(Incorporated in the Cayman Islands with limited liability) (Stock Code: 850)

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult a licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your securities in the Company, you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. This circular is for information only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. (Incorporated in the Cayman Islands with limited liability) (Stock Code: 850) DISCLOSEABLE TRANSACTION IN RELATION TO ACQUISITION OF 51% EQUITY INTEREST IN NORTHEAST OIL (CHINA) DEVELOPMENT COMPANY LIMITED AND REFRESHMENT OF SCHEME MANDATE LIMIT UNDER THE SHARE OPTION SCHEME AND REFRESHMENT OF GENERAL MANDATE FOR ISSUE OF NEW SHARES OF THE COMPANY Financial adviser to the Company in respect of the discloseable transaction Goldbond Capital (Asia) Limited Independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of refreshment of general mandate for issue of new shares of the Company Nuada Limited A letter from the board of directors of the Company is set out on pages 6 to 21 of this circular. A letter from the Independent Board Committee (as defined herein) containing its recommendation to the Independent Shareholders (as defined herein) in connection with the Proposed Refreshment (as defined herein) is set out on page 22 of this circular. A letter from Nuada Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, containing its advice in connection with the Proposed Refreshment (as defined herein) is set out on pages 23 to 27 of this circular. A notice convening an extraordinary general meeting of the Company to be held at Suite 1006, 10/F, Ocean Centre, Harbour City, Tsim Sha Tsui, Kowloon, Hong Kong on Monday, 5 March 2007 at 11:00 a.m., is set out on pages 35 to 37 of this circular. A form of proxy for use at the extraordinary general meeting is also enclosed with this circular. Whether or not you are able to attend the meeting, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return the same to the Company s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited, at 46th Floor, Hopewell Centre, 183 Queen s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of the extraordinary general meeting or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting at the extraordinary general meeting or any adjourned meeting if you so wish. 16 February 2007

2 CONTENTS Page Definitions... 1 Letter from the Board... 6 Letter from the Independent Board Committee Letter from the Independent Financial Adviser Appendix General information Notice of EGM i

3 DEFINITIONS In this circular, unless the context requires otherwise, the following expressions have the following meanings: Acquisition AGM associates Board Business Day Company Completion Conditions Subsequent connected persons Consideration Consideration Share(s) Current General Mandate Director(s) the conditional acquisition of the Sale Shares by the Purchaser from the Vendor pursuant to the Formal S&P Agreement the annual general meeting of the Company held on 25 August 2006 for the Shareholders to approve, inter alia, the Current General Mandate; has the meaning ascribed thereto under the Listing Rules the board of Directors any day (not being a Saturday) on which licensed banks are generally open for business in Hong Kong throughout their normal business hours Wing Shing International Holdings Limited, a company incorporated in the Cayman Islands with limited liability and the issued Shares of which are listed on the main board of the Stock Exchange completion of the Acquisition in accordance with the terms of the Formal S&P Agreement the conditions to be fulfilled by the Vendor after Completion as set out in the paragraph headed Conditions Subsequent in this circular has the meaning ascribed thereto in the Listing Rules total consideration for the Acquisition, being HK$50,000,000 60,606,060 new Shares to be allotted and issued by the Company to the Vendor upon the Fulfillment Date at an issue price of HK$0.66 per Consideration Share as part of the Consideration the general mandate approved at the AGM to grant to the Directors to allot and issue Shares of up to 20% of the issued share capital of the Company as at the date of passing the relevant ordinary resolution director(s) of the Company 1

4 DEFINITIONS Dongming EGM Fulfillment Date Formal S&P Agreement Fu 710" Future Co-operation Agreement Group Hong Kong Independent Board Committee Independent Financial Adviser, a wholly-foreign owned enterprise being established by the Target in Qiqihar City, the PRC and an Independent Third Party the extraordinary general meeting of the Company to be held at Suite 1006, 10/F, Ocean Centre, Harbour City, Tsim Sha Tsui, Kowloon, Hong Kong on Monday, 5 March 2007 at 11:00 a.m. to consider and, if appropriate, to approve the resolutions contained in the notice of the meeting which are set out on pages 35 to 37 of this circular the date falling on the fourteenth Business Day after fulfillment of the Conditions Subsequent the formal sale and purchase agreement entered into between the Purchaser and the Vendor on 26 January 2007 in relation to the Acquisition 710 the agreement proposed to be entered into among Qiqihar Oil, Shengli Oil and the Target in relation to their joint development of certain area within the Meilisi 723 district in the future should Qiqihar Oil obtain the relevant exploitation license in respect of such area the Company and its subsidiaries, and where the context requires, includes the Target Group after Completion the Hong Kong Special Administrative Region of the PRC an independent board committee, comprising Mr. Chan Shu Kin, Mr. Chan Kam Ching, Paul and Mr. Cheung Kwan Hung, being the independent non-executive Directors, to advise the Independent Shareholders as to the fairness and reasonableness of the Proposed Refreshment Nuada Limited, being a corporation licensed under the SFO to conduct type 6 (advising on corporate finance) regulated activity under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in connection with the Proposed Refreshment 2

