ADOPTION OF SHARE APPRECIATION RIGHTS SCHEME AND APPLICATION FOR A CREDIT FACILITY FROM A BANK

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1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. If you are in 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 accountant or other professional adviser. If you have sold or transferred all your shares in China National Materials Company Limited, you should at once hand this circular to the purchaser(s) or transferee(s) or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s). (a joint stock company incorporated in the People s Republic of China with limited liability) (Stock code: 01893) ADOPTION OF SHARE APPRECIATION RIGHTS SCHEME AND APPLICATION FOR A CREDIT FACILITY FROM A BANK A notice convening the EGM to be held at meeting room No.3212 of the Company at 11 Beishuncheng Street, Xizhimennei, Xicheng District, Beijing , the PRC at 2:00 p.m. on Friday, 22 October 2010 is set out on pages 9 to 12 of this circular. Whether or not you are able to attend the EGM in person, please complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as practicable and in any event not less than 24 hours before the time appointed for the holding of the EGM or any adjournment thereof, and deposit it with Computershare Hong Kong Investor Services Limited, the H share registrar and transfer office of the Company in Hong Kong, at 17M Floor, Hopewell Centre, 183 Queen s Road East, Wan Chai, Hong Kong. Completion and return of the form of proxy will not preclude you from attending in person and voting at the EGM or any adjournment thereof should you so desire. 6 September 2010

2 CONTENTS DEFINITIONS... 1 LETTER FROM THE BOARD 1. Introduction Adoption of Share Appreciation Rights Scheme Application for a Credit Facility from a Bank EGM Recommendation... 8 NOTICE OF EGM... 9 i

3 DEFINITIONS In this circular, unless the context requires otherwise, the following terms have the following meanings: Articles Board Company Date of Grant Director(s) Effective Date EGM Group the articles of association of the Company, as amended, modified or otherwise supplemented from time to time the board of Directors China National Materials Company Limited ( ), a joint stock limited company incorporated under the laws of the PRC and whose H shares are listed and traded on the Hong Kong Stock Exchange the date when the Share Appreciation Rights are granted to Incentive Recipients under the Scheme upon obtaining approval from the Board the director(s) of the Company the date when the Scheme becomes effective the extraordinary general meeting of the Company to be held at meeting room No.3212 of the Company at 11 Beishuncheng Street, Xizhimennei, Xicheng District, Beijing , the PRC at 2:00 p.m. on Friday, 22 October 2010 the Company and its subsidiaries H Share(s) the overseas listed foreign shares of RMB1.00 each in the ordinary share capital of the Company Hong Kong Hong Kong Listing Rules Hong Kong Stock Exchange The Hong Kong Special Administrative Region of the PRC the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange The Stock Exchange of Hong Kong Limited Incentive Recipient(s) persons who receive the Share Appreciation Rights in accordance with the Scheme at nil consideration 1

4 DEFINITIONS Latest Practicable Date 1 September 2010, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular Parent China National Materials Group Corporation Ltd. ( ), the controlling shareholder of the Company and one of the promoters of the Company Parent Group PRC Remuneration Committee RMB Parent and its subsidiaries (excluding the Group) the People s Republic of China, which for the purpose of this circular only (unless otherwise indicated) excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan the remuneration committee under the Board Renminbi, the lawful currency of the PRC SASAC State-owned Assets Supervision and Administration Commission of the State Council ( ) SFO Share Appreciation Rights Share Appreciation Rights Scheme or Scheme Shareholders Trading Day(s) or Business Day(s) Validity Period Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong, as amended from time to time rights granted to the Incentive Recipients under the Scheme to receive stipulated earnings from the increase in market price of H Shares, subject to pre-set prices and conditions within specific timeframe in the future the share appreciation rights scheme to be adopted by the Company for the purpose of linking the long-term return of the Incentive Recipients to the Company s long term development and the interests of Shareholders the shareholders of the Company any day on which the Hong Kong Stock Exchange is open for the business of dealing in securities the validity period of the Share Appreciation Rights which is from the Date of Grant until the last working day of exercise of the Share Appreciation Rights for a period of seven years 2

