assets, receivables
and operating cash, income tax recoverable and deferred tax assets. Segment liabilities
comprise operating liabilities, income tax payable and deferred tax liabilities.
Segment capital expenditure is the total cost incurred during the periods to
acquire segment assets (both tangible and intangible) that are expected to be used for
more than one period.
Unallocated items may comprise financial and corporate assets and interestbearing loans, corporate and financing expenses.
II – 31
APPENDIX II
(v)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Critical accounting estimate and judgements
Key sources of estimation uncertainty
In the process of applying the Target Group’s accounting policies,
management makes various estimates based on past experiences, expectations
of the future and other information. The key sources of estimation uncertainty
that may significantly affect the amounts recognised in the financial statements
are disclosed below:–
(i)
Estimated useful lives of tangible assets
The Target Group estimates the useful lives of tangible assets
based on the periods over which the assets are expected to be available
for use. The Target Group reviews annually their estimated useful lives,
based on factors that include asset utilisation and anticipated use of the
assets tempered by related industry benchmark information. It is possible
that future results of operation could be materially affected by changes
in these estimates brought about by changes in factors mentioned. A
reduction in the estimated useful lives of tangible assets would increase
depreciation charges and decrease non-current assets.
(ii)
Impairment of non-financial assets
The Target Group assesses whether there are any indicators of
impairment for all non-financial assets at the end of each reporting
period. Non-financial assets with definite life are tested for impairment
when there are indicators that the carrying amounts may not be
recoverable. An impairment exists when the carrying value of an asset
or a cash-generating unit exceeds its recoverable amount, which is
the higher of its fair value less costs to sell and its value in use. The
calculation of the fair value less costs to sell is based on available data
from binding sales transactions in an arm’s length transaction of similar
assets or observable market prices less incremental costs for disposing
of the asset. When value in use calculations are undertaken, management
must estimate the expected future cash flows from the asset or cashgenerating unit and choose a suitable discount rate in order to calculate
the present value of those cash flows.
II – 32
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
(iii)
Impairment of trade receivables and other receivables
Impairment of trade receivables and other receivables is
made based on assessment of their recoverability. The identification
of impairment of trade receivables and other receivables requires
management’s judgement and estimates. Where the actual outcome
or expectation in future is different from the original estimate, such
differences will impact the carrying value of the receivables and
impairment loss or reversal of impairment in the period in which such an
estimate has been changed.
(iv)
Net realisable value of inventories
Net realisable value of inventories is the estimated selling price
in the ordinary course of business less estimated selling expenses. These
estimates are based on the current market condition and the historical
experience of selling products of similar nature. It could change
significantly as a result of changes in customer taste or competitor
actions in response to market conditions. Management reassesses these
estimates at each reporting date.
(v)
Deferred tax assets
Deferred tax assets are recognised for all unused tax losses to
the extent that it is probable that taxable profit will be available against
which the losses can be utilised. Significant management judgement
is required to determine the amount of deferred tax assets that can be
recognised, based upon the likely timing and level of future taxable
profits together with future tax planning strategies. Details are contained
in Note 27 to the Financial Information.
II – 33
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
(vi)
Fair value of biological assets
Biological assets are measured at fair value less costs to sell. In
determining the fair value of the biological assets, the professional valuer
has applied a discounted cash flow method of the income approach
which requires a number of key assumptions and estimates to be made
such as discount rate, tea leaves selling price, operating costs and
lifecycle. Any change in the estimates may affect the fair value of the
biological assets significantly. The professional valuer and management
review the assumptions and estimates periodically to identify any
significant change in the fair value of biological assets.
4.
Segment information
For management purposes, the Target Group is organised into business units based on
their products and has two reportable operating segments as follows:–
–
Raw teas segment
–
Refined teas and other related products segment
Management monitors the results of the Target Group’s operating segments separately
for the purpose of making decisions about resources allocation and performance assessment.
Segment performance is evaluated based on reportable segment profit, which is a measure of
adjusted profit before tax. The adjusted profit before tax is measured consistently with the
Target Group’s profit before tax except that finance costs as well as head office and corporate
expenses are excluded from such measurement.
Segment assets exclude the Target Group’s investments in subsidiaries, deferred tax
assets, pledged deposits, cash and cash equivalents, and other unallocated head office and
corporate assets as these assets are managed on a group basis.
Segment liabilities exclude bank loans, income tax payable, deferred tax liabilities and
other unallocated head office and corporate liabilities as these liabilities are managed on a
group basis.
II – 34
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Raw teas
RMB’000
Refined teas
and other
related
products
RMB’000
Elimination of
intersegment
RMB’000
Total
RMB’000
Segment revenue
Sales to external customers
Intersegment sales
242,160
52,427
68,198
–
–
(52,427)
310,358
–
Consolidated total revenue
294,587
68,198
(52,427)
310,358
141,365
2,147
(7,595)
135,917
Year ended 31 December 2010
Segment results
Reconciliation:
Corporate and other unallocated
segment expenses
Finance costs
(4,476)
(181)
Consolidated profit before tax
Segment assets
Corporate and other
unallocated assets
131,260
239,768
291,823
(14,379)
48,935
Consolidated total assets
Segment liabilities
Corporate and other
unallocated liabilities
566,147
49,968
33,120
(14,379)
68,709
14,017
Consolidated total liabilities
Other segment information:
Depreciation of property,
plant and equipment
Amortisation of prepaid
land lease payments
Capital expenditure (including
deposit paid) on:–
Property, plant and equipment
Prepaid land lease payments
Biological assets
517,212
82,726
217
252
–
469
13
–
–
13
533
–
64,085
40,927
3,001
–
–
–
–
41,460
3,001
64,085
II – 35
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Raw teas
RMB’000
Refined teas
and other
related
products
RMB’000
Elimination of
intersegment
RMB’000
Total
RMB’000
Segment revenue
Sales to external customers
Intersegment sales
307,135
84,814
101,106
–
–
(84,814)
408,241
–
Consolidated total revenue
391,949
101,106
(84,814)
408,241
228,610
(2,071)
(12,759)
213,780
Year ended 31 December 2011
Segment results
Reconciliation:
Corporate and other unallocated
segment expenses
Finance costs
(8,173)
(866)
Consolidated profit before tax
Segment assets
Corporate and other
unallocated assets
204,741
422,158
312,533
(22,099)
15,205
Consolidated total assets
Segment liabilities
Corporate and other
unallocated liabilities
727,797
11,023
55,357
(22,099)
44,281
6,875
Consolidated total liabilities
Other segment information:
Depreciation of property,
plant and equipment
Amortisation of prepaid
land lease payments
Capital expenditure (including
deposit paid) on:–
Property, plant and equipment
Prepaid land lease payments
Biological assets
712,592
51,156
197
1,826
–
2,023
13
69
–
82
135
–
157,100
14,316
881
–
–
–
–
14,451
881
157,100
II – 36
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Raw teas
RMB’000
Refined teas
and other
related
products
RMB’000
Elimination of
intersegment
RMB’000
Total
RMB’000
Segment revenue
Sales to external customers
Intersegment sales
305,126
50,574
83,921
–
–
(50,574)
389,047
–
Consolidated total revenue
355,700
83,921
(50,574)
389,047
206,090
5,204
(13,612)
197,682
(510)
Year ended 31 December 2012
Segment results
Finance costs
Consolidated profit before tax
Segment assets
Corporate and other
unallocated assets
197,172
672,745
335,250
(76,086)
9,758
Consolidated total assets
Segment liabilities
Corporate and other
unallocated liabilities
1,017,753
75,984
146,857
(76,086)
146,755
3,887
Consolidated total liabilities
Other segment information:
Depreciation of property,
plant and equipment
Amortisation of prepaid
land lease payments
Capital expenditure (including
deposit paid) on:–
Property, plant and equipment
Prepaid land lease payments
Biological assets
1,007,995
150,642
423
2,270
–
2,693
13
137
–
150
50
–
35,000
1,400
970
–
–
–
–
1,450
970
35,000
II – 37
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Geographical information
Since over 90% of the Target Group’s revenue and operating profit were
generated from the sales of raw teas and refined teas and other related products in
the PRC and over 90% of the Target Group’s identifiable assets and liabilities were
located in the PRC, no geographical segment information is presented in accordance
with IFRS 8 Operating Segments.
Information about major customers
No analysis of the Target Group’s turnover from operations by major customers
has been presented as there are no transactions with a single external customer equal
to or greater than 10 per cent of the Target Group’s total turnover.
5.
Turnover and other income
The Target Group’s turnover represents the net invoiced value of goods sold, after
allowances for returns and trade discounts during the Relevant Periods.
An analysis of turnover and other income is as follows:–
(a)
Turnover
Sales of raw teas
Sales of refined teas and
other related products
II – 38
2010
RMB’000
2011
RMB’000
2012
RMB’000
242,160
307,135
305,126
68,198
101,106
83,921
310,358
408,241
389,047
APPENDIX II
(b)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Other income
Bank interest income
Exchange gain
Government grant
Others
6.
2010
RMB’000
2011
RMB’000
2012
RMB’000
13
–
64
2
917
–
156
10
2,941
52
2,048
17
79
1,083
5,058
Profit from operations
The Target Group’s profit from operations is arrived at after charging/(crediting):–
(a)
(b)
#
Employee benefit expense
(including directors’
remuneration) (Note 10) :–
Wages and salaries
Social welfare and other costs
(including defined contribution
pension schemes)
Other items:–
Auditor’s remuneration
Amortisation of prepaid
land lease payments
Depreciation of property,
plant and equipment
Operating lease charges
for properties
Exchange losses/(gain)
Cost of inventories#
2010
RMB’000
2011
RMB’000
2012
RMB’000
7,824
12,638
12,863
1,774
3,250
2,950
9,598
15,888
15,813
941
544
603
13
82
150
469
2,023
2,693
17,496
471
151,533
21,844
1,464
188,135
22,841
(52)
201,071
Cost of inventories for the years ended 31 December 2010, 2011 and 2012 includes
RMB21,365,000, RMB23,015,000 and RMB23,972,000 relating to staff costs, depreciation and
amortisation expense and operating lease charges which amount is also included in the respective
total amount disclosed separately in this note above for each of these types of expenses.
II – 39
APPENDIX II
7.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Finance costs
Interest expenses on bank borrowings
wholly repayable within five years
8.
2010
RMB’000
2011
RMB’000
2012
RMB’000
181
866
510
Income tax expenses
(a)
Income tax expense in the consolidated income statement represents:–
Current PRC corporate income tax
(Note 27(a))
Deferred tax (Note 27(b))
2010
RMB’000
2011
RMB’000
2012
RMB’000
4,981
(349)
6,612
3,881
5,397
1,221
4,632
10,493
6,618
The Target Group is subject to income tax on an entity basis on profits arising
in or derived from the jurisdictions in which members of the Target Group are
domiciled and operate.
No Hong Kong profits tax has been provided as there was no assessable profit
earned in or derived from Hong Kong during the Relevant Periods.
Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the
Cayman Islands, the Target Company has obtained an undertaking from the
Governor-in-Council that no law which is enacted in the Cayman Islands
imposing any tax to be levied on profits, income, gain or appreciation shall
apply to the Target Company or its operations.
Pursuant to the International Business Companies Act, 1984 (the “IBC Act”)
of the British Virgin Islands (the “BVI”), international business companies
incorporated pursuant to the IBC Act enjoy a complete exemption from
income tax. This includes an exemption from capital gains tax and all forms of
withholding tax. Accordingly, the subsidiaries incorporated in the BVI are not
subject to tax.
II – 40
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The National People’s Congress approved the Corporate Income Tax Law of
the PRC (the “New CIT Law”) on 16 March 2007 and the State Council has
announced the Detailed Implementation Regulations on 6 December 2007,
which has been effective since 1 January 2008. According to the New CIT Law,
the income tax rates for both domestic and foreign investment enterprises are
unified at 25% effective from 1 January 2008. Pursuant to the relevant PRC
tax rules and regulations, the Target Group’s income derived from the teas
plantation is subject to preferential income tax rates of 0% – 12.5%.
Pursuant to the New CIT Law and its implementation rules, the gross amount
of dividends received by the Target Company’s subsidiary incorporated in
Hong Kong from its PRC subsidiaries in respect of their profits generated
since 1 January 2008 is subject to withholding tax at a rate of 5%. Under the
Caishui (2008) No. 1, the undistributed profits of the PRC subsidiaries as at 31
December 2007 determined based on the relevant PRC tax rules and regulations
are exempted from withholding tax. Since the Target Group can control the
quantum and timing of distribution of profits of the Target Group’s subsidiaries
in the PRC, deferred tax liabilities are only provided to the extent that such
profits are expected to be distributed in the foreseeable future.
(b)
Reconciliation between tax expense and accounting profit at applicable tax
rates:–
A reconciliation of the tax expense applicable to profit before tax using the
applicable rate for the regions in which the Target Company and its subsidiaries
are domiciled to the tax expense at the effective tax rate is as follows:–
Profit before taxation
Taxation at the applicable
tax rate of 25%
Incomes not taxable
for tax purpose
Expenses not deductible
for tax purpose
Effect of preferential tax rates
for teas plantation in the PRC
Income tax expense
II – 41
2010
RMB’000
2011
RMB’000
2012
RMB’000
131,260
204,741
197,172
32,815
51,185
49,293
(2)
(35)
(74)
3,366
1,031
1,400
(31,547)
(41,688)
(44,001)
4,632
10,493
6,618
APPENDIX II
9.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Profit attributable to equity shareholders of the target company
The consolidated profit attributable to equity shareholders of the Target Company
for the years ended 31 December 2010, 2011 and 2012 included the loss for the year of
RMB4,477,000, RMB8,152,000 and RMBNil, respectively, which have been dealt with in the
financial statements of the Target Company (Note 29) .
10.
Directors’ remuneration
Details of the remuneration of the directors of the Target Company during the
Relevant Periods are presented below based on the remuneration that the directors obtained
from the Target Group in the respective years.
2010
RMB’000
2011
RMB’000
2012
RMB’000
–
–
–
178
204
119
8
8
7
186
212
126
Directors’
fees
RMB’000
Salaries,
allowances
and other
benefits
RMB’000
Contributions
to defined
contribution
pension
schemes
RMB’000
Total
RMB’000
–
–
–
–
–
–
178
–
–
–
–
8
–
–
–
–
186
–
–
–
–
178
8
186
Fees
Other emoluments:–
Salaries, allowances and benefits
in kind
Contributions to defined contribution
pension schemes
2010
Mr. Cai Zhenyao
Mr. Cai Rongxu
Mr. Lee Kam Wing, Victor
Mr. Ng Shui Yu
Mr. Li Ngai
II – 42
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
2011
Mr. Cai Zhenyao
Mr. Cai Rongxu
Mr. Lee Kam Wing, Victor
Mr. Ng Shui Yu
Mr. Li Ngai
Directors’
fees
RMB’000
Salaries,
allowances
and other
benefits
RMB’000
Contributions
to defined
contribution
pension
schemes
RMB’000
Total
RMB’000
–
–
–
–
–
–
204
–
–
–
–
8
–
–
–
–
212
–
–
–
–
204
8
212
Directors’
fees
RMB’000
Salaries,
allowances
and other
benefits
RMB’000
Contributions
to defined
contribution
pension
schemes
RMB’000
Total
RMB’000
–
–
–
–
–
–
119
–
–
–
–
7
–
–
–
–
126
–
–
–
–
119
7
126
2012
Mr. Cai Zhenyao
Mr. Cai Rongxu
Mr. Lee Kam Wing, Victor
Mr. Ng Shui Yu
Mr. Li Ngai
There was no arrangement under which a director waived or agreed to waive any
remuneration during the Relevant Periods.
II – 43
APPENDIX II
11.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Five highest paid individuals
The five highest paid individuals included one director for the years ended 31
December 2010, 2011 and 2012 respectively, and details of whose remuneration are detailed
in Note 10 above. Details of the remuneration of the remaining four non-directors, highest
paid employees for each of the Relevant Periods are as follows:–
Salaries, bonuses, allowances and
benefits in kind
Pension scheme contributions
2010
RMB’000
2011
RMB’000
2012
RMB’000
520
32
502
31
480
26
552
533
506
The number of non-directors, highest paid employees whose remuneration fell within
the following bands is as follows:–
Nil to RMB1,000,000
12.
2010
RMB’000
2011
RMB’000
2012
RMB’000
4
4
4
Earnings per share
No earnings per share information is presented as its inclusion, for the purpose of this
report, is not considered meaningful.
13.
Dividends
The directors did not declare any dividends in respect of the Relevant Periods.
II – 44
APPENDIX II
14.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Property, plant and equipment
Buildings
RMB’000
Machinery
RMB’000
Equipment
and
furniture
RMB’000
1,512
122
667
337
645
189
469
374
–
819
335
25,449
3,628
27,290
1,634
1,004
834
843
819
25,784
30,918
Accumulated depreciation:–
At 1 January 2010
Charge for the year
681
121
186
110
222
152
5
81
–
5
–
–
1,094
469
At 31 December 2010
802
296
374
86
5
–
1,563
Net book value:–
At 31 December 2010
832
708
460
757
814
25,784
29,355
1,634
–
1,004
204
834
1,908
843
1,031
819
7,260
25,784
22,150
30,918
32,553
1,634
1,208
2,742
1,874
8,079
47,934
63,471
Accumulated depreciation:–
At 1 January 2011
Charge for the year
802
71
296
135
374
328
86
167
5
1,322
–
–
1,563
2,023
At 31 December 2011
873
431
702
253
1,327
–
3,586
Net book value:–
At 31 December 2011
761
777
2,040
1,621
6,752
47,934
59,885
1,634
–
–
1,208
32
4,745
2,742
188
–
1,874
–
–
8,079
314
–
47,934
10,011
(4,745)
63,471
10,545
–
At 31 December 2012
1,634
5,985
2,930
1,874
8,393
53,200
74,016
Accumulated depreciation:–
At 1 January 2012
Charge for the year
873
57
431
399
702
495
253
201
1,327
1,541
–
–
3,586
2.693
At 31 December 2012
930
830
1,197
454
2,868
–
6,279
Net book value:–
At 31 December 2012
704
5,155
1,733
1,420
5,525
53,200
67,737
Cost:–
At 1 January 2010
Additions
At 31 December 2010
Cost:–
At 1 January 2011
Additions
At 31 December 2011
Cost:–
At 1 January 2012
Additions
Transfer
II – 45
Motor
Leasehold Construction
in progress
vehicles improvements
RMB’000
RMB’000
RMB’000
Total
RMB’000
APPENDIX II
15.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Prepaid land lease payments
2010
RMB’000
2011
RMB’000
2012
RMB’000
At 1 January
Transfer from long term prepayments
Acquisition during the year
Amortisation for the year
477
–
–
(13)
464
6,001
881
(82)
7,264
–
970
(150)
At 31 December
Current portion included in prepayment,
deposits and other receivable
464
7,264
8,084
(13)
(150)
(150)
Non-current portion
451
7,114
7,934
Prepaid land lease payments represent cost of land use rights in respect of leasehold
lands situated in the PRC which are held under medium lease terms.
As at 31 December 2012, prepaid land lease payment with net book value of
RMB7,646,000 were pledged to banks to secure bank loans of RMB34,000,000 (Note 23) .
16.
Biological assets
At 1 January
Increase due to purchase
Plantation cost
Changes in fair value less cost to sell
Decrease due to harvest
II – 46
2010
RMB’000
2011
RMB’000
2012
RMB’000
906
–
332
189
(332)
1,095
221,185
29,864
33,383
(29,864)
255,663
–
76,835
38,602
(100,190)
1,095
255,663
270,910
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Biological assets represent Tea Forest located in the PRC. During the year ended
31 December 2011, the Target Group completed the acquisition of Tea Forest with total
cultivable area of 29,520.7 Mu and increased the total cultivable area for Tea Forest
recognised as biological assets from 72 Mu as at 31 December 2010 to 29,592.7 Mu as at 31
December 2011 and 2012. The Target Group recognises the Tea Forest as a biological asset
or agricultural produce when, and only when:–
–
The Target Group controls the Tea Forest as a result of past event, which
is evidenced by issuance of Forestry Right Certificate by the relevant PRC
authority for the purpose of tea plantation;
–
It is probable that future economic benefits associated with the Tea Forest will
flow to the Target Group; and
–
The fair value or cost of the Tea Forest can be measured reliably.
According to the Forestry Right Certificates issued by the relevant PRC authority,
the Target Group is granted a right to perform tea plantation within the cultivable area of
29,592.7 Mu for approximately 30 to 40 years.
As at 31 December 2012, certain Tea Forest of approximately RMB42,093,000 with
total cultivable area of 4,598 Mu was pledged to secure bills payable of RMB60,000,000
(Note 25) .
As at 31 December 2012, certain Tea Forest of approximately RMB63,222,000 with
cultivable area of 6,906 Mu was pledged to secure bank loans of RMB34,000,000 (Note 23) .
The Tea Forest was independently valued by Jones Lang LaSalle Corporate Appraisal
and Advisory Limited (“JLL”). JLL has adopted a discounted cash flow method of the
income approach in valuing the Tea Forest. The following are the major assumptions used in
the valuation:–
(a)
The Capital Asset Pricing Model has been used to determine a discount rate of
18.96%, 19.68% and 18,47% for the years ended 31 December 2010, 2011 and
2012 respectively;
(b)
The yield per tree, which represents the harvest level of the tea trees, is
affected by the age, species and health of the tea trees, as well as the climate,
location, soil condition, topography and infrastructure. In general, yield per tree
increases from age 2 to 5, remains stable for remaining years;
(c)
The direct production cost, which represents the direct costs necessary to
bring the tea leaves to their sale form, includes fertiliser costs, picking fee
and management cost of tea farmers. The direct production cost variables are
determined with reference to actual costs incurred for areas that have been
previously harvested and cost information for comparable areas with regards to
areas that have not been harvested previously;
II – 47
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
(d)
The valuation adopted the market sales prices prevailing as of the end of the
reporting periods for each type of tea leaves produced by the Target Group as
the assumed market price;
(e)
The market price variables and direct production cost variables in each
projected year will increase with reference to the expected inflation rate in the
PRC;
(f)
Cash flows are calculated from the current rotation of tea trees only,
without taking into account the projected turnover or costs related to the
re-establishment of new tea trees or any future business activities that may
impact the future price or yield of tea leaves harvested from the Target Group’s
tea trees;
(g)
There are no material changes in the existing political, legal, technological,
fiscal, economic conditions, climate and any other unfavourable natural
conditions;
(h)
The interest rates will not differ materially from those presently prevailing;
(i)
The tea trees are grown with balanced nutrition such that the tea leaves can be
harvested in reasonable quality; and
(j)
The availability of finance will not be a constraint on the cultivation of tea
trees.
