CHINA LITERATURE LIMITED

Transcription

1 Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, 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 announcement. CHINA LITERATURE LIMITED (incorporated in the Cayman Islands with limited liability) (Stock Code: 772) LR13.51A CONTINUING CONNECTED TRANSACTIONS The Board is pleased to announce that, on March 20, 2018, Shanghai Yueting, a wholly-owned subsidiary of the Company (on behalf of the Group), entered into (i) the Literary, Audio and Comics Work Licensing Agreement, (ii) the Audio and Comics Cooperation Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, and (vii) the Revised Promotion Cooperation Framework Agreement with Tencent Computer (on behalf of the Retained Tencent Group), pursuant to which the parties have agreed to, among other things, conduct various cooperation on IP, games, etc., and (in the case of (vii) above) revise the scope of cooperation of the Promotion Cooperation Framework Agreement. The Board is pleased to announce that, on March 20, 2018, Shanghai Yueting, a wholly-owned subsidiary of the Company (on behalf of the Group), entered into the Comprehensive Cooperation Agreement with Sogou Technology (on behalf of the Sogou Group), pursuant to which the parties have agreed to conduct various cooperation on games, literary work and audio work. 1

2 LISTING RULES IMPLICATIONS As of the date of this announcement, Tencent is the controlling shareholder of the Company, holding approximately 52.66% of the total issued share capital of the Company, and Tencent Computer is an indirect wholly-owned subsidiary of Tencent. Accordingly, Tencent Computer is a connected person of the Company and the transactions contemplated under each of (i) the Literary, Audio and Comics Work Licensing Agreement, (ii) the Audio and Comics Cooperation Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, and (vii) the Revised Promotion Cooperation Framework Agreement constitute continuing connected transactions of the Company pursuant to Chapter 14A of the Listing Rules. As of the date of this announcement, Tencent holds approximately 52.2% of total voting power of Sogou and Sogou Technology is an indirect wholly-owned subsidiary of Sogou. Accordingly, Sogou Technology constitutes a connected person of the Company, and the transactions contemplated under the Comprehensive Cooperation Agreement constitute continuing connected transaction of the Company pursuant to Chapter 14A of the Listing Rules. As the highest applicable percentage ratios in respect of the annual caps for each of the Literary, Audio and Comics Work Licensing Agreement, the Novel Creation and Solicitation Cooperation Agreement, the Game Cooperation Agreement, the Virtual Currency Purchase Agreement, the Joint Investment Agreement, the Revised Promotion Cooperation Framework Agreement and the Comprehensive Cooperation Agreement are more than 0.1% but all percentage ratios are less than 5%, the transactions contemplated thereunder are therefore subject to reporting, announcement and annual review requirements but are exempt from the requirement of independent Shareholders approval under Chapter 14A of the Listing Rules. As the highest applicable percentage ratio in respect of the annual caps for the Audio and Comics Cooperation Agreement is more than 5%, the transactions contemplated thereunder are therefore subject to reporting, announcement, annual review and independent Shareholders approval under Chapter 14A of the Listing Rules. 2

3 A circular containing, among other things, (i) details of the transactions contemplated under the Audio and Comics Cooperation Agreement (ii) a letter of recommendation from the Independent Board Committee to the independent Shareholders; and (iii) a letter of recommendation from the independent financial adviser to the Independent Board Committee and independent Shareholders, is expected to be dispatched to Shareholders by no later than April 13, INTRODUCTION The Board is pleased to announce that, on March 20, 2018, Shanghai Yueting, a wholly-owned subsidiary of the Company (on behalf of the Group), entered into (i) the Literary, Audio and Comics Work Licensing Agreement, (ii) the Audio and Comics Cooperation Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, and (vii) the Revised Promotion Cooperation Framework Agreement with Tencent Computer (on behalf of the Retained Tencent Group), pursuant to which the parties have agreed to, among other things, various cooperation on IP, game, etc. (in the case of (vii) above) revise the scope of cooperation of the Promotion Cooperation Framework Agreement. The Board is pleased to announce that, on March 20, 2018, Shanghai Yueting, a wholly-owned subsidiary of the Company (on behalf of the Group), entered into the Comprehensive Cooperation Agreement with Sogou Technology (on behalf of the Sogou Group), pursuant to which the parties have agreed to conduct various cooperation on games, literary work and audio work. 3

