OUR HISTORY AND DEVELOPMENT

Transcription

1 HISTORY AND DEVELOPMENT Corporate development Shandong Yongxin Our current business operations commenced in 1992 when Shandong Yongxin Industrial Corporation ( ) ( Shandong Yongxin ), a collectively-owned enterprise established in Shandong province by Mr. Zhu Xinli and his family members, commenced the production and sale of juice concentrates and purees. In October 2003, Shandong Yongxin was converted into a limited liability company with Mr. Zhu Xinli, Mr. Zhu Xinxue (Mr. Zhu Xinli s brother) and Ms. Zhu Shengqin (Mr. Zhu Xinli s daughter) as its shareholders, holding 60%, 20% and 20%, respectively, in the registered capital of Shandong Yongxin. At the same time, Shandong Yongxin was renamed Shandong Yongxin Industrial Company Limited ( ). In November 2004, the Yiyuan county government confirmed the shareholding interests of Mr. Zhu Xinli and his family members in Shandong Yongxin. Beijing Huiyuan Juice In February 1997, Shandong Yongxin acquired Beijing Huainan Industrial Group Corporation ( ), a collectively-owned enterprise, from Beijing Huairou Miaocheng Town General Corporation ( ), an independent third party, and transferred two juice production lines to the newly-acquired company as its capital contribution. In March 1997, Beijing Huainan Industrial Group Corporation ( ) was renamed Beijing Huiyuan Juice & Beverage Group Corporation ( ) ( Beijing Huiyuan Juice ). In March 2004, Beijing Huiyuan Juice was converted from a collectively-owned enterprise into a limited liability company. Following the completion of conversion, Mr. Zhu Xinli, Mr. Zhu Xinxue and Mr. Jiang Xu, who is one of our executive directors, replaced Shandong Yongxin as the registered shareholders of Beijing Huiyuan Juice, holding 80%, 10% and 10% interest in its registered capital, respectively. In April 2004, Beijing Huiyuan Juice was renamed Beijing Huiyuan Juice & Beverage Co., Ltd. ( ). Mr. Jiang Xu has confirmed that he has held such 10% interest in the registered capital of Beijing Huiyuan Juice as a trustee for and on behalf of Mr. Zhu Xinli and his family members. Beijing Huiyuan Beverage In June 2001, Beijing Huiyuan Juice and Xinjiang Tunhe Investment Co., Ltd. ( ) ( Xinjiang Tunhe ), an independent third party and a listed company in the PRC, established Beijing Huiyuan Beverage & Food Group Co., Ltd. ( ) ( Beijing Huiyuan Beverage ) by contributing 49% and 51% to its registered capital, respectively. Notwithstanding his 49% interest in Beijing Huiyuan Beverage, pursuant to an operation and management agreement entered into between Mr. Zhu Xinli and the board of directors of Beijing Huiyuan Beverage, Mr. Zhu Xinli assumed operational and management responsibilities of Beijing Huiyuan Beverage while Xinjiang Tunhe had control of Beijing Huiyuan Beverage as the majority shareholder. In October 2003, in its capacity as the trustee of Beijing Huiyuan Juice, pursuant to a trust acquisition agreement with Beijing Huiyuan Juice and an acquisition agreement with Xinjiang Tunhe which were entered into on April 28, 2003, Hubei Weiling Group Co., Ltd. 67

2 ( ) ( Hubei Weiling ), an independent third party, acquired the 51% equity interest in Beijing Huiyuan Beverage held by Xinjiang Tunhe for and on behalf of Beijing Huiyuan Juice for a consideration of RMB530,400,000. Such trust acquisition arrangement was made as requested by Xinjiang Tunhe. The registration of change in the legal title of such 51% equity interest with the relevant administrative authority was completed on December 10, In October 2004, Hubei Weiling, according to the instruction of Beijing Huiyuan Juice, transferred the legal title of the 50% and 1% equity interest in Beijing Huiyuan Beverage to Beijing Huiyuan Juice and Mr. Zhu Xinli, respectively. Since 2001, our primary operations have been conducted through Beijing Huiyuan Juice and Beijing Huiyuan Beverage and their various subsidiaries. Business development The key milestones in our business development are as follows:. In 1994, we established our first enterprise in Beijing, Shunyi Huiyuan, and relocated our corporate headquarters to Beijing.. In 1995, our operational focus shifted to the production of 100% fruit juices and we commenced sales of 100% fruit juice in 250ml packaging size.. In 1996, we commenced sales of 100% fruit juice in 1L package size.. In 1997, we launched our key marketing slogan A healthy life starts from drinking Huiyuan juice.. In 2001, we imported the our first PET aseptic cold filling equipment.. In 2002, we established our nation-wide sales network.. In 2002, and trademarks were recognized as China Famous Trademarks and we were recognized as one of the Leading Industrialized Agricultural Enterprises in the PRC.. In 2003, we were the first beverage company to obtain a safety certification for juice products from the National Beverage Safety Management Centre ( ).. In 2004, our products were recognized as PRC Famous Brand Product by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC. 68