The estimated quantity and fair value less costs to sell of agricultural produce harvest
from tea trees during the Relevant Periods since recognition of the Tea Forest as biological
assets were as follows:–
Estimated fair value less cost to sell
Estimated quantity (kg)
II – 48
2010
RMB’000
2011
RMB’000
2012
RMB’000
332
29,864
100,190
17,421
2,782,912
5,600,787
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The Target Group is exposed to a number of risks related to tea trees plantation:–
(i)
Regulatory and environmental risks
The Target Group is subject to laws and regulations in the PRC in which it
operates. The Target Group has established environmental policies and procedures
aimed at compliance with local environmental and other laws. Management performs
regular reviews to identify environmental risks and to ensure that the systems in place
are adequate to manage those risks. The directors are not aware of any environmental
liabilities as at 31 December 2010, 2011 and 2012.
(ii)
Supply and demand risks
The Target Group is exposed to risks arising from fluctuations in the price
and sales volume of tea leave. When possible the Target Group manages this risk
by controlling its harvest volume, according to market conditions. Management
performs regular industry trend analysis to ensure the Target Group’s pricing policy is
comparable to the market and the projected harvesting volumes are consistent with the
expected demand.
(iii)
Climate and other risks
The Target Group’s tea plantation is exposed to the risk of damage from
climatic changes, diseases, forest fires and other natural forces. The Target Group has
procedures in place aimed at monitoring and mitigating those risks, including regular
Tea Forest inspections and pesticide preventions.
17.
Deposits and prepayments
Prepayments for:–
Subcontracting charges for cultivation
Promotion expenses
Deposits for acquisition of:–
Biological assets
Land use right
Property, plant and equipment
II – 49
2010
RMB’000
2011
RMB’000
2012
RMB’000
1,688
3,000
1,681
5,250
1,701
–
64,085
6,001
17,871
–
–
4,695
50,000
–
–
92,645
11,626
51,701
APPENDIX II
18.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Investments in subsidiaries
Unlisted shares, at cost
2010
RMB’000
2011
RMB’000
2012
RMB’000
201,603
201,603
201,603
Details of subsidiaries comprising the Target Group
As at the date of this report, the Target Company had direct or indirect
interests in the subsidiaries all of which are private limited liability companies (or, if
incorporated outside Hong Kong, have substantially similar characteristics to a private
company incorporated in Hong Kong), the particulars of which are set out below:–
Company name
Place and date of
incorporation/
registration
and operations
Particulars of
Registered/paid
up capital
(in ’000)
Fujian Anxi Daping Green Food Technology
福建省安溪縣大坪綠色食品工程有限公司
PRC
13 March 1998
RMB1,200
–
100%
(i), (a)
Citiasia International Limited (“Citiasia”)
豐亞國際有限公司
Hong Kong
17 April 2007
HK$100
–
100%
(ii), (b)
Fujian Nature Tea Science and Technology
Co., Ltd
福建大自然茶業科技有限公司
PRC
13 March 1998
HK$193,663
–
100%
(iii), (a)
China Tea Holdings (BVI) Limited
(“China Tea BVI”)
BVI
27 July 2010
US$10
100%
–
(ii), (c)
Quanzhou Pingshan Tea Co., Ltd
泉州坪山茶業有限公司
PRC
10 December 2010
RMB1,000
–
100%
(iii), (a)
Xiamen Pingshan Tea Co., Ltd
廈門泙山茶業有限公司
PRC
15 December 2010
RMB1,000
–
100%
(iii), (d)
Fujian Huidian Packing Co., Ltd
福建匯典包裝有限公司
PRC
18 January 2011
RMB5,000
–
100%
(iii), (d)
Liaoning Pingshan Tea Co., Ltd
遼寧坪山茶業有限公司
PRC
11 February 2011
RMB5,000
–
100%
(iii), (e)
Shaanxi Pingshan Tea Co., Ltd
陝西坪山茶業有限公司
PRC
6 May 2011
RMB5,000
–
100%
(iii), (f)
Chongqing Shengfang Tea Co., Ltd
重慶盛芳茶葉有限公司
PRC
24 May 2011
RMB5,000
–
100%
(iii), (g)
II – 50
Attributable
equity interest
held
Direct Indirect
Notes
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Notes of the principal activities
(i)
Sales of raw teas in PRC
(ii)
Investment holding
(iii)
Sales of refined teas and/or other related products in PRC
Notes of the statutory auditors
(a)
The statutory financial statements for the years ended 31 December 2010, 2011
and 2012 were audited by Quanzhou Liancheng Certified Public Accountant
Co. Limited.
(b)
The statutory financial statements for the years ended 31 December 2010 and
2011 were audited by Cheng & Cheng Limited.
(c)
No statutory financial statements have been prepared for the years ended 31
December 2010, 2011 and 2012 as there is no statutory requirement for the
companies to prepare audited financial statements.
(d)
The statutory financial statements for the years ended 31 December 2011 and
2012 were audited by Xiamen Hexiang Certified Public Accountants Co.,
Limited.
(e)
The statutory financial statements for the years ended 31 December 2011
and 2012 were audited by Liaoning Ning Me Certified Public Accountants
Company Limited.
(f)
The statutory financial statements for the years ended 31 December 2011 and
2012 were audited by Shaanxi Guanghe Certified Public Accountants Company
Limited.
(g)
The statutory financial statements for the years ended 31 December 2011 and
2012 were audited by Chongqing Zeno Certified Public Accountants Co., Ltd.
Amounts due from subsidiaries
The amounts due from subsidiaries of the Target Company are interest-free,
unsecured and repayable on demand.
Amount due to a subsidiary
The amount due to a subsidiary of the Target Company is interest-free,
unsecured and repayable on demand.
II – 51
APPENDIX II
19.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Inventories
Raw materials – raw teas for refining
Finished goods – refined teas and
other related products
20.
2010
RMB’000
2011
RMB’000
2012
RMB’000
5,729
13,011
16,059
2,250
2,806
3,532
7,979
15,817
19,591
2010
RMB’000
2011
RMB’000
2012
RMB’000
278
–
2,588
–
5,724
–
278
2,588
5,724
Trade receivables
Trade receivable
Impairment loss
The Target Group seeks to maintain strict control over its outstanding receivables
and has a credit control department to minimise credit risk. Overdue balances are reviewed
regularly by senior management. Since the Target Group’s trade receivables relate to a large
number of diversified customers whom there were no recent history of default, there is no
significant concentration of credit risk. Trade receivables are non interest-bearing and neither
past due nor impaired.
An aged analysis of the trade receivables as at the end of each reporting period, based
on the invoice date is as follows:–
Within 6 months
More than 6 months
but less than 1 year
II – 52
2010
RMB’000
2011
RMB’000
2012
RMB’000
275
2,588
5,724
3
–
–
278
2,588
5,724
APPENDIX II
21.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Prepayments, deposits and other receivables
Deposits:–
Rental deposits
Others
Prepayments:–
Prepayments for rental
Prepayments for purchases of
pesticides
Others
Current portion of long term assets:–
Prepaid land lease payments
Prepayment of promotion expenses
Prepayments for subcontracting
charges for cultivation
Other receivables:–
Amount due from related parties
(Note 32(b)(i))
Advance to staff
Others
Bills receivable
2010
RMB’000
2011
RMB’000
2012
RMB’000
655
–
819
452
825
57
206
1,074
930
–
382
1,307
397
–
1,659
13
5,250
150
5,250
150
5,250
78
78
78
106,235
–
729
37
1,092
843
4,995
1,794
816
–
–
40,000
113,548
11,499
56,554
None of the above assets is past due. The financial assets included in the balances
relate to receivables for which there was no recent history of default.
Prepayment, deposits and
other receivables
Impairment loss
II – 53
2010
RMB’000
2011
RMB’000
2012
RMB’000
113,548
–
11,499
–
56,554
–
113,548
11,499
56,554
APPENDIX II
22.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Cash and cash equivalents and pledged deposits
Cash and bank balances
Pledged deposits
2010
RMB’000
2011
RMB’000
2012
RMB’000
271,045
48,551
363,605
–
497,905
37,500
319,596
363,605
535,405
Less: Pledged deposits
(48,551)
–
(37,500)
Cash and cash equivalents
271,045
363,605
497,905
At 31 December 2010 and 2012 , the pledged deposits were pledged to secure
bank loans of RMB40 million (Note 23) and bills payable of RMB60 million (Note 25)
respectively.
The Target Group’s cash and bank balances and pledged deposits at the end of each
reporting period are denominated in the following currencies:–
RMB
United States dollars (“US dollars”)
Hong Kong dollars (“HK dollars”)
2010
2011
2012
RMB’000
RMB’000
RMB’000
190,883
48,812
79,901
340,877
14,107
8,621
522,583
3,862
8,960
319,596
363,605
535,405
RMB is not freely convertible into foreign currencies. All foreign exchange
transactions involving RMB must take place through the People’s Bank of China or other
institutions authorized to buy and sell foreign exchange.
Cash at banks earns interest at floating rates based on daily bank deposit rates. The
bank balances are deposited with creditworthy banks with no recent history of default. The
carrying amounts of the cash and cash equivalents and pledged deposits approximate to their
fair values.
II – 54
APPENDIX II
23.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Bank loans, secured
2010
RMB’000
2011
RMB’000
2012
RMB’000
40,000
–
34,000
Secured short-term loans
Notes:–
(i)
The weighted-average interest rate per annum for secured short-term loans as at 31 December 2010
and 2012 were 5.10% and 6.60% per annum respectively.
(ii)
As at 31 December 2010, the above secured bank loans were secured by pledged deposits (Note 22)
and guaranteed by key management personnel (Note 32(a)(iv)) .
(iii)
As at 31 December 2012, the above secured bank loans were secured by the land use rights held by
the Target Group (Note 15), certain Tea Forest held by the Target Group (Note 16) and guaranteed
by key management personal (Note 32(a)(iv)) .
During the Relevant Periods, there was no covenant requirement under the banking
facilities granted to the Target Group.
24.
Trade payables
Trade payables
II – 55
2010
RMB’000
2011
RMB’000
2012
RMB’000
269
4,568
1,815
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
An aged analysis of the trade payables at the end of each reporting period, based on
the invoice date, is as follows:–
Within 3 months
2010
RMB’000
2011
RMB’000
2012
RMB’000
269
4,568
1,815
The trade payables are non-interest-bearing and expected to be settled within one year.
25.
Other payables and accruals
Deposits received
Rental payable
Staff payroll and welfare payables
Other taxes payable and surcharges
Construction cost payable
Legal and professional fee
Shares issue expenses
Amount due to a related party
(Note 32(b)(ii))
Other payables
Interest payable
Bills payable
2010
RMB’000
2011
RMB’000
2012
RMB’000
3,591
407
5,632
7,516
3,701
5,638
8,028
1,758
705
6,148
7,047
8,627
2,295
3,950
1,294
1,570
6,037
7,610
13,027
4,173
–
604
61
–
–
918
2,318
–
–
–
3,953
360
60,000
35,178
33,766
98,024
At 31 December 2012, the bills payable of RMB60,000,000 were secured by the
Target Group’s pledged deposits of RMB 37,500,000 (Note 22) , certain Tea Forest of
approximately RMB 42,093,000 as at 31 December 2012 with total cultivable area of
4,598 Mu and guarantees jointly provided by Mr. Cai Yanghang and Mr. Cai Rongxu with
aggregate amount of RMB25,000,000.
Other payables are non-interest-bearing and expected to be settled within one year.
26.
Employee retirement benefits
In compliance with the Mandatory Provident Fund Schemes Ordinance (the “MPF
Ordinance”), the Target Company’s subsidiary operated in Hong Kong has participated in an
MPF scheme, which is a defined contribution scheme managed by an independent trustee, to
provide retirement benefits to its Hong Kong employees. Contributions to the MPF scheme
are made in accordance with the statutory limits prescribed by the MPF Ordinance.
II – 56
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
As stipulated by the PRC state regulations, the subsidiaries in the PRC participate in
a defined contribution retirement scheme. All employees are entitled to an annual pension
equal to a fixed proportion of the average basic salary amount of the geographical area of
their last employment at their retirement date. The PRC subsidiaries are required to make
contributions to the local social security bureau at 32% to 33% of the previous year’s average
basic salary amount of the geographical area where the employees are under employment
with the PRC subsidiaries.
The Target Group has no obligation for the payment of pension benefits beyond the
annual contributions as set out above.
According to the relevant rules and regulations of the PRC, the PRC subsidiaries and
their employees are each required to make contributions to an accommodation fund at 5% of
the salaries and wages of the employees which is administered by the Public Accumulation
Funds Administration Centre. There is no further obligation on the part of the Target Group
except for such contributions to the accommodation fund.
As at 31 December 2010, 2011 and 201 2 , the Target Group had no significant
obligation apart from the contributions as stated above.
27.
Income tax payable and deferred tax
(a)
The movements in income tax payable during the Relevant Periods are as
follows:–
At 1 January
Current tax for the year
(Note 8(a))
Current tax paid for the year
At the end of each year
II – 57
2010
RMB’000
2011
RMB’000
2012
RMB’000
5,642
7,279
10,141
4,981
(3,344)
6,612
(3,750)
5,397
(4,834)
7,279
10,141
10,704
APPENDIX II
(b)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The components of deferred tax assets/(liabilities) recognised in the
consolidated statements of financial position and the movements during the
Relevant Periods are as follows:–
Fair value
changes
from
biological
assets
RMB’000
Losses
available
for offsetting
against future
taxable profits
RMB’000
Others
RMB’000
Total
RMB’000
At 1 January 2010
(Charged)/credited to
consolidated profit or
loss during the year
(Note 8(a))
(53)
–
904
851
(23)
–
372
349
At 31 December 2010
and 1 January 2011
(76)
–
1,276
1,200
(Charged)/credited to
consolidated profit or
loss during the year
(Note 8(a))
(4,174)
884
(591)
(3,881)
At 31 December 2011
and 1 January 2012
(4,250)
884
685
(2,681)
(Charged)/credited to
consolidated profit or
loss during the year
(Note 8(a))
(1,905)
684
–
(1,221)
At 31 December 2012
(6,155)
1,568
685
(3,902)
II – 58
APPENDIX II
(c)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Reconciliation to the statements of financial position
Net deferred tax asset
recognised in the statement
of financial position
Net deferred tax liability
recognised in the statement
of financial position
2010
RMB’000
2011
RMB’000
2012
RMB’000
1,200
–
2,197
–
(2,681)
(6,099)
1,200
(2,681)
(3,902)
As at 31 December 2010, 2011 and 2012, temporary differences relating to
the undistributed profits of the Target Company’s subsidiaries in the PRC
were RMB295,228,000, RMB492,781,000 and RMB663,673,000 respectively.
The related deferred tax liabilities of RMB14,761,000, RMB24,639,000 and
RMB33,184,000 as at 31 December 2010, 2011 and 2012 respectively have not
been recognised in respect of the withholding tax that would be payable on the
distribution of these retained profits as the Target Group controls the dividend
policy of the subsidiaries and it has been determined that it is probable that
profits will not be distributed in the foreseeable future.
28.
Share capital
As at 31 December 2010, 2011 and 2012, details of the issued share capital of the
Target Company were as follows:–
Share capital
Authorised:–
200,000,000 shares of
HK$0.1 each
Equivalent to RMB’000
Issued and fully paid:–
132,278,632 shares of
HK$0.1 each
Equivalent to RMB’000
II – 59
2010
HK$’000
2011
HK$’000
2012
HK$’000
20,000
20,000
20,000
17,582
17,582
17,582
13,228
13,228
13,228
11,488
11,488
11,488
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
A summary of the transactions in the Target Company’s issued share capital are as
follows:–
Number of
issued and
fully paid
ordinary
shares
On incorporation (note (a))
Issue of shares in connection with
the Reorganisation (note (a))
Issue of new shares (note (b))
Share issue expenses
As at 31 December 2010, 2011
and 2012
Share
premium
HK$’000
Equivalent
nominal
value of
ordinary
shares
RMB’000
Equivalent
share
premium
RMB’000
Equivalent
total
RMB’000
–
–
–
–
–
99,999,999
32,278,632
–
10,000
3,228
–
221,496
230,772
(10,440)
8,709
2,779
–
192,895
198,667
(8,987)
201,604
201,446
(8,987)
132,278,632
13,228
441,828
11,488
382,575
394,063
Nominal
value of
ordinary
shares
HK$’000
1
Notes:–
(a)
The Target Company was incorporated in the Cayman Islands on 27 July 2010 with initial
authorised share capital of HK$20,000,000 divided into 200,000,000 shares at a par value of
HK$0.1 each. On the date of incorporation, 1 fully paid ordinary share of HK$0.1 was issued. In
connection with the Reorganisation, 99,999,999 ordinary shares were issued in exchange for the
100% shareholding of Citiasia at an amount of HK$231,496,000 (equivalent to RMB201,604,000).
(b)
On 4 October 2010, additional 32,278,632 ordinary shares of HK$0.1 each were issued at a
consideration of HK$234,000,000 (equivalent to approximately RMB201,446,000).
(c)
Capital management
The Target Group’s equity capital management objectives are to safeguard the Target Group’s
ability to continue as a going concern and to provide an adequate return to shareholder
commensurately with the level of risk. To meet these objectives, the Target Group manages the
equity capital structure and makes adjustments to it in the light of changes in economic conditions
by issuing new equity shares, and raising or repaying debts as appropriate.
II – 60
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The Target Group’s equity capital management strategy was to maintain a reasonable proportion
in total debts and equity capital. The Target Group monitored equity capital on the basis of the
debt-to-equity capital ratio, which is calculated as total debt over equity capital. Equity capital
comprises all components of equity (i.e. share capital and reserves). The debt-to-equity ratio as at
31 December 2010, 2011 and 2012 were as follows:–
Total debt
2010
2011
2012
RMB’000
RMB’000
RMB’000
82,276
51,156
150,642
483,421
676,641
867,111
0.17
0.08
0.17
Equity attributable to the owners of
the Target Company
Debt-to-equity ratio
29.
Reserves
(a)
Statutory reserve
Pursuant to the relevant PRC rules and regulations, those PRC subsidiaries
which are domestic enterprises in the PRC as mentioned in Note 18 of Section II in
this report are required to transfer no less than 10% of their profits after taxation,
as determined under PRC accounting regulations, to the statutory reserve until the
reserve balance reaches 50% of the registered capital. The transfer to this reserve must
be made before the distribution of a dividend to shareholders.
(b)
Merger reserve
The merger reserve represents the difference between the amount of issued and
fully paid share capital of Citiasia and the nominal amount of the shares issued by the
Target Company in exchange for the entire equity interest in Citiasia as part of the
Reorganisation.
(c)
Exchange reserve
The exchange reserve comprises all foreign exchange differences arising from
the translation of the financial statements of the companies outside the PRC. The
reserve is dealt with in accordance with the accounting policy set out in Note 3(t) of
Section II.
II – 61
APPENDIX II
(d)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Other reserve
Other reserve represents the capitalisation of loan from the Controlling
Shareholders of HK$20,000,000 (equivalent to approximately RMB17,450,000) on 7
September 2010 for the purpose of the Reorganisation.
Target Company
Share
premium
RMB’000
Exchange
reserve
RMB’000
Accumulated
losses
RMB’000
Total
RMB’000
–
–
–
–
192,895
198,667
(8,987)
–
–
–
–
–
–
192,895
198,667
(8,987)
–
(3,054)
(4,477)
(7,531)
As at 31 December 2010
Total comprehensive loss
for the year
382,575
(3,054)
(4,477)
375,044
–
(6,282)
(8,152)
(14,434)
As at 31 December 2011
Total comprehensive loss
for the year
382,575
(9,336)
(12,629)
360,610
–
(993)
–
(993)
As at 31 December 2012
382,575
(10,329)
(12,629)
359,617
As at 1 January 2010
Issue of shares in connection
with the Reorganisation
Issue of new shares
Share issue expenses
Total comprehensive loss
for the year
30.
Contingent liabilities
As at 31 December 2010, 2011 and 2012 neither the Target Group nor the Target
Company had any significant contingent liabilities.
II – 62
APPENDIX II
31.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Commitments
(a)
Capital commitments
Capital commitments of the Target Group in respect of property, plant and
equipment and biological assets outstanding at the end of each reporting period not
provided for in the Financial Information were as follows:–
Contracted, but not
provided for
– buildings
– cultivation bases of
tea plants
(b)
2010
RMB’000
2011
RMB’000
2012
RMB’000
24,492
23,018
22,218
125,915
–
57,500
150,407
23,018
79,718
Operating lease commitments
At the end of each reporting period, the Target Group had total future minimum
lease payments under non-cancellable operating leases payable as follows:–
Within 1 year
After 1 year
but within 5 years
After 5 years
2010
RMB’000
2011
RMB’000
2012
RMB’000
4,026
4,991
5,402
13,498
11,466
17,110
8,898
13,808
6,970
28,990
30,999
26,180
The Target Group is the lessee in respect of a number of properties held under
operating leases. The leases typically run for an initial period of one to ten years, with
an option to renew the leases when all the terms are renegotiated. None of the leases
includes contingent rentals.