4 LITERARY, AUDIO AND COMICS WORK LICENSING AGREEMENT Principal Terms of the Literary, Audio and Comics Work Licensing Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and (2) Tencent Computer (on behalf of the Retained Tencent Group) Subject matter Fee arrangements : The Retained Tencent Group has agreed to license the information network transmission rights of its literary, audio and comics work to the Group, and the Group shall pay licensing fees to the Retained Tencent Group in return. : The licensing fees payable by the Group to the Retained Tencent Group shall be calculated on any of the following bases: fixed amount of licensing fees revenue sharing mixture of the above two Payment and settlement terms : Payment and settlement terms under the Literary, Audio and Comics Work Licensing Agreement shall be specified in each of the implementation agreements to be entered into under the Literary, Audio and Comics Work Licensing Agreement. Proposed Annual Caps and Basis of Determination The proposed annual caps for the licensing fees payable by the Group to the Retained Tencent Group under the Literary, Audio and Comics Work Licensing Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 Licensing fees payable by the Group to the Retained Tencent Group 15,005 24,010 39,020 4

5 The historical amounts for the licensing fees payable by the Group to the Retained Tencent Group in respect of licensing of such literary, audio and comics work are set out as follows: Licensing fees paid by the Group to the Retained Tencent Group in respect of: For the year ended December 31, RMB 000 RMB 000 RMB 000 Literary work Audio work Comics work 2,330 Total 1 4 2,336 There were insignificant transaction amounts in respect of licensing of literary, audio and comics work by the Retained Tencent Group to the Group in the past. As the Retained Tencent Group has continued to further develop its IP contents, the license from the Retained Tencent Group of its literary, audio and comics work in 2017 has rapidly increased. The above proposed annual caps for the three years ending December 31, 2020 were determined with reference to the following factors, including (i) the estimated scale of potential literary, audio and comics work that the Retained Tencent Group intends to license to the Group in the three years ending December 31, 2020; (ii) the average market price range for licensing information network transmission rights of literary, audio and comics work; and (iii) the estimated procurement scale of the Group in respect of the licensing of literary, audio and comics work of the Retained Tencent Group. Pricing Basis and Pricing Policies The fixed licensing fees, the percentage of revenue to be shared by the Group to the Retained Tencent Group, and/or a mixture of the above fee arrangements under the Literary, Audio and Comics Work Licensing Agreement shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and various commercial factors, including the nature, popularity, quantity, quality and commercial potential of the relevant literary, audio and comics work. 5

6 Reasons and Benefits of Entering into the Literary, Audio and Comics Work Licensing Agreement Given that the Retained Tencent Group is a leading provider of internet value-added services in the PRC and leveraging on the abundant pan-entertainment contents, it is expected that the cooperation with the Retained Tencent Group on licensing the literary, audio and comics work of the Retained Tencent Group for the Group s distribution on its platform will generate more potential readers on the Group s platforms and enhance the popularity of the Group s platforms, products and services, thereby further enhancing the business growth of the Group. AUDIO AND COMICS COOPERATION AGREEMENT Principal Terms of the Audio and Comics Cooperation Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and (2) Tencent Computer (on behalf of the Retained Tencent Group) Subject matter : (1) In respect of audio and comics work not operated by the Group The Group has agreed to license the information network transmission rights of such audio and comics work to the Retained Tencent Group, and the Retained Tencent Group shall pay licensing fees to the Group in return. The Group will not be involved in the price setting and operation of such audio and comics work to be distributed by the Retained Tencent Group. 6

7 (2) In respect of audio work operated by the Group The Group has agreed to distribute audio work operated by the Group on the platforms of the Retained Tencent Group on a non-exclusive basis, and the Retained Tencent Group shall receive distribution fees from the Group in return. The Group shall have the sole discretion over the operation and the price setting of such audio work. Fee arrangements : The parties shall cooperate on the following terms for the licensing of audio and comics work which are not operated by the Group on the Retained Tencent Group s platforms, and the distribution of audio work, which are operated by the Group on the Retained Tencent Group s platforms: fixed amount of licensing fees / distribution fees revenue sharing / profit sharing mixture of the above two Conditions precedent Other terms : The Audio and Comics Cooperation Agreement shall become effective after it is approved by way of an ordinary resolution at the Annual General Meeting. : The Group and the Retained Tencent Group shall enter into specific agreement for particular transactions contemplated under the Audio and Comics Cooperation Agreement, to agree on details of cooperation, such as the scope of authorized audio and comics works and the Retained Tencent Group s platforms, the fee arrangements and the payment and settlement terms. 7