5 LETTER FROM THE BOARD (a joint stock company incorporated in the People s Republic of China with limited liability) (Stock code: 01893) Executive Directors: TAN Zhongming ZHOU Yuxian LI Xinhua Non-executives Directors: YU Shiliang LIU Zhijiang CHEN Xiaozhou Registered office: 11 Beishuncheng Street Xizhimennei Xicheng District Beijing PRC Independent non-executive Directors: LEUNG Chong Shun SHI Chungui LU Zhengfei WANG Shimin ZHOU Zude 6 September 2010 To the Shareholders Dear Sir or Madam, ADOPTION OF SHARE APPRECIATION RIGHTS SCHEME AND APPLICATION FOR A CREDIT FACILITY FROM A BANK INTRODUCTION The purpose of this circular is to provide you with information regarding i) the proposed adoption of Share Appreciation Rights Scheme; and ii) the proposed application for a credit facility from a bank by the Company to enable you to make an informed decision on whether to vote for or against the proposed resolutions at the EGM. 3

6 LETTER FROM THE BOARD ADOPTION OF SHARE APPRECIATION RIGHTS SCHEME 1. Background Reference is made to information disclosed under the section headed Directors, Supervisors, Senior Management and Employees of the prospectus of the Company dated 7 December 2007 in relation to the intention of adoption of the Share Appreciation Rights Scheme to motivate and incentivize the members of the Company s senior management team and other key employees. In order to further construct and consolidate the incentive control mechanism, enhance the corporate governance structure and remuneration structure, and better benefit the Company and its Shareholders, the Scheme was considered and approved at a meeting of the Board held on 22 April 2008 and the Company also obtained the approval of the Scheme from SASAC on 19 July The Scheme is still subject to the approval of the Shareholders at the EGM as required by relevant PRC laws and regulations and it shall be effective for a term of 10 years from the date on which the Scheme is approved by the Shareholders at the EGM. The Scheme will be administered by the Board and the Remuneration Committee. The Scheme does not involve the grant of options over new securities of the Company and therefore, it does not fall within the ambit of, and is not subject to, the regulations of Chapter 17 of the Hong Kong Listing Rules. 2. Incentive Vehicle: Share Appreciation Rights a) Share Appreciation Rights refer to the an invented stock option being granted to the Incentive Recipients by the Company who will be entitled to receive payments for the appreciation when the market price of the H Shares of the Company rises above the exercise price of the Share Appreciation Rights within a particular period and under certain conditions. The Incentive Recipients have the right to exercise and/or give up the Share Appreciation Rights but the Share Appreciation Rights cannot be transferred, pledged or applied to settle indebtedness by the Incentive Recipients. b) The Incentive Recipients being granted with such rights do not actually hold the H Shares, and do not have any voting rights and rights to dividends entitled by the Shareholders. In addition, the Company is entitled to cancel any other Share Appreciation Rights held but not yet exercised by such Incentive Recipients. c) Each of the Share Appreciation Rights is linked to one H Share. d) Under the Scheme, the payment for appreciation under the Share Appreciation Rights is to be settled by way of cash. Therefore, it does not affect the total number of H Shares and will not result in any dilution of the H Shares of the Company. The number of Share Appreciation Rights granted to an Incentive Recipient will be linked to certain benchmarks of his working performance and his responsibilities in the Group. 4

7 LETTER FROM THE BOARD 3. Incentive Recipients The Incentive Recipients who are eligible to obtain the Share Appreciation Rights under the Scheme shall mainly include Directors, senior management, key management persons and core technical experts who are required for the implementation of the Company s strategic goal. In principle, the Share Appreciation Rights shall be granted to the following persons: a) directors of the Company (excluding independent non-executive Directors and Directors without holding any positions in the Group or the Parent Group); b) senior management of the Company or its controlled or wholly-owned subsidiaries; c) core technical experts and key management persons determined by the Board based on the Company s characteristics and development requirement; and d) other persons considered by the Board as having key strategic functions to the Company. The Company proposes that the initial Share Appreciation Rights be granted to 16 persons, comprising the chairman, the president, three Directors, ten vice presidents and one chief financial officer. Subject to the approval of the Scheme by the Shareholders at the EGM, the Company will initially grant 4,130,000 Share Appreciation Rights to the initial Incentive Recipients upon satisfication of initial granting conditions stated below. The cash payments as a result of the exercise of the Share Appreciation Rights by the Incentive Recipients shall be deposited into a bank account opened by the Company for the Incentive Recipients, and no less than 20% of such cash payments so deposited shall remain in the account until the end of the term of service of the relevant Incentive Recipient and shall only be payable if the relevant Incentive Recipient has passed the final performance appraisal or review. 4. Allocation under the Share Appreciation Rights Scheme a) During the effective period of the Scheme, the aggregate number of the Share Appreciation Rights granted under the Scheme shall not exceed 357,000,000, representing 10% of the total issued share capital of the Company on the date when its H Shares were listed on the Main Board of the Hong Kong Stock Exchange. b) The total number of the Share Appreciation Rights proposed to be initially granted is 4,130, Other major provisions in the Share Appreciation Rights Scheme a) Certain major provisions of the Share Appreciation Rights Scheme (i) Date of Grant: the date on which the Company grants Share Appreciation Rights to the Incentive Recipients in accordance with the Scheme upon obtaining approval from the Board. 5