II – 63
APPENDIX II
32.
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Related party transactions and balances
Mr. Cai Zhenrong, Mr. Cai Zhenyao and Mr. Ng Shui Yu are the Controlling
Shareholders. They are considered to be related parties of the Target Group.
Smart Fujian Group Limited, Exalt Wealth Limited and Shine Strategy Limited are
collectively the Shareholders of the Target Group. They are also considered to be related
parties of the Target Group.
The following key management personnel of the Target Group are considered to be
related parties of the Target Group:–
Mr. Cai Yanghang: President of the Target Group
Mr. Cai Rongxu: Director of the Target Group
Mr. Cai Zhenyao: Director of the Target Group
(a)
Transactions with related parties
The following transactions were carried out with related parties during the
Relevant Periods:–
2010
RMB’000
2011
RMB’000
2012
RMB’000
604
314
(918)
–
–
(27)
(5)
–
–
–
(5)
–
604
277
(918)
Advance to related
parties
Mr. Cai Yanghang
(999)
–
(4,958)
(iii) Repayments from
related parties
Mr. Cai Yanghang
–
106,235
–
40,000
–
–
–
–
25,000
40,000
–
25,000
(i)
(ii)
Operating cash inflow/
(outflow)
Mr. Cai Zhenyao
Smart Fujian Group
Limited
Exalt Wealth Limited
Shine Strategy
Limited
(iv) Guaranteed by key
management
personnel
Mr. Cai Rongxu
(Note 23)
Jointly by Mr. Cai
Rongxu and
Mr. Cai Yanghang
(Note 25)
II – 64
APPENDIX II
(b)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Balances with related parties
(i)
Due from related parties:–
Key management
personnel:–
Mr. Cai Yanghang
The Controlling
Shareholder:–
Mr. Cai Zhenyao
The Shareholders:–
Smart Fujian Group
Limited
Exalt Wealth
Limited
Shine Strategy
Limited
2010
RMB’000
2011
RMB’000
2012
RMB’000
106,235
–
–
–
–
4,958
–
27
27
–
5
5
–
5
5
106,235
37
4,995
Amounts due from related parties were interest-free, unsecured and
repayable on demand.
(ii)
Due to a related party:–
The Controlling
Shareholder:–
Mr. Cai Zhenyao
2010
RMB’000
2011
RMB’000
2012
RMB’000
604
918
–
Amount due to a related party was interest-free, unsecured and repayable
on demand.
II – 65
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
(iii)
Compensation of key management personnel of the Target Group:–
Short term employee
benefit
Contribution to
pension scheme
Total compensation
paid to key
management
personnel
2010
RMB’000
2011
RMB’000
2012
RMB’000
802
973
958
47
71
59
849
1,044
1,017
Further details of directors’ emoluments are included in Note 10 to the
Financial Information.
33.
Nature and extent of financial instruments risks
The Target Group’s principal financial instruments comprise interest-bearing loans,
cash and cash equivalents and pledged deposits. The main purpose of these financial
instruments is to raise finance for the Target Group’s operations. The Target Group has
various other financial assets and liabilities such as trade receivables, trade payables and
amount due from/to related parties, which arise directly from its operations.
The main risks arising from the Target Group’s financial instruments are interest rate
risk, credit risk, liquidity risk and currency risk. The board of directors reviews and agrees
policies for managing each of these risks and they are summarised below.
(a)
Credit risk
Credit risk is the risk that a party to a financial instrument will cause a financial
loss for the Target Group by failing to discharge an obligation. The Target Group has a
credit policy in place and exposure to the credit risk is monitored on an ongoing basis.
II – 66
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Carrying amounts of financial assets as at 31 December 2010, 2011 and 2012
which represented the amounts of maximum exposure to credit risk, were as follows:–
Trade receivables
Deposits and other receivables
Pledged deposits
Bank balances
2010
RMB’000
2011
RMB’000
2012
RMB’000
278
107,619
48,551
270,956
2,588
3,243
–
360,855
5,724
48,487
37,500
490,961
427,404
366,686
582,672
In respect of trade receivables, individual credit evaluations are performed on
all customers requiring credit over a certain amount. These evaluations focus on the
customer’s past history of making payments when due and current ability to pay, and
may take into account information specific to the customer as well as pertaining to the
economic environment in which the customer operates. Debtors are due within one
month from the date of billing. Normally, the Target Group does not obtain collateral
from customers.
The directors consider that the credit risk from pledged deposits and bank
balances is minimal as the balances are placed with financial institutions with high
credit ratings.
The directors consider that the credit risk of trade receivables, deposits and
other receivables is minimal as the counter parties have no past history of default and
are financially healthy.
The Target Group does not provide any guarantees which would expose the
Target Group to credit risk.
II – 67
APPENDIX II
(b)
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Liquidity risk
Liquidity risk is the risk that the Target Group will encounter difficulty in
meeting obligations associated with financial liabilities. The Target Group manages
liquidity risk by monitoring its liquidity position through periodic preparation of cash
flows and cash balances forecasts and periodic evaluation of the ability of the Target
Group to meet its financial obligations, measured by the debt-to-equity capital ratio.
Maturities of the financial liabilities of the Target Group as at 31 December
2010, 2011 and 2012 were as follows:–
Bank loans, secured
Trade payables
Other payables and accruals
II – 68
Carrying
amount
RMB’000
2010
Total
contractual
undiscounted
cash flow
RMB’000
Within
1 year
or on demand
RMB’000
40,000
269
31,783
40,164
269
31,783
40,164
269
31,783
72,052
72,216
72,216
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
Trade payables
Other payables and accruals
Bank loans, secured
Trade payables
Other payables and accruals
(c)
Carrying
amount
RMB’000
2011
Total
contractual
undiscounted
cash flow
RMB’000
Within
1 year
or on demand
RMB’000
4,568
33,000
4,568
33,000
4,568
33,000
37,568
37,568
37,568
Carrying
amount
RMB’000
2012
Total
contractual
undiscounted
cash flow
RMB’000
Within
1 year
or on demand
RMB’000
34,000
1,815
97,648
36,057
1,815
97,648
36,057
1,815
97,648
133,463
135,520
135,520
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in market interest rates.
The Target Group’s interest rate risk arises primarily from bank loans, bank
balances and pledged deposits. Except for bank loans and pledged deposits, which
are held at fixed interest rates, the bank balances are held at variable rates. The
Target Group does not use financial derivatives to hedge against the interest rate risk.
However, the interest rate profile of the Target Group is closely monitored by the
management and may enter into appropriate swap contracts, when it is considered
significant and cost-effective, to manage the interest rate risk.
II – 69
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The following table indicates the variable-rate financial assets which are
exposed to interest rate risk and approximate change in the Target Group’s profit for
the year if the interest rate increased by 100 basis points:–
Bank balances
Effect resulted in increase in
profit for the year
if interest rate increased
by 100 basis points
2010
RMB’000
2011
RMB’000
2012
RMB’000
270,956
360,855
490,961
2,710
3,609
4,909
The sensitivity analysis above has been determined based on the exposure to
interest rate for financial instruments at the end of each reporting period. The analysis
is prepared assuming the amount of assets at the end of each reporting period were
held for the whole year. 100 basis points increase are used when reporting interest rate
risk internally to key management personnel and represent management’s assessment
of the reasonable possible change in interest rates.
(d)
Currency risk
Currency risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate because of changes in foreign exchange rates.
The Target Group is exposed to currency risk primarily through pledged
deposits and bank balances that are denominated in currency other than the functional
currency of the operations to which they relate. The currency giving rise to this risk
is primarily the HK dollars, which is relatively stable against the RMB. The Target
Group considers that the exposure to the currency risk is not material and no hedging
arrangement has been made.
II – 70
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The following table demonstrates the sensitivity at the end of the reporting
period to a reasonably possible change in the HK dollars exchange rate, with all other
variables held constant, of the Target Group’s profit before taxation.
Pledged deposits
Bank balances
US dollars
HK dollars
RMB
2010
RMB’000
2011
RMB’000
2012
RMB’000
48,551
80,069
–
22,264
–
12,066
128,620
22,264
12,066
48,812
79,808
–
14,107
8,111
46
3,862
8,158
46
128,620
22,264
12,066
The financial assets denominated in US dollars are held by the Target Company
and its subsidiaries of which the functional currencies are HK dollars. Since HK
dollars are pegged to US dollars, material fluctuations in the exchange rates of HK
dollars against US dollars are remote.
The financial assets denominated in RMB are held by a subsidiary of which
the functional currency is HK dollars. Since such amount was insignificant as at 31
December 2010, 2011 and 2012, the exposure to currency risk is considered limited.
II – 71
APPENDIX II
ACCOUNTANTS’ REPORT OF THE TARGET GROUP
The financial assets denominated in HK dollars are held by a subsidiary of
which the functional currency is RMB. Should HK dollars appreciate or depreciate
by 5% against RMB, the carrying amount of the net financial assets and profit for the
year would approximately change as follows:–
Increase/(decrease) in carrying amount of
net financial assets and profit for the year
2010
RMB’000
2011
RMB’000
2012
RMB’000
3,990
406
408
(3,990)
(406)
(408)
HK dollars appreciate
against RMB
HK dollars depreciate
against RMB
(e)
Fair value
The carrying amounts of the Target Group’s financial instruments carried at
cost or amortised cost were not materially different from their fair values as at 31
December 2010, 2011 and 2012.
34.
Major non-cash transactions
On 7 September 2010, the Controlling Shareholders entered into a deed of assignment
with China Tea BVI and Citiasia, pursuant to which all parties agreed to capitalise the loan
from the Controlling Shareholders of HK$20,000,000 for the purpose of the Reorganisation.
In September 2012, the Target Group’s deposits for acquisition of biological assets of
RMB50,000,000 was partially settled by issuance of bills payable of RMB15,000,000.
35.
Immediate and ultimate holding company
The directors consider the immediate and ultimate holding company to be Smart
Fujian Group Limited, a company incorporated in BVI.
36.
Subsequent events
For the construction of the Target Group’s new production and packaging centres,
offices and staff dormitories, approximately RMB35 million was paid in the second quarter
of 2013.
II – 72
APPENDIX III
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
The following is the text of a report prepared for the sole purpose of inclusion in this
circular, in respect of the unaudited pro forma financial information of the Enlarged Group received
from the reporting accountants, PKF, Certified Public Accountants, Hong Kong.
28 June 2013
The Directors
Huafeng Group Holdings Limited
Dear Sirs,
We report on the unaudited pro forma consolidated statement of financial position,
consolidated income statement, consolidated statement of comprehensive income and consolidated
statement of cash flows of Huafeng Group Holdings Limited (the “Company”) and its subsidiaries
(hereinafter collectively referred to as the “Group”) and China Natural Tea Holdings Company
Limtied (the “Target Company”) and its subsidiaries (hereinafter collectively referred to as the
“Target Group”) (together with the Group hereinafter referred to as the “Enlarged Group”) (the
“Unaudited Pro Forma Financial Information”) which have been prepared by the directors of the
Company for illustrative purposes only, to provide information about how the acquisition of the
entire issued share capital of the Target Company (the “Acquisition”) might have affected the
financial information presented, for inclusion as Appendix III to circular of the Company dated
28 June 2013 (the “Circular”). The basis of preparation of the Unaudited Pro Forma Financial
Information of the Enlarged Group is set out in pages III – 4 and III – 5 of the Circular.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS OF THE COMPANY AND
REPORTING ACCOUNTANTS
It is the sole responsibility of the directors of the Company to prepare the Unaudited Pro
Forma Financial Information in accordance with paragraph 29 of Chapter 4 of the Rules Governing
the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”)
and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information
for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public
Accountants (the “HKICPA”).
III – 1
APPENDIX III
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
It is our responsibility to form an opinion, as required by paragraph 29(7) of Chapter 4 of
the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to
you. We do not accept any responsibility for any reports previously given by us on any financial
information used in the compilation of the Unaudited Pro Forma Financial Information beyond that
owed to those to whom those reports were addressed by us at the dates of their issue.
BASIS OF OPINION
We conducted our engagement in accordance with Hong Kong Standard on Investment
Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information
in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the
unadjusted financial information with source documents, considering the evidence supporting the
adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of
the Company. This engagement did not involve independent examination of any of the underlying
financial information.
Our work did not constitute an audit nor review made in accordance with Hong Kong
Standards on Auditing or Hong Kong Standards on Review Engagements issued by the HKICPA,
and accordingly, we do not express any such audit or review assurance on the Unaudited Pro Forma
Financial Information.
We planned and performed our work so as to obtain the information and explanations we
considered necessary in order to provide us with sufficient evidence to give reasonable assurance
that the Unaudited Pro Forma Financial Information has been properly compiled by the directors
of the Company on the basis stated, that such basis is consistent with the accounting policies of
the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma
Financial Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing Rules.
The Unaudited Pro Forma Financial Information is for illustrative purpose only, based on
the judgements and assumptions of the directors of the Company, and because of its hypothetical
nature, it does not provide any assurance or indication that any event will take place in the future
and may not be indicative of:
(a)
the financial position of the Enlarged Group as at 31 March 2013 or any future date;
or
III – 2
APPENDIX III
(b)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
the financial results and cash flows of the Enlarged Group for year ended 31
December 2012 or any future period.
OPINION
In our opinion:
(a)
the Unaudited Pro Forma Financial Information has been properly compiled by the
directors of the Company on the basis stated;
(b)
such basis is consistent with the principal accounting policies of the Group; and
(c)
the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial
Information as disclosed pursuant to paragraph 29(1) of Chapter 4 of the Listing
Rules.
Yours faithfully,
PKF
Certified Public Accountants
Hong Kong
III – 3
APPENDIX III
(A)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED
GROUP
1.
Introduction
The accompanying unaudited pro forma financial information of the Enlarged
Group, comprising the unaudited pro forma consolidated income statement, unaudited pro
forma consolidated statement of comprehensive income, unaudited pro forma consolidated
statement of financial position and unaudited pro forma consolidated statement of cash flows
of the Enlarged Group, has been prepared by the directors of the Company in accordance
with paragraph 29 of Chapter 4 of the Rules Governing the Listing of Securities on The
Stock Exchange of Hong Kong Limited (the “Listing Rules”) for illustrative purpose only,
to provide information about how the acquisition might have affected the financial position,
results of operations and cash flows of the Group as if the Acquisition had been completed
on (i) 31 March 2013 in respect of the unaudited pro forma consolidated statement of
financial position of the Enlarged Group; and (ii) 1 January 2012 in respect of the unaudited
pro forma consolidated income statement, unaudited pro forma consolidated statement of
comprehensive income and unaudited pro forma consolidated cash flows of the Enlarged
Group.
The unaudited pro forma consolidated statement of financial position of the Enlarged
Group as at 31 March 2013 is based upon (i) the unaudited consolidated statement of
financial position of the Group as at 31 March 2013, as extracted from the interim report
of the Company for the six months ended 31 March 2013; and (ii) the audited consolidated
statement of financial position of the Target Group as at 31 December 2012, as extracted
from the Accountants’ Report thereon set out in Appendix II of this Circular after making
appropriate pro forma adjustments that are considered necessary as described in the
accompanying notes.
The unaudited pro forma consolidated income statement, unaudited pro forma
consolidated statement of comprehensive income and unaudited pro forma consolidated
statement of cash flows of the Enlarged Group for the year ended 31 December 2012 are
prepared based upon (i) the audited consolidated income statement, the audited consolidated
statement of comprehensive income and the audited consolidated statement of cash flows of
the Group for the year ended 30 September 2012; and (ii) the audited consolidated income
statement, the audited consolidated statement of comprehensive income and the audited
consolidated statement of cash flows of the Target Group for the year ended 31 December
2012, as extracted from the Accountants’ Report thereon set out in Appendix II to this
Circular after making appropriate pro forma adjustments that are considered necessary as
described in the accompanying notes.
III – 4
APPENDIX III
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
The unaudited pro forma financial information of the Enlarged Group is based on
a number of assumptions, estimates and uncertainties. As a result of these assumptions,
estimates and uncertainties, the unaudited pro forma financial information of the Enlarged
Group does not purport to describe the true picture of the financial position, results of
operations and cash flows of the Enlarged Group that would have been attained had the
Acquisition been completed as at the specified dates. Further, the unaudited pro forma
financial information of the Enlarged Group does not purport to the future financial position,
results of operations and cash flows of the Enlarged Group.
The unaudited pro forma financial information of the Enlarged Group should be read
in conjunction with the historical financial information of the Group as set out in Appendix
I to this circular, the Accountants’ Reports on the Target Group as set out in Appendix II to
this circular and other financial information included elsewhere in this Circular.
III – 5
APPENDIX III
(B)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT OF THE
ENLARGED GROUP
TURNOVER
Cost of services rendered and
cost of sales
GROSS PROFIT
Change in fair value of biological
assets less costs to sell during
the year
Other income
Selling and distribution expenses
Administrative expenses
Impairment loss on property,
plant and equipment
Loss on disposal of investment
properties
Other operating expenses
(LOSS)/PROFIT FROM
OPERATIONS
Finance costs
Loss on modifications of
convertible bonds
Loss on disposal of subsidiaries
(LOSS)/PROFIT BEFORE TAX
Income tax expenses
(LOSS)/PROFIT FOR THE
YEAR ATTRIBUTABLE
TO OWNERS OF THE
COMPANY
The Group
HK$’000
The Target
Group
HK$’000
Note 1
539,118
478,827
–
–
1,017,945
(478,493)
(247,472)
–
–
(725,965)
60,625
231,355
–
–
291,980
–
9,145
(20,468)
(55,311)
47,510
6,225
(24,777)
(16,390)
–
–
–
–
–
–
–
–
47,510
15,370
(45,245)
(71,701)
(114,383)
–
–
–
(114,383)
(48,189)
(6,392)
–
(623)
–
–
–
(9,597)
(48,189)
(16,612)
(174,973)
243,300
–
(9,597)
58,730
(11,224)
(628)
(56,584)
–
(68,436)
(1,943)
(2,386)
–
–
–
–
–
–
(1,943)
(2,386)
(190,526)
242,672
(56,584)
(9,597)
(14,035)
(249)
(8,145)
–
–
(8,394)
(190,775)
234,527
(56,584)
(9,597)
(22,429)
III – 6
Pro forma adjustments
HK$’000
HK$’000
Note 3
Note 5
The Enlarged
Group
HK$’000
APPENDIX III
(C)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME OF THE ENLARGED GROUP
The Group
HK$’000
The Target
Group
HK$’000
Note 1
(190,775)
234,527
(56,584)
(9,597)
(22,429)
8,893
(103)
–
–
8,790
(5,631)
6,040
–
–
–
–
–
–
(5,631)
6,040
(1,511)
–
–
–
(1,511)
OTHER COMPREHENSIVE
INCOME/(LOSS) FOR THE
YEAR, NET OF TAX
7,791
(103)
–
–
7,688
TOTAL COMPREHENSIVE
(LOSS)/INCOME FOR THE
YEAR ATTRIBUTABLE
TO OWNERS OF THE
COMPANY
(182,984)
234,424
(56,584)
(9,597)
(14,741)
(LOSS)/PROFIT FOR
THE YEAR
Other comprehensive income/
(loss):
Exchange differences on
translating foreign operations
Exchange differences reclassified
to profit or loss upon disposal
of subsidiaries
Gains on property revaluation
Deferred tax relating to gains on
property revaluation
III – 7
The Enlarged
Pro forma adjustments
Group
HK$’000
HK$’000
HK$’000
Note 3
Note 5
APPENDIX III
(D)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL
POSITION OF THE ENLARGED GROUP
The Group
HK$’000
The Target
Group
HK$’000
Note 1
932,112
–
–
5,590
1,292
93,754
–
335,650
–
–
–
1,413,153
–
–
–
–
–
–
–
–
–
–
–
–
–
1,025,866
1,413,153
335,650
5,590
1,292
10,357
–
–
–
–
10,357
64,090
–
64,056
2,722
–
–
–
–
–
–
128,146
2,722
1,013,441
496,182
1,413,153
–
–
2,922,776
57,174
144,164
24,273
7,092
–
–
–
–
–
–
81,447
151,256
56,834
–
155,262
398,685
70,069
46,461
–
616,891
–
–
–
(193,850)
–
–
–
–
–
–
–
(9,597)
126,903
46,461
155,262
812,129
812,119
764,786
(193,850)
–
(9,597)
1,373,458
–
23,703
239,523
13,608
42,125
2,249
121,449
13,262
–
–
–
–
–
–
–
–
–
–
–
–
42,125
25,952
360,972
26,870
276,834
179,085
–
–
–
455,919
535,285
585,701
(193,850)
–
(9,597)
917,539
1,548,726
1,081,883
1,219,303
–
(9,597)
3,840,315
110,023
95,493
–
–
432,174
–
–
–
–
–
542,197
95,493
5,000
23,882
–
7,556
–
–
–
–
–
–
5,000
31,438
234,398
7,556
432,174
–
–
674,128
NET ASSETS
1,314,328
1,074,327
787,129
–
(9,597)
3,166,187
CAPITAL AND RESERVES
Share capital
Reserves
15,579
1,298,749
13,228
1,061,099
94,958
692,171
(13,228)
13,228
–
(9,597)
110,537
3,055,650
TOTAL EQUITY
1,314,328
1,074,327
787,129
–
(9,597)
3,166,187
NON-CURRENT ASSETS
Property, plant and equipment
Goodwill
Biological assets
Intangible assets
Available-for-sale financial assets
Deposits paid for acquisition of property,
plant and equipment
Deposits, other receivables and
prepayments
Deferred tax assets
CURRENT ASSETS
Inventories
Trade receivables
Prepayments, deposits and
other receivables
Pledged deposits
Fixed bank deposits
Bank and cash balances
CURRENT LIABILITIES
Bank loans, secured
Trade payables
Other payables and accruals
Current tax liabilities
NET CURRENT ASSETS
TOTAL ASSETS LESS CURRENT
LIABILITIES
NON-CURRENT LIABILITIES
Convertible bonds
Debentures
Deposit received for subscription of
debenture
Deferred tax liabilities
III – 8
Pro forma adjustments
HK$’000
HK$’000
HK$’000
Note 2
Note 4
Note 5
The Enlarged
Group
HK$’000
APPENDIX III
(E)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS OF
THE ENLARGED GROUP
The Group
HK$’000
The Target
Group
HK$’000
Note 1
(190,526)
242,672
(56,584)
(9,597)
–
(14,035)
(2,850)
888
8,128
2,208
(3,620)
–
–
628
–
11,118
45,466
–
–
–
–
–
–
–
–
–
(6,470)
12,006
53,594
2,836
70,614
3,314
–
–
–
73,928
–
185
–
–
–
185
–
2,386
(18,766)
–
–
–
–
–
–
–
(18,766)
2,386
114,383
–
–
–
–
114,383
5,423
–
–
–
–
5,423
1,943
1,226
48,189
–
–
–
–
–
–
–
–
–
–
–
–
1,943
1,226
48,189
527
–
–
–
–
527
62,539
(6,914)
(2,541)
224,413
(4,645)
(3,860)
–
–
–
(9,597)
–
–
–
–
–
277,355
(11,559)
(6,401)
34,337
288
28,373
6,318
(3,388)
10,398
–
–
–
–
–
–
–
–
–
40,655
(3,100)
38,771
116,082
229,236
–
(9,597)
–
335,721
(2,484)
(5,950)
–
–
–
(8,434)
113,598
223,286
–
(9,597)
–
327,287
Pro forma adjustments
HK$’000
HK$’000
HK$’000
Note 3
Note 5
Note 6
The Enlarged
Group
HK$’000
CASH FLOWS FROM
OPERATING ACTIVITIES
(Loss)/profit before tax
Adjustment for:
Bank interest income
Interest expenses on convertible bonds
Imputed interest on convertible bonds
Other finance costs
Depreciation of property,
plant and equipment
Amortisation of prepaid land lease
payments
Change in fair value of biological assets
less costs to sell during
the year
Loss on disposal of subsidiaries
Impairment loss on property,
plant and equipment
Loss on disposal of property,
plant and equipment
Loss on modification of
convertible bonds
Amortisation of technical knowhow
Loss on disposal of investment properties
Property, plant and equipment
written off
Operating profit before working capital
changes
Increase in inventories
Increase in trade receivables
Increase in prepayments, deposits and
other receivables
Increase/(decrease) in trade payables
Increase in other payables and accruals
Cash generated from/(used in) operations
Income tax paid
Net cash generated/(used in) from
operating activities
III – 9
APPENDIX III
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
The Group
HK$’000
The Target
Group
HK$’000
Note 1
(172,415)
(2,979)
–
–
–
(175,394)
–
(43,077)
–
–
–
(43,077)
1,359
–
–
–
–
1,359
3,679
–
–
–
–
3,679
3,220
–
–
(361)
3,545
–
(6,102)
–
–
3,620
–
–
(193,850)
–
–
–
–
–
–
–
–
–
447,514
–
–
3,220
(6,102)
253,664
(361)
7,165
(160,973)
(48,538)
(193,850)
–
447,514
44,153
Share issued expenses paid
Proceeds from bank loans
Repayment of bank loans
Increase in pledged deposits for
bills payable
Convertible bond interest paid
Other finance cost paid
–
–
(48,000)
(4,862)
41,846
–
–
–
–
–
–
–
–
–
–
(4,862)
41,846
(48,000)
–
(752)
(2,207)
(46,154)
–
(185)
–
(11,118)
–
–
–
–
–
–
–
(46,154)
(11,870)
(2,392)
Net cash used in financing activities
(50,959)
(9,355)
(11,118)
–
–
(71,432)
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS
(98,334)
165,393
(204,968)
(9,597)
447,514
300,008
Effect of foreign exchange rate changes
1,906
(103)
–
–
–
1,803
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
357,432
447,514
–
–
(447,514)
357,432
CASH AND CASH EQUIVALENT AT
END OF YEAR
261,004
612,804
(204,968)
(9,597)
–
659,243
Pro forma adjustments
HK$’000
HK$’000
HK$’000
Note 3
Note 5
Note 6
The Enlarged
Group
HK$’000
CASH FLOW FROM INVESTING
ACTIVITIES
Payments to acquire and deposits for
acquisition of property, plant and
equipment
Payments to acquire and deposits for
acquisition of biological assets
Proceeds from disposals of property,
plant and equipment
Proceeds from disposals of investment
properties
Net proceeds from disposal of
subsidiaries
Advances to related parties, net
Acquisition of subsidiaries
Increase in fixed bank deposits
Interest received
Net cash used in/(generated from)
investing activities
CASH FLOW FROM FINANCING
ACTIVITIES
III – 10
APPENDIX III
(F)
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE
ENLARGED GROUP
1.