8 Proposed Annual Caps and Basis of Determination (1) In respect of audio and comics work not operated by the Group The proposed annual caps for the licensing fees payable by the Retained Tencent Group to the Group in respect of the licensing of the audio and comics work which are not operated by the Group under the Audio and Comics Cooperation Agreement for the three years ending December 31, 2020 are set out as follows: Licensing fees payable by the Retained Tencent Group to the Group in respect of: For the year ending December 31, RMB 000 RMB 000 RMB 000 Audio work 7,000 9,000 11,000 Comics work 500 1,000 2,000 Total 7,500 10,000 13,000 As the transactions in respect of the licensing of the audio and comics work which are not operated by the Group on the Retained Tencent Group s platforms were new business opportunities that the Group and the Retained Tencent Group explored in the year 2018, no historical data is available for reference as far as the determination of the proposed annual caps for the licensing fees payable by the Retained Tencent Group to the Group in respect of licensing of such audio and comics work. The above proposed annual caps for the three years ending December 31, 2020 were determined with reference to the following factors, including (i) the estimated scale of potential audio and comics work that the Group has intention to license to the Retained Tencent Group in the next three years; (ii) the average market price for licensing information network transmission rights of audio and comics work; (iii) the anticipated number of daily active users in each of the Retained Tencent Group s platforms; and (iv) the estimated average amount of the increase in revenue or profit to be generated from each active user of these platforms. 8

9 (2) In respect of audio work operated by the Group The proposed annual caps for the distribution fees payable by the Group to the Retained Tencent Group in respect of the distribution of the audio work which are operated by the Group on the Retained Tencent Group s platform under the Audio and Comics Cooperation Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 Distribution fees payable by the Group to the Retained Tencent Group 4,100 6,600 12,300 As the transactions in respect of the distribution of the audio work, which are operated by the Group, on the Retained Tencent Group s platforms were new business opportunities that the Group and the Retained Tencent Group explored in the year 2018, no historical data is available for reference as far as the determination of the proposed annual caps for the distribution fees payable by the Group to the Retained Tencent Group in respect of distribution of such audio work. The above proposed annual caps for the three years ending December 31, 2020 are determined based on the following factors: (i) the estimated scale of audio work that the Group is operating and that has the potential to be developed for future operation; and (ii) the historical cost of distribution of other types of intellectual property rights with the Retained Tencent Group; (iii) the anticipated number of daily active users in each of the Retained Tencent Group s platforms; and (iv) the estimated average amount of increase in revenue or profit to be generated from each active user of these platforms. Pricing Basis and Pricing Policies (1) In respect of audio and comics work not operated by the Group The fixed licensing fees, the percentage of revenue or profit to be shared by the Retained Tencent Group to the Group, and/or a mixture of the above fee arrangements shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and taking into account various commercial factors, including the nature, popularity and commercial potential of the relevant audio and comics work, and the quantity and quality of the Retained Tencent Group s distribution platforms. 9

10 (2) In respect of audio work operated by the Group The fixed distribution fees, the percentage of revenue or profit to be shared by the Group to the Retained Tencent Group, and/or a mixture of the above fee arrangements shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and taking into account various commercial factors, including the quantity and quality the of the Retained Tencent Group s distribution platforms, the coverage of content product by the Group, the frequency of content update by the Group, and other services that may be required by the Group. Reasons and Benefits of Entering into the Audio and Comics Cooperation Agreement The Group has been exploring ways to develop and monetize its literary contents into different media formats, and has started to adapt its literary contents into audio and comics work. Through the Audio and Comics Cooperation Agreements, the contents of the Group could be widely distributed through various online platforms operated by the Retained Tencent Group (including but not limited to websites and other user platforms), thereby enhancing the popularity of the Group s audio and comics work, spreading its influence and promoting the development of original contents. The Board has also considered the potential risks of the Audio and Comics Cooperation Agreement that users of the Group s products on its self-operated platforms may be diverted into the Retained Tencent Group s platforms in case the audio and comics work are distributed by the Retained Tencent Group s platform. However, the Board does not believe such risks would be material to the Group as a whole on the basis that (i) leveraging on the coverage of the Retained Tencent Group s platforms, such commercial arrangements can facilitate the promotion of the popularity of the Group s audio and comics work, and thereby enhancing the commercial value of the Group s original contents and the audio and comics work as well as the overall business growth of the Group; (ii) audio and comics licensing and distribution are peripheral business of the Group at this stage; and (iii) the Group have established long-term cooperation relationship with the Retained Tencent Group on various platforms, and have shared users with the Retained Tencent Group for a long period of time. 10

11 THE NOVEL CREATION AND SOLICITATION COOPERATION AGREEMENT Principal Terms of the Novel Creation and Solicitation Cooperation Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and (2) Tencent Computer (on behalf of the Retained Tencent Group) Subject matter : The Retained Tencent Group has agreed to cooperate with the Group on the following matters: the Group shall create novels based on IP concepts of the Retained Tencent Group in accordance with the requirements provided by the Retained Tencent Group, and the Retained Tencent Group shall pay commission to the Group for such novel creation services provided by the Group; the Group shall organize novel writing competition with or on behalf of the Retained Tencent Group, and the Retained Tencent Group shall undertake the cost of such competition and pay commission to the Group for the services of organizing such novel writing competition by the Group. Payment and settlement terms : Payment and settlement terms under the Novel Creation and Solicitation Cooperation Agreement shall be specified in each of the implementation agreements under the Novel Creation and Solicitation Cooperation Agreement. 11