8 LETTER FROM THE BOARD (ii) Lock-up Period: the period of two years from the Date of Grant and during which the Share Appreciation Rights cannot be exercised. (iii) Exercise Period: 5 years after the expiry of the lock-up period. (iv) (v) Date of Vesting: the date when the Incentive Recipients can start exercising the Share Appreciation Rights subject to the satisfaction of certain vesting conditions stated below by the Company and the Incentive Recipients. Vesting Method: the Share Appreciation Rights shall be vested to the Incentive Recipients in even proportion for each of the 3 years within the exercise period: 1) since the end of the second anniversary (the 24th month) from the Date of Grant, one-third of the Share Appreciation Rights being granted to each of the relevant Incentive Recipients shall become exercisable; 2) since the end of the third anniversary (the 12th month) from the Date of Grant, one-third of the Share Appreciation Rights being granted to each of the relevant Incentive Recipients shall become exercisable; and 3) since the end of the fourth anniversary (the 48th month) from the Date of Grant, one-third of the Share Appreciation Rights being granted to each of the Incentive Recipients shall become exercisable. b) Granting Conditions of the Initial Share Appreciation Rights: The Company shall grant the initial Share Appreciation Rights to the Incentive Recipients if the Company fulfills the following two performance conditions: i) growth rate in revenue of the core business for the financial year prior to the Share Appreciation Rights granting shall not be lower than the average level of the Company for the three preceding years or shall not be lower than the average level of the same industry or shall not be lower than 50 percentile of peer benchmark companies; and ii) rate of return on net assets (net of non-recurring gains and losses) for the financial year prior to the Share Appreciation Rights granting shall not be lower than the average level of the Company for the three preceding years or shall not be lower than the average level of the industry or shall not be lower than 50 percentile of peer benchmark companies. c) Vesting Conditions of the Initial Share Appreciation Rights: i) Company Results Conditions: weighted average rate of return on net assets (net of non-recurring gains and losses) for the financial year prior to the Share Appreciation Rights vesting shall not be lower than 10% or shall not be lower than the average level and 75 percentile of peer benchmark companies; compound annual growth rate in revenue of the core business for the three preceding years prior to the Share 6

9 LETTER FROM THE BOARD Appreciation Rights vesting shall be 30%, 25% and 25%, respectively, and growth rate in revenue of the core business for the financial year prior to the Share Appreciation Rights vesting shall not be lower than the average level and 75 percentile of peer benchmark companies. The Share Appreciation Rights to the Incentive Recipients can only be vested if the Incentive Recepients satisfy the following personal performance conditions upon the satisfaction of the above Company results conditions. ii) Personal Performance Conditions: as at the Date of Vesting, if the Incentive Recipient obtains a grade of good or above in the performance appraisal or review for the financial year prior to the Share Appreciation Rights vesting, 100% of the Share Appreciation Rights that is supposed to be vested for that year can be vested; if the Incentive Recipient obtains a grade of pass in the performance appraisal or review for the financial year prior to the Share Appreciation Rights vesting, 80% of the Share Appreciation Rights that is supposed to be vested for that year can be vested; if the Incentive Recipient obtains a grade below pass in the performance appraisal or review for the financial year prior to the Share Appreciation Rights vesting, Share Approciation Rights that is supposed to be vested for that year shall be cancelled. d) Exercise Price The exercise price of the Share Appreciation Rights shall be the higher of the following two prices: (i) the closing price for the H Shares of the Company on the Hong Kong Stock Exchange on the Date of Grant; and (ii) the average closing price for the H Shares of the Company on the Hong Kong Stock Exchange for five Trading Days prior to the Date of Grant. e) Adjustment to the Share Appreciation Rights In the event there is any change in the total share capital of the Company as a result of new share issue, increase of share capital, merger, separation and repurchase or other events, the Company shall make corresponding adjustment to the exercise price and the number of Share Appreciation Rights. 7