The amounts are derived from the audited consolidated statement of financial position
of the Target Group as at 31 December 2012 and the audited consolidated income
statement, the audited consolidated statement of comprehensive income and the
audited consolidated statement of cash flows of the Target Group for the year ended
31 December 2012 as set out in Appendix II to the Circular, after foreign exchange
translation at the closing exchange rate of HK$1 = RMB 0.80712 and average
exchange rate of HK$1 = RMB0.8125 respectively, and have been reclassified to
conform to the presentation format of the Group.
2.
Pursuant to the sale and purchase agreement entered on 17 January, 2013, the total
consideration of HK$2,487,480,000 is to be satisfied by:–
HK$’000
Cash (the “Cash Consideration”)
Issuance of the 9,495,834,903 ordinary shares of the Company
(with nominal value of HK$0.01 per share) at an issue price of
approximately HK$0.1768 (the “Consideration Shares”)
Issuance of convertible bonds with principal amount of
HK$614,770,000 (the “Convertible Bonds”)
Total Consideration
193,850
1,678,860
614,770
2,487,480
For the purpose of unaudited pro forma financial information, the Acquisition is
assumed to be completed at 31 March 2013 and the carrying amount of net identifiable
assets of the Target Group at 31 March 2013 is deemed as the fair value of its net
identifiable net assets at the completion date.
The following pro forma adjustments are to reflect the effect of the Acquisition on
the unaudited pro forma consolidated statement of financial position of the Enlarged
Group as if the Acquisition had been completed on 31 March 2013. The effect
includes recognition of i) estimated goodwill; ii) payment of Cash Consideration; iii)
Issuance of Consideration Shares; and iv) issuance of Convertible Bonds.
III – 11
APPENDIX III
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
HK$’000
Fair value of consideration
Cash Consideration
Consideration Shares (a)
Convertible Bonds (b)
193,850
1,678,860
614,770
Total
2,487,480
Fair value of net identifiable assets of the Target Group
1,074,327
Estimated goodwill
1,413,153
Note:
For the purpose of unaudited pro forma financial information, it is assumed that:–
(a)
The fair value of Consideration Shares as at 31 March 2013 is approximately HK$1,678,860,000
and the share capital and share premium of the Company will increase by approximately
HK$94,958,000 and approximately HK$1,583,902,000 respectively.
(b)
The Convertible Bonds of HK$336,820,000 and HK$277,950,000 are to be issued to i) Exalt
Wealth, Shine Strategy and Smart Fujian (the “Target Group Controlling Shareholders”) with zero
coupon interest rate; and ii) Teya, Templeton, Great Vantage and Ample Gold (the “Target Group
Minority Shareholders”) with interest rate of 4% per annum which is payable semi-annually,
respectively.
The fair value of liability component of the whole Convertible Bonds is HK$432,174,098 which
was estimated by BMI Appraisals Limited, an independent valuer to the Company, using discounted
cash flows method at discount rates of 13.27% and 13.10% for the portions of Convertible
Bonds to be issued to the Target Group Controlling Shareholders and the Target Group Minority
Shareholders, respectively. The residual amount of approximately HK$182,595,902, representing
the deemed fair value of the equity conversion component, is included in the convertible bonds
equity reserve of the Company.
Since the fair value of the net identifiable assets of the Target Group at the completion
date may be different from its carrying amount as at 31 March 2013, the actual goodwill
arising from the Acquisition may be different from that stated above.
III – 12
APPENDIX III
3.
UNAUDITED PRO FORMA FINANCIAL
INFORMATION OF THE ENLARGED GROUP
The adjustment represents the estimated finance cost from interest expense based
on the coupon rate and imputed interest expense on the Convertible Bond of
approximately HK$11,118,000 and HK$45,466,000 respectively.
This adjustment will have a continuing effect on the Enlarged Group in subsequent
years.
4.
The elimination of the issued share capital of Target Company of approximately
HK$13,228,000.
5.
The adjustment represents estimated Acquisition related cost of approximately
HK$9,597,000.
This is a non-recurring adjustment.
6.
The adjustment represents the cash inflow from cash and bank balances of the Target
Group as at 1 January 2012 as if the Acquisiton had been completed at the beginning
of the year.
III – 13
APPENDIX IV
(A)
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION REPORT OF THE PROPERTIES OF THE GROUP
The following is the text of a letter, summary of values and valuation certificates, prepared
for the purpose of incorporation in this circular received from BMI Appraisals Limited, an
independent valuer, in connection with its valuations as at 31 March 2013 of the properties located
in the People’s Republic of China.
33rd Floor, Shui On Centre, Nos. 6-8 Harbour Road, Wanchai, Hong Kong
28 June 2013
The Directors
Huafeng Group Holdings Limited
Room 2105
Shun Tak Centre
West Tower
No. 200 Connaught Road Central
Hong Kong
Dear Sirs,
INSTRUCTIONS
We refer to your instructions for us to value the properties held by Huafeng Group Holdings
Limited (the “Company”) and/or its subsidiaries (together referred to as the “Group”) which are
all located in the People’s Republic of China (the “PRC”). We confirm that we have conducted
inspections, made relevant enquiries and obtained such further information as we consider
necessary for the purpose of providing you with our opinion of the market values of the properties
as at 31 March 2013 (the “valuation date”).
BASIS OF VALUATION
Our valuations of the concerned properties have been based on the Market Value, which
is defined as “the estimated amount for which an asset or liability should exchange on the
valuation date between a willing buyer and a willing seller in an arm’s-length transaction after
proper marketing and where the parties had each acted knowledgeably, prudently and without
compulsion”.
IV – 1
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION METHODOLOGY
In valuing the properties, we have adopted the Depreciated Replacement Cost Approach.
Depreciated replacement cost is defined as “the aggregate amount of the value of the land for the
existing use or a notional replacement site in the same locality and the new replacement cost of the
buildings and other site works, from which appropriate deductions may then be made to allow for
the age, condition, economic or functional obsolescence and environmental factors, etc.; all of these
might result in the existing property being worth less to the undertaking in occupation than would a
new replacement”. This basis has been used due to the lack of an established market upon which to
base comparable transactions, which generally furnishes the most reliable indication of values for
assets without a known used market. This opinion of value is subject to adequate profitability of the
business compared to the value of the total assets employed.
TITLE INVESTIGATION
We have been provided with copies of title documents and have been advised by the Group
that no further relevant documents have been produced. However, we have not examined the
original documents to verify ownership or to ascertain the existence of any amendment documents,
which may not appear on the copies handed to us. In the course of our valuations, we have relied
upon the advice and information given by the Group’s PRC legal advisor – Fujian Quan Xiu
Law Office（福建泉秀律師事務所）regarding the title of the properties located in the PRC. All
documents have been used for reference only.
VALUATION ASSUMPTIONS
Our valuations have been made on the assumption that the properties are sold in the market
in their existing state without the benefit of deferred terms contract, leaseback, joint venture,
management agreement or any other similar arrangement which would serve to affect the values of
the properties.
In addition, no account has been taken of any option or right of pre-emption concerning or
affecting the sale of the properties and no forced sale situation in any manner is assumed in our
valuations.
IV – 2
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION CONSIDERATIONS
The properties were inspected by Ms. Ellen Lo (BSc in Valuation & Estate Management) and
Mr. Andy Lee (MSc in Surveying) in December 2012. We have inspected the properties externally
and where possible, the interior of the properties. In the course of our inspections, we did not note
any serious defects. However, no structural surveys have been made. We are, therefore, unable to
report whether the properties are free from rot, infestation or any other structural defects. No tests
were carried out on any of the services.
In the course of our valuations, we have relied to a considerable extent on the information
given by the Group and have accepted advice given to us on such matters as planning approvals or
statutory notices, easements, tenures, particulars of occupancy, site/floor areas, completion dates of
the buildings, identification of the properties and other relevant information.
Except otherwise stated, dimensions, measurements and site/floor areas included in the
valuation certificates are based on information contained in the leases and other documents
provided to us and are therefore only approximations.
We have not carried out detailed on-site measurements to verify the correctness of the site/
floor areas in respect of the properties but have assumed that the site/floor areas shown on the
documents handed to us are correct.
We have no reason to doubt the truth and accuracy of the information provided to us by the
Group and we have relied on your confirmation that no material facts have been omitted from the
information provided. We consider that we have been provided with sufficient information for us to
reach an informed view.
IV – 3
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
No allowance has been made in our valuations for any charges, mortgages or amounts owing
on the properties or for any expenses or taxation, which may be incurred in effecting a sale or
purchase.
Unless otherwise stated, it is assumed that the properties are free from encumbrances,
restrictions and outgoings of an onerous nature, which could affect their values.
For the purpose of compliance with Rule 11.3 of the Code on Takeovers and Mergers and as
advised by the Company, the potential tax liabilities which may arise from the sale of the properties
include:
•
Business tax at a rate of 5% of consideration for the property in the PRC;
•
Profits tax on the profit from the sale at a rate of 25% for the property in the PRC; and
•
Land value appreciation tax for the property in the PRC at progressive tax rates
ranging from 30% to 60% on the appreciation;
As advised by the Group, the likelihood of any potential tax liability being crystalised is
remote as the Group has no intention to sell these properties.
Our valuations have been prepared in accordance with The HKIS Valuation Standards (2012
Edition) published by The Hong Kong Institute of Surveyors.
Our valuations have been prepared under the generally accepted valuation procedures and are
in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong
Kong Limited and the Code on Takeovers and Mergers.
IV – 4
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
REMARKS
We hereby certify that we neither have any present nor any prospective interest in the Group
or the appraised properties or the values reported.
Unless otherwise stated, all monetary amounts stated herein are in Renminbi (RMB) and no
allowances have been made for any exchange transfers.
Our summary of values and the valuation certificates are attached herewith.
Yours faithfully,
For and on behalf of
BMI APPRAISALS LIMITED
Dr. Tony C.H. Cheng
Joannau W.F. Chan
BSc., MUD, MBA(Finance), MSc.(Eng), PhD(Econ),
BSc., MSc., MRICS, MHKIS, RPS(GP)
SIFM, FCIM, CPA UK, MHKIS, MCIArb
Senior Director
MASCE, MIET, MIEEE, MASME, MIIE
Managing Director
Notes:
Dr. Tony C. H. Cheng is a member of The Hong Kong Institute of Surveyors (General Practice) who has over 20 years’
experience in valuations of properties in Hong Kong and the People’s Republic of China.
Ms. Joannau W.F. Chan is a member of The Hong Kong Institute of Surveyors (General Practice) who has over 20 years’
experience in valuations of properties in Hong Kong and over 14 years’ experience in valuations of properties in the People’s
Republic of China.
IV – 5
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
SUMMARY OF VALUES
No.
Market Value
in existing state as at
31 March 2013
RMB
Property
Properties held and occupied by the Group in the PRC
1.
An industrial complex
located at
No. 18, Dong Village District No.4,
Liantang Village,
Hanjiang Town,
Shishi City,
Fujian Province,
the PRC
101,800,000
位於中國福建省
石獅巿
蚶江鎮蓮塘村東村4區18號之
廠房
2.
An industrial complex
located at
No. 1 Huafeng Road,
Shihugang Industrial District,
Hanjiang Town,
Shishi City,
Fujian Province,
the PRC
71,100,000
位於中國福建省
石獅巿
蚶江鎮石湖港工業園區華豐路1號之
廠房
IV – 6
APPENDIX IV
No.
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
Market Value
in existing state as at
31 March 2013
Property
RMB
3.
An industrial complex (Land Parcel No. 2000-2-26)
located at
Wubao Village,
Hongshan Town,
Shishi City,
Fujian Province,
the PRC
61,600,000
位於中國福建省
石獅巿
鴻山鎮伍堡村之
廠房（宗地編號：2000-2-26）
4.
An industrial complex (Land Parcel No. Lutian Chanye Jidi
Fazhan Dadao (Nan) 6-1-2-3-5-6-7) located at
Lutian Industrial District,
Poyang County,
Shangrao City,
Jiangxi Province,
the PRC
No commercial value
位於中國江西省
上饒巿鄱陽縣
蘆田工業區之
廠房（宗地編號：蘆田產業基地發展大道（南）
6-1-2-3-5-6-7）
Grand-total:
234,500,000
IV – 7
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION CERTIFICATE
Properties held and occupied by the Group in the PRC
No.
Property
Particulars of
occupancy
Description and tenure
Building
Ownership
Market Value
in existing
state as at
31 March 2013
RMB
1.
An industrial complex
located at
No. 18, Dong Village
District No.4,
Liantang Village,
Hanjiang Town,
Shishi City,
Fujian Province,
the PRC
位於中國福建省
石獅巿
蚶江鎮蓮塘村東村4區
18號之廠房
The property comprises two parcels of
land with a total site area of approximately
50,963.99 sq.m. and various buildings and
ancillary structures completed in various stages
between 1995 and 2009 erected thereon.
The buildings of the property have a total gross
floor area of approximately 83,668 sq.m.
The land use rights of a parcel of land with a
site area of approximately 22,297.32 sq.m have
been granted for a term expiring on 12 July
2055 for industrial use.
The property is
occupied by the
Group for industrial
use.
Pursuant to Notes 5
& 6, a building of
the property with
a gross floor area
of approximately
2,514.86 sq.m. out
of 83,668 sq.m. is
legally owned by
Huafeng Knitting, an
indirect wholly-owned
subsidiary of the
Company.
101,800,000
Notes:
1.
The property is located within the industrial district of Shishi City. It takes about 1.5 hours’ drive to Xiamen
International Airport.
2.
Pursuant to a State-owned Land Use Rights Certificate, Shi Han Guo Yong (2005) Di No. 0066（獅蚶國用(2005)第
0066號）, issued by the People’s Government of Shishi City dated 24 November 2005, the land use rights of a parcel
of land with a site area of approximately 22,297.32 sq.m. have been granted to Huafeng Knitting Co., Ltd. Shishi
City, Fujian（福建省石獅市華豐針織有限公司）(‘‘Huafeng Knitting’’) for a term expiring on 12 July 2055 for
industrial use.
3.
Pursuant to 15 Land Use Rights Transfer Contracts（土地使用權出讓合同）entered into between various parties and
Huafeng Knitting during the period between January and March 2008, the land use rights of 15 parcels of land with
a total site area of approximately 28,666.67 sq.m. have been transferred to Huafeng Knitting for a term of 30 years
commencing on respective dates of the contracts.
IV – 8
APPENDIX IV
4.
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
For the land use rights of a parcel of land with a site area of approximately 28,666.67 sq.m, we have not been
provided with any title certificates.
5.
Pursuant to a Building Ownership Certificate, Shi Jian Fang Quan Zheng Han Jiang Zi Di No. 00435（獅建房權證
蚶江字第00435號）dated 9 March 2009 issued by Shishi City Real Estate Administration and Transaction Centre
（石獅市房產登記交易中心）, an office building of the property with a gross floor area of approximately 2,514.86
sq.m. is legally owned by Huafeng Knitting.
6.
For the remaining buildings with a total gross floor area of approximately 81,153.14 sq.m, we have not been
provided with any title certificates.
7.
In the valuation of the property, we have attributed no commercial value to the portion of the property as stated in
Note 4 and Note 6 as we have not been provided with any relevant title certificates of this portion of the property.
However, for your reference purpose, we are of the opinion that the market value of this portion of the property as at
the valuation date would be in the sum of approximately RMB50,700,000 assuming all relevant title certificates have
been obtained and this portion of the property could be freely transferred in the market.
8.
The opinion given by the PRC legal advisor to the Group is as follows:
a.
Huafeng Knitting has obtained the land use rights and building ownership rights of the property (except
portion of the property as stated in Note 4 and Note 6) and is entitled to transfer the property in the market;
b.
The property is not subject to mortgage or any other material encumbrances;
c.
The land premium of the property has been settled in full; and
d.
For the land use rights and building ownership rights of the portion of the property as stated in Note 4 and
Note 6, the application of relevant title certificates from the government is being processed.
9.
Huafeng Knitting is an indirect wholly-owned subsidiary of the Company.
IV – 9
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION CERTIFICATE
No.
Property
Particulars of
occupancy
Description and tenure
Building
Ownership
Market Value
in existing
state as at
31 March 2013
RMB
2.
An industrial complex
located at
No. 1 Huafeng Road,
Shihugang Industrial
District,
Hanjiang Town,
Shishi City,
Fujian Province,
the PRC
位於中國福建省
石獅巿
蚶江鎮石湖港
工業園區華豐路1號之
廠房
The property comprises a parcel of land with
a site area of approximately 129,389.4 sq.m.
and various buildings and ancillary structures
completed in 2007
erected thereon.
The buildings of the property have a total gross
floor area of approximately 47,700 sq.m.
The land use rights of the property have been
granted for a term expiring on 10 April 2057
for industrial use.
The property is
occupied by the
Group for industrial
use.
Pursuant to Notes 3
& 4, a building of
the property with
a gross floor area
of approximately
8,522.11 sq.m. out
of 47,700 sq.m. is
legally owned by
Fujian Fenghua, an
indirect wholly-owned
subsidiary of the
Company.
