THE CROSS-HARBOUR (HOLDINGS) LIMITED (Incorporated in Hong Kong with limited liability)

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountants or other professional advisers. If you have sold or transferred all your shares in The Cross-Harbour (Holdings) Limited, you should at once hand this circular to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. THE CROSS-HARBOUR (HOLDINGS) LIMITED (Incorporated in Hong Kong with limited liability) CONNECTED TRANSACTION SHARE OPTION AGREEMENT Independent financial adviser to the Independent Shareholders of The Cross-Harbour (Holdings) Limited A letter from the Board is set out on pages 4 to 9 of this circular. A letter from Dao Heng Securities Limited, the independent financial adviser, containing its advice to the Independent Shareholders is set out on pages 10 to 24 of this circular. A notice convening an extraordinary general meeting of The Cross-Harbour (Holdings) Limited to be held at Rooms , China Resources Building, 26 Harbour Road, Wanchai, Hong Kong at 9:00 a.m. on Monday, 23rd June, 2003 to consider and, thought fit, to pass the ordinary resolution as set out on page 31 of this circular. Whether or not you intend to attend the meeting, you are requested to complete and return the accompanying form of proxy in accordance with the instructions printed thereon as soon as possible and in any event not less than 48 hours before the time appointed for holding of the meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the meeting or any adjourned meeting should you so desire. 2nd June, 2003

2 CONTENTS Page Definitions... 1 Letter from the Board 1. Introduction Share Option Agreement Reasons for the Transaction Connected Transaction Recommendations Extraordinary General Meeting Additional Information... 9 Letter from Dao Heng Securities Appendix General Information Notice of Extraordinary General Meeting i

3 DEFINITIONS In this circular, the following expressions have the following meanings unless the context requires otherwise: Announcement the announcement dated 12th May, 2003 issued by the Company headed Connected Transaction in respect of the Share Option Agreement associates Board Business Day has the meaning ascribed to it under the Listing Rules the board of directors of the Company a day (excluding Saturday) on which banks in Hong Kong are generally open for business Company The Cross-Harbour (Holdings) Limited, a company incorporated in Hong Kong with limited liability and the shares of which are listed on the Stock Exchange Convertible Notes I Convertible Note II Dao Heng Securities Date of Grant EGM several convertible notes with an aggregate principal amount of HK$133 million issued by the Company to institutional and/or professional investors on 8th May, 2002 pursuant to a placing and underwriting agreement dated 23rd April, 2002 entered into between, inter alia, the Company and Tai Fook Securities Company Limited, the outstanding principal amount of the Convertible Notes I was HK$2 million as at the Latest Practicable Date the convertible note with principal amount of HK$117 million issued by the Company to Honway on 11th June, 2002 pursuant to a subscription agreement dated 23rd April, 2002 entered into between the Company and Honway, the outstanding principal amount of the Convertible Note II was HK$80,457,060 as at the Latest Practicable Date Dao Heng Securities Limited, a deemed licensed corporation under the SFO who has been appointed as the independent financial adviser to advise the Independent Shareholders in relation to the Share Option Agreement the date of grant of the Option, namely, the date on which Honway effects payment of HK$50,000,000 in accordance with the Share Option Agreement the extraordinary general meeting of the Company to be held on 23rd June, 2003 in connection with the Share Option Agreement 1

4 DEFINITIONS Equity Share Capital Exercise Date Exercise Moneys Exercise Notice Group Honway Independent Shareholders Latest Practicable Date Listing Rules Loan the issued share capital of the Company excluding any part thereof which does not either as respects dividends or as respects capital carry any right to participate beyond a specified amount or beyond an amount calculated by reference to a specified rate in a distribution any Business Day falling during the Option Period on which the Option is duly exercised before the close of business on such day by delivery of an Exercise Notice to the Company, where appropriate, together with a remittance for the Exercise Moneys and/or a completed notice of waiver of Loan (as attached to the Exercise Notice) and otherwise in accordance with the Share Option Agreement provided that if an Exercise Notice is served during a period when the register of holders of Shares is closed the Exercise Date shall be the next following Business Day on which the register of holders of Shares is open in relation to the Option, the aggregate amount of the relevant Option Price multiplied by the number of Option Shares payable by Honway to the Company upon the exercise of the Option and in the case of the exercise of any particular Option means the relevant Option Price multiplied by the relevant number of Option Shares in respect of which that particular Option has been exercised a notice to be completed, signed and delivered by Honway to the Company in accordance with the Share Option Agreement in order to exercise the Option in whole or in part the Company and its subsidiaries Honway Holdings Limited, a company incorporated in the British Virgin Islands and a wholly owned subsidiary of Y. T. Realty the Shareholders other than Honway and its associates 29th May, 2003, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited a 3-year interest-free term loan in the principal amount of HK$20,000,000 to be advanced by Honway to the Company pursuant to the Share Option Agreement, the maturity date of the Loan is the last day of the Option Period 2