10 LETTER FROM THE BOARD APPLICATION FOR A CREDIT FACILITY FROM A BANK A credit facility for a period of one year in the amount of RMB200 million which was subsequently increased to RMB800 millon in 2009 provided by the headquarter of China Minsheng Banking Corp., Ltd. has expired. The Company will apply to the headquarter of China Minsheng Banking Corp. Ltd. for a credit facility of no more than RMB5 billion in 2010 (the Credit Facility ) for the future business development of the Company and for a period of one year. The Credit Facility will be used for current assets loans and the interest rate for such loans shall be 10% less than the benchmark rate for the same-level loans of People s Bank of China during the same period. In accordance with the Articles, contract value for a single credit facility which exceed 50% of the latest audited net assets of the Company is subject to shareholders approval, therefore, a general meeting shall be convened to approve such Credit Facility. EGM The EGM will be held at meeting room No.3212 of the Company at 11 Beishuncheng Street, Xizhimennei, Xicheng District, Beijing , the PRC at 2:00 p.m. on Friday, 22 October The notice of EGM is set out on pages 9 to 12 of this circular. Whether or not you are able to attend the EGM in person, please complete and return the enclosed form of proxy in accordance with the instructions printed thereon as soon as practicable and in any event not less than 24 hours before the time appointed for the holding of the EGM or any adjournment thereof, and deposit it with Computershare Hong Kong Investor Services Limited, the H share registrar and transfer office of the Company in Hong Kong, at 17M Floor, Hopewell Centre, 183 Queen s Road East, Wan Chai, Hong Kong. Completion and return of the form of proxy will not preclude you from attending in person and voting at the EGM or any adjournment thereof should you so desire. RECOMMENDATION The Directors believe that the proposed resolutions in respect of (i) the adoption of the Share Appreciation Rights Scheme; and (ii) the application for the Credit Facility, are in the best interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend that all the Shareholders should vote in favour of the aforesaid resolutions at the EGM. By order of the Board CHINA NATIONAL MATERIALS COMPANY LIMITED Tan Zhongming Chairman of the Board 8

11 NOTICE OF EGM (a joint stock company incorporated in the People s Republic of China with limited liability) (Stock code: 01893) NOTICE OF EGM NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the EGM ) of China National Materials Company Limited (the Company ) will be held at meeting room No.3212 of the Company at 11 Beishuncheng Street, Xizhimennei, Xicheng District, Beijing , the People s Republic of China (the PRC ), at 2:00 p.m. on Friday, 22 October 2010, for the purposes of considering and, if thought fit, passing the following resolutions: AS ORDINARY RESOLUTIONS: 1. To consider and, if thought fit, to approve the share appreciation rights scheme of the Company (the Share Appreciation Rights Scheme ), and authorize the board of directors of the Company to a) grant the share appreciation rights to the incentive recipients of the Company within a particular period and under certain conditions in accordance with the Share Appreciation Rights Scheme and the relevant legal requirements; b) make corresponding adjustments to the exercise prices and number of share appreciation rights if there is any change in the total issued share capital of the Company as a result of new share issue, increase of share capital, merger, separation and repurchase or other events; c) amend the Share Appreciation Rights Scheme, and to decide and formulate any matters relating to the Share Appreciation Rights Scheme during the effective period of the Share Appreciation Rights Scheme; and d) proceed with the examination, registration, filing, approval and consent procedures with relevant government authorities and to sign, execute, amend, terminate and complete documents to be submitted to relevant government authorities, organizations and individuals and to do all acts, matters and things deemed necessary, appropriate or expedient in relation to the Share Appreciation Rights Scheme. 2. To consider and, if thought fit, to approve the application by the Company to the headquarter of China Minsheng Banking Corp., Ltd. for a credit facility of RMB5 billion for the future business development of the Company and for a period of one year. 9