5 DEFINITIONS Independent Shareholders Independent Third Party(ies) Joint Development Agreement Joint Development Zone Latest Practicable Date Listing Rules Meilisi 723" MOU MOFCOM New General Mandate Original Joint Development Agreement PRC Shareholders other than Ever Source Enterprises Limited, Mr. Poon Sum and Mr. Poon Sau Tin and their respective associates in respect of the resolutions to approve the Proposed Refreshment any person(s) or company(ies) and their respective ultimate beneficial owner(s), to the best of the Directors knowledge, information and belief having made all reasonable enquiries, are third parties independent of the Company and its connected persons of the Company in accordance with the Listing Rules the joint development agreement proposed to be entered into between Shengli Oil and the Target certain parts of the Fu 710 and Meilisi 723 districts in the Fulaerjiqu Oilfield, Qiqihar City, Heilongjiang Province, the PRC with a total area of approximately 34 square kilometres, which is the subject area of the Joint Development Agreement 13 February 2007, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained therein the Rules Governing the Listing of Securities on the Stock Exchange 723 the non-legally binding memorandum of understanding entered into between the Target, the Vendor and the Group dated 18 September 2006 in relation to the Acquisition Ministry of Commerce of the PRC the general mandate proposed to be granted at the EGM to allot, issue and otherwise deal with additional shares not exceeding 20% of the issued share capital as at the date of EGM the agreement entered into between the Target and Shengli Oil dated 22 June 2006, pursuant to which the contracting parties will jointly develop an oil exploitation business the People s Republic of China, which for the purpose of this circular, excludes Hong Kong, Taiwan and Macau Special Administrative Region 3

6 DEFINITIONS Production Sharing Contract Proposed Refreshment Purchaser Qiqihar Oil Research Institute Sale Shares Scheme Mandate Limit SFO Share(s) Shareholder(s) Share Option Scheme the contract entered into between Qiqihar Oil and Sinopec Daming dated 23 April 2003, pursuant to which Sinopec Daming was granted the production right to produce crude oil in the contracted area including the Joint Development Zone the proposed refreshment of the general mandate proposed to be granted to the Directors at the EGM to allot, issue and otherwise deal with additional Shares not exceeding 20% of the issued share capital of the Company as at the date of the EGM; Honour Bright Investments Limited, a company incorporated under the laws of the British Virgin Islands and a wholly-owned subsidiary of the Company, a PRC incorporated oil exploitation and sales company and the holder of the exploitation license for the Joint Development Zone and an Independent Third Party (Exploration and Development Research Institute of Daqing Oilfield Company Ltd.), which is specialised in the research of the exploitation and reserve of oil and gas and an Independent Third Party 5,100 shares of HK$1.00 each in the issued share capital of the Target, representing 51% of its entire issued share capital the maximum number of Shares which may be allotted and issued upon the exercise of all options which initially shall not in aggregate exceed 10% of the Shares in issue as at the date of adoption of the Share Option Scheme and thereafter, if refreshed shall not exceed 10% of the Shares in issue as at the date of approval of the refreshed limit by the Shareholders Securities and Futures Ordinance, Cap. 571 of the Law of Hong Kong ordinary share(s) of HK$0.01 each in the share capital of the Company holder(s) of the Share(s) the share option scheme of the Company adopted by the Company on 21 October 2002 and amended by the Company on 8 December

7 DEFINITIONS Shengli Oil Sinopec Daming Stock Exchange Supplemental Agreement Target Target Group Technical Service Agreement Vendor HK$, a company incorporated in the PRC in December 2001, a subsidiary of Sinopec Daming and an Independent Third party, a company incorporated in the PRC and an Independent Third party The Stock Exchange of Hong Kong Limited the supplemental agreement proposed to be entered into among Qiqihar Oil, Sinopec Daming and Shengli Oil in relation to the Production Sharing Contract, which is to rectify and to clarify certain terms in the Production Sharing Contract Northeast Oil (China) Development Company Ltd., ( ), a company incorporated in Hong Kong and has been wholly owned by the Vendor immediately before Completion Target and Dongming the technical service agreement proposed to be entered into between Shengli Oil and Dongming subject to acknowledgement of Qiqihar Oil for Dongming to provide certain technical services in relation to oil exploitation to Shengli Oil Well Lead Group Limited, a company incorporated under the laws of the British Virgin Islands and an Independent Third Party immediately before the entering into of the Formal S&P Agreement Hong Kong dollars, the lawful currency of Hong Kong % per cent. 5