5 DEFINITIONS Option Option Period Option Price Option Shares SFO Shares the right to subscribe in aggregate for up to the Option Shares at a price per Share equal to the Option Price in force on the relevant Exercise Date the period from the Date of Grant to the third anniversary of the Date of Grant (both dates inclusive) the sum payable in respect of each Share on exercise of the Option being HK$3.40 for the period from the Date of Grant up to the first anniversary of the Date of Grant, HK$3.70 for the period from the date immediately following the first anniversary of the Date of Grant up to the second anniversary of the Date of Grant and HK$4.00 for the period from the date immediately following the second anniversary of the Date of Grant up to the third anniversary of the Date of Grant or such adjusted price as may for the time being be applicable in accordance with the terms of the Share Option Agreement up to a maximum of 60,000,000 new Shares issuable upon the exercise of the Option Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) shares of HK$1.00 each in the authorized capital of the Company existing on the date of this circular and all other (if any) stock or shares from time to time and for the time being ranking pari passu therewith and all other (if any) shares or stock in the Equity Share Capital of the Company resulting from any sub-division, consolidation or re-classification of Shares Share Option Agreement the share option agreement dated 9th May, 2003 made between the Company and Honway for subscription of the Option Shares Shareholders Stock Exchange substantial shareholder Takeovers Code Y. T. Realty the shareholders of the Company The Stock Exchange of Hong Kong Limited has the meaning ascribed to it under the Listing Rules the Hong Kong Codes on Takeovers and Mergers and Share Repurchases Y. T. Realty Group Limited, the holding company of Honway, and the securities of which are listed on the Stock Exchange % per cent 3

6 LETTER FROM THE BOARD THE CROSS-HARBOUR (HOLDINGS) LIMITED (Incorporated in Hong Kong with limited liability) Directors: CHEUNG Chung Kiu (Chairman) YEUNG Hin Chung, John (Managing Director) YUEN Wing Shing WONG Chi Keung LEUNG Wai Fai TUNG Wai Lan, Iris LEE Ka Sze, Carmelo* WONG Wai Kwong, David* Registered Office: Rooms China Resources Building 26 Harbour Road Wanchai Hong Kong * Independent Non-Executive Directors 2nd June, 2003 To the Shareholders Dear Sir/Madam, CONNECTED TRANSACTION SHARE OPTION AGREEMENT 1. INTRODUCTION The Company announced on 12th May, 2003 that the Share Option Agreement was entered into between the Company and Honway pursuant to which the Company has conditionally agreed to grant Honway an option to subscribe for up to a maximum of 60,000,000 Shares in the capital of the Company at the Option Price during the Option Period. In consideration of the sum of HK$50,000,000 (as to HK$5,000,000 being the amount for purchasing the Option and as to HK$25,000,000 being the non-refundable and non-interest bearing deposit payable in advance for exercise of the Option and as to HK$20,000,000 being a 3-year interest-free term loan to be advanced by Honway to the Company) payable by Honway to the Company within 3 Business Days upon fulfilment of the conditions set out below, the Company shall grant the Option to Honway. The Option will not be listed on the Stock Exchange. 4

7 LETTER FROM THE BOARD The Share Option Agreement is conditional upon (i) the approval of the Stock Exchange to the grant of the Option and the grant of a listing of and permission to deal in the new Shares to be issued on exercise of the Option by the Listing Committee of the Stock Exchange; and (ii) the passing at the EGM of a resolution to approve the Share Option Agreement and the transaction contemplated thereunder (including but not limited to the grant of the Option and the allotment and issue of the new Shares to be issued on exercise of the Option) at which meeting Honway and its associates shall abstain from voting. As at the Latest Practicable Date, Honway was beneficially interested in approximately 27.57% of the issued share capital of the Company and is therefore a substantial shareholder of the Company and a connected person of the Company according to the Listing Rules. The grant of the Option to Honway to subscribe for the Company s new Shares as contemplated under the Share Option Agreement constitutes a connected transaction for the Company under Rule 14.26(4) of the Listing Rules and is therefore subject to the approval by the Independent Shareholders at the EGM at which meeting Honway and its associates shall abstain from voting. The main purpose of this circular is (a) to provide you with further information relating to the Share Option Agreement; (b) to set out the letter of advice from Dao Heng Securities to the Independent Shareholders on the Share Option Agreement; and (c) to seek your approval at the EGM of the ordinary resolution in relation to the Share Option Agreement and the transaction contemplated thereunder as set out in the notice of the EGM. 2. SHARE OPTION AGREEMENT Date of agreement 9th May, 2003 Parties The Company Honway Principal terms of the Share Option Agreement (1) The Company has conditionally agreed to grant Honway an option to subscribe for up to a maximum of 60,000,000 Shares in the capital of the Company at the Option Price during the Option Period in consideration of the sum of HK$50,000,000 (as to HK$5,000,000 being the amount for purchasing the Option and as to HK$25,000,000 being the non-refundable and non-interest bearing deposit payable in advance for exercise of the Option and as to HK$20,000,000 being a 3-year interest-free term loan to be advanced by Honway to the Company) payable by Honway to the Company within 3 Business Days upon fulfilment of the conditions set out below. The Option Prices of HK$3.40, HK$3.70 and HK$4.00 represent a premium of 7.09%, 16.54% and 25.98% respectively of the closing price of the Shares as at 9th May, The 5