3 REORGANIZATION The following chart sets out the shareholding structure of the companies in our Group immediately prior to the Reorganization: Notes: (1) The 10% interest in the registered capital of Beijing Huiyuan Juice was held by Mr. Jiang Xu as a trustee for and on behalf of Mr. Zhu Xinli and his family members. (2) Beijing Huiyuan Juice directly owned 49% of the registered capital of Beijing Huiyuan Beverage. The remaining 51% was owned by Beijing Huiyuan Juice through a trust arrangement with Hubei Weiling, an independent third party, who pursuant to a trust acquisition agreement dated April 28, 2003 agreed to hold the beneficial ownership of such interests for and on behalf of Beijing Huiyuan Juice. (3) The remaining interest was held by Techgen, an independent third party mainly engaged in investment holding. (4) The remaining interest was held by Total International, a company owned by Ms. Fang Xiaoling, Mr. Zhu Xinli s wife, and Mr. Zhu Shenghua, Mr. Zhu Xinli s son, as to 60% and 40%, respectively. (5) The remaining interest was held by Shandong Yongxin, an investment holding company. (6) The remaining interest was held by Jilin Yanbian Hualong Company, an independent third party mainly engaged in fruit plantation and distribution. (7) The remaining interest was held by Shanxi Youyu Beverage Factory, an independent third party mainly engaged in beverage production. (8) The remaining interest was held by Gongyi City Supply and Sales Corporation, an independent third party mainly engaged in general trading. (9) The remaining interest was held by Hubei Weiling Beverage Company Limited, an independent third party mainly engaged in beverage production. Acquisition of our PRC businesses and equity interests We funded part of the acquisition costs of our PRC businesses (the Acquisitions ) described below through a cooperation agreement (the UP Cooperation Agreement ) dated March 21, 2005 entered into between Huiyuan Holdings, Mr. Zhu Xinli and Uni-President Enterprises Corporation ( Uni-President ), a company incorporated and listed in Taiwan which is the leading packaged food manufacturer in Taiwan, an independent third party. In consideration of US$212,080,000 provided by Uni-President and/or its affiliated companies or nominated strategic investment partners, Huiyuan Holdings agreed to procure the placing of a prescribed number of the shares of China Hui Yuan Holdings to Uni-President and/or one of its affiliated companies or nominated strategic investment partners, which would represent up to 35% of the 69

4 issued share capital of China Hui Yuan Holdings. Between March 17, 2005 and January 25, 2006, we received US$121,544,369 under the UP Cooperation Agreement which we applied towards the Acquisitions. During subsequent negotiations with Uni-President on the timing of the outstanding investment and the extent of the strategic alliance, we were unable to agree on the major terms of our business relationship. On July 4, 2006, Huiyuan Holdings, Mr. Zhu Xinli, China Hui Yuan Holdings and Uni-President entered into a termination agreement pursuant to which the parties agreed to terminate the UP Cooperation Agreement, and Uni-President further agreed to fully and unconditionally release each of Mr. Zhu Xinli, Huiyuan Holdings and China Hui Yuan Holdings from his/its obligations under the UP Cooperation Agreement following full repayment of the investment amount received under the UP Cooperation Agreement. The investment amount received under the UP Cooperation Agreement has been repaid in full and no proceeds from the Global Offering will be applied towards the repayment for such investment. In order to consolidate the relevant juice beverage operations under regional operating investment holding companies, we carried out the acquisitions described below. Acquisitions by Huiyuan Beijing (1) Acquisition of Shunyi Huiyuan On April 26, 2005, Huiyuan Beijing entered into an agreement with Beijing Huiyuan Beverage to acquire its 75% equity interest in Shunyi Huiyuan for a consideration of RMB247,436,300; and an agreement with Total International, a company wholly owned by Mr. Zhu Xinli s family, to acquire its 25% equity interest in Shunyi Huiyuan for a consideration of RMB82,478,800. The consideration payable by Huiyuan Beijing in connection with the acquisition of Shunyi Huiyuan described above has been paid in full. Huiyuan Beijing currently holds a 100% equity interest in Shunyi Huiyuan. (2) Acquisition of Shuangcheng Huiyuan On March 20, 2005, Huiyuan Beijing entered into an agreement with Beijing Huiyuan Juice to acquire its 96.25% equity interest in Shuangcheng Huiyuan for a consideration of US$9,322,000; and an agreement with Beijing Huiyuan Beverage to acquire its 3.75% equity interest in Shuangcheng Huiyuan for a consideration of US$363,200. The consideration payable by Huiyuan Beijing in connection with the acquisition of Shuangcheng Huiyuan described above has been paid in full. Huiyuan Beijing currently holds a 100% equity interest in Shuangcheng Huiyuan. (3) Acquisition of Luzhong Huiyuan On March 20, 2005, Huiyuan Beijing entered into an agreement with Beijing Huiyuan Juice to acquire its 75% equity interest in Luzhong Huiyuan for a consideration of RMB73,084,200; and an agreement with Techgen, an independent third party, to acquire its 25% equity interest in Luzhong Huiyuan for a consideration of RMB14,473,300. In July 2005, the acquisition of the equity interest in Luzhong Huiyuan contemplated under each of the agreements as described above was completed and Luzhong Huiyuan became a whollyowned subsidiary of Huiyuan Beijing. In January 2006, Huiyuan Beijing contributed an additional US$10,000,000 to Luzhong Huiyuan to increase the registered capital of Luzhong Huiyuan from US$10,100,000 to US$20,100,

