The Smart Triumph Offers are UNFAIR

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3 The Smart Triumph Offers are UNFAIR The Smart Triumph Offers are unfair and inadequate The Share Offer Consideration and the Option Offer Consideration offer Shareholders and Optionholders a discount rather than a premium for ceding control. You are being offered HK$2.90 per Share of which only HK$2.00 will be paid in cash and HK$0.90 will be paid in junk bonds. Smart Triumph and Pioneer are taking unfair advantage of Shareholders by offering junk bonds as a substantial portion of the Share Offer Consideration. Accepting Shareholders are effectively providing a 3-year financing to Smart Triumph through their holding of the Exchangeable Bonds. Repayment of the Exchangeable Bonds is highly uncertain and Shareholders accepting the Share Offer may get nothing from the Exchangeable Bonds. The Exchangeable Bonds are junk bonds with very substantial risks attached to them. The Exchangeable Bonds are illiquid, non-transferable, unsecured and are deeply subordinated. Payments and repayments under the Exchangeable Bonds are highly uncertain due to the highly geared financial position of Pioneer and Smart Triumph. Ability for Bondholders to exchange Exchangeable Bonds for Shares may be subject to consent of the Offeror s lenders. On page 23 of the Offer Document, Macquarie warned Shareholders that the Exchangeable Bonds may not be suitable for every Shareholder, that is, they are not suitable for you.

4 There isno FUTURE with Smart Triumph or Pioneer There are no real or feasible plans for China Oriental s future. There are significant risks and uncertainties involved in Pioneer s plans to inject YYF into China Oriental Pioneer s intention to inject YYF into China Oriental is subject to shareholder and regulatory approvals. Shareholders have not been provided with any information on YYF. In particular, the Offeror, Pioneer and Macquarie have provided: NO financial information regarding YYF. NO information on YYF s other equity holders and there is NO WAY in which to assess whether these other equity holders are desirable strategic partners for China Oriental. NO information on the price China Oriental will have to pay for YYF. No confidence in Smart Triumph, Pioneer or Ms. Chen The Board and the Group s employees have no confidence in Smart Triumph and Pioneer s ability to run China Oriental Smart Triumph and Pioneer have never been publicly listed with little experience or understanding of the Listing Rules or any rules of any stock exchanges or any other Hong Kong laws or regulations. Hebei Jinxi s employees have expressed their lack of confidence in Ms. Chen and Pioneer s ability to operate and manage the Group and they have grave concerns for the Group s future if Ms. Chen and Pioneer seize control of the Group. Ms. Chen has little, if none, involvement in the affairs of China Oriental or Hebei Jinxi, despite her role as executive director of these companies Ms. Chen s poor attendance at China Oriental and Hebei Jinxi s board meetings is a clear indication that she has no regard to proper corporate governance.

5 We WELCOME Ms. Chen and Pioneer s exit Ms. Chen sought to hold Shareholders at ransom by declaring that she will seek to exit her investment in China Oriental if the Smart Triumph Offers fail. The reality is, we would very much welcome her exit from China Oriental Conflict between Ms. Chen and the members of the Board has, to a great extent, hindered the performance of the Shares Ms. Chen and the other members of the Board have conflicting views on how best to run China Oriental, largely due to her lack of participation in the management and operations of the Group and her lack of experience in operating and managing an iron and steel manufacturing company like China Oriental. It is unfortunate and unfair to Shareholders that Ms. Chen has resorted to holding Shareholders at ransom by declaring that she will seek to exit her investment in China Oriental if the Smart Triumph Offers fail The Board however, strongly believes in China Oriental and its unique strategic position in the iron and steel manufacturing market in China, and has every confidence that upon Ms. Chen and Pioneer s exit, there will be no difficulties in securing a long-term strategic partner whose interests align with that of China Oriental.

6 We have reasons to believe that Ms. Chen had DISREGARDED her duties as a director of China Oriental We have reasons to believe that Ms. Chen had, in the past, provided inaccurate information to China Oriental which may have potentially caused China Oriental to breach its obligations under the Listing Rules The Board has discovered, from information stated in the Offer Document, that Ms. Chen may have provided inaccurate information to China Oriental in respect of her relationship with Long King International Company Limited. This may have potentially caused China Oriental to breach the Listing Rules in respect of connected transactions. China Oriental has sought the assistance and guidance of the Stock Exchange regarding, among others, Ms. Chen s potential breach of her duties as a director of China Oriental and potential breach of her undertakings to the Stock Exchange in respect of a confirmation Ms. Chen provided which confirmed that Long King International Limited ( Long King ) is not, since the date of its establishment, her connected person or associate. However, it has since been disclosed by the Offeror in the Offer Document that on 1 April 2004, Pioneer acquired 100% of Long King. As this may have resulted in China Oriental breaching the relevant Listing Rules requirements, China Oriental will reserve its rights to take further action against, among others, Ms. Chen if it is proved that the confirmations she made were false.