8 LETTER FROM THE BOARD amount of HK$5,000,000 for purchasing the Option and the premium mentioned above is determined as a result of negotiations between Honway and the Company. The Option Price of HK$3.40 is determined with reference to approximately 7% to 8% premium over the one-month average closing price of the Shares ending on 7th May, 2003 and the Option Prices of HK$3.70 and HK$4.00 are determined with reference to approximately 8% to 9% premium over the Option Price of HK$3.40 and HK$3.70 respectively. (2) The HK$25,000,000 non-refundable and non-interest bearing deposit so payable in advance may be used by Honway as part of the Exercise Moneys in respect of the exercise of any particular Option but shall otherwise be non-refundable to Honway by the Company. (3) Instead of making payment in cash to the Company in respect of the Exercise Moneys payable on the exercise of the Option, Honway may at its sole option waive all or any part of the Loan owing by the Company to Honway in satisfaction in full or part of the cash sum otherwise payable by Honway to the Company and the Company will be entitled to treat that part of the Loan so waived as extinguished. (4) The Option may be exercised in whole or in part at any time and from time to time during the Option Period. (5) The number of new Shares to be allotted on exercise of the Option shall be calculated by dividing the amount of the Exercise Moneys specified in the Exercise Notice by the Option Price applicable on the Exercise Date. (6) The benefit of the Share Option Agreement may be assigned in whole or in part by Honway to its holding company for the time being or to any wholly owned subsidiary of Honway or of such holding company. Conditions of the Share Option Agreement The Share Option Agreement is conditional upon (i) the approval of the Stock Exchange to the grant of the Option and the grant of the listing of and permission to deal in the Shares of the Company to be issued on exercise of the Option by the Listing Committee of the Stock Exchange; and (ii) the passing at the EGM of a resolution to approve the Share Option Agreement and the transaction contemplated thereunder (including but not limited to the grant of the Option and the allotment and issue of the Shares to be issued on exercise of the Option) at which meeting Honway and its associates shall abstain from voting. In the event that the conditions set out above are not fulfilled by 30th June, 2003 (or such later date as the parties may agree), the Share Option Agreement shall thereupon forthwith cease and determine and neither party shall have any claim against the other. 6

9 LETTER FROM THE BOARD Size of Option The exercise of the entire Option will result in the issue of 60,000,000 Shares, constituting approximately 24.29% of the existing issued capital of the Company and approximately 19.54% of the Company s existing issued capital as enlarged by such issue. On exercise of the entire Option which will result in the issue of 60,000,000 new Shares to Honway, Honway s interest in the Company will be increased from 27.57% to 41.72%. Honway has however indicated that it has no present intention to exercise the Option in a manner which will trigger off an obligation on Honway s part to make a general offer under the Takeovers Code. Should the change of the equity interest of Honway, together with parties acting in concert with it, following the exercise of the Option triggers a general offer for the Shares under Rule 26 of the Takeovers Code, Honway and all parties acting in concert with it are required to comply with the requirements under the Takeovers Code from time to time. The Company has not received any notification from other Shareholders holding 5% or more of the issued capital of the Company pursuant to the SFO. Shareholding structures The shareholding structures of the Company upon the exercise in full of the Convertible Note II and/or the Option are summarised as follows: Shareholdings at the Latest Practicable Date Scenario I Scenario II Scenario III Shareholdings upon exercise of the Option in full (assuming no Shareholdings upon conversion right full exercise of both attaching to the the Option and Convertible Note II is the Convertible exercised) Note II Shareholdings upon exercise in full of the conversion rights attaching to the Convertible Note II (assuming no Option is exercised) at HK$3.50 at HK$3.70 at HK$3.90 at HK$3.70 at HK$3.90 Honway 27.57% 33.74% 33.43% 33.15% 41.72% 45.58% 45.39% Independent Shareholders 72.43% 66.26% 66.57% 66.85% 58.28% 54.42% 54.61% Total % % % % % % % Notes: The above table has not taken into account the effect of the Shares issuable pursuant to the following Convertible Notes I and the Company s employee share option scheme: (1) As at the Latest Practicable Date, the outstanding principal amount of the Convertible Notes I was HK$2,000,000 which is convertible by holders of the Convertible Notes I at the price of (a) HK$3.70 per Share up to 8th May, 2004; and (b) HK$3.90 per Share for the period from 9th May, 2004 up to 8th May, 2005 (subject to adjustment) at the sole option of the holders of the Convertible Notes I at any time up to 8th May, For details of the Convertible Notes I, please refer to the Company s circular issued to the Shareholders in relation thereto dated 15th May, (2) The total number of Shares issuable by the Company upon exercise in full of the outstanding options granted under the Company s employee share option scheme is 19,200,000 Shares. As mentioned above, the HK$25,000,000 non-refundable and non-interest bearing deposit payable in advance may be used by Honway as part of the Exercise Moneys in respect of the 7