5 On February 25, 2006, Luzhong Huiyuan, Beijing Huiyuan Beverage and Shandong Yongxin entered into an agreement pursuant to which Luzhong Huiyuan shall acquire the 95% and 5% equity interest in Huiyuan Luzhong from Beijing Huiyuan Beverage and Shandong Yongxin for a consideration of RMB77,680,000 and RMB4,100,000, respectively. On March 6, 2006, Huiyuan Luzhong and Luzhong Huiyuan entered into a merger agreement pursuant to which Huiyuan Luzhong will be merged into Luzhong Huiyuan. The acquisitions by Luzhong Huiyuan of the 95% and 5% equity interest in Huiyuan Luzhong under the agreement as described above and the merger of Huiyuan Luzhong into Luzhong Huiyuan have been approved by the relevant PRC authorities and are pending the de-registration of Huiyuan Luzhong by the relevant local administrative authority of industry and commerce. (4) Acquisition of Xinyuan Huiyuan On March 20, 2005, Huiyuan Beijing entered into an agreement with Beijing Huiyuan Juice to acquire its 75% equity interest in Xinyuan Huiyuan for a consideration of RMB58,155,100; and an agreement with Techgen to acquire its 25% equity interest in Xinyuan Huiyuan for a consideration of RMB19,385,000. The consideration payable by Huiyuan Beijing in connection with the acquisition of Xinyuan Huiyuan described above has been paid in full. Huiyuan Beijing currently holds a 100% equity interest in Xinyuan Huiyuan. Acquisitions by Huiyuan Shanghai (1) Acquisition of Shanghai Huiyuan On March 20, 2005, Huiyuan Shanghai entered into an agreement with Beijing Huiyuan Beverage to acquire its 75% equity interest in Shanghai Huiyuan for a consideration of RMB105,114,700; and an agreement with Techgen to acquire its 25% equity interest in Shanghai Huiyuan for a consideration of RMB35,038,200. The consideration payable by Huiyuan Shanghai in connection with the acquisition of Shanghai Huiyuan described above has been paid in full. Huiyuan Shanghai currently holds a 100% equity interest in Shanghai Huiyuan. (2) Acquisition of Huanggang Huiyuan On March 20, 2005, Huiyuan Shanghai entered into an agreement with Beijing Huiyuan Juice to acquire its 95% equity interest in Huanggang Huiyuan for a consideration of RMB246,570,800; and an agreement with Beijing Huiyuan Beverage to acquire its 5% equity interest in Huanggang Huiyuan for a consideration of RMB12,977,400. The consideration payable by Huiyuan Shanghai in connection with the acquisition of Huanggang Huiyuan described above has been paid in full. Huiyuan Shanghai currently holds a 100% equity interest in Huanggang Huiyuan. (3) Acquisition of Jiujiang Huiyuan On March 20, 2005, Huiyuan Shanghai entered into an agreement with Beijing Huiyuan Beverage to acquire its 95% equity interest in Jiujiang Huiyuan for a consideration of RMB87,463,000; and an agreement with Beijing Huiyuan Juice to acquire its 5% equity interest in Jiujiang Huiyuan for a consideration of RMB4,603,

6 The consideration payable by Huiyuan Shanghai in connection with the acquisition of Jiujiang Huiyuan described above has been paid in full. Huiyuan Shanghai currently holds a 100% equity interest in Jiujiang Huiyuan. Acquisitions by Huiyuan Chengdu (1) Acquisition of Xianyang Huiyuan On March 20, 2005, Huiyuan Chengdu entered into an agreement with Beijing Huiyuan Juice to acquire its 5% equity interest in Xianyang Huiyuan for a consideration of RMB4,434,100; and an agreement with Beijing Huiyuan Beverage to acquire its 95% equity interest in Xianyang Huiyuan for a consideration of RMB84,248,600. As at the date hereof, the consideration payable by Huiyuan Chengdu in connection with the acquisition of Xianyang Huiyuan described above has been paid in full. Huiyuan Chengdu currently holds a 100% equity interest in Xianyang Huiyuan. (2) Acquisition of Chengdu Huiyuan On March 20, 2005, Huiyuan Chengdu entered into an agreement with Beijing Huiyuan Juice to acquire its 2% equity interest in Chengdu Huiyuan for a consideration of RMB5,755,200; and an agreement with Beijing Huiyuan Beverage to acquire its 98% equity interest in Chengdu Huiyuan for a consideration of RMB282,004,100. The consideration payable by Huiyuan Chengdu in connection with the acquisition of Chengdu Huiyuan described above has been paid in full. Huiyuan Chengdu currently holds a 100% equity interest in Chengdu Huiyuan. (3) Acquisition of Kaifeng Huiyuan On March 20, 2005, Huiyuan Chengdu entered into an agreement with Beijing Huiyuan Juice to acquire its 5% equity interest in Kaifeng Huiyuan for a consideration of RMB3,244,300; and an agreement with Beijing Huiyuan Beverage to acquire its 95% equity interest in Kaifeng Huiyuan for a consideration of RMB61,641,700. The consideration payable by Huiyuan Chengdu in connection with the acquisition of Kaifeng Huiyuan described above has been paid in full. Huiyuan Chengdu currently holds a 100% equity interest in Kaifeng Huiyuan. Other acquisitions and disposals involved in the Reorganization Acquisition of Juice Production Facilities Prior to the Reorganization, Huiyuan Yichang, a company owned by Beijing Huiyuan Beverage and Hubei Weiling Beverage Company Limited, an independent third party, as to 55% and 45%, respectively, carried out juice production business in Hubei province. Following unsuccessful negotiations with Hubei Weiling Beverage Company Limited to acquire its 45% equity interest in Huiyuan Yichang in early 2005, Beijing Huiyuan Beverage decided to carry out its juice production business in Hubei province through Huanggang Huiyuan. As part of the Reorganization and to avoid the competition with our business, Beijing Huiyuan Beverage procured Huiyuan Yichang to transfer its juice production facilities to our subsidiaries. Pursuant to an agreement entered into between Huiyuan Yichang and Kaifeng Huiyuan on December 27, 2005, Kaifeng Huiyuan acquired a juice production line of Huiyuan Yichang for a consideration of approximately RMB3,637,651. Pursuant to agreements entered into among Huiyuan Yichang, Beijing Huiyuan Beverage and Huanggang Huiyuan on February 10, 2006, Huanggang Huiyuan 72