12 Annual Cap and Basis of Determination The proposed annual caps for the commission payable by the Retained Tencent Group to the Group in respect of the services provided by the Group for novel creation and writing competition under the Novel Creation and Solicitation Cooperation Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 The commission payable by the Retained Tencent Group to the Group 5,000 6,000 7,000 The historical amounts for the commission payable by the Retained Tencent Group to the Group under the Novel Creation and Solicitation Cooperation Agreement are set out as follows: For the year ended December 31, RMB 000 RMB 000 RMB 000 The commission paid by the Retained Tencent Group to the Group The Group and the Retained Tencent Group had conducted such novel creation and writing competition periodically in the past years. However, the Group and the Retained Tencent Group have reviewed the impacts and benefits of such cooperation, and expect that such transactions would be bring synergetic effect in support of the development of the Company s other businesses in the upcoming years. The above proposed annual caps for the three years ending December 31, 2020 were determined with reference to the following factors, including (i) the estimated scale of novels the Retained Tencent Group intends to assign to the Group for novel creation for the three years ending December 31, 2020; (ii) the estimated scale of novel competitions the Retained Tencent Group intends to organize for the three years ending December 31, 2020; and (iii) the average commission received by the Group from the Retained Tencent Group for similar services provided by the Group. 12

13 Pricing Basis for the Novel Creation and Solicitation Cooperation Agreement The commission payable by the Retained Tencent Group to the Group shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and considering various commercial factors, including the nature, popularity, quality and commercial potential of IP concepts. Reasons and Benefits of Entering into the Novel Creation and Solicitation Cooperation Agreement Tencent owns numerous popular IP concepts and intends to monetize the concepts by way of novel creation, whilst the Group has the strong capability in literary work creation and editing, deep pool of writers and extensive reader reach. Through the cooperation on novel creation and writing competition, it is expected that the Group could leverage on the IP concepts of the Retained Tencent Group to bring high quality literary work to the Group s users and identify, nurture and promote promising writers, thereby strengthening the relationship with and increasing the popularity of the Group s writers and enhancing the potential of their literary work. GAME COOPERATION AGREEMENT Principal Terms of Game Cooperation Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and (2) Tencent Computer (on behalf of the Retained Tencent Group) Subject matter : The Group shall have the right to license games, which are legally owned by or licensed to it, to the Retained Tencent Group for operations on the Retained Tencent Group s platforms on a non-exclusive basis, and the Group shall pay distribution fees to the Retained Tecent Group in return. The Retained Tencent Group shall have the right to license games, which are legally owned by or licensed to it, to the Group for operations on the Group s platforms on a non-exclusive basis, and the Retained Tencent Group shall pay distribution fees to the Group in return. 13

14 Fee arrangements : The distribution fees payable by the Group or the Retained Tencent Group (as the case may be) for the distribution of the Group s or the Retained Tencent Group s games to the other s platforms shall be calculated on any of the following bases fixed amount of distribution fees revenue sharing mixture of the above two Payment and settlement terms : Payment and settlement terms under the Game Cooperation Agreement shall be specified in the each of the implementation agreements under the Game Cooperation Agreement. Annual Cap and Basis of Determination The proposed annual caps for the distribution of games by the Group to the platforms of the Retained Tencent Group and that by the Retained Tencent Group to the platforms of the Group respectively under the Game Cooperation Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 The distribution fee payable and/or revenue to be shared by the Group to the Retained Tencent Group 30,000 39,000 50,700 The distribution fee payable and/or revenue to be shared by the Retained Tencent Group to the Group 2,400 3,050 3,550 14

15 The historical amounts for the distribution of games by the Group to the platforms of the Retained Tencent Group and that by the Retained Tencent Group to the platforms of the Group respectively under the Game Cooperation Agreement are set out as follows: For the year ended December 31, RMB 000 RMB 000 RMB 000 The distribution fee paid and/or revenue shared by the Group to the Retained Tencent Group 168 The distribution fee paid and/or revenue shared by the Retained Tencent Group to the Group The above proposed annual caps for the three years ending December 31, 2020 were determined with reference to the following factors, including (i) the estimated scale of games the Group intends to distribute on the platforms of the Retained Tencent Group for the three years ending December 31, 2020; (ii) the estimated scale of games the Retained Tencent Group intends to distribute on the platforms of the Group for the three years ending December 31, 2020; and (iii) the average cost of and revenue from distribution of games in respect of distribution of games on the Retained Tencent Group s platforms and the Group s platforms, respectively. Pricing Basis for Game Cooperation Agreement The distribution fee payable and/or revenue to be shared by the Group to the Retained Tencent Group and the distribution fee payable and/or revenue to be shared by the Retained Tencent Group to the Group shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and considering various commercial factors, including the nature, popularity, quality and commercial potential of the relevant games. Reasons and Benefits of Entering into Game Cooperation Agreement The Retained Tencent Group owns a large amount of top-rated game products and game platforms, and the Group has been dedicated to adapting its literary contents into games. It is expected that the Retained Tencent Group and the Group could leverage on each other s competitive advantage in their products and platforms to improve the popularity of games owned by each other and increase the number of 15