10 LETTER FROM THE BOARD exercise of any particular Option. If such deposit is used in full to settle the Exercise Moneys (assuming that Honway does not make any additional cash payment to the Company or waive any part of the Loan as Exercise Moneys and no further new Shares will be issued pursuant to the exercise of the conversion rights attached to the Convertible Notes I and/or the Convertible Note II and/or the exercise of the options granted to the employees of the Group), the shareholding interest of Honway in the Company will increase from approximately 27.57% as at the Latest Practicable Date to approximately 29.66% (based on the Option Price of HK$3.40 per Share), 29.50% (based on the Option Price of HK$3.70 per Share) and 29.36% (based on the Option Price of HK$4.00 per Share) respectively. The terms of the Share Option Agreement were negotiated between the Company and Honway on an arm s length basis. The Directors consider that the Share Option Agreement is on normal commercial terms and the terms of such agreement are fair and reasonable and in the best interest of the Company and the Independent Shareholders as a whole. In arriving at such views, the Directors agree to the reasons, the basis and the opinion of Dao Heng Securities, the independent financial adviser to advise the Independent Shareholders in relation to the Share Option Agreement, as set out in its letter to the Independent Shareholders contained in this circular. 3. REASONS FOR THE TRANSACTION The principal activities of the Group are investment holding, tunnel management and operation, motoring school operation, and operation of an automatic toll collection system in Hong Kong. Such investments include, among others, 37% interest in Western Harbour Tunnel Company Limited, 70% interest in The Hong Kong School of Motoring Limited and 35% attributable interest in Autotoll Limited. The Share Option Agreement, if implemented, will enable the Company to raise immediately $50 million additional working capital in a most efficient way with no interest expense incurred by the Company. If the Option is exercised, further funds will be raised by way of equity thus strengthening the capital base of the Company. In view of the current adverse economic condition prevailing in Hong Kong, the Board believes that it is prudent to increase liquidity and general working capital of the Group. The Board has not decided as to the application of the funds raised from the issue of the Option Shares as a result of exercise of the Option since there is no assurance that the Option will be exercised by Honway. 4. CONNECTED TRANSACTION Honway is beneficially interested in approximately 27.57% of the issued share capital of the Company and is therefore a substantial shareholder of the Company and a connected person of the Company according to the Listing Rules. The grant of the Option to Honway to subscribe for the Company s new Shares as contemplated under the Share Option Agreement constitutes a connected transaction for the Company under Rule 14.26(4) of the Listing Rules and is therefore subject to the approval by the Independent Shareholders at the EGM. 8

11 LETTER FROM THE BOARD 5. RECOMMENDATIONS As Mr. Lee Ka Sze, Carmelo and Mr. Wong Wai Kwong, David, the two independent non-executive Directors, are also the independent non-executive directors of Y. T. Realty, the holding company of Honway, they are not considered appropriate to advise the Independent Shareholders on the Share Option Agreement. Accordingly, Dao Heng Securities has been appointed as the independent financial adviser to advise the Independent Shareholders on the Share Option Agreement. Your attention is drawn to the letter from Dao Heng Securities to the Independent Shareholders which contains its advice to the Independent Shareholders in relation to the Share Option Agreement and the principal factors and reasons considered by Dao Heng Securities in arriving at its advice. The Board believes that the Share Option Agreement is in the best interests of the Group and the Independent Shareholders and accordingly recommends the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to consider and, if thought fit, to approve the Share Option Agreement. 6. EXTRAORDINARY GENERAL MEETING Set out on pages 31 to 32 of this circular is a notice convening the EGM at which the ordinary resolution will be proposed to the Independent Shareholders to consider and, if thought fit, to approve the Share Option Agreement. A form of proxy for use at the EGM is enclosed. Whether or not you are able to attend the meeting you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as possible to the Company s registered office at Rooms , China Resources Building, 26 Harbour Road, Wanchai, Hong Kong and in any event not less than 48 hours before the time appointed for holding the meeting or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting at the meeting or any adjournment thereof should you so desire. Honway and its associates will abstain from voting on the ordinary resolution to be proposed at the EGM in respect of the Share Option Agreement. 7. ADDITIONAL INFORMATION Your attention is drawn to the letter from Dao Heng Securities, the notice of the EGM attached to this circular and the general information of the Group as set out in the Appendix to this circular. Application has been made to the Stock Exchange for the listing of, and the permission to deal in, the new Shares issuable upon the exercise of the Option. The Option will not be listed on the Stock Exchange. Yours faithfully, By Order of the Board THE CROSS-HARBOUR (HOLDINGS) LIMITED Yeung Hin Chung, John Managing Director 9

12 LETTER FROM DAO HENG SECURITIES The following is the text of the letter of advice to the Independent Shareholders made by Dao Heng Securities on 2nd June, 2003 in connection with the terms of the Share Option Agreement which has been prepared for the purpose of inclusion in this circular. 2nd June, 2003 To the Independent Shareholders Dear Sirs, CONNECTED TRANSACTION SHARE OPTION AGREEMENT INTRODUCTION We refer to our engagement by the Company as independent financial adviser to advise the Independent Shareholders with respect to the terms of the Share Option Agreement. Details of the principal terms of the Share Option Agreement are contained in the Letter from the Board in the circular dated 2nd June, 2003 to the Shareholders (the Circular ), of which this letter forms part. Terms defined in the Circular bear the same meanings herein unless the context otherwise requires. On 9th May, 2003, the Company and Honway entered into the Share Option Agreement pursuant to which the Company has conditionally agreed to grant Honway an option to subscribe for up to a maximum of 60,000,000 shares in the capital of the Company at the Option Price during the Option Period, in consideration of HK$50,000,000 (as to HK$5,000,000 being the amount for purchasing the Option and as to HK$25,000,000 being the non-refundable and non-interest bearing deposit payable in advance for exercise of the Option and as to HK$20,000,000 being a 3-year interest-free term loan to be advanced by Honway to the Company) payable by Honway to the Company within 3 Business Days upon fulfillment of the conditions under the Share Option Agreement. As Honway is a substantial Shareholder beneficially interested in approximately 27.57% of the existing issued share capital of the Company and is therefore a connected person of the Company according to the Listing Rules. The grant of the Option to Honway to subscribe for the Company s new Shares as contemplated under the Share Option Agreement constitutes a connected transaction for the Company under Rule 14.26(4) of the Listing Rules and the grant of the Option is therefore subject to the approval by the Independent Shareholders at the EGM. Honway and its associates shall abstain from voting at the EGM. Our role as the independent financial adviser to the Independent Shareholders is to give our opinion as to whether the terms of the Share Option Agreement are fair and reasonable so far as the Independent Shareholders are concerned. 10