7 acquired the remaining two juice production lines of Huiyuan Yichang for a total consideration of approximately RMB2,073,793. Huiyuan Yichang has ceased the juice production business since then. In view of the declining juice production business of Huiyuan Yichang, subsequent to the transfer of the 45% equity interest held by Hubei Weiling Beverage Company Limited to Hubei Dingdong Beverage Company Limited, Hubei Dingdong Beverage Company Limited agreed to transfer such 45% equity interest to Beijing Huiyuan Juice for a payment of RMB29,150,000 on January 16, 2006 in consideration of the land and other buildings held by Huiyuan Yichang. The transfer has been completed and Huiyuan Yichang is owned by Beijing Huiyuan Beverage and Beijing Huiyuan Juice as to 55% and 45%, respectively. Huiyuan Yichang is currently a dormant company and does not have operations. Disposal and cessation of juice production businesses As part of the Reorganization, Mr. Zhu Xinli, our controlling shareholder, also disposed of his interest in, or ceased the operation of, the following juice production businesses to avoid any competition with our business. Disposal of equity interest in Beijing Huiyuan Gongyi Prior to the Reorganization, Beijing Huiyuan Beverage held a 51% equity interest in Huiyuan Gongyi, which also carried out juice production business in Henan province. Due to the low investment return generated by Huiyuan Gongyi and to avoid any competition with our business, Beijing Huiyuan Beverage decided to dispose its investments in Huiyuan Gongyi. On December 28, 2005, Beijing Huiyuan Beverage entered into an equity transfer agreement with Gongyi City Supply and Sales Corporation, the shareholder of the remaining 49% equity interest in Huiyuan Gongyi and an independent third party, and an assets transfer agreement with Gongyi City Supply and Sales Corporation and Huiyuan Gongyi, pursuant to which, Beijing Huiyuan Beverage agreed to transfer its 51% equity interest in Huiyuan Gongyi to Gongyi City Supply and Sales Corporation in return for Huiyuan Gongyi agreeing to transfer certain juice production facilities and related stocks to Beijing Huiyuan Beverage, for a total cash consideration of approximately RMB3,014,028 and beverage products of approximately of RMB2,000,000 in value. The transactions contemplated under such agreements have been completed and Huiyuan Gongyi is currently 100% owned by Gongyi City Supply and Sales Corporation. Cessation of juice production business of Huiyuan Yanbian Prior to the Reorganization, Huiyuan Yanbian, a company owned by Beijing Huiyuan Beverage and Jilin Yanbian Hualong Company, an independent third party, as to 97% and 3%, respectively, carried out the production of juice beverages. With the establishment of Shuangcheng Huiyuan in the nearby area which is more focused on and committed to the juice production, we decided to carry out juice production business in such area through Shuangcheng Huiyuan rather than through the acquisition of the equity interest in Huiyuan Yanbian. To avoid any competition with our business, Huiyuan Yanbian has ceased the juice production business on June 30, Huiyuan Yanbian is currently a dormant company and does not have operations. Cessation of juice production business of Huiyuan Youyu Prior to the Reorganization, Huiyuan Youyu, a company owned by Beijing Huiyuan Beverage and Shanxi Youyu Beverage Factory, an independent third party, as to 55% and 45%, respectively, mainly carried out the production of juice beverages. As part of the Reorganization, following our unsuccessful negotiations with Shanxi Youyu Beverage Factory to acquire its 45% equity interest in Huiyuan Youyu, Huiyuan Youyu has ceased its juice production business on June 30, 2006 and is currently focused on the production of fruit purees and canned fruit. 73

8 The results of Huiyuan Yichang, Huiyuan Gongyi, Huiyuan Yanbian and Huiyuan Youyu have been included in the results of our Group on the basis that such entities were involved in the same business and were under the common control and management with the other companies comprising our Group at the relevant time during the period comprising the three years ended December 31, 2005 and the nine months ended September 30, Compliance with the relevant PRC laws and regulations In the course of the Reorganization described above, we and Mr. Zhu Xinli, our controlling shareholder, have complied with all the relevant requirements of the then prevailing PRC laws and regulations. The following chart sets out our shareholding structure immediately following the completion of the Acquisitions and disposals described above: Note: (1) As of the date of this prospectus, the acquisitions by Luzhong Huiyuan of the 95% and 5% equity interests in Huiyuan Luzhong under the agreement as described above and the merger of Huiyuan Luzhong into Luzhong Huiyuan have been approved by the relevant PRC authorities. The de-registration of Huiyuan Luzhong by the relevant local administrative authority of industry and commerce is in process. 74