16 platform users. The Group expects that such two-way cooperation could enable it to further promote the monetization of the IP of its literary contents into games and extend the IP across non-book entertainment media formats to reach more users, thereby broadening and deepening the Group s revenue streams. VIRTUAL CURRENCY PURCHASE AGREEMENT Principal Terms of Virtual Currency Purchase Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and (2) Tencent Computer (on behalf of the Retained Tencent Group) Subject matter : The Retained Tencent Group shall purchase virtual currency of the Group, which can be consumed on the Group s platforms to purchase the Group s services and products for marketing and promotional purposes. Payment and settlement terms Annual Cap and Basis of Determination : Payment and settlement terms under the Virtual Currency Agreement shall be specified in each of the implementation agreements under the Virtual Currency Purchase Agreement. The proposed annual caps for the consideration payable by the Retained Tencent Group to the Group in respect of the purchase of virtual currency of the Group under the Virtual Currency Purchase Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 The consideration payable by the Retained Tencent Group to the Group 48,000 58,000 70,000 As the transactions in respect of the purchase of virtual currency of the Group by the Retained Tencent Group were new business opportunities that the Group and the Retained Tencent Group explored in the year 2018, no historical data is available for 16

17 reference as far as the determination of the proposed annual caps for the consideration payable by the Retained Tencent Group to the Group in respect of the purchase of virtual currency of the Group under the Virtual Currency Purchase Agreement for the three years ending December 31, The above proposed annual caps for the three years ending December 31, 2020 were determined with reference to the following factors, including (i) the Retained Tencent Group s estimated procurement amount of virtual currency for the three years ending December 31, 2020; and (ii) the historical unit price of virtual currency of the Group. Pricing Basis for the Virtual Currency Purchase Agreement The consideration payable by the Retained Tencent Group to the Group in respect of the purchase of virtual currency of the Group shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and considering the quantity of currency of the Group to be purchased by the Retained Tencent Group. Reasons and Benefits of Entering into the Virtual Currency Purchase Agreement Leveraging Tencent s well established online social communication platforms and the vast user base, it is expected that the Retained Tencent Group s purchase of virtual currency of the Group for consumption by their users on the Group s platforms for the Group s products and services will introduce more users to the Group s platforms and promote the popularity of its platforms, products and services. JOINT INVESTMENT AGREEMENT Principal Terms of the Joint Investment Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and (2) Tencent Computer (on behalf of the Retained Tencent Group) Subject matter : The Group has agreed to cooperate with the Retained Tencent Group in the following joint arrangements: (a) making joint investments in the production and distribution of movies and television series; 17

18 Payment and settlement terms Annual Cap and Basis of Determination (b) making joint investments in the research and development of games, animations, comics and other products; and (c) forming joint ventures or other joint arrangements (whether as a joint venture company, partnership or in any other form) for the purpose of the above joint investments. : Payment and settlement terms under the Joint Investment Agreement shall be specified in each of the implementation agreements under the Joint Investment Agreement. The proposed annual caps for the maximum investment cost to be contributed by the Group in the joint arrangements with the Retained Tencent Group contemplated under the Joint Investment Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 The maximum investment cost to be contributed by the Group in the joint arrangements with the Retained Tencent Group 400, , ,000 The Group has explored the new form of investment cooperation with the Retained Tencent Group, and entered into two such transactions in the beginning of the year However, no historical data during the last three financial years are available for reference as far as the determination of the proposed annual caps for the maximum investment cost to be contributed by the Group in the joint arrangements with the Retained Tencent Group contemplated under the Joint Investment Agreement for the three years ending December 31, The above proposed annual caps for the three years ending December 31, 2020 were determined with reference to the following factors, including (i) the scale, nature, popularity and commercial potential of the literary contents of the Group; (ii) the rapid growth of the intellectual property adaptation market; (iii) the anticipated scale of projects in the production and distribution of movies and television series and the 18