13 LETTER FROM DAO HENG SECURITIES In formulating our recommendations, we have relied on the accuracy of the information and representations contained in the Circular, which have been provided by the Directors and have assumed that all information and representations made or referred to in the Circular are true and accurate in all material respects. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and have been advised by the Directors that no material facts have been omitted from the information provided and referred to in the Circular. We consider that we have reviewed sufficient information to reach an informed view and to justify relying on the accuracy of the information contained in the Circular and to provide a reasonable basis for our advice. We have not, however, conducted any independent investigation into the business and affairs or the future prospects of the Group. PRINCIPAL TERMS OF THE SHARE OPTION AGREEMENT Pursuant to the Share Option Agreement, the Company has conditionally agreed to grant Honway the Option to subscribe for up to a maximum of 60,000,000 shares in the capital of the Company at the Option Price during the Option Period, subject to the conditions as set out in the Letter from the Board in the Circular, principal terms of which are set out as follows: i. Size of Option : Up to a maximum of 60,000,000 new Shares issuable upon the exercise of the Option ii. Option price : HK$3.40 per Share for the period from the Date of Grant up to the first anniversary of the Date of Grant ( First Year ) (subject to adjustment); HK$3.70 per Share for the period from the date immediately following the first anniversary of the Date of Grant up to the second anniversary of the Date of Grant ( Second Year ) (subject to adjustment); and HK$4.00 per Share for the period from the date immediately following the second anniversary of the Date of Grant up to the third anniversary of the Date of Grant ( Third Year ) (subject to adjustment) iii. Option period : the period from the Date of Grant to the third anniversary of the Date of Grant (both dates inclusive) iv. Consideration : HK$5,000,000 v. Deposit : HK$25,000,000 being payable in advance for exercise of the Option, which is non-refundable and non-interest bearing vi. Loan : HK$20,000,000 being a 3-year interest-free term loan to be advanced by Honway to the Company Pursuant to the Share Option Agreement, instead of making a cash payment to the Company in respect of the Exercise Moneys payable on the exercise by Honway, Honway is entitled, at its sole option, to waive all or any part of the Loan owing by the Company to Honway as at the relevant Exercise Date in satisfaction in full or in part of the cash sum otherwise payable by Honway. 11

14 LETTER FROM DAO HENG SECURITIES Further details of the terms of the Share Option Agreement are set out in the Letter from the Board in the Circular. PRINCIPAL FACTORS AND REASONS CONSIDERED In giving our opinion as to the fairness and reasonableness of the terms of the Share Option Agreement and giving our advice to the Independent Shareholders, we have taken into account the following factors and reasons: A. Principal terms of the Option (i) Size of the Option As stated in the Letter from the Board, the exercise of the entire Option will result in the issue of 60,000,000 Shares, constituting approximately 24.29% of the existing issued capital of the Company and approximately 19.54% of the Company s issued capital as enlarged by such issue. On exercise of the entire Option which will result in the issue of 60,000,000 new Shares to Honway, Honway s interest in the Company will be increased from approximately 27.57% to 41.72%. As advised by the Directors, Honway has however indicated that it has no present intention to exercise the Option in a manner which will trigger off an obligation on Honway s part to make a general offer under the Takeovers Code. Based on (i) 247,063,929 Shares in issue as at the Latest Practicable Date; (ii) Honway s present intention not to trigger off its obligation to make a general offer under the Takeovers Code; and (iii) the assumption that no further new Shares will be issued pursuant to the exercise of the conversion rights attached to the Convertible Notes I and/or the Convertible Note II and/or the exercise of the options granted to the employees of the Group, not more than 8,573,032 new Shares will be issued upon exercise of the Option, representing approximately 3.47% of the existing issued capital of the Company and approximately 3.35% of the Company s issued capital as enlarged by such issue. Therefore, Honway s interest in the Company will be increased from approximately 27.57% to 29.99%. 12

15 LETTER FROM DAO HENG SECURITIES The following table sets out the proceeds from the exercise of the Option during different times of the Option Period. Table 1: Proceeds from the exercise of the Option Period Option Price Gross proceeds from 60,000,000 new Shares to be issued upon exercise of the Optioninfull Gross proceeds from 8,573,032 Shares to be issued upon exercise of the Option not triggering off Honway s obligation to make a general offer under the Takeovers Code First Year HK$3.40 HK$204 million* HK$29.1 million Second Year HK$3.70 HK$222 million* HK$31.7 million Third Year HK$4.00 HK$240 million* HK$34.3 million * The non-refundable deposit of HK$25 million pursuant to the Share Option Agreement is payable in advance by Honway as part of the Exercise Moneys in respect of the exercise of the Option. 13