8 LETTER FROM THE BOARD (Incorporated in the Cayman Islands with limited liability) (Stock Code: 850) Executive Directors: Registered office: Mr. Poon Sum (Chairman) Cricket Square Mr. Wong Kwok Leung Hutchins Drive Mr. Poon Wai Kong P.O. Box 2681 Grand Cayman Non-executive Directors: KY Mr. Chen Lizhong Cayman Islands Ms. Chew Lye Yin Head office and principal place Independent non-executive Directors: of business in Hong Kong: Mr. Chan Shu Kin Units 9-10, 4/F Mr. Chan Kam Ching, Paul Kinglet Industrial Building Mr. Cheung Kwan Hung Shing Wan Road Tai Wai, Shatin Hong Kong 16 February 2007 To the Shareholders and, for information only, the warrantholders of the Company Dear Sir or Madam, DISCLOSEABLE TRANSACTION IN RELATION TO ACQUISITION OF 51% EQUITY INTEREST IN NORTHEAST OIL (CHINA) DEVELOPMENT COMPANY LIMITED AND REFRESHMENT OF SCHEME MANDATE LIMIT UNDER THE SHARE OPTION SCHEME AND REFRESHMENT OF GENERAL MANDATE FOR ISSUE OF NEW SHARES OF THE COMPANY INTRODUCTION On 31 January 2007, the Company announced that on 26 January 2007, the Purchaser, a whollyowned subsidiary of the Company, entered into the Formal S&P Agreement with the Vendor, pursuant to which the Group conditionally agreed to acquire and the Vendor agreed to sell the Sale Shares on and subject to the terms and conditions of the Formal S&P Agreement. References are made to the announcements of the Company dated 18 September 2006 and 15 November 2006 in relation to the possible acquisition of certain equity interests of the Target. 6

9 LETTER FROM THE BOARD The purpose of this circular is to provide with you the information relating to (i) the Acquisition; (ii) the proposed refreshment of the Scheme Mandate Limit under the Share Option Scheme; (iii) the Proposed Refreshment; (iv) the recommendation from the Independent Board Committee to the Independent Shareholders in connection with the Proposed Refreshment; (v) the recommendation from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in connection with the Proposed Refreshment; and (vi) the notice of EGM. DETAILS OF THE FORMAL S&P AGREEMENT Date 26 January 2007 Parties The Vendor: The Purchaser: Well Lead Group Limited, the legal and beneficial owner of the entire issued share capital of the Target. The Vendor is beneficially owned as to 60% by Mr. Au Kin Keung and as to 40% by Mr. Yin Jiancai. To the best of the Directors knowledge, information and belief having made all reasonable enquiries, the Vendor and its ultimate beneficial owners are not connected persons of the Company and are Independent Third Parties. Honour Bright Investments Limited, a wholly-owned subsidiary of the Company Subject of the Acquisition Pursuant to the Formal S&P Agreement, the Purchaser has agreed conditionally to acquire and the Vendor has agreed to sell the Sale Shares, representing 51% equity interest in the issued share capital of the Target, on and subject to the terms and conditions of the Formal S&P Agreement. The Target entered into the Original Joint Development Agreement dated 22 June 2006 with Shengli Oil, pursuant to which the contracting parties will jointly develop an oil exploitation business in the Fu 710 and Meilisi 723 districts in Qiqihar City, Heilongjiang Province, the PRC. As at the Latest Practicable Date, the Target is in the process of establishing a wholly-foreign owned enterprise in the PRC, Dongming, for carrying out all the relevant activities in relation to the Joint Development Agreement. Consideration The Consideration payable by the Group to the Vendor shall be an aggregate amount of HK$50 million, of which HK$10 million will be satisfied by cash subject to the following payment terms and the remaining balance of HK$40 million will be satisfied by way of allotment and issue of the Consideration Shares to the Vendor or its nominee, credited as fully paid at the issue price of HK$0.66 each. 7

10 LETTER FROM THE BOARD Total cash portion of the Consideration of HK$10 million will be payable by three installments, of which (i) (ii) HK$3 million has been paid on the date of Completion; HK$3 million is payable upon 90 days from the date of the Formal S&P Agreement after all the following payment conditions have been fulfilled or waived by the Purchaser: 1. the Group being satisfied with its due diligence on the assets, liabilities and operation of the Target Group; 2. the obtaining of a legal opinion issued by a qualified PRC legal adviser, the form and substance of which shall be to the satisfaction of the Group, in relation to the business of the Target Group including without limitation the legality and enforceability of the Supplemental Agreement, Technical Service Agreement, the Joint Development Agreement and the Future Co-operation Agreement; 3. the Vendor having procured Qiqihar Oil, Sinopec Daming and Shengli Oil to enter into the Supplemental Agreement; 4. the Vendor having procured Shengli Oil and Dongming to enter into the Technical Service Agreement; 5. the Vendor having procured the Target and Shengli Oil to enter into the Joint Development Agreement; and 6. the Vendor having procured the Target, Qiqihar Oil and Shengli Oil to enter into the Future Co-operation Agreement. If any of the above conditions cannot be fulfilled (or waived by the Group, as the case may be) within three months from the date of the Formal S&P Agreement (or such later date as may be agreed by the Group), the Group is entitled to require the Vendor to purchase back the Sale Shares and/or shareholder s loan for a consideration equal to the total amount of Consideration that the Group has paid and/or the total amount of shareholder s loan that the Group has advanced to the Target, as the case may be. As at the Latest Practicable Date, none of the above conditions has been fulfilled or waived by the Group. Details of the arrangement of the shareholders loan are set out in the paragraph headed Future funding of the Target below; and (iii) HK$4 million will be payable upon six months from the date of Completion (or the Fulfillment Date if such date falls earlier than the date of six months from the date of Completion). The cash portion of the Consideration is expected to be funded by internal resources of the Group. 8

