DONGFENG MOTOR GROUP COMPANY LIMITED *

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1 The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this announcement, makes no representation as to its accuracy 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 announcement. DONGFENG MOTOR GROUP COMPANY LIMITED * (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 489) REVISED ANNUAL CAPS FOR CERTAIN CONTINUING CONNECTED TRANSACTIONS AND FINANCIAL SERVICES ARRANGEMENTS The Directors wish to announce that in relation to each of the two Continuing Connected Transactions entered into between the Company and Dongfeng Motor Corporation and between the Company and Chaoyang Diesel, the respective aggregate values of such transactions for the year ended 31 December 2005 exceeded the specified annual caps in the waiver granted to the Company by the Stock Exchange from strict compliance with the relevant requirements of the Listing Rules. In view of the developments in the automobile and electricity supply markets, the Directors consider that the relevant annual caps for the Continuing Connected Transactions for the remaining two years under the Waiver are insufficient and propose to increase such caps. The Company intends to seek Independent Shareholders approval for the Revised Annual Caps for the Continuing Connected Transactions at its upcoming AGM. The Directors also wish to announce that Dongfeng Motor Finance, a Jointly-controlled Entity of the Company engaged in the provision of Financial Services, is deemed a subsidiary of the Company as from 1 January Any continuing transactions between Dongfeng Motor Finance and the Parent Group have become continuing connected transactions as a result. A circular containing full notice of the AGM, information relating to the business to be conducted thereat, the Revised Annual Caps for the Continuing Connected Transactions, information about the Financial Services Arrangements, a letter from the independent financial adviser to the Independent Board Committee and the Independent Shareholders and a letter from the Independent Board Committee to the Independent Shareholders will be issued to the Shareholders as soon as possible. 1

2 CONTINUING CONNECTED TRANSACTIONS Background information The Dongfeng Motor Group was one of the three largest automotive manufacturers in the PRC in terms of sales revenue in It comprises the majority of businesses and is the key business unit of the Parent Group and the Dongfeng Motor Group, which, when combined, was one of the three largest automotive manufacturers in the PRC in terms of sales volume in 2005, according to the China Association of Automobile Manufacturers. Electricity Supply Agreement On 29 October 2005 the Company entered into the Electricity Supply Agreement pursuant to which electricity produced by the Parent Group is supplied to the Dongfeng Motor Group for a term of three years commencing on 7 December 2005, further details of which can be found on pages of the Prospectus. Dongfeng Motor Corporation holds per cent. of the share capital in the Company and is the controlling Shareholder; as such, Dongfeng Motor Corporation is a connected person of the Company and continuing transactions between Dongfeng Motor Corporation and the Company constitute continuing connected transactions under the Listing Rules. Mutual Supply Agreement Also on 29 October 2005 the Company entered into the Mutual Supply Agreement with Chaoyang Diesel, which is engaged in the manufacture of diesel engines, for a term of three years commencing on 7 December 2005, further details of which can be found on pages of the Prospectus. Chaoyang Diesel is a subsidiary of the Dongfeng Motor Corporation which in turn holds per cent. of the share capital in the Company and is the controlling Shareholder; as such, Chaoyang Diesel is a connected person of the Company and continuing transactions between Chaoyang Diesel and the Company constitute continuing connected transactions under the Listing Rules. Waiver In November 2005 (prior to the Listing) the Stock Exchange granted the Company the Waiver from strict compliance with the requirements of announcement and Independent Shareholders approval in respect of the Group s purchase of electricity under the Electricity Supply Agreement and the purchase of diesel engines under the Mutual Supply Agreement. The Waiver was granted for a term of three financial years ending 31 December