19 research and development of games, animations and other products that the Group may be involved; and (iv) the expected costs involved in the production and distribution of movies and television series and the research and development of games, animations and other products. Pricing Basis for the Joint Investment Agreement Both parties have agreed that specific commercial terms under the Joint Investment Agreement relating to the joint investment projects shall be determined on fair and reasonable basis with reference to factors such as ownership of the copyrights, costs and expenses involved in the development, production and distribution of the relevant IP contents, revenue sharing or profit sharing arrangements, the equity interests of the parties in the joint arrangements, and settlement of tax. The specific investment amount, investment proportion, and proportion of investment return shall be determined on a case-by-case basis. Generally, unless otherwise agreed by the parties, the Group s investment return (being the portion out of the total returns generated by the relevant joint investment projects) shall be determined with reference to the proportion of investment amount that the Group has invested in. Reasons and Benefits of Entering into the Joint Investment Agreement The joint investment between the Retained Tencent Group and the Group will be a mutually beneficial cooperation arrangement. The formation of joint venture and engagement in joint arrangements for the adaptation of popular intellectual properties into television series, movies and other forms of media will enable the Group to reach more potential users and attract viewers of the television series, movies and other forms of media to read the original literary contents, thereby diversifying and expanding the reader base of the Group s literary work and enhancing the popularity and branding of the Group. REVISED PROMOTION COOPERATION FRAMEWORK AGREEMENT Shanghai Yueting (on behalf of the Group) and Tencent Computer (on behalf of the Retained Tencent Group) entered into the Promotion Cooperation Framework Agreement on October 21, 2017, pursuant to which the Retained Tencent Group would promote the Group s products or services on its platforms (including but not limited to provision of promotion services and provision of links to the Group s products and content). In light of the emerging business needs of the Group, the Group intended to expand the scope of service provided by the Retained Tencent Group in respect of promotion of the services and products offered by the Group. Therefore, on March 20, 2018, 19

20 Shanghai Yueting (on behalf of the Group) and Tencent Computer (on behalf of the Retained Tencent Group) entered into the Revised Promotion Cooperation Framework Agreement as a supplemental agreement to the Promotion Cooperation Framework Agreement. Principal Terms of the Revised Promotion Cooperation Framework Agreement Details of the revisions made by the Revised Promotion Cooperation Framework Agreement to the Promotion Cooperation Framework Agreement are set out as follows: 1. Service scope The Retained Tencent Group has agreed to provide more promotion services to the Group including but not limited: distribution of red packets ( ) and coupons on the platforms of the Retained Tencent Group; and optimization of search results on search engines of the Retained Tencent Group. 2. Payment terms The Group and the Retained Tencent Group have agreed to include the following payment and settlement terms for the promotion services provided by the Retained Tencent Group: fixed amount of service fee: the Group shall pay fixed amount of service fee to the Retained Tencent Group for the promotion services provided by the Retained Tencent Group; revenue sharing: the Group shall share certain portion of revenue generated from the promotion services provided by the Retained Tencent Group as the service fees; and mixture of the above two. Save as disclosed above, there are no other changes made to the Promotion Cooperation Framework Agreement, and other provisions provided in the Promotion Cooperation Framework Agreement shall remain unchanged. The Revised Promotion Cooperation Framework Agreement shall prevail if there is any inconsistency with the Promotion Cooperation Framework Agreement. 20

21 Annual Cap and Basis of Determination The proposed annual caps for the years ending 31 December 2019 in respect of the service fee payable to the Retained Tencent Group by the Group shall remain as RMB80 million, RMB100 million and RMB120 million, respectively. The above proposed annual caps for the three years ending December 31, 2019 were determined with reference to the following factors, including the potential growth in the Group s online reading business and the promotional and marketing requirements. The Directors have taken into account the widened service scope, and considered that the existing proposed annual caps shall be fair and reasonable for the transactions contemplated under the Promotion Cooperation Framework Agreement and the Revised Promotion Cooperation Agreement. Reasons and Benefits of Entering into the Revised Promotion Cooperation Framework Agreement By entering into the Revised Promotion Cooperation Agreement, the Group could have more access to the various promotion services offered by the Retained Tencent Group. Leveraging Tencent s leading position in the PRC Internet, social network and media entertainment industries, promotion of the Group s services and products on its platforms would enable the Group to gain more popularity and reach more potential readers, and hence further strengthen the business growth of the Group. 21

22 COMPREHENSIVE COOPERATION AGREEMENT Principal Terms of Comprehensive Cooperation Agreement Date : March 20, 2018 Parties : (1) Shanghai Yueting (on behalf of the Group); and Subject matter : (i) Game cooperation (2) Sogou Technology (on behalf of the Sogou Group) The Group shall have the right to license games, which are legally owned by or licensed to it, to the Sogou Group for operations on the Sogou Group s platforms on a non-exclusive basis, and the Group shall pay distribution fees to the Sogou Group in return. The Sogou Group shall have the right to license games, which are legally owned by or licensed to it, to the Group for operations on the Group s platforms on a non-exclusive basis, and the Sogou Group shall pay distribution fees to the Group in return. (ii) Online platform cooperation The Group has agreed to license the information network transmission rights of its literary work to the Sogou Group, and the Sogou Group shall pay licensing fees in return. The Group shall be the exclusive literary content provider of the platforms of the Sogou Group (the Sogou Group can continue to cooperate with other cooperation parties who have access to the platforms of the Sogou Group before Sogou s exclusive cooperation with the Group, until the expiration of the existing agreements between the Sogou Group and such other parties). 22