71,100,000
Notes:
1.
The property is located within the industrial district of Shishi City. It takes about 1.5 hours’ drive to Xiamen
International Airport.
2.
Pursuant to a State-owned Land Use Rights Certificate, Shi Di Han Guo Yong (2007) Di No. 0038（獅地蚶國用
(2007)第0038號）dated 24 July 2007 issued by the Shishi City People’s Government（ 石獅市人民政府）, the land
use rights of the property with a site area of approximately 129,389.4 sq.m. have been granted to Fujian Fenghua
Textile Co., Ltd.（ 福建豐華紡織有限公司）(“Fujian Fenghua”) for a term expiring on 10 April 2057 for industrial
use.
3.
Pursuant to a Building Ownership Certificate, Shi Jian Fang Quan Zheng Han Jiang Zi Di No. 00436（獅建房權證
蚶江字第00436號）dated 10 March 2009 issued by Shishi City Real Estate Administration and Transaction Centre
（石獅市房產登記交易中心）, a building of the property with a gross floor area of approximately 8,522.11 sq.m. is
legally owned by Fujian Fenghua.
4.
For the remaining buildings of the property with a total gross floor area of approximately 39,177.89 sq.m, the Group
has not been provided with any title certificates.
IV – 10
APPENDIX IV
5.
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
In the valuation of the property, we have attributed no commercial value to the buildings of the property as stated
in Note 4 as we have not been provided with any relevant title certificates of these buildings. However, for your
reference purpose, we are of the opinion that the depreciated replacement cost of these buildings as at the valuation
date would be in the sum of approximately RMB29,300,000 assuming all relevant title certificates have been
obtained and these buildings could be freely transferred in the market.
6.
The opinion given by the PRC legal advisor to the Group is as follows:
a.
Fujian Fenghua has obtained the land use rights and building ownership rights of the property (except the
buildings as stated in Note 4) and is entitled to transfer the property in the market;
b.
The property is not subject to mortgage or any other material encumbrances;
c.
The land premium of the property has been settled in full; and
d.
For the building ownership rights of the portion of the property as stated in Note 4, the application of
relevant title certificates from the government is being processed.
7.
Fujian Fenghua is an indirect wholly-owned subsidiary of the Company.
IV – 11
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION CERTIFICATE
No.
Property
Particulars of
occupancy
Description and tenure
Building
Ownership
Market Value
in existing
state as at
31 March 2013
RMB
3.
An industrial complex
(Land Parcel No.
2000-2-26)
located at
Wubao Village,
Hongshan Town,
Shishi City,
Fujian Province,
the PRC
位於中國福建省
石獅巿
鴻山鎮伍堡村之
廠房（宗地編號：
2000-2-26）
The property comprises two parcels of
land with a total site area of approximately
32,945.74 sq.m and various buildings and
ancillary structures completed in various stages
between 2001 and 2011 erected thereon.
The property is
occupied by the
Group for industrial
use.
The buildings have a total gross floor area of
approximately 41,220.5 sq.m.
The land use rights of a parcel of land with a
site area of approximately 30,845.74 sq.m have
been granted for a term expiring on 20 August
2055 for industrial use.
Pursuant to Notes 5
& 6, a building of
the property with a
gross floor area of
approximately 5,176.5
sq.m. out of 41,220.5
sq.m. is legally owned
by Huarun Knitting,
an indirect whollyowned subsidiary of
the Company.
61,600,000
Notes:
1.
The property is located within the industrial district of Shishi City. It takes about 1.5 hours’ drive to Xiamen
International Airport.
2.
Pursuant to a State-owned Land Use Rights Grant Contract entered into between Shishi City State-owned Land
Planning and Construction Bureau（石獅市國土規劃建設局）and Shishi Huarun Knitting & Dyeing Co., Ltd.（ 石獅
市華潤織造印染有限公司）(“Huarun Knitting”), dated 12 March 2005, the former has agreed to grant the land use
rights of a parcel of land with a site area of approximately 31,440 sq.m. to Huarun Knitting for a term of 50 years
for industrial use. As advised by the Group, portion of the land parcel with a site area of approximately 594.26 sq.m.
has been handed over to the government for extension of planned roads.
3.
Pursuant to a State-owned Land Use Rights Certificate, Shi Hong Guo Yong (2005) Di No. 0010（獅鴻國用(2005)
第0010號）dated 24 November 2005 issued by the Shishi City People’s Government（ 石獅市人民政府）, the land
use rights of a parcel of land of the property with a site area of approximately 30,845.74 sq.m. have been granted to
Huarun Knitting for a term expiring on 20 August 2055 for industrial uses.
4.
For the land use rights of a parcel of land with a site area of approximately 2,100 sq.m, we have not been provided
with any title certificates.
IV – 12
APPENDIX IV
5.
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
Pursuant to a Building Ownership Certificate Shi Jian Fang Quan Zheng Hong Shan Zi Di No. 00146（獅建房權
證鴻山字第00146號）dated 12 May 2008 issued by Shishi City Real Estate Administration and Transaction Centre
（石獅市房產登記交易中心）, a building of the property with a gross floor area of approximately 5,176.5 sq.m. is
legally owned by Huarun Knitting.
6.
For the remaining buildings with a total gross floor area of approximately 36,044 sq.m, we have not been provided
with any title certificates.
7.
In the valuation of the property, we have attributed no commercial value to the portion of the property as stated in
Note 4 and Note 6 as we have not been provided with any relevant title certificates of this portion of the property.
However, for your reference purpose, we are of the opinion that the market value of this portion of the property as at
the valuation date would be in the sum of approximately RMB30,400,000 assuming all relevant title certificates have
been obtained and this portion of the property could be freely transferred in the market.
8.
The opinion given by the PRC legal advisor to the Group is as follows:
a.
Huarun Knitting has obtained the land use rights and building ownership rights of the property (except
portion of the property as stated in Note 4 and Note 6) and is entitled to transfer the property in the market;
b.
The property is not subject to mortgage or any other material encumbrances;
c.
The land premium of the property has been settled in full; and
d.
For the land use rights and building ownership rights of the portion of the property as stated in Note 4 and
Note 6, the application of relevant title certificates from the government is being processed.
9.
Huarun Knitting is an indirect wholly-owned subsidiary of the Company.
IV – 13
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION CERTIFICATE
No.
Property
Particulars of
occupancy
Description and tenure
Building
Ownership
Market Value
in existing
state as at
31 March 2013
RMB
4.
An industrial complex
(Land Parcel No.
Lutian Chanye Jidi
Fazhan Dadao (Nan)
6-1-2-3-5-6-7) located
at Lutian Industrial
District,
Poyang County,
Shangrao City,
Jiangxi Province,
the PRC
The property comprises a parcel of land with
a site area of approximately 533,333 sq.m
and various buildings and ancillary structures
completed in various stages between 2008 and
2011 erected thereon.
The property
is occupied for
industrial and
ancillary uses.
The buildings of
the property are not
owned by the Group.
No commercial
value
The buildings of the property have a total gross
floor area of approximately 28,100 sq.m.
The land use rights of the property have been
granted for a term of 50 years.
位於中國江西省
上饒巿鄱陽縣
蘆田工業區之
廠房（宗地編號：
蘆田產業基地
發展大道（南）
6-1-2-3-5-6-7）
Notes:
1.
The property is located within the industrial district of Shangrao City. It takes about 2 to 3 hours’ drive to Nanchang
Chanbei Airport and 1 to 2 hours to Jingdezhen Airport.
2.
Pursuant to a Land Use Rights Transfer Contract entered into between Poyang County Real Estate Composite
Development Company（鄱陽縣房地產綜合開發公司）and Jiangxi Fenghua Textile Co., Ltd.（ 江西豐華紡織有限
公司）(“Jiangxi Fenghua”) dated 27 April 2007, the former has agreed to transfer the land use rights of the property
with a site area of approximately 533,333 sq.m. to Jiangxi Fenghua for a term of 50 years for industrial use.
IV – 14
APPENDIX IV
3.
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
In the valuation of the property, we have attributed no commercial value to the property as we have not been
provided with any relevant title certificates. However, for your reference purpose, we are of the opinion that the
market value of the property as at the valuation date would be in the sum of approximately RMB159,100,000
assuming all relevant title certificates have been obtained and this portion of the property could be freely transferred
in the market.
4.
The opinion given by the PRC legal advisor to the Group is as follows:
a.
b.
The Land Use Rights Transfer Contract has been legally signed;
The application of the Land Use Rights Certificate is being processed by the government. There is no legal
impediment for Jiangxi Fenghua to obtain the relevant title certificate; and
c.
5.
The property is subject to an outstanding land premium of an amount of RMB1,100,000
Jiangxi Fenghua is an indirect wholly-owned subsidiary of the Company.
IV – 15
APPENDIX IV
(B)
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
VALUATION REPORT OF THE MACHINERIES AND EQUIPMENT OF THE
GROUP
The following is the text of a letter and opinion of values, prepared for the purpose of
incorporation in this circular received from BMI Appraisals Limited, an independent valuer, in
connection with its valuations as at 31 March 2013 of the machineries and equipment located in the
People’s Republic of China.
33rd Floor, Shui On Centre, Nos. 6-8 Harbour Road, Wanchai, Hong Kong
28 June 2013
The Directors
Huafeng Group Holdings Limited
Room 2105
Shun Tak Centre
West Tower
No. 200 Connaught Road Central
Hong Kong
Dear Sirs,
INSTRUCTIONS
We refer to your instructions for us to value the machineries and equipment held by
Huafeng Group Holdings Limited (the “Company”) and/or its subsidiaries (together referred to
as the “Group”) located in the People’s Republic of China (the “PRC”) (the “Machineries and
Equipment”). We confirm that we have conducted sample inspections, made relevant enquiries and
obtained such further information as we consider necessary for the purpose of providing you with
our opinion of the market values of the Machineries and Equipment as at 31 March 2013 (the “date
of valuation”).
SCOPE OF INVESTIGATION
We have conducted sample inspections of the Machineries and Equipment, investigated
market conditions and interviewed with relevant personnel in order to familiarize ourselves with the
conditions, utilities and histories of the Machineries and Equipment.
IV – 16
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
LOCATION OF THE MACHINERIES AND EQUIPMENT
The Machineries and Equipment are situated in various locations within the PRC, which are
held by the following 5 entities:
Name of the Entity
(1)
(2)
Location
Huafeng Knitting Co., Ltd.
Shishi City, Fujian
（福建省石獅市華豐針織有限公司）
Liantang Village, Hanjiang Town,
Shishi City, Fujian Province, the PRC
（中國福建省石獅巿蚶江鎮蓮塘村）
Huafeng Trading Macao Commercial
Offshore Limited
Liantang Village, Hanjiang Town,
Shishi City, Fujian Province, the PRC
（中國福建省石獅巿蚶江鎮蓮塘村）
(3)
(4)
Shishi Huarun Knitting &
Dyeing Co., Ltd.
（石獅市華潤織造印染有限公司）
Jiangxi Fenghua Textile Co., Ltd.
（江西豐華紡織有限公司）
Wubao Village, Hong Shan Town,
Shishi City, Fujian Province, the PRC
（中國福建省石獅巿鴻山鎮伍堡村）
Lutian Industrial District, Poyang County,
Shangrao City, Jiangxi Province,
the PRC
（中國江西省上饒巿鄱陽縣蘆田工業區）
(5)
Fujian Fenghua Textile Co., Ltd.
（福建豐華紡織有限公司）
Shihugang Industrial District,
Hanjiang Town, Shishi City,
Fujian Province, the PRC
（中國福建省石獅巿蚶江鎮石湖港
工業園區）
DESCRIPTION OF THE MACHINERIES AND EQUIPMENT
As advised by the Group, the Machineries and Equipment comprise the machineries and
equipment held by the Group as contained in the industrial buildings and they are being utilized by
the 5 entities which are principally engaged in the textile industry.
IV – 17
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
OBSERVATION
During the inspections, we interviewed relevant personnel who are familiar with the
condition of the Machineries and Equipment. As advised by the Group and as per our on-site
observation, they are generally in reasonable condition. Although not all the Machineries and
Equipment were in use upon our inspections, we are of the opinion that they should be capable of
operating the purposes for which they were designed and produced. During our inspections, some of
the Machineries and Equipment appeared to be under-maintained. Thus, in our opinion, this reflects
a reasonable level of regular maintenance and repair works.
BASIS OF VALUATION
We have valued the Machineries and Equipment on the basis of Market Value, which is
defined as “the estimated amount for which an asset should exchange on the date of valuation
between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing
wherein the parties had each acted knowledgeably, prudently and without compulsion”.
EXCLUSIONS
This valuation exercise excludes the land, buildings, leasehold improvements, raw materials,
inventory, semi-finished and finished products, spare parts and any current or intangible assets.
VALUATION METHODOLOGIES
We have considered two generally accepted approaches to ascertain the market values of the
Machineries and Equipment, namely:
The Market Approach
The Market Approach considers transaction prices recently paid for similar assets,
with adjustments made to the indicated market prices to reflect the conditions and utilities
of the appraised assets relative to their market comparables. The values of assets for which
there are established secondhand market comparables may be appraised by this approach.
IV – 18
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
The Cost Approach
The cost approach considers the cost to reproduce or replace in new condition
the assets appraised in accordance with current market prices for similar assets, with
allowances for accrued depreciation arising from condition, utility, age, wear and tear, and/
or obsolescence present (physical, functional and/or economic), taking into consideration
the past and present maintenance policy and rebuilding history. This approach generally
furnishes the most reliable indication of the values of assets in the absence of a known
market based on comparable sales.
We have relied on the information provided by the Group that the Machineries and
Equipment are in reasonable conditions. We did not attempt to operate or test the Assets. In
addition, our valuations have been prepared based upon the following assumptions:
The Machineries and Equipment will continue in existing use in the course
of business of the existing owners subject to adequate potential profitability of the
business; and
The Machineries and Equipment will be used in the existing state with the
benefit of continuity of tenure of land and buildings in the foreseeable future.
It must be noted that the valuations are dated as at the date of valuation. We take
no responsibility for the condition, continued existence and/or operational abilities of the
Machineries and Equipment after this date. We must advise that the valuations are not
suitable for insurance purposes.
VALUATION CONSIDERATIONS
During our inspections, we have been provided by the Group a list of the Machineries and
Equipment regarding information on the identifications, quantities, purchase years and dates of first
use of the Machineries and Equipment, which we have selectively inspected and verified. We have
relied considerably on this plus on other information such as equipment specifications, construction
cost data and other documents provided to us.
We have had no reason to doubt the truth and accuracy of the information provided to us
by the Group. The Group has also advised us that no material facts have been omitted from the
information for us to reach an informed view, and we have no reason to suspect that any material
information has been withheld.
IV – 19
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
No allowance has been made in our valuations for any charges, mortgages or amounts
owing on the Machineries and Equipment or for any expenses or taxation, which may be incurred
in effecting a sale. Unless otherwise stated, it is assumed that the Machineries and Equipment are
free from encumbrances, restrictions and outgoings of an onerous nature, which could affect their
values.
We have not investigated the title or any liabilities affecting the Machineries and Equipment
appraised. No consideration was made for any outstanding amount owed under financing
agreements, if any.
Unless otherwise stated, it is assumed that all necessary procedures, licenses, permits and
other relevant documents have been obtained by the Group in accordance with relevant legislations
and regulations for utilization of the Machineries and Equipment and that they can be freely
disposed of in the market.
For the purpose of compliance with Rule 11.3 of the Code on Takeovers and Mergers and
as advised by the Company, the potential tax liabilities which would arise on the transfer of the
Machineries and Equipment at the amount of the valuation are PRC value-added tax (17% of the
selling price) and PRC corporate income tax (25% of the profit from the sale). The likelihood of
any potential tax liability being crystallised is remote as the Group has no intention to sell the
Machineries and Equipment in the PRC.
REMARKS
We hereby certify that we neither have any present nor any prospective interest in the Group
or the Machineries and Equipment appraised or the values reported.
Unless otherwise stated, all monetary amounts stated herein are in Renminbi (RMB) and no
allowances have been made for any exchange transfers.
IV – 20
APPENDIX IV
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
OPINION OF VALUES
We are of the opinion that the total market value of the Machineries and Equipment based
on the aforesaid basis, assumptions and considerations, as at 31 March 2013, was in the sum of
RMB272,800,000 (RENMINBI TWO HUNDRED SEVENTY TWO MILLION AND EIGHT
HUNDRED THOUSAND ONLY) and the market values of the respective machineries and
equipment held by the 5 entities are as follows:
Market Value as
at 31 March 2013
(RMB)
Name of the Entity
(1)
(2)
Huafeng Knitting Co., Ltd. Shishi City, Fujian
（福建省石獅市華豐針織有限公司）
Huafeng Trading Macao Commercial Offshore Limited
105,800,000
14,800,000
(3)
Shishi Huarun Knitting & Dyeing Co., Ltd.
（石獅市華潤織造印染有限公司）
69,600,000
(4)
Jiangxi Fenghua Textile Co., Ltd.
（江西豐華紡織有限公司）
39,300,000
(5)
Fujian Fenghua Textile Co., Ltd.
（福建豐華紡織有限公司）
43,300,000
TOTAL:
272,800,000
Yours faithfully,
For and on behalf of
BMI APPRAISALS LIMITED
Dr. Tony C.H. Cheng
BSc., MUD, MBA(Finance), MSc.(Eng), PhD(Econ),
FSOE, FIPlantE, CEnv, SIFM, FCIM, CPA UK, MCIArb
MASCE, MIET, MIEEE, MASME, MIIE
Managing Director
Note:
Dr. Tony C. H. Cheng has various engineering qualifications . He is currently the Chairman of Institute of
Mechanical Engineers, a Fellow member of The Society of Operations Engineers (SOE), Institution of Plant
Engineers (IPlantE) and a member of The Institute of Industrial Engineers (IIE) and the American Society of
Mechanical Engineers (ASME). He has extensive experience in machinery valuations in different industries in Hong
Kong and the PRC.
IV – 21
APPENDIX IV
(C)
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
REPORT FROM ORIENTAL PATRON ASIA LIMITED IN CONNECTION WITH
THE VALUATION OF THE MACHINERIES AND EQUIPMENT OF THE GROUP
28 June 2013
The Board of Directors
Huafeng Group Holdings Limited (the “Company”)
Room 2105, West Tower
Shun Tak Centre
200 Connaught Road Central
Hong Kong
Dear Sirs,
We refer to the valuation report dated 28 June 2013 prepared by BMI Appraisals Limited
(“BMI”) in relation to the valuation of the machineries and equipment as set out in Appendix IV to
the circular of the Company dated as of the date of this letter (the “Circular”). Unless the context
requires otherwise, capitalised terms used in this letter shall have the same meanings as those
defined in the Circular.
This letter constitutes a report pursuant to Rule 11.1(b) of the Takeovers Code and sets out
our assessment and review of the qualification and experience of Dr. C.H. Cheng (“Dr. Cheng”)
from BMI and the expertise and track records of BMI whose reports are set out in the Circular. We
hereby confirm that:
(i)
We have undertaken reasonable checks to assess the relevant experience and expertise
of Dr. Cheng and BMI and to satisfy ourselves that reliance could fairly be placed on
their work; and
IV – 22
APPENDIX IV
(ii)
VALUATION REPORTS OF THE PROPERTIES, MACHINERIES
AND EQUIPMENT OF THE GROUP AND RELATED LETTER
We have reviewed and discussed with the Company and BMI the qualifications, basis
and assumptions adopted by Dr. Cheng and BMI in the course of their work, and have
satisfied ourselves that Dr. Cheng and BMI are suitably qualified and experienced
with sufficient current knowledge, skills and understanding necessary to undertake the
valuation of the assets of the Company competently, that the qualifications, basis and
assumptions have been made with due care and objectivity, and on a reasonable basis.
Yours faithfully
For and on behalf of
Oriental Patron Asia Limited
Karlson Chan
Director
IV – 23
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Jones Lang LaSalle Corporate Appraisal and Advisory Limited
6/F Three Pacific Place 1 Queen’s Road East Hong Kong
tel +852 2846 5000 fax +852 2169 6001
Licence No.: C-030171
28 June 2013
The Board of Directors
Huafeng Group Holdings Limited
Room 2105, West Tower
Shun Tak Centre
200 Connaught Road Central
Hong Kong
Dear Sirs,
In accordance with the instructions from Huafeng Group Holdings Limited (hereinafter
referred to as the “Company”), we have carried out a valuation exercise which requires Jones Lang
LaSalle Corporate Appraisal and Advisory Limited (“JLL”) to express an independent opinion of
the fair value of the economic interest in the biological assets (the “Biological Assets”) owned
by 福建省安溪縣大坪綠色食品工程有限公司 (translated as “Fujian Anxi Daping Technology
Company Limited” and hereinafter referred to as “Daping”) as at 31 March 2013 (“Valuation
Date”). This report dated 28 June 2013 outlines the basis of opinion, methodology and assumptions
in relation to the valuation exercises.
The purpose of this valuation is to express an independent opinion on the fair value of the
Biological Assets as at the Valuation Date for accounting reference.
Our valuation was carried out on a fair value basis. Fair Value is defined as “the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date”.
V–1
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
BACKGROUND
Daping was established in 1998 and principally engaged in the plantation, processing and
sale of oolong teas. It was originally owned as to 20% by 教育部食品工程研究中心 (translated
as “Education Bureau Food Engineering Research Centre”), as to 5% by 安溪縣大坪鄉人民政
府 (translated as “The People’s Government of Anxi County Daping Country”), and as to 75% by
certain individuals. 80% and 20% equity interest of Daping was acquired by Fujian Nature Tea
Industry Technology Co., Ltd. (“Fujian Nature”) respectively in 2007 and 2008. Fujian Nature is an
indirect wholly-owned subsidiary of the Target Company.