9 FINANCIAL INVESTORS Issuance of Convertible Bonds On April 21, 2006 and April 28, 2006, respectively, China Hui Yuan Holdings issued an aggregate of US$20,000, % redeemable convertible bonds due on April 15, 2010 (the April 2006 Convertible Bonds ) to Development Partners Investors and the Value Partners Investors. Development Partners Investors subscribed for US$6,000,000 of the April 2006 Convertible Bonds and the Value Partners Investors subscribed for the remaining US$14,000,000 of the April 2006 Convertible Bonds. On June 28, 2006, China Hui Yuan Holdings issued an aggregate of US$85,000,000 convertible bonds due June 28, 2011 (the June 2006 Convertible Bonds ) in two tranches. The first tranche of these convertible bonds, which amounted to US$20,000,000, were issued to Development Partners Investors and the Value Partners Investors in exchange for the surrender of the April 2006 Convertible Bonds. The second tranche of the June 2006 Convertible Bonds, which amounted to US$65,000,000, were issued to Warburg Pincus Funds Investor. On December 31, 2006, China Hui Yuan Holdings issued an additional US$675,000 of convertible bonds to Warburg Pincus Funds Investor as an interest payment in kind. Pursuant to the Bond & Share Swap Agreement, our Company agreed to issue an aggregate of US$85,675,000 convertible bonds (including US$675,000 convertible bonds in exchange of US$675,000 convertible bonds issued by China Hui Yuan Holdings as described above) due June 28, 2011 (the Convertible Bonds ) to the Bondholders, immediately prior to commencement of dealings on the Listing Date in exchange for the surrender by the Bondholders of all the June 2006 Convertible Bonds. The Convertible Bonds have the same terms and conditions as the June 2006 Convertible Bonds. For further details on the Bond & Share Swap Agreement, please refer to the paragraph below headed Bond & Share Swap Agreement. Terms The major terms and conditions of the Convertible Bonds, when issued upon completion of the Pre-Listing Reorganization, will include:. Interest Rate. Our Company shall pay an interest on the Convertible Bonds at 2.0% per annum prior to the Listing Date and 2.5% per annum following the Listing Date. A Bondholder may (but is not obliged to) elect to receive some or all of the interest payments payable to it on any interest payment date by way of receipt of Convertible Bonds with an equivalent principal amount.. Conversion Price. Each of the Bondholders shall have the right to convert any outstanding Convertible Bonds into the Ordinary Shares at 85% of the Offer Price.. Maturity. On June 28, 2011, our Company must redeem any outstanding Convertible Bonds at a price that will enable the Bondholders to receive a 7.5% internal return rate on the principal amount of the Convertible Bonds being redeemed (for the purpose of calculating the internal return rate only, excluding any additional Convertible Bonds received as interest payment in kind).. Redemption. On June 28, 2009, each of the Bondholders shall have an option, subject to the approval of the majority holders of the Convertible Bonds, to require our Company to redeem the outstanding Convertible Bonds held by it at a price that will enable it to receive a 7.5% internal return rate on the principal amount of the bonds that are being redeemed 75

10 (for the purpose of calculating the internal return rate only, excluding any additional Convertible Bonds received as interest payment in kind). In addition, at any time upon any prescribed redemption event, each of the Bondholders shall have an option, subject to the approval of the majority holders of the Convertible Bonds, to either require our Company to redeem, or require our controlling shareholder to purchase, the outstanding Convertible Bonds held by it at a price that will enable it to receive a 15% internal return rate on the principal amount of the bonds that are being redeemed (excluding any additional Convertible Bonds received as interest payment in kind).. Our Controlling Shareholder s Performance Guarantee. Our controlling shareholder, Mr. Zhu Xinli, undertakes to compensate each of the Bondholders by transferring a number of the Ordinary Shares held by him in our Company to such holders if the arithmetic average of our earnings per share for the two financial years ending December 31, 2006 and December 31, 2007 is less than an amount equal to RMB250 million divided by the then total issued share capital of our Company on an as-converted basis and/or (b) our earnings per share for the financial year ending December 31, 2007 is less than an amount that equals to RMB310 million divided by the then total issued share capital of our Company on an as-converted basis. The number of the Ordinary Shares to be transferred will be determined by reference to the conversion price of the Convertible Bonds notionally adjusted as a result of our failure to fulfill the prescribed profit targets. In the event that the performance guarantee described above is triggered, we will make an announcement on the dilutive effect on the shareholding interest of our controlling shareholder resulting from such share transfer to the holders of the Convertible Bonds. A statement containing details of such dilutive effect will also be set out in our annual report and interim report until such time that the performance guarantee expires.. Our Controlling Shareholder s Internal Rate of Return Guarantee. Our controlling shareholder undertakes to each of the Bondholders that, following a six-month lock up period after the completion of the Global Offering but prior to June 30, 2009, upon sale or other disposition by such Bondholders of their Convertible Bonds or shares into which the Convertible Bonds have been converted, if such Bondholder s internal rate of return on its investment in the Convertible Bonds is less than 10%, our controlling shareholder will compensate such Bondholder by paying a cash amount equal to the return shortfall to guarantee a 10% internal rate of return upon such sale, subject to certain exceptions as described in more detail in Appendix IV Summary of the Convertible Bonds. Notwithstanding the terms and conditions of the Convertible Bonds, the Bondholders have agreed, and we have undertaken, that we will not issue any shares into which any of the Convertible Bonds are converted (the Conversion Shares ) during the six-month lock-up period if this will result in less than 25% of our issued share capital being held in public hands. In addition, any Conversion Shares will not be counted as part of the public float so long as they are subject to the six month lock-up undertaking given by the Bondholders to each of us, the Global Coordinator and the Hong Kong Underwriters, the details of which are set out in the section of Underwriting in this prospectus. For further details on the terms of the Convertible Bonds, please refer to Appendix IV Summary of the Convertible Bonds. Furthermore, we will provide periodic updates in our annual and interim reports to include (i) the number of shares that may be issued upon full conversion of the outstanding Convertible Bonds; (ii) the dilutive impact on the then issued share capital of our Company and respective 76