23 (iii) Audio work licensing The Group has agreed to license the information network transmission rights of its audio work to the Sogou Group, and the Sogou Group shall pay licensing fees to the Group in return. Fee arrangements : The parties shall cooperate on the following terms for (i) the distribution of games to the others platforms; (ii) online platform cooperation; and (iii) audio work licensing: fixed amount of licensing fees / distribution fees revenue sharing mixture of the above two Payment and settlement terms : Payment and settlement terms under the Comprehensive Cooperation Agreement shall be specified in each of the implementation agreements under the Comprehensive Cooperation Agreement. 23

24 Annual Cap and Basis of Determination The proposed annual caps for (i) the game cooperation; (ii) online platform cooperation; and (iii) audio work licensing under the Comprehensive Cooperation Agreement for the three years ending December 31, 2020 are set out as follows: For the year ending December 31, RMB 000 RMB 000 RMB 000 In respect of (i) Game cooperation - distribution fees payable or revenue / profit to be shared by the Group to the Sogou Group for the distribution of the Group s games on platforms of the Sogou Group 3,000 3,900 5,070 - distribution fees payable or revenue / profit to be shared by the Sogou Group to the Group for the distribution of the Sogou Group s games on platforms of the Group 1,500 1,700 1,900 (ii) Online platform cooperation: licensing fees payable or revenue / profit to be shared by the Sogou Group to the Group for the licensing of our literary work to the Sogou Group 80, , ,000 (iii) Audio work licensing: the licensing fee payable or revenue / profit to be shared by the Sogou Group to the Group for the licensing of audio work 1,500 2,000 2,500 24

25 The historical amounts for the licensing fees payable by the Group to the Sogou Group in respect of licensing of such literary, audio and comics work are set out as follows: For the year ended December 31, RMB 000 RMB 000 RMB 000 In respect of (i) Game cooperation: - distribution fees paid or revenue / profit shared by the Group to the Sogou Group for the distribution of the Group s games on platforms of the Sogou Group 91 - distribution fees paid or revenue / profit shared by the Sogou Group to the Group for the distribution of the Sogou Group s games on platforms of the Group (ii) Online platform cooperation: licensing fees paid by the Sogou Group to the Group 1,557 12,793 37,833 (iii) Audio work licensing: the licensing fee paid or revenue / profit shared by the Sogou Group to the Group for the licensing of audio work The above proposed annual caps for the three years ending December 31, 2020 in respect of game cooperation were determined with reference to the following factors, including (i) the estimated scale of games the Group intends to distribute on the platforms of the Sogou Group for the three years ending December 31, 2020; (ii) the estimated scale of games the Sogou Group intends to distribute on the platforms of the Group for the three years ending December 31, 2020; (iii) the average cost of and revenue from distribution of games in respect of distribution of games on the Sogou Group s platforms and the Group s platforms respectively and (iv) the historical amount of transactions of similar nature conducted between the Group and the Sogou Group. 25

26 The above proposed annual caps for the three years ending December 31, 2020 in respect of online platform cooperation were determined with reference to the following factors, including (i) the estimated scale of literary work that the Group expect to distribute on the platforms of the Sogou Group in the three years ending December 31, 2020; (ii) the average market price for online literary distribution; and (iii) the historical amount of transactions of similar nature conducted between the Group and the Sogou Group. The above proposed annual caps for the three years ending December 31, 2020 in respect of audio work licensing were determined with reference to the following factors, including (i) the estimated scale of potential audio work that the Group expect to license to the Sogou Group in the three years ending December 31, 2020; and (ii) the average market price for game cooperation. Pricing Basis and Pricing Policies The fee arrangement of the fixed distribution or licensing fees or the percentage of revenue to be shared by the Group to the Sogou Group or by the Sogou Group to the Group (as the case may be) shall be determined after arm s length negotiation between the parties with reference to the prevailing market price and considering various commercial factors, including the nature, popularity, quality and commercial potential of the relevant game, literary and audio work. Reasons and Benefits of Entering into the Comprehensive Cooperation Agreement Through entering into the Comprehensive Cooperation Agreement, the contents including literary work, games and audio work provided by the Group could be widely distributed through online platforms operated by the Sogou Group (including but not limited to websites and other user platforms), thereby enhancing the popularity of the Group s literary contents, further promoting its development in online game publishing segment, fully unleashing the monetization potential of the Group s intellectual property. It is also expected that the distribution of games operated by the Sogou Group on the Group s platforms will broaden the user base of the Group, thereby enhancing the popularity of the Group s platforms, products and services. INTERNAL CONTROL MEASURES The Group s designated business development team comprising personnel responsible for overseeing its intellectual property operations (the Business Development Team ) will seek to solicit cooperation with other independent third parties to the extent commercially practicable, and will compare the commercial 26