BIOLOGICAL ASSETS DESCRIPTION
Daping produces and sells Chinese teas, including Mao Xie tea（毛蟹茶）, Huangjin Gui
（黃金桂）, Ben Shan tea（本山茶）and Tie Guan Yin tea（鐵觀音）. According to the information
provided to us by Daping, as at 31 March 2013, Daping owned about 29,592.7 Mu of tea trees
at Daping Town and Xiping Town, Anxi, Fujian Province of the People’s Republic of China (the
“PRC”) with the following distribution,
Species planted
Area (Mu)
Percentage
Ben Shan tea
Mao Xie tea
Tie Guan Yin tea
Huangjin Gui
3,396.14
16,986.96
7,785.08
1,424.52
11.48%
57.40%
26.31%
4.81%
Total
29,592.70
100.00%
The above area is covered by 127 forest rights certificates. We have been provided with
copies of these forest rights certificates. According to the legal opinion prepared by the PRC Legal
Advisers dated 28 June 2013, Daping has the legal titles as to the ownership and use rights of the
Biological Assets being valued. Based on the information provided by Daping, the age distribution
(rounded) of the total 29,592.7 Mu tea tree plantations as at 31 March 2013 is presented below,
Age
1 – 2 years old
3 – 4 years old
5 – 10 years old
11 – 20 years old
Ben Shan
Mao Xie
Tie Guan Yin
Huangjin Gui
9.14%
15.25%
26.58%
49.03%
8.69%
11.31%
25.68%
54.32%
8.34%
14.88%
29.91%
46.87%
9.66%
12.39%
19.20%
58.75%
V–2
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
During the field inspection, JLL and the Expert Consultants have visited all of the 127
cultivation bases (represented by 127 forest rights certificates). We have cross-checked the age of
the tea trees with the age distribution list in some of the locations and no irregularities have been
found. For details of the field inspection please refer to the section headed “Field Inspection” in this
appendix.
BASIS OF OPINION
We understand that the objective of this valuation exercise is to assist the Company and its
auditors in recognising the value of the Daping’s Biological Assets in accordance with International
Accounting Standard 41 – Agriculture (“IAS 41”) issued by the International Accounting
Standards Board. IAS 41 prescribes the accounting treatment, financial statement presentation, and
disclosures related to agricultural activity. Agricultural activity refers to the management of the
biological transformation and harvest of biological assets, defined as living animals or plants, or for
conversion into agricultural produce, defined as harvested product.
IAS 41 presumes that fair value can be reliably measured for most biological assets. The
following guidance is provided on the measurement of fair value:
•
a quoted market price in an active market for a biological asset or agricultural produce
in its present location and condition is the most reliable basis for determining the fair
value of that asset. If an active market does not exist, IAS 41 provides guidance for
choosing another measurement basis. First choice would be a market-determined price
such as the most recent market price for that type of asset, or market prices for similar
or related assets; IAS 41.17-19;
•
if reliable market-based prices are not available, the present value of expected net cash
flows from the asset should be used, discounted at a current market-determined rate;
IAS 41.20;
•
in limited circumstances, cost is an indicator of fair value, where little biological
transformation has taken place or the impact of biological transformation on price is
not expected to be material; IAS 41.24; and
•
the fair value of a biological asset is based on current quoted market prices and is not
adjusted to reflect the actual price in a binding sale contract that provides for delivery
at a future date. IAS 41.16.
We have conducted our valuation in accordance with IAS 41 and with reference to
International Valuation Standards issued by the International Valuation Standards Committee.
The valuation procedures employed include the review of physical and economic condition of
the subject asset, an assessment of key assumptions, estimates, and representations made by the
proprietor or the operator of the subject assets. All matters we consider essential to the proper
understanding of the valuation are disclosed in the valuation report.
V–3
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
The following factors form an integral part of our basis of opinion:
•
Assumptions on the market such as future market prices, discount rate (i.e. the
required return of the subject business expected by the market), the assets such as
the production yield forecast, the expected condition of the subject assets and other
assumptions as outlined in the section “Valuation Assumptions” in this report that are
considered to be fair and reasonable;
•
Consideration and analysis on the micro and macro economy affecting the subject
assets;
•
Analysis on tactical planning, management standard and synergy of the subject assets;
and
•
Analytical review of the subject assets.
We planned and performed our valuation so as to obtain all the information and explanations
which we considered necessary in order to provide us with sufficient evidence to express our
opinion on the subject assets.
VALUATION METHODOLOGY
Given the unique characteristics of the asset, there are substantial limitations for the market
approach and the cost approach for valuing the underlying asset. Firstly, the market approach
requires market transactions of comparable assets as an indication of value. However, we have
not identified any current market transactions which are comparable given the characteristics of
biological assets such as maturity, species composition, site productivity, proximately to market,
site terrain, etc. Secondly, the cost approach does not directly incorporate information about the
economic benefits contributed by the subject asset.
In view of the above, we have adopted the income approach for the valuation. Income
Approach is the conversion of expected periodic benefits of ownership into an indication of value.
It is based on the principle that an informed buyer would pay no more for the asset than an amount
equal to the present worth of anticipated future benefits (income) from the same or a substantially
similar asset with a similar risk profile.
Under this method, value depends on the present worth of future economic benefits to be
derived from the projected sales income. Indications of value have been developed by discounting
projected future net cash flows available for payment of owners’ interest to their present worth at
V–4
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
discount rates which in our opinion are appropriate for the risks of the business. In considering the
appropriate discount rate to be applied, we have taken into account a number of factors including
the current cost of financing and the relevant risks inherent in the business.
An income approach technique known as multi period excess earnings method is adopted
to value the tea trees. It is a derivative of the discounted cash flow (“DCF”) method. Using this
technique, we estimate the direct economic benefits attributed to the tea trees. Such economic
benefits are then capitalized at a rate which reflects all business risks including intrinsic and
extrinsic uncertainties in relation to the subject assets. To estimate the economic benefit, the
revenues for the tea trees are projected over the remaining useful life of the biological assets. Based
on the projected revenues, the costs associated with supporting the tea trees are subtracted. The net
income projection is then adjusted by economic capital charges. The capital charges include returns
on the assets that are used or used up in the generation of the subject biological asset income
projection.
Examples of such assets include:
•
Working capital; and
•
Assembled workforce
Most the tea trees generate economic benefit and have predictable future income, therefore
income approach is adopted.
SOURCE OF INFORMATION
In conducting our valuation of the Biological Assets, we have been provided copies of the
following documents from Daping, including, but not limited to:
•
Financial statements and accounts of Daping;
•
Description (Area, location, density, age and species) of the tea plantations of Daping;
and
•
The 127 forest right certificates in respect of the 29,592.7 Mu Biological Assets.
V–5
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
We have held discussions with management of Daping, conducted research from public
sources and carried out site inspection to assess the reasonableness and fairness of information
provided. We assumed such information to be reliable and legitimate; and we have relied to a
considerable extent on the information provided in arriving at our opinion of value.
APPOINTMENT OF TEA EXPERT
Through controlled processes, both biological and non-biological fixed assets can produce
tangible results and contribute to the value of an existing economic operation. However, biological
assets are different from fixed assets in nature and form. Biological assets are living animals or
plants while fixed assets are usually associated with non-living tangible forms like real estate and
plant and machinery. Biological assets require management of its biological transformation in
order to grow, mature and produce harvestable products. Their physical aspects change constantly
through time while that of fixed assets are relatively stable. Although changes occur to fixed assets
due to physical wear and tear, economic obsolescence, and/or renewal and expansion, these changes
can often be objectively traced by means of a simple audit of related costs and capital expenses
spent on the fixed assets. However, in the case of biological assets, apart from purchases or sales
of the assets, a major cause of the changes in biological assets is the natural growth cycle which
can be varied and difficult to trace. The actual growth of the biological assets may be affected by
factors such as weather, natural effect of growth, livability, disease, management of the assets,
environmental conditions, etc.
As such, valuation of biological assets warrants a thorough understanding of the attributes
mentioned above in order to arrive at a credible and acceptable result. In the process of our
valuation exercise, we were advised by the Expert Consultants on the following relevant areas,
including but not limited to:
External factors
•
Topographical and meteorological aspects of the area;
•
Ecosystem and biotic interactions of the plantation;
•
Soil quality and conditions at the plantation; and
•
Other considerations of the livability of the subject asset.
V–6
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Specific factors
•
Characteristics of the tea plants;
•
Specie resilience and variability; and
•
Sustainability and productivity of the asset, if any.
The discussion of the above factors can be found in the sections headed “2. Overview of the
region under assessment” and “4. Results of the assessment” of the Appendix VII to this circular.
In this valuation assignment, we have appointed expert consultants, Dr. Su Zhucheng, Vice
Dean of the School of Tea Culture of Zhejiang A&F University, Mr. Wu Liangru from Chinese
Academy of Forestry, Dr. Zheng Dexiang, Associate Professor of Forestry College of Fujian
Agriculture and Forestry University and Mr. Zhang Yusong, a retired Associate Professor of Fujian
Agriculture and Forestry University (the “Expert Consultants”), to join our team and assist in the
exercise. Such appointment is necessary due to the importance of a thorough understanding of the
current physical and biological attributes of the Biological Assets. The primary role of the Expert
Consultants is to provide assistance and advice on the biological aspects of the Biological Assets
in order for us to have a better understanding of the nature of the subject asset. We have considered
and relied to a considerable extent on the expertise and opinion of the Expert Consultants with
respect to the physical and biological attributes of the Biological Assets in the preparation of the
valuation report.
Dr. Su Zhucheng, currently Vice Dean of the School of Tea Culture of Zhejiang A&F
University, focuses on research on tea leaves processing and tea industry economy and culture. Dr.
Su is also a 國家一級評茶師 (translated as national level tea taster). Dr. Su started his career in tea
industry since 1986. His research papers have been published in different journals including“中國
農村經濟”,“中國農業經濟評論”,“茶業科學”,“國際貿易問題”and “Economic Review”, etc.
Dr. Su has also been involved in different government tea related projects in China.
Mr. Wu Liangru started his career in forestry research field since 1986. He was teaching in
Reaesrch Institute of Subtropical Forestry, Chinese Academy of Forestry since 1986 and become
an Associate Professor in 1998. Currently, Mr. Wu is an Associate Professor, Chief of Scientific
Research and Development Division of Chinese Academy Forestry. One of his research fields is
forest ecosystem management and sustainable management of man-made forests. He has been
involved in tea plantation valuation project since 2010.
V–7
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Dr. Zheng Dexiang, currently is an Associate Professor of Forestry College of Fujian
Agriculture and Forestry University. He has been engaging in teaching and scientific research
in terms of the operation and management of forest resources, forestry asset appraisal, forestry
sustainable development and so on for a long time. Details of Dr. Zheng can be found in the Tea
Plantation Resource Assessment Report of the Target Group as set out in the Appendix VII to this
circular.
Mr. Zhang Yusong, a senior tea specialist, a national level tea taster, a national level tea
maker, Fujian provincial tea taster, senior assessor of tea specialist, a member of China Tea Science
Society, and a director of the Home of Fujian Province Tea Friend of China Tea Friend Association.
He was an Associate Professor of Fujian Agriculture and Forestry University until his retirement in
2011. Details of Mr. Zhang can be found in the Tea Plantation Resource Assessment Report of the
Target Group as set out in the Appendix VII to this circular.
The primary role of the Expert Consultants is to provide assistance and advice on the
biological aspects of the Biological Assets such as the health and condition of the subject asset in
order for us to have a better understanding of the nature of the subject asset. The Expert Consultants
has also provided assistance on the market price information on the relevant biological aspect.
Dr. Zheng and Mr. Zhang also provided assistance in verifying the area, existence, quality
and the plantation of the Biological Assets. For details, please refer to the Tea Plantation Resource
Assessment Report of the Target Group Report as set out in the Appendix VII to this circular.
We have considered and relied to a considerable extent on the expertise and opinion of the
Expert Consultants with respect to the physical and biological attributes of the Biological Assets in
the preparation of the valuation report.
All of the Expert Consultants were not involved in preparing the valuation report. Instead,
they provide support and advice to JLL in the valuation process so that the assumptions such as the
production yield forecast are reasonably projected.
FIELD INSPECTION
In order to compare the data and descriptions (including the map information of the tea trees
plantation by age, species and location) of the tea trees provided by Daping (on which JLL relied
during the course of valuation) with the actual conditions in the ground, as part of the valuation,
2 field inspections have been conducted during the period from 20 – 23 August 2012 and 14 – 20
April 2013 by JLL and Expert Consultants.
V–8
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
The following personnel from JLL have been involved in the inspection. Mr. Kevin Chan,
senior manager, Mr. Sam Lai, assistant manager, Mr Elvis Cheung and Miss Maymay Lo, both
senior analysts, Mr Simon Wong, analyst, and Mr Sean He and Miss Sarah Ye, both assistant
analysts. All of the above JLL personnel have been involving in valuing biological assets for a range
of 0 – 3 years.
The work undertaken during the field inspections comprised:
•
Visits all cultivation bases (represented by 127 forest rights certificates) to have a
general understanding and to verify the existence of the Biological Assets;
•
Establish a random list of 14 cultivation bases (representing over 10% in terms of
number of forest rights certificates and also above 10% in terms of area of cultivation
bases covered) for detailed inspection and measurement with reference to 福建省地方
標準DB35/T642-2005《森林資源資產評估技術規範》(translated as “Local Standards
of Fujian Province: DB35/T642-2005 Forest Resources Asset Appraisal Technical
Specifications”). Please refer to the “Tea Plantation Resource Assessment Report of
the Target Group” in Appendix VII for details;
•
Recording the GPS location and tea species’ type and age;
•
Inspecting and observing the quality of the plantation including but not limited
to topographical and meteorological aspects of the area, ecosystem and biotic
interactions of the plantation, soil quality and conditions at the plantation, and other
factors that affect the livability of the Biological Assets;
•
Interviews with staff at Daping’s office; and
•
Examine, taste and drink the final products.
Based on the field inspection and the subsequent analysis based on the rules as set out in
section headed “3.1 This assessment has been conducted based on the followings” of the Appendix
VII to this circular, the information of the area and the age for each type of the tea trees as provided
by Daping is credible and can be applied in asset valuation. Please refer to the section 4 of the
Appendix VII to this circular for details.
We have also conducted sample checking on the conditions of the Biological Assets. The
sampling results were matched with the information stated in the operating statistics provided by
Daping to identify if there is any material discrepancy.
For details of the field inspection, please refer to the Tea Plantation Resource Assessment
Report of the Target Group as set out in the Appendix VII to this circular.
V–9
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
VALUATION ASSUMPTIONS
In determining the fair values of tea trees, we have made the following key assumptions:
•
After reviewing the documents including but not limited to the copies of the Forest
Right Certificates, maps and Transfer Agreements, and based on the result of field
inspection including the sample checking on those details provided (for details of the
field inspection, please refer to the Tea Plantation Resource Assessment Report of
the Target Group as set out in the Appendix VII to this circular), we have assumed
that information provided by Daping, including but not limited to, the area, location,
density, age and species are true and accurate; and
•
After reviewing the historical performance including the financial statements and
accounts of Daping and discussing with management of Daping regarding the
operation of the tea plantation, we have assumed that the projected business of the
Biological Assets can be achieved with the effort of the management of Daping.
Other key assumptions include the following,
Lifecycle and production yield
The production lifecycle and the yield of tea trees are based on the estimates indicated
in the independent survey reports prepared by the Expert Consultants. These estimates have
been reviewed and concurred by the Company and Daping. The Expert Consultants have
reviewed the historical production record and the biological operating planning（“生態經營
技術方案”）adopted by Daping. They have also considered the following factors as their
basis of opinion,
i
The existing growth condition, soil and the environment;
ii
The management and the operation conditions of the plantation;
iii.
Researches regarding the operation of the tea plantation (which outlined the
general biological growth pattern of the tea tree); and
iv.
The plantation norm in the local area.
V – 10
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Based on the opinion of Expert Consultants, the production lifecycle is assumed to be 20
years and the yield is projected as follows (in kg of tea leaves per Mu),
Daping Town
Xiping Town
Ben Shan
Mao Xie
Tie Guan
Huangjin
Ben Shan
Tie Guan
tea
tea
Yin tea
Gui
tea
Yin tea
Year 1
0
0
0
0
0
0
Year 2
75 – 220
120 – 320
50 – 150
85 – 250
60 – 160
40 – 120
Year 3
300 – 605
480 – 880
200 – 413
340 – 688
240 – 440
160 – 330
Year 4
525 – 935
840 – 1,360
350 – 638
595 – 1,063
420 – 680
280 – 510
750 – 1,100 1,200 – 1,600
500 – 750
850 – 1,250
600 – 800
400 – 600
Year 5 – 20
Revenue
1.
We have referenced the consumer price index (“CPI”) growth rate of China and
assumed a 3% inflation rate for the selling prices during the whole forecast period and
presented as follows (in RMB/kg).
Ben Shan
tea
Current
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Year 11
Year 12
Year 13
Year 14
Year 15
Year 16
Year 17
Year 18
Year 19
3.35
3.45
3.55
3.66
3.77
3.88
4.00
4.12
4.24
4.37
4.50
4.64
4.78
4.92
5.07
5.22
5.38
5.54
5.70
5.87
Daping Town
Mao Xie
Tie Guan
tea
Yin tea
2.35
2.42
2.49
2.57
2.64
2.72
2.81
2.89
2.98
3.07
3.16
3.25
3.35
3.45
3.55
3.66
3.77
3.88
4.00
4.12
V – 11
7.98
8.21
8.46
8.71
8.98
9.25
9.52
9.81
10.10
10.41
10.72
11.04
11.37
11.71
12.06
12.42
12.80
13.18
13.58
13.98
Huangjin
Gui
3.15
3.24
3.34
3.44
3.55
3.65
3.76
3.87
3.99
4.11
4.23
4.36
4.49
4.63
4.76
4.91
5.05
5.21
5.36
5.52
Xiping Town
Ben Shan
Tie Guan
tea
Yin tea
3.35
3.45
3.55
3.66
3.77
3.88
4.00
4.12
4.24
4.37
4.50
4.64
4.78
4.92
5.07
5.22
5.38
5.54
5.70
5.87
16.33
16.82
17.33
17.85
18.38
18.93
19.50
20.09
20.69
21.31
21.95
22.61
23.29
23.99
24.71
25.45
26.21
27.00
27.81
28.64
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
2.
With consideration of the current market prices of relevant types of agricultural
produces, the opinions provided by the Expert Consultants have been considered in
determining the unit prices of the agricultural produces derived from tea plants;
3.
The production yield forecast of the tea trees were after considering the field
inspection result and the projection made by the Expert Consultants, which have made
reference to the health condition, soil quality, management and operation conditions
and the historical production record;
4.
With the forecasted selling price (based on the current market prices and the
projection as stated in the point 1 and 2 above) and the production yield forecast (as
stated in the section headed “Lifecycle and production yield” and point 3 above), the
product forms revenue streams as follows (in RMB ’000),
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Year 11
Year 12
Year 13
Year 14
Year 15
Year 16
Year 17
Year 18
Year 19
Ben Shan
tea
Mao Xie
tea
Tie Guan
Yin tea
Huangjin
Gui
8,457
8,603
8,658
8,504
8,247
7,935
7,597
7,231
6,830
6,632
6,417
6,183
5,928
5,653
5,365
3,765
2,065
1,463
882
51,883
51,854
51,595
50,608
48,341
45,891
43,252
40,412
37,295
35,664
33,902
32,003
29,958
27,762
25,490
18,574
11,221
8,559
5,727
47,949
48,558
49,310
49,571
48,136
46,570
45,067
42,921
40,589
39,038
37,357
35,541
33,581
31,473
29,227
20,361
10,935
7,982
4,842
4,579
4,577
4,515
4,378
4,133
3,870
3,587
3,283
2,945
2,885
2,818
2,745
2,665
2,578
2,498
1,826
1,111
848
569
V – 12
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Costs
1.
We have referenced the CPI growth rate of China and assumed a 3% inflation rate for
the operating costs during the whole forecast period;
2.
Based on the information provided by Daping, costs include cost of rental, fertilizer,
harvest picking fee, management cost, transportation cost and other costs. We have
reviewed the financial statements and accounts, and historical production record to
assess the historical unit costs;
3.
Projected unit costs are estimated with reference to the historical unit costs in point 2
and the inflation rate as in point 1.
4.
The projected costs of production are derived from the projected unit costs and the
production yield forecast and as follows (in RMB ‘000),
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Year 11
Year 12
Year 13
Year 14
Year 15
Year 16
Year 17
Year 18
Year 19
*
Fertilizer
cost
Picking
fee
Management
cost
16,169
15,707
15,203
14,655
14,060
13,416
12,721
11,972
11,156
10,720
10,248
9,738
9,188
8,596
7,974
5,700
3,282
2,450
1,565
17,027
17,128
17,182
17,003
16,360
15,659
14,925
14,072
13,144
12,627
12,067
11,463
10,811
10,110
9,368
6,671
3,804
2,883
1,801
16,911
21,946
21,283
20,542
19,708
18,805
17,830
16,779
15,629
15,016
14,351
13,633
12,859
12,026
11,155
7,977
4,599
3,434
2,196
Other
costs*
4,565
6,138
6,169
6,121
5,942
5,307
5,043
4,755
4,439
4,278
4,104
3,917
3,716
3,498
3,189
2,305
1,370
993
596
Other costs includes rental, transportation cost and other miscellaneous costs
Our valuation is also premised on the following:
•
We reviewed the operation with the management of tea plants. Having discussed
with the Expert Consultants on the bases and assumptions in arriving their opinion,
considered the qualification and experience of the Expert Consultants, and referred
to the historical performance of the company, we are satisfied with the opinion of the
Expert Consultants. With reference to to the opinions from the Expert Consultants,
particularly on the tea prices and the production yield forecast, we have estimated
the future cash flow of tea plants. In addition, we have assumed the operating and
management procedures are consistent and can achieve the forecast operational and
financial performances;
V – 13
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
•
In order to realize the growth potential in the yield of tea plants and maintain a
competitive edge, additional manpower, equipment and facilities may be required. For
this valuation exercise, we have assumed that the necessary facilities and systems are
available for future growth;
•
We have assumed that there will be no material change in the existing political, legal,
technological, fiscal or economic condition which may adversely affect the operation
of tea plants. In addition, we have assumed that the competitive advantages and
disadvantages of the operation of tea plants do not change significantly during the
projection period; and
•
Disease, natural disaster and extreme weather condition can have negative impact on
the production or the life of tea plants. We have assumed that there will be no unusual
events which could have significant impacts on the production volume during the
projection period.