11 LETTER FROM THE BOARD The Group will satisfy the balance of the Consideration of HK$40 million by the allotment and issue of the Consideration Shares on the Fulfillment Date, being the date falling on the fourteenth Business Days after the fulfillment of the Conditions Subsequent, at an issue price of HK$0.66 per Consideration Share. The issue price of HK$0.66 per Consideration Share represents: (i) a discount of 17.5% to the closing price of HK$0.80 per Share as quoted by the Stock Exchange on the trading date immediately before the date of the Formal S&P Agreement; and (ii) a discount of approximately 7.6% to the average of the closing prices of HK$0.714 per Share as quoted by the Stock Exchange over the last five trading days up to the trading date immediately before the date of the Formal S&P Agreement. The Consideration Shares to be issued represent approximately 7.11% and 6.64% of the existing issued share capital and the enlarged issued share capital of the Company upon the issue of the Consideration Shares respectively based on the outstanding number of Shares as at the Latest Practicable Date. The Consideration Shares will be allotted and issued pursuant to the general mandate granted to the Directors at the annual general meeting of the Company held on 25 August The general mandate authorises the Company to allot and issue the Shares from time to time not exceeding 20% of the issued share capital of the Company as at the date of such annual general meeting. As at the Latest Practicable Date, about 9.6% of the issued share capital of the Company as at the date of the abovementioned annual general meeting under the general mandate has been utilised for the placing of new Shares. The Consideration Shares will rank, upon issue, pari passu in all respects among themselves and with the Shares in issue as at the date of the issue of the Consideration Shares. An application will be made to the Stock Exchange for the listing of and permission to deal in the Consideration Shares. Pursuant to the Formal S&P Agreement, if such approval is not obtained two Business Days before the Fulfillment Date, the Group shall have the right to satisfy the balance of the Consideration of HK$40 million in cash, in which event the additional cash amount payable by the Group is expected to be funded by internal resources and/or external financing. Pursuant to the Formal S&P Agreement, the Vendor has undertaken not to sell or transfer or create any encumbrances over the Consideration Shares for a period of six months immediately following the Fulfillment Date. The Consideration was determined after arm s length negotiations between the parties to the Formal S&P Agreement taking into account, inter alia, (i) the preliminary assessment report prepared by the Research Institute, based on which it is estimated that the crude oil reserve of the Joint Development Zone is approximately 3.16 million tons; (ii) certain recent merger and acquisition transactions in the PRC and other parts of Asia during the last 18 months in which companies having various levels of interests in certain oil reserves were being acquired. The Board had also taken into consideration the technical service fee that may be received by the Target Group upon execution of the Technical Service Agreement and the production sharing ratio to which the Target Group may be entitled regarding future exploitation in the Joint Development Zone over the term of the Joint Development Agreement once it becomes effective as well as the possibility of acquiring the production sharing right in relation to other area covered by the exploitation license of Qiqihar Oil under the Future Cooperation Agreement. 9

12 LETTER FROM THE BOARD Completion of the Acquisition As at the Latest Practicable Date, all conditions precedent to the completion of the Acquisition pursuant to the terms of the Formal S&P Agreement had been fulfilled. Completion has taken place as the first installment of the Consideration has been made by the Group and the Sales Shares have been transferred from the Vendor to the Group. As at the Latest Practicable Date, the Group is interested in 51% of the issued share capital of the Target and has the right to nominate a majority of directors in the board of directors of the Target, and the Target has become a subsidiary of the Company. Conditions Subsequent The allotment and issue of the Consideration Shares to the Vendor on the Fulfillment Date is subject to the fulfillment of the following conditions after Completion: 1. the Group having obtained all the necessary consent, authorisations, permits and approvals in relation to the Production Sharing Contract, the Supplemental Agreement, the Technical Service Agreement, the Joint Development Agreement and the Future Co-operation Agreement, and/ or, if applicable, all relevant parties having executed and/or made all necessary agreements and/or amendments as may be required by the PRC regulatory bodies pertaining to the joint development of oil exploitation project contemplated under the Formal S&P Agreement; and 2. the Group having obtained a PRC legal opinion, the form and substance of which shall be to the satisfaction of the Group, as to the fulfillment of item (1) above. If any of the above Conditions Subsequent cannot be fulfilled within one year from the date of the Formal S&P Agreement (or such a later date as may be agreed by the Group), the Group is entitled to require the Vendor to purchase back the Sale Shares and/or the shareholder s loan for a consideration of the total amount equal to Consideration that the Group has paid and/or the total amount of shareholder s loan that the Group has advanced to the Target, as the case may be. As at the Latest Practicable Date, none of the Conditions Subsequent has been fulfilled. Details of the arrangement of the shareholders loan are set out in the paragraph headed Future funding of the Target below. Future funding of the Target If the Target requires additional funding for its working capital other than by way of borrowings from banks or other financial institutions, the Group and the Vendor, pursuant to the Formal S&P Agreement, may be required to contribute additional funds in the form of unsecured, non-interest bearing shareholders loan in proportion to their respective shareholding in the Target. The Vendor has directed the Group to pay all the cash portion of the Consideration receivable by the Vendor direct to the Target in the form of shareholder s loan provided by the Vendor. As such, in addition to the payment of the Consideration, the Group shall also have to contribute its share of shareholder s loan to the Target in proportion to its equity interest in the Target i.e. approximately HK$10.4 million. 10