16 LETTER FROM DAO HENG SECURITIES (ii) Option Price The premiums of the Option Prices over the closing prices of the Share for different periods are set out in the following table. Table 2: Comparison of Option Prices with the Share prices Date/period Closing price / average closing price per Share for the period Premium of the Option Price of HK$3.40 in the First Year over the Share price Premium of the Option Price of HK$3.70 in the Second Year over the Share price Premium of the Option Price of HK$4.00 in the Third Year over the Share price As at 9th May, 2003 HK$ % 16.5% 26.0% Ten-day period up to and including 9th May, 2003 HK$ % 18.3% 27.9% One-month period up to and including 9th May, 2003 HK$ % 16.8% 26.3% Three-month period up to and including 9th May, 2003 HK$ % 13.6% 22.9% Six-month period up to and including 9th May, 2003 ( Six-month Period ) HK$ % 12.9% 22.1% The premiums of the Option Price of HK$3.40 in the First Year over the periods as shown in Table 2 range from approximately 3.8% to 8.7%. In the Second Year, the premiums of the Option Price of HK$3.70 over the periods as shown in Table 2 range from approximately 12.9% to 18.3%. For the Third Year, the premiums of the Option Price of HK$4.00 over the periods as shown in Table 2 range from approximately 22.1% to 27.9%. 14

17 LETTER FROM DAO HENG SECURITIES Diagram 1 below depicts the closing prices and the trading volume of the Share during the Six-month Period. Diagram 1: Closing price and trading volume of the Share during the Six-month Period Share Price (HK$) HK$4.00 HK$3.70 HK$ , , , , , , , ,000 0 Trading Volume (Shares) As illustrated in Table 2 and Diagram 1 above, each of the Option Prices represents significant premium over the closing prices of the Shares throughout the Six-month Period. As such, we consider that the Option Prices as stipulated under the Option are acceptable. (iii) Other considerations As stated in the Letter from the Board, the consideration for the grant of the Option shall be the payment of HK$50,000,000 which consists of (i) HK$5,000,000 for purchasing the Option; (ii) HK$25,000,0000 for the non-refundable and non-interest bearing deposit payable in advance for exercise of the Option; and (iii) HK$20,000,000 for a three-year interest-free term loan to be advanced by Honway to the Company. No similar grant of option by listed companies in Hong Kong during the Six-month Period has been identified. We, however, consider that reference can be made to the issuance of convertible notes in order to assess the reasonableness of the terms of the Option. Option Price As stated in the Letter from the Board, the Option Price of HK$3.40 is determined with reference to approximately 7% to 8% premium over the one-month average closing price of the Shares ending on 7th May, During the Six-month Period, there were 16 convertible note issues (the Comparable Issues ) by listed companies in Hong Kong. Among these Comparable Issues, 12 Comparable Issues have their conversion prices set at premium over their respective one-month average share price ranging from 4.02% to %, while 4 Comparable Issues have their conversion prices set at discount to their respective 1-month average share price ranging from 0.99% to 33.33%. 15

18 LETTER FROM DAO HENG SECURITIES Table 3: Term Comparison of Option Prices with the conversion prices of the Comparable Issues Premium/(discount) to the one-month average share price prior to the publish of announcement represented by the conversion price of the Comparable Issues Premium to the onemonth average Share price prior to the publish of the announcement of the Company on 12th May, 2003 represented by the Option Prices (%) (%) One year (0.99) 7.4 One to two years (28.57) to Two to three years (33.33) to As illustrated in Table 3, the Option Prices in different period represent premium of approximately 7.4% to 26.3% over the 1-month average Share price, which lie in the range of those of the Comparable Issues. Therefore, taking into account (i) the non-interest bearing Loan and (ii) deposit payable under the Option, we consider the Option Prices to be acceptable. Other Terms of the Option The term of the Comparable Issues range from one year to five years. Among the 16 Comparable Issues, five of them with term of three years carry interest rates ranging from nil to 5.0% per annum and issue size ranging from HK$4 million to HK$200 million. The average interest rate of the aforesaid five Comparable Issues is approximately 2.55% per annum. We consider that the grant of Option is in the interest of the Company as it would provide an interest-free working capital of HK$50,000,000 (of which only HK$20,000,000 is repayable to Honway by the Company at the third anniversary of the Date of Grant if such fund is not used to finance the exercise of the Option) to the Group and facilitate an interest saving of approximately HK$3.8 million for the Group (based on the average interest rate of the five Comparable Issue of approximately 2.55% and the term of three years), which is in the interest of the Company. 16

19 LETTER FROM DAO HENG SECURITIES B. Reasons for entering into the Share Option Agreement As stated in the Letter from the Board, the principal activities of the Group are investment holding, tunnel management and operation, motoring school operation, and operation of an automatic toll collection system in Hong Kong. Such investment include, among others, 37% interest in Western Harbour Tunnel Company Limited, 70% interest in The Hong Kong School of Motoring Limited and 35% attributable interest in Autotoll Limited. As advised by the Directors, the business of the Group is subject to, among others, the general economic conditions of Hong Kong, the level of tourist-related activities, both inbound and outbound, and the level of domestic consumption in Hong Kong. The outbreak of atypical pneumonia in Hong Kong since March 2003 is generally expected to exert considerable direct and indirect influence on Hong Kong economy. According to the views obtained from the Quarterly Business Tendency Survey conducted by the Census and Statistics Department of the government of Hong Kong during late March to early April, the volume of business/output in the construction, wholesale and retail, restaurants and hotels, transport and related services sectors is expected to fall in the second quarter of 2003 as compared with the first quarter of In particular, 42% of the respondents from the transport and related services show pessimistic view regarding their volume of business who expect the volume of business will contract in the second quarter of 2003 as compared with the first quarter of 2003, while only 17% of them expect an increase therein. The Directors are of the view that under such volatile economic situation the operating environment of the Group may be adversely affected. In light of the above, we concur with the Directors view that, under the current adverse economic condition prevailing in Hong Kong, it is prudent to increase liquidity and general working capital of the Group and raising additional working capital by way of the grant of Option is the most efficient way with no interest expense incurred by the Company. C. Alternative way of financing Based on our discussion with the Directors, we understand that the Directors have considered other financing alternatives, such as banking facilities, issuance of convertible notes, placing of new Shares or rights issue to satisfy its funding needs. The Directors consider that the Company would incur interest expense under both bank borrowing and issuance of convertible notes and therefore the Directors are of the view that the grant of Option, under which no interest expense would be incurred by the Company, is a more efficient way for the Company to raise additional working capital. 17