DISCOUNT RATE
In applying the discounted cash flow method to calculate the value of the Biological Assets,
it is necessary to determine an appropriate discount rate for tea businesses. The discount rate
represents an estimate of the rate of return required by a third party investor for an investment of
this type. The rate of return expected from an investment by an investor relates to perceived risk.
Risk factors relevant in our selection of an appropriate discount rate include:
1.
Interest rate risk, which measures the variability of returns caused by changes in the
general level of interest rates.
2.
Purchasing power risk, which measures the loss of purchasing power over time due to
inflation.
3.
Liquidity risk, which measures the ease with which an instrument can be sold at the
prevailing market price.
4.
Market risk, which measures the effects of the general market on the price behavior of
securities.
5.
Business risk, which measures the uncertainty inherent in projections of operating
income.
6.
Exchange rate risk, which measures the possible influence that changes in exchange
rates might have on the value of the investment.
V – 14
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Consideration of risk also involves elements such as quality of management, degree of
liquidity, and other factors affecting the rate of return acceptable to a given investor in a specific
investment. An adjustment for risk is an increment added to a base rate to compensate for the extent
of risk believed to be involved in the investment.
We have used the Weighted Average Cost of Capital (“WACC”) in evaluating the appropriate
discount rates. WACC is calculated by multiplying the cost of each capital component by its
proportional weight and then summing:
WACC =
E
V
× Re +
D
V
× R d × (1-T c )
where:
Re
Rd
E
D
V
E/V
D/V
Tc
=
=
=
=
=
=
=
=
Required return on equity
Required return on debt
market value of the firm’s equity
market value of the firm’s debt
E+D
percentage of financing that is equity
percentage of financing that is debt
corporate tax rate
Required Return on Equity
The return on equity required of a company represents the total rate of return investors
expect to earn, through a combination of dividends and capital appreciation, as a reward for
risk taking. The Capital Asset Pricing Model (“CAPM”) is used to calculate the required rate
of return on equity investment by using publicly-traded companies.
The CAPM is a fundamental tenet of modern portfolio theory which has been the
generally accepted basis for marketplace valuations of equity capital. The CAPM technique
is widely accepted in the investment and financial analysis communities for the purpose of
estimating a business’s required return on equity capital.
The equation of CAPM is shown as follow:
Expected Required Return on Equity = Risk Free Rate +
Nominal Beta ( β) x Risk Premium
Determination of Beta
Beta was developed as a yardstick for comparing the volatility of the investment in a
specific company of a specific industry to the investment in a broad portfolio of companies
as a whole, such as the S&P 500 or the Hang Seng indices. It had been developed as the
V – 15
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
result of extensive empirical research into the market pricing of risk. Beta has gained wide
acceptance as a measure of the degree of relative or systematic risk incurred by investing in
an individual company as compared to the equivalent risk incurred by investing in a welldiversified portfolio of common shares.
Specific Risks
To account for specific risks inherent in Daping, we have included the Greek symbol
“epsilon” in the CAPM as follows:
Required Return on Equity = Risk Free Rate + Nominal Beta x Risk Premium + ε
This adjustment is to account for the fact that the expected return for a company
is expected to be affected by factors independent of the general market such as quality of
management, maturity of business, liquidity of assets and others.
Parameters for CAPM
In determining the discount rate for the biological assets, the following parameters
have been used:
31 March
2013
Valuation date
Risk free rate
Hong Kong
China
Equity risk premium
Estimated beta
Hong Kong
China
Size premium
Other premium
Cost of equity
0.87%
3.48%
6.70%
0.99
1.06
6.03%
6.00%
21.41%
Remarks:
1.
Hong Kong risk free rates are made reference to average of 10-year Hong Kong
Monetary Authority Exchange Fund Bills and Notes Official Fixings
2.
China risk free rates are made reference to average of 10-year yield of China
Government Bond
3.
Equity risk premiums are made reference to long-horizon expected equity risk
premium from Ibbotson SBBI 2013 Valuation Yearbook
V – 16
APPENDIX V
4.
5.
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Estimated betas (Hong Kong) are made reference to 5-year weekly adjusted
Beta of comparable companies listed in Hong Kong which are selected based on
the following criteria,
a.
Principally engaged in planting of agricultural products in China; and
b.
With at least 5 years of sufficient trading record;
Estimated betas (China) are made reference to 5-year weekly adjusted Beta
of comparable companies listed in China which are selected based on the
following criteria,
a.
Principally engaged in planting of agricultural products in China; and
b.
With at least 5 years of sufficient trading record;
6.
Size premiums are made reference to Ibbotson SBBI 2013 Valuation Yearbook
market capitalization between USD1.139M and USD253.761M;
7.
Other premium are determined with respect to quality of management, maturity
of business, liquidity of assets, operation risk and political risk relative to the
comparable companies:
Risk item
Comments
Risk level
Quality of
management
Relatively there is difference in certain
extent on the quality of management
such as corporate governance
between public company and closely
held company.
Higher
Maturity of business
Tea plantation including the technique
and operation is highly developed
and matured in Anxi County area.
However, as the Target Group
started the tea cultivation business
in 2007, higher risk should be
considered.
Higher
V – 17
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Risk item
Comments
Risk level
Liquidity of assets
Normally, selling assets like biological
assets (the whole plantation) of
a closely held company are less
liquid than the sale of a business of
a public company. Higher premium
shall be considered.
Higher
Operation risk*
The operation risk faced by the
operator of the biological asset
is similar to the comparable
companies, which are also engaged
in similar businesses.
Similar
Political risk*
As the comparable companies are
also engaging in similar businesses
in China, they shall face similar
political risk
Similar
*
Please refer the section “Risk Factors” in this report for details
WACC
The application of CAPM and WACC as outlined above yielded the following discount
rates, which we believe to be fair and reasonable required return for the biological asset.
31 March
2013
Valuation date
Debt to equity ratio
Cost of equity
After-tax cost of debt
WACC
26.21%
21.41%
6.55%
18.32%
Remarks:
1.
Debt to equity ratios are made reference to the debt to equity ratio of the
comparable companies
V – 18
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
2.
Costs of equity are made reference to the rate derived from CAPM discussed in
the previous section
3.
After-tax costs of debt are made reference to RMB lending rate published by
The People’s Bank of China
RISK FACTORS
The following factors may affect the result of this valuation.
Natural Disaster
Given the nature of the Biological Assets, the productivity of Biological Assets are
subject to the effect of natural environmental conditions such as weather conditions and
disease. Any occurrence of natural disaster such as fire, frost and snow damage, typhoons
and pests and disease, etc. may have a material impact on the productivity and hence the
economic benefit generated by the Biological Assets.
Legal issues concerning operation of agricultural land in the PRC
The legal framework and the administrative and registration system for rural and suburban agricultural land in the PRC are not as developed as those for urban land. Under the
laws and regulations in the PRC, there is currently no requirement for leases of rural or suburban agricultural land in the PRC to be registered with the relevant land administrative
authorities. Hence, there are specific risks associated with the ownership, leasing and use of
agricultural land in the PRC including risks concerning the legality and validity of land use
rights or leasing arrangements.
Uncertainty of Market Competition
As China has become a member of the WTO, it is expected that the import tariffs
of agricultural products will be lowered and the related import quotas and restrictions will
be eliminated. This may result in an increase in competition from local as well as overseas
suppliers. Any unexpected price fluctuation in agricultural products may also affect the
economic value of the Biological Assets.
Tax concessions
Daping enjoys concessions of business tax and income tax for its tea operation.
However, any change in the tax concession available to Daping may have an adverse effect
on the value of the tea trees.
V – 19
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Change in Government Policies
The Chinese government is continually experimenting with economic and political
reforms to develop the country. Many of the reform measures are new and untested. Despite
China’s accession into the WTO, future government policies may have unfavorable impacts
on the business of the Biological Assets.
Fluctuation of prices
While tea are not subject to any government pricing control, production quota or
restriction, there is no assurance that market prices of tea will not experience significant
fluctuations which will materially affect the value of the Biological Assets.
Economic Advancement
The Chinese economy has experienced significant development in the past 20 years.
However, such development is unbalanced both geographically and industrially. Future
social and economic changes in China might have uncertain impacts on the business of the
Biological Assets, which might be favorable or unfavorable.
OPINION OF VALUE
Based on the results of our investigations and analyses outlined in the report which follows,
we are of the opinion that the fair values of the Biological Assets as at the Valuation Date are
reasonably stated as follows:
Valuation Date
Area (Mu)
Fair Value
(RMB)
31 March 2013
29,592.7
272,392,000
Pursuant to Rule 11.3 of the Code on Takeovers and Mergers, we hereby include the
following information:
As advised by the Company, the potential tax liabilities which would arise if the Biological
Assets of the Company were to be sold at the amount of the valuation include PRC corporate
income tax at a rate of 25% on the profit from the sale and PRC business tax at a rate of 5% on the
consideration.
The Directors consider that it is unlikely any such tax liability will be crystallized as
the Company has no intention to sell the Biological Assets which are being used for Daping’s
operations.
SENSITIVITY ANALYSIS
A sensitivity analysis has been conducted that addresses the main drivers of value within the
current valuation model. These are:
•
Discount rate and tea selling prices; and
•
Discount rate and cost of production.
V – 20
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
Tea prices sensitivity
Discount rate applied
15.32%
16.82%
18.32%
19.82%
21.32%
287,195
258,949
230,703
272,728
246,806
219,883
19.82%
21.32%
244,493
258,949
273,404
233,027
246,806
260,584
Fair value in RMB (’000)
5% tea prices increase
No tea prices increase
5% tea prices decrease
337,156
304,004
270,852
318,670
287,332
255,995
302,103
272,392
242,682
Cost of production (COP) sensitivity
Discount rate applied
15.32%
16.82%
18.32%
Fair value in RMB (’000)
5% COP increase
No COP increase
5% COP decrease
287,041
304,004
320,967
271,297
287,332
303,368
257,188
272,392
287,597
The valuation result is more sensitive to tea prices with 5% reduction in tea prices,
causing 11% decrease in the value of the biological asset. It is less sensitive to cost of
production with 5% increase in cost of production, causing 6% reduction in the value of the
biological asset.
LIMITING CONDITIONS
The conclusion of value is based on accepted valuation procedures and practices that rely
substantially on the use of numerous assumptions and the consideration of many uncertainties,
not all of which can be easily quantified or ascertained. Further, while the assumptions and other
relevant factors are considered by us to be reasonable, they are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of which are beyond
the control of Daping, the Company and Jones Lang LaSalle Corporate Appraisal and Advisory
Limited.
V – 21
APPENDIX V
VALUATION REPORT OF THE BIOLOGICAL ASSETS
OF THE TARGET GROUP
We do not intend to express any opinion on matters which require legal or other specialized
expertise or knowledge, beyond what is customarily employed by valuers. Our conclusions assume
continuation of prudent management of Daping and the Company over whatever period of time that
is reasonable and necessary to maintain the character and integrity of the assets valued.
Yours faithfully,
For and on behalf of
Jones Lang LaSalle
Corporate Appraisal and Advisory Limited
Simon M.K. Chan
Regional Director
Note:
Simon M.K. Chan is a CPA Fellow member of the Hong Kong Institute of Certified Public Accountants, a CPA
Fellow member of CPA Australia and a Certified Valuation Analyst, who has extensive experience in valuation and
corporate advisory business. He has provided a wide range of valuation services to numerous listed and private
companies in different industries in Mainland China and Hong Kong for over 10 years. He has also been involved in
biological asset valuation, including tea plantation, in Mainland China since 2007.
V – 22
APPENDIX VI
(A)
COMFORT LETTERS IN RELATION TO THE
VALUATION REPORT OF THE TARGET GROUP
REPORT FROM PKF IN CONNECTION WITH THE VALUATION OF THE
BIOLOGICAL ASSETS OF THE TARGET GROUP
REPORT FROM REPORTING ACCOUNTANT ON DISCOUNTED ESTIMATED FUTURE
CASH FLOWS IN CONNECTION WITH THE VALUATION OF THE FAIR VALUE OF THE
BIOLOGICAL ASSETS
The board of directors
Huafeng Group Holdings Limited (the “Company”)
We have been engaged to report on the calculations for the fair value of the biological
assets owned by 福建省安溪縣大坪綠色食品工程有限公司 (the “Valuation”) dated 28 June
2013 prepared by Jones Lang LaSalle Corporate Appraisal and Advisory Limited (the “Valuer”).
The Valuation is set out in Appendix V to the circular of Huafeng Group Holdings Limited (the
“Company”) dated 28 June 2013 (the “Circular”) in connection with the acquisition of the entire
equity interest in the China Natural Tea Holdings Company Limited (the “Target Company”) by
the Company. The Valuation based on the discounted cash flows is regarded as a profit forecasts
under Rule 14.61 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong
Kong (the “Listing Rules”) and Rule 11.1(a) of the Code on Takeovers and Mergers issued by the
Securities and Futures Commission (the “Takeovers Code”). The discounted cash flows do not
involve the adoption of accounting policies.
Directors’ Responsibility for the Discounted Cash Flows
The directors of Target Company (the “Target Company’s Directors”) are responsible for the
preparation of the discounted cash flows in accordance with the bases and assumptions determined
by the Target Company’s Directors or proposed by the Expert Consultants (as defined in Appendix
V to this Circular) and agreed by the Target Company’s Directors (the “Bases and Assumptions”)
and as set out in the Appendix V to the Circular. This responsibility includes carrying out
appropriate procedures relevant to the preparation of the discounted cash flows for the Valuation
and applying an appropriate basis of preparation; and making estimates that are reasonable in the
circumstances.
VI – 1
APPENDIX VI
COMFORT LETTERS IN RELATION TO THE
VALUATION REPORT OF THE TARGET GROUP
Reporting Accountant’s Responsibility
Our responsibility is to report to the directors of the Company on our review of the
calculations for the Valuation as required by Rule 14.62(2) of the Listing Rules and Rule 10.3(b) of
the Takeovers Code, and for no other purpose. We do not assume responsibility towards or accepted
liability to any other person for the contents of this report.
We conducted our work in accordance with the Hong Kong Standard on Assurance
Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial
Information”. This standard requires that we comply with ethical requirements and plan and
perform the assurance engagement to obtain sufficient appropriate evidence on whether the
discounted cash flows, so far as the calculations are concerned, has been properly compiled in
accordance with the Bases and Assumptions reviewed by the Valuer as set out in the Appendix V to
the Circular. Our work does not constitute any valuation of the Target Company and its subsidiaries.
The discounted cash flows depend on future events and on a number of Bases and
Assumptions which cannot be confirmed and verified in the same way as past results and not all
of which may remain valid throughout the period. Even if the events and actions anticipated do
occur, actual results may still be different from the Valuation and the variation may be material.
Accordingly, we are not reporting on the appropriateness and validity of the Bases and Assumptions
on which the discounted cash flows are based.
Opinion
Based on the foregoing, in our opinion, the discounted cash flows, so far as the calculations
are concerned, has been properly compiled in all material respects in accordance with the Bases and
Assumptions as set out in the Appendix V of the Circular.
PKF
Certified Public Accountants
Hong Kong, 28 June 2013
VI – 2
APPENDIX VI
(B)
COMFORT LETTERS IN RELATION TO THE
VALUATION REPORT OF THE TARGET GROUP
REPORT FROM ORIENTAL PATRON ASIA LIMITED IN CONNECTION WITH
THE VALUATION OF THE BIOLOGICAL ASSETS OF THE TARGET GROUP
28 June 2013
The Board of Directors
Huafeng Group Holdings Limited (the “Company”)
Room 2105, West Tower
Shun Tak Centre
200 Connaught Road Central
Hong Kong
Dear Sirs,
We refer to the valuation report dated 28 June 2013 (the “Valuation Report”) setting out
an independent valuation of the fair value of the economic interest in the biological assets (the
“Biological Assets”) owned by 福建省安溪縣大坪綠色食品工程有限公司 (translated as “Fujian
Anxi Daping Technology Company Limited” and hereinafter referred to as “Fujian Daping”)
as at 31 March 2013 (the “Valuations”) prepared by Jones Lang LaSalle Corporate Appraisal and
Advisory Limited (“JLL”) as set out in Appendix V to the circular of the Company dated as of the
date of this letter (the “Circular”). Unless the context requires otherwise, capitalised terms used in
this letter shall have the same meanings as those defined in the Circular.
Our work does not constitute any valuation of the biological assets of the Target Group
and we have assumed, without independent verification, the accuracy of the parameters stated in
the Valuation Report with respect to the Biological Assets. In particular, we have not assessed
including but not limited to, the age distribution of the tea tree plantations, the harvesting methods,
the distribution of tea tree species, the production lifecycle of the tea trees, the analysis of future
production yield, production costs and market prices of the tea leaves.
We note that the Valuation Report states that the Valuations have been prepared based on,
amongst other things, the discounted cash flows methodology, and are therefore regarded as profit
forecast under Rule 11.1 (a) of the Takeovers Code and under Rule 14.61 of the Listing Rules,
and are required to be reported on (as set out below) by us pursuant to the Takeovers Code and the
Listing Rules.
VI – 3
APPENDIX VI
COMFORT LETTERS IN RELATION TO THE
VALUATION REPORT OF THE TARGET GROUP
Furthermore, our report on the qualifications and experience of JLL to prepare the Valuation
Report is required under Rule 11.1(b) of the Takeovers Code and this letter also constitutes such
report from us.
We have reviewed the Valuation Report and discussed with the management of the Target
Group and JLL regarding the Valuation Report, including the qualifications, bases and assumptions
set out therein. We have considered the report addressed to you from PKF dated 28 June 2013 as
set out in part A of Appendix VI to the Circular on the calculations of the discounted estimated
future cash flows on which the Valuations are based, and noted that PKF is of the opinion that, so
far as such calculations are concerned, these have been properly compiled in all material respects
in accordance with the bases and assumptions determined by the directors of Fujian Daping or
proposed by the Expert Consultants (as defined in Appendix V to this Circular) and agreed by the
directors of Fujian Daping. With regard to JLL’s qualifications and experience, we have conducted
reasonable checks to assess the relevant qualification, experience and expertise of JLL, including
reviewing the supporting documents on the qualifications of JLL and discussion with JLL on their
qualifications and experience.
In arriving at our views, we have relied on information and materials supplied to us by the
Group, the Target Group and JLL, and the opinions expressed by, and the representations of, the
management of the Group, the Target Group and JLL, which we have assumed to be true, accurate,
complete and not misleading and remain so as of the date hereof, and that no material fact or
information has been omitted therefrom. Circumstances could have developed or could develop in
the future that, if known to us at the time of the issue of this letter, may affect our assessment and
our views on the Valuations. Further, we would caution that qualifications, bases and assumptions
of the Valuations are inherently subject to potential significant business, economic and competitive
uncertainties and contingencies, which are beyond the control of the Company, the Target Group,
JLL and us.
We are acting only as the financial adviser to the Company in relation to the Acquisition.
We and our respective directors and affiliates will not, whether jointly or severally, be responsible
to anyone other than the Company for providing advice in connection with the Acquisition, nor
will we, our respective directors and affiliates, whether jointly or severally, owe any responsibility
to anyone other than the Company. Nothing in this letter should be construed as an opinion
or recommendation to any person as to how to vote on the Acquisition, the Sale and Purchase
Agreement and the transactions contemplated thereunder and the Whitewash Waiver. Shareholders
are recommended to read the letter from the Independent Board Committee as set out on pages 202
and 203 of the Circular and the letter from the Independent Financial Adviser as set out on pages
204 to 257 of the Circular.
VI – 4
APPENDIX VI
COMFORT LETTERS IN RELATION TO THE
VALUATION REPORT OF THE TARGET GROUP
On the basis of the foregoing and the information comprising the Valuation Report, we are of
the opinion that the bases and assumptions set out therein, for which the directors of Fujian Daping
and the Directors are responsible, have been made after due care, consideration and objectivity,
and on a reasonable basis. We are also satisfied that JLL is suitably qualified and experienced
with sufficient current knowledge, skills and understanding necessary to undertake the Valuations
competently, and, to our best knowledge, confirm that there is no legal or regulatory requirement
which applies to the Valuations disclosed in the Valuation Report.
Yours faithfully,
For and on behalf of
Oriental Patron Asia Limited
Karlson Chan
Director
VI – 5
APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
The English version of this report is for reference only. In case of any inconsistency with the
Chinese version, the Chinese version shall prevail.
TEA PLANTATION RESOURCE ASSESSMENT REPORT
OF
CHINA NATURAL TEA HOLDINGS COMPANY LIMITED
IN
ANXI COUNTY, FUJIAN PROVINCE
THE PEOPLE’S REPUBLIC OF CHINA
Jones Lang LaSalle Corporate Appraisal and Advisory Limited
仲量聯行企業評估及咨詢有限公司
FUJIAN PROVINCE FULIN CONSULTANCY CENTER
OF FUJIAN AGRICULTURE AND FORESTRY UNIVERSITY
28 June 2013
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APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Contents
Page
1
2
3
4
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 3
1.1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 3
1.2
Assessment description and specifications . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 3
Overview of the region under assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 4
2.1
Natural geographical overview of the region under assessment . . . . . . . . .
VII – 4
2.2
Economic overview of the region under assessment . . . . . . . . . . . . . . . . .