27 terms offered by the independent third parties with those offered by the Retained Tencent Group and the Sogou Group in respect of all the continuing connected transactions of the Group respectively entered into with the Retained Tencent Group and Sogou Group. In making the decision as to whether the Group will cooperate with the Retained Tencent Group and the Sogou Group, the Business Development Team will also consider other commercial factors, such as the potential of the intellectual properties, the prevailing market pricing, the prospects of the intellectual property cooperation, with a view to maximizing the commercial value of the relevant intellectual properties. The Business Development Team is required to comply with the pricing policy for the continuing connected transactions with the Retained Tencent Group and the Sogou Group as set out above, and the internal control team of the Company will regularly monitor the compliance of such pricing policy. Furthermore, regardless of the party the Group may cooperate with (whether it is the Retained Tencent Group, the Sogou Group or any independent third party), the Company has established a standard procedure to examine cooperation and its underlying agreement by taking into account various commercial factors. Before entering into an agreement, legal affairs department and finance department of the Company will conduct feasibility study and separate review of the cooperation and consider the benefits and risks of such cooperation on a case-by-case basis. OPINION FROM THE BOARD The Directors (including the independent non-executive Directors) are of the view that terms of each of the (i) the Literary, Audio and Comics Work Licensing Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, (vii) the Revised Promotion Cooperation Framework Agreement, and (viii) the Comprehensive Cooperation Agreement were determined after arm s length negotiation, and the transactions contemplated under each of the those abovementioned transactions (including the proposed annual caps for the three years ending December 31, 2020) are conducted in the ordinary and usual business of the Company and are on normal commercial terms, fair and reasonable and in the interests of the Company and its shareholders as a whole. The Directors (excluding the independent non-executive Directors) are of the view that terms of the Audio and Comics Cooperation Agreement were determined after arm s length negotiation, and the transactions contemplated under the Audio and Comics Cooperation Agreement (including the proposed annual caps for the three years ending December 31, 2020) are conducted in the ordinary and usual business of the Company and are on normal commercial terms, fair and reasonable and in the 27

28 interests of the Company and its shareholders as a whole. The independent non-executive Directors have formed the Independent Board Committee for the purposes of advising the independent Shareholders in respect of the Audio and Comics Cooperation Agreement and the transactions contemplated under the Audio and Comics Cooperation Agreement (including the proposed annual caps for the three years ending December 31, 2020) and whose views and recommendation will be included in the circular to be dispatched by the Company. Mr. James Gordon Mitchell, Ms. Li Ming and Mr. Lin Haifeng, all being Directors, are employees of Tencent, and have therefore abstained from voting on the relevant Board resolutions approving each of the (i) the Literary, Audio and Comics Work Licensing Agreement, (ii) the Audio and Comics Cooperation Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, (vii) the Revised Promotion Cooperation Framework Agreement, and (viii) the Comprehensive Cooperation Agreement and the transactions contemplated thereunder. Save as disclosed above, none of the other Directors has material interests in the transactions contemplated under (i) the Literary, Audio and Comics Work Licensing Agreement, (ii) the Audio and Comics Cooperation Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, (vii) the Revised Promotion Cooperation Framework Agreement, and (viii) the Comprehensive Cooperation Agreement. Save as disclosed above, none of the other Directors have abstained from voting on the relevant resolutions at the Board meeting. LISTING RULES IMPLICATIONS As of the date of this announcement, Tencent is the controlling shareholder of the Company, holding approximately 52.66% of the total issued share capital of the Company, and Tencent Computer is an indirect wholly-owned subsidiary of Tencent. Accordingly, Tencent Computer is a connected person of the Company and the transactions contemplated under each of (i) the Literary, Audio and Comics Work Licensing Agreement, (ii) the Audio and Comics Cooperation Agreement, (iii) the Novel Creation and Solicitation Cooperation Agreement, (iv) the Game Cooperation Agreement, (v) the Virtual Currency Purchase Agreement, (vi) the Joint Investment Agreement, and (vii) the Revised Promotion Cooperation Framework Agreement constitute continuing connected transactions of the Company pursuant to Chapter 14A of the Listing Rules. 28