13 LETTER FROM THE BOARD Technical Service Agreement Pursuant to the Formal S&P Agreement, the Vendor will have to procure the execution of the Technical Service Agreement, pursuant to which Dongming will provide the technical know-how, equipment, consultation, relevant trainers and technicians as well as other necessary supporting services to Shengli Oil for the purpose of oil exploitation in the Joint Development Zone. The aggregate value of equipment to be provided by Dongming will not exceed RMB40 million. It is expected that, such expenditure will be funded partly by shareholders loan from the Group and the Vendor and/or partly by external financing where necessary. In return, Dongming will be entitled to receive a technical service fee calculated as a certain percentage of the sales of Shengli Oil generated from the oil produced from the Joint Development Zone. The finalisation of the terms of the Technical Service Agreement is subject to the negotiation between the Target Group on one side and Shengli Oil on the other side. Joint Development Agreement Pursuant to the Formal S&P Agreement, the Vendor will have to procure the replacement of the Original Joint Development Agreement by the Joint Development Agreement. According to the Joint Development Agreement, the Target will have an exclusive right to jointly develop the oil exploitation business in Qiqihar City by exploiting the Joint Development Zone with Shengli Oil. Sinopec Daming, the parent company of Shengli Oil, entered into the Production Sharing Contract with Qiqihar Oil, the holder of the exploitation licence for the Joint Development Zone, in April 2003 for obtaining the production right in a contracted area in the Fulaerjiqu Oilfield which includes the Joint Development Zone and authorised Shengli Oil as its agent for matters related to the Production Sharing Contract. Qiqihar Oil, being the exploitation license holder for the Joint Development Zone, assumes no active role under either the Joint Development Agreement or the Production Sharing Contract whereas, according to the terms of the Production Sharing Contract, it will only collect a share of the production sharing of Shengli Oil, representing 5% of the total oil revenue to be generated from the Joint Development Zone, under the Joint Development Agreement. Both the Original Joint Development Agreement and the Production Sharing Contract will expire in April The Joint Development Agreement is also expected to have the same expiration date. Under the terms of the Joint Development Agreement, the Target is expected to be responsible for contributing all the relevant capital expenditures, where such investments is in the form of provision of the equipment that have been acquired by Dongming for the provision of the technical services under the Technical Service Agreement, for the exploitation business and to bear all of the operating costs involved except for the relevant taxes and selling expenses, which are expected to be shared between the Target and Shengli Oil in accordance with their then production sharing ratios. In return, the Target and Shengli Oil will be entitled to share the oil revenue generated from the Joint Development Zone according to the agreed production sharing ratios stipulated under the Joint Development Agreement between themselves. Similar to the Original Joint Development Agreement, the production sharing ratio to which the Target will be entitled under the Joint Development Agreement is expected to be 90% from the effective date of the Joint Development Agreement up to June Since then, the production sharing ratio are expected to be adjusted as to 85% and will remain at such level until the expiry of the Joint Development Agreement. As mentioned above, Qiqihar Oil is expected to take a share, representing 5% of the oil revenue generated, from the entitlement of Shengli Oil. 11

14 LETTER FROM THE BOARD It is also proposed that upon expiration of the Joint Development Agreement, all the fixed assets invested and installed by the Target in the Joint Development Zone will have to be transferred to Shengli Oil at nominal value. As advised by the PRC legal adviser of the Company, the Joint Development Agreement will be subject to the approval of MOFCOM or its designated authorities before it becomes effective. Therefore, the finalisation of the terms of the Joint Development Agreement is subject to both the negotiation between the Target and Shengli Oil as well as any comment and approval from MOFCOM or its designated authorities. Supplemental Agreement As mentioned above, Sinopec Daming entered into the Production Sharing Contract with Qiqihar Oil in April 2003 for obtaining the production right in a contracted area in the Fulaerjiqu Oilfield which includes the Joint Development Zone and authorised Shengli Oil as its agent for matters related to the Production Sharing Contract. In June 2006, Shengli Oil entered into the Original Joint Development Agreement with the Target to jointly develop an oil exploitation business in Qiqihar City. The Supplemental Agreement to be entered among Qiqihar Oil, Sinopec Daming and Shengli Oil is expected to rectify and to clarify certain terms in the Production Sharing Contract and the assignment of the rights and obligations of Sinopec Daming under the Production Sharing Contract to Shengli Oil. Future Co-operation Agreement Pursuant to the Future Co-operation Agreement, Qiqihar Oil shall agree to grant a first right of refusal to Shengli Oil and the Target for their joint development of certain area within the Meilisi 723 district should Qiqihar Oil obtain the relevant exploitation license in respect of such area. Based on the preliminary assessment report prepared by the Research Institute, which has offered technical supports for many oil and gas projects of PetroChina Company Limited as stated in the report, it is estimated that the crude oil reserve in this area is approximately 0.43 million tons based on prior exploration survey carried out as set out in the paragraph headed Information on the joint development zone. INFORMATION ON THE GROUP The Company was incorporated as an exempted company in the Cayman Islands with limited liability. The principal activities of the Group are the manufacture and sale of paints and blended solvents, manufacture and sale of plastic colorants and trading of chemical materials. In striving for its market position as an integrated energy and chemical group, the Group, partnering with a number of technical experts, has been developing a variety of chemicals with custom-made application techniques for depressing or diluting the viscosity of thickened oil reserve, thereby increasing the overall outputs of oil fields. Recently, the innovative chemicals, specifically termed as High Efficient Viscosity Depressor for Oil Exploitation, have been developed successfully and the Group is now applying for the patent of these products. 12