11 shareholdings of the substantial shareholders of our Company; (iii) the dilutive impact on earnings per share; (iv) the analysis on our financial and liquidity positions discussing our ability to meet our redemption obligations under the Convertible Bonds such as our existing cash on hand, our existing outstanding debts and our cashflow generation ability; (v) the number of shares that may be issued and the dilutive impact on items (i) (iii) above assuming that the Bondholders have elected to have all the interests under the Convertible Bonds to be paid in kind; and (vi) the price of the shares of our Company that will result in a situation where, absent other factors which may affect the share price, the Bondholders will be indifferent in whether to convert or redeem the Convertible Bonds. For further details on the dilutive effect of the Convertible Bonds, please see Risk Factors you will experience dilution in shareholding should Warburg Pincus Funds Investor and other Bondholders convert their Convertible Bonds into Ordinary Shares. Pursuant to an agreement dated June 25, 2006 between Warburg Pincus Funds Investor and Danone Asia (as amended by the Bond & Share Swap Agreement), Warburg Pincus Funds Investor have agreed not to (i) transfer or agree to transfer (save for certain permitted transfers) any of the June 2006 Convertible Bonds (or upon completion of the Pre-Listing Reorganization, the Convertible Bonds), or any Conversion Shares to any third party purchaser, (ii) redeem any of such Convertible Bonds, (iii) sell or transfer any of such Convertible Bonds or Conversion Shares in accordance with the put option arrangements set out under the Investors Rights Agreement or (iv) to sell any such Conversion Shares into an initial public offering of the Company unless in each case, it shall first have offered such Convertible Bonds or Conversion Shares for purchase to Danone Asia. Use of Proceeds of the June 2006 Convertible Bonds China Hui Yuan Holdings used a portion of the proceeds from the issuance of the June 2006 Convertible Bonds to fund the remaining consideration due under the Acquisitions and a portion of the proceeds was paid to Beijing Huiyuan Beverage as consideration for settlement of the acquisition of the Huiyuan trademark, design patents and domain names pursuant to a license and assignment contract dated June 30, We have always used the Huiyuan trademark and since Beijing Huiyuan Beverage and we are under the common control of Mr. Zhu Xinli, such settlement was not accounted for as an acquisition of trademark asset but as a distribution of cash to our equity holders. STRATEGIC INVESTOR On June 30, 2006, China Hui Yuan Holdings issued to Danone Asia, for an aggregate consideration of US$137,250,000, 225,000 series A convertible shares of par value US$0.01 each (the Series A Shares ). The major terms and conditions in relation to the Series A Shares include:. Shares to be issued to Danone Asia upon the Listing Date. The Series A Shares held by Danone Asia shall be mandatorily converted into the ordinary shares of China Hui Yuan Holdings at a conversion price equal to the Offer Price.. Prior to the Global Offering, in the event that any of the holders of the June 2006 Convertible Bonds (or following the Pre-Listing Reorganization, the Convertible Bonds) converts all or part of their bonds into the ordinary shares of China Hui Yuan Holdings (or following the Pre-Listing Reorganization, our Company), Danone Asia will have a right to subscribe for such number of the ordinary shares of China Hui Yuan Holdings at the then prevailing conversion price of Series A Shares (or following the Pre-Listing Reorganization, 77

12 the Offer Price) in order for it to have a minimum shareholding of 22.18% in China Hui Yuan Holdings (or following the Pre-Listing Reorganization, our Company) after such conversion.. Immediately prior to the Listing Date, Danone Asia has a right to subscribe for such number of ordinary shares of our Company at the Offer Price to maintain its shareholding at 22.18%, on a fully diluted basis (assuming all June 2006 Convertible Bonds (or following the Pre-Listing Reorganization, the Convertible Bonds) are converted and options granted under the Pre-IPO Option Scheme are exercised immediately upon the listing of our shares on the Hong Kong Stock Exchange). Danone, as a leading international beverage producer, is a strategic investor in our Company, via Danone Asia. It also has ownership interests in various PRC-based entities who are engaged in businesses which may be in competition with our business. We plan to enter into a strategic cooperation agreement with Danone Asia to set out the terms pursuant to which Danone Asia will provide assistance to our Company in key aspects of our operations such as product development, raw materials sourcing, production marketing and distribution. For further details, please refer to Business Our Strategies Leverage on the strengths of our strategic and financial investors. China Hui Yuan Holdings used approximately US$121.5 million of the proceeds from the issue of the Series A Shares to repay the investment amount received under the UP Cooperation Agreement. Pursuant to an agreement dated September 23, 2006 (as amended by the Bond & Share Swap Agreement) between Danone Asia and the Swap Covenantors, following the completion of the six-month lock-up period from the Listing Date and for such period in which Danone Asia holds at least 66% of the shares of our Company acquired by it from China Hui Yuan Holdings as a result of a share swap pursuant to the Bond & Share Swap Agreement (excluding the shares acquired through the Danone Top-up Right), the Swap Covenantors have agreed not to transfer, or agree to transfer, or engage in any negotiation for the sale or transfer of any of the shares of our Company to any third party purchaser unless the Swap Covenantors shall first have offered such shares for purchase to Danone Asia. Under the same agreement, each of Mr. Zhu Xinli, Huiyuan Holdings, China Hui Yuan Holdings, Keep Good and Mr. Zhu Shenghua each has also granted a right of first refusal to Danone Asia that if any of them receives a bona fide offer from any third party purchaser for any of his shares in our Company and in the event that he wishes to sell such shares to the third party purchaser, he shall be obliged to first offer to sell these shares to Danone Asia at the same price and on the same terms and conditions of the proposed purchase by the third party purchaser. The agreement further provides for tag-along rights if Danone Asia does not exercise its right of first refusal. In these circumstances, Danone Asia shall be permitted to sell to the third party purchaser such proportion of the total number of shares it holds which is equal to the proportion of the shares (out of the total number of shares held by Mr. Zhu Xinli or Mr. Zhu Shenghua) that Mr. Zhu Xinli or Mr. Zhu Shenghua proposes to sell, directly or indirectly, at the same price and on the same terms and conditions as that agreed between Mr. Zhu Xinli or Mr. Zhu Shenghua and the third party purchaser. On February 5, 2007, Danone Asia tendered a notice to convert (the Conversion Notice ), on the Listing Date, its 225,000,000 Series A Shares to the ordinary shares of China Hui Yuan Holdings at the Offer Price (the Conversion ). On February 5, 2007, Danone Asia tendered a notice to exercise the Danone Top-up Right (the Top-up Notice ). All the ordinary shares acquired by Danone Asia upon the Conversion will be exchanged into an equal number of 78