7 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this Response Document or as to the action to be taken, you should consult a licensed securities dealer or a registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in China Oriental Group Company Limited, you should at once hand this Response Document to the purchasers or transferees, the bank, a licensed securities dealer or a registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this Response Document, 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 Response Document. (Incorporated in Bermuda with limited liability) (Stock Code: 581) Response document in relation to the unsolicited voluntary conditional offers by Macquarie (Hong Kong) Limited on behalf of Smart Triumph Corporation to acquire all the outstanding Shares and cancel all the outstanding Share Options of China Oriental Group Company Limited not already owned by Smart Triumph Corporation and parties acting in concert with it REJECT THE SMART TRIUMPH OFFERS TAKE NO ACTION DO NOT COMPLETE ANY FORMS OF ACCEPTANCE Financial Adviser to China Oriental Group Company Limited Independent Financial Adviser to the Independent Board Committee, the Independent Shareholders and Optionholders of China Oriental Group Company Limited A letter from the Board is set out on pages 9 to 39 of this Response Document. A letter from the Independent Board Committee containing its recommendations in respect of the Smart Triumph Offers is set out on pages 42 to 43 of this Response Document. A letter from the Jinxi Labour Union to the Offeror is set out on pages 40 to 41. A letter from Evolution Watterson Securities Limited to the Independent Board Committee, Independent Shareholders and Optionholders containing its advice to the Independent Board Committee, the Independent Shareholders and Optionholders of China Oriental in respect of the Smart Triumph Offers is set out on pages 44 to 65 of this Response Document. * For identification purposes only 17 August 2007

8 CONTENTS Page DEFINITIONS... 1 LETTER FROM THE BOARD A. Introduction B. Executive Summary C. Reasons for Rejecting the Smart Triumph Offers and StayingwithChinaOriental D. Additional Information E. Intentions of the Controlling Shareholder and the Directors in respect of the their Shares and Share Options F. Recommendation LETTER FROM JINXI LABOUR UNION TO SMART TRIUMPH LETTER FROM THE INDEPENDENT BOARD COMMITTEE LETTER FROM EVOLUTION WATTERSON APPENDIX I ADDITIONAL INFORMATION ABOUT THE GROUP APPENDIX II RISKS ASSOCIATED WITH THE EXCHANGEABLE BONDS APPENDIX III FINANCIAL INFORMATION ON CHINA ORIENTAL GROUP COMPANY LIMITED APPENDIX IV PROPERTY VALUATION APPENDIX V STATUTORY AND GENERAL INFORMATION i

9 DEFINITIONS In this Response Document, unless the context otherwise requires, the following expressions have the following meanings: acting in concert has the meaning ascribed to it under the Takeovers Code Angang Angang Steel Company Limited * ( ), a joint stock limited company incorporated in the PRC whose securities are listed on the Stock Exchange with stock code 347 Appendix or Appendices associate Board Bondholders Bridging Loan Lenders Bridging Loan CCASS refers to the appendix and appendices to this Response Document has the meaning ascribed to it under the Takeovers Code the board of Directors and for the reasons set out in paragraph 1 of Appendix V to the Response Document, unless stated otherwise, the expression Board in this Response Document shall exclude Ms. Chen holders of the Exchangeable Bonds or any of them Australia and New Zealand Banking Group Limited, Natixis Hong Kong Branch and Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., Hong Kong Branch (also known as Rabobank International Hong Kong Branch) being the providers of the Bridging Loan, details of which are more particularly set out in the Offer Document a bridging loan of up to HK$3,217 million, which is secured by Shares held or to be held by the Offeror, made available by the Bridging Loan Lenders to the Offeror pursuant to a facility agreement dated 14 June 2007 for the purpose of partially funding the Smart Triumph Offers and incidental expenses, details of which are more particularly set out in the Offer Document the Central Clearing and Settlement System established and operated by Hong Kong Securities Clearing Company Limited China Oriental or Company China Oriental Group Company Limited ( * ), an exempted company incorporated under the laws of Bermuda with limited liability, the shares of which are listed on the main board of the Stock Exchange with stock code 581 * For identification purposes only 1

10 DEFINITIONS Chingford Chingford Holdings Limited, a company incorporated under the laws of the British Virgin Islands with limited liability which is beneficially owned as to 100% by Mr. Han as at the Latest Practicable Date and which, as at the Latest Practicable Date holds approximately 1.99% of the issued share capital of China Oriental Chonggang Chongqing Iron & Steel Company Limited ( ), a joint stock limited company incorporated in the PRC whose securities are listed on the Stock Exchange with stock code 1053 CIMB-GK Comparable Companies CIMB-GK Securities (HK) Limited which is licensed for Type 1 regulated activity (dealing in securities), Type 4 regulated activity (advising on securities) and Type 6 regulated activity (advising on corporate finance) under the SFO, and financial adviser to China Oriental Chonggang, Magang and Angang CorporateLink CorporateLink Limited, the public relations representative of China Oriental Director(s) Disinterested Shares Exchange Rights Exchangeable Bonds the director(s) of China Oriental and for the purpose of this Response Document and for the reasons set out in paragraph 1 of Appendix V to the Response Document, the Directors include Mr. Han, Mr. Zhu Jun, Mr. Liu Lei, Mr. Shen Xiaoling, Mr. Yu Jianshui, Mr. Wong Man Chung, Francis, Mr. Yu Tung Ho and Mr. Gao Qingju only and does not include Ms. Chen all the issued Shares and Shares that may be issued under the Share Option Scheme other than those which are owned by the Offeror or persons acting in concert with it the rights of exchange at a ratio of one Share for each Exchangeable Bond held (subject to adjustments) attached to the Exchangeable Bonds, details of which are more particularly set out in the Offer Document the 4.75% coupon, unsecured exchangeable bonds due 2010 with a face value of HK$4.50 each to be issued by the Offeror pursuant to the Share Offer and to be guaranteed by Pioneer 2