3 EXCEEDING OF CAPS AND REVISED ANNUAL CAPS For the reasons set out below, the aggregate values of the purchases of electricity supply from the Parent Group and diesel engines from Chaoyang Diesel exceeded the respective caps for 2005 as contained in the Waiver. The details are as follows: Aggregate value for the year ended 31 December 2005 Cap for 2005 (RMB million) (RMB million) Purchase of electricity supply from the Parent Group Purchase of diesel engines from Chaoyang Diesel REASONS FOR EXCEEDING CAPS The annual caps for the three years ending 31 December 2007 had been determined using historical rates of usage, expected growth in production and usage, expected increase in demand, unit price of electricity and auto parts, and production capacity of the Dongfeng Motor Group. The cap for the purchase of diesel engines from Chaoyang Diesel for the year ended 31 December 2005 was exceeded due to an unexpected increase in consumer demand in the PRC automobile market in the last quarter of This led to an increase in production and as a result, the total number of diesel engines supplied by Chaoyang Diesel to the Company was 19.6 per cent. higher than the forecast amount. The reason for the exceeding of the cap for the purchase of electricity supply was that in order to balance the demand for electricity between industrial and domestic users, the local electricity authority in Hubei Province from time to time regulates the consumption of electricity by industrial users during off-peak hours; the Group had to adjust its electricity consumption pattern and as a result increased its usage of electricity during normal and peak hours. This occurred during the last quarter of 2005 with unanticipated consequences on the Group s electricity consumption pattern. As a result, the actual amount paid by the Company to Dongfeng Motor Corporation for electricity used by the Group for the year ended 31 December 2005 exceeded the cap for that year. Further, as the Company s electricity bills were settled on a quarterly basis, the consequences brought by the government s regulation in the last quarter of 2005 had not come to light at the time of Listing when the caps were determined. MEASURES ADOPTED BY THE COMPANY TO ENSURE FUTURE COMPLIANCE WITH THE LISTING RULES The Company only became aware of the exceeding of the caps under the Electricity Supply Agreement and the Mutual Supply Agreement in early 2006 when its auditors were finalising the Company s financial statements for 2005 and when the electricity bills for the last quarter of 2005 were being summarised and verified by the auditors. This process took longer than anticipated as a number of companies within the Dongfeng Motor Group were involved, and therefore the Company had not published a press announcement immediately when the caps were exceeded in The Directors have acted promptly in compliance with the Listing Rules as soon as this came to their notice and have accordingly made this announcement. The Directors will take appropriate measures to ensure future compliance with the Listing Rules. A team will be set up within the Company s finance and accounting department to monitor closely the extent of the Continuing Connected Transactions on a monthly basis taking into account developments and/or conditions in the PRC automobile and electricity supply markets at the time of review, and if there 3

4 is any indication that the caps will likely be exceeded, the Company will promptly re-comply with the disclosure, reporting and/or Independent Shareholders approval requirements under Chapter 14A of the Listing Rules. PROPOSED NEW CAPS In view of all the above factors, the Directors have reviewed the relevant caps for the Continuing Connected Transactions for 2006 and 2007 under the Waiver and consider it necessary to increase such caps based on the following factors: expected growth in production, the historical quantity and prices of diesel engines purchased from Chaoyang Diesel, forecast purchase volumes for diesel engines, historical government-prescribed prices of electricity supply (on which the Parent Group bases its electricity unit charge) and forecast electricity consumption pattern. The Revised Annual Caps will be as follows: Original cap for 2006 Revised Annual Cap for 2006 to be approved by Shareholders Original cap for 2007 Revised Annual Cap for 2007 to be approved by Shareholders (RMB million) (RMB million) (RMB million) (RMB million) Purchase of electricity supply from the Parent Group Purchase of diesel engines from Chaoyang Diesel ,017 The Company intends to seek Independent Shareholders approval at its upcoming AGM for the Revised Annual Caps shown in the table above. The Revised Annual Caps have been determined after arm s length negotiation between the respective parties to the Electricity Supply Agreement and the Mutual Supply Agreement. The Directors are of the view that the Continuing Connected Transactions are entered into in the ordinary and usual course of business of the Company, on normal commercial terms and that they are fair and reasonable and in the interests of the Company and Shareholders as a whole; and that the Revised Annual Caps are also fair and reasonable and in the interests of the Company and Shareholders as a whole. Please refer to the letter of advice from Hantec Capital Limited, the independent financial adviser, to the Independent Board Committee and the Independent Shareholders and the recommendation and opinion of the Independent Board Committee as advised by Hantec Capital Limited in relation to the Revised Annual Caps, which can be found in the Circular. FINANCIAL SERVICES ARRANGEMENTS Dongfeng Motor Finance, which is a non-bank financial institution engaged in the provision of Financial Services solely to members of the Group and the Parent Group, is a Jointly-controlled Entity directly held as to 55 per cent. by Dongfeng Motor Co. Ltd. and as to 20 per cent. by the Company. Dongfeng Motor Co. Ltd is in turn a 50: 50 JCE jointly controlled by the Company and Nissan (China) Investment Co. Ltd. The Company holds a 27.5 per cent. indirect equity interest in Dongfeng Motor Finance. The Stock Exchange had required the JCEs of the Company be deemed subsidiaries for the purposes of post-listing compliance with the Listing Rules, subject to the waiver granted by the Stock Exchange prior to the Listing regarding immaterial JCEs. Under this waiver, a JCE whose all of the total assets, profit and revenue contribute less than 5 per cent. of the consolidated total assets, net profit and revenue (based on the latest consolidated financial statements) of the Company is not deemed a subsidiary of the Company. Where the said 5 per cent. threshold for a relevant year is exceeded, the immaterial JCE would be required to comply with the ongoing obligations under the Listing Rules as a deemed subsidiary of the Company for the following year, further details of which can be found on pages of the Prospectus. As Dongfeng Motor Finance exceeded the 5 per cent. threshold for the asset ratio for the year ended 2005, Dongfeng Motor Finance is deemed a subsidiary of the Company for The Company confirms that other than 4