13 ordinary shares of our Company on the Listing Date pursuant to the Bond & Share Swap Agreement described below. It is expected that Danone Asia (after the Danone Top-up Right is exercised) will own an aggregate of 337,497,502 shares (assuming an Offer Price of HK$6.00, being the highest point of the indicative Offer Price range) or 346,834,104 shares (assuming an Offer Price of HK$4.80, being the lowest point of the indicative Offer Price range) upon the listing of our shares on the Hong Kong Stock Exchange. Based on the assumption that all Convertible Bonds are converted prior to the Listing Date, Danone Asia has a right to subscribe for an additional 123,802,854 shares (assuming an Offer Price of HK$4.80, being the lowest point of the indicative Offer Price range) or 159,072,502 shares (assuming an Offer Price of HK$6.00, being the highest point of the indicative Offer Price range) to maintain its percentage interest in our Company at not less than 22.18% on a fully diluted basis upon the listing of our shares on the Hong Kong Stock Exchange. Any shares subscribed by Danone Asia under the Top-up Notice will be subscribed under the same terms as those generally offered to other investors under the Global Offering and will be subject to a six month lock-up period from the Listing Date. After the listing of our shares on the Hong Kong Stock Exchange, the Danone Top-up Right will lapse and cease to apply. As a substantial shareholder of our Company, Danone Asia is a connected person of our Company under the Hong Kong Listing Rules, and as such, any shares it subscribes for upon the Conversion or under the Top-up Notice will not be counted as part of our public float for the purposes of complying with the Listing Rules. PRE-LISTING REORGANIZATION Formation of our Company We were incorporated in the Cayman Islands on September 14, 2006 by China Hui Yuan Holdings. Pursuant to a bond and share swap agreement dated February 5, 2007 (the Bond & Share Swap Agreement ), we will become the holding company of all of the subsidiaries which are currently owned by China Hui Yuan Holdings, simultaneously upon the Underwriting Agreements becoming unconditional and immediately prior to the commencement of dealings of our shares on the Hong Kong Stock Exchange. Bond & Share Swap Agreement On February 5, 2007, Mr. Zhu Xinli, Huiyuan Holdings, China Hui Yuan Holdings, Danone Asia, the Bondholders, Keep Good, Mr. Zhu Shenghua, Huiyuan Beijing, Huiyuan Shanghai, Huiyuan Chengdu and our Company entered into the Bond & Share Swap Agreement, pursuant to which they have agreed that, simultaneously upon the Underwriting Agreements becoming unconditional and immediately prior to commencement of dealings in our shares on the Hong Kong Stock Exchange: (a) China Hui Yuan Holdings will transfer all its interests in its wholly-owned subsidiaries, Huiyuan Beijing, Huiyuan Shanghai and Huiyuan Chengdu to our Company in return for the issuance of a number of the Ordinary Shares equal to the number of the total issued ordinary shares of China Hui Yuan Holdings as at the Listing Date following the exercise of the Conversion Notice; 79

14 (b) (c) (d) (e) (f) (g) China Hui Yuan Holdings will repurchase all the ordinary shares issued to Danone Asia under the Conversion Notice in return for China Hui Yuan Holdings transferring an equal number of the Ordinary Shares to Danone Asia and will repurchase all the ordinary shares held by Keep Good in return for China Hui Yuan Holdings transferring an equal number of the Ordinary Shares to Keep Good; Danone Asia will exercise the Danone Top-up Right pursuant to which our Company will issue such number of our shares to Danone Asia to maintain its shareholding interest at 22.18% of our issued share capital upon the listing of our shares on the Hong Kong Stock Exchange; The Bondholders will surrender, on the Listing Date, all the June 2006 Convertible Bonds in return for the issuance of the Convertible Bonds with terms and conditions identical to those of the June 2006 Convertible Bonds; China Hui Yuan Holdings will, on the Listing Date, pay in cash to the Bondholders all the interest accrued to the June 2006 Convertible Bonds during the period from January 1, 2007 up to the Listing Date; China Hui Yuan Holdings will put an aggregate of 325,000,000 shares to Law Debenture Trust (Asia) Limited in escrow pursuant to an escrow arrangement mutually agreed upon among Danone Asia, Warburg Pincus Funds Investor, Mr. Zhu Xinli and Huiyuan Holdings in support of the performance guarantee and internal rate of return guarantee (as described under Financial Investors Issuance of Convertible Bonds above) provided by Mr. Zhu Xinli in connection with our Company s financial performance; and Our Company will become a party to the Investors Rights Agreement as of the date of the Investors Rights Agreement as a result of the Bond & Share Swap Agreement described above. 80