20 LETTER FROM DAO HENG SECURITIES Table 4: Trading volume and turnover of the Shares in different periods ended 9th May, 2003 Periods ended 9th May, 2003 Average daily volume traded Daily volume traded over the total number of Shares in issue as at the Latest Practicable Date Average daily turnover Daily turnover over market capitalisation of the Company as at the Latest Practicable Date (Shares) (%) (HK$) (%) One month 61, , Three months 50, , Six months 55, , As illustrated in Table 4, the liquidity of the Shares remained relatively thin during different periods ended 9th May, As such, the Directors consider that placing of new Shares or rights issue would require a subscription price being set at a substantial discount to the prevailing market price of the Shares and, in case of placing of new Shares, will result in the immediate dilution effect on the existing Shareholders. Furthermore, in view of the unfavorable stock market conditions in Hong Kong and the uncertainty as to when the market conditions will improve, the Directors are of the opinion that it is difficult to raise funds at this time through the equity capital markets for an amount similar to that of the Option. As such, we concur with the Directors view that to raise additional working capital by way of the grant of the Option would be the most appropriate means for the Group in this circumstances. D. Effect on the net asset value of the Group Based on the audited consolidated financial statements of the Group for the year ended 31st December, 2002, the audited consolidated net asset value of the Group as at 31st December, 2002 was approximately HK$1,321.4 million. Set out below is (i) the adjusted consolidated net tangible asset values of the Group (the NAV ); and (ii) the adjusted NAV per Share during the First Year, the Second Year and the Third Year under different scenarios of the exercise of the Option and/or the conversion rights attached to the Convertible Note II. 18

21 LETTER FROM DAO HENG SECURITIES Table 5: Effects of the exercise of the Option and/or the conversion rights to the Convertible Note II on the Group s adjusted NAV Adjusted NAV of the Group (HK$) Adjusted NAV per Share (HK$) As at 31st December, 2002 (6) 1,321.4m Proceeds from conversion of the Convertible Notes I and the Convertible Note II during the period from 1st January, 2003 to the Latest Practicable Date 132.5m As at the Latest Practicable Date 1,453.9m 5.88 (1) Upon the grant of the Option 1,458.9m 5.91 (1) Scenario I: Full conversion of the Convertible Note II but no Option is exercised (8) At a conversion price of HK$3.50 per Share 1,539.4m 5.70 (2) At a conversion price of HK$3.70 per Share 1,539.4m 5.73 (2) At a conversion price of HK$3.90 per Share 1,539.4m 5.75 (2) Scenario II: Full exercise of the Option but no further Convertible Note II is converted The First Year at HK$3.40 per Share 1,662.9m 5.42 (3) The Second Year at HK$3.70 per Share 1,680.9m 5.47 (3) The Third Year at HK$4.00 per Share 1,698.9m 5.53 (3) 19

22 LETTER FROM DAO HENG SECURITIES Adjusted NAV of the Group (HK$) Adjusted NAV per Share (HK$) Scenario III: Full exercise of the Option and full conversion of the Convertible Note II during different periods (8) Option Price per Share Conversion price per Share The First Year HK$3.40 (7a) HK$3.70 1,743.4m 5.30 (4) HK$3.40 (7b) HK$3.90 1,743.4m 5.32 (4) The Second Year HK$3.70 HK$3.90 1,761.4m 5.38 (4) The Third Year HK$4.00 (7a) 1,779.4m 5.41 (4) HK$4.00 (7b) 1,779.4m 5.43 (4) Scenario IV: The Option is exercised to the extent not triggering off Honway s obligation to make a general offer under the Takeovers Code during: The First Year at HK$3.40 per Share 1,488.1m 5.82 (5) The Second Year at HK$3.70 per Share 1,490.7m 5.83 (5) The Third Year at HK$4.00 per Share 1,493.2m 5.84 (5) Notes: (1) Based on 247,063,929 Shares in issue as at the Latest Practicable Date (2) Adjusted NAV per Share is calculated based on: (i) 247,063,929 Shares in issue as at the Latest Practicable Date; (ii) the remaining balance of principal amount of the Convertible Note II held by Honway of HK$80,457,060 as at the Latest Practicable Date; and (iii) 22,987,731 new Shares, 21,745,151 new Shares and 20,630,015 new Shares to be issued upon conversion of the Convertible Note II at conversion price of HK$3.50, HK$3.70 and HK$3.90 per Share respectively (but no further new Shares will be issued pursuant to the exercise of the conversion rights attached to the Convertible Notes I and/or exercise of the options granted to the employees of the Group under the Company s employee share option scheme) (3) Adjusted NAV per Share is calculated based on: (i) 247,063,929 Shares in issue as at the Latest Practicable Date; 20