15 LETTER FROM THE BOARD INFORMATION ON THE TARGET GROUP The Target is a special purpose vehicle incorporated on 20 June 2006 as an investment holding company for the purpose of investing in oil exploitation projects in the PRC and has been wholly-owned by the Vendor immediately before the Completion. As at the Latest Practicable Date, the Target is in the process of establishing Dongming in the PRC for carrying out all the relevant activities in relation to the Technical Service Agreement. The Target Group does not intend to engage in any kind of exploitation projects as at the Latest Practicable Date. For the period from 20 June 2006 (being the date of incorporation) to 31 December 2006, the Target did not generate any turnover but recorded an unaudited loss for the period of about HK$10,700. As at 31 December 2006, the Target recorded an unaudited deficiency in net assets of about HK$10,600 according to its management account. Subsequent to Completion, the Group will have control of the Target Group and will participate in its operation while the Vendor being a shareholder holding 49% interest in the Target will also continue to participate in the operation of the Target Group. Profits generated by the Target Group subsequent to Completion will be shared between the Group and the Vendor according to their respective equity interests in the Target. INFORMATION ON SHENGLI OIL To the best information available to the Directors, Shengli Oil was incorporated in the PRC in December It is principally engaged in the business of exploitation and sales of oil and gas, relevant technical services and constructions of oil and gas wells. Its parent company, Sinopec Daming, has authorised Shengli Oil as its agent for matters related to the Production Sharing Contract. Under Qiqihar Oil s exploitation license for the Fu 710 and Meilisi 723 districts in the Fulaerjiqu Oilfield, annual production of crude oil from the whole licensed area is allowed to be up to 100,000 tons. To the best of the knowledge of the Directors, there is currently no crude oil produced from such licensed area despite there are also oil reserves found in area covered under the exploitation license of Qiqihar Oil but outside of the Joint Development Zone. The current exploitation license will expire in 2010 and pursuant to the terms of the Production Sharing Contract, Qiqihar Oil is responsible for renewing such license. INFORMATION ON THE JOINT DEVELOPMENT ZONE The Joint Development Zone consists of parts of the Fu 710 and Meilisi 723 districts, which situate in the Fulaerjiqu Oilfield, Qiqihar City, Heilongjiang Province, the PRC. Based on the preliminary assessment report prepared by the Research Institute, which have offered technical supports for many oil and gas projects of PetroChina Company Limited as stated in the report, the total area of the Joint Development Zone is approximately 34 square kilometres. It is also estimated that the crude oil reserve in the Joint Development Zone is approximately 3.16 million tons, with the part of the Fu 710 district has an estimated reserve of approximately 2.56 million tons and the part of Meilisi 723 district has an estimated reserve of approximately 0.59 million tons. Such reserve amounts are estimated based on prior exploration work carried out in the Fulaerji oilfield, including the drilling of 100 oil wells. A two-dimension seismic exploitation survey was done for the Meilisi district while reserve exploitation for the Fu 710 district had been completed through the use of 11 exploitation wells. Notwithstanding there is a larger amount of reserve in the part of the Fu 710 district, the Research Institute had noted that the development costs for such area is expected to be higher than those needed for the part of Meilisi 723 district considering the buildings and infrastructure already established in the Fu 710 district. 13

16 LETTER FROM THE BOARD Set out below as a diagram demonstrating relationships among the contracting parties to the abovementioned agreements: Qiqihar Oil Production Sharing Contract Sinopec Daming exploitation licence Supplemental Agreement* Shengli Oil Subsidiary Original Joint Development Agreement Target Joint Deveopment Agreement * Subsidiary Technical Service Agreement * Dongming Future Co-operation Agreement * * agreements to be entered into REASONS FOR THE ACQUISITION Subject to the due diligence being conducted by the Group on the Target Group, it is expected that the Acquisition will present a good opportunity for the Group to be involved in the energy industry, which in turn will integrate the existing business lines of the Group by, for example, applying the newly launched High Efficient Viscosity Depressor for Oil Exploitation development by the Group for increasing overall outputs of oil fields, into the energy industry. It is also expected that the Acquisition will reinforce the Group s market position as an integrated energy and chemical group and thereby broadening its earning bases in future. The Directors believe that the terms of the Acquisition are fair and reasonable and are in the interest of the Company and Shareholders as a whole. Despite that under the terms of the Joint Development Agreement, all the sales of the oil produced in the Joint Development Zone will have to be arranged by Shengli Oil, the Directors are of the preliminary view that majority of the oil produced is expected to be sold to major refinery factories nearby and some industrial users. 14