15 CORPORATE STRUCTURE FOLLOWING COMPLETION OF THE GLOBAL OFFERING The following chart sets out our shareholding and corporate structure immediately after completion of the Pre-Listing Reorganization, including the exercise of the Danone Top-up Right, and the Global Offering based on an Offer Price at the highest point of the indicative Offer Price range, and assuming that (i) the Over-allotment Option is not exercised, (ii) the Convertible Bonds have not been converted, and (iii) none of the options granted under the Pre-IPO Share Option Scheme has been exercised: Notes: (1) Mr. Zhu Xinli transferred 40,000 shares out of the 650,000 shares held by him in China Hui Yuan Holdings through Huiyuan Holdings to Keep Good, a company wholly owned by his son, Mr. Zhu Shenghua, on September 28, Such shares will be exchanged into 40,000,000 shares of our Company on the Listing Date prior to the commencement of dealings in the shares of our Company on the Hong Kong Stock Exchange pursuant to the Bond & Share Swap Agreement. The shares held by Keep Good are also subject to a six-month lock up period, the details of which are set out in the section headed Underwriting in this prospectus. (2) Xinjiang Huiyuan was established on December 27, 2006 in Xinjiang province, the PRC. 81

16 The following chart sets out our shareholding and corporate structure immediately after completion of the Pre-Listing Reorganization, including the exercise of the Danone Top-up Right, and the Global Offering based on an Offer Price at the lowest point of the indicative Offer Price range, and assuming that (i) the Over-allotment Option is not exercised, (ii) the Convertible Bonds have not been converted, and (iii) none of the options granted under the Pre-IPO Share Option Scheme has been exercised: 82

17 The following chart sets out our shareholding and Group structure immediately after completion of the Pre-Listing Reorganization, including the exercise of the Danone Top-up Right, and the Global Offering (based on an Offer Price at the highest point of the indicative Offer Price range, assuming that (i) the Over-allotment Option is not exercised, (ii) that the Convertible Bonds have been fully converted, and (iii) all the options granted under the Pre-IPO Share Option Scheme have been exercised: Notes: (1) Assuming the Over-allotment Option is exercised, shareholdings in our Company held by China Hui Yuan Holdings, Keep Good, Danone Asia, Warburg Pincus Funds Investor, other Bondholders, the public shareholders and the shares belong to Mr. Lu Changqing from the exercise of the options granted under the Pre-IPO Share Option Scheme will be 38.6%, 2.5%, 21.3%, 6.4%, 1.9%, 29.2% and 0.04%, respectively. (2) Includes the shares belonging to Mr. Ng Yuk Keung, Mr. Matthew Gene Mouw, Mr. Chen Zhiqiang and Mr. Dong Ying from the exercise of options granted under the Pre-IPO Share Option Scheme. (3) Being the shares belonging to Mr. Lu Changqing from the exercise of options granted under the Pre-IPO Share Option Scheme and whose shares are not deemed as public float. 83

18 The following chart sets out our shareholding and Group structure immediately after completion of the Pre-Listing Reorganization, including the exercise of the Danone Top-up Right, and the GlobalOfferingbasedonanOfferPriceatthelowest point of the indicative Offer Price range, and assuming that (i) the Over-allotment Option is not exercised, (ii) the Convertible Bonds have been fully converted, and (iii) all the options granted under the Pre-IPO Share Option Scheme have been exercised: Notes: (1) Assuming the Over-allotment Option is exercised, shareholdings in our Company held by China Hui Yuan Holdings, Keep Good, Danone Asia, Warburg Pincus Funds Investor, other Bondholders, the public shareholders and the shares belonging to Mr. Lu Changqing from the exercise of options granted under the Pre-IPO Share Option Scheme will be 37.6%, 2.5%, 21.3%, 7.7%, 2.4%, 28.5% and 0.04%, respectively. (2) Includes the shares belonging to Mr. Ng Yuk Keung, Mr. Matthew Gene Mouw, Mr. Chen Zhiqiang and Mr. Dong Ying from the exercise of options granted under the Pre-IPO Share Option Scheme. (3) Being the shares belonging to Mr. Lu Changqing from the exercise of options granted under the Pre-IPO Share Option Scheme and whose shares are not deemed as public float. M&A RULES On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce ( MOFCOM ) and the China Securities Regulatory Commission ( CSRC ), promulgated the Rules on Acquisition of Domestic Enterprises by Foreign Investors (the M&A Rules ), a new 84

19 regulation with respect to the mergers and acquisitions of domestic enterprises by foreign investors that became effective on September 8, The M&A Rules, among other things, purports to require that an offshore special purpose vehicle ( SPV ) formed for listing purposes and controlled directly or indirectly by PRC companies or individuals, such as our Company, shall obtain the approval of the CSRC prior to the listing and trading of such SPV s securities on an overseas stock exchange, especially in the event that the SPV acquires shares of or equity interests in the PRC companies in exchange for the shares of offshore companies. On September 21, 2006, the CSRC published on its official website procedures specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings. The application of the M&A Rules are subject to interpretation with no consensus currently existing among the leading PRC law firms regarding the scope and applicability of the CSRC approval requirement. Based on the understanding of Zhong Lun Law Firm, our PRC legal counsel, of the M&A Rules, the listing of the Company on the Hong Kong Stock Exchange does not require the approval by the CSRC, because (i) we have completed the acquisitions of the relevant PRC companies and obtained all necessary approvals from the relevant PRC foreign trade and economic cooperative regulatory authorities for the Reorganization before September 8, 2006, the date on which the M&A Rules became effective; and (ii) such acquisitions were based on cash consideration and did not involve the exchange of shares of offshore companies. However, Zhong Lun Law Firm cannot rule out the possibility that the CSRC may require, either by interpretation or clarification of the M&A Rules or by any new rules, regulations or directives or in any other ways promulgated after the date of its legal opinion, that oversea listings of all SPVs (or those involving the completion of the acquisition of the PRC companies based on cash consideration before September 8, 2006, such as our Company) must obtain the approval from the CSRC. Should the above event occur, we will make an announcement to the public immediately. 85