VII – 5
2.3
General overview of the plantations for the intended assessment . . . . . . . .
VII – 6
Process, methods and description of the assessment . . . . . . . . . . . . . . . . . . . . . .
VII – 10
3.1
Basis of the assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 10
3.2
Assessment process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 11
3.3
Methods and description of the assessment . . . . . . . . . . . . . . . . . . . . . . . .
VII – 12
Results of the assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VII – 15
4.1
4.2
4.3
5
Confirmation of the area under the plantation ownership
certificates and plantation area verification . . . . . . . . . . . . . . . . . . . . . .
Analysis of the suitability of ecological environment and
ecosystem of the plantation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimation on the production volume of the
plantation and quality evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overall evaluation of the assessment and recommendations . . . . . . . . . . . . . . . . .
VII – 2
VII – 15
VII – 30
VII – 32
VII – 35
APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
The Directors
Huafeng Group Holdings Limited
Room 2105, West Tower, Shun Tak Centre
200 Connaught Road Central
Hong Kong
TEA PLANTATION RESOURCE ASSESSMENT REPORT
1
INTRODUCTION
1.1
Background
Huafeng Group Holdings Limited is intended to acquire China Natural Tea Holdings
Company Limited (hereinafter referred to as “the Target Company”). Fujian Anxi Daping
Technology Company Limited, an indirect wholly-owned subsidiary of the Target Company,
owns the operation rights of the tea planting bases in Daping Village and Pingzhou Village
in Daping Town, and Chishui Village in Xiping Town, Anxi County, Fujian Province, China
with an area of 29,592.7 Chinese Mu.
As engaged by Huafeng Group Holdings Limited, Jones Lang LaSalle Corporate
Appraisal and Advisory Limited (“Jones Lang LaSalle”) and Fujian Province Fulin
Consultancy Center（ 福建省福林諮詢中心）of Fujian Agriculture and Forestry University
conducted an assessment on the quantity and quality of the tea planting bases and issued an
independent opinion for internal reference by the Company.
1.2
Assessment description and specifications
According to the requirements of the engagement, the main description and technical
specifications under this assessment and appraisal are as follows:–
•
Checking of plantation area
•
Identification of tea species
•
Estimation of tea yield from the plantation and
•
Evaluation of the standard of operation and management
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APPENDIX VII
2.
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
OVERVIEW OF THE REGION UNDER ASSESSMENT
2.1
Natural geographical overview of the region under assessment
Anxi County is located along the south-eastern coast of Fujian Province. It is in the
north-western part of the golden triangle of Xiamen-Zhangzhou-Quanzhou and is under
the administration of Quanzhou City. The regional coverage of the county is situated at the
longitude of 117°36’-118°17’ and the latitude of 24°50’-25°26’. It is adjacent to Nanan City
on the east, linked to Huaan County on the west, closed to Tongan District on the south,
with Yongchun County on the north. It is linked to Changtai County on the southwest and is
contiguous to Zhangping City on the northwest. The county has a total area of 3,057.28 sq.
kilometers.
Anxi is located at the south-eastern slope of Daiyun Mountain Range, higher in its
north-western region and lower in the south-eastern region. Its natural boundary ranges from
the Wulang Mountain in the western edge of Hutou Basin to the Diesihu Mountain in the
western edge of Guanqiao Basin. The western part of the county is named Inner Anxi, with
its eastern part Outer Anxi. Outer Anxi has a relatively low terrain with an average altitude
of 300 meters – 400 meters above sea level. It mainly comprises low hills and hilly beaded
river valley basins. Inner Anxi has a relatively high and steep terrain with an average attitude
of 600 meters – 700 meters above sea level, which are mainly mountains. The soil of the
entire county can basically be classified into 6 main categories, including lateritic red soil
(latosolic red soil), red soil, yellow soil, yellow-brown soil, purple soil and limestone soil
(representing 4.61%, 83.22%, 11.95%, 0.01%, 0.04%, 0.18% of the total soil in the county
respectively). Its soil thickness is generally ranging from 70-168cm with the humus layer
thickness between 2.0-15cm and pH value of 4-6.5. The soil texture is relatively loose, and in
terms of soil fertility, grade one, grade two and grade three accounted for 4.43%, 87.25% and
8.32% of all soil respectively. The red soil is distributed in low hills and is the natural soil
that is most widely scattered within Anxi.
The eastern part of Anxi belonged to the Jinjiang River stream with a watershed area
of 1,954.08 sq. kilometers, representing 63.92% of the total area of the whole county. The
main river in the county is Xixi (also named as Lanxi) with Jinjiang River as its upstream.
It originates from Taozhou, Tangdi and Yidu of Yongchun, from which it flows to the
southeast, passing through Nanan and enters into Jinjiang River, with a flowing distance of
105 kilometers within the county. Its western part belonged to the Jiulongjiang River stream
with a watershed area of 1,103.20 sq. kilometers, representing 36.08% of the total area of the
whole county, including Fuqian, Baixingxi and Juxi. Its flowing distance is relatively short,
flowing from northwest to southwest and enters into the Jiulongjiang River.
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TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Anxi is a humid sub-tropical climate zone, of which Outer Anxi represents
approximately 32% of total area of the whole county. It is relatively densely populated
with its population represents approximately 54.4% of the total population of the whole
county. Its summer is long and hot and winter is short and not extremely cold. The average
temperature for the year is 19-20˚C with an annual rainfall of about 1,600 mm and a frostfree period of about 350 days. For Inner Anxi, the average temperature for the year is 1618˚C with an annual rainfall of over 1,800 mm and a frost-free period of about 260 days.
Its autumn is cold and comes in early but spring comes in late. So there is a saying that
“different winds between mountains, same time but different rainfall”（隔山不同風，同時不
同雨）.
2.2
Economic overview of the region under assessment
Anxi County comprises 24 towns and 465 villages. It has a population of 1.12 million
with multi-tribes like Han and She. It is among the lists of top 100 counties nationwide
in terms of fundamental economic competitiveness, top 100 counties nationwide with
most investment potential for small and medium-sized cities, top 100 counties in China’s
trademarks development, well-known county with most distinctive tourist attraction in China,
top 10 counties in terms of economic strength in Fujian Province, and best 10 counties
in terms of economic development in Fujian Province. The gross domestic products of
the county in 2011 were RMB35.58 billion, with gross industrial output of RMB66.023
billion. It has total fiscal income of RMB2.15 billion, and farmers’ per capita net income of
RMB9,541.
Anxi is the home of Chinese Oolong tea (a well-known tea), and is the main
production region of Oolong tea nationwide. It is the source of origin of the famous Tie Guan
Yin and Huangjin Gui, and is ranked top among the important counties in tea production
nationwide. Anxi Tie Guan Yin has become the top Chinese tea, and also one of the world’s
top 10 tea. The tea business is a distinctive and pillar industry of the county. In March 1995,
Anxi County was awarded “The Home of Chinese Oolong Tea (a well-known tea)”. In 2011,
the county’s tea production output was 65,000 tons with total tea output value of RMB10.0
billion.
The Zhangzhou-Quanzhou Railway runs across the whole Anxi County, with 4
provincial roads (lines 206, 207, 307 and 308) stretching across the county with a total length
of 254 kilometers. There are 11 county-level roads with a total length of 350 kilometers with
crisscrossing rural roads covering various rural areas throughout the county. In the coming
years, the four expressways including Fuzhou-Guangzhou Expressway, Xiamen-Shaxian
County Expressway, Putian-Yongding Expressway and the connection line of QuanzhouSanming Expressway to Anxi will pass through Anxi. Currently, the expressway section of
Nanan (Jingtao) to Xiamen under the Fuzhou-Guangzhou Expressway was officially opened
at the noon on 31 December 2012. There are four expressways entrances within Anxi County
and as such, it is only 40 minutes’ drive from Anxi to Xiamen and Quanzhou, and Anxi has
already fully integrated into “One-hour Economic Circle”, taking Quanzhou and Xiamen as
the centers.
VII – 5
APPENDIX VII
2.3
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
General overview of the plantations for the intended assessment
The plantations which are under this assessment are located at Daping Town and
Xiping Town:
Daping Town is situated in the southern part of Anxi County, which is about 50
kilometers from the county center. It is adjoined to Longmen Town on the east, Huqiu Town
on the northwest and Lianhua Town of Tongan District and Fangyang Town of Changtai
County on the south. Daping Town is 800 meters above sea level with sub-tropical climate.
It has an average temperature for the year of 16-18˚C, with sunshine duration of 1,875 hours.
Its rainfall capacity is 1,700-1,900 mm with relative humidity of 70%-80%. Its soil is mainly
consisted of red and yellow soil. Its air, soil and water are all remained in original state,
thereby providing unique and favorable conditions for the development of tea production
with Mao Xie as the main plantation category.
Xiping Town is the source of origin of the well-known Chinese tea – Tie Guan Yin
（鐵觀音）. It is located in the mountainous region of Inner Anxi, the mid-southern part of
Anxi County. It is 500-850 meters above sea level with sub-tropical humid monsoon climate
and sufficient sunshine, heat and ample rainfall. It has four distinctive seasons in a year with
high temperature and plenty of rainfall in summer and moderate temperature and less rainfall
in winter. Xiping Town has a distinctive terrain landscape with significant vertical variation
in climates. It has an average temperature for the year of 16-19˚C with its hottest month in
July and the coldest in January. The frost-free period is over 320 days a year when crops can
grow during the whole year. Xiping Town has ample rainfall with an annual rainfall capacity
of 1,700-2,100 mm. There are significant disparities in rainfall during the year with spring
and summer having plenty of rainfall while autumn and winter have less, suitable for the
development of Tie Guan Yin plantation.
The tea species planted in Daping Town are: Tie Guan Yin, Ben Shan, Mao Xie and
Huangjin Gui.
The tea species planted in Xiping Town are: Tie Guan Yin and Ben Shan.
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APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Tie Guan Yin: the plant is of shrub type with the tree growing loosely and stretching
with diagonal branches, its leaf blades are horizontally inserted on the branches. The shape
of the leaf is elliptic and marginal teeth are sparse and blunt. The leaf uplifts in wave-shaped
with apparent ribbing shape, and slightly crimps backwards. The mesophyll is thick and leaf
colour is thickly green and smooth. Its leaf base is a bit blunt with leaf tip slightly concaved
and slightly slants to the left and droops. It soft shoots are purplish-red. The tea yield is not
high but is suitable for manufacturing high quality tea bags.
Tie Guan Yin
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APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Ben Shan: the plant is of shrub type, medium leaf class and middle shoot specie.
The tree grows openly and stretching with diagonal branches and is densely sub-branched.
The shape of the leaf is elliptic, thin and brittle. The leaf is slightly curving inwards with
the leaf edge having apparent waves. The marginal teeth are uneven with the buds growing
closely and the stems are thin and long with many flowers and fruits, a close specie of Tie
Guan Yin but has stronger growing trend and adaptability than Tie Guan Yin. It is suitable
for manufacturing high quality oolong and good quality Ben Shan is almost equivalent to Tie
Guan Yin.
Ben Shan
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APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Huangjin Gui: the plant is of small arbor type, medium leaf class and early germinate
specie. The tree grows semi-openly with close branches, short internode and thin leaf. The
leaf is slightly curved with deep and sharp marginal teeth. The leaf colour is yellowish green
and lustrous. It has high germination rate, able to bloom but with less fruits. Its growing
period is 8 months in a year. It has strong adaptability, relatively strong against various pests
and diseases, and has relatively high yield in single production.
Huangjin Gui
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APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Mao Xie: the plant is of shrub type, medium leaf class and middle shoot specie. The
tree grows semi-openly with close branches with elliptic leaf shape and with sharp tip which
stretches openly and flat. The leaf colour is dark green, thick and brittle with sharp marginal
teeth. The bud tip is stout and strong with thick stems and short internodes. The backside of
the leaf is full of white fluff, blooming with flowers but basically without fruits. Its growing
period is 8 months in a year. It has strong ability to germinate but easily wither. It germinates
closely and neatly with many picking batches. Its crown resumes quickly and easy to form a
plantation. It has strong adaptability, tough to survive, easy to cultivate and has high yield.
Mao Xie
3.
PROCESS, METHODS AND DESCRIPTION OF THE ASSESSMENT
3.1
Basis of the assessment
(1)
Principal Technical Regulations for Forest Resources Planning and Design
Assessment （《森林資源規劃設計調查主要技術規定》）(2003) issued by the
State Forestry Administration;
(2)
Guo Zi Ban Fa [1996] No. 95: Forest Resources Asset Appraisal Technical
Specifications (Provisional)（《森林資源資產評估技術規範（試行）》）;
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APPENDIX VII
3.2
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
(3)
National Standards of the People’s Republic of China: GB/T9598-2006 Product
of Geographical Indication – Anxi Tie Guan Yin（《地理標誌產品－安溪鐵觀
音》）;
(4)
Local Standards of Fujian Province: DB35/T642-2005 Forest Resources Asset
Appraisal Technical Specifications（《森林資源資產評估技術規範》）;
(5)
Technical Regulations for Forest Resources Planning and Design Assessment
（《森林資源規劃設計調查技術規定》）(2006) of Fujian Province;
(6)
Local Standards of Fujian Province: DB35/T943-2009 Product of Geographical
Indication – Fujian Oolong Tea（《地理標誌產品－福建烏龍茶》）;
Assessment process
(1)
Preparation before field work: the principal prepared the forest right certificates
of the plantations, assets list and topographic map (1:10,000) of the field works
and manpower allocation and provide support.
(2)
Field work: the field work team comprises two specialists, namely Dr. Zheng
Dexiang and Mr. Zhang Yusong from Fujian Fulin Consultancy Center, five
other persons from the Center, and five analysts from Jones Lang LaSalle, a
total of 12 members. The teams were divided into 4 groups, accompanied by 4
management and production staff of the Target Company. The teams drew the
outline of the plantations, checked the plantation area, checked the tea species
and assessed the quality of the tea plantations.
(3)
Desktop processing of data from field work: Fujian Province Fulin Consultancy
Center organized 10 specialists to conduct internal mapping and ARCGIS
arrangement based on the external mapping and assessment results and
completed the verification works of the area and data processing.
(4)
Prepare the assessment report.
Please refer to the notes of this report for the biographical information of the two
specialists from Fujian Province Fulin Consultancy Center.
VII – 11
APPENDIX VII
3.3
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
Methods and description of the assessment
The main assessment methods include field visit, field investigation and plotting
(field work outline drawing for short), interview with tea farmers, references and experts
judgments and internal operation calculation by ARCGIS.
The procedures of field investigation and field plotting (field work outline drawing
for short) are: investigation and plotting by applicable topographic map, i.e. to confirm the
map holder’s field location on the map is within the scope of the map, so that the actual
surrounding scenery can correspond to the images on the map one by one. The field map
interpretation will be carried out and then conducted the assessment, drawing and mapping
according to the purpose of the assessment. The general procedures are as follows:
1.
the calibration range is determined generally according to the direction of
object orientation: i.e. by looking for three or more obvious points with
direction function on the field, which is corresponded to those on the map, then
rotate the map to enable the location of objects on the map is consistent with
those of the corresponding objects on the field. At this moment, the direction on
the map will be in line with the location on the field.
2.
confirmation of the standing position to confirm the standing position of the
surveyor in which in general is to determine the direction first and then the
point. That is, to determine the orientation of the topography map correctly
according to the corresponding relationship of the obvious landforms
(for example, valleys, ridge, roads, river, hills and so on), then to find the
location of standing position on the map (which may integrate with the GPS
positioning). For areas with obvious change in topography, the location of
standing position can be determined according to the comparatively obvious
topographic features field works and the contour lines on the map. For areas
with complex topography and less objects on the ground, which is not easy to
interpret, the location of standing position can be determined according to the
comparatively obvious objects on the ground and features of the objects on
the ground and apply the altitude or longitude and latitude position by GPS.
According to overall external features of the tea sites, field plotting is made on
field works to reflect the actual boundaries on the topography map.
To determine the parcels of land under each of the Forest Right Certificate, the
plotting methods that are generally used are as follows:
1.
slope-to-slope plotting: after arriving at the slope of the parcel of land under
assessment, it should select the location where the view can generally be seen
as a whole and draw the whole physiognomy of small land area, but can also
see clearly the contour profile of land boundaries, and draw the land boundaries
and the boundaries of small land areas on the topography map by the positions
of the objects and landscapes.
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APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
2.
When it is not possible to draw lines on the slope under the assessment, it
should go farther down the plantation and use the four borders of the plantation
and the assessment lines. Draw the line with reference to the objects on the
land for specific areas. For some plots where it is not possible to conduct the
assessment, visual inspection, pacing the distance inspection and GPS are
recommended to draw the outline.
3.
For the field assessment in certain plots: in deep jungles or covered areas where
there is insufficient reference objects on the map and the geomorphic features
are not suitable to draw lines, then the GPS and altitude measurement can be
adopted to mark on evident objects on the land and draw them on the map.
3.3.1 Assessment on the area of all the tea plantations (field topographic map
plotting combined with GPS positioning)
This assessment covered a total of 127 Forest Right Certificates with an area
of 29,592.7 Chinese Mu. During the assessment, we investigated and verified the tea
plantations in question one by one according to the Forest Right Certificates, and replanned and plotted the map on the field according to the forest right map attached
to the Forest Right Certificates, using a 1:10000 scale topographic map as a base
map. We verified the scope and boundaries of the tea plantations, and conducted GPS
positioning to draw the plantations on the topographic map, and then we used the
ARCGIS software to conduct the area checking and desktop processeing of data from
field work.
3.3.2 Partial sample-plot assessment (field topographic map plotting combined
with GPS positioning)
In order to further investigate the species, quantity and quality in the plantation
forest land, pursuant to the provision of Article 62 of the Technical Regulations for
Forest Resources Planning and Design Assessment （《森林資源規劃設計調查技
術規定》）of Fujian Province in which it states that “for small land area quantity
checking: the small land area planning should not be less than 4% of the small
land area quantity and its area, and small land area checking should not be less
than 2% of small land area quantity and its area” and the provision of the Local
Standards of Fujian Province: DB35/T642-2005 Forest Resources Asset Appraisal
Technical Specifications （《森林資源資產評估技術規範》） in which it states that
“6.3 Inspection Method, in 6.3.3.2, sampling investigations should be conducted on
a random, systematic or layering methods to assess the total number of small land
area, and the assessment of small land area samplings should be over 10% of the total
number of small land area and over 10% of the total area.” During the sampling, the
number of Forest Right Certificates should be the total number, using Forest Right
Certificate as operating small land area unit to randomly sample 14 Forest Right
Certificates to conduct field works sampling checking. During the checking of the
sampling Forest Right Certificates, we verified and investigated and plotted each land
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TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
in relation to each Forest Right Certificate one by one according to tea species and
age, mainly using field topographic map plotting and combined with GPS positioning,
and then conducting the checking desktop processing of data from field work. This
assessment was conducted under the combined method of comprehensive outline
drawing inspection and partial field inspections. The comprehensive inspection can
assure that the areas involved are plantations and not lands for other economic crops,
and partial field inspections were conducted by referencing to the state and local
relevant regulations and standards, namely the Principal Technical Regulations for
Forest Resources Planning and Design Assessment（《森林資源規劃設計調查主要
技術規定》）issued by the State Forestry Administration (the “Principal Technical
Regulations”) and the Technical Regulations for Forest Resources Planning and
Design Assessment（《森林資源規劃設計調查技術規定》）issued by the Fujian
Provincial Department of Forestry (the “Technical Regulations”). Pursuant to
the provision of Article 35 of the Principal Technical Regulations, “the workload
conducted by professional inspection teams during normal inspection should not be
less than 3% of the total area under assessment. Among the samples being inspected,
if over 90% of the inspected samples have reached the allowable deviation, then
the work quality of the inspection meets the requirements.” The Principal Technical
Regulations also require the precision to be over 90% (i.e. the allowable deviation to
be below 10%). Pursuant to the provision of Article 62 of the Technical Regulations,
“for planning of small land areas, the small land areas being inspected should not be
less than 4% in terms of the total area or in terms of the total number. For checking
on small land areas, the small land areas being inspected should not be less than 2%
in terms of the total area or in terms of the total number.” The Technical Regulations
also require the precision to be over 90% (in Article 4). Based on the above provisions
and requirements, the amount of samples being inspected is determined. After taking
into consideration of the biological characteristics and production features in tea
cultivation, we believe that the quality and quantity of tea products will not vary a
lot in a relatively concentrated tea base under the same management. Therefore, the
field inspection on different species can, in general, reflect the overall growth and
production of the plantations. Apart from some possible differences in certain small
areas, its reliability can, in general, reach over 90% and satisfies the requirements of
the plantation assessment.
According to the findings, such deviations are attributable to (1) the planting
area of the plantations not reaching the permissible boundary area; and (2) the area
computed after the assessment is different from such area as stated in the Forest
Right Certificates. The deviations obtained from the above assessment represent
approximately 0.34% of the total area of the plantations.
For the 14 Forest Right Certificates under this sampling investigation, they
represent approximately 11% of all Forest Right Certificates, and the respective area
of which represent approximately 11.5% of the total area, which meets the 92.6%
precision level of the above regulation and standards according to the findings of
assessment, all of which have satisfied the requirements of the Principal Technical
Regulations and the Technical Regulations. For details of the findings of the sampling
investigation, please refer to section 4 of this report.
VII – 14
APPENDIX VII
TEA PLANTATION RESOURCE ASSESSMENT
REPORT OF THE TARGET GROUP
3.3.3 Sample site tea leaves quality assessment (mainly based on species, quality
and field visits and field works by tea experts)
By integrating the aforesaid sample-plot assessment and completed all field
visits, we mainly adopted the reference materials and the field inspections by tea
experts to conduct tea species identification and planting quality judgment. In view
of the fact that it was not the tea picking seasons of spring, summer, heat season and
autumn during the assessment period, we were not able to make a comprehensive
judgment on the te