17 LETTER FROM THE BOARD CHANGES ON SHAREHOLDING STRUCTURE OF THE COMPANY The changes of the shareholding structure of the Company as a result of the issue of the Consideration Shares based on the shareholding structure of the Company as at the Latest Practicable Date are as follows: Immediately after As at the Latest the issue of the Practicable Date Consideration Shares Number of Approximate Number of Approximate Shareholders Shares percentage Shares percentage Mr. Poon Sum (Note 1) 50,594, % 50,594, % Mr. Poon Sau Tin (Note 2) 27,002, % 27,002, % Ever Source Enterprises Limited (Note 3) 220,898, % 220,898, % Directors (other than Mr. Poon Sum and Mr. Poon Sau Tin) 18,952, % 18,952, % The Vendor 0 0% 60,606, % Other public Shareholders 535,288, % 535,288, % Total 852,735, % 913,341, % Notes: 1. Mr. Poon Sum is the chairman of the Company and is the brother of Mr. Poon Sau Tin. 2. Mr. Poon Sau Tin is the elder brother of Mr. Poon Sum. 3. The issued share capital of Ever Source Enterprises Limited is beneficially owned as to 50% by Time Concord Limited, a company incorporated in the British Virgin Islands and indirectly owned by a discretionary trust, the beneficiaries of which are family members of Mr. Poon Sum, and as to 50% by Guidance Investments Limited, a company incorporated in the British Virgin Islands and indirectly owned by a discretionary trust, the beneficiaries of which are family members of Mr. Poon Sau Tin. As far as the Directors are aware of, the issuance and allotment of the Consideration Shares will not result in a change of control of the Company. FINANCIAL EFFECTS OF THE ACQUISITION As a result of the Acquisition, the Target has become a subsidiary of the Company and its financial results will be consolidated with those of the Group. There has not been any material effect on the assets and liabilities of the Group immediately after the Acquisition. Upon the fulfillment of the Conditions Subsequent, the issue of the Consideration Shares is expected to lead to an increase in the equity of the Group. The increase will be subject to the determination of the fair value of the Consideration Shares with reference to the then prevailing market price of the Shares upon such issuance for valuing the 51% equity interests of the Company in the Target. Total assets of the Group will increase by an amount extrapolated from the fair value of the Consideration Shares to account for the total assets of the Target. 15

18 LETTER FROM THE BOARD CURRENT GENERAL MANDATE At the AGM, Shareholders approved, among other things, an ordinary resolution to grant to the Directors the Current General Mandate to allot and issue not more than 140,027,157 Shares, being 20% of the entire issued share capital of the Company of 700,135,787 Shares as at the date of passing of the resolution. During the period from the granting of the Current General Mandate to the Latest Practicable Date, the Current General Mandate had been utilised as to 67,000,000 Shares for the placing of new Shares, being approximately 47.8% of the aggregate number of Shares which may be allotted and issued under the Current General Mandate and as to 60,606,060 Shares for the Acquisition, being approximately 43.3% of the aggregate number of Shares which may be allotted and issued under the Current General Mandate. The balance of the Current General Mandate will be reserved for the proposed issue of consideration shares for the acquisition of America Archi Colors Group Limited. Please refer to the Company s announcements dated 18 September 2006, 10 October 2006 and 31 January 2007 respectively for further details regarding the above matters. PROPOSED GRANTING OF NEW GENERAL MANDATE The Company will be convening the EGM at which ordinary resolutions will be proposed to the Independent Shareholders that: (i) (ii) the Directors be granted the New General Mandate to allot and issue Shares not exceeding 20% of the issued share capital of the Company as at the date of passing the relevant ordinary resolution; and the New General Mandate be extended to Shares repurchased by the Company pursuant to the general mandate granted to the Directors at the AGM. As at the Latest Practicable Date, the Company had an aggregate of 852,735,787 Shares in issue. Subject to the passing of the ordinary resolutions for the approval of the New General Mandate and on the basis that no further Shares are issued and/or repurchased by the Company between the Latest Practicable Date and the date of the EGM, the Company would be allowed under the New General Mandate to allot and issue up to 170,547,157 Shares (being 20% of the 852,735,787 Shares then in issue). REASONS FOR THE NEW GENERAL MANDATE As explained in the paragraph headed Current General Mandate above, the Current General Mandate had been utilised. 16

19 LETTER FROM THE BOARD The Board believes that granting of the New General Mandate is in the best interests of the Company and the Shareholders as a whole by maintaining the financial flexibility necessary for the Group s future business development. The Board considers equity financing to be an important avenue of resources to the Group since it does not create any interest paying obligations on the Group. In appropriate circumstances, the Group will also consider other financing methods such as debt financing or internal cash resources to fund its future business development. While the Board considers that there is no immediate funding need for the Group s current operations (other than the payment of the cash portion of the Consideration) and that there is currently no concrete proposal presented by potential investors for investment in the Shares, the Board is now proposing to seek the approval of Independent Shareholders at the EGM of the New General Mandate such that should future funding needs arise or attractive terms for investment in the Shares become available from potential investors, the Board will be able to respond to the market promptly because fund raising exercise pursuant to a general mandate provides the Company a more simple and less lead time process than other types of fund raising exercises and to avoid the uncertainties in such circumstances that specific mandate may not be obtained in a timely manner. There has not been any refreshment of the Current General Mandate since the AGM. The following table summarises the use of Current General Mandate since the AGM: Actual use of proceeds Date of initial Intended as at the Latest announcement Event Net proceeds use of proceeds Practicable Date 18 September 2006 Placing of HK$33.1 million (i) Acquisition (note 3) 67,000,000 of equity interest in new Shares Northeast Oil (China) Development Company Limited; and (ii) general working capital 10 October 2006 Acquisition Not applicable (note 1) Not applicable Not applicable of the entire equity interests of America Archi Colors Group Limited 31 January 2007 Acquisition Not applicable (note 2) Not applicable Not applicable of 51% equity interest in Northeast Oil (China) Development Company Limited 17