11 DEFINITIONS Executive Evolution Watterson Evolution Watterson Letter Fair Share Offer Consideration per Share Forms of Acceptance Group the Executive Director of the Corporate Finance Division of the SFC or any delegate of the Executive Director Evolution Watterson Securities Limited, the independent financial adviser to the Independent Board Committee, the Independent Shareholders and Optionholders in respect of the Smart Triumph Offers and a licensed corporation under the SFO to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities the letter of advice dated 17 August 2007 from Evolution Watterson to the Independent Board Committee, the Independent Shareholders and Optionholders containing Evolution Watterson s advice and recommendation in respect of the Smart Triumph Offers HK$2.90 per Share, being HK$2.00 in cash and Exchangeable Bonds with a fair value of HK$0.90 on the basis of the valuation by Evolution Watterson the pink form of acceptance and transfer in respect of the Share Offer and the white form of acceptance and cancellation for the outstanding Share Options in respect of the Option Offer China Oriental and its subsidiaries Hebei Jinxi Hebei Jinxi Iron and Steel Company Limited ( ), a joint stock limited company incorporated in the Peoples Republic of China on 24 December 1999 and the principal operating subsidiary of China Oriental. As at the Latest Practicable Date, China Oriental holds approximately 97.6% equity interest in Hebei Jinxi and the remaining approximately 2.4% equity interest is held as to 2.2% by Tangshan City Jinxi Iron and Steel Group Co., Ltd. ( ) and as to 0.2% by Tangshan City Qianxi Valves Factory ( ) HIBOR Hong Kong Interbank Offered Rate, the rate of interest offered on Hong Kong dollar loans by banks in the interbank market for a specified period ranging from overnight to one year 3

12 DEFINITIONS HK$ or HK dollar Hong Kong Independent Board Committee Independent Shareholders IPO Issue Date Hong Kong dollars, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the PRC an independent board committee of the Board comprising Mr. Yu Tung Ho, Mr. Gao Qingju and Mr. Wong Man Chung, Francis all of whom are independent nonexecutive Directors, established to advise the Independent Shareholders and Optionholders in respect of the Smart Triumph Offers the Shareholders other than the Offeror and parties acting in concert with it the initial public offering of the Shares on the Stock Exchange on 2 March 2004 the issue date of the Exchangeable Bonds as detailed in the Offer Document Jinxi Labour Union Hebei Jinxi Iron and Steel Company Limited Labour Union ( ), a body representing over 7,000 employees of Hebei Jinxi, the principal operating subsidiary of China Oriental Last Trading Date Latest Practicable Date Listing Rules Loans 15 June 2007, being the last trading day for the Shares prior to the date of the Offer Announcement 14 August 2007, being the latest practicable date prior to the printing of this Response Document for the purpose of ascertaining certain information contained in this Response Document, unless otherwise stated the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited the Bridging Loan, the Mezzanine Facility and any refinancing loan (where a member of the Bridging Loan Lenders is a lending party) to be provided to the Offeror for the purposes of refinancing the Bridging Loan and a Loan shall mean any one of such loans, details of which are more particularly set out in the Offer Document 4

13 DEFINITIONS Macquarie Macquarie (Hong Kong) Limited, a licensed corporation for Type 6 (advising on corporate finance) regulated activities under the SFO, being the financial adviser to the Offeror in relation to the Smart Triumph Offers Magang Maanshan Iron & Steel Company Limited ( ), a joint stock limited company incorporated in the PRC whose securities are listed on the Stock Exchange with stock code 323 Maturity Date Mezzanine Facility Mr. Han Ms. Chen the maturity date of the Exchangeable Bonds, being the third anniversary from the date of their issue, details of which are more particularly set out in the Offer Document a facility of up to HK$780 million provided and arranged by PMA Capital Management Limited on behalf of investments funds it manages to the Offeror pursuant to a facility agreement dated 14 June 2007 for the purposes of, inter alia, partially funding the Smart Triumph Offers, details of which are more particularly set out in the Offer Document Mr. Han Jingyuan, chairman and chief executive officer of the Group Ms. Chen Ningning, the sole shareholder of Pioneer, an executive director of the Offeror and an executive director of China Oriental Offer Announcement the announcement issued by the Offeror on 18 June 2007 in relation to the Smart Triumph Offers Offer Document the offer document dated 3 August 2007 issued by Macquarie on behalf of the Offeror in connection with the Smart Triumph Offers Offer Shares the Shares and any further shares which are unconditionally allotted or issued after the date hereof and before the date on which the Share Offer closes (or such earlier date or dates as the Offeror may decide) pursuant to the exercise of share options under the Share Option Scheme 5

14 DEFINITIONS Offeror or Smart Triumph Offeror Shares Optionholders Option Offer Option Offer Consideration PBR PER Smart Triumph Corporation, a company incorporated in the British Virgin Islands with limited liability and whose ultimate sole shareholder is Ms. Chen the existing issued shares in the Offeror holders of the Share Options the conditional cash offer for cancellation of the Share Options at the Option Offer Consideration the cash amount of HK$1.24 payable by the Offeror for cancellation of each Share Option accepted under the Option Offer price to book value ratio price to earnings multiples Pioneer Pioneer Iron & Steel Group Company Limited, a company incorporated in the British Virgin Islands and the sole shareholder of the Offeror Pioneer Group Pioneer and its subsidiaries (excluding Long King International Limited which the Company was not aware until its review of the Offer Document, that it is a subsidiary of Pioneer) Pioneer Shares PRC or China Response Document RMB ROA ROE SFC the existing issued shares in Pioneer the People s Republic of China this response document issued by China Oriental in connection with the Smart Triumph Offers and in response to the Offer Document Renminbi, the lawful currency of the PRC return on asset ratio return on equity ratio the Hong Kong Securities and Futures Commission 6

15 DEFINITIONS SFO Shareholders Shares Share Offer Consideration the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time holders of the Shares the existing issued shares of HK$0.10 each in China Oriental HK$18.00 in cash and two Exchangeable Bonds with face value of HK$4.50 each for every 9 Shares held by Shareholders who accept the Share Offer and Share Offer Consideration per Share shall mean HK$3.00, being HK$2.00 in cash and Exchangeable Bonds with face value of HK$1.00, per Share Share Option Scheme the share option scheme adopted by China Oriental on 23 June 2006 pursuant to a shareholders resolution passed on 17 May 2006 Share Options Share Offer Smart Triumph Offers Stock Exchange Takeovers Code US$ Valuer the outstanding options granted pursuant to the Share Option Scheme which are not exercised as at the Latest Practicable Date the unsolicited voluntary conditional offer made by Macquarie on behalf of the Offeror to acquire the Offer Shares not already owned by the Offeror and the parties acting in concert with it, including any revision thereof the Share Offer and the Option Offer The Stock Exchange of Hong Kong Limited the Hong Kong Code on Takeovers and Mergers, as in force from time to time United States dollar(s), the lawful currency of the United States of America DTZ Debenham Tie Leung Limited, a property valuer independent of China Oriental 7

16 DEFINITIONS Wellbeing Wellbeing Holdings Limited, a company incorporated under the laws of the British Virgin Islands with limited liability which is beneficially owned as to 60.69% by Mr. Han, as at the Latest Practicable Date and which, as at the Latest Practicable Date, holds approximately 42.82% of the Shares in China Oriental YYF Zhuhai Yueyufeng Co. Ltd, a company located in the Zhuhai Special Economic Zone in the PRC and in which, as at 31 July 2007, the Offeror indirectly holds 66% of the equity interest, with the remaining equity interest being held by third parties who are independent of the Offeror, Pioneer or any of their respective associates % per cent. In this Response Document, certain amounts denominated in RMB have been translated, for illustration purposes only, into HK$ at the exchange rate of RMB1.00:HK$1.03 and certain amounts denominated in US$ have been translated for illustration purposes only, into HK$ at the exchange rate of US$1.00:HK$7.80. In the event of inconsistency, the English text of this Response Document shall prevail over the Chinese text. 8

17 LETTER FROM THE BOARD (Incorporated in Bermuda with limited liability) (Stock Code: 581) Executive Directors: Mr. Han Jingyuan (Chairman and Chief Executive Officer) Mr. Zhu Jun Mr. Liu Lei Mr. Shen Xiaoling Mr. Yu Jianshui Independent Non-executive Directors: Mr. Gao Qingju Mr. Yu Tung Ho Mr. Wong Man Chung, Francis Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda Principal office and place of business in Hong Kong: Suites & 10 9th Floor, Great Eagle Centre 23 Harbour Road Wanchai Hong Kong 17 August 2007 Note: For the reasons set out in paragraph 1 of Appendix V to the Response Document, for the purpose of this letter, which expresses the Board s views on the Smart Triumph Offers, Ms. Chen has been excluded from the Board. To the Shareholders and Optionholders Dear Sir or Madam, Unsolicited voluntary conditional offers by Macquarie (Hong Kong) Limited on behalf of Smart Triumph Corporation to acquire all the outstanding Shares and cancel all the outstanding Share Options of China Oriental Group Company Limited not already owned by Smart Triumph Corporation and parties acting in concert with it REJECT THE SMART TRIUMPH OFFERS TAKE NO ACTION DO NOT COMPLETE ANY FORMS OF ACCEPTANCE THERE IS NO FUTURE WITH SMART TRIUMPH OR PIONEER * For identification purposes only 9

18 LETTER FROM THE BOARD A. INTRODUCTION On 18 June 2007, the Offeror made an unsolicited voluntary conditional offer to acquire all the Offer Shares and cancel all the Share Options (other than those already owned by the Offeror and parties acting in concert with it). The Offeror has offered a Share Offer Consideration of HK$18.00 in cash and two Exchangeable Bonds with face value of HK$4.50 each for every 9 Shares held by Shareholders who accept the Share Offer (which is equivalent to HK$2.00 in cash plus Exchangeable Bonds with a face value of HK$1.00 per Share) and an Option Offer Consideration of HK$1.24 for the cancellation of each Share Option accepted under the Option Offer. Details of the Smart Triumph Offers are set out in the Offer Document which was despatched to the Shareholders on 3 August In accordance with Rule 2.1 and Rule 2.8 of the Takeovers Code, the Independent Board Committee comprising all the independent non-executive Directors of China Oriental, namely Mr. Yu Tung Ho, Mr. Gao Qingju and Mr. Wong Man Chung, Francis, was established to advise the Independent Shareholders and the Optionholders in respect of the Smart Triumph Offers. The independent non-executive Directors are independent of and have no direct or indirect interest in the Smart Triumph Offers other than, in the case of Mr. Gao Qingju and Mr. Wong Man Chung, Francis, as holders of the Share Options which are subject to the Option Offer. China Oriental, with the approval of the Independent Board Committee, has appointed Evolution Watterson as its independent financial adviser to advise the Independent Board Committee, the Independent Shareholders and the Optionholders on whether the Smart Triumph Offers are fair and reasonable so far as the Independent Shareholders and the Optionholders are concerned and as to the actions to be taken by them. Evolution Watterson has advised the Independent Board Committee, the Independent Shareholders and Optionholders that it is of the view that the terms of the Smart Triumph Offers are inadequate and thus the Smart Triumph Offers are not fair and not reasonable so far as the Independent Shareholders (in respect of the Share Offer) and Optionholders (in respect of the Option Offer) are concerned. Accordingly, Evolution Watterson has advised the Independent Board Committee, the Independent Shareholders and Optionholders to reject the Smart Triumph Offers. The full text of the letter of advice from Evolution Watterson addressed to the Independent Board Committee, the Independent Shareholders and the Optionholders is set out in the Response Document. Shareholders and Optionholders are advised to read the letter of advice from Evolution Watterson and the additional information contained in the Appendices to the Response Document carefully before taking any action in respect of the Smart Triumph Offers. The Board, including each of the independent non-executive Director (taking into account the advice and recommendation of Evolution Watterson), unanimously recommends the Shareholders and the Optionholders in the strongest possible terms to REJECT the Smart Triumph Offers. Shareholders and Optionholders are advised to TAKE NO ACTION. DO NOT COMPLETE ANY FORMS OF ACCEPTANCE. 10

19 LETTER FROM THE BOARD The purpose of this letter is to give you further information on the business of the Group and its prospects and the reasons for the Board s recommendation to the Shareholders to REJECT the Smart Triumph Offers. Mr. Han, the Chairman of the Board and the only Director who holds Shares in China Oriental and together with parties acting in concert with him (and together, they hold 1,303,082,849 Shares, representing approximately 44.81% of China Oriental s issued share capital), intends to REJECT the Share Offer in respect of the Offer Shares he holds. Each of the Directors (save for Mr. Yu Tung Ho, who does not hold any Share Options) intends to REJECT the Option Offer in respect of all the Share Options they hold. If you are a Shareholder or an Optionholder, in order to REJECT the Smart Triumph Offers, you do not need to take any action. In particular, there is no need to respond to any current or future documents sent to you by the Offeror, Pioneer or Macquarie or to any other communications from the Offeror, Pioneer or Macquarie or any of their representatives (including telephone solicitation or canvassing). We strongly encourage you to read the Response Document carefully before making any decisions relating to your Offer Shares or Share Options. We very much hope that you will make the right decision and stay with China Oriental. The Board welcomes Ms. Chen and Pioneer s exit from China Oriental It is unfortunate and unfair that Ms. Chen has resorted to holding Shareholders at ransom by declaring that she will seek to exit her investment in China Oriental if the Smart Triumph Offers fail. The reality is, we would very much welcome her exit from China Oriental, both as a board member and a shareholder. The Board strongly believes in China Oriental and its unique strategic position in the iron and steel manufacturing market in China, and has every confidence that upon Ms. Chen and Pioneer s exit there will be no difficulties in securing a long-term strategic partner whose interests align with that of China Oriental. Ms. Chen and the other members of the Board have conflicting views on how best to run China Oriental, largely due to her lack of participation in the management and running of the Group and her lack of experience in operating and managing an iron and steel manufacturing company like China Oriental. While the members of the Board have the insights and visions to anticipate the changes in the Chinese steel manufacturing industry and have taken the strategic position of focusing on improving China Oriental s product mix, Ms. Chen does not have the same vision and proposes to inject YYF into China Oriental, which only produces low margin billets that goes against China Oriental s future growth strategy. The Board strongly believes that the conflict between Ms. Chen and the members of the Board has, to a great extent, hindered the performance of the Shares. The following will demonstrate very clearly the overriding reasons to REJECT the Smart Triumph Offers and the overriding reasons to STAY WITH CHINA ORIENTAL. 11

20 LETTER FROM THE BOARD B. EXECUTIVE SUMMARY The following gives a brief summary of the Board s main reasons for rejecting the Smart Triumph Offers, please refer to section C of this letter and the Appendices to the Response Document for further details. REJECT THE SMART TRIUMPH OFFERS THEY FAIL TO OFFER FAIR VALUE The Smart Triumph Offers are unfair and inadequate and offer Shareholders and Optionholders a discount rather than a premium for ceding control The Share Offer Consideration per Share and hence the Option Offer Consideration represents a significant discount rather than a premium to the value of China Oriental. The Share Offer Consideration per Share of HK$3.00 and the Fair Share Offer Consideration per Share of HK$2.90 represent a discount of approximately 9.6% and 12.6%, respectively to the closing price of HK$3.32 per Share as quoted on the Stock Exchange on the Latest Practicable Date. Shareholders should also note that a significant part of the value of the Share Offer Consideration is based on the value of the Exchangeable Bonds. The Exchangeable Bonds are unrated, unsecured, unlisted, illiquid, nontransferable and are deeply subordinated in payment and repayment to rank behind the Loans and will rank only ahead of equity share capital. The Offeror and Pioneer are both private companies and there is very little information relating to their operations, assets and future plans available in the public. For the reasons stated in section C of this letter and sections (B) and (C) of Appendix II to the Response Document, the Board strongly believes that the Offeror s ability to fully redeem the Exchangeable Bonds when they mature is highly uncertain and there are significant risks for accepting Shareholders to successfully exercise their Exchange Rights. The Offeror stated that China Oriental is underperforming but the Offeror omitted to mention that China Oriental performs better than Comparable Companies of similar size Macquarie rightly pointed out in the Offer Document that Chonggang is more comparable to China Oriental in both size and product mix but it had omitted, however, to tell you that China Oriental s performance, in terms of net profits, ROA and ROE, have consistently and significantly outperformed Chonggang. 12

21 LETTER FROM THE BOARD The Offeror s allegation that Wellbeing and Chingford s purchases of Shares supported an artificially high Share price is entirely GROUNDLESS The Board considers the allegation made in the Offer Document totally groundless on the following basis: The maximum purchase price paid by Wellbeing and Chingford was HK$3.25 per Share while the closing price of the Shares continued to rise from HK$3.26 on 11 July 2007 (the last day on which Wellbeing and Chingford purchased Shares) to a high of HK$3.87 on 25 July The Board fails to see how Wellbeing and Chingford s relatively insignificant purchases could lead to the recent significant increase in the Share price. The Board strongly believes that the recent Share price increase is due to the market s re-assessment of China Oriental. REJECT THE SMART TRIUMPH OFFERS YOU HAVE NO FUTURE WITH SMART TRIUMPH OR PIONEER The Offeror and Pioneer have formulated NO clear growth strategy and have not provided Shareholders with any real or feasible plans for China Oriental s future. Shareholders are warned that there may be significant risks and uncertainties involved in Pioneer s plans to inject YYF into China Oriental On page 10 of the Offer Document, Pioneer states that it intends to inject Pioneer s 66% stake in YYF into China Oriental subject to shareholder and regulatory approvals but have provided NO INFORMATION on YYF or the proposed injection of YYF into China Oriental. In particular, the Offeror, Pioneer and Macquarie have provided: NO financial information regarding YYF. NO information on YYF s product mix. NO information on YYF s other equity holders and there is NO WAY in which to assess whether these equity holders are desirable strategic partners for China Oriental. NO information on the shareholder and regulatory approvals required. 13

22 LETTER FROM THE BOARD NO information on the extent this proposed injection will affect China Oriental s debt position. NO information on the price China Oriental will have to pay for YYF. Given the lack of any material or useful information regarding YYF, the Board strongly believes that Offeror, Pioneer and Macquarie have failed to provide Shareholders with any real or feasible plans for China Oriental s future. NO concrete expansion plans to support the Offeror and Pioneer s fund raising programme. Shareholders interests in China Oriental will be diluted substantially The Board is gravely concerned that the Offeror and Pioneer s intentions to use China Oriental as a platform for raising funds without any concrete plans will only serve to dilute Shareholders interests in China Oriental. The Board seriously doubts and is highly skeptical of the Offeror or Pioneer s ability to provide better managed and secure iron ore supply contracts Since 2004, prices quoted for iron ore by the Pioneer Group has consistently been more expensive than the PRC unified agreed price for iron ore imports and the Group therefore ceased sourcing its iron ore requirements from the Pioneer Group. On this basis, the Board is seriously concerned that the Pioneer Group will fail Shareholders in its promise to provide better managed and secure iron ore supply contracts to China Oriental. We have reasons to believe that Ms. Chen may have disregarded her duties as a director of China Oriental On 13 August 2007, China Oriental announced that it has made a submission to the Stock Exchange, seeking its assistance and guidance in investigating a potential breach of directors duties by Ms. Chen and another individual and a potential breach of their undertakings to the Stock Exchange under Part 2 of Appendix 5B of the Listing Rules. China Oriental has discovered that certain facts disclosed in the Offer Document are inconsistent with certain confirmations (the Confirmations ) made by Ms. Chen and other individuals to China Oriental in respect of the relationships Ms. Chen and these individuals have with a company called Long King International Limited ( Long King ). In reliance on the Confirmations that Long King was not an associate or connected person (as defined under the Listing Rules) of Ms. Chen or these individuals, China Oriental entered into certain transactions with Long King. China Oriental now has reasons to believe that the Confirmations were inaccurate and therefore these transactions may have amounted to connected transactions for the purpose of Rule 14A of the Listing Rules. If the Confirmations are proved to be false, China Oriental reserves its rights to take action against Ms. Chen and any other person in respect of such misrepresentation. 14