5 Dongfeng Motor Finance, none of the other immaterial JCEs of the Company have exceeded the 5 per cent. threshold and would be required to comply with the ongoing obligations as a deemed subsidiary of the Company in the following year. The Company is required to comply with the announcement and reporting requirement in relation to the Financial Services Arrangements but not the Independent Shareholders approval requirement under Rule 14A.34 of the Listing Rules, as each of the percentage ratios (other than the profits ratio) is less than 2.5 per cent. The transaction amounts under the Financial Services Arrangements for the first quarter of 2006 were as follows: (i) Members of the Parent Group had deposited approximately RMB677 million with Dongfeng Motor Finance which had accrued interest of approximately RMB1.08 million; (ii) Dongfeng Motor Finance granted loans amounting to approximately RMB42.5 million to members of the Parent Group and interest charged on such loans amounted to approximately RMB0.88 million; and (iii) Dongfeng Motor Corporation made entrusted loans of approximately RMB97.8 million to members of the Parent Group and the Dongfeng Motor Group through Dongfeng Motor Finance (due to restrictions under PRC laws on intra-group loans extended directly by a parent to its subsidiaries), and the amount of handling commission received by Dongfeng Motor Finance totalled approximately RMB0.06 million. The above amounts represent the maximum transaction values for the first quarter of The Company undertakes that if it enters into new transactions under the Financial Services Arrangements, it will comply with the reporting, announcement and Independent Shareholders approval requirements under the Listing Rules whenever necessary. DEFINITIONS AGM means the annual general meeting of the Company to be held at 9 a.m. on 16 June 2006 at No. 8 Car City Road North, Wuhan Economic and Technology Development Zone, Wuhan, Hubei , PRC Agreements Chaoyang Diesel Circular means the Electricity Supply Agreement and the Mutual Supply Agreement means Dongfeng Chaoyang Diesel Co. Ltd., a subsidiary of Dongfeng Motor Corporation which is engaged in the manufacture of diesel engines means the circular containing full notice of the AGM, information relating to the business to be conducted at the AGM, the Revised Annual Caps and the Financial Services Arrangements, and a letter from the independent financial adviser to the Independent Shareholders which will be issued to the Shareholders as soon as possible Company means (Dongfeng Motor Group Company Limited), a joint stock limited company duly incorporated in the PRC with limited liability and the H Shares of which are listed on the Stock Exchange Continuing Connected Transactions Directors Dongfeng Motor Corporation means the Group s purchase of electricity supply pursuant to the Electricity Supply Agreement and the purchase of diesel engines pursuant to the Mutual Supply Agreement means directors of the Company means, a state-owned enterprise incorporated under the laws of the PRC which directly holds a per cent. equity interest in the registered capital of the Company 5

6 Dongfeng Motor Finance Dongfeng Motor Group Electricity Supply Agreement means Dongfeng Motor Finance Co. Ltd. means the Group, the Dongfeng Joint Venture Companies and their respective subsidiaries and associates means the agreement with Dongfeng Motor Corporation for the provision of electricity supply pursuant to which electricity produced by the Parent Group is supplied to the Dongfeng Motor Group Financial Services Financial Services Arrangements means financial services which include taking deposits, issuing corporate bonds, granting loans and arranging financial leases, accepting and discounting bills of exchange, underwriting corporate bonds, acting as financial advisers, and providing guarantee and other businesses approved by the China Banking Regulatory Commission means the financial services carried out by Dongfeng Motor Finance which include receiving deposits from the Parent Group, extending loans to the Parent Group and other members of the Group, and extending entrusted loans to other members of the Parent Group Group Hong Kong Independent Shareholders Jointly-controlled Entity or JCE Joint Venture Company means the Company and its subsidiaries means Hong Kong Special Administrative Region of the People s Republic of China means Shareholders other than the Directors and their associates and any connected persons who are interested in the Continuing Connected Transactions a jointly-controlled entity is a Joint Venture Company which is subject to joint control, resulting in none of the participating parties having unilateral control over the economic activity of the jointly-controlled entity. A joint venture party s investments in its Jointly-controlled Entities can be accounted for by proportionate consolidation, which involves recognizing a proportionate share of the joint venture s assets, liabilities, income and expenses with similar items in the consolidated financial statements of the joint venture party on a line-by-line basis. When the profit sharing ratio is different to the joint venture party s equity interests in the Jointly-controlled Entities, the joint venture party s share of their assets, liabilities, income and expenses is determined based on the agreed profit sharing ratio. The results of Jointly-controlled Entities are included in the joint venture party s profit and loss account to the extent of dividends received and receivable. The joint venture party s investments in Jointly-controlled Entities are treated as long term assets and are stated at cost less impairment losses a joint venture company is a company set up by contractual agreement, whereby joint venture parties undertake an economic activity. A joint venture company operates as a separate entity in which each party has an interest 6

7 The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture company s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement A joint venture company is treated by a joint venture party as: (a) (b) (c) (d) a subsidiary, if the joint venture party has unilateral control, directly or indirectly, over the joint venture company; a jointly-controlled entity, if the joint venture party does not have unilateral control, but has joint control, directly or indirectly, over the joint venture company; an associate, if the joint venture party does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20 per cent. of the joint venture company s registered capital and is in a position to exercise significant influence over the joint venture company; or an investment, if the joint venture party holds, directly or indirectly, less than 20 per cent. of the joint venture company s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture company Listing means the listing of the Shares on the Stock Exchange on 7 December 2005 Listing Rules Mutual Supply Agreement Parent Group PRC means the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited means the agreement with Chaoyang Diesel for the mutual supply of auto parts pursuant to which, inter alia, Chaoyang Diesel agrees to supply diesel engines to the Group means Dongfeng Motor Corporation and its subsidiaries, but excluding the Group means the People s Republic of China, but for the purposes of this document only, excludes Hong Kong, Macau and Taiwan Prospectus means the prospectus of the Company dated 24 November 2005 Revised Annual Caps RMB Shares Shareholders Stock Exchange means the new caps in the Agreements for the Continuing Connected Transactions means Renminbi, the lawful currency of the People s Republic of China means ordinary shares of RMB1.00 each in the share capital of the Company means shareholders of the Company means The Stock Exchange of Hong Kong Limited 7

8 Waiver means the waiver granted by the Stock Exchange to the Company from strict compliance with the announcement and/or Independent Shareholders approval requirements in respect of the Continuing Connected Transactions for a term of three financial years ending 31 December 2007 By order of the Board of Directors XU PING Chairman 20 April 2006, PRC As at the date of this announcement, Mr. Xu Ping, Mr. Liu Zhangmin, Mr. Zhou Wenjie, Mr. Li Shaozhu and Mr. Fan Zhong are the executive directors of the Company, Mr. Tong Dongcheng, Mr. Ouyang Jie, Mr. Liu Weidong and Mr. Zhu Fushou are the non-executive directors of the Company and Mr. Sun Shuyi, Mr. Ng Lin-fung and Mr. Yang Xianzu are the independent non-executive directors of the Company. * For identification purposes only Please also refer to the published version of this announcement in South China Morning Post. 8