12 NOTICE OF EGM By order of the Board CHINA NATIONAL MATERIALS COMPANY LIMITED Tan Zhongming Chairman of the Board Beijing, 6 September 2010 As at the date of this notice, the executive Directors are Mr. Tan Zhongming, Mr. Zhou Yuxian and Mr. Li Xinhua, the non-executive Directors are Mr. Yu Shiliang, Mr. Liu Zhijiang and Mr. Chen Xiaozhou, and the independent non-executive Directors are Mr. Leung Chong Shun, Mr. Shi Chungui, Mr. Lu Zhengfei, Mr. Wang Shimin and Mr. Zhou Zude. Notes: 1. Eligibility for Attending the EGM Holders of H Shares whose names appear on the register of members of the Company maintained by Computershare Hong Kong Investor Services Limited, the H share registrar and transfer office of the Company in Hong Kong, at the close of business of Wednesday, 22 September 2010 shall be entitled to attend the EGM. Holders of H Shares intending to attend and vote at the EGM to be held on Friday, 22 October 2010 shall lodge all the transfer documents for H Shares with the relevant share certificates to Computershare Hong Kong Investor Services Limited, the H share registrar and transfer office of the Company in Hong Kong, at Rooms , 17th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong, no later than 4:30 p.m. on Tuesday, 21 September Proxy (1) Shareholders entitled to attend and vote at the EGM may appoint one or more proxies in writing to attend and vote at the meeting on his behalf. The proxy need not be a shareholder of the Company. (2) A proxy shall be appointed by a shareholder with a written instrument signed by the appointor or his attorney duly authorised in writing. In case of a corporation, the same must be either under its common seal or under hand of its director(s) or duly authorised attorney(s). If the written instrument is signed by an attorney of the appointor, the power of attorney or other documents of authorisation of such attorney shall be notarised. (3) To be valid, the notarized power of attorney or other document(s) of authorization (if any), and the form of proxy shall be delivered to (i) the registered address of the Company for holders of domestic shares and unlisted foreign shares; and (ii) Computershare Hong Kong Investor Services Limited, the H share registrar and transfer office of the Company in Hong 10

13 NOTICE OF EGM Kong, for the holders of H Shares, no less than 24 hours before the time fixed for convening the EGM or any adjournment thereof (as the case may be). Completion and return of a form of proxy will not preclude a shareholder from attending and voting in person at the meeting if he so wishes. 3. Registration Procedures for Attending the EGM (1) A shareholder or his proxy shall produce his identification document when attending the EGM. Where a shareholder is a legal person, the legal representative of that shareholder or the person authorised by its board of directors or other governing body shall produce a copy of the resolution of the board of directors or other governing body of such shareholder appointing such person to attend the meeting. (2) Shareholders intending to attend the EGM shall return to the Company the reply slip stating their attendance on or before Saturday, 2 October (3) A shareholder may return the above reply slip to the Company in person, by post or by fax. 4. Closure of Register of Members The register of members of the Company will be closed from Wednesday, 22 September 2010 to Friday, 22 October 2010 (both days inclusive), during which time no transfer of shares will be registered. 5. Method of Voting at the EGM According to Rule 13.39(4) of the Hong Kong Listing Rules, any vote of shareholders at a general meeting must be taken by way of poll. Accordingly, the chairman of the EGM will demand a poll in relation to all the proposed resolutions at the EGM. 6. Miscellaneous (1) The EGM is expected to be held for less than half a day. Shareholders attending the EGM shall be responsible for their own travelling and accommodation expenses. (2) The address of Computershare Hong Kong Investor Services Limited, the H share registrar and transfer office of the Company in Hong Kong, is 17M Floor, Hopewell Centre, 183 Queen s Road East, Wan Chai, Hong Kong. 11

14 NOTICE OF EGM (3) The registered address and the contact details of the principal place of business of the Company are set out below: 11 Beishuncheng Street Xizhimennei Xicheng District Beijing PRC Telephone: (+86) Fax: (+86)