23 LETTER FROM THE BOARD REJECT THE SMART TRIUMPH OFFERS THERE ARE OVERRIDING REASONS TO REJECT THE SMART TRIUMPH OFFERS NO confidence in the corporate governance standards of the Offeror, Pioneer and Ms. Chen The Board has strong reservations on the Offeror or Pioneer or Ms. Chen s pledge of good corporate governance for China Oriental for the following reasons: Neither the Offeror nor Pioneer are publicly listed companies or Hong Kong incorporated companies and therefore, the Board strongly doubts whether they have sufficient experience or understanding of the Listing Rules, any rules of any stock exchanges or any other Hong Kong laws or regulations. Ms. Chen s poor attendance at China Oriental and Hebei Jinxi s board meetings is a clear indication that she has no regard to proper corporate governance. Exchange Rights are not valuable Shareholders should be warned that if they accept the Share Offer, their ability to benefit from any increase in the Share price and any dividends China Oriental may distribute will be locked-up for one full year. More importantly, the Board wishes to emphasise that the conversion price of the Exchangeable Bonds of HK$4.50 represents a 50.0% premium to the Share Offer Consideration per Share of HK$3.00. Such premium is totally unfair to Shareholders who accept the Share Offer and who exercise the Exchange Right as the increase in the Share price from HK$3.00 to HK$4.50 would only benefit the Offeror, rather than the Bondholders. The Smart Triumph Offers are unsolicited and do not have the support of the Board, China Oriental s controlling shareholder and the Directors The Board wishes to emphasise that the Smart Triumph Offers are UNSOLICITED and is NOT SUPPORTED by the Board (including the independent non-executive Directors taking into account the advice and recommendation of Evolution Watterson), the Directors, Chingford and Wellbeing (which is China Oriental s controlling shareholder and together with Chingford, are controlled by Mr. Han). 15

24 LETTER FROM THE BOARD If the Smart Triumph Offers succeed, China Oriental s ability to maintain its minimum public float as required under the Listing Rules will be adversely affected and the value of the Shares underlying the Exchangeable Bonds will be significantly reduced Wellbeing (China Oriental s controlling shareholder), Chingford and the Directors have expressed their intentions to reject the Smart Triumph Offers and as such, even if the Share Offer succeeds, China Oriental will fail to maintain its minimum public float as required under the Listing Rules. This will necessarily involve the placing of a significant number of Shares at a steep discount to the market price and will in turn have a significant negative impact on the price of the Shares. Shareholders who accept the Share Offer will suffer further as the value of the Exchangeable Bonds they hold would further decrease due to the expected significant reduction in the value of the Shares underlying the Exchangeable Bonds. Acceptance threshold for the Share Offer will be unusually high and there is no prospect of the Option Offer becoming unconditional. Accordingly, there is little prospect of the Smart Triumph Offers becoming successful As Wellbeing, Chingford and the Directors have expressed their intentions to reject the Smart Triumph Offers (and together, Wellbeing, Chingford and the Directors (together with any concert parties acting with them) hold approximately 44.81% of the issued share capital of China Oriental), in order for the Smart Triumph Offers to become unconditional, an unusually high acceptance threshold for the Share Offer (Please refer to section (D) of Appendix I to the Response Document for the relevant shareholding structure table) must be met. It follows that although mathematically possible, there is very little prospect of the Smart Triumph Offers becoming successful. The Smart Triumph Offers are not supported by a majority of China Oriental s employees Jinxi Labour Union, a union established by the employees of Hebei Jinxi, the principal operating subsidiary of China Oriental, which represents the interests of over 7,000 employees of Hebei Jinxi, has expressed, among other things, that the Smart Triumph Offers are not in the best interests of the employees of Hebei Jinxi and they have no confidence in the Offeror, Pioneer or Ms. Chen in running the Group, and that it strongly urges Wellbeing to reject the Smart Triumph Offers. 16

25 LETTER FROM THE BOARD There are risks associated with the Offeror and Pioneer s lack of experience in operating a company such as China Oriental So far as the Board is aware, neither the Offeror, Pioneer nor Ms. Chen has any experience in managing or operating an iron and steel manufacturing company in China. Ms. Chen has a poor board meeting attendence rate at China Oriental, having only personally attended two out of 19 board meetings in 2005 and Further, neither the Offeror, Pioneer nor Ms. Chen has any in depth knowledge of the operations of Hebei Jinxi, China Oriental s principal operating subsidiary, having spent minimal time and contributed minimal effort into its operations and management. STAY WITH CHINA ORIENTAL MAXIMISE YOUR RETURNS WITH US The Board strongly believes that Shareholders should stay with China Oriental for the following reasons: The Offeror and Pioneer lack the insights and visions for China Oriental s future growth As discussed in the Offer Document, the Offeror and Pioneer are far more concerned about the quantity of products China Oriental can produce without reference to the quality of such products. This is a clear indication that they do not have the necessary insights or visions for China Oriental s future growth. Since 2003, not only has China Oriental s steel production capacity increased, it has also focused, in line with PRC government policies, on improving its competitive edge by enhancing its product mix and production efficiency. Accordingly, while China Oriental has continued to expand its steel production capacity, it has also begun to produce products with higher margins such as H-section steel. Pioneer s plans to inject YYF, which only produces low margin billets, goes against China Oriental s strategic plans and the PRC government s policies for the steel industry in China. The Group has a strong track record and its existing management team has consistently excelled in managing the Group s assets and equity The Group s existing management team has consistently excelled in the management and utilisation of the Group s assets and equity capital with its ROE and ROA for the three years ended as at 31 December 2006 being consistently higher than the 17

26 LETTER FROM THE BOARD average ROE and ROA of the Comparable Companies during this period. In addition, Hebei Jinxi, the principal subsidiary of the Group, is a highly successful company in China which has won numerous awards in China for its achievements in recent years. Please refer to section (A) of Appendix I to the Response Document for an analysis of China Oriental financial ratios and a list of awards achieved by Hebei Jinxi in recent years. The Board strongly believes the Share Offer Consideration and the Option Offer Consideration do not reflect the Group s excellent prospects and unique strategic position Since China Oriental s IPO, the Group, under the leadership of its existing management team, has successfully realised all the plans stated in China Oriental s prospectus and annual reports, including, but not limited to, the increase in production capacity and the introduction of H-section steel production to improve its product mix. The Group continues to be committed to the development and expansion of its H-section steel production capacity. Combined with the promising outlook of the H-section steel market in China, the Board has every confidence that the Group is in a strong strategic position with solid and sustainable operational and financial growth prospects. China Oriental s existing management team is highly experienced and committed The Group has a strong, experienced, dedicated and highly capable management team which has solid and extensive operational and managerial experience in the iron and steel manufacturing industry. The existing management team is instrumental to the Group s success and has led the Group to attain its strong foothold in the iron and steel manufacturing market in China. The Group s existing management team is committed to the continual development and growth of the Group with a view to create greater value for Shareholders. China Oriental s corporate governance will continue to improve The Board has every confidence in the ability and experience of the Directors in performing their duties as directors of China Oriental and to guide China Oriental in the continual improvement of its corporate governance. 18

27 LETTER FROM THE BOARD C. REASONS FOR REJECTING THE SMART TRIUMPH OFFERS AND STAYING WITH CHINA ORIENTAL REJECT THE SMART TRIUMPH OFFERS The following provide further details and information on the various issues highlighted in the previous section. THE SMART TRIUMPH OFFERS FAIL TO OFFER FAIR VALUE 1. The Smart Triumph Offers are unfair and unattractive and offer Shareholders and Optionholders a discount rather than a premium for ceding control The Share Offer Consideration and hence the Option Offer Consideration represent a discount rather than a premium to the value of China Oriental. It represents a PER and PBR of only approximately 8.1 times of the profit attributable to Shareholders and 1.5 times of the consolidated net asset value of China Oriental for the year ended and as at 31 December 2006, respectively, which are highly inadequate compared to average of 17.5 times and 2.4 times of the Comparable Companies for the same period. Shareholders should also note that a significant part of the value of the Share Offer Consideration is based on the value of the Exchangeable Bonds. The Exchangeable Bonds are junk bonds with very substantial risks attached to them While we note that Macquarie has valued the Exchangable Bonds at HK$4.50 per Exchangeable Bond, we have serious doubts as to the valuation of the Exchangeable Bonds provided by Macquarie. In particular and more detailedly discussed in Appendix II to the Response Document: Valuation assumptions not justifiable. Valuation assumptions used by Macquarie in deriving its valuation of the Exchangeable Bonds, including an unreasonably low interest rate used and the failure to take into account Pioneer s highly geared financial position, are unjustifiable. Fair value of the Exchangeable Bonds. According to Evolution Watterson, the fair value of the Exchangeable Bonds is only HK$4.05 per Exchangeable Bond, a discount of 10.0% to HK$4.50. No value on the Exchangeable Bonds if the Offeror or Pioneer defaults on the Loans. For the following reasons, the Board is of the view that payments and repayments of the Exchangeable Bonds are highly uncertain which could effectively mean that they are worth nothing: 19

28 LETTER FROM THE BOARD As stated on page 22 of the Offer Document, there is no immediate right of acceleration of repayment of the Exchangeable Bonds even if the Loans are in default. The Exchangeable Bonds are unsecured and are deeply subordinated in payment and repayment to rank behind the Loans and will rank only ahead of equity share capital. The high debt to equity ratios of the Offeror and Pioneer of approximately 3,800% and 118%, respectively (please refer to section (E) of Appendix II to the Response Document for the basis of the calculation of the Offeror and Pioneer s gearing ratios) and the deeply subordinated nature of the Exchangeable Bonds are great causes for concern on the Offeror and Pioneer s ability to repay the Loans without stripping cash from China Oriental. Further, as stated on pages 22 to 23 of the Offer Document, the Offeror has agreed that it will not make any payments under the Exchangeable Bonds unless, among other things, the aggregate of all principal amounts and all other amounts under the Bridging Loan is equal to or less than the aggregate principal value of the issued Exchangeable Bonds which have not been redeemed or purchased. Significant risks for Shareholders wishing to exercise Exchange Right. The Loans are principally secured by the Shares held by the Offeror. If the Offeror defaults on repayment of the Loans in accordance with their terms, Shareholders who accept the Share Offer will have a very high risk of not being able to receive Shares on exercise of their Exchange Right. Further, as warned by Macquarie on page 23 of the Offer Document, the Offeror may (to the extent that the Loans have not been terminated prior to an exercise by a Bondholder of its Exchange Right) need to seek from the relevant lenders the release of such Shares to satisfy such Bondholder s Exchange Right. This substantially increases the uncertainty and the difficulty for Shareholders who accept the Share Offer to successfully exercise their Exchange Rights to receive the Shares. The Exchangeable Bonds are unrated. Shareholders should note that the Exchangeable Bonds are not conventional rated corporate bonds. Unlike rated corporate bonds, there is very little understanding or information regarding the quality of the Exchangeable Bonds. 20