23 LETTER FROM DAO HENG SECURITIES (ii) 60,000,000 new Shares to be issued upon exercise of the Option in full; and (iii) no further new Shares will be issued pursuant to the exercise of the conversion rights attached to the Convertible Notes I and/or Convertible Note II and/or the exercise of the options granted to the employees of the Group (4) Adjusted NAV per Share is calculated based on: (i) 247,063,929 Shares in issue as at the Latest Practicable Date; (ii) the remaining balance of principal amount of the Convertible Note II held by Honway of HK$80,457,060 as at the Latest Practicable Date; (iii) 21,745,151 new Shares and 20,630,015 new Shares to be issued upon conversion of the Convertible Note II at conversion price of HK$3.70 and HK$3.90 per Share respectively (but no further new Shares will be issued pursuant to the exercise of the conversion rights attached to the Convertible Notes I and/or exercise of the options granted to the employees of the Group); and (iv) 60,000,000 new Shares to be issued upon exercise of the Option in full (5) Adjusted NAV per Share is calculated based on: (i) 247,063,929 Shares in issue as at the Latest Practicable Date; (ii) 8,573,032 new Shares to be issued upon the Option is exercised to the extent not triggering off Honway s obligation to make a general offer under the Takeovers Code; and (iii) no further new Shares will be issued pursuant to the exercise of the conversion rights attached to the Convertible Notes I and/or Convertible Note II and/or the exercise of the options granted to the employees of the Group under the Company s employee share option scheme (6) Based on the audited consolidated financial statements of the Group as at 31st December, 2002 (7) (a) Assuming the Convertible Note II is exercised in full in the First Year at HK$3.70 per Share (b) Assuming the Convertible Note II is exercised in full in the Second Year at HK$3.90 per Share (8) In addition to the Convertible Note II held by Honway, the other outstanding convertible securities of the Company are as follows: (i) the Convertible Notes I (which is convertible by the holders of the Convertible Notes I at the price of (a) HK$3.70 per Share during the period from 9th May, 2003 to 8th May, 2004; and (b) HK$3.90 per Share during the period from 9th May, 2004 to 8th May 2005 (subject to adjustment)) with an outstanding principal amount of HK$2,000,000 as at the Latest Practicable Date; and (ii) the share options granted to the eligible employees of the Company pursuant to the share option scheme adopted by the Company on 8th May, 2001 exercisable at a price of HK$2.492 up to 7th May, 2011 and as at the Latest Practicable Date, the outstanding options were exercisable up to 19,200,000 Shares. As shown in Table 5, the grant of the Option will increase the adjusted NAV per Share from approximately HK$5.88 as at the Latest Practicable Date to HK$5.91. The full exercise of the Option 21

24 LETTER FROM DAO HENG SECURITIES during different periods will decrease the adjusted NAV per Share to utmost approximately HK$5.42 if solely the Option is fully exercised and approximately HK$5.30 if both of the Option and the Convertible Note II are fully exercised, representing decreases of approximately 7.8% and 9.9% from the adjusted NAV per Share as at the Latest Practicable Date respectively. However, based on Honway s present intention to exercise the Option in a manner not to trigger off its obligation to make a general offer under the Takeovers Code and 8,573,032 new Shares to be issued upon exercise of the Option, the adjusted NAV per Share will decline to utmost approximately HK$5.82 as a result of the exercise of the Option. Such decline represents a decrease of approximately 1.0% and 1.5% from the NAV per Share as at the Latest Practicable Date and the adjusted NAV per Share upon the grant of the Option respectively, of which we consider not substantial. Furthermore, although there is a dilution in the adjusted NAV per Share upon exercise of the Option, Independent Shareholders should note that they might face a deeper level of dilution if placing of securities or rights issue of Shares is otherwise conducted, as the subscription price of which would usually be set at a substantial discount to the prevailing market price of the Shares, while the Option Prices represent various premiums thereof. Based on the above, we consider that the dilution in the Group s adjusted NAV per Share upon exercise of the Option is acceptable. E. Dilution effect on the interests of Independent Shareholders The possible dilution effect on the shareholding of Independent Shareholders during different periods is tabulated as follows: Table 6: Dilution effect on the shareholding of Independent Shareholders Shareholding as at the Latest Practicable Date Scenario I Scenario II Scenario III Scenario IV Shareholding upon full conversion of the Convertible Note II (assuming no Option is exercised) at HK$3.50 at HK$3.70 at HK$3.90 Shareholding upon exercise of the Option in full (assuming no Convertible Note II is converted) Shareholding upon full exercise of both of the Option and the Convertible Note II at HK$3.70 at HK$3.90 Shareholding upon exercise of the Option/ Convertible Note II in a manner not triggering off Honway s obligation to make a general offer under the Takeovers Code Honway 27.57% 33.74% 33.43% 33.15% 41.72% 45.58% 45.39% 29.99% Independent Shareholders 72.43% 66.26% 66.57% 66.85% 58.28% 54.42% 54.61% 70.01% Total % % % % % % % % 22