20 LETTER FROM THE BOARD Notes: 1. The Shares have not been allotted and issued and it is expected that the completion of the acquisition will take place in April ,606,060 Shares have not been issued to satisfy part of the Consideration. 3. The net proceed of approximately HK$33.1 million has been applied as general working capital of the Group and particularly about HK$6.1 million has been used to settle the first installment of the Consideration and to provide working capital for the Target in the form of unsecured non-interest bearing shareholder s loan. REFRESHMENT OF THE SCHEME MANDATE LIMIT Under the Listing Rules, the maximum number of Shares which may be allotted and issued upon the exercise of all options which initially shall not in aggregate exceed 10% of the Shares in issue as at the date of adoption of the Share Option Scheme and thereafter, if refreshed shall not exceed 10% of the Shares in issue as at the date of approval of the refreshed limit by the Shareholders. The Scheme Mandate Limit was previously refreshed by the Company at the extraordinary general meeting held on 5 June 2006 which enabled the grant of further share options to subscribe for up to a total of 61,413,578 Shares, representing 10% of the Shares in issue as at 5 June Up to the Latest Practicable Date, 61,300,000 options had been granted since the previous refreshment of the Scheme Mandate Limit. Since the number of Shares in issue has increased since the previous refreshment of the Scheme Mandate Limit, the Board proposes to refresh the Scheme Mandate Limit in order to enable the Company to grant further options to eligible participants so as to provide opportunities and incentives to them to work towards enhancing the values of the Company and Shares for the benefit of the Company and the Shareholders as a whole. As at the Latest Practicable Date, there were 852,735,787 Shares in issue. Pursuant to the terms of the Share Option Scheme and in compliance with the Listing Rules, the maximum number of Shares which may be issued upon the exercise of all the options granted or to be granted under the Share Option Scheme under the Scheme Mandate Limit as refreshed should be 85,273,578 Shares, being 10% of the Shares in issue and assuming no further issue or repurchase of Shares during the period between the Latest Practicable Date up to and including the date of the EGM. The proposed refreshment of the Scheme Mandate Limit is conditional upon: (1) the passing of an ordinary resolution by the Shareholders to approve the proposed refreshment; and (2) the Listing Committee granting the listing of, and permission to deal in, the Shares to be issued pursuant to the exercise of the options granted under the refreshed Scheme Mandate Limit. Pursuant to the Listing Rules, the Shares which may be issued upon exercise of all outstanding share options granted and yet to be exercised under the Share Option Scheme and any other scheme(s) at any time should not exceed 30% of the Shares in issue from time to time. No share options shall be granted under any scheme(s) of the Company (including the Share Option Scheme) or any of its subsidiaries if this will result in the 30% limit being exceeded. 18

21 LETTER FROM THE BOARD Application will be made to the Listing Committee for the listing of, and permission to deal in, the Shares to be issued pursuant to the exercise of options granted under the refreshed Scheme Mandate Limit. EGM The notice convening the EGM is set out on pages 35 to 37 of this circular. At the EGM, ordinary resolutions will be proposed to approve the Proposed Refreshment and the refreshment of Scheme Mandate Limit. Pursuant to Rule 13.36(4)(a) of the Listing Rules, the Proposed Refreshment requires the approval of the Independent Shareholders at the EGM at which any of the controlling Shareholders and their associates or, where there are no controlling Shareholders, Directors (excluding independent nonexecutive Directors) and the chief executive of the Company and their respective associates shall abstain from voting. As at the Latest Practicable Date, Ever Source Enterprises Limited, Mr. Poon Sum and Mr. Poon Sau Tin holding 298,495,329 Shares in total, or approximately 35.01% of the total issued Shares will abstain from voting at the EGM. Further, pursuant to Rule 13.39(4)(b) of the Listing Rules, any vote of the Independent Shareholders at the EGM will be taken by poll. A form of proxy for use at the EGM is enclosed with this circular. To be valid, the form of proxy must be completed in accordance with the instructions printed thereon and deposited, together with the power of attorney or other authority at the Company s branch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited at 46th Floor, Hopewell Centre, 183 Queen s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the EGM or any adjourned meeting. Completion and delivery of the form of proxy will not preclude you from attending and voting at the EGM or the adjourned meeting if you so wish. PROCEDURES FOR DEMANDING A POLL BY SHAREHOLDERS Pursuant to the articles of association of the Company, a resolution put to the vote of a meeting shall be decided on a show of hands unless a poll is taken as may from time to time be required under the rules of the designated stock exchange or any other applicable laws, rules or regulations or unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded: (a) (b) by the chairman of such meeting; or at least three Shareholders present in person or in the case of a Shareholder being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or 19