Listing by way of Introduction

Transcription

1 Man Sang Jewellery Holdings Limited 民生珠寶控股有限公司 Man Sang Jewellery Holdings Limited 民生珠寶控股有限公司 Man Sang Jewellery Holdings Limited 民生珠寶控股有限公司 (Incorporated in the Cayman Islands with limited liability) Stock Code: 1466 Listing by way of Introduction Sponsor This photo illustrates an enlarged image of pearls.

2 IMPORTANT You are advised to exercise caution when reading this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. Man Sang Jewellery Holdings Limited 民生珠寶控股有限公司 (Incorporated in the Cayman Islands with limited liability) Stock code: 1466 LISTING BY WAY OF INTRODUCTION ON THE MAIN BOARD OF THE STOCK EXCHANGE OF HONG KONG LIMITED Sponsor REORIENT Financial Markets Limited Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this listing document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this listing document. This listing document is published in connection with the Listing on the Main Board of the Stock Exchange and contains particulars given in compliance with the Securities and Futures (Stock Market Listing) Rules (Chapter 571V of the Laws of Hong Kong) and the Listing Rules solely for the purpose of giving information with regard to the Company and its subsidiaries. The listing document does not constitute an offer of, nor is it calculated to invite offers for, Shares or other securities of the Company, nor have any such Shares or other securities been allotted or issued with a view to any of them being offered for sale to or subscription by the public. No Shares will be allotted or issued in connection with, or pursuant to, this listing document. Your attention is drawn to the section headed Risk Factors in this listing document. Information regarding the proposed arrangements for the listing of, and dealings and settlement of dealings in, the Shares following completion of the Spin-off is set out in the section headed Information about this listing document and the Spin-off in this listing document. 30 September 2014

3 EXPECTED TIMETABLE Date (1) Last day of dealings in MSIL Shares on a cum entitlement basis First day of dealings in MSIL Shares on anexentitlementbasis... 3October2014 6October2014 Latest time for lodging transfers of the MSIL Shares cum entitlement to the Shares pursuant to the MSIL Distribution :30 p.m. on 7 October 2014 RegistersofmembersofMSILclose... 8October2014to10October2014 RecordDate... Registers of members of MSIL re-open Share certificates for the Shares to be despatched (2)... Dealings in the Shares on the Stock Exchange expected to commence (2)... 10October October October October2014 Notes: (1) All dates and times refer to Hong Kong dates and times, unless otherwise stated. (2) The Share certificates are expected to be despatched to Qualifying MSIL Shareholders (except for any Overseas MSIL Shareholders) on 16 October The Share certificates will only become valid if the MSIL Distribution becomes unconditional. In the event the MSIL Distribution does not become unconditional, dealings in the Shares on the Stock Exchange will not commence on 17 October In such event, the Company will make an announcement of the above and, if necessary, of a revised timetable. Investors who trade in the Shares prior to the receipt of the Share certificates do so entirely at their own risk. i

4 CONTENTS IMPORTANT NOTICE The Group has not authorised anyone to provide you with information that is different from what is contained in this listing document. Any information or representation not made in this listing document must not be relied on by you as having been authorised by the Group, the Sponsor, any of the Group or its respective directors, officers or representatives or any other person or party involved in the Spin-off. Page Expected Timetable... i Contents... ii Summary and Highlights... 1 Definitions Glossary of Technical Terms Forward-looking Statements Risk Factors Waiver from Strict Compliance with the Listing Rules Information about this Listing Document and the Spin-off Directors and Parties Involved in the Spin-off Corporate Information Industry Overview Regulatory Overview History, Reorganisation and Corporate structure Business Relationship with Controlling Shareholders Continuing Connected Transactions Directors and Senior Management Substantial Shareholders ii

5 CONTENTS Page Share Capital Financial Information Future Plans Appendix I Accountant s Report... I 1 Appendix II Unaudited Pro Forma Financial Information... II 1 Appendix III Property Valuation... III 1 Appendix IV Summary of the Constitution of the Company and Cayman Islands Company Law... IV 1 Appendix V Statutory and General Information... V 1 Appendix VI Documents Available for Inspection... VI 1 iii

6 SUMMARY AND HIGHLIGHTS This summary is intended to give you an overview of the information contained in this listing document. Since it is a summary, it does not contain all the information that may be important to you. You should read the listing document in its entirety. PROFIT WARNING THE COMPANY MAY ISSUE A PROFIT WARNING AFTER LISTING IN RESPECT OF THE GROUP S VERY SUBSTANTIAL REDUCTION IN THE FINANCIAL RESULTS FOR THE SIX MONTHS ENDING 30 SEPTEMBER IT IS PRELIMINARILY REVIEWED AND ESTIMATED BY THE BOARD THAT THERE WILL BE A VERY SUBSTANTIAL REDUCTION IN THE PROFIT OF THE GROUP FOR THE SIX MONTHS ENDING 30 SEPTEMBER 2014 AS A RESULT OF THE LISTING EXPENSES AMOUNTING TO APPROXIMATELY HK$11.3 MILLION, WHICH ARE ONE-OFF NON-RECURRING EXPENSES, AND THE PROFIT OF THE GROUP FOR THE FINANCIAL YEAR ENDING 31 MARCH 2015 WILL ALSO BE SIGNIFICANTLY ADVERSELY AFFECTED BY THE LISTING EXPENSES AMOUNTING TO APPROXIMATELY HK$15.8 MILLION AND TO A LESSER EXTENT, BY THE EXPECTED INCREASE IN THE RENTAL EXPENSES FOR THE GROUP S HEADQUARTERS IN HONG KONG AND THE LOSS OF ENTITLEMENT TO THE FAVOURABLE TAX TREATMENT UNDER DIPN21. OVERVIEW The Group s business activities The Group is principally engaged in the purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products (with and without pearls). Apart from selling jewellery products designed by the Group, the Group also sells jewellery products on an OEM basis. During the Track Record Period, the Group did not market its jewellery products under its own brand name except it has agreed to sell jewellery products to one major customer, which is a retailer in Europe, under the Group s own brand Man Sang Collections. The Group also designs and produces jewellery products without pearls to provide the customers with a wider selection of products. The Group has established its own design and CAD engineering teams which designs the majority of the Group s jewellery products. On average, each of the Group s design staff creates approximately 100 to 200 designs per month. For the three financial years ended 31 March 2014, the Group s designers have created approximately 7,000, 15,000 and 13,000 new jewellery product designs. Pearls that the Group sells include: (1) South Sea pearls (which is a type of saltwater pearls), (2) Tahitian pearls (which is a type of saltwater pearls); and (3) freshwater pearls. These pearls are sold individually, in packs of sorted pearls in various numbers and in strands mainly of 16 inches (approximately 40 cm) in length. The Group s jewellery products include, among others, necklaces, earrings, rings, pendants and bracelets and are usually made with 14K or 18K gold or sterling silver. 1

7 SUMMARY AND HIGHLIGHTS The processing, manufacturing and production of pearls and jewellery products are conducted at the Group s production facilities (including SZ Factory) located in Shenzhen, the PRC and which has a total gross floor area of approximately 8,200 square metres. For the three financial years ended 31 March 2014, the Group processed approximately 12,600 kg, 12,100 kg and 9,300 kg of pearls. For the three financial years ended 31 March 2014, the Group manufactured approximately 758,000 pieces, 543,000 pieces and 550,000 pieces of jewellery products. Customers The Group s customer base consists principally of corporate customers such as wholesale distributors, mass merchandisers, department store merchandisers in Europe, North America, Hong Kong and other Asian countries including Japan and China. During the Track Record Period, the Group predominantly used USD, HKD and Euro when transacting with its customers. For the three financial years ended 31 March 2014, the Group s five largest customers together accounted for approximately 57.9%, 50.8% and 45.1% of its total revenue with the largest customer accounting for approximately 18.1%, 13.3% and 11.5% of its total revenue. For the three financial years ended 31 March 2014, the Group had approximately 480, 370 and 400 customers, respectively, including 95, 102 and 98 customers, respectively, which purchased jewellery products from the Group. Save for 2 customers which bought jewellery products from the Group on an OEM basis, all other customers that bought jewellery products had bought jewellery products on an ODM basis. Suppliers The Group s raw materials mainly include pearls, precious metals (including gold and silver), diamonds, gemstones, accessories and parts and packaging materials for the production of jewellery products. The Group s pearls are sourced from pearl farmers and other pearl suppliers (like freshwater pearl processors and distributors) in the PRC, the Philippines, French Polynesia and Australia. The Group s precious metals, diamonds, gemstones and accessories and parts and packaging materials are mainly purchased from suppliers in Hong Kong and the PRC with a relatively small amount of the Group s other materials (mainly parts and accessories) are sourced from countries like Japan, Italy and Germany. For the three financial years ended 31 March 2014, the five largest suppliers of the Group together accounted for approximately 51.3%, 48.3% and 44.8% of the Group s total purchases and the largest supplier accounted for approximately 20.7%, 20.9% and 12.2% of the Group s total purchases respectively. Marketing The Group regularly attends trade shows and exhibitions to display and market its pearls and jewellery products, meet with existing and potential customers, evaluate market trends and collect market information. During the Track Record Period, the Group participated in major pearl and jewellery trade shows where many major international pearl and jewellery manufacturers and retailers attend and visit. 2

8 SUMMARY AND HIGHLIGHTS Products The following table sets forth the revenue by product types and the percentage of contribution of each product segment to the Group s total revenue for the financial years indicated: Financial year ended 31 March HK$ 000 % of total HK$ 000 % of total HK$ 000 % of total Saltwater pearls 79, , , Freshwater pearls 6, , , Jewellery products OEM 74, , , ODM 107, , , Man Sang Collections (Note) 32, , , Total 300, , , Note: During the Track Record Period, the Group sold jewellery products to one major customer exclusively under the Group s brand name ManSangCollections. Please refer to the section headed Business Branding for further details. The table below sets out the breakdown of the revenue from the sales of the Group s jewellery products during the Track Record Period. Financial year ended 31 March HK$ 000 % of total jewellery products sales HK$ 000 % of total jewellery products sales HK$ 000 % of total jewellery products sales Jewellery products with pearls 170, , , Jewellery products without pearls 43, , , Total revenue from the sales of jewellery products 213, , ,

9 SUMMARY AND HIGHLIGHTS Major markets The following table sets forth the revenue by geographical segments and the percentage of contribution of each geographical segment to the Group s total revenue for the financial years indicated: Financial year ended 31 March HK$ 000 % of total HK$ 000 % of total HK$ 000 % of total Europe 150, , , North America 76, , , Asian countries (excluding Hong Kong) 50, , , Hong Kong 13, , , Others 8, , , Total 300, , , Gross profit by products The table below sets out the gross profit and gross profit margin by the Group s major products during the Track Record Period. Financial year ended 31 March Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin HK$ 000 % HK$ 000 % HK$ 000 % Saltwater pearls 30, , , Freshwater pearls 3, , , Jewellery products 69, , , Gross profit before provision 104, , , Reversal of provision/(provision) for stock obsolescence/slow moving stock 7,800 3,636 (1,357) Gross profit after provision 112, , ,

10 SUMMARY AND HIGHLIGHTS COMPETITIVE STRENGTHS The Group believes that the following competitive strengths have set the Group apart from its competitors: An established operating history and a group of loyal and experienced senior management Established relationships with quality customers Ability to purchase pearls in bulk quantity from suppliers and establish cooperative relationships with suppliers A vertically integrated production chain and balanced product mix Experienced in-house processing, design and production teams Details of the Group s competitive strengths are set out in the section headed Business Competitive Strengths on pages 94 to 97 in this listing document. STRATEGIES The Group s goal is to become a leading pearl and jewellery product designer and manufacturer in Asia. To achieve this, the Group proposes to: Diversify the Group s range of products Strengthen the Group s design capabilities Build brand recognition Expand the Group s pearl and jewellery customer base Expand the Group s sales channels Please see the section headed Business Business Strategies on Future Development on pages 97 to 101 in this listing document for a detailed description of the Group s future plans. 5

11 SUMMARY AND HIGHLIGHTS KEY BUSINESS DRIVERS The Group s key business drivers include the following factors: Macro-economic conditions increase in real personal consumption expenditures in Europe and North America, being the major markets of the Group will have a positive impact on the sales of the Group Material price an expected long term stability in material prices, including pearls, gold and silver price will help attract customers and promote sales Marketing efforts subject to the more important factor of the macro-economic conditions, more participation in jewellery trade shows and exhibitions, offer more new designs and products and the Group s plan to launch its online shops will help generate sales and establish new business contacts MAJOR RISK FACTORS The Directors believe that there are certain risks involved in the Group s operations. Many of these risks are beyond the Group s control and can be categorised into: (i) risks relating to the business and industry of the Group; (ii) risks relating to conducting business in the PRC; and (iii) risks relating to the Introduction. The Group believes that the following are some of the major risks that may have a material adverse effect on it:. The Company may issue a profit warning after Listing in respect of the Group s very substantial reduction in the financial results for the six months ending 30 September It is preliminarily reviewed and estimated by the Board that there will be a very substantial reduction in the profit of the Group for the six months ending 30 September 2014 as a result of the listing expenses amounting to approximately HK$11.3 million, which are one-off nonrecurring expenses; and the profit of the Group for the financial year ending 31 March 2015 will also be significantly affected by the listing expenses amounting to approximately HK$15.8 million, the increase in rental expenses and the loss of entitlement to the favourable tax treatment;. Reliance on European and North American markets which are facing a difficult market environment;. Reliance on key management in the conduct of the Group s business;. Fluctuation in prices, or any availability, of the raw materials that the Group uses in its products may materially and adversely affect the Group s business, results of operations or financial condition;. There is no publicly available standard price index or reliable reference for pearls;. Higher labour costs and labour shortages could have material and adverse impact on the Group s operations and profitability;. Reduction of discretionary spending by retail customers; 6

12 SUMMARY AND HIGHLIGHTS. Reliance on major customers;. The Group leases premises in Hong Kong for use as its offices and warehouse and in China for use as its offices and production facilities and therefore the Group is exposed to risks relating to the commercial real estate rental market, including unpredictable and potentially high rental costs;. TheGroupwillceasetoenjoythefavourable tax treatment under the Hong Kong tax laws when the processing plant arrangements end;. The jewellery business is highly competitive. If the Group is unable to remain competitive, the Group will lose market share to its competitors as well as to new entrants in the markets in which the Group operates;. Historical expenses may not be a good indication of the level of expenses of the Group after the Listing; and. The Group did not fully pay certain social insurance and housing provident fund for its employees in the PRC during the Track Record Period and was not in compliance with PRC laws. The risks mentioned above are not the only significant risks that may affect the Group s business and results of operations. As different investors may have different interpretations and standards for determining materiality of a risk, you are cautioned that you should carefully read the entire section headed Risk Factors onpages30to43inthislistingdocument. Property The Group owns a residential property in Hong Kong, which is used by Mr. CH Cheng, the Nonexecutive Chairman of the Board, as Chairman s quarters at nil consideration. According to a rental indication letter issued for reference purpose by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the current market rental, including government rates and rent and management fee, of the said residential property in Hong Kong ranges from approximately HK$140,000 to HK$150,000 per month. For the purposes of the Spin-off, some management and back office expenses (including the rental expenses of providing the Chairman s quarters which included the estimated market rental value, actual government rates, management fees and car park rental expenses) were shared between the Group and the Remaining Group. As set out in the Accountant s Report contained in Appendix I to this listing document, the amount under the item Other benefits, beingthe rental expenses including the estimated market rental value, actual government rates, management fee and car park rental expenses in respect of the Chairman s quarters apportioned and attributable to the Group was approximately HK$0.31 million, HK$0.34 million and HK$0.34 million for each of the financial year ended 31 March 2012, 2013 and 2014 respectively. The full amount of the rental expenses of the said Chairman s quarters was approximately HK$1.6 million, HK$1.7 million and HK$1.7 million for each of the financial year ended 31 March 2012, 2013 and 2014 respectively. Among the Other benefits, the portion representing the estimated market rental value is included for disclosure purposes only and is not actually recorded in the Group s combined statement of comprehensive income. 7

13 SUMMARY AND HIGHLIGHTS Mr. CH Cheng is a non-executive Director and the Chairman of the Company and he is also a founder of the Group. The provision of the Chairman s quarters to Mr. CH Cheng is a benefit provided to him pursuant to the service contract entered into between the Company and Mr. CH Cheng. As at the Latest Practicable Date, Mr. CH Cheng was a non-executive director of MSIL and he will resign as a director and Chairman of MSIL prior to the Listing. As mentioned above, according to a rental indication letter issued for reference purpose by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the current market rental of the said residential property in Hong Kong ranges from approximately HK$140,000 to HK$150,000 per month, including government rates and rent and management fee. For illustrative purposes, for the year ending 31 March 2015, based on such estimated market rental, the full amount of the rental expenses of the said Chairman s quarters is estimated to be in the range of approximately HK$1.68 million to HK$1.80 million, part of which will be shared between the Group and the Remaining Group prior to Listing. As the related cost is shared between the Group and the Remaining Group, it is estimated that out of the amount of the above estimated rental expenses for the financial year ending 31 March 2015, approximately HK$1.0 million to HK$1.1 million will be allocated to and shared by the Group. After Listing, the full amount of the rental expenses of the said Chairman s quarters will be reflected in the Group s financial statements in the financial year ending 31 March 2015 (whilst the estimated rental value will only be included in the notes to the financial statements for information purposes only). Further information on the Group s owned and leased properties is set out on pages 133 to 134 of this listing document. 8

14 SUMMARY AND HIGHLIGHTS SUMMARY COMBINED FINANCIAL INFORMATION The below summary combined financial information for the three financial years ended 31 March 2014 should be read together with the combined financial information in Appendix I to this listing document, including the accompanying notes and the information set forth in Financial Information in this listing document. The combined financial information was prepared in accordance with the HKFRS. Financial year ended 31 March HK$ 000 HK$ 000 HK$ 000 Revenue 300, , ,473 Cost of sales (187,929) (179,862) (174,827) Gross profit 112,095 81,549 93,646 Other (losses)/gains, net (5,783) (289) 1,170 Selling expenses (16,879) (13,448) (15,627) Administrative expenses (43,419) (52,062) (47,580) Operating profit 46,014 15,750 31,609 Finance income 1, Finance cost (169) Finance income, net 1, Profit before income tax 47,902 16,398 32,024 Income tax expense (4,966) (2,121) (2,428) Profit for the year attributable to equity holders of the Company 42,936 14,277 29,596 Other comprehensive income: Items that will not be subsequently reclassified to profit or loss Increase in fair value of leasehold land and buildings, net of deferred tax 4,912 6,520 4,869 Items that may be subsequently reclassified to profit or loss Exchange difference on translation of foreign operation (170) Other comprehensive income, net of tax 4,912 6,520 4,699 Total comprehensive income for the year attributable to equity holders of the Company 47,848 20,797 34,295 Dividends 200, ,000 9

15 SUMMARY AND HIGHLIGHTS The Accountant s Report has not provided information on the earnings per share during the Track Record Period. It is stated in note 12 to the Accountant s Report that earnings per share information is not presented as its inclusion, for the purposes of the Accountant s Report, is not considered meaningful due to the Reorganisation and the presentation of the results for the financials years ended 31 March 2012, 2013 and 2014 on a combined basis as set out in note 1.3 to the Accountant s Report. Selected Combined Balance Sheet Items As at 31 March HK$ 000 HK$ 000 HK$ 000 Total non-current assets 91,623 96,214 99,933 Total current assets 547, , ,187 Total current liabilities 185, ,416 81,829 Total non-current liabilities 9,570 10,665 11,430 Net current assets 361, , ,358 Total equity attributable to equity holders of the Company (before the Deemed Distribution and the Capitalisation Issue) 443, , ,861 Note: Please refer to the unaudited pro forma statement of adjusted net tangible assets in respect of the effect of the Deemed Distribution and the Capitalisation Issue. Key Financial Ratios Financial year ended 31 March % % % Gross profit margin Net profit margin Return on equity Return on total assets As at 31 March Current ratio Debt-to-equity ratio 0.12 Please refer to the paragraph headed Key Financial Ratios in the section headed Financial Information on pages 200 to 202 of this listing document for further details. The Directors are of the opinion that, taking into account the financial resources available to the Group, including internally generated funds, the Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the expected date of this listing document. 10

16 SUMMARY AND HIGHLIGHTS Financial year ended 31 March HK$ 000 HK$ 000 HK$ 000 Net cash generated from/(used in) operating activities 13,433 (11,643) 22,520 Net cash (used in)/generated from investing activities (305,684) 7,378 (95,429) Net cash generated from financing activities 47,600 Cash and cash equivalents at the beginning of the financial year 490, , ,110 Effect of foreign exchange rate changes (18) (206) Cash and cash equivalents at the end of the financial year 198, , ,595 The Group recorded a net cash generated from operating activities of approximately HK$13.4 million and approximately HK$22.5 million for the financial years ended 31 March 2012 and 2014 respectively. For the financial year ended 31 March 2013, the Group recorded a net cash outflow from operating activities of approximately HK$11.6 million. The cash flow from operating activities was significantly affected by the decrease in sales and the increase of the trade receivable turnover during the Track Record Period. The overall cash flow position of the Group was also significantly affected by the funding transfer between the Group and the Remaining Group during the Track Record Period. For further details, please refer to the section headed Financial Information Liquidity and Capital Resources on pages 202 to 204 of this listing document. LEGAL PROCEEDINGS AND NON-COMPLIANCES The Directors have confirmed that, during the Track Record Period, there were no litigation or arbitration proceedings, and, to their best knowledge, they are not aware of any pending or threatened litigation or arbitration proceedings against the Group or any of the Directors, in each case, which had or could have a material and adverse effect on the Group s financial condition or results of operations. During the Track Record Period, the Group had the following major non-compliance issues: (i) the Group failed to make full social insurance contributions as required under the related PRC law according to the actual wages for its employees in the PRC during the Track Record Period, (ii) the Group failed to set up a housing provident fund account and contribute to most of its employees s housing provident fund accounts during the Track Record Period, and (iii) the Group s PRCOperations failed to comply with the approval/filing requirements in respect of its subcontracting arrangements under PRC laws. For details of the Group s historical non-compliance incidents, please refer to Business Legal Proceedings and Non-Compliances beginning on pages 137 to 141 of this listing document. DIVIDEND POLICY The Directors are responsible for submitting proposals in respect of dividend payments, if any, to the Shareholders general meeting for approval. Whether the Company pays a dividend and in what amount is based on its results of operations, cash flows, financial condition, cash dividends it receives from its subsidiaries, future business prospects, statutory and regulatory restrictions on the payment of dividends by the Group and other factors that the Directors deem relevant. 11

17 SUMMARY AND HIGHLIGHTS Dividends may be paid only out of distributable profits as determined under the HKFRS. The Group paid dividends of HK$200 million, HK$100 million and nil to the Remaining Group for the financial years ended 31 March 2012, 2013 and 2014, respectively. In the future, the Company expects to distribute no less than 30% of its annual distributable profits as dividends. There is, however, no assurance that the Company will be able to distribute dividends of such amount or any amount each year or in any year. The Group s future dividend policy will be determined by the Board based on the Group s results of operations, cash flows, financial position, capital adequacy ratio, cash dividends the Company receives from its subsidiaries, future business prospects, statutory and regulatory restrictions on the payment of dividends by the Group, and other factors that the Board may consider relevant. BACKGROUND INFORMATION OF THE GROUP AND THE REMAINING GROUP MSIL was incorporated in Bermuda on 30 July 1997 and has been listed on the Main Board since 26 September MSIL is principally engaged in (i) the purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products; and (ii) the development, investment, sales and leasing of properties. The Company was incorporated in the Cayman Islands on 13 May 2014, as the holding company of the Group. The Group is principally engaged in the purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products. On 10 April 2014, MSIL submitted a proposal for the Spin-off to the Stock Exchange pursuant to Practice Note 15 to the Listing Rules and has obtained confirmation from the Stock Exchange on 19 June 2014 that it may proceed with the proposal. Immediately following completion of the MSIL Distribution, the Remaining Group will be principally engaged in property development, whereas the Group will focus on the Pearls and Jewellery Business. The Spin-off aims to create separate platforms for the two businesses of the Pre Spin-off MSIL Group with clear delineation. The directors of MSIL believe that the separate listing of the Group will be beneficial to the Group and the Remaining Group based on the following reasons: (1) MSIL and the Company have different growth paths and different business strategies. The Spin-off will set up separate platforms for the business development of the two groups which in turn on one hand may enable the management team of MSIL to continue to focus on building the core business of the Remaining Group, thereby enhancing the decision-making process and its responsiveness to market changes; whilst on the other hand will also provide a mechanism to attract and motivate the Group s management directly in line with the financial performance of the Group on a standalone basis; (2) the Spin-off will facilitate the further development of the Group and it will provide separate fund raising platforms for the Remaining Group and the Group with respect to their respective operations and future prospects; (3) the Spin-off will create two groups of companies and will offer their respective shareholders and other investors flexibility to participate in the future development of both the Remaining Group and the Group or either of the groups; 12

18 SUMMARY AND HIGHLIGHTS (4) the Spin-off is expected to improve the operational and financial transparency of both the Remaining Group and the Group and provide investors, the market and rating agencies with greater clarity on the businesses as well as the respective financial status of the Remaining Group and the Group; and (5) after the separate listing of the Company, the respective management of the Group and the Remaining Group will be remunerated independently based on their performance which helps promote better staff motivation. Upon the completion of the Spin-off, the Company will no longer be a subsidiary of MSIL and the Group will be spun off from MSIL. As the Listing will not involve fund raising and offering of new Shares, the MSIL Qualifying Shareholders will have the same attributable interests in both groups before and immediately after Listing. THE SPIN-OFF The Spin-off will be implemented in compliance with the Listing Rules including Practice Note 15 to the Listing Rules. According to the Listing Rules including Practice Note 15 to the Listing Rules, approval by the shareholders of MSIL is not required for the Spin-off. As the Spin-off will be effected by way of introduction with no offering of new Shares or any other securities, there will be no dilution of the attributable interest of the Qualifying MSIL Shareholders. The Spin-off is conditional upon the Listing Committee granting listing of, and permission to deal in, the Shares in issue as at the Record Date on the Main Board. SHAREHOLDERS Immediately before the MSIL Distribution and as at the date of this listing document, Mr. CH Cheng is the Group s ultimate Controlling Shareholder, whose indirect interest is held through his direct wholly owned company, Rich Men Limited, and MSIL which directly holds the Company s entire issued share capital. Immediately after the MSIL Distribution and the Listing, Mr. CH Cheng will remain as the Group s ultimate Controlling Shareholder. Pursuant to the non-competition deed entered into among the Company and Mr. CH Cheng, subject to certain exceptions, Mr. CH Cheng has undertaken with the Company that he will not, and will procure that his close associates (other than members of the Group) will not, directly or indirectly, carry on or be engaged or interested in any business that is, directly or indirectly, in competition with the principal business of the Group of purchasing, processing, designing, production and sale of pearls and jewellery products in the PRC, Hong Kong or any part of the world in which any member of the Group may from time to time operate. Please refer to the section headed Relationship with Controlling Shareholders Non-competition Undertakings in this listing document for further details of the noncompetition undertakings. After the completion of the MSIL Distribution and the Spin-off, there will be certain continuing connected transactions between the Group and the Remaining Group, all of which are expected to be exempt from the reporting, announcement and independent shareholders approval requirements under Chapter 14A of the Listing Rules. Details of these continuing connected transactions are set out in the section headed Continuing Connected Transactions on pages 149 to 155 of this listing document. 13

19 SUMMARY AND HIGHLIGHTS UNAUDITED PRO FORMA STATEMENT OF ADJUSTED COMBINED NET TANGIBLE ASSETS The following unaudited pro forma statement of adjusted combined net tangible assets of the Group attributable to equity holders of the Company prepared based on the audited combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 as set out in the Accountant s Report contained in Appendix I to this listing document in accordance with Rule 4.29 of the Listing Rules is for illustration purpose only, and is set out here to illustrate the effect of the Listing (including the Deemed Distribution and Capitalisation Issue under the Reorganisation) on the combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 as if the Listing had taken place on that date. Due to its hypothetical nature, the unaudited pro forma statement of adjusted combined net tangible assets of the Group attributable to equity holders of the Company may not give a true picture of the combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 or any future date following the Listing and adjusted as described below. Audited combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 Estimated expenses relating to the Listing Effect of the Deemed Distribution and the Capitalisation Issue Unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company Unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company per Share HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ (note 1) (note 2) (note 3) (note 4) (note 5) 398,861 (15,796) (146,893) 236, Notes: 1. The audited combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 is extracted from the financial information contained in the Accountant s Report set out in Appendix I to this listing document. 2. The amount represents estimated expenses relating to the Listing expected to be incurred by the Group subsequent to 31 March 2014 which mainly include professional fees for the Sponsor, the Company s legal advisers and the reporting accountant, and other listing expenses. 3. For the purpose of this pro forma statement, it is assumed that the Deemed Distribution of HK$430,039,000 had been settled by netting off against the Group s net amount due from the Remaining Group (amounted to HK$92,146,000 as at 31 July 2014), a cash payment of approximately HK$54,747,000 and the Capitalisation Issue of HK$283,146,000. Pursuant to the Capitalisation Issue as stated in the section headed History, Reorganisation and Corporate Structure of this listing document, certain new Shares will be issued to MSIL by way of capitalising of the amounts due from the Company to MSIL of HK$283,146,

20 SUMMARY AND HIGHLIGHTS 4. Except for the listing expenses, the Deemed Distribution and the Capitalisation Issue, the unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company have not taken into account any trading results or other transactions entered into subsequent to 31 March The unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company per Share is based on 256,038,041 Shares in issue subsequent to the share sub-division of the Company on 26 September 2014 and the Capitalisation Issue prior to the Listing, but takes no account of any Shares which may fall to be issued upon the exercise of the share options under the Share Option Scheme. FUTURE PLANS It is the Group s objective to become a leading pearl and jewellery product designer and supplier in Hong Kong. For a detailed description of the Group s future plans, please see the section headed Business Business Strategies on Future Development on pages 97 to 101 of this listing document. PROFIT WARNING THE COMPANY MAY ISSUE A PROFIT WARNING AFTER LISTING IN RESPECT OF THE GROUP S VERY SUBSTANTIAL REDUCTION IN THE FINANCIAL RESULTS FOR THE SIX MONTHS ENDING 30 SEPTEMBER IT IS PRELIMINARILY REVIEWED AND ESTIMATED BY THE BOARD THAT THERE WILL BE A VERY SUBSTANTIAL REDUCTION IN THE PROFIT OF THE GROUP FOR THE SIX MONTHS ENDING 30 SEPTEMBER 2014 AS A RESULT OF THE LISTING EXPENSES AMOUNTING TO APPROXIMATELY HK$11.3 MILLION, WHICH ARE ONE-OFF NON-RECURRING EXPENSES, AND THE PROFIT OF THE GROUP FOR THE FINANCIAL YEAR ENDING 31 MARCH 2015 WILL ALSO BE SIGNIFICANTLY ADVERSELY AFFECTED BY THE LISTING EXPENSES AMOUNTING TO APPROXIMATELY HK$15.8 MILLION AND TO A LESSER EXTENT, BY THE EXPECTED INCREASE IN THE RENTAL EXPENSES FOR THE GROUP S HEADQUARTERS IN HONG KONG AND THE LOSS OF ENTITLEMENT TO THE FAVOURABLE TAX TREATMENT UNDER DIPN21. Please refer to the risk factors The Group s financial results for the six months ending 30 September 2014 and the financial year ending 31 March 2015 may be significantly adversely affected by the listing expenses, increase in the rental expenses for the Group s headquarters in Hong Kong and the loss of some tax benefit in relation to the processing plant arrangements and The Group will cease to enjoy the favourable tax treatment under Hong Kong tax laws when the processing arrangements end in this listing document. RECENT DEVELOPMENTS After 31 March 2014, the Group has completed the last parts of the Reorganisation, including transferring all related assets and liabilities in relation to the Pearls and Jewellery Business from Man Sang HK, MH Shenzhen and MS Factory to MS Jewellery and HBF Jewellery, both wholly-owned subsidiaries of the Group on 30 April All related employees who worked for Man Sang HK, MH Shenzhen and MS Factory on 30 April 2014 have been transferred to the Group and have commenced working for the Group since 1 May Save for the consideration payable under the Reorganisation, no material liability has been recorded by the Group or the Remaining Group as a result of such business transfer and reorganisation. There was no material interruption to the Group s operations as a result of such transfer and reorganisation. The consideration for the above transfer, together with all 15

21 SUMMARY AND HIGHLIGHTS other consideration payable under the Reorganisation, of approximately HK$430.0 million (which shall equal to the Deemed Distribution amount) has been netted off against other inter-company balances between the Group and the Remaining Group, a payment of approximately HK$54.7 million by the Group to the Remaining Group and the remaining balance will be settled in full by the Capitalisation Issue before Listing. Please also refer to the section headed History, Reorganisation and Corporate Structure for details of the Reorganisation. The effect of the Deemed Distribution is to replicate the consideration payable by the Group to the Remaining Group under the Reorganisation. Pursuant to DIPN21, the Group was only required to regard 50% of its taxable profit from the sales of products processed or manufactured by MS Factory or SZ Factory during the Track Record Period. For the three financial years ended 31 March 2014, the total tax savings enjoyed by the Group from the processing arrangements amounted to approximately HK$2.6 million, HK$0.8 million and HK$2.1 million respectively. Subsequent to the Reorganisation, the Group no longer engages in the processing arrangement under the MS Processing Agreement. The Group will no longer be entitled to the above favourable tax treatment under DIPN21 in respect of profit derived from the sale of products processed or manufactured pursuant to the MS Processing Agreement and as such may have an adverse effect to the Group s financial results. The Group will continue to be entitled to the tax benefits under the SZ Processing Agreement until its expiry on 9 May The business of the Group continues to grow after the financial year ended 31 March Based on the unaudited consolidated financial statements for the three months ended 30 June 2014 prepared by the Directors in accordance with Hong Kong Accounting Standard 34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ), which have been reviewed by the Company s reporting accountant, PricewaterhouseCoopers, in accordance with the Hong Kong Standards on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the HKICPA, the unaudited total revenue of the Group for the three months ended 30 June 2014 was approximately HK$66.6 million. The gross profit of the Group amounted to approximately HK$23.6 million representing a gross profit margin of approximately 35.3% for the three months ended 30 June The Group s initiative in strengthening its sales channels, such as the setting up of the VIP room in April 2014 and improving the product mix have contributed to the Group s results in terms of sales and gross profit margin. After 17 March 2014, the monthly rental cost of the Group s offices premises in Hong Kong increased from approximately HK$31 per square feet to approximately HK$45 per square feet representing an increase of 45%. Based on this, it is estimated that the rental expenses of the Group s headquarters in Hong Kong for the financial year ending 31 March 2015 will amount to HK$7.2 million, representing an increase of approximately 30% over that for the financial year ended 31 March Save for the listing expenses as mentioned below, the Group has not incurred any material nonrecurring expenses. 16

22 SUMMARY AND HIGHLIGHTS Save as disclosed above, as far as the Directors are aware, there have been no material changes in the general economic and market conditions, related laws and regulations or the pearl and jewellery product industry in which the Group operates, market trend the Group s major customers and suppliers that have materially and adversely affected the Group s results of operation or financial condition since 31 March 2014 and up to the Latest Practicable Date. LISTING EXPENSES Listing expenses include the fees of the Sponsor, reporting accountant, legal advisers fees and other professional fees for the Reorganisation and listing application. Listing expenses expected to be incurred in relation to the Spin-off which will be charged to the statement of comprehensive income of the Group for the financial year ending 31 March 2015 amount to approximately HK$15.8 million (among which, approximately HK$11.3 million is expected to be reflected in the Company s consolidated statement of comprehensive income for the six months ending 30 September 2014), which is higher than the segment profit of the Pearls and Jewellery Business as stated in the interim report of MSIL for the six months ended 30 September 2013 of HK$11.7 million. The Qualifying MSIL Shareholders should note that the segment profit of the Pearls and Jewellery Business of MSIL for the six months ended 30 September 2013 is subject to the allocation of the certain shared expenses between the Group and the Remaining Group as detailed in the paragraph headed Basis of presentation in the section headed Financial Information in this listing document and therefore does not represent the profit of the Group for the six months ended 30 September NO MATERIAL ADVERSE CHANGE Save for the listing expenses in relation to the Spin-off, the increase in rental expenses for the Group s headquarters in Hong Kong and the loss of entitlement to the favourable tax treatment under Hong Kong tax laws (as described above), the Directors confirm that there has been no material adverse change in the financials or trading position or prospects of the Group since 31 March 2014, being the date to which the Company s latest audited combined financial statements were prepared as set out in Appendix I to this listing document, and up to the Latest Practicable Date. 17

23 DEFINITIONS In this listing document, the following expressions and terms shall have the meanings set out below unless the context otherwise requires. Certain terms are explained in the section headed Glossary of Technical Terms in this listing document. Arcadia BVI Arcadia Investment Arcadia Jewellery Articles Board BVI CAGR Capitalisation Issue Cayman Islands Companies Law or Companies Law Arcadia Global Holdings Limited ( 匯寶豐環球控股有限公司 ), a company incorporated in BVI on 15 February 2013 and directly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect whollyowned subsidiary of the Company on 17 June 2014 Arcadia Investment Holdings Limited ( 匯寶豐投資控股有限公司 ), a company incorporated in Hong Kong on 28 February 2013 and indirectly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company on 17 June 2014 Arcadia Jewellery Limited ( 薈寶珠飾有限公司 ) (formerly known as Overseas South Limited ( 南僑有限公司 ) and Overseas South Pearls Limited ( 南僑珍珠有限公司 )), a company incorporated in Hong Kong on 18 March 1993 and indirectly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company on 17 June 2014 the articles of association of the Company conditionally adopted on 26 September 2014 to become effective upon the Listing, and as amended from time to time, a summary of which is set out in Appendix IV to this listing document the board of Directors the British Virgin Islands compound annual growth rate the issue of such number of Shares required for the purpose of effectingthemsildistributiontomsilontherecorddateby way of capitalisation of amounts due from the Company to MSIL. Based on the issued share capital of MSIL as at the Latest Practicable Date and assuming it will remain unchanged on the Record Date, it is expected that 256,037,941 Shares will be issued pursuant to the Capitalisation Issue the Companies Law Cap. 22, (Law 3 of 1961) of the Cayman Islands, as consolidated and revised from time to time 18

24 DEFINITIONS CCASS the Central Clearing and Settlement System established and operated by Hong Kong Securities Clearing Company Limited CCASS Clearing Participants a person admitted to participate in CCASS as a direct clearing participant or general clearing participant CCASS Custodian Participants a person admitted to participate in CCASS as a custodian participant CCASS Operational Procedures CEO CG Code the operational procedures of HKSCC in relation to CCASS, containing the practices, procedures and administrative requirements relating to the operations and functions of CCASS, as from time to time in force Chief Executive Officer Code on Corporate Governance Practices as set out in Appendix 14 of the Listing Rules China Customs 南頭海關 (Nantou Customs*), which is under 深圳海關 (Shenzhen Customs*), and the responsible customs for all processing plants located in Bao an District, Guangming New District and Longhua New District China South City cm China South City Holdings Limited, a company incorporated in Hong Kong with limited liability, the shares of which are listed on the Main Board of the Stock Exchange centimetre Company Man Sang Jewellery Holdings Limited ( 民生珠寶控股有限公司 ), an exempted company with limited liability incorporated in the Cayman Islands on 13 May 2014 under the Cayman Islands Companies Law Companies Ordinance connected person Controlling Shareholder(s) CPF CSC Group the Companies Ordinance (Chapter 622 of the Laws of Hong Kong) has the meaning ascribed thereto under the Listing Rules has the meaning ascribed to it under the Listing Rules and, in the case of the Company, means Mr. CH Cheng and Rich Men Limited CPF Franc, the lawful currency of French Polynesia China South City and its subsidiaries 19

25 DEFINITIONS CSC Management Deemed Distribution DIPN21 Director(s) China South City Management Company Limited, a company incorporated in Hong Kong with limited liability which is a wholly-owned subsidiary of China South City representing the total consideration of approximately HK$430 million payable by the Group to the Remaining Group for the transfer of the related assets and liabilities of the Pearls and Jewellery Business under the Reorganisation Departmental Interpretation and Practice Notes No. 21 (Revised) issued by the IRD director(s) of the Company EIT Law Enterprise Income Tax Law ( 中華人民共和國企業所得稅法 ) EU Euro GDP Group Greater China HBF Jewellery HKFRS HKSCC European Union comprising the following member countries as at the Latest Practicable Date: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom Euro, the lawful currency used by the Institutions of the European Union and is the official currency of the eurozone, which consists of 18 of the 28 member states of the European Union gross domestic product the Company and its subsidiaries, or, as the context may require, any of them including the Pearls and Jewellery Business of MH Shenzhen, MS Factory and SZ Factory means the PRC, Hong Kong and Taiwan 匯寶豐珠寶 ( 深圳 ) 有限公司 (Hui Bao Feng Jewellery (Shenzhen) Limited*), a wholly foreign owned enterprise established in the PRC on 6 November 2013 and indirectly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company on 17 June 2014 Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants Hong Kong Securities Clearing Company Limited 20

26 DEFINITIONS HK$, HKD and cent Hong Kong Hong Kong Branch Share Registrar Independent Third Party Hong Kong dollars and cents, respectively, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the PRC Tricor Investor Services Limited an individual or a company who is not connected (within the meaning of the Listing Rules) with any directors, chief executive or substantial shareholders of the Company, its subsidiaries or any of their respective associates Ipsos Ipsos Hong Kong Limited, an independent market research company Ipsos Report IRD Latest Practicable Date Listing Listing Committee Listing Date Listing Rules Long Stop Date ManSangHK Man Sang Industrial City the industry research report prepared by Ipsos Inland Revenue Department Hong Kong 22 September 2014, being the latest practicable date for the purpose of ascertaining certain information contained in this listing document prior to its publication the listing by way of introduction of the Shares on the Main Board of the Stock Exchange the listing sub-committee of the board of the Stock Exchange the date, expected to be on or about 17 October 2014, on which the Shares are listed on the Stock Exchange and from which date dealings in the Shares are permitted to commence on the Stock Exchange the Rules Governing the Listing of Securities on the Stock Exchange, as amended, supplemented or otherwise modified from time to time 24 October 2014 or such later date as the board of directors of MSIL may decide as the long stop date for the satisfaction of the Spin-off Condition Man Sang Jewellery Company Limited ( 民生珠寶有限公司 ), a company incorporated in Hong Kong and indirectly whollyowned by MSIL 27 blocks of industrial facilities located in Min Sheng Main Road, Gongming, Bao an, Shenzhen, the PRC 21

27 DEFINITIONS MH Shenzhen mm Mr. CH Cheng Mr. Chen MS Factory MS Holdings MS Innovations MS Investments MS Jewellery Man Hing Industry Development (Shenzhen) Co., Ltd, ( 民興實業發展 ( 深圳 ) 有限公司 ), a limited liability company established in the PRC and indirectly wholly-owned by MSIL millimetre Mr. Cheng Chung Hing, the Chairman of the Company, a nonexecutive Director and a Controlling Shareholder Mr. Chen Zhi Wei, an Executive Director 深圳市寶安區公明上村民生珠寶廠 (Shenzhen Bao an Gongming Upper Village Man Sang Jewellery Factory*), a processing plant ( 來料加工廠 ) in the PRC controlled by Man Sang HK Man Sang International Holdings Limited ( 民生國際控股有限公司 ), a company incorporated in BVI on 15 February 2013 and directly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became a direct wholly-owned subsidiary of the Company on 17 June 2014 Man Sang Innovations Limited ( 民生創見有限公司 ) (formerly known as Goodrich Investments Limited ( 行豐投資有限公司 ), a company incorporated in Hong Kong on 4 March 1998 and directly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company on 17 June 2014 Hong Kong Man Sang Investments Limited ( 香港民生投資有限公司 ) (formerly known as Wealth-in Investment Limited ( 添富投資有限公司 )), a company incorporated in Hong Kong on 5 December 1997 and indirectly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company on 17 June 2014 Man Sang Jewellery (Hong Kong) Limited ( 民生珠寶 ( 香港 ) 有限公司 ), a company incorporated in Hong Kong on 5 July 2013 and indirectly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company on 17 June

28 DEFINITIONS MS Processing Agreement Ms. Yan an agreement entered into between the Processing Party and Man Sang HK on 25 August 2004 for a term of 11 years expiring on 25 August 2015 to undertake the manufacturing process of the Group s pearl products (as amended by supplemental agreements dated 18 February 2005, 26 April 2007 and 14 October 2008) Ms.YanSauMan,Amy,anExecutive Director and the CEO MSIL Man Sang International Limited, a company incorporated in Bermuda and the shares of which are listed on the Main Board of the Stock Exchange (Stock Code: 938) MSIL Distribution MSIL Shares Overseas MSIL Shareholders Pearls and Jewellery Business PRC or China PRC Legal Adviser Pre Spin-off MSIL Group Processing Agreements a conditional special interim dividend declared by MSIL to be satisfied by way of a distribution in specie of the entire issued share capital of the Company to Qualifying MSIL Shareholder(s) (or, in the case of Overseas MSIL Shareholder(s), a cash amount equal to the net proceeds of the sale of the Shares to which such Overseas MSIL Shareholder(s) would have been entitled had their addresses on the Record Date not been outside Hong Kong), subject to the satisfaction of the Spin-off Condition ordinary shares which have a nominal value of HK$0.10 each in the capital of MSIL Qualifying MSIL Shareholder(s) whose address(es) on the register of members of MSIL on the Record Date is/are in a jurisdiction outside Hong Kong and whom the directors of MSIL, having made relevant enquiries, consider it unlawful or impracticable to receive Shares under the MSIL Distribution for any of the reasons set out in the section headed History, Reorganisation and Corporate Structure in this listing document the pearls and jewellery product related operations carried on by the Group the People s Republic of China excluding, for the purpose of this listing document, Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan, unless otherwise specified Commerce&FinanceLawOffices MSIL and its subsidiaries the MS Processing Agreement and the SZ Processing Agreement 23

29 DEFINITIONS Processing Party 深圳市寶安區公明鎮上村經濟發展公司 (Shenzhen Bao an Gongming Upper Village Economic Development Company*), a company established in the PRC and an Independent Third Party who undertakes the processing work using imported materials supplied by the Group pursuant to the MS Processing Agreement and the SZ Processing Agreement (pursuant to the local policy since 2003 about urbanisation, 深圳市寶安區公明鎮上村經濟發展公司 was reformed to 深圳市公明上村股份合作公司 (Shenzhen City Gongming Upper Village Stock Company*) in December 2004) Qualifying MSIL Shareholder(s) shareholder(s) of MSIL whose name(s) appear(s) on the register of members of MSIL on the Record Date Record Date 10 October 2014, being the record date for ascertaining entitlements to the MSIL Distribution Remaining Group Reorganisation MSIL and its subsidiaries (excluding the Group) the corporate and business reorganisation of the Pre Spin-off MSIL Group in connection with the Listing as set out in the section headed History, Reorganisation and Corporate Structure in this listing document, pursuant to which the Company has become the holding company of its various subsidiaries Rich Men Limited a company incorporated in the BVI on 20 November 2009, wholly owned by Mr. CH Cheng and a Controlling Shareholder RMB or Renminbi SAT SFO Share(s) Renminbi, the lawful currency of the PRC State Administration of Tax of the PRC the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) share(s) of HK$0.01 each in the share capital of the Company Share Option Scheme the share option scheme of the Company approved by the shareholders of MSIL on 25 July 2014 and conditionally approved and adopted by the Company pursuant to a resolution of the Board passed on 26 September 2014, a summary of certain principal terms of which is set out in the paragraph headed Other information Share Option Scheme in Appendix V to this listing document 24

30 DEFINITIONS Shenzhen Kasiao 深圳市卡斯奧珠寶有限公司 (Kasiao (Shenzhen) Jewellery Company Limited*), a limited liability company established in the PRC on 20 December 2012 and indirectly wholly-owned by MSIL immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company pursuant to an equity transfer agreement entered into between MH Shenzhen and HBF Jewellery on 29 May 2014 Spin-off Spin-off Condition the spin-off of the Company by way of the Listing to be effected by the MSIL Distribution the condition to Listing, namely the Listing Committee granting the listing of, and permission to deal in, the Shares in issue as at the Record Date on the Main Board of the Stock Exchange on or before the Long Stop Date Sponsor REORIENT Financial Markets Limited which is licensed to conduct type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO Stock Exchange SZ Factory SZ Processing Agreement Tahiti Track Record Period United States or U.S. US$, USD or U.S. dollars VAT Yen The Stock Exchange of Hong Kong Limited 深圳市寶安區公明上村深寶首飾廠 (Shenzhen Bao an Gongming Upper Village Shen Bao Jewellery Factory*), a processing plant ( 來料加工廠 ) in the PRC controlled by Arcadia Jewellery an agreement entered into between the Processing Party and Arcadia Jewellery on 9 May 2004 for a term of 11 years expiring on 9 May 2015 to undertake the manufacturing process of the Group s jewellery products (as amended by agreements dated 2 November 2007 and 10 October 2008) an island in French Polynesia (an overseas country of the French Republic) the period comprising the three financial years ended 31 March 2014 the United States of America, its territories, its possessions and all areas subject to its jurisdiction United States dollars, the lawful currency of the United States value added tax Japanese Yen, the lawful currency of Japan * For reference purposes only 25

31 DEFINITIONS In this listing document:. Certain amounts set out in this listing document have been rounded. Accordingly, figures shown as totals of certain amounts may not be an arithmetic sum of such amounts.. Unless otherwise specified, amounts denominated in RMB have been translated into HK$ at the rate of HK$1.25 = RMB1.00 and amounts in US$ have been translated into HK$ at the rate of US$1.00 = HK$7.8. Such conversions shall not be construed as representations that amounts in RMB or US$ were or may have been converted into HK$ and vice versa at such rates or any other exchanges rates.. For ease of reference, certain terms relating to laws or regulations in the PRC have been included in this listing document in both the Chinese and English languages and in the event of any inconsistency between the Chinese terms mentioned in this listing document and their English translation, the Chinese terms shall prevail. 26

32 GLOSSARY OF TECHNICAL TERMS This glossary contains definitions of certain terms used in this listing document in connection with the Group and its business. Some of these definitions may not correspond to standard industry definitions. 2D 3D 14K 18K B2C blood diamonds BSCI carat CAD CCTV COD colour complexion ERP freshwater pearls Japanese cultured pearls lustre mollusc two dimensional three dimensional a form of gold which contains 58.3% gold a form of gold which contains 75.0% gold business to consumer diamonds sold to finance insurgency and civil wars in Africa Business Social Compliance Initiative a measure of weight used for measuring diamonds and gemstones computer aided design closed-circuit television cash on delivery a combination of the body colour and the overtone cleanliness of a pearl surface enterprise resource planning pearls which are grown in mussels that live in lakes and rivers pearls produced by Akoya oysters the measurement of the quality and quantity of light that reflects from the surface and just under the surface of a pearl an invertebrate animal having a soft unsegmented body and often having a shell 27

33 GLOSSARY OF TECHNICAL TERMS nucleus overtone ODM OEM saltwater pearls shape size South Sea pearls Sterling silver Tahitian pearls ounce TT VIP processing plant the bead implanted into a mollusc around which nacre deposition occurs the subtle colour that occurs naturally in a pearl original design manufacturer (whereby the Group provides the product designs) original equipment manufacturer (whereby the customers provide the product designs) both South Sea pearls and Tahitian pearls characteristic of a pearl and broadly referring to three broad categories: spherical shapes are perfectly round or nearly round, symmetrical shapes are balanced and regular, baroque shapes are irregular or abstract. Pearls are mostly non-symmetrical in nature a measurement according to its diameter in millimetres a type of saltwater pearls produced by a specie of mollusc that can produce pearls in the warm waters of Australia, Indonesia and the Philippines an alloy of sterling silver containing 92.5% by mass of silver and 7.5% by mass of other metals a type of saltwater pearls which have black and dark colours and come from Tahiti, the Cook Islands and are produced by the black-lip oyster a measurement of mass of precious metals telegraphic transfer very important person a plant processing duty free imported materials and exporting finished product according to a processing arrangement 28

34 FORWARD-LOOKING STATEMENTS This listing document contains forward-looking statements that state the Company s belief, expectations, or intentions for the future. These forward-looking statements reflect the current view of the Company with respect to future events and are, by their nature, subject to significant risks, assumptions and uncertainties. These forward-looking statements include, without limitation, statements relating to:. the Group s business and operating strategies and various measures to implement such strategies;. the Group s capital expenditure plans;. the Group s operations and business prospects, including development plans for the Group s existing business;. the Group s financial condition and results of operations;. the general economic trend of Hong Kong; and. the regulatory environment and industry outlook generally. The words aim, anticipate, believe, consider, could, estimate, expect, forecast, going forward, intend, may, might, ought to, plan, potential, project, propose, seek, shall, should, will, would and similar expressions, as they relate to the Group, or the management of the Group are intended to identify a number of these forward-looking statements. These forward-looking statements reflecting the views of the management of the Company with respect to future events are not a guarantee of future performance and are subject to certain risks, uncertainties and assumptions, including the risk factors described in this listing document. One or more of these risks or uncertainties may materialise, or underlying assumptions may prove incorrect. Subject to the requirements of the Listing Rules and applicable laws, the Group does not have any obligation nor does the Group intend to publicly update or otherwise revise the forward-looking statements in this listing document, whether as a result of new information, future events or otherwise. As a result of these and other risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this listing document might not occur in the way the Group expects, or at all. Accordingly, you should not place undue reliance on any forward-looking statements. All forwardlooking statements in this listing document are qualified by reference to this cautionary statement. In this listing document, statements of or references to the intentions of the Company or any of the Directors are made as of the date of this listing document. Any such intentions may potentially change in light of future developments. 29

35 RISK FACTORS You should consider carefully all the information set out in this listing document and, in particular, the risks and uncertainties described below before making an investment in the Shares. The occurrence of any of the following events could harm the Group and the Group s business, financial condition or results of operations could be materially and adversely affected by any of these risks. If these events occur, the trading price of the Shares could decline and you may lose all or part of your investment. There are certain risks and uncertainties involved in the Group s operations, some of which are beyond the Group s control. The Group has categorised these risks and uncertainties into: (i) risks relating to the business and industry of the Group, (ii) risk relating to conducting business in the PRC, and (iii) risks relating to the Introduction. There may be other risks and uncertainties which are not currently known to the Group or which are not expected, which could also harm the Group s business, financial condition and results of operation. RISKS RELATING TO THE BUSINESS AND INDUSTRY OF THE GROUP The Company may issue a profit warning after Listing in respect of the very substantial reduction in its financial results for the six months ending 30 September It is preliminarily reviewed and estimated by the Board that there will be a very substantial reduction in the profit of the Group for the six months ending 30 September 2014, as a result of the listing expenses amounting to approximately HK$11.3 million, which are one-off non-recurring expenses; and the profit of the Group for the financial year ending 31 March 2015 will also be significantly affected by the listing expenses amounting to approximately HK$15.8 million, the increase in rental expenses and the loss of entitlement to the favourable tax treatment As set out in the paragraph headed Profit Warning in the section headed Financial Information in this listing document, the listing expenses, which are one-off non-recurring, amounting to approximately HK$15.8 million are expected to be charged to the Group s consolidated statement of comprehensive income for the year ending 31 March 2015 (of which, approximately HK$11.3 million is expected to be charged to the Company s consolidated statement of comprehensive income for the six months ending 30 September 2014). Such amount of listing expenses to be charged in the six months ending 30 September 2014 is close to the amount of the segment profit of the Pearls and Jewellery Business of HK$11.7 million as stated in the interim report of MSIL for the six months ended 30 September It should be noted that the segment profit of the Pearls and Jewellery Business of MSIL for the six months ended 30 September 2013 is subject to the allocation of the certain shared expenses between the Group and the Remaining Group as detailed in the paragraph headed Basis of presentation in the section headed Financial Information in this listing document and therefore does not represent the profit of the Group for the six months ended 30 September Rental expenses are also expected to increase significantly as detailed in the paragraph headed Recent Developments in the section headed Financial Information in this listing document. Further, as a result of the Group ceasing the processing plant arrangements under the MS Processing Agreement, the Group will not enjoy certain tax benefits under Hong Kong tax laws. The Directors estimate that the financial results of the Group for the six months ending 30 September 2014 will be substantially reduced and that for the financial year ending 31 March 2015 is also expected to be significantly adversely affected by the above factors. 30

36 RISK FACTORS RelianceonEuropeanandNorthAmericanmarketswhich are facing difficult market environment The Group s total sales to the customers in Europe and North America represented approximately 50.3% and 25.6% of the total sales of the Group in the financial year ended 31 March 2012 and approximately 46.0% and 25.8% of the total sales of the Group in the financial year ended 31 March 2013 and approximately 34.0% and 29.7% of the total sales of the Group in the financial year ended 31 March 2014 respectively. The Group s sales to customers in Europe and North America decreased by approximately 20.0% and 12.4% respectively during the financial year ended 31 March 2013 as compared with the sales to the European and North American customers for the financial year ended 31 March For the financial year ended 31 March 2014, sales of the Group to customers in Europe continued to decrease by approximately 24.1%, while sales to customers in North America stabilised and increased by approximately 18.3%. The Company considers that the aftermath of the global financial crisis in 2008 and the ongoing European debt crisis since 2009 has had a significant impact on the Group s sales to both the European and the North American markets. In 2011, 2012 and 2013, the EU recorded lower growth in GDP as compared with the global average and ranked lowest among the EU, North America, Hong Kong and the PRC. The EU only recorded a slight growth in GDP of approximately 1.7% in 2011, a decrease in GDP by approximately 0.4% in 2012 and a marginal growth in GDP of 0.1% in As compared to the EU, the North American market experienced a better situation than the EU. North America recorded a growth in GDP of approximately 1.9% in 2011, approximately 2.7% in 2012 and approximately 2.0% in The Group cannot assure whether the EU economy will recover or will continue to deteriorate. Any continued or further unexpected economic, political and social events in any of these areas may continue to have a significant impact on retail consumption which could affect the performance of the Group. Whilst the Group is endeavouring to develop sales to customers in other regions, if the Group is not able to diversify its market and if there is any event that leads to consistently low demand for the Group s jewellery products in major markets where the Group s customers are located, such as Europe and North America, the performance of the Group could be significantly affected. Reliance on key management in the conduct of the Group s business The Group s success is, to a significant extent, attributable to the experience of the executive Directors, particularly Ms. Yan and Mr. Chen. Ms. Yan is an executive Director and the CEO of the Company responsible for the overall management of the Group as well as the formulation, development and implementation of the business strategies and overall sales and marketing strategies of the Group. Mr. Chen is responsible for procurement at the Pearls and Jewellery Business. Should any of the Group s key personnel cease to serve the Group or the Group fail to recruit new talents, the Group s business operation may be adversely affected. Information on the experience of Ms. Yan and Mr. Chen is set out in the section headed Directors and Senior Management in this listing document. Fluctuations in prices, or any unavailability, of the raw materials that the Group uses in its products may materially and adversely affect the Group s business, results of operations or financial condition For each of the three financial years ended 31 March 2014, the cost of the Group s major raw materials accounted for approximately 78.7%, 76.4% and 75.4%, respectively, of the Group s total cost of sales over the same periods. The Group s purchases of pearls, gold, silver, diamonds and gemstones together represent the largest component of its cost of sales, and fluctuations in the prices of these raw 31

37 RISK FACTORS materials can have a material effect on its business, results of operations and financial condition. In addition, raw materials used in the Group s production are subject to price volatility caused by external conditions, such as market supply and demand, climate, environmental conditions, commodity price fluctuations, currency fluctuations, changes in governmental policies and natural disasters. The average purchase price of pearls increased substantially during the Track Record Period and is summarised below. Financial year ended 31 March HK$ (approximate) HK$ (approximate) HK$ (approximate) South Sea pearls 132/piece 177/piece 267/piece Tahitian pearls 43/piece 54/piece 52/piece Freshwater pearls 900/kg 2,200/kg 3,500/kg Further information on the fluctuation of pearl market price in recent years is set out in the section headed Industry Overview Average Price of Pearl in Global Market from 2009 to During the Track Record Period, gold price fluctuated significantly. Gold price peaked in September 2011 at a price of approximately HK$14,803 per ounce. The lowest price of gold was recorded in December 2013 at a price of approximately HK$9,274 per ounce. As at the Latest Practicable Date, gold price was approximately HK$9,435 per ounce. During the Track Record Period, silver price ranged from approximately HK$145 per ounce in June 2013 to approximately HK$377 per ounce in April As at the Latest Practicable Date, silver price was approximately HK$138 per ounce. The Group prices its products with reference to the cost of purchase and production. It tries to transfer the risk of fluctuating material costs to the customers by purchasing pearls based on anticipated demands in the next few months and purchasing precious metals mainly after orders have been received. If the Group is unable to obtain raw materials in the quantities and of quality that it requires, the Group s production volume, quality of products and profit margins may be adversely affected. In addition, the Group s ability to pass any increases in raw material costs to its customers may be limited by market competition. The Group cannot assure that it will be able to raise the prices of its products to cover increased costs resulting from the increase in the cost of the Group s raw materials. As a result, any significant price increase of the Group s raw materials may have an adverse effect on the Group s profitability and results of operations. There is no publicly available standard price index or reliable reference for pearls There is no publicly available standard price index or other reliable reference for pearls and therefore the purchase price of pearls is determined based on the experience and estimation of the Group s management and procurement team, and negotiated between the suppliers and the Group. When determining the selling price of the Group s pearls, the Group s management and sales team will consider, among other things, the cost of purchase and the expected margins. The estimation of the net realisable value of the Group s pearl inventory is also materially relied upon the Group s management experience and estimation. If the Group s management fails to properly and accurately estimate the price of the pearls that it purchases or sells, this may adversely affect the trading prospects and thus results of the Group. Shareholders and investors should also note that the net realisable value of the pearl 32

38 RISK FACTORS inventory that the Group holds as estimated by its management may also differ from the actual price that such pearl inventory are sold. Where the actual outcome or expectation in the future is different from the original estimate, such difference will have an impact on the carrying amounts of the related pearl inventory and the provision/reversal amount in the period in which such estimate has changed, and thus may have a material impact on the financial and trading position of the Group. Higher labour costs and labour shortages could have a material and adverse impact on the Group s operations and profitability The Group relies on a significant number of craftsmen and workers to support its product development and production processes. As of the Latest Practicable Date, the Group had 490 employees in the PRC. Direct labour costs represented approximately 19.0%, 18.7% and 18.7% of the Group s total cost of sales in each of the three financial years ended 31 March 2012, 2013 and 2014, respectively. Average labour costs in the PRC have soared due to improving living standards and the PRC Government s policies to uplift the minimum wage for workers. Further, the Group may need to enhance the Group s remuneration packages for its employees in order to recruit and retain the Group s staffdue to an increasingly intense competition for skilled workers. If the labour costs continue to increase and the Group is unable to control its labour cost by improving efficiency, or to pass on these costs to the Group s customers or if the Group is unable to recruit staff at competitive pricing then this may have a material adverse effect on the Group s business and results of operations. Reduction of discretionary spending by retail customers The Group s results of operations are impacted by the discretionary spending of retail customers, both of the Group s pearl and jewellery products. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of the Group s control. Retail customers purchases of discretionary items, including the Group s products, could decline during periods when disposable income is lower or in periods of actual or perceived unfavourable economic conditions, which could adversely impact the Group s financial condition and results of operations. Reliance on major suppliers The principal raw materials purchased by the Group include pearls, gold, other precious metals, diamonds, gemstones, and other parts and accessory. For each of the three financial years ended 31 March 2014, purchases from the Group s five largest suppliers accounted for approximately 51.3%, 48.3% and 44.8% of the total purchases of the Group respectively, and purchases from the Group s largest suppliers accounted for approximately 20.7%, 20.9% and 12.2% respectively. During the same periods, none of the Group s five largest suppliers had entered into any long-term supply contract with the Group. There can be no assurance that the Group will be able to continue to source sufficient supply of raw materials from any of its suppliers. If any of the Group s major suppliers ceases to supply raw materials to the Group and the Group is unable to find suitable alternative suppliers at comparable quality and prices, the profitability and prospects of the Group may be adversely affected. 33

39 RISK FACTORS Reliance on major customers For each of the three financial years ended 31 March 2014, sales to the Group s five largest customers accounted for approximately 57.9%, 50.8% and 45.1% of the total revenue of the Group respectively, and sales to the Group s largest customer accounted for approximately 18.1%, 13.3% and 11.5% of the total revenue of the Group respectively. The Group s sales to its top five customers amounted to approximately HK$173.8 million, HK$132.7 million and HK$121.2 million for each of the three financial years ended 31 March 2012, 2013 and 2014 respectively, representing a decrease of approximately 23.6% in the financial year ended 31 March 2013 and a decrease of approximately 8.7% in the financial year ended 31 March This was also mainly affected by the difficult market environment as explained in the paragraph headed Reliance on European and North American markets which are facing a difficult market environment above in this section. Because of industry practice, the Group did not enter into any long-term sales contracts with any of its customers. If any of the Group s five largest customers were to further substantially reduce the volume or value of purchases from the Group or were to terminate its business relationship with the Group entirely, there can be no assurance that the Group would be able to obtain orders from other customers to replace the lost sales. If the Group were unable to obtain replacement orders on comparable terms, the business and profitability of the Group could be adversely affected. The Group is subject to counterparty credit risks The Group may grant its selected customers credit periods of between 30 days to 120 days. To manage and minimise the Group s credit risk exposure, customers are given different terms of payment which depend on factors such as the nature and size of the transaction, level of risk involved, cost structure, payment history of the customer, the Group s relationship with the customer and the credit standing of the customer. However, the Group s customers may not settle the trade receivables within the credit period granted by the Group and had trade receivable turnover days of approximately 62 days, 79 days and 81 days for each of the three financial years ended 31 March 2012, 2013 and 2014 respectively. The Group makes specific provisions on these overdue amounts based on, among other factors, the customer s payment history and the Group s relationships with these customers. In the event that the Group s trade receivable ageing lengthens significantly or these customers become unable or unwilling to settle the receivables, its liquidity could be adversely affected and the Group may have to write off receivables or make provisions against bad debts which could adversely and materially affect the Group business condition and results of operations. The Group leases premises in Hong Kong for use as its offices and warehouse and in China for use as its office and production facilities and therefore the Group is exposed to risks relating to the commercial real estate rental market, including unpredictable and potentially high rental costs The Group leases properties in Hong Kong for use as its offices and warehouse and in China for use as its office and production facilities. For the three financial years ended 31 March 2014, the Group s expenses incurred for the lease of premises in Hong Kong and China amounted in total to approximately HK$8.4 million, HK$8.1 million and HK$8.0 million, respectively, representing approximately 2.8%, 3.1% and 3.0% of the Group s revenue, respectively. Including other premises being leased by the Group, the headquarters in Hong Kong are leased from an Independent Third Party and for a term from 17 March 2014 to 16 March 2017 and the production facilities are leased from the Remaining Group for a term from 1 May 2014 to 15 November Rental charges are subject to 34

40 RISK FACTORS market rate which can be volatile. After 17 March 2014, the monthly rental cost of the Group s offices premises in Hong Kong increased from approximately HK$31 per square foot to approximately HK$45 per square foot representing an increase of 45%. If upon expiry of the lease agreements as mentioned above, the rental for the premises that the Group is using increases substantially and the Group is unable to relocate its related operations to other premises at a similar or better rate and terms, the Group s financial position may be adversely affected. The Group will cease to enjoy the favourable tax treatment under the Hong Kong tax laws when the processing plant arrangements end Pursuant to DIPN21, the Group was only required to regard 50% of its taxable profit from the sales of products processed or manufactured by MS Factory or SZ Factory during the Track Record Period. For the three financial years ended 31 March 2014, the total tax savings enjoyed by the Group from the processing arrangements amounted to approximately HK$2.6 million, HK$0.8 million and HK$2.1 million respectively. Subsequent to the Reorganisation, the Group has ceased to engage in the processing arrangement under the MS Processing Agreement. The Group will no longer be entitled to the above favourable tax treatment under DIPN21 in respect of profit derived from the sale of products processed or manufactured pursuant to the MS Processing Agreement and as such may have an adverse effect to the Group s financial results. The related tax benefit in respect of the tax benefit enjoyed by the Group under the SZ Processing Agreement will also cease after the arrangement expires on 9 May The Group may not be able to set up banking facilities The Group s Pearls and Jewellery Business is mainly internally funded by its operating cash inflow. Save for a loan secured by a property owned by the Group in Hong Kong which has been fully drawn down, the Group does not have any banking borrowings or available banking facilities. As at the Latest Practicable Date, the Group was applying for a new banking facility of HK$15 million, which had not yet been approved or granted by the related bank. If the Group is unable to generate sufficient funds for its operations from cash inflow and/or obtain other banking facilities for its own operations after the Listing, it may not have sufficient capital to meet its long-term expansion plans. If the Group is unable to implement its long term expansion plans successfully then the Group s value may be materially and adversely affected. If the Group is unable to respond effectively to changes in market trends and customer preferences, its market share and result of operations could be adversely affected The success of the Group s business is dependent on the Group s ability to identify market trends and customer preferences in different countries and overseas, and then to design and sell in a timely manner products that satisfy the current preferences of a broad range of customers in each respective region. Customer preferences may differ across different regions, and may shift over time in response to changing aesthetics and economic circumstances. The Group cannot assure that it will be able to observe, anticipate and respond to changes in customer preferences in one or more of the regions in which the Group operates. Even if the Group does observe, anticipate and respond to such changes, it cannot assure that the Group will bring to market in a timely manner enhanced or new products that meet these changing preferences. If the Group fails to observe, anticipate or respond to changes in customer preferences or fail to bring to market products that satisfy customers preferences in a timely manner, the Group s market share and the Group s sales and profitability could be adversely affected. 35

41 RISK FACTORS The Group is subject to foreign exchange risks The Group uses different currency, such as Euro, USD, Yen, RMB to settle its trading transactions, purchases and sales. Accordingly, the Group is subject to foreign currency exchange risks. During the Track Record Period, the Group predominantly used USD, HKD and Euro when transacting with its customers. For the financial year ended 31 March 2014, approximately 84.5%, 8.2% and 5.3% of the Group s revenue was denominated in USD, HKD and Euro, respectively. For the financial year ended 31 March 2014, approximately 36.6%, 26.7%, 19.3%, 14.9% and 2.5% of the Group s purchases were denominated in USD, HKD, Euro, Yen and RMB respectively. The Group purchases the necessary foreign exchange currencies, save for USD and RMB, shortly before the Group s purchases (which mainly are on cash on demand). The Group has not hedged its foreign currency exposure. The Group s foreign exchange losses amounted to approximately HK$6.1 million, HK$1.7 million and HK$0.6 million for the three financial years ended 31 March 2014 which were recorded mainly as a result of consolidating its PRC subsidiaries financials statements which are denominated in RMB. Should there be any significant changes in the exchange rate of the aforementioned foreign currencies (or other currencies in which future customers payments are denominated), the Group s financial condition and results of operations may be adversely affected. The jewellery business is highly competitive. If the Group is unable to remain competitive, the Group will lose market share to its competitors as well as to new entrants in the markets in which the Group operates The jewellery market is highly competitive, and the Group faces competition from many competitors who compete against it on a national or local level, including those high-end luxury brands that do not exclusively focus on jewellery but whose product offerings include jewellery product lines. The Group faces strong competition from national and local competitors in jewellery. The Group also competes with other competitors in terms of, among others things, source of quality pearls, production of quality products, pricing, delivery time and effective communication with customers. If the Group fails to compete effectively against its competitors on any of the above, the Group may be unable to remain competitive in the market or expand its market share in its key growth markets or in its product categories, and may lose market share. Infringe other s jewellery product designs Product design is a crucial part of the Group s business model on which the Group has placed a strong emphasis. A majority of the jewellery products made by the Group is designed the Group s inhouse design team. There is no assurance that the Group s designs will not infringe any third parties design rights or intellectual property rights. For each of the three financial years ended 31 March 2014, the Group did not receive any material claim of this nature. Nonetheless, there can be no assurance that the Group will not face such claims in the future. In such event, the business reputation of the Group could be adversely affected and the Group might lose its customers. Potential infringement of the Company s jewellery design by third parties In the course of conducting its business, the Group may not be able to protect its own intellectual property rights. The Group regards the copyright, trademarks and other intellectual property rights that it uses as important to the success of its business, and any unauthorised use of such intellectual property rights by third parties may materially and adversely affect its business and reputation. The Group relies 36

42 RISK FACTORS on the protection of the intellectual property laws and contractual arrangements with its employees, clients, business partners and others to protect such intellectual property rights. Despite precautions taken by the Group, it may be possible for third parties to infringe the Group s intellectual property rights by copying or otherwise obtaining and using the Group s intellectual property rights, including text, typography, photographs and design layout. Should the Group fail to protect or be unable to assert its rights to these intellectual property rights, there might be an adverse impact on its marketing plans and business of the Group. Insufficient insurance to cover the risks relating to the business operations Insurance is important to the Group s business and an essential means to mitigate the operational risk in relation to the Group s raw materials, work-in-progress and finished products and other major assets. The Group may not have maintained sufficient insurance covering all the risks in respect of its inventory stored within its premises or in transit. Any material losses, damage and liabilities that are not covered or adequately covered by the Group s insurance will result in business interruption or damage in the business reputation of the Group. In any of these events, the Group s performance could be significantly and adversely affected. Uncertainty on the introduction of new jewellery products The Directors believe that future sales growth of the Group depends in part on the introductions of new product range. The Group therefore introduces new jewellery products from time to time to meet customer demand and preference. While the Group has successfully launched a number of new jewellery products in the past, there is no assurance that all new jewellery products launched will be well received by customers in the future. If the Group fails to launch new jewellery products or the new jewellery products do not achieve a satisfactory market reception, this may have an adverse impact on the Group s profitability. Dividend policy For each of the three financial years ended 31 March 2014, the Group declared dividends in an aggregate amount of HK$200 million, HK$100 million and nil respectively. Though the Directors expect to declare and pay dividends of not less than 30% of the net profit attributable to the equity holders of the Company after Listing, there can be no assurance that dividends will be declared in the future and the dividends declared in the past should not be used as a reference for the Company s dividend policy nor should it be a basis to forecast whether and how much dividend will be declared by the Company in the future. Historical expenses may not be a good indication of the level of expenses of the Group after the Listing The Group s spin-off from MSIL involves carving out from MSIL operations which only relates to the Pearls and Jewellery Business. The expenses incurred in respect of the Pearls and Jewellery Business were not previously completely segregated and have been accounted for together with the other operations that will remain to be operated under the Remaining Group. Whilst most of the expenses can be identifiable as incurred solely in relation to the Pearls and Jewellery Business, for the purposes of the Spin-off, some expenses (mainly salary expenses of the senior management of MSIL and salary expenses of some back office support departments, such as human resources, information technology, administration departments) were shared between the Pearls and Jewellery Business and other businesses 37

43 RISK FACTORS and activities of the Remaining Group which for the purpose of preparing the Accountant s Reporthave been allocated between the Group and the Remaining Group based on estimation considered by the Directors, to accurately, reasonably and fairly reflect the related portion of cost which the Pearls and Jewellery Business has incurred. The estimation of the historical allocation of expenses between the Group and the Remaining Group has been made by the Directors based on their understanding and knowledge of the operations. This is not an indication of the future level of expenses that the Group will incur as a separate listed group. Subsequent to the Spin-off, the expenses incurred by the Group will not be the same as the amount of expenses shared and incurred in the past. Accordingly, such historical expense level should not be used as a reference or basis to forecast how much expenses will be incurred by the Company in the future. The Group did not fully pay certain social insurance and housing provident fund for its employees in the PRC during the Track Record Period and was not in compliance with PRC laws During the Track Record Period, the Group did not fully pay certain social insurance and housing provident fund for its staff in the PRC and such non-payment is a non-compliance with the related PRC laws. For details of the non-compliance, see section headed Business Legal Proceedings and Noncompliances of this listing document. Should the Group have paid all social insurance and housing provident fund, the Group s expenses would have increased by approximately HK$3.7 million for the financial year ended 31 March 2012, approximately HK$3.4 million for the financial year ended 31 March 2013 and approximately HK$1.4 million for the financial year ended 31 March 2014 which have not been reflected in the Group s financial statements set out in the Accountant s Report. The Group has made an accrual of approximately HK$4.4 million as at 31 March 2014 for possible claims of unpaid social insurance and housing provident fund in the past two years prior to 31 March 2014 in respect of those employees in the PRC who were working for the Group in March 2014 after having considered the advice of the PRC Legal Adviser. Mr. CH Cheng has also undertaken to indemnify the Group in respect of any payment of any social insurance or housing provident fund unpaid or any penalty in respect of the related non-compliances before the Listing exceeding the accrued amount provided in the Group s financial statements as at 31 March 2014 as set out in the Accountant s Report. As at the Latest Practicable Date, the Group has complied with all social insurance and housing provident fund payment requirements in respect of the Group s employees in the PRC. Should the related authorities/employees require the Group to fully pay back all social insurance and/or housing provident fund which the Group has failed to pay and/or impose penalty on the Group, the aggregate amount of which exceeds the accrued amount as at 31 March 2014 and if Mr. CH Cheng fails to honour his indemnity undertaking, it could adversely affect the Group s business, its financial condition and results of operations. RISKS RELATING TO CONDUCTING BUSINESS IN THE PRC Fluctuation of RMB exchange rate may adversely affect the Group s operations and financial results The Group s production facilities are located in Shenzhen the PRC and use RMB as their operating currency. The value of the RMB is subject to changes in the PRC government s policies and depends, to a large extent, on domestic and international economic and political developments, as well as supply and demand in the local market. Since 1994, the conversion of RMB into foreign currencies, including HKD and USD, has been based on exchange rates published by the People s Bank of China, which are set daily based on the previous day s interbank foreign exchange market rates in the PRC and current exchange rates on the world financial markets. On 21 July 2005, the PRC government introduced a managed floating exchange rate system to allow the value of RMB to fluctuate within a regulated band 38

44 RISK FACTORS based on market supply and demand and by reference to a basket of currencies. On the same day, the value of RMB appreciated by approximately 2% against USD. In March 2014, the People s Bank of China announced that the spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 3% of the central parity, instead of 2% which was set in The Group s business involves materials import, processing and export business and export settlements are all denominated in U.S. dollars and other currencies. Accordingly, any appreciation of RMB against any currencies that the Group s settlements are denominated may subject the Group to increase costs which could adversely affect the operating results of the Group and therefore the value of the Group s dividend payment. In addition, under the current foreign exchange regime in the PRC, there can be no assurance that sufficient foreign currency will be available in the PRC at a given exchange rate to satisfy the demands of a particular enterprise in full. There can also be no assurance that shortages in the availability of foreign currency will not restrict the Group s ability to obtain sufficient foreign currency in the PRC to satisfy the Group s foreign currency needs. Political and legal developments and economic policies of the PRC government and social conditions and legal developments of the PRC could affect the Group s business The Group s financial condition, results of operations and prospects are to a significant degree subject to the economic, political and legal developments of the PRC, as most of the Group s products are manufactured in the PRC. The economic, political and social conditions, as well as government policies, including taxation policies, of the PRC, could affect the Group s business. The PRC economy differs from the economies of other countries in many respects. The PRC economy has historically been a planned economy and has been in a transitional stage to a more market economy. Although the PRC government has implemented measures emphasising the use of market forces for economic reform in recent years, there can be no assurance that economic, political or legal systems of the PRC will not developinawaythatisdetrimentaltothegroup s business, results of operations and prospects. Uncertainties regarding interpretation and enforcement of the PRC laws and regulations may impose adverse impact on the Group s business, operations and profitability Although many laws and regulations have been promulgated and amended in the PRC since 1978, the PRC legal system is still not sufficiently comprehensive when compared to the legal systems of certain developed countries. The interpretation of the PRC laws and regulations may be influenced by momentary policy changes reflecting domestic political and social changes. In addition, it may also be difficult to enforce judgements and arbitration awards in the PRC. Many laws and regulations in the PRC are promulgated in broad principles and the Central People s Government has gradually laid down implementation rules and has continued to refine and modify such laws and regulations. As the PRC legal system develops, the promulgation of new laws or refinement and modification of existing laws may affect foreign investors. There can be no assurance that future changes in legislation or the interpretation thereof will not have an adverse effect upon the Group s business, operations or profitability. 39

45 RISK FACTORS Under the EIT Law, the Group may be classified as a resident enterprise of the PRC. Such classification could result in unfavourable tax consequences to the Group and its non-prc shareholders The EIT Law provides that enterprises established outside of China whose de facto management bodies are located in China are considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. Under the implementation rules to the EIT Law, a de facto management body is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the Circular Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies ( 關於境外註冊中資控股企業依據實際管理機構標準認定為居民企業有關問題的通知 ), or Circular 82, issued by the SAT on 22 April 2009 regarding the standards used to classify certain Chinese-controlled enterprises established outside of China as resident enterprises clarified that dividends and other income paid by such resident enterprises will be considered to be the PRC source income, subject to the PRC withholding tax, currently at a rate of 10%, when recognised by non-prc enterprise shareholders. Circular 82 also subjects such resident enterprises to various reporting requirements with the PRC tax authorities. Circular 82 further details that certain Chinese-controlled enterprises will be classified as resident enterprises if the following are located or resident in the PRC: (i) senior management personnel and departments that are responsible for daily production, operation and management; (ii) financial and personnel decision-making bodies; (iii) major assets, accounting books, the company seal, and minutes of board meetings and shareholders meetings; and (iv) half or more of the senior management or directors having voting rights. Although the determining criteria set forthincircular82mayreflectthesat s general position on how the de facto management body test should be applied in determining the tax resident status of offshore enterprises, Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by foreign individuals or foreign enterprises like the Group. Also, currently there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which are applicable to the Company or the Group s overseas subsidiary. Therefore, the Group do not currently consider the Company or any of its overseas subsidiaries to be a PRC resident enterprise. If the PRC tax authorities determine that the Company is a resident enterprise for the PRC enterprise income tax purposes, a number of unfavourable PRC tax consequences could follow. First, the Company or its overseas subsidiaries will be subject to the uniform 25% enterprise income tax rate as to its global income as well as the PRC enterprise income tax reporting obligations. Second, although under the EIT Law and its implementing rules dividends paid to the Group from the Group s PRC subsidiaries would qualify as tax-exempted income, the Group cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control and tax authorities have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for the PRC enterprise income tax purposes. Finally, dividends payable by the Group to its investors and gain on the sale of its shares may become subject to the PRC withholding tax. It is possible that future guidance issued with respect to the new resident enterprise classification could result in a situation in which a withholding tax of 10% for the Group s non-prc enterprise investors or a potential withholding tax of 20% for non-prc individual investors is imposed on dividends the Group pays to them and with respect to gains derived by such investors from transferring 40

46 RISK FACTORS the Shares. In addition to the uncertainty regarding how the new resident enterprise classification could apply, it is also possible that the rules may change in the future, possibly with retrospective effect. If the Group is required under the EIT law to withhold the PRC income tax on dividends payable to the Group s foreign shareholders, or if you are required to pay the PRC income tax on the transfer of the Shares under the circumstances mentioned above, the value of your investment in the Shares may be materially and adversely affected. It is unclear whether, if the Group are considered a PRC resident enterprise, holders of the Shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. By comparison, there is no taxation on such income in the Cayman Islands. The ability of the Group s subsidiaries to pay any dividend in agivenyeartothegroupdepends on the legal and regulatory requirements to which the relevant subsidiary is subject Generally, the Group s subsidiaries could not pay any dividend to the Group if they do not have any distributable profits. Limitations on the ability of the Group s subsidiaries to remit their after-tax profits to the Group in the form of dividend or other distributions could adversely affect the Group s ability to grow, invest, pay dividend and other distributions, and conduct its business. The Group also cannot assure you that its subsidiaries will generate sufficient earnings and cash flow to pay dividend or otherwise distribute sufficient funds to the Group to enable it to pay dividend to its Shareholders. In respect of the Group s PRC subsidiary, the EIT Law issued on 16 March 2007 and its implementation rules stipulate that if an entity is deemed to be a non-prc resident enterprise which has no establishment or place of business in the PRC or has establishment or place of business in the PRC but the income has no relationship with such establishment or place, withholding tax at the rate of 10% will be applicable to any dividend paid to it by its PRC subsidiary, unless it is entitled to reduction or elimination of such tax, including under relevant tax treaties. In addition, restrictive covenants in bank credit facilities, joint venture agreements or other arrangements that the Group or its subsidiaries may enter into in the future may also restrict the ability of its subsidiaries to pay dividend or make distributions to the Group. These restrictions, if any, would reduce the amount of dividend or other distributions it could receive from the Group s subsidiaries, which in turn would restrict the Group s ability to pay dividend to the Shareholders. RISKS RELATING TO THE INTRODUCTION Shareholders interests in the share capital of the Company may be diluted in the future The Group may in the future expand its capabilities and business through acquisition, joint venture and strategic partnership with parties who can add value to the Group s business. The Group may require additional equity funding after the Introduction and the equity interests of the Shareholders will be diluted should the Company issue new Shares to finance future acquisitions, joint ventures and strategic partnerships and alliances. 41

47 RISK FACTORS Issue of Shares under the Share Option Scheme will have a dilution effect and may affect the Group s profitability The Group has conditionally adopted the Share Option Scheme prior to the Listing Date. Exercise of any option to be granted under the Share Option Scheme in the future will result in a dilution in the shareholding of the Shareholders in the Company and may result in a dilution in the earnings per Share and/or net asset value per Share depending on the exercise price and the then published results and financial position of the Group. Under HKFRS, the costs of share options to be granted under the Share Option Scheme will be charged to the Group s statement of comprehensive income over the vesting period by reference to the fair value at the date of granting of the share options. As a result, the Group s profitability may be adversely affected. The interests of the Controlling Shareholders may differ from those of other Shareholders, and such Shareholders may be disadvantaged by the actions of the Controlling Shareholders Based on the issued share capital of MSIL as at the Latest Practicable Date and assuming that it will remain unchanged on the Record Date, the Controlling Shareholders will control the exercise of approximately 63.32% of the voting rights at general meetings of the Company immediately after the MSIL Distribution. In light of the foregoing, the Controlling Shareholders could exercise significant influence in determining the outcome of any corporate transaction or many other matters submitted to the Shareholders for approval, including mergers, consolidations and the sale of all, or substantially all, of the Group s assets, election of directors, and other significant corporate actions. The interests of the Controlling Shareholders may differ from the interests of other Shareholders. If the interests of the Controlling Shareholders conflict with the interests of other Shareholders, or if the Controlling Shareholders choose to cause the Group s business to pursue strategic objectives that conflict with the interests of the other Shareholders, those Shareholders could be disadvantaged by the actions of the Controlling Shareholders. There may be a lack of liquidity of the Shares and volatility of their market price Prior to the Introduction, there has been no public market for the Shares. There is no guarantee that a liquid public market for the Shares will be developed or be sustainable upon completion of the Introduction. If an active public market for the Shares could not develop after the Introduction, the market price and liquidity of the Shares might be adversely affected. The stock market of Hong Kong may be subject to increasing price and volume fluctuations, some of which have been unrelated or have not corresponded to the results of operations of such companies in recent years. Volatility in the price of the Shares may be caused by factors beyond the Group s control and may be unrelated or disproportionate to the Group s operating results. The Group cannot guarantee the accuracy of facts and other statistics with respect to the pearl and jewellery industry and the global economy contained in this listing document The Group has derived certain facts and other statistics in this listing document relating to the pearl and jewellery industry and the global economy from various government publications and organisations that it believes to be reliable. While the Group believes that such facts and statistics are 42

48 RISK FACTORS appropriate sources for such information, and the Directors have taken reasonable care in the reproduction of the information and have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading, they have not been prepared or independently verified by the Group, the Sponsor or any of the Group s or their respective affiliates or advisers. Therefore, the Group makes no representation as to the accuracy of such facts and statistics, which may not be consistent with other information complied within or outside the PRC or available from other sources. Such facts and other statistics include the facts and statistics contained in this section, the sections headed Summary, Industry Overview and Business in this listing document. Due to possibly flawed or ineffective sampling or discrepancies between published information and market practices or other reasons, such facts and statistics may be inaccurate or may not be comparable to official statistics and you should not place undue reliance on them. Accordingly, you should consider carefully how much weight or importance you should attach to or place on such facts or statistics. Forward-looking statements contained in this listing document are subject to risks and uncertainties This listing document contains certain statements that are forward-looking andindicatedbythe use of forward-looking terminology such as aim, anticipate, believe, consider, could, estimate, expect, forecast, going forward, intend, may, might, ought to, plan, potential, project, seek, shall, should, will or would or similar expressions. You are cautioned that reliance on any forward-looking statement involves risk and uncertainties, any or all of those assumptions could prove to be inaccurate and as a result, the forward looking statements based on those assumptions could also be incorrect. The risks and uncertainties in this regard consist of those identified in the risk factors discussed above. In light of these and other risks and uncertainties, the enclosure of forward-looking statements in this listing document should not be regarded as representations by the Group that the plans and objectives will be achieved, and you should not place undue reliance on such statements. 43

49 WAIVER FROM STRICT COMPLIANCE WITH THE LISTING RULES In preparation for the Listing, the Group has sought the following waiver from strict compliance with the relevant provisions of the Listing Rules. SHARE ISSUE RESTRICTION The Company has applied to the Stock Exchange for a waiver from strict compliance with the restrictions on further issue of securities within the first six months from the Listing Date under Rule of the Listing Rules, and a consequential waiver from Rule 10.07(1)(a) of the Listing Rules in respect of the deemed disposal of Shares by the Controlling Shareholders upon any issue of securities by the Company within the first six months from the Listing Date, and the Stock Exchange has granted such a waiver on conditions that: (a) (b) (c) any issue of new Shares (or convertible securities) or the entering into of an agreement in this regard by the Company during the first six months after Listing must be either for cash to fund a specific acquisition or as part or full consideration for a specific acquisition; such acquisition must be for assets or businesses which will contribute to the growth of the Group s operation; and Mr. CH Cheng, being a Controlling Shareholder, will not cease to be a Controlling Shareholder of the Company as a result of the dilution of his holdings of Shares (i.e. deemed disposal of Shares) upon the issue of securities by the Company within the twelve months of the Listing. The reasons for the application for a waiver from strict compliance with Rule and the consequential waiver from strict compliance with Rule 10.07(1)(a) of the Listing Rules by the Company are, inter alia, as follows: (a) (b) (c) (d) the Company does not have current plans to raise funds in the short-term, but it is essential for the Company to have the flexibility to raise funds by way of further issue of Shares in either Hong Kong equity market or enter into further acquisitions for share consideration should an appropriate opportunity arise. Any issue of new Shares by the Company will enhance the Shareholder base and increase the trading liquidity of the Shares, and the interests of the existing Shareholders and prospective Hong Kong investors would be prejudiced if the Company could not raise funds for their expansion due to the restrictions under Rule of the Listing Rules; as the Company will not issue new Shares or raise new funds, the Listing will not result in any dilution of the interests of the Qualifying MSIL Shareholders; the interests of the Shareholders are well protected since any further issue of Shares by the Company would be subject to Shareholders approval as required under Rule of the Listing Rules; and Mr. CH Cheng is strongly committed to the Company and he does not intend to dispose of any Shares owned by him within six months from the Listing Date. 44

50 INFORMATION ABOUT THIS LISTING DOCUMENT AND THE SPIN-OFF DIRECTORS RESPONSIBILITY FOR THE CONTENTS OF THIS LISTING DOCUMENT This listing document, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this listing document is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this listing document misleading. INFORMATION ON THE SPIN-OFF The Company has not authorised anyone to provide any information or to make any representation not contained in this listing document. You should not rely on any information or representation not contained in this listing document as having been authorised by the Group, the Sponsor, or any of the Group s or their respective directors, officers or representatives or any other person involved in the Spin-off. Neither the delivery of this listing document nor the distribution of Shares pursuant to the MSIL Distribution should, under any circumstances, constitute a representation that there has been no change or development reasonably likely to involve a change in the Group affairs since the date of this listing document or imply that the information contained in this listing document is correct as at any date subsequent to the date of this listing document. RESTRICTIONS ON THE USE OF THIS LISTING DOCUMENT This listing document is published solely in connection with providing information on the Spin-off. It may not be used for any other purpose and, in particular, no person is authorised to use or reproduce this listing document or any part thereof in connection with any offering of Shares or other securities of the Company. Accordingly, this listing document does not constitute an offer or invitation in any jurisdiction to acquire, subscribe for or purchase any of the Shares or other securities of the Company nor is it calculated to invite any offer or invitation for any of the Shares or other securities of the Company. APPLICATION FOR LISTING ON THE STOCK EXCHANGE The Company has applied to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Shares in issue and to be issued (including any Shares which may be issued pursuant to the exercise of options that may be granted under the Share Option Scheme). No part of the share or loan capital of the Company is listed on or dealt in on any other stock exchange. At present, the Company is not seeking or proposing to seek such listing of, or permission to deal in, the share or loan capital of the Company on any other stock exchange. ABOUT THE SPIN-OFF The Spin-off does not involve an offering of Shares or any other securities of the Company for purchase or subscription and no money will be raised in conjunction with the Spin-off. 45

51 INFORMATION ABOUT THIS LISTING DOCUMENT AND THE SPIN-OFF CONDITION OF THE MSIL DISTRIBUTION AND THE SPIN-OFF The MSIL Distribution is conditional on the Listing Committee granting the listing of, and permission to deal in, the Shares in issue on the Main Board of the Stock Exchange on or prior to the Long Stop Date. If such condition is not satisfied, the MSIL Distribution will not be made and the Spinoff will not take place, in which case an announcement will be made. Further, the Company confirms that if the Spin-off does not occur for any reason, the MSIL Distribution will not be made. NO CHANGE IN BUSINESS The Company does not contemplate there to be any change in the business of the Group immediately following the Spin-off. HONG KONG BRANCH REGISTER AND STAMP DUTY The Company s HongKongbranchregisterofmembersis maintained by the Hong Kong Branch Share Registrar in Hong Kong. Dealings in the Shares on the Stock Exchange will be registered on the Company s Hong Kong branch register of members maintained in Hong Kong. Dealings in the Shares on the Company s Hong Kong branch register of members maintained in Hong Kong will be subject to Hong Kong stamp duty. Unless the Company determines otherwise, after the Listing, dividends payable in HKD in respect of the Shares will be paid to the Shareholders listed on the Company s register of members, by way of cheque sent by ordinary post, at the Shareholder s risk, to the registered address of each Shareholder as stated in the Company s register of members. SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS Subject to the granting of listing of, and permission to deal in, the Shares in issue on the Stock Exchange and the Company s compliance with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares on the Stock Exchange or any other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. All necessary arrangementshavebeenmadeforthesharestobeadmittedintoccass. PROFESSIONAL TAX ADVICE RECOMMENDED You should consult your professional advisers if you are in any doubt as to the taxation implications of receiving, purchasing, holding, disposing of and dealing in the Shares. It is emphasised that none of the Company, the Sponsor, any member of the Group or their respective directors, officers or representatives or any other person involved in the Spin-off accepts responsibility for any tax effects or liabilities resulting from the receipt of, purchase, holding or disposing of, or dealing in, the Shares or your exercise of any rights attaching to the Shares. 46

52 INFORMATION ABOUT THIS LISTING DOCUMENT AND THE SPIN-OFF COMMENCEMENT OF DEALINGS IN THE SHARES Dealings in the Shares on the Stock Exchange are expected to commence on 17 October The stock code of the Shares is The Shares will be traded in board lots of 2,000 Shares each. In order to facilitate the trading of odd lots (if any) in the Shares, the Company has appointed a third party to provide matching services, on a best efforts basis, to enable Qualifying MSIL Shareholders who wish to acquire odd lots of the Shares to make up a full board lot or to dispose of their holdings of odd lots. Further details will be sent out in an announcement by MSIL. ODD LOT ARRANGEMENTS As a result of the MSIL Distribution, Qualifying MSIL Shareholders, may receive Shares in odd lots. The Company has appointed SBI China Capital Financial Services Limited as its agent in providing matching service to the Shareholders to facilitate the acquisition of odd lots of the Share to make up a full board lot or the disposal of any Shares which they may receive in odd lots. For details, please refer to an announcement to be made prior to the Listing by MSIL for information about the special arrangements to facilitate the disposal of any Shares which the Qualifying MSIL Shareholders may receive in odd lots. 47

53 DIRECTORS AND PARTIES INVOLVED IN THE SPIN-OFF DIRECTORS Name Residential Address Nationality Chairman and Non-executive Director Mr. Cheng Chung Hing ( 鄭松興 ) Executive Directors Ms. Yan Sau Man, Amy (CEO) ( 甄秀雯 ) Flat B on 20th Floor The Mayfair No. 1 May Road Mid-Levels Hong Kong Flat E, 31st Floor Tower 2, The Harbourside No. 1 Austin Road West Tsimshatsui Kowloon, Hong Kong Chinese Chinese Mr. Chen Zhi Wei ( 陳志偉 ) Flat B, 21/F Tower 10 Island Harbourview 11 Hoi Fai Road Mongkok Kowloon, Hong Kong Australian Independent non-executive Directors Mr. Fung Yat Sang ( 馮逸生 ) Mr. Look Andrew ( 陸東 ) Mr. Tsui Francis King Chung ( 崔勁中 ) 50E, Tower 2, Sorrento No. 1 Austin Road West Tsimshatsui Kowloon, Hong Kong House 7, Custom Pass 18 Fei Ngo Shan Road Fei Ngo Shan Kowloon, Hong Kong Flat 7B, Tower 2 Robinson Heights 8 Robinson Road Mid-levels Hong Kong Australian British Chinese Further information on the Directors is disclosed in the section headed Directors and Senior Management of this listing document. 48

54 DIRECTORS AND PARTIES INVOLVED IN THE SPIN-OFF PARTIES INVOLVED Sponsor Legal advisers to the Company REORIENT Financial Markets Limited Suites /F Far East Finance Centre 16 Harcourt Road, Admiralty Hong Kong As to Hong Kong law: Reed Smith Richards Butler 20th Floor Alexandra House 18 Chater Road, Central Hong Kong As to the PRC law: Commerce & Finance Law Offices 27C Shenzhen Te Qu Bao Building 6008 Shennan Road Shenzhen The PRC As to Cayman Islands law: Conyers Dill & Pearman (Cayman) Limited Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman, KY Cayman Islands Legal advisers to the Sponsor Reporting accountant Property valuer Robertsons 57/F., The Center 99 Queen s Road Central Hong Kong PricewaterhouseCoopers Certified Public Accountants 22/F, Prince s Building Central Hong Kong DTZ Debenham Tie Leung Limited 16th Floor, Jardine House 1 Connaught Place Central Hong Kong 49

55 DIRECTORS AND PARTIES INVOLVED IN THE SPIN-OFF Industry consultant Ipsos Hong Kong Ltd 22/F Leighton Centre 77 Leighton Road Causeway Bay Hong Kong 50

56 CORPORATE INFORMATION Registered office Principal place of business in Hong Kong Company s website Company secretary Authorised representatives Cricket Square, Hutchins Drive P.O. Box 2681 Grand Cayman KY Cayman Islands Suites , 22nd Floor Sun Life Tower, The Gateway 15 Canton Road Tsimshatsui Kowloon, Hong Kong (information contained in this website does not form part of this listing document) Mr. Mok Kin Kwan CPA Mr. Cheng Chung Hing Flat B on 20th Floor The Mayfair No. 1 May Road Mid-levels Hong Kong Mr. Mok Kin Kwan Flat E, 52/F Tower 6, Tseung Kwan O Plaza Tseung Kwan O, New Territories Hong Kong Audit committee Remuneration committee Nomination committee Mr. Fung Yat Sang (Chairman) Mr. Look Andrew Mr. Tsui Francis King Chung Mr. Look Andrew (Chairman) Mr. Fung Yat Sang Mr. Tsui Francis King Chung Mr. Cheng Chung Hing Ms. Yan Sau Man, Amy Mr. Tsui Francis King Chung (Chairman) Mr. Look Andrew Mr. Fung Yat Sang Mr. Cheng Chung Hing Ms. Yan Sau Man, Amy 51

57 CORPORATE INFORMATION Compliance adviser Cayman Islands Principal Share Registrar and Transfer agent Hong Kong Branch Share Registrar Principal Banker REORIENT Financial Markets Limited Suites /F Far East Finance Centre 16 Harcourt Road, Admiralty Hong Kong Codan Trust Company (Cayman) Limited Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY Cayman Islands Tricor Investor Services Limited Level 22, Hopewell Centre 183 Queen s RoadEast Hong Kong The Hongkong and Shanghai Banking Corporation Limited 1Queen s RoadCentral Hong Kong 52

58 INDUSTRY OVERVIEW The information presented in this section, unless otherwise indicated, is derived from various official government publications and other publications and from the market research report prepared by Ipsos, which was commissioned by the Group. The Company believes that the information is derived from appropriate sources and has taken reasonable care in extracting and reproducing the information. The Company has no reason to believe that the information is false or misleading in any material respect or that any fact has been omitted that would render the information false or misleading in any material respect. The information has not been independently verified by the Company, the Sponsor or any of their respectively affiliates, advisers, directors, officers or representatives or any other person involved in the Spin-off. Neither the Group, the Sponsor, or any of their respectively affiliates, advisers, directors, officers or representatives nor any other person involved in the Spin-off make any representation as to the accuracy, completeness or fairness of such information from official government publications. The information extracted from the Ipsos Report reflects estimates of market conditions based on samples, and is prepared primarily as a market research tool. References to Ipsos should not be considered as the opinion of Ipsos as to the value of any security or the advisability of investing in the Group. The Directors believe that the sources of information extracted from the commissioned report from Ipsos are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. The Directors confirm that after taking reasonable care, there is no adverse change in the market information since the date of the Ipsos Report. SOURCES OF INFORMATION The Company has commissioned Ipsos, an independent market research company, to analyse and report on, among others, the trends of the pearls and pearl jewellery industry for the period from 2009 to 2018 at a fee of HK$400,000 and the Directors consider that such fee reflects market rates. To provide an analysis of the aforementioned markets, Ipsos combined the following data and intelligence gathering methodology: (a) performing client consultation to facilitate the research including in-house background information of the client such as the business of the Company; (b) conducting desk research to gather background information and to obtain the relevant information and statistics on the industry; and (c) conducting in-depth interviews including face to face, phone interviews with key stakeholders and industry experts in Hong Kong. The information and statistics as set forth in this section have been extracted from the Ipsos Report. Founded in Paris, France, in 1975 and publicly-listed on the NYSE Euronext Paris in 1999, Ipsos SA acquired Synovate Ltd. in October After the combination, Ipsos has become the third largest research company in the world which employs approximately 16,000 personnel worldwide across 85 countries. Ipsos conducts research on market profiles, market size, share and segmentation analyses, distribution and value analyses, competitor tracking and corporate intelligence. Ipsos is independent of the Company and none of the Directors or their associates has any interest in Ipsos. The Directors confirm that Ipsos is independent of and not connected with the Company (within the meaning of the Listing Rules). Ipsos has given its consent for the Company to quote from the Ipsos Report and to use information contained in the Ipsos Report in this listing document. 53

59 INDUSTRY OVERVIEW Except as otherwise noted, all of the data and forecasts contained in this section are derived from the Ipsos Report, various official government publications and other publications. ASSUMPTIONS AND PARAMETERS USED IN THE IPSOS REPORT Analyses in the Ipsos Report are based on the following assumptions: The economy is assumed to maintain a steady growth across the forecast period. It is assumed that there is no external shock such as financial crisis which will affect the demand and supply of pearls and pearl jewellery products in Hong Kong, the PRC and the world during the forecast period. The global demand for pearls and pearl jewellery products is assumed to be stable with more players entering the market. The following parameters have been taken into account in the market sizing and forecast model in the Ipsos Report: GDP growth rate in the world, Europe, North America, the PRC and Hong Kong from 2009 to 2013; GDP per capita in the world, Europe, North America, the PRC and Hong Kong from 2009 to 2013; average annual personal consumption expenditure in the world, Europe, North America, the PRC and Hong Kong from 2009 to 2013; average annual personal disposable income in the world, Europe, North America, the PRC and Hong Kong from 2009 to RELIABILITY OF INFORMATION IN THE IPSOS REPORT The Directors are of the view that the sources of information used in this section are reliable as the information was extracted from the Ipsos Report. The Directors believe the Ipsos Report is reliable and not misleading as Ipsos is an independent professional research agency with extensive experience in its profession. AN OVERVIEW OF THE PEARL AND PEARL JEWELLERY MARKET Pearls have a long history of different uses and are a major type of materials for jewellery products. Pearls are the result of a biological process that occurs within a living mollusc such as an oyster, mussel or clam. Pearls form when a tiny foreign object enters a mollusc and the mollusc covers the object with nacre to protect itself. Layers upon layers of nacre cover the foreign object and thus form a pearl. Types of pearls Pearls that grow in the nature only accounted for less than 0.001% of pearls on the market in Most pearls for commercial use are cultured pearls that are grown and prepared in pearl farms. In pearl farming, oysters and mussels are nucleated and/or grafted and then cared for about 2 to 5 years for pearls to grow and develop. Pearls are mainly categorised into two types saltwater and freshwater pearls as defined by their production environment or their geographical location of cultivation. 54

60 INDUSTRY OVERVIEW Saltwater pearls include South Sea, Tahitian and the Japanese-originated Akoya type and are defined as pearls that are produced from a mollusc that is cultivated in ocean waters, including lagoon or open sea. South Sea pearls are grown in Australia, Indonesia and the Philippines. Tahitian pearls are grown in French Polynesian and Pacific Islands. Cultured freshwater pearls are farmed and produced using mussels that is cultivated in areas of freshwater such as lakes and rivers, fish pools and reservoirs, etc. Freshwater pearls are mainly grown in the PRC, Japan and the United States of America. Structure of the Pearl Jewellery Industry The pearl jewellery industry supply chain is a 6-step process, outlined below: Pearl Farming Cultivation and harvest of pearls Pearl Processing Polishing, dyeing and bleaching processes on pearls. Pearl Jewellery Manufacturing Pearls are sorted and made into jewellery Pearl Jewellery Wholesale Pearl jewellery are shipped to retailers Pearl Jewellery Retail Pearl jewellery sold in stores and online channels to consumers End Users/ Buyers Consumer purchase Source: Ipsos Research and Analysis Major Sales Channels in Jewellery Industry for Pearl Farmers, Processors and Jewellery Manufacturers Auctions and gem and jewellery trade shows or exhibitions are common events for selling pearls by farmers and other suppliers. Key pearl auctions and events include the Hong Kong s jewellery and Gem Fair held in March, June and September every year. Together with the Paspaley Australia event (selling white South Sea pearls) and the Robert Wan event (selling black Tahitian pearls) which are usually held before the Hong Kong s Jewellery Fair; and China s International Gold, Jewellery and Gem Fair, Shenzhen and Shanghai, held in February and November every year. Major Factors Affecting Demand for Pearl Jewellery Price and quality are the two major criteria for choosing pearl jewellery. Price: Price of pearl jewellery varies, depending on the types and quality of pearls used and the intricacies of the design, the precious metals and gemstones used. Types of pearls: Freshwater pearls traditionally have a lower value due to the abundance of supply from freshwater pearl farming, as compared to saltwater pearls. South Sea pearls in general command the highest value. Tahitian pearls also can command a high value depending on their size, shape and lustre. Additional precious metals and gemstones used: All pearl jewellery, require the use of precious metals and other materials for settings, embellishments and fastenings. The grade of precious metals and gemstones used will also affect the price of a pearl jewellery. 55

61 INDUSTRY OVERVIEW The number of identical pearls used: Price of a pearl jewellery also depends on the number of identical pearls used in it. Quality: Similar to price, quality is also a key criteria for selecting pearl jewellery. The size, lustre, shape, colour and type of pearls used: These will all affect the quality and price of pearl jewellery. Pearls that are large, with deep lustre that are perfectly round with a consistent white colour, and a rose or golden tones are most popular. Workmanship: Designs that are more complicated or unique will call upon craftsmen that have a higher standard of workmanship. Pearl jewellery brands: Brands are also associated with perceived quality levels. Some globally famous brands are associated with high prices, and good quality and workmanship. ECONOMY AFFECTING THE INDUSTRY Economic conditions have a significant impact on supply of and demand for pearls jewellery products. GDP Growth Rates in the World, Europe, North America, China and Hong Kong from 2009 to 2013 % growth rate 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 9.2% -0.4% -2.5% -2.8% -4.5% 10.4% 6.8% 2.5% 2.6% 2.0% 9.3% 4.9% 3.6% 1.9% 1.7% 7.8% 7.7% 3.2% 2.7% 3.1% 2.9% 2.0% 1.5% -0.4% 0.1% World Europe North America China Hong Kong Sources: World Bank; Eurostat; Ipsos research and analysis As affected by the global financial crisis in 2008, most regions and countries in the world recorded a decrease in their respective GDP in Save for the PRC which maintained a positive GDP growth rate at 9.2% that year. In 2010, the PRC had the highest GDP growth rate of 10.4%, which was attributed to the implementation of expansive monetary policy and economic stimulus plan introduced by the PRC government in November However, all the above selected regions in the chart demonstrated a general decreasing trend in their GDP from 2010 onwards, illustrating that the Eurozone crisis from 2009 onwards had an impact on the world economy. North America experienced an increase in GDP growth rate, from 1.9% in 2011 to 2.7% in This could be the effect of the Federal Reserve s quantitative easing strategy. Despite of slowdown of GDP growth, Hong Kong s growthrate showed a mild increase in 2013, from about -2.5% in 2009 to about 2.9% in 2013 due to the increase in the value and volume of investments in Renminbi products and surging tourism industry. 56

62 INDUSTRY OVERVIEW Average Annual Personal Disposable Income in the World, Europe, North America, China and Hong Kong from 2009 to 2013 US$ 40,000 35,000 34, , , , ,195.4 World 30,000 25,000 20,000 23, , , , , , , , , ,674.1 Europe North America 15,000 10,000 5, , , , , , , , , , , China Hong Kong Sources: World Bank; Eurostat; Economist Intelligence Unit; Ipsos research and analysis The average annual personal disposable incomes of all selected regions were increasing at a moderate rate. Global annual personal disposable income was increasing as the result of restoring economic growth, from about US$5,707.5 in 2009 to about US$6,729.5 in 2013, with a CAGR of about 4.2%. From 2009 to 2013, the CAGR of the average annual disposable income in North America was about 3.0%; that in Europe was about 2.9%; that in the PRC was about 16.5%; and that in Hong Kong was about 5.0%. Average Annual Personal Consumption Expenditure in the World, Europe, North America, China and Hong Kong from 2009 to 2013 US$ 35,000 30,000 28, , , , ,352.5 World 25,000 20,000 17, , , , ,091.5 Europe North America 15,000 10,000 5, , , , , , , , , , , , , , , China Hong Kong Sources: World Bank; Eurostat; Economist Intelligence Unit; Ipsos research and analysis The global annual personal consumption expenditure also showed a moderate increase, from about US$5,034.2 in 2009 to about US$5,946.4 in 2013, with a CAGR of about 4.3%. Save for Europe, all the above selected regions showed a growth in annual personal consumption expenditure from 2009 to Although Europe is gradually recovering from its sovereign debt crisis, its average annual period 57

63 INDUSTRY OVERVIEW consumption expenditure decreased from approximately US$14,264 in 2009 to approximately US$11,962 in 2012, and then slightly picked up to approximately US$12,284 in 2003 with a CAGR of about -3.7%. MARKET SIZE OF THE PEARL AND PEARL JEWELLERY INDUSTRY Total Consumption Expenditure of Pearl Jewellery Products in the World from 2009 to 2013 US$ million 25,000 19, ,000 15,000 10,000 5,000 8, , , , , , , , ,912.9 Total consumption expenditure on pearl jewellery products F 2015F 2016F 2017F 2018F Sources: Ipsos Research and Analysis The total consumption expenditure of pearl jewellery products in global market increased from about US$8,109.0 million in 2009 to US$11,984.3 million in 2013, with a CAGR of about 10.3%. The global financial crisis from 2008 to 2009 caused a reduction in the growth in the consumption expenditure from 2009 to 2010, and thus affected the growth of pearl jewellery products during the said period. The total consumption expenditure of pearl jewellery products in the global market is expected to grow from about US$13,021.6 million in 2014 to US$19,704.2 million in 2018, with a CAGR of about 10.9%. Major driving forces of the increasing expenditures include (1) the declining saltwater pearl output which has led to an increase in price of pearl jewellery; (2) the strengthening demand for jewellery products as the global economy continues to improve; (3) the increasing sales channels through internet; and (4) the improving quality of pearl jewellery products. 58

64 INDUSTRY OVERVIEW Revenue of Pearl Processing Industry in Global Market from 2009 to 2018 US$ million ,000 2, , , , , , , , , , ,500 2,000 Total revenue of pearl processing industry in the global market 1,500 1, F 2015F 2016F 2017F 2018F Sources: United Nations Commodity Trade Statistics; Ipsos research and analysis The total revenue of pearl processing industry in world fluctuated during 2009 and 2013, with a CAGR of about -0.4%. Since 2011, the supply of pearls in global market has started to decline, because some of the freshwater and saltwater pearl farmers ran out of business during the global financial crisis in 2008 and 2009 and Eurozone crisis from 2009 onwards. The drop in total revenue of pearl processing industry in the global market in 2012 was due to the decline in supply of higher value saltwater pearls with some leading pearl farmer reduced the number of wholesale saltwater pearl auctions in The total value of processed pearls in the global market is expected to grow from about US$2,630.8 million in 2014 to about US$3,086.4 million in 2018, with a CAGR of about 4.1%. As further explained below, the price of the pearls is expected to increase due to the limited supply of pearls and continued growth in demand. The Total Revenue of Pearl Jewellery Manufacturing Industry and Pearl Jewellery Distribution Industry in Global Market from 2009 to 2018 US$ million 6, , , , ,000 3,000 2, , , , , , , , , , , , , ,777.3 Pearl jewellery distribution industry Pearl jewellery manufacturing industry F 2015F 2016F 2017F 2018F Sources: United Nations Commodity Trade Statistics; Ipsos research and analysis 59

65 INDUSTRY OVERVIEW The total revenue of pearl jewellery manufacturing industry in the global market increased from approximately US$731.4 million in 2009 to approximately US$1,081.0 million in 2013 at a CAGR of about 10.3%. Meanwhile, the total revenue of pearl jewellery distribution industry in global market increased from approximately US$2,213.3 million in 2009 to approximately US$3,271.0 million in 2013 at a CAGR of about 10.3%. As the pearl jewellery manufacturing industry was transitioning from low value-added procedures of pearl processing to high value-added procedures of incorporating jewellery design, usage of precious metals and diamonds for making fine jewellery, the industry revenue has increased together with the increase in consumption expenditure. As the pearl jewellery market was expanding to Eastern Europe and the Middle East, the pearl jewellery distribution industry was experiencing a higher growth in revenue. The total revenue of pearl jewellery manufacturing industry in global market is expected to increase from approximately US$1,174.5 million in 2014 to approximately US$1,777.3 million in Meanwhile, the total revenue of pearl jewellery distribution industry in global market is expected to increase from approximately US$3,465.3 million in 2014 to approximately US$5,243.6 million in Average Price of Pearl in Global Market from 2009 to 2013 US$ per piece Saltwater Pearl Freshwater Pearl Sources: Ipsos Research and Analysis Note: The average prices of pearls were generated by trading records of auction prices and from interviews. There is no publicly available standard market price index or other reliable reference for pearls. The average price of freshwater pearls in the global market increased from approximately about US$1.8 per piece in 2009 to approximately US$4.2 per piece in 2013 at a CAGR of about 23.6%. The increase in production costs and decrease in supply from pearl farms led to an increase in wholesale price of freshwater pearls. Approximately 90.0% of the total production volume of freshwater pearls was from the PRC in However, after the global economic crisis in 2008, the scale of freshwater pearl farms in the PRC decreased from about million square metres in 2008 to approximately million square metres in Such reduction in scale led to the decrease in quantity of supply of freshwater pearls and the price of freshwater pearl increased as a result. In 2013, the prices of freshwater pearls in the world, mainly the PRC, rose to about US$4.2 per piece at about a 31.3% increase when compared to the price in

66 INDUSTRY OVERVIEW The average price of saltwater pearls in global market increased from approximately US$14.2 per piece in 2009 to approximately US$31.4 per piece in 2013 at a CAGR of approximately 21.9%. In 2012, there was a sharp decrease in global production volume of saltwater pearls by approximately 30.0% to 40.0% due to the global economic crisis with decrease in demand for saltwater pearls and high mortality of oysters related to water pollution and pathogen infection. The reduction of production volume led to the sharp increase of the average price of saltwater pearls from about US$18.4 per piece in 2011 to about US$27.6 per piece in Pearl farmers in countries such as Indonesia, Myanmar and Papua New Guinea were becoming more skilled by means of saltwater pearl farming techniques and their quality of saltwater pearls were internationally recognised. The global production volume and supply of saltwater pearl became more stable and the average price of saltwater pearl increased moderately in Average Price of Gold and Silver for Pearl Jewellery Industry in Global Market from 2009 to 2013 Gold Silver US$ per ounce US$ per ounce 2, , , , , , Gold Silver Sources: Ipsos Research and Analysis Note: The monthly average prices were recorded based upon the closing price of gold and silver (metal) on last transaction of the corresponding month. The average price of gold in global market increased from approximately US$985.1 per ounce in 2009 to approximately US$1,393.8 per ounce in The average price of silver in the global market increased from approximately US$14.7 per ounce in 2009 to approximately US$23.3 per ounce in There was a continuous growth in demand for gold used for jewellery. The global demand for gold used for jewellery making increased from approximately 1,998.0 tonnes in 2012 to approximately 2,361.2 tonnes in New Market Demands for Pearl Jewellery e-commerce, Online Shopping and New Geographic Segments The pearl jewellery industry is anticipated to expand due to the growth of e-commerce. 61

67 INDUSTRY OVERVIEW Online shopping on e-commerce platforms such as ebay, Taobao, Amazon and other retail chain stores with online shopping services shall continue to drive the global retail sales performance of pearl jewellery. e-commerce platforms shall provide more direct sales channels for potential consumers to engage in business with pearl jewellery manufacturers and retailers. With new purchasing channels created, buyers and end users of pearl jewellery now have alternate means to access pearl jewellery. It is estimated that online channels will account for about 10.0% of pearl jewellery sales by The increasing use of online channels for purchasing pearl jewellery will be one of the market growth drivers for the industry. Increasing consumer demand from emerging markets in Southeast Asia and the Middle East is also expected to drive more demand for pearl jewellery. COMPETITION ANALYSIS IN THE PRC AND HONG KONG Major Competition of the Pearl Processing and pearl jewellery Industry As of 2013, there were approximately 3,100 pearl processing service providers (including farmers and processors) in the PRC and Hong Kong among which 79.3% of these pearl processing companies are located in Zhuji of Zhejiang province, the PRC, which mainly focus on freshwater pearls. Out of all the pearl processing service providers in the PRC and Hong Kong, over 99.0% were processing freshwater pearls and less than 1.0% were processing saltwater pearls in 2013 which are mainly located in the Southern in the PRC. The pearls and pearl jewellery market in the PRC and Hong Kong is highly fragmented. The top 5 players of the pearl processing industry in the PRC and Hong Kong accounted for about 15.8% of the total value of pearl processing industry in the PRC and Hong Kong in In 2013, based on the Ipsos Report, the leading pearl processing company accounted for about 5.6% of the total revenue of the pearl farming and processing companies in the PRC and HK. The Group ranked fifth among the pearl farming and/or processing companies in the PRC and HK with a market share of about 1.5% in There were about 900 pearl jewellery manufacturers in the PRC and Hong Kong in 2013 among which approximately 380 pearl jewellery manufacturers were in Hong Kong. Like the pearl farming and processing industry in the PRC and Hong Kong, the pearl jewellery market is very fragmented and no player dominates the market. Competition is fierce and keen among players in terms of product range, price, design capacity and ability to source quality pearls. The top 5 players accounted for approximately 13.3% of the total value of pearl jewellery manufacturing industry in the PRC and Hong Kong in Based on the Ipsos Report, the Group ranked first among pearl jewellery manufacturers in the PRC and HK with a market share of approximately 4.9% in terms of the total revenue of all pearl jewellery manufacturers in the region in

68 REGULATORY OVERVIEW SUMMARY OF PRC LAWS AND REGULATIONS This section sets forth a summary of the most significant regulations that affect the Group s business activities. Information contained in this section should not be construed as a comprehensive summary of laws and regulations applicable to the Group. REGULATIONS ON WHOLLY FOREIGN-OWNED ENTERPRISE Wholly foreign-owned enterprise as a form of foreign investment permitted in the PRC is primarily governed by the following laws and regulations:. Company Law of the PRC ( 中華人民共和國公司法 ), promulgated in 1993, as amended on 25 December 1999, 28 August 2004, 27 October 2005, and 28 December 2013 respectively;. Wholly Foreign-Owned Enterprise Law of the PRC ( 中華人民共和國外資企業法 ), promulgated in 1986, and amended on 31 October 2000;. Detailed Implementing Rules for the Wholly Foreign-Owned Enterprise Law of the PRC ( 中華人民共和國外資企業法實施細則 ), promulgated in 1990, amended on 12 April 2001 and 19 February A wholly foreign-owned enterprise is a limited liability company under the PRC law and its establishment is subject to the approval of the Ministry of Commerce (hereinafter referred to as MOFCOM ) or its authorised local counterpart where such wholly foreign-owned enterprise is located. The MOFCOM or the local authorities are responsible for approving the relevant articles of association of foreign invested enterprises and other substantial changes to foreign-invested enterprises, including changes to capital, equity transfer and consolidation. Regulations on Environment Protection Various environmental protection laws and regulations have been formulated and implemented by the PRC government, including the Environmental Protection Law of the PRC (the Environmental Protection Law ) ( 中華人民共和國環境保護法 ), the Law of the PRC on Evaluation of Environmental Effects ( 中華人民共和國環境影響評價法 ), the Law of the PRC on Prevention and Control of Water Pollution ( 中華人民共和國水污染防治法 ), the Law of the PRC on the Prevention and Control of Atmospheric Pollution ( 中華人民共和國大氣污染防治法 ), the Law of the PRC on Prevention and Control of Environmental Pollution by Solid Waste ( 中華人民共和國固體廢物污染環境防治法 ), the Law of the PRC on Prevention and Control of Environmental Noise Pollution ( 中華人民共和國環境噪聲污染防治法 ) and the Regulations on Environmental Protection Management for Construction Projects (the Regulations on Construction Projects ) ( 建設項目環境保護管理條例 ), etc. Pursuant to the current Environmental Protection Law promulgated and effective on 26 December 1989, the competent department of environmental protection administration under the State Council of the PRC shall establish the national standards for environment quality. The people s governments of provinces, autonomous regions and municipalities directly under the Central Government of the PRC may establish their local standards for environment quality for items not specified in the national standards for environment quality and shall report them to the competent department of environmental protection administration under the State Council of the PRC for the record. 63

69 REGULATORY OVERVIEW The Environmental Protection Law has been amended on 24 April 2014 and will come into effect on 1 January Under the newly amended Environmental Protection Law, (i) with regard to items already specified in the national standards for environment quality, the people s governments of provinces, autonomous regions and municipalities directly under the Central Government of the PRC may set local standards which are more stringent than the national standards; (ii) the administrative organisations shall issue corrective orders and fines to violators and, commencing on the day after the corrective order is issued, collect a fine for each day the violation continues, based on the original penalty amount and local regulations may broaden the types of violations that are subject to continuous daily fines; (iii) under the circumstances of four serious violations, including ignoring and refusing to perform a decision ordering rectification, to continue the construction without environmental evaluation, to discharge pollutants without emission permission, to discharge pollutants by tampering with and faking monitoring data, and to produce and use the pesticides unequivocally prohibited, the company executives and others deemed responsible could be detained as much as 15 days by the public security organ. Pursuant to the Regulations on Construction Projects promulgated and effective on 29 November 1998, the government of the PRC shall put into practice a system of environmental impact assessment for construction projects. A construction unit shall, during the period when the feasibility study of a construction project is carried out, submit for approval the environmental impact report, environmental impact statement or environmental impact registration form of the construction project. For a construction project which does not require a feasibility study, the construction unit shall submit the environmental impact report, environmental impact statement or environmental impact registration form for approval before the construction of the project commences. The Company has confirmed that they do not have any such projects in construction as at the Latest Practicable Date. The relevant environmental protection laws also impose fees for discharge of waste substances, and impose fines and indemnity for the improper discharge of waste substance and serious environmental pollution. The processing and production of pearls may discharge waste water and solid waste, and may also cause noise pollution. Therefore, the company must strictly abide by the PRC environmental protection laws. Laws and Regulations on Tax Enterprise Income Tax The EIT Law, enacted on 16 March 2007 and effective on 1 January 2008, adopts a tax rate of 25% for all enterprises (including foreign-invested enterprises). Pursuant to the Regulations on the Implementation of Enterprise Income Tax Law of the PRC (the Regulations on EIT Law ) ( 中華人民共和國企業所得稅法實施條例 ), promulgated by the State Council of the PRC on 6 December 2007, and effective on 1 January 2008, a reduced enterprise income rate of 10% will be applicable to any dividends payable to the abovementioned non-resident enterprise investors on the incomes derived from the PRC. Moreover, under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ( 內地和香港特別行政區關於對所得避免雙重徵稅和防止偷漏稅的安排 ), the PRC resident enterprise which distributes dividends to its Hong Kong shareholders should be levied enterprise income tax according to the PRC law, however, if the beneficiary of the dividends is a Hong Kong resident enterprise, which directly 64

70 REGULATORY OVERVIEW holds not less than 25% equity of the aforesaid enterprise (i.e. the dividend distributor), the tax levied shall be 5% of the distributed dividends. If the beneficiary is a Hong Kong resident enterprise, which directly holds less than 25% equity of the aforesaid enterprise, the tax levied shall be 10% of the distributed dividends. Under the Circular of the State Council of the PRC on the Implementation of Transitional Preferential Policies with Regard to Enterprise Income Tax ( 國務院關於實施企業所得稅過渡優惠政策的通知 ) passed on 26 December 2007, (i) enterprises enjoying a preferred tax rate of 15% will be gradually transferred to bear the uniform tax rate, that is of, 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012; (ii) enterprises enjoying the preferential policies with regard to enterprise income tax which is exempted in the first 2 years and reduced by a half in the following 3 years, can continue to enjoy the preferential treatment until its expiration. Enterprises which did not enjoy the preferential tax treatment due to the lack of profit, are entitled to the preferential treatment from Under the Regulations on EIT Law, enterprises which are established under the law of a foreign country (region) but whose actual management body is in the PRC, are referred to as resident enterprises and should be subject to enterprise income tax at the rate of 25% on its global income. Under the Regulations on EIT Law, de facto management bodies is defined as organisations that exercise substantial and comprehensive management and control with regard to, among other things, production and business operation, personnel, finance, and property of enterprises. Consumption Tax The Interim Regulations of the PRC on Consumption Tax (the Consumption Tax Regulations ) ( 中華人民共和國消費稅暫行條例 ) was issued on 13 December 1993 and the amendment became effective on 1 January Under the Consumption Tax Regulations, entities and individuals engaged in producing, commissioned processing or importing consumer goods within the territory of the PRC and all other entities and individuals determined by the State Council of the PRC to sell consumer goods shall be the taxpayers of consumption tax and shall pay consumption tax. A taxpayer shall pay tax while marketing the taxable consumer goods he produces. A taxpayer shall pay no consumption tax on the taxable consumer goods he produces for his own use that are used for continuous production of taxable consumer goods, and shall pay consumption tax on the taxable consumer goods that are used for other purpose at the time of delivery for use. In accordance with taxable items and tax rates of the consumption tax specified in the Consumption Tax Regulations, the tax rate of gold jewellery, platinum jewellery and diamonds and diamonds ornaments is 5% and the tax rate of other precious jewellery, jade and stones is 10% respectively. Value Added Tax Pursuant to the Interim Regulations of the PRC on Value-added Tax ( 中華人民共和國增值稅暫行條例 ) promulgated by the State Council of the PRC on 13 December 1993 and amended on 5 November 2008, and the Detailed Rules for the Implementation of the Interim Regulations of the PRC on Value- Added Tax ( 中華人民共和國增值稅暫行條例實施細則 ) promulgated on 15 December 2008 and revised on 28 October 2011, all entities and individuals in the PRC engaging in sale of goods, processing and repair and replacement services, and import of goods are required to pay value added tax for the added value derived from the process of manufacture, sale or services. Except for some limited circumstances 65

71 REGULATORY OVERVIEW that the value added tax rate is 13%, the general rate of value added tax is 17%. In addition, when exporting goods, the exporter is entitled to a portion of or all the refund of value added tax that it has already paid or borne. Since May 2013, a nationwide pilot programme of replacing business tax with value-added tax has been launched in transportation industry and some of the modern service industries in the PRC. The latest effective regulation on this pilot programme, Notice of the Ministry of Finance and the State Administration of Taxation on Including Railway Transport and Postal Services under the Pilot Programme of Replacing Business Tax with Value-Added Tax (the Notice No. 106) ( 財政部 國家稅務總局關於將鐵路運輸和郵政業納入營業稅改徵增值稅試點的通知 ) was promulgated on 12 December 2013, came into effect on 1 January 2014 and was revised on 29 April Four regulations have been published accordingly, namely, Implementing Measures for the Pilot Programme of Replacing Business Tax with Value-Added Tax (the Measures for Pilot Programme ) ( 營業稅改徵增值稅試點實施辦法 ), Provisions on Issues concerning the Pilot Programme of Replacing Business Tax with Value-Added Tax ( 營業稅改徵增值稅試點有關事項的規定 ), Provisions on Transitional Policies concerning the Pilot Programme of Replacing Business Tax with Value-Added Tax ( 營業稅改徵增值稅試點過渡政策的規定 ), and Provisions on the Application of Zero-Rated Value-Added Tax and Value-Added Tax Exemption Policies to Taxable Services ( 應稅服務適用增值稅零稅率和免稅政策的規定 ). Pursuant to the Measures for Pilot Programme, entities and individuals engaged in the provision of transportation services, postal services and some of the modern services (the Tax Payable Services ) shall be considered as value added taxpayers. The Tax Payable Services include land transport services, waterway transport services, air transport services, pipeline transport services, regular postal services, special postal services, other postal services, research and development services, information technology services, culture and creative services, logistic assistance services, rental services of movable tangible assets, assurance and consultation services, as well as radio and television services. The tax rates for value added tax are as follows: (i) 17% for taxpayers providing rental services of movable tangible assets; (ii) 11% for taxpayers providing transportation and postal services; (iii) 6% for taxpayers providing modern services (excluding the rental services of movable tangible assets); and (iv) 0% for the tax payable services clarified by the Ministry of Finance and State Administration of Taxation. City Maintenance and Construction Tax and Educational Surtax Under the Circular of the State Council of the PRC on Unifying the System of City Maintenance and Construction Tax and Education Surtax Paid by Domestic and Foreign Invested Enterprise and individual ( 國務院關於統一內外資企業和個人城市維護建設稅和教育費附加制度的通知 ) promulgated on 18 October 2010, the Provisional Regulations on City Maintenance and Construction Tax of the PRC ( 中華人民共和國城市維護建設稅暫行條例 ) promulgated in 1985, amended on 8 January 2011, the Tentative Provisions on Levy of Educational Surtax ( 徵收教育費附加的暫行規定 ) promulgated in 1986 by the State Council of the PRC, revised on 20 August 2005 and 8 January 2011, and rules, regulations and policies on city maintenance and construction tax and educational surtax promulgated since 1985 by the State Council of the PRC and the competent financial departments shall also be applicable to foreign-invested enterprises, foreign enterprises and foreigners from 1 December In accordance with the Provisional Regulations on City Maintenance and Construction Tax of the PRC, any enterprise or individual liable for consumption tax, value added tax and business tax shall also be required to pay city maintenance and construction tax. City maintenance and construction tax shall be based on the amount of consumption tax, value added tax and business tax actually paid by the taxpayer and shall be 66

72 REGULATORY OVERVIEW levied simultaneously. The rate of city maintenance and construction tax shall be 7% for the taxpayer in a city, and shall be 5% for the taxpayer in a county or town, and shall be 1% for the taxpayer not in a city, county or town. Stamp Tax Under the Provisional Regulations of the PRC on Stamp Tax ( 中華人民共和國印花稅暫行條例 ) promulgated on 6 August 1988 and amended on 8 January 2011, and the Detailed Rules of Implementation of the Provisional Regulations of the PRC on Stamp Tax ( 中華人民共和國印花稅暫行條例施行細則 ) promulgated on 29 September 1988 and amended on 5 November 2004, all enterprises and individuals creating and obtaining taxable documents within the PRC shall pay stamp tax. The list of taxable documents includes purchase and sale contracts, processing contracts, construction project contracts, property lease contracts, cargo freight contracts, warehousing and storage contracts, loan contracts, property insurance contracts, technical contracts, other documents resemble contract in nature, title transfer deeds, business account books, certificate of rights, license and other taxable documents specified by the Ministry of Finance. The items and rates of stamp tax shall be implemented in accordance with the List of Items and Rates of Stamp Tax ( 印花稅稅目稅率表 ) attached in the Provisional Regulations of the PRC on Stamp Tax. Regulations on Foreign Currency Exchange Foreign currency exchange in the PRC is primarily governed by two administrative regulations, namely, the Regulations of the PRC on Foreign Exchange Control ( 中華人民共和國外匯管理條例 ), promulgated by the State Council of the PRC on 29 January 1996, amended on 14 January 1997 and 5 August 2008 respectively, and the Regulations on the Administration of Settlement, Sale and Payment of Foreign Exchange ( 結匯 售匯及付匯管理規定 ), promulgated by the People s Bank of China on 20 June In accordance with the abovementioned foreign exchange administrative regulations, upon payment of the applicable taxes, foreign-invested enterprises may convert the dividends they received in Renminbi into foreign currencies and remit such amount outside the PRC through their foreign exchange bank accounts. Generally, foreign invested enterprises may convert Renminbi into foreign currencies and remit them out of the PRC without the prior approval of State Administration of Foreign Exchange under the two following circumstances: (a) when an enterprise needs to settle current account items in foreign currencies; or (b) when an enterprise needs to distribute dividends to its foreign shareholders. Under other circumstances, including the settlement of capital account items, foreign-invested enterprises are subject to the above administrative regulatory restrictions on foreign exchange, and must acquire prior approval from the State Administration of Foreign Exchange or its branches before converting Renminbi into foreign currencies. Regulations on Labour and Social Insurance Under the Labour Contract Law of the PRC ( 中華人民共和國勞動合同法 )(the Labour Contract Law ) promulgated on 29 June 2007 and amended on 28 December 2012, labour contracts shall be concluded in writing if labour relationships are to be or have been established between enterprises or institutions and the labourers. Enterprises and institutions are forbidden to force the labourers to work beyond the time limit and employers shall pay labourers for overtime work in accordance with national regulations. In addition, the requirement of entry into fixed term employment contracts and dismissal of employees is very strict. Under the Regulations on Paid Annual Leave for Employees ( 職工帶薪年休假 67

73 REGULATORY OVERVIEW 條例 ) which was promulgated on 14 December 2007 and became effective on 1 January 2008, employees who have worked continuously for more than one year are entitled to a paid vacation ranging from 5 to 15 days, depending on the length of employees work time. Employees who consent to waive such vacation at the request of employers shall be compensated by an amount equal to three times their normal daily salaries for each vacation day being waived. The Group is also subject to the employee welfare rules and regulations set out in the Regulations on Work-Related Injury Insurance ( 工傷保險條例 ), which was promulgated by State Council of the PRC on 27 April 2003, came into force on 1 January 2004 and was amended on 20 December Enterprises shall purchase work-related injury insurance, paying work-related injury insurance premiums for all their employees. Where an employee is injured in an accident or suffers from an occupational disease due to his work and needs treatment, his treatment will be paid for by the insurance company. The employee also enjoys disability subsidy if any injury results in disability. Pursuant to the Interim Regulation on the Collection and Payment of Social Insurance Premiums ( 社會保險費徵繳暫行條例 ), promulgated and became effective on 22 January 1999, enterprises with employees shall carry out social insurance registration at the local social insurance agency and participate in social insurance programmes. Such participants shall report to the social insurance agency the amount of social insurance premiums payable and pay its social insurance premiums every month within the prescribed time limit upon assessment of the social insurance agency. If a premium paying entity fails to carry out social insurance registration, changes its registration or cancels its registration, or fails to report the amount of social insurance premiums payable, the administrative department of labour and social security can order it to rectify the situation by paying the outstanding premium within the prescribed time limit. Pursuant to the Social Insurance Law of the PRC ( 中華人民共和國社會保險法 ) promulgated by the Standing Committee of the PRC on 28 October 2010 which became effective on 1 July 2011, the government of the PRC establishes social insurance systems such as basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance so as to protect the right of citizens in receiving material assistance from the State and society in accordance with the law when getting old, sick, injured at work, unemployed and giving birth. Employers in the PRC are required to contribute, on behalf of their employees in the PRC, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, work-related injury insurance and maternity insurance. If an employing in the PRC entity does not pay the full amount of social insurance premiums as scheduled, the social insurance premium collection institution shall order it to make the payment or make up the difference within the stipulated period and impose a daily surcharge equivalent to 0.05% of the overdue payment from the date on which the payment is overdue on unpaid contribution payable after 1 July 2011 and 0.2% on unpaid contribution payable before 1 July If the payment is not made within the stipulated period, the relevant administration department shall impose a fine from one to three times the amount of the overdue payment. Regulations on Housing Provident Fund Enterprises and the employees should pay the housing provident fund pursuant to the Regulations on Management of Housing Provident Fund ( 住房公積金管理條例 ), which was issued by the State Council of the PRC on 3 April 1999, and the amendment came into force on 24 March Under this 68

74 REGULATORY OVERVIEW regulation, an employer in the PRC shall go to the housing provident fund management centre to undertake registration of payment and deposit of the housing provident fund and, upon verification by the housing provident fund management centre, go to a commissioned bank to go through the formalities of opening housing provident fund accounts on behalf of its staff and workers in the PRC. When employing new staff or workers, the employers shall undertake housing provident fund payment and deposit registration at a housing provident fund management centre within 30 days from the date of the employment, and shall go through the formalities of opening or transferring housing provident fund accounts of staff and workers at a commissioned bank with the verified documents of the housing provident fund management centre. The housing provident funds deposited by an individual employee and those deposited by the employers shall be owned by the employee. Housing provident funds shall be used by employees to buy or build houses, rebuild or overhaul houses for self-dwelling, and shall not be misappropriated by any entity or individual for any other purpose. Under the Interim Administration Measures on Housing Provident Funds in Shenzhen ( 深圳市住房公積金管理暫行辦法 ) promulgated by Shenzhen Municipal People s Government and became effective on 20 December 2010, an employer should deposit housing provident funds for its Shenzhen and non- Shenzhen resident employees at a rate between 5% and 20% of the deposit base. Any employer in the PRC fails to undertake payment and deposit registration of housing provident fund or fails to go through the formalities of opening housing provident fund accounts for its staff and workers, the housing provident fund management centre shall order it to undertake the relevant registration within a prescribed time limit; where failing to do so at the expiration of the time limit, a fine of not less than RMB10,000 nor more than RMB50,000 shall be imposed. Regulations on Labour Safety and Health Under the Labour Law of the PRC ( 中華人民共和國勞動法 ) promulgated on 5 July 1994 and revised on 27 August 2009, employers in the PRC must establish and perfect their systems of labour safety and health, strictly implement the State s rules and standards for labour safety and health, provide education on labour safety and health to labourers, prevent accidents during work and reduce occupational hazards. Moreover, employers in the PRC shall provide labourers with labour safety and health conditions prescribed by the government of the PRC and necessary labour protection articles, and arrange regular health examination for labourers engaged in operations with occupational hazards. Labourers shall strictly follow the rules of safe operation during work. Pursuant to the Law of the PRC on Work Safety ( 中華人民共和國安全生產法 ) promulgated on 29 June 2002, which became effective on 1 November 2002 and revised on 27 August 2009, production and business units in the PRC shall provide their employees in the PRC with work protective gears that are up to national standards or industrial specifications, and they shall give instruction to their employees and ensure that they wear or use these gears in accordance with the rules for their use. The employers in the PRC shall give their employees in the PRC tuition and training in work safety to ensure that the employees acquire the necessary knowledge about work safety and are familiar with the relevant rules for work safety and safe operating regulations. Employees who fail the qualification tests after receiving tuition and training in work safety shall not be assigned to work. 69

75 REGULATORY OVERVIEW Regulations on Intellectual Property Trademark The Trademark Law of the PRC ( 中華人民共和國商標法 ) was adopted by the Standing Committee of the National People s Congress on 23 August 1982, came into effect on 1 March 1983, and was revised on 22 February 1993, 27 October 2001 and 30 August The Trademark Law is enacted for the purposes of improving the administration of trademarks, protecting the exclusive right to use trademarks, and of encouraging producers and operators to guarantee the quality of their goods and services and maintaining the reputation of their trademarks, with a view to protecting the interests of consumers, producers and operators. If the trademark has not been registered, holders of the trademark cannot protect or prevent others from using the trademark. The trademark license contract shall be submitted to the Trademark Office for record. Failure to submit a trademark license contract for recordfiling shall not affect the validity of the license contract, unless otherwise agreed upon by the parties concerned. Where a trademark license contract is not submitted to the Trademark Office for recordfiling, opposition to a bona fide third party shall be prohibited. Patent Under the Patent Law of the PRC ( 中華人民共和國專利法 ), promulgated in 1984, amended on 4 September 1992, 25 August 2000 and 27 December 2008 and the Rules for the Implementation of the Patent Law of the PRC ( 中華人民共和國專利法實施細則 ), promulgated on 15 June 2001, amended on 28 December 2001 and 9 January 2010, patent protections include three categories: invention patent, utility patent and design patent. Invention patent is intended to protect new technology or measures in respect of a product, method or its improvement. Utility patent is intended to protect new technology or measures in respect of an enhancement of the utility of a product s shape, or structure or the combination of the above. Design patent is intended to protect new designs by a combination of product shape, graphic or colour with aesthetic and industrial application value. Regulations on Domain Names The Measures for the Administration of Internet Domain Names of China ( 中國互聯網域名管理辦法 ), adopted by Ministry of Information Industry on 5 November 2004, which became effective on 20 December 2004, regulates the registration of Internet domain names with Internet country code.cn, and domain names in Chinese. Measures of China Internet Network Information Center for Resolving Domain Name Disputes ( 中國互聯網信息中心域名爭議解決辦法 ) (the Measures of Domain Name Disputes) was issued by China Internet Network Information Center (CNNIC) on 28 June 2012 and came into effect on 28 June Under the Measures of Domain Name Disputes, domain name disputes shall be resolved by dispute settlement body approved by the China Internet Network Information Center. Regulations on Online Websites and Transactions Pursuant to the Administrative Measures on Internet Information Services ( 互聯網信息服務管理辦法 ) which was promulgated, and took effect on 25 September 2000, as revised on 8 January 2011 by the State Council of the PRC, internet information services shall be classified into profit-making internet information services and non-profit-making internet information services. The term of profit-making internet information services refers to such service activities as the provision, via the Internet, of 70

76 REGULATORY OVERVIEW information or webpage making, etc. in return for payments to Internet users, while the term of nonprofit-making internet information services refers to the provision of open or shareable information for free to Internet users. In order to engage in the provision of profit-making internet information services, an applicant shall apply an Internet Information Services Value-added Telecommunications Service Operating Permit. In order to engage in the provision of non-profit-making internet information services, an applicant shall carry out record-filing procedure with the provincial telecommunications administration authority. The one engaging in the provision of non-profit-making internet information services without having completed the record-filing procedures, or providing services beyond the scope of the services placed in the record, the provincial telecommunications administration authority shall order rectification within a limited period of time. If the violator refuses to rectify the violation, the provincial telecommunications administration authority shall order the website to be shut down. The Measures for the Administration of Record-Filing of Non-Profit-Making Internet Information Services ( 非經營性互聯網信息服務備案管理辦法 ) which was promulgated on 8 February 2005 by the Ministry of Information Technology (the predecessor of the Ministry of Industry and Information Technology) and took effect on 20 March 2005 formulates more detailed procedural requirements of record-filing for non-profit-making internet information services providers. The Measures on the Administration of Online Transactions (the Measures of Online Transactions ) ( 網絡交易管理辦法 ), issued by the State Administration for Industry and Commerce on 26 January 2014, became effective on 15 March Under the Measures of Online Transactions, online product transactions shall refer to the business activities of selling products or providing services via the Internet (including the mobile Internet). A business operator that intends to engage in online product transactions and relevant services shall go through industrial and commercial registration pursuant to the law. A natural person who intends to engage in online product transactions shall carry out business activities via a third-party transaction platform, and submit to the third-party transaction platform his/her name, address, valid identity proof, valid contact details and other real identity information. The said natural person shall go through industrial and commercial registration pursuant to the law if he/she meets the requirements on registration. Where legal persons, other economic organisations or industrial and commercial sole proprietors that have been registered by administrations for industry and commerce and that have collected business licences engage in online product transactions and relevant services, they shall make public the information specified in their respective business licences or provide electronic links to their respective business licences in eye-catching locations on their website homepages or the main web pages for business activities. Under the Notice of the General Office on Issues Related to Examination, Approval, and Administration of Online Sales and Vending Machine Sales Projects of Foreign-Invested Enterprises ( 商務部辦公廳關於外商投資互聯網 自動售貨機方式銷售項目審批管理有關問題的通知 ), promulgated and became effective on 19 August 2010, i) foreign-invested manufacturing enterprises and commercial enterprises that are legally registered, subject to approval, may directly engage in online sales services, ii) an application for the establishment of a foreign-invested enterprise to exclusively engage in online sales shall be reported to the relevant provincial commerce department for approval, and the provincial commerce department shall conduct strict examination and approval in accordance with the Administrative Measures on Foreign Investment in the Commercial Sector and other relevant laws and regulations, iii) a foreign-invested enterprise that intends to provide network services to other trading parties with its own online platform shall file an application with the Ministry of Industry and Information Technology for a value-added telecom service operation permit. 71

77 REGULATORY OVERVIEW Regulations on Processing with Supplied MaterialsandImportedMaterials Interim Measures for the Administration of Examination and Approval of Processing Trade (the Processing Trade Measures ) ( 加工貿易審批管理暫行辦法 ) issued by the Ministry of Foreign Trade and Economic Cooperation on 27 May 1999 and became effective on 1 June 1999, aims to strengthen the administration of processing trade, protect normal operative order and ensure the healthy development of processing trade. Under the Processing Trade Measures, processing trade shall mean the operation in which all or part of raw materials, accessories, spare parts, components, packing materials are imported in bond, and then processed or assembled by domestic enterprises into finished products for export. Processing trade includes processing with supplied materials and processing with imported materials. The establishment and modification of a processing enterprise ( 加工企業 ), which includes a manufacturing company with a legal person status or a plant established by an operating enterprise as non-legal-person with a business licence and accounting independently dealing with processing trade with imported materials and parts, must be examined and approved by the authority of foreign economic relations and trade (namely, the local authority of MOFCOM). Processing with Supplied Materials The Regulations of Guangdong Province on the Foreign Processing and Assembling Business (the Processing Regulations ) ( 廣東省對外加工裝配業務條例 ), promulgated on 1 June 1993 and amended on 29 July 2004, 28 November 2008 and 26 July 2012, are applicable to those processing and assembling businesses with supplied materials that are processed by legally established enterprises and factories within Guangdong Province (excluding foreign-funded enterprises). The Processing Regulations mainly clarify the cooperation manners between operating enterprise, trade enterprise, processing plant and foreign traders, the applicable regulations on these parties, and essential clauses of the cooperation contract. The Operation Opinions of the General Office of Shenzhen Municipal People s Government on the Transformation of the Enterprises Engaging in Processing with Supplied Materials in Shenzhen to Foreign-Invested Enterprises without Pausing Production Activities at the Original Place (the Operation Opinions ) ( 深圳市人民政府辦公廳關於深圳市來料加工企業原地不停產轉型外商投資企業操作意見 ) promulgated on 28 August 2008, promote enterprises engaging in processing with supplied materials, which conform to the industrial policies and environmental requirements, to transform to foreigninvested legal person enterprises. The Operation Opinions encourage the transformation at the original place without disruption to the production activities. Notice of the General Office of Shenzhen Municipal People s Government on Issues Related to Regulating Registration and Record-Filing of Processing with Supplied Materials ( 深圳市人民政府辦公廳關於規範來料加工項目登記和備案有關問題的通知 ), issued on 2 March 2010, clarifies that further Authorised Business Licence for Processing With Supplied Materials will no longer be issued. The Guiding Opinions of Shenzhen Municipal People s Government on Accelerating Industrial Transformation and Upgrading (the Guiding Opinions ) ( 深圳市人民政府關於加快產業轉型升級的指導意見 ) was promulgated on 28 October The goal of the Guiding Opinions is to promote the development of strategic new industries and the high and new technology industries through transformation and upgrades, and to drive the strategic transition of industrial structure, technical 72

78 REGULATORY OVERVIEW innovation, urban spatial layout and population structure. The Guiding Opinions also aims to promote the transformation and upgrade of processing trade enterprises and the transformation of enterprises engaging in processing with supplied materials to legal person enterprises. On 20 March 2012, the Implementing Opinions on Further Promoting Transformation And Upgrading of Enterprises Processing Supplied Materials (the Implementing Opinions ) ( 關於進一步推動來料加工企業轉型升級的實施意見 ) was jointly issued by the Economy, Trade and Information Commission of Shenzhen Municipality and the other 13 departments of Shenzhen Municipality. The Implementing Opinions aim to accelerate transformation and upgrading progress of non-legal-person enterprises engaging in processing with supplied materials, and to promote optimisation of the industrial structure and coordinated economic development. Processing with Imported Materials Under the Measures of the Customs of the People s Republic of China for the Supervision of Processing Trade Goods ( 中華人民共和國海關加工貿易貨物監管辦法 ) promulgated and became effective on 12 March 2014, processing trades shall refer to business activities wherein the operating enterprise imports all or part of the raw or auxiliary materials, parts and components, component parts and packaging materials, and re-exports the finished products after processing or assembling, including processing with supplied and imported materials. Processing with imported materials shall refer to the business activities wherein the operating enterprise imports materials by paying in foreign exchange, and exports the finished products on its own. An operating enterprise shall go through the filing procedures for processing trade goods with the competent customs authority at the place where the processing enterprise is located. The processing trade contracts should be submitted to the competent customs for the record. Additionally, a subcontracting arrangement entered into between the processing plant and an independent third-party shall be filed with the local administrative customs within three days and any resubcontracting is prohibited. RELATED REGULATIONS IN THE EU The European Commission has sole responsibility for the commercial policy. EU import controls are directly applicable in all EU member states. The EU implements trade defensive measures recognising the right of its members to counter unfair trade practices. These include surveillance measures, quotas on imports, safeguard measures and anti-dumping measures. Special importing measures are implemented in sectors such as textiles and clothing, food safety, agricultural products, iron and steel products and animal health. There are currently no pan-eu specific importing measures in respect of pearls and gold, silver or platinum jewellery products. Product safety General product safety is regulated by the General Product Safety Regulations 2005 which implement Directive 2001/95/EC. These regulations apply to all products (new and second-hand) used by consumers and maintain the general duty placed on producers and distributors to place on the market (or supply) only products that are safe in normal or reasonably foreseeable use. Product-specific legislation will take precedence in areas where the provisions have similar objectives to these regulations. 73

79 REGULATORY OVERVIEW Regulation (EC) 1907/2006 on the Registration, Evaluation and Authorisation of Chemicals regulates the manufacture, placing on the market or use of certain substances, either on their own or in mixtures or articles, within the EU territory if they pose an unacceptable risk to health or the environment. The EU has set limits for the nickel content in products coming in contact with the skin. This applies to all jewellery types, and particularly, piercings. The regulations are directly applicable in all EU member states. RELATED REGULATIONS IN THE U.S. U.S. Patriot Act Pursuant to the authority of Section 352 of the U.S. Patriot Act of 2011 (Pub. L. No Stat. 272 (2001)), the U.S. requires that all dealers in precious metals, precious stones and jewels develop and implement a written anti-money laundering programme to prevent the dealers from being used to facilitate money laundering and the financing of terrorist activities. As the Group does not have an office, affiliates, or subsidiaries in the United States, the Group is not engaged within the United States as a business in the purchase and sale of the above covered goods. Therefore, the Group is not subject to the Patriot Act s Section 352 requirement to develop and implement an anti-money laundering programme. U.S. Sanctions The U.S. Department of the Treasury, Office of Foreign Assets Control ( OFAC ) administers and enforces various sanctions programmes, including, but not limited to, restrictions on trade with Cuba, Iran, North Korea, Sudan, Syria, and persons designated as Specially Designated Nationals ( SDN ). U.S. sanctions generally exporting goods, services, and technology to designated countries and entities that are subject to specific sanction. The Group has confirmed that its products do not contain Burmese, Cuban, Iranian, North Korean or Sudanese origin components. Therefore, the Group s products are not prohibited by OFAC for import into the United States. Kimberley Process Pursuant to the Clean Diamond Trade Act of 2003 and Executive Order 13312, the U.S. is a participant in the Kimberley Process. The U.S. implementation of the Kimberley Process prohibits all imports into and exports from the United States of any rough diamond unless the rough diamond has been controlled through the Kimberley Process Certification Scheme. The Group has confirmed that it does not engage in the import or export of rough diamonds in the United States. Therefore, the Group does not believe that its business operations are subject to enforcement of the Kimberley Process under U.S. law. U.S. Anti-Dumping and Countervailing Duties Goods imported into the United States may be subject to anti-dumping or countervailing duties. 74

80 REGULATORY OVERVIEW The Group has confirmed that it does not act as the importer of record for imports of its merchandise into the United States and is not aware of any anti-dumping or countervailing duty cases assessed against Group exports to the United States. U.S. Customs Requirements Commercial imports of diamonds, jewellery, pearls and precious or semi-precious stones do not require a licence for import into the United States. However, commercial imports valued at US$2,500 or more require a formal entry into the United States and the importer is required to obtain a bond from the U.S. Customs to ensure that all duties, taxes and fees owed to the U.S. government will be paid. The importer of goods into the United States is responsible for all duties owed to the U.S. government. The Group has confirmed it does not act as the importer of record for imports into the United States. Copyright Copyright Law in the U.S. is governed exclusively by federal law, namely the Copyright Act, 17 U.S.C , as interpreted by court decisions. Under U.S. law, copyright protects a literary, musical, dramatic, choreographic, pictorial or graphic, audiovisual, or architectural work, or a sound recording, from being reproduced without the permission of the copyright owner. The copyright in a work vests originally in the author(s) of the work upon creation. Works may be registered with the U.S. Copyright Office; while not mandatory, registration is generally required to sue for infringement in federal court and to obtain statutory damages. Trademarks Trademarks Law in the U.S. is governed by both state and federal law. The main federal statute is the Lanham Act, 15 U.S.C. 1051, which defines a trademark as any word, name, symbol, or device, or any combination thereof to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown. Aside from trademarks, U.S. law recognises service marks, collective membership marks and certification marks, which not only include words and symbols, but can also include designs, sounds, smells and other matters that can function as an indicator of source. In the U.S., rights can be obtained by (1) first use in commerce; or (2) first to register the mark with the U.S. Patent and Trademark Office. While trademark protection depends on use in commerce, registration affords several advantages, including but not limited to (i) nation-wide trademark rights, (ii) presumption of validity, (iii) enhanced remedies for infringement, including the possibility of triple damages and criminal penalties for counterfeiting. Patents Patent Law in the U.S. is governed exclusively by federal law, namely the Patent Act, 35 U.S.C. 1 et seq., enacted by Congress under its Constitutional grant of authority to secure for limited times to inventors the exclusive right to their discoveries. Article I, Section 8, Clause 8 of the U.S. Constitution specifically established the United States Patent and Trademark Office. Types of patents recognised under U.S. law include (1) utility patents (inventions) (2) design patents (ornamental designs) (3) plant patents (varieties of asexually reproducing plants). To obtain protection under U.S. law, an 75

81 REGULATORY OVERVIEW applicant must submit a patent application to the United States Patent and Trademark Office, where it will be reviewed to determine if the invention is patentable. The five primary requirements for patentability are: (i) patentable subject matter, (ii) utility, (iii) novelty, (iv) nonobviousness, and (v) enablement. U.S. law grants to patentees the right to exclude others from making, using, or selling the subject matter of the patent. In the U.S., a patent is essentially a limited monopoly whereby the patent holder is granted the exclusive right to make, use, and sell the patented innovation for a limited period of time. Once the term of protection has ended (20 years for a utility patent, 14 years for a design patent), the patented innovation enters the public domain. Product Safety Product safety laws as set forth by U.S. regulations does not appear to target the adult jewellery market. However, a foreign jewellery manufacturer might be subject to regulations placing limits on levels of lead, cadmium, or any other harmful material that may be found in their products. At the federal level, the main source for product safety law in the United States is the Consumer Product Safety Commission ( CPSC ), which implements the Consumer Product Safety Act and Consumer Product Safety Improvement Act ( CPSIA ). The CPSC is charged with protecting the public from unreasonable risks of injury or death associated with the use of the thousands of types of consumer products under the agency s jurisdiction. In certain instances, the CPSC requires manufacturers to file a General Certificate of Conformity ( GCC ) to indicate compliance with applicable regulations. For products which are manufactured outside of the U.S. and are subject to CPSC scrutiny, it is the importer who must issue a GCC. A GCC is used to certify that a product complies with all applicable consumer product safety rules and similar rules, bans, standards, and regulations under any law administered by the CPSC. The Group has confirmed that it does not act as an importer for imports of its products into the U.S. Products imported into the U.S. which fail to comply with CPSIA s requirements are subject to confiscation and the importer and/or distributor in the U.S. is subject to civil penalties and fines, as well as possible criminal prosecution. The CPSIA also gives enforcement powers to state attorneys general. Product Liability The Group s products sold in the U.S. are subject to product liability laws in the U.S., which are generally based in common law claims and vary from jurisdiction to jurisdiction. Product liability laws are backward-looking in that they seek to redress a harm or injury after a product accident has occurred. To this end, product liability rules define the legal responsibility of sellers and other commercial suppliers of products for damages resulting from product defects and misrepresentations about a product s safety or performance capabilities. The four most common theories of recovery for injuries caused by an alleged defective product include: strict product liability, negligence, breach of warranty and tortious misrepresentation. The Company has confirmed that during the Track Record Period and up to the Latest Practicable Date, it has not been a party to any litigation in respect of a product liability claim in the U.S. 76

82 HISTORY, REORGANISATION AND CORPORATE STRUCTURE HISTORY OF THE GROUP Business history The Group s foundation was laid in the early 1980s when Mr. CH Cheng and Mr. Cheng Tai Po, the brother of Mr. CH Cheng, using their personal savings commenced trading in freshwater pearls and Japanese cultured pearls in Hong Kong. Since then, the Pre Spin-off MSIL Group has established and maintained good relationships with Chinese and Japanese pearl farmers and its suppliers. The Pre Spinoff MSIL Group has subsequently expanded and diversified its product portfolio progressively to include freshwater pearls, South Sea pearls, Tahitian pearls and jewellery products, and a majority of the Group s revenue was generated from the sale of such products during the Track Record Period. As for the customer base, initially, the products of the Pre Spin-off MSIL Group were primarily sold to customers in Hong Kong. Having participated in local jewellery exhibitions since mid 1980s, the corporate image of the Pre Spin-off MSIL Group and the public awareness of the Pre Spin-off MSIL Group in the pearl market have been further enhanced. Through the Pre Spin-off MSIL Group s continuous effort, it has developed a market presence in Europe, North America and other Asian countries, and Europe and North America became the two major markets of the Group during the Track Record Period. During the Track Record Period, pursuant to an agreement dated 26 September 2012, Mr. CH Cheng purchased from his brother, Mr. Cheng Tai Po (i) approximately 8.21% of the then total issued share capital of MSIL, and (ii) 40% of the issued share capital of Rich Men Limited. Rich Men Limited, which has become a Controlling Shareholder of MSIL since 2010, was owned as to 60% by Mr. CH Cheng and 40% by Mr. Cheng Tai Po prior to the aforementioned purchases. Following the completion of the said transactions on 3 October 2012, Mr. Cheng Tai Po ceased to be interested directly or indirectly in any shares of MSIL, whereas Mr. CH Cheng became the sole shareholder of Rich Men Limited and was interested directly and indirectly in approximately 63.32% of the then total issued share capital of MSIL. For further particulars on the Group s business strategies, please refer to the section headed Business Business strategies on future development in this listing document. Business milestones The following is a brief summary of the Group s business milestones: Early 1980s. Commenced trading in freshwater pearls and Japanese cultured pearls in Hong Kong under Man Sang Trading Hong. Since mid 1980s. Participated in jewellery exhibitions and succeeded in establishing contacts with a number of overseas buyers at such pearl and jewellery exhibitions which broadened the Pre Spin-off MSIL Group s customer base from primarily Hong Kong customers to include customers from Europe, North America and other Asian countries Man Sang HK was incorporated. 77

83 HISTORY, REORGANISATION AND CORPORATE STRUCTURE In order to cope with its business expansion and to take advantage of the low cost labour supply in the PRC, the Pre Spin-off MSIL Group decided to set up its own pearl processing facilities in the PRC The Pre Spin-off MSIL Group expanded its operations to include the assembly of freshwater pearl jewellery with the establishment of MH Shenzhen In order to step up its sales and marketing efforts and resources for freshwater pearls, the Pre Spin-off MSIL Group set up Arcadia Jewellery, another wholly-owned subsidiary in Hong Kong. Mid 1990s. The Pre Spin-off MSIL Group expanded its product range to include South Sea pearls and Tahitian pearls The shares of MSIL were listed on the Main Board of the Stock Exchange under the stock code 938 and MSIL s principal business activity at the time of its listing was the purchasing, processing, assembling, merchandising, and wholesale distribution of pearls and pearl products Arcadia Jewellery acquired certain assets and client base from an Independent Third Party and expanded its product range and client base to include design, manufacture and sale of jewellery products Arcadia Jewellery entered into the SZ Processing Agreement for a term of 11 years on 9 May 2004 to establish SZ Factory for the processing of jewellery products.. Man Sang HK entered into the MS Processing Agreement for a term of 11 years on 25 August 2004 to establish MS Factory for the processing of pearl products Shenzhen Kasiao was established in the PRC to develop internet marketing and B2C sales of jewellery products. Corporate history The Company For the purpose of the Listing, the Company was incorporated on 13 May 2014 in the Cayman Islands under the Cayman Islands Companies Law as an exempted company with limited liability with an authorised share capital of HK$380,000 divided into 380,000 shares with a par value of HK$1.00 each. On 13 May 2014, one share, representing the then entire issued share capital of the Company, was issued and allotted to the initial subscriber, being a nominee of the relevant company incorporation service provider, for cash at par. On 13 May 2014, the said initial subscriber transferred the one share of the Company it held to MSIL. As a result, the Company became a wholly-owned subsidiary of MSIL. 78

84 HISTORY, REORGANISATION AND CORPORATE STRUCTURE On 26 September 2014, pursuant to the written resolutions of the sole shareholder of the Company, the authorised share capital of the Company was increased from HK$380,000 to HK$10,000,000 and each issued and unissued shares of HK$1.00 each was sub-divided into 100 Shares of HK$0.01 each. Immediately thereafter, the authorised share capital of the Company comprised 1,000,000,000 Shares of HK$0.01 each, of which 100 Shares were in issue. The Company became the holding company of the Group as a result of the Reorganisation, details of which are set out in the paragraph headed Reorganisation below. MS Holdings On 15 February 2013, MS Holdings was incorporated in the BVI and was authorised to issue a maximum of 50,000 shares with a par value of US$1.00 each. On the same date, MS Holdings allotted and issued one share to MSIL for cash at par value and hence MS Holdings became a wholly-owned subsidiary of MSIL. Following the Reorganisation, MS Holdings has become a direct wholly-owned subsidiary of the Company. Arcadia BVI On 15 February 2013, Arcadia BVI was incorporated in the BVI and was authorised to issue a maximum of 50,000 shares with a par value of US$1.00 each. On the same date, Arcadia BVI allotted and issued one share to MS Holdings for cash at par value. As a result, Arcadia BVI became a direct wholly-owned subsidiary of MS Holdings. On 29 April 2014, MS Holdings transferred the entire issued share capital of Arcadia BVI to MSIL for cash at par value, following which Arcadia BVI became a direct wholly-owned subsidiary of MSIL. Following the Reorganisation, Arcadia BVI has become a direct wholly-owned subsidiary of the Company. Arcadia BVI is an investment holding company. MS Investments On 5 December 1997, MS Investments was incorporated in Hong Kong with an authorised share capital of HK$10,000 divided into 10,000 shares with a par value of HK$1.00 each and on the same date, MS Investments allotted and issued one share to Company Kit Registrations Limited and one share to Company Kit Secretarial Services Limited (Note). (Note: This company could be the relevant company incorporation service provider or a nominee/representative of such service provider.) On 20 February 1998, Company Kit Registrations Limited transferred its one share in MS Investments to Man Sang Development Company Limited (formerly known as Golden Concord (Asia) Limited) for cash at par, and MS Investments allotted and issued 4,998 shares to Man Sang Development Company Limited for cash at par. On the same day, Company Kit Secretarial Services Limited transferred its one share in MS Investments to Mr. Cheng Tai Po for cash at par, who held the share on trust for Man Sang Development Company Limited. As a result, Man Sang Development Company Limited became the sole beneficial owner of the entire issued share capital of MS Investments. 79

85 HISTORY, REORGANISATION AND CORPORATE STRUCTURE MS Investments is the holder of a Hong Kong property which is being used as the Chairman s quarters. Following the Reorganisation, MS Investments has become a direct wholly-owned subsidiary of MS Holdings. Arcadia Investment On 28 February 2013, Arcadia Investment was incorporated in Hong Kong with an authorised share capital of HK$10,000 divided into 10,000 shares with a par value of HK$1.00 each. Arcadia BVI was the initial subscriber (which subscribed for one share for cash at par) and is still the sole shareholder of Arcadia Investment holding such one share of Arcadia Investment, which constitutes the entire issued share capital of Arcadia Investment. Arcadia BVI continues to hold the entire issued share capital of Arcadia Investment following the Reorganisation. MS Innovations On 4 March 1998, MS Innovations was incorporated in Hong Kong with an authorised share capital of HK$10,000 divided into 10,000 shares with a par value of HK$1.00 each. Company Kit Registrations Limited (Note) and Company Kit Secretarial Services Limited (Note) were the initial subscribers of MS Innovations and each subscribed for one share of MS Innovations on 4 March 1998 for cash at par. (Note: This company could be the relevant company incorporation service provider or a nominee/representative of such service provider.) On 5 August 1998, MS Innovations allotted and issued 4,998 shares to MSIL for cash at par. On 6 August 1998, Company Kit Registrations Limited transferred one share of MS Innovations to MSIL for cash at par. On the same day, Company Kit Secretarial Services Limited transferred one share of MS Innovations to Mr. CH Cheng for cash at par, who held the share on trust for MSIL. As a result, MSIL became the sole beneficial owner of the entire issued share capital of MS Innovations prior to the Reorganisation. MS Innovations is the holder of certain intellectual property rights of the Group, details of which are set out in the paragraph headed Further information about the Company s business Intellectual property rights of the Group in Appendix V to this listing document. Following the Reorganisation, MS Innovations has become a direct wholly-owned subsidiary of Arcadia BVI. MS Jewellery On 5 July 2013, MS Jewellery was incorporated in Hong Kong with an authorised share capital of HK$10,000 divided into 10,000 shares with a par value of HK$1.00 each. Arcadia Investment was the initial subscriber (which subscribed for one share for cash at par) and is still the sole shareholder of MS Jewellery holding such one share, which constitutes the entire issued share capital of MS Jewellery. MS Jewellery is engaged in the trading of pearl products, which business was previously carried on by Man Sang HK (which remains a member of the Remaining Group) and such business was transferred by Man Sang HK to MS Jewellery pursuant to the Reorganisation (see below for details). Arcadia Investment continues to directly hold the entire issued share capital of MS Jewellery following the Reorganisation. 80

86 HISTORY, REORGANISATION AND CORPORATE STRUCTURE Arcadia Jewellery On 18 March 1993, Arcadia Jewellery was incorporated in Hong Kong with an authorised share capital of HK$10,000 divided into 10,000 shares with a par value of HK$1.00 each. Snatch Prize Limited (Note) and Boxing Company Limited (Note), were the initial subscribers and each subscribed for one share of Arcadia Jewellery for cash at par. (Note: This company could be the relevant company incorporation service provider or a nominee/representative of such service provider.) On 8 April 1993, Arcadia Jewellery allotted and issued 9,998 shares to Man Sang HK for cash at par. On 13 April 1993, Boxing Company Limited transferred one share of Arcadia Jewellery to Man Sang HK for cash at par. On the same day, Snatch Prize Limited transferred one share of Arcadia Jewellery to Mr. CH Cheng for cash at par, who held the share on trust for Man Sang HK. As a result, Man Sang HK became the sole beneficial owner of the entire issued share capital of Arcadia Jewellery. On 15 February 1994, the authorised share capital of Arcadia Jewellery was increased to HK$500,000 by the creation of an additional 490,000 shares of HK$1.00 each. On 16 February 1994, Arcadia Jewellery further allotted and issued 490,000 shares to Man Sang HK for cash at par. Prior to the Reorganisation, Man Sang HK was the beneficial owner of 500,000 shares of Arcadia Jewellery. Arcadia Jewellery is engaged in the trading and manufacturing of pearls and jewellery products. Following the Reorganisation, Arcadia Jewellery has become a direct wholly-owned subsidiary of Arcadia Investment. HBF Jewellery On 16 October 2013, the articles of association and the establishment of HBF Jewellery in the PRC were approved. The Certificate of Approval for Establishment of Enterprises with Investment of Taiwan, Hong Kong, Macao and Overseas Chinese in the PRC ( 台港澳僑投資企業批准證書 ) was issued on 17 October 2013 and the business licence was granted to HBF Jewellery on 6 November On 6 November 2013, HBF Jewellery was established in the PRC with a registered capital of US$2,000,000. As at 15 January 2014, the paid-up capital of HBF Jewellery amounted to US$2,000,000. HBF Jewellery is engaged in the purchasing and processing of pearls and manufacturing of jewellery products, which business was previously carried on by MS Factory and MH Shenzhen (which remains a member of the Remaining Group) and such business was transferred by MS Factory and MH Shenzhen to HBF Jewellery pursuant to the Reorganisation (see below for details). HBF Jewellery has been a wholly-owned subsidiary of Arcadia Investment since its establishment and following the Reorganisation. Shenzhen Kasiao On 20 December 2012, Shenzhen Kasiao was established in the PRC with a registered capital of RMB2,000,000. As at 29 October 2012, the paid-up capital of Shenzhen Kasiao amounted to RMB2,000,000. Shenzhen Kasiao had been a wholly-owned subsidiary of MH Shenzhen since its establishment and until prior to the Reorganisation. 81

87 HISTORY, REORGANISATION AND CORPORATE STRUCTURE Shenzhen Kasiao is engaged in the internet marketing and B2C sales of pearls and jewellery products. Following the Reorganisation, Shenzhen Kasiao has become a direct wholly-owned subsidiary of HBF Jewellery. REORGANISATION Corporate structure prior to the Reorganisation The following chart sets out the corporate structure of the Pre Spin-off MSIL Group immediately prior to the Reorganisation: MSIL (Bermuda) Investment holding 100% 100% 100% 100% 100% Other members of the Remaining Group Man Sang Enterprise Ltd. (BVI) Investment holding MS Innovations (HK) Holder of trademarks MS Holdings (BVI) Investment holding Arcadia BVI (BVI) Investment holding Man Sang Development Company Limited (HK) Investment holding MS Investments (HK) Holder of Chairman s quarters 100% 100% M.S. Collections Limited (HK) Investment holding 100% 100% Peking Pearls Company Limited (HK) Investment holding 40% 60% MH Shenzhen (PRC) Processing of pearls and property investment and development 100% 100% Man Sang HK (HK) Trading of pearl products and investment holding (Note 1) MS Factory Processing of pearl products Arcadia Jewellery (HK) Trading and designing % of jewellery products (Note 2) 100% 100% 100% Arcadia Investment (HK) Investment holding MS Jewellery (HK) No business operations HBF Jewellery (PRC) No business operations 100% Shenzhen Kasiao (PRC) Jewellery and pearl business, planning to engage in B2C sales SZ Factory Production of jewellery products These entities were transferred, pursuant to the Reorganisation, to the Group These pearls and jewellery businesses were transferred, pursuant to the Reorganisation, to the Group Notes: 1. Prior to the Reorganisation, Man Sang HK was engaged in the business of the trading of pearl products and investment holding. Prior to the Reorganisation, Man Sang HK established a processing arrangement with MS Factory, in the PRC for the processing with supplied materials ( 來料加工 ) in respect of the Pre Spin-off MSIL Group s pearl products. Man Sang HK participated in the management of MS Factory and treated the processing plantaspartofmansanghk s operations. 2. Arcadia Jewellery is engaged in the business of trading and manufacturing of jewellery products. Prior to the Reorganisation, Arcadia Jewellery established a processing arrangement with SZ Factory, in the PRC for the processing with supplied materials ( 來料加工 ) in respect of the Pre Spin-off MSIL Group s jewellery products. Arcadia Jewellery participated in the management of SZ Factory and treated the processing plant as part of Arcadia Jewellery s operation. 82

88 HISTORY, REORGANISATION AND CORPORATE STRUCTURE Corporate and business reorganisation of the Pre Spin-off MSIL Group On 13 May 2014, the Company was incorporated under the laws of the Cayman Islands and was wholly-owned by MSIL. In preparation for the Spin-off and the Listing, the Pre Spin-off MSIL Group underwent the Reorganisation and, as a consequence, the Company became the holding company of the Group which is engaged in the business of purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products. The Reorganisation primarily involved the following steps: 1. Transfer of shares in MS Innovations to Arcadia BVI On 30 April 2014, pursuant to a sale and purchase agreement entered into between MSIL and Arcadia BVI, MSIL transferred 5,000 shares of MS Innovations, representing the entire issued share capital of MS Innovations, to Arcadia BVI for a consideration of HK$1.00 as MS Innovations (being the holding company of certain intellectual properties) was in a negative net assets position. The consideration formed part of the net current account balance between the Group and the Remaining Group, part of which will be capitalised into Shares pursuant to the Capitalisation Issue. 2. Transfer of shares in Arcadia Jewellery to Arcadia Investment On 30 April 2014, pursuant to a sale and purchase agreement entered into between Man Sang HK and Arcadia Investment, Man Sang HK transferred 500,000 shares of Arcadia Jewellery, representing the entire issued share capital of Arcadia Jewellery, to Arcadia Investment for a consideration of approximately HK$2.3 million, which took account of the net asset value of Arcadia Investment. The consideration formed part of the net current account balance between the Group and the Remaining Group, part of which will be capitalised into Shares pursuant to the Capitalisation Issue. 3. Transfer of the business from Man Sang HK to MS Jewellery As Man Sang HK is one of the holders of the registered capital of MH Shenzhen (which in turn holds the principal business and assets of the Remaining Group after the Spin-off), Man Sang HK remains with the Remaining Group after the Spin-off. Thus on 30 April 2014, pursuant to a business transfer agreement entered into between Man Sang HK and MS Jewellery and the relevant notices on transfer of business, and an agreement between MS Factory and HBF Jewellery (i) the business of the trading of pearl products operated by Man Sang HK and the related assets (including the relevant operating assets and employees) were transferred from Man Sang HK to MS Jewellery for a consideration of approximately HK$105.1 million, which took account of the book value of assets transferred to and the liabilities assumed or settled by MS Jewellery and MS Jewellery has also agreed to assume the obligations of Man Sang HK in respect of such business, and, following the aforementioned transfer, Man Sang HK has ceased to engage in the trading of pearl products, and (ii) the relevant operating assets and employees of MS Factory were transferred 83

89 HISTORY, REORGANISATION AND CORPORATE STRUCTURE by MS Factory to HBF Jewellery for nil consideration as the relevant operating assets were fully depreciated. The aforesaid consideration formed part of the net current account balance between the Group and the Remaining Group which will be partly capitalised into Shares pursuant to the Capitalisation Issue. 4. Transfer of equity interests of Shenzhen Kasiao to HBF Jewellery Pursuant to an equity transfer agreement entered into between MH Shenzhen and HBF Jewellery on 29 May 2014, MH Shenzhen transferred the entire equity interest of Shenzhen Kasiao to HBF Jewellery for a consideration of approximately RMB1.3 million, which was determined based on the net asset value of Shenzhen Kasiao. The consideration was settled in cash on 20 June Transfer of business from MH Shenzhen to HBF Jewellery As MH Shenzhen holds the principal business and assets of the Remaining Group after the Spin-off, MH Shenzhen remains with the Remaining Group after the Spin-off. Thus on 30 April 2014, pursuant to an assets transfer master agreement entered into between MH Shenzhen and HBF Jewellery, the business of the processing of pearls operated by MH Shenzhen (including the relevant operating assets and employees) (save that certain amount of inventories were sold by MH Shenzhen to Independent Third Parties and proceeds thereof have been settled by MH Shenzhen making a payment of the same amount to the Group, which amount, constituting part of the working capital of the Group s Pearls and Jewellery Business was paid by MSIL to the Company as referred to in the paragraph headed The MSIL Distribution and the Capitalisation Issue below) was transferred to HBF Jewellery for a consideration of approximately HK$123.6 million, which took account of the book value of assets transferred to and the liabilities assumed or settled by HBF Jewellery, and following which MH Shenzhen has ceased to engage in the Pearls and Jewellery Business. The consideration formed part of the net current account balance between the Group and the Remaining Group, part of which will be capitalised into new Shares pursuant to the Capitalisation Issue. 6. Transfer of shares in MS Investments to MS Holdings On 30 April 2014, pursuant to a sale and purchase agreement entered into between Man Sang Development Company Limited and MS Holdings, Man Sang Development Company Limited transferred 5,000 shares of MS Investments, representing the entire issued share capital of MS Investments, to MS Holdings for a consideration of approximately HK$50.9 million, which was determined based on the net asset value of MS Investments. The consideration formed part of the net current account balance between the Group and the Remaining Group, part of which will be capitalised into new Shares pursuant to the Capitalisation Issue. 7. Assignment of trademarks Pursuant to a trademark assignment entered into between Man Sang HK and MS Jewellery on 17 June 2014, Man Sang HK has transferred certain trademarks registered under its name which are relevant to the Pearls and Jewellery Business to MS Jewellery for a nominal consideration. Further details of such trademarks are set out in the paragraph headed B. Further information about the business of the Group 2. Intellectual property rights of the Group in Appendix V to this listing document. 84

90 HISTORY, REORGANISATION AND CORPORATE STRUCTURE Pursuant to a trademark transfer agreement entered into between HBF Jewellery and MH Shenzhen on 1 April 2014, MH Shenzhen has transferred certain PRC trademarks registered under its name which are relevant to the Pearls and Jewellery Business to HBF Jewellery for nil consideration. Further details of such trademarks are set out in the paragraph headed B. Further information about the business of the Group 2. Intellectual property rights of the Group in Appendix V to this listing document. 8. Incorporation of the Company On 13 May 2014, the Company was incorporated in the Cayman Islands under the Cayman Islands Companies Law as an exempted company with limited liability with an authorised share capital of HK$380,000 divided into 380,000 Shares with a par value of HK$1.00 each as described in the paragraph headed Corporate History The Company above in this section. 9. Subscription of shares in MS Holdings and Arcadia BVI by the Company On 17 June 2014, pursuant to a subscription agreement entered into between the Company and MS Holdings, the Company subscribed for 1,500 shares in MS Holdings for a subscription price of US$1.00 per share which took account of the net asset value and incorporation expenses of MS Holdings. The subscription price was settled in cash on the date of the subscription agreement. On the same day, pursuant to a subscription agreement entered into between the Company and Arcadia BVI, the Company subscribed for 1,000 shares in Arcadia BVI for a subscription price of US$1.00 per share which took account of the net asset value and incorporation expenses of Arcadia BVI. The subscription price was settled in cash on the date of the subscription agreement. 10. Repurchase of shares held by MSIL by MS Holdings and Arcadia BVI On 17 June 2014, pursuant to a repurchase agreement entered into between MSIL and MS Holdings, MS Holdings repurchased one share in MS Holdings held by MSIL for a consideration of US$1.00 which took account of the net asset value of MS Holdings. The consideration formed part of the net current account balance between the Group and the Remaining Group, part of which will be capitalised into Shares pursuant to the Capitalisation Issue. On the same day, pursuant to a repurchase agreement entered into between MSIL and Arcadia BVI, Arcadia BVI repurchased one share in Arcadia BVI held by MSIL for a consideration of US$1.00 which took account of the net asset value of Arcadia BVI. The consideration formed part of the net current account balance between the Group and the Remaining Group, part of which will be capitalised into Shares pursuant to the Capitalisation Issue. Since the completion of the above steps, the Group has been carrying on the business of purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products, whilst the principal business of the Remaining Group is the development, sales and leasing of properties. 85

91 HISTORY, REORGANISATION AND CORPORATE STRUCTURE The following chart sets out the corporate structure of the Pre Spin-off MSIL Group immediately following the completion of the above steps but before the MSIL Distribution and the Capitalisation Issue: MSIL (Bermuda) Investment holding Other members of the Remaining Group 100% Man Sang Enterprise Ltd. (BVI) Investment holding 100% Company (Cayman Islands) Investment holding 100% Man Sang Development Company Limited (HK) Investment holding 100% M.S. Collections Limited (HK) Investment holding 100% Man Sang HK (HK) Investment holding 100% MS Holdings (BVI) Investment holding 100% Arcadia BVI (BVI) Investment holding 100% Peking Pearls Company Limited (HK) Investment holding 40% 60% 100% 100% MS Investments (HK) Holder of chairman s quarters Arcadia Investment (HK) Investment holding 100% MS Innovations (HK) Holder of trademarks MH Shenzhen (PRC) Property investment and development 100% MS Jewellery (HK) Trading of pearl products These entities are members of the Group None of these entities are involved in the Pearls and Jewellery Business 100% 100% Arcadia Jewellery (HK) Trading and designing of jewellery products HBF Jewellery (PRC) Purchasing and processing of pearls and designing and production of jewellery products 100% Shenzhen Kasiao (PRC) Jewellery and pearl business, planning to engage in B2C sales SZ Factory Production of jewellery products 11. Increase in the authorised share capital of the Company On 26 September 2014, pursuant to the written resolutions of the sole shareholder of the Company, the authorised share capital of the Company was increased from HK$380,000 to HK$10,000,000 and each issued and unissued share of HK$1.00 was sub-divided into 100 Shares of HK$0.01 each. Immediately thereafter, the authorised share capital of the Company comprised 1,000,000,000 Shares of HK$0.01 each, of which 100 Shares were in issue. 86

92 HISTORY, REORGANISATION AND CORPORATE STRUCTURE THE MSIL DISTRIBUTION AND THE CAPITALISATION ISSUE On 26 September 2014, the board of directors of MSIL declared a conditional special distribution to the Qualifying MSIL Shareholders. The MSIL Distribution will be satisfied by way of a distribution in specie to the Qualifying MSIL Shareholders of the entire issued share capital of the Company, in proportion to their respective shareholdings in MSIL, on the basis of one Share for every five MSIL Shares held on the Record Date. Fractional entitlements under the MSIL Distribution will be retained by MSIL for sale in the market and MSIL will keep the net proceeds of sale, after deduction of the related expenses therefrom, for the benefit of MSIL. The Company has appointed SBI China Capital Financial Services Limited as its agent in providing matching service to the Qualifying MSIL Shareholders to facilitate the acquisition of odd lots of the Shares to make up a full board lot or the disposal of any Shares which they may receive in odd lots. For details, please refer to an announcement to be made prior to the Listing by MSIL for information about the special arrangements to facilitate the disposal of any Shares which the Shareholders may receive in odd lots. On the Record Date, the Company will capitalise the amount of approximately HK$283.1 million due from the Company to MSIL (such amount arose out of the netting-off of inter-group company balances (including, among other things, the purchase consideration arising out of the Reorganisation steps as mentioned above and certain cash amounts constituting the working capital required for the Pearls and Jewellery Business which were paid by MSIL to the Company) between members of the Group and the Remaining Group and the assignment and transfer of the relevant balances to MSIL such that the net asset value of the Group will become approximately HK$254.0 million) by allotting and issuing such number of Shares required for the purpose of effecting the MSIL Distribution, credited as fully paid, to MSIL. Subsequent to the Capitalisation Issue and based on the issued share capital of MSIL as at the Latest Practicable Date and assuming that it will remain unchanged on the Record Date, 256,038,041 Shares will be held by MSIL which will be the subject of the MSIL Distribution as described above. If there are any Qualified MSIL Shareholders whose addresses on the register of members of MSIL at the close of business on the Record Date are in a jurisdiction outside of Hong Kong, the directors of MSIL will make enquiries as to whether the transfer of the Shares to such Qualified MSIL Shareholders may contravene or require the satisfaction of any requirements of the applicable securities legislation of the relevant overseas places or the requirements of the relevant regulatory body or stock exchange. If, after making such enquiry, the directors of MSIL are of the opinion that it would be unlawful or impracticable, on account of either the restrictions or requirements (including, for example, any registration, qualification or the compliance or satisfaction of other requirements that would be required for any such transfer of Shares) under the laws, regulations or directions of the relevant place or any requirement of the relevant regulatory body or stock exchange in that place or of the costs (whether in absolute terms or relative to the amount of Shares to be transferred) involved or time required, to transfer the Shares to such Qualified MSIL Shareholders (such shareholders referred to as the Overseas MSIL Shareholders ) in the absence of a registration statement or special formalities, such Overseas MSIL Shareholders (if any) will be entitled to the MSIL Distribution but will not receive the Shares. Instead, they will receive a cash amount which equals to the net proceeds of the sale by MSIL (if such proceeds shall exceed HK$100.00) on their behalf of the Shares to which they would otherwise be entitled pursuant to the MSIL Distribution after dealings in the Shares commence on the Stock Exchange at the prevailing market price. The net proceeds of such sale will be paid to the relevant Overseas MSIL Shareholders in HKD. Cheques for such net proceeds are expected to be despatched within 87

93 HISTORY, REORGANISATION AND CORPORATE STRUCTURE approximately two weeks following the commencement of dealings in the Shares on the Main Board. According to the register of members of MSIL as at the Latest Practicable Date, there were 26, 2 and 1 shareholders of MSIL with their addresses in the U.S., Canada and Macau, respectively. Following the Listing, the Company will no longer be a subsidiary of MSIL. As the Spin-off will be by way of the MSIL Distribution alone, it does not constitute and will not be regarded as a transaction of MSIL for the purposes of Chapter 14 of the Listing Rules. Accordingly, the Spin-off does not require approval from the MSIL Shareholders. The Company has applied for the listing of, and permission to deal in, the Shares (including the Shares to be issued upon the exercise of the share options which may be granted under the Share Option Scheme) on the Main Board of the Stock Exchange. The MSIL Distribution is subject to the Spin-off Condition. If such condition is not satisfied, the MSIL Distribution will not be made and the Spin-off will not take place. The relevant share certificates are expected to be despatched to Qualifying MSIL Shareholders (except for any Overseas MSIL Shareholders) on 16 October Such share certificates will only become valid if the MSIL Distribution becomes unconditional. The Qualifying MSIL Shareholders who hold MSIL Shares through CCASS Clearing Participants or CCASS Custodian Participants will receive Shares through their respective brokers or custodians who are CCASS Clearing Participants or CCASS Custodian Participants. 88

94 HISTORY, REORGANISATION AND CORPORATE STRUCTURE The following chart sets out the shareholding structure of the Group immediately following the completion of the Reorganisation, the MSIL Distribution and the Capitalisation Issue (assuming there is no change to the shareholdings of Mr. CH Cheng and Ms. Yan in MSIL and the shareholding structure of MSIL since the Latest Practicable Date): Mr. CH Cheng 100% Rich Men Limited Ms. Yan Public Shareholders 36.62% 26.70% 1.40% 35.28% 100% Company (Cayman Islands) Investment holding 100% 100% MS Holdings (BVI) Investment holding Arcadia BVI (BVI) Investment holding 100% 100% 100% MS Investments (HK) Holder of Chairman s quarters Arcadia Investment (HK) Investment holding MS Innovations (HK) Holder of trademarks 100% 100% 100% MS Jewellery (HK) Trading of pearl products Arcadia Jewellery (HK) Trading and designing of jewellery products HBF Jewellery (PRC) Purchasing and processing of pearls and designing and production of jewellery products SZ Factory Production of jewellery products 100% Shenzhen Kasiao (PRC) Jewellery and pearl business, planning to engage in B2C Sales REASONS FOR AND BENEFITS OF THE SPIN-OFF The directors of MSIL believe that the separate listing of the Group will be beneficial to Group and the Remaining Group based on the following reasons: (1) MSIL and the Company have different growth paths and different business strategies. The Spin-off will set up separate platforms for the business development of the two groups which in turn on one hand may enable the management team of MSIL to continue to focus on building the core business of the Remaining Group, thereby enhancing the decision-making 89

95 HISTORY, REORGANISATION AND CORPORATE STRUCTURE process and its responsiveness to market changes; whilst on the other hand will also provide a mechanism to attract and motivate the Group s management directly in line with the financial performance of the Group on a standalone basis; (2) the Spin-off will facilitate the further development of the Group and it will provide separate fundraising platforms for the Remaining Group and the Group with respect to their respective operations and future prospects; (3) the Spin-off will create two groups of companies and will offer their respective shareholders and other investors flexibility to participate in the future development of both the Remaining Group and the Group or either of the groups; (4) the Spin-off is expected to improve the operational and financial transparency of both the Remaining Group and the Group and provide investors, the market and rating agencies with greater clarity on the businesses as well as the respective financial status of the Remaining Group and the Group; and (5) after the separate listing of the Company, the respective management of the Group and the Remaining Group will be remunerated independently based on their performance which helps promote better staff motivation. In light of the above, the Board also considers that the Spin-off is in the interests of the Company, as well as the overall interests of its Shareholders (after Listing) when considered as a whole. 90

96 BUSINESS OVERVIEW The Group is principally engaged in the purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products (with and without pearls). Apart from selling jewellery products designed by the Group, the Group also sells jewellery products on an OEM basis. During the Track Record Period, the Group did not market its jewellery products under its own brand name except that it has agreed to sell jewellery products to one major customer, which is a retailer in Europe, under the Group s own brand Man Sang Collections. Whilst designs of the Group s jewellery products are principally focused on using pearls as its main theme, the Group also designs and produces jewellery products without pearls to provide its customers a wider selection of products. As stated in the Industry Overview section, the pearl and jewellery markets are very fragmented and highly competitive. Whilst the Group is one of the leading pearl processors and pearl jewellery manufacturers in the Hong Kong and PRC region, according to the Ipsos Report, its market share in 2013 was less than 2% of the pearl farming and processing segment revenue and less than 5% of the pearl jewellery manufacturing segment revenue in According to the Ipsos Report, no player dominates the market in the pearl and jewellery industry. Different pearl processors and pearl jewellery manufacturers compete on quality, price, design and production capability. The Group owns its own production facilities in Shenzhen, the PRC, part of which are conducted at SZ Factory, a processing plant formed under the SZ Processing Agreement entered into between Arcadia Jewellery and the Processing Party, an Independent Third Party. Under the SZ Processing Agreement, the Group is engaged in a processing trade in which SZ Factory utilises raw materials, accessories, machinery and equipment and packing materials owned and imported by the Group to produce jewellery products for the Group. The Group closely participates in the operation and management of SZ Factory and effectively controls its decision making process. All operations of SZ Factory are funded by the Group. Accordingly, the Group has treated SZ Factory (as well as MS Factory (which was another processing plant engaged by the Group during the Track Record Period under similar arrangements) prior to the Reorganisation) as part of the Group. Other part of the Group s production is carried out by HBF Jewellery, a wholly-owned subsidiary of the Group. The processing, manufacturing and production of pearls and jewellery products are conducted at the Group s production facilities (including SZ Factory) located in Shenzhen, the PRC and which has a total gross floor area of approximately 8,200 square metres. 91

97 BUSINESS Shown below are the major types of pearls and those shaded in grey are the types of pearls offered for sale by the Group during the Track Record Period and as at the Latest Practicable Date: Akoya Japanese* Chinese* Saltwater Pearls Tahitian Black Pearls Freshwater Pearls South Sea Gold White Other (such as mabe pearls, conch pearls and abalone pearls) * Mainlywhiteandpinkincolour Pearls that the Group sells are typically sold in loose form or in strands. The Group also uses its processed pearls in making jewellery products. The Group s customers are mainly retailers and other jewellery merchandisers and distributors in Europe, North America and other parts of the world. For the financial year ended 31 March 2012, sales to Europe, North America and other parts of the world were approximately HK$150.5 million, HK$77.0 million and HK$72.5 million and accounted for approximately 50.3%, 25.6% and 24.1% of the Group s revenue respectively. For the financial year ended 31 March 2013, sales to Europe, North America and other parts of the world was approximately HK$120.3 million, HK$67.5 million and HK$73.6 million and accounted for approximately 46.0%, 25.8% and 28.2% of the Group s revenue respectively. For the financial year ended 31 March 2014, sales to Europe, North America and other parts of the world were approximately HK$91.3 million, HK$79.8 million and HK$97.3 million and accounted for approximately 34.0%, 29.7% and 36.3% of the Group s revenue respectively. For the three financial years ended 31 March 2014, sales of saltwater pearls and freshwater pearls accounted for approximately 26.4%, 28.1% and 30.3%, and 2.3%, 4.6% and 8.8%, of the Group s revenue respectively. For the three financial years ended 31 March 2014, sales of jewellery products accounted for approximately 71.3%, 67.3% and 60.9% of the Group s revenue respectively. 92

98 BUSINESS The following table sets forth the sales by product types and the percentage of contribution of each product type to the Group s total revenue during the Track Record Period: Financial year ended 31 March HK$ 000 % of total HK$ 000 % of total HK$ 000 % of total Saltwater pearls 79, , , Freshwater pearls 6, , , Jewellery products OEM 74, , , ODM 107, , , Man Sang Collections (Note) 32, , , Total 300, , , Note: During the Track Record Period, the Group sold jewellery products to one major customer exclusively under the Group s brand name Man Sang Collections. Please refer to the paragraph headed Branding in this section below for further details. For the three financial years ended 31 March 2014, the Group had approximately 480, 370 and 400 customers, respectively, including 95, 102 and 98 customers, respectively, which purchased jewellery products from the Group. Save for 2 customers which bought jewellery products from the Group on an OEM basis, all other customers that bought jewellery products had bought jewellery products on an ODM basis. The table below sets out the breakdown of the revenue from the sales of the Group s jewellery products during the Track Record Period. Financial year ended 31 March HK$ 000 % of total jewellery products sales HK$ 000 % of total jewellery products sales HK$ 000 % of total jewellery products sales Jewellery products with pearls 170, , , Jewellery products without pearls 43, , , Total revenue from the sales of jewellery products 213, , ,

99 BUSINESS The following table sets out an analysis of jewellery products (in terms of HK$) sold by the Group during the Track Record Period: Financial year ended 31 March HK$ 000 %of total sales HK$ 000 %of total sales HK$ 000 %of total sales Product (Note 1) Necklaces 88, , , Earrings 41, , , Rings 26, , , Bracelets 17, , , Pendants 19, , , Sets and others (Notes 2 and 3) 19, , , All jewellery products 213, , , Notes: (1) Jewellery products made by the Group may comprise saltwater pearls, freshwater pearls, diamonds and/or other gemstones. Accordingly, it is not practical to further breakdown the Group s sales of jewellery products by types of pearls or gemstones set on them. (2) A set means a combination of one or more of the above products sold together. (3) Others include tie clips, bangles and chokers. For the financial year ended 31 March 2014, the Group purchased a total of approximately HK$68.6 million saltwater pearls (2013: HK$56.6 million, 2012: HK$56.9 million) and a total of approximately HK$6.3 million freshwater pearls (2013: HK$20.2 million, 2012: HK$12.5 million). With the wide range of products offered by the Group, the selling prices of the Group s products vary depending on the size, weight and quality of the pearls, diamonds or gemstones inlaid and the type and amount of precious metals used and the complexity of the product design. Particulars of the pricing policy of the Group are disclosed in the section headed Business Pricing on page 120 of this listing document. COMPETITIVE STRENGTHS The Directors believe that the wholesale market for pearls and jewellery products is very fragmented. The Directors are of the view that the business of processing, design and sale of pearls and jewellery products normally does not require substantial capital investments and advanced technology and, accordingly, has a relatively low entry barrier in terms of capital. However, a successful company in the business will require a thorough understanding of the supply and demand market, processing techniques, good and efficient-assembly process, quality control, building of strong relationships with quality suppliers and customers which the Directors believe the Group and its management team have possessed after more than 30 years of development. The Directors consider that competition within the 94

100 BUSINESS industry is keen and there are numerous entities, operating on different scales, which are engaged in the business similar to that of the Group. The Directors consider the Group s main competitors include pearls and jewellery manufacturers and wholesalers in Hong Kong and the PRC. The Directors consider that the Group has the following major competitive strengths which have made it a leader in the pearl industry and allowed it to gain further market share: The Group has an established operating history and a group of loyal and experienced senior management The Group was founded in the 1980 s by Mr. CH Cheng and his brother, Mr. Cheng Tai Po and has a history of about 30 years in the pearl business. The Directors believe that the Group has already established a solid foundation and good reputation in the pearl and pearl jewellery sector through the guidance and direction of the two Mr. Chengs. Many of the Group s key senior management staff members have been working with the Group for between 10 to 20 years. They are mostly trained internally and have accumulated invaluable experience and knowledge in the industry. Ms. Yan, an executive Director and the CEO is mainly responsible for the overall management of the Group in particular overseeing sales and marketing of the Group as well as product development. She first joined the Pre Spin-off MSIL Group in 1984 and left the Group for a short period of time from October 1986 to June She rejoined the Group in June 1987 and since then, has remained working for the Group. Mr. Chen, the other executive Director mainly responsible for pearl procurement has also been working for the Group since For more details of the industry experience of the Group s senior management, please see Directors and Senior Management in this listing document. The Directors and senior management team have helped the Group to deal with many difficulties, including the rise and fall of the market demand for Chinese cultured saltwater pearls or Chinese Akoya during late 1990 s to early 2000 s, the Asia Financial Crisis in 1997, the Global Financial Crisis in 2008 and the recent European Sovereign Debt Crisis in 2012 and Responding to market developments and enhancing the profitability of the Group, the Group s senior management team has successfully expanded the Group s operations from a pearl processor and trader to also a jewellery product designer and manufacturer. The senior management team is committed to value creation through their understanding of market dynamics, talent development and customer needs. The Group believes that its management team possesses in-depth knowledge critical to success in the pearls and jewellery industry and is capable of seizing market opportunities, formulating sound business strategies, assessing and managing risks, implementing management and production schemes and increasing the Group s overall profit to maximise the shareholder value for the Shareholders. Established long-term relationships with quality customers The Group has close direct working relationships with its major customers. The Directors believe that dealing directly with customers, instead of through middlemen and agents allows the Group to maintain a closer relationship and better understand customers needs. During the Track Record Period, the Group had maintained the same top five customers which purchased mainly jewellery products from the Group. As at the Latest Practicable Date, the Group has business relationships with its top five customers ranging from approximately 7 years to 26 years. The 95

101 BUSINESS Group believes these long-term stable relationships represent acceptance of the Group s products and services. The Group believes this strong client base will continue to give the Group a solid income source. Good relationships with the customers also enable the Group to keep abreast of the latest product developments and consumers preferences. Leveraging on its established relationships with its customers will continue to enable the Group to make jewellery products that meet latest market trends from time to time. Ability to purchase pearls in bulk quantity from suppliers and established cooperative relationships with suppliers The Company believes that its ability to purchase bulk quantity of pearls from suppliers in cash allows the Group to maintain a good bargaining power over its suppliers. The Group also discusses with and gives advice to its major suppliers with a view to allowing its suppliers to improve their farming techniques and product quality. The Group has also established good business relationships with many suppliers. The Group s top five suppliers during each of the financial years of the Track Record Period have business relationships with the Group ranging from 2 years to over 10 years. The Group s established relationships with quality pearl suppliers in particular give the Group the ability to source pearls with good quality and in various quantity. The Company believes that their good long-term relationships with major suppliers will continue to benefit the Group by being able to source quality pearls at reasonable prices. A vertically integrated production chain and a balanced product mix The Group has been in the pearl business since the 1980s. The Group has then gradually diversified and expanded into the design and production of the jewellery products. The Group also sells a well-balanced amount of lower priced freshwater pearls and more expensive saltwater pearls; and makes jewellery products using both types of pearls. This vertically integrated model allows the Group to earn additional profit by adding value in product design and assembly. The Group believes that this vertically integrated model with a good product mix will also continue to allow the Group to get a better penetration into the different customer segments of the pearl jewellery market and make the Group less vulnerable to fluctuations of demand from one single customer segment. In addition, the Group s vertical integration results in better operational efficiencies that often translates into more competitive pricing for the Group s products, which benefits the Group s customers as well as attracts more customers, both new and recurring, to buy the Group s products. 96

102 BUSINESS Experienced in-house processing, design and production teams The Group has been engaging in the pearl business for about 30 years and has gradually developed its own processing expertise and key techniques. The Group is committed to the continual development of its processing and jewellery making knowhow. Recently, the Group has engaged an Independent Third Party, Japanese cultured pearl farming specialist, who is experienced in bleaching and dyeing of pearls to advise on enhancement of the Group s pearl processing techniques and knowhow. The aim is to further improve the Group s pearl quality in terms of shininess and colours mainly for freshwater pearls which, the Directors consider, will also benefit the Group s jewellery product range. As the Group has expanded into design, production and sale of jewellery products, it has placed considerable emphasis on the building of its design team. The Group s design team is headed by an experienced and well trained designer. The Group s design team, together with its sales team, regularly attends jewellery trade shows to keep abreast with the latest jewellery trends and strives to design new and innovative jewellery products to meet customers demands. The Group regularly introduces new designs to its customers and different jewellery product designs are prepared to cater to the difference tastes of customers from different geographical regions. For each of the financial years ended 31 March 2012, 2013 and 2014, the Group s design team created approximately 7,000, 15,000 and 13,000 new designs respectively. Apart from jewellery product design, the Group is also paying an increasing focus on product engineering which helps connect product design and the production process by utilising CAD software. The CAD engineering team transforms 2D hand drawn jewellery designs into 3D digital images which will allow for better made prototype models and thus better planned assembly and production procedures in terms of production efficiency and craftsmanship. The Directors believe this CAD engineering team together with the Group s experienced jewellery craftsmen will together improve the Group s jewellery production techniques and the quality of the Group s jewellery products. To maintain this competitive strength, the Group encourages its staff members to attend courses and workshops to strengthen their knowledge in design and production for jewellery products. The Directors consider that the Group s processing, design, engineering and production abilities have enabled the Group to introduce new quality products with designs at competitive cost and price to meet market demands. BUSINESS STRATEGIES ON FUTURE DEVELOPMENT The Group s goal is to maintain a leading position among pearl and jewellery product designers and suppliers in Hong Kong by leveraging on its competitive strengths above and to achieve better profitability by improving its product positioning and branding. To achieve this goal, the Group plans to continue to leverage on the close relationships with its customers and to provide them with a wider range of jewellery products (with and without pearls) based on the Group s established understanding of the customers preference and the market trend. The Group will continue to strengthen its design capability by continuing to help enhance the design technique and market knowledge of the designers. The Group will upgrade its equipment in order to further improve product crafting. The Group also plans to widen its distribution channels to cover more potential customers, including the market targeting wealthy consumers in Greater China by capitalising on the contacts directly with potential 97

103 BUSINESS consumer customers and boutique retailers that the Group has established. The Group will also attend jewellery trade shows and exhibitions in new target markets with a view to establishing new contacts with potential customers. Implementation of the various business strategies are further explained below: Diversify the Group s range of products At the early stages of the business, the Group was engaged mainly in trading of freshwater pearls and Japanese cultured pearls in Hong Kong. In the mid-1990s, the Group diversified into selling Chinese Akoya pearls and set up the Group s operations for processing Chinese Akoya pearls. By leveraging on the experience of the Group s senior management team, as well as their marketing efforts and business connections with the pearl farmers and customers, the Group s product mix has expanded into include South Sea pearls, Tahitian pearls, and jewellery products. The Directors will closely monitor any new market trends and opportunities and tap into other product ranges that they consider to be potentially profitable. For example, the Group intends to introduce a high-end jewellery line under the Group s own brand targeting the Greater China quality boutique retailers and wealthy individuals as well as expand the Group s product range to include more jewellery products without pearls, to attract new customers and new orders from existing customers by leveraging on the Group s well established understanding of the customers preference and requirements. During each of the financial years under the Track Record Period, sales of non-pearl jewellery products accounted for approximately 20% of the Group s total sales of jewellery products. The Group has established a market position as a leading pearl jewellery designer and producer in the region and has also actively been developing its non-pearl jewellery product lines. The Company believes that it will be able to leverage on and extend its existing business model and strategies to further expand the Group s sales of jewellery products without pearls. The Company is of the view that there is no material difference in terms of design, production, craftsmanship and marketing on jewellery products with or without pearls. The Company s management believes they should be able to apply the business operation strategy in developing and marketing pearl jewellery products and further strengthen its current development of the sale of non-pearl jewellery products. The Group will continue to focus on executing various initiatives under the divergent strategic plans of developing both pearls and non-pearls jewellery products. Many customers of the Group s jewellery products are retailers which have demand for both jewellery products with and without pearls. The Group will target existing customers that are sourcing non-pearl jewellery products from other suppliers and those customers that are looking to launch new lines of non-pearl jewellery products with the intention to capture a larger market share of the non-pearl jewellery products market. By offering more product choices and targeting a new market share, the Directors believe that this will help broaden the Group s revenue sources with limited product cannibalisation. To cope with the diversification of the Group s range of products, the Group will acquire additional moulding machinery which may allow for more elaborate and unique designs to be created and marketed to the Group s existing and new customers and consider recruiting more designers to design more pearl and non-pearl jewellery products. 98

104 BUSINESS Strengthen the Group s design capabilities In order to allow the Group to continue to grow and expand the Group s product lines, it is essential for the Group to continue to invest in and build up strong processing, design, engineering and production teams. The Group has also hired a reputable and experienced external consultant to help improve its pearl processing techniques. During the Track Record Period, the Group s design team created over 35,000 designs of jewellery products. The Group s design team consists of 6 staff and the department head has over 15 years of jewellery design experience. The Group proposes to strengthen its design capabilities by recruiting new designers as well as continuing to upgrade the design knowledge and capabilities of the existing design staff to ensure the products that the Group designs and offers meet the Group s customers taste and preference. The Group has also built up a CAD engineering team to facilitate the design team by using CAD software with an automated moulding machine that provides a fast and versatile solution for transforming 2D drawings to 3D drawings and prototype. As at the Latest Practicable Date, the Group has 5 skilled technicians in the CAD engineering department. The Group will look to employ new designers and engineers who may provide additional design and technical capabilities to the existing design and engineering team. The Group will also request the design and engineering staff to attend external training courses to enhance and develop their design and engineering skills. Build brand recognition The Directors hope that with an increasing ability on pearl processing, jewellery design and production, the Group will be able to provide better quality jewellery products, build up a stronger market reputation associated with the high quality, new and fashionable products. The Directors believe that this will gradually allow the Group to tap into the high-end fine jewellery market by offering high-end fine jewellery to reputable boutique retailers through different major jewellery trade shows and exhibitions. The Group will also sell its products to high net worth individuals through personal connections of its staff members. The Group will also endeavour to create and develop new lines of jewellery products under the Group s own brands such as Arcadia ( 薈寶 ) and Dear Pearl ( 珍飾 ). The Group will also work closely with its customers and may sell jewellery products to customers under new brands to be introduced by the Group. As at the Latest Practicable Date, the Group was still considering the detailed branding and marketing plan for this new line of jewellery. Expand the Group s pearl and jewellery customer base The Group will continue to expand its Pearls and Jewellery Business coverage worldwide, including but not limited to Europe, North America, Hong Kong, the PRC and other Asian countries. The Group has penetrated a number of countries in Europe (such as Germany and Italy). The Group will continue to focus on expanding further in the European market. Given the increase in demand by the Chinese for high-end and high quality luxury goods, the Group will also endeavour to expand its business network to attract boutique retailers in the region targeting high net worth individuals to buy the Group s jewellery products. The Group will also continue to achieve organic growth through participating in different jewellery fairs, exhibitions and shows as well as develop online market and distribution channels, capitalising on its ample financial resources. The Group has since April 2014 set up a VIP showroom at its offices in Hong Kong to 99

105 BUSINESS showcase and demonstrate the Group s fine jewellery products to target high-end boutique retailers and wealthy individuals in or visiting Hong Kong through connections established via major jewellery trade shows and exhibitions and personal connections of its senior management team. Since setting up of the VIP showroom in April this year up to 30 June 2014, the Group has achieved additional sales of approximately HK$7.5 million from sales generated from this new sales and marketing channel. To expand into new markets and build a stronger market presence, the Group will participate in more trade shows which previously the Group has not participated in, such as participating in the China Harbin International Jewellery Fair ( 中國哈爾濱國際珠寶玉石博覽會 )inmayandjune 2014 and may consider appointing agents (who shall have the necessary experience and contacts with potential customers) to help expand the Group s brand s presence in new locations. Expand the Group s sales channels The Group has over the years principally marketed and sold its products through traditional sales channels which will continue to be the major marketing channel of the Group in the near future. In the past, the Group only introduced online sales on a trial basis. As such, the Group has not invested significant resources in its past online shops and in developing its online selling strategy. With the development and success of online shopping in recent years and the acceptance of shopping online by consumers, the Group will also attempt to reposition and develop new online sales channels to offer affordable yet high quality products using the Group s Dear Pearl ( 珍飾 ) registered trademark to consumers through well-known online portals such as Tmall.com ( 天貓 ), jd.com ( 京東 )and aolaigo.com ( 奧萊購 ). The Group will continue to market the Group s Arcadia ( 薈寶 ) brand of products on its own online sales platform. The Group will place more resources on staff remuneration package and training, with a view to attracting and maintaining experienced human resources to develop sales through these revamped channels. As at the Latest Practicable Date, the Group was still considering the detailed plan of its online sales strategy. Preliminarily, the Group plans to establish online shops through other popular B2C websites in the PRC and is expected to relaunch its B2C website by the end of Financing The Group has been financing its business principally for its operating cash inflow and will continue to do so. As at the Latest Practicable Date, the Group had applied for a new banking facility from a bank in Hong Kong amounting to HK$15 million, which had not been approved or granted by the related bank. Subject to the granting of any such banking facility, the related cost of financing and expected return of the opportunity, the Group may also utilise funding from this banking facility (if made available) to facilitate the Group s future developments. However there is no assurance that the Group will be able to obtain the banking facility at acceptance terms or at all. Whilst the Group has no plan to finance any expansion by debt, failure to get a banking facility or any other kind of financing may adversely affect the Group s long-term expansion strategy. 100

106 BUSINESS Disclaimer The Group s actual course of business may vary from the business strategies and plan set out above. There can be no assurance that the plans of the Group will materialise or by when it can be materialised. The Directors will use their best endeavours to anticipate future changes in the industry, take measures and be flexible so that the Group may stay ahead of or react timely to such changes. BUSINESS OPERATIONS The Group is principally engaged in the purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products. Pearls product range Major types of pearls that the Group sells include: (1) South Sea pearls (which is a type of saltwater pearls), (2) Tahitian pearls (which is a type of saltwater pearls); (3) freshwater pearls. These pearls are sold individually, in packs of sorted pearls in various numbers and in strands mainly of 16 inches (approximately 40 cm) in length. (1) South Sea pearls South Sea pearls are considered to be of the highest quality amongst the cultured pearls. The Group sources South Sea pearls mainly from pearl farmers and suppliers in Australia and the Philippines. They are available mainly in white and gold with overtones such as whitepink, silver-white, creamy-pink and gold. The normal size of South Sea pearls usually measure from 10 mm to 18 mm in diameter. (2) Tahitian pearls Tahitian pearls processed and sold by the Group are mainly sourced from Tahiti, French Polynesia. Tahitian pearls are usually available in sizes of 8 mm to 16 mm in diameter and in a spectrum of black colours with various overtone (green, violet, purple, blue, copper, gold with various overtone and, to a rarer extent, peacock green). 101

107 BUSINESS (3) Freshwater pearls Freshwater pearls processed and sold by the Group are available in a variety of shapes including round, potato and rice shapes, with sizes usually ranging from 2 mm to 10 mm in diameter. Freshwater pearls are generally less expensive than saltwater pearls. The Group sources freshwater pearls mainly from pearl farmers and suppliers in Zhejiang Province, the PRC. Unlike the farming of saltwater pearls which involves putting an external nucleus into the mollusc, farming of freshwater pearls generally only involves the grafting of strip of tissue from a suitable donor mollusc. In recent years, farmers of freshwater pearls have adopted a similar farming technique used in growing of saltwater pearls, namely the insertion of an external nucleus in a mollusc. Freshwater pearls grown with this technique have different natural colours like South Sea pearls and Tahitian pearls. The market for this new type of freshwater pearl is still developing. Traditional freshwater pearls grown are generally in white, cream, pink and usually require bleaching and dyeing. Jewellery products Apart from the processing and sale of pearls, the Group also offers customers with a range of jewellery products (with and without pearls). The Group s jewellery products are mainly designed and produced in-house on an ODM basis or on an OEM basis. The Group also sells jewellery products to one major customer exclusively under the Group s brand name Man Sang Collections. Under the Group s agreement with such customer, the Group cannot market and/or offer for sale and/or have marketed and/or offered for sale any products in the Man Sang Collections to other customers also selling through the same medium as such customer in the relevant areas. Further details regarding the arrangement are set out in the section headed Business Sales and Marketing below in this listing document. Save for the above, the Group does not sell any products under its own brandname to its wholesale customers. Though a majority of the Group s jewellery products have been designed with pearls as the principal focus, to provide a wider selection of jewellery products from which the Group s customers can choose, the Group also designs and manufactures jewellery products without pearls. The Group may set diamonds (usually ones which are not larger than 5 mm) and other gemstones on its jewellery products. The Group s jewellery products are usually made with 14K or 18K gold or sterling silver. 102

108 BUSINESS The Group s jewellery products include necklaces, earrings, rings, pendants and bracelets. Below are pictures of some selected jewellery products of the Group: During the Track Record Period, the range of selling prices for each type of jewellery products is set forth below: High Necklaces Earrings Rings Pendants Bracelets (per (per (per (per (per string) pair) piece) piece) string) 75,457 23,330 25,700 42,120 11, HK$ Low Average Median Financial year ended 31 March 2013 HK$ High Low Average Median 40,794 21,800 22,000 28,080 13, High 31,013 28,587 36,574 16,000 18, HK$ Low Average Median Note: The selling price of jewellery products is determined based on various factors including, among others, cost of the jewellery components, cost of design and production, market demands and price trends, and thus may vary substantially. PROCUREMENT/SUPPLIERS The procurement department is responsible for procuring the Group s raw materials which include: (i) pearls, (ii) precious metals (including gold and silver), (iii) diamonds, gemstones and other miscellaneous items, such as packaging materials, thread and accessory parts like clasps and earring pins. A breakdown of the purchase of raw materials during the Track Record Period is shown below: 2012 HK$ 000 Pearls Precious metals Diamonds and gemstones Others Total purchases Financial year ended 31 March % of total % of total % of total purchases HK$ 000 purchases HK$ 000 purchases 69,387 36,838 25,704 28, ,771 31,863 21,971 12, ,843 18,893 26,248 14, , , ,

109 BUSINESS The below table sets out the average purchase price for the Group major raw materials during the Track Record Period: Financial year ended 31 March Raw material Pearls South Sea pearls (HK$/piece) (approximate) Tahitian pearls (HK$/piece) (approximate) Freshwater pearls (HK$/kg) (approximate) 900 2,200 3,500 Precious metals Gold (HK$/kg) (approximate) 409, , ,500 Silver (HK$/kg) (approximate) 9,000 7,800 5,500 Diamonds (HK$/carat) (approximate) 3,000 3,200 3,100 The procurement of these raw materials is conducted by the Group s full-time, well-trained and experienced procurement staff from its offices in Hong Kong and Shenzhen in the PRC. As at the Latest Practicable Date, the Group s purchasing department had 5 staff and is headed by Mr. Chen, an executive Director and who has over 15 years of experience in the pearls industry and has been mainly involved in procurement of pearls. Detailed information on the qualification and experience of Mr. Chen is set out in the section headed Directors and Senior Management in this listing document. In addition to procuring pearls for the Group, Mr. Chen is also responsible for assisting the Group s management and sales team on the pricing of the Group s pearls. The main raw materials that the Group purchases are pearls and gold. The purchasing staff maintains regular contacts with pearl farmers and other pearls suppliers (like freshwater pearl processors and distributors) in the PRC, the Philippines, French Polynesia and Australia. The Group prefers to buy directly from farmers whenever possible, to cut out any margin earned by middlemen and to gain access to a larger quantity of quality pearls. The Group s management and the procurement staff meet regularly to discuss the market trend for pearls and to estimate customers demand and project the Group s requirement for pearls. The Group usually purchases pearls of 8 mm to 13 mm based on internal estimated customer demand but will also maintain a lower basic stock level of larger pearls. Further, when the Group has customers orders for pearls of more specific requirements, it will inform the Group s suppliers which will notify the Group s procurement team should such stock become available. The Group may also participate at auctions organised by farmers and suppliers for the purchase of pearls (mainly saltwater pearls). The Group s procurement staff may also visit the Group s suppliers to inspect and select pearls to purchase. The procurement team will usually discuss with the Group s management after the procurement team has inspected the pearls available for sale when determining purchase prices acceptable to the Group. As the quality of pearls varies considerably from piece to piece and from lot to lot, there is no publicly available standard price index or reliable reference for pearls and the assessment of the purchase price of a piece or a lot primarily relies on the experience of the management and procurement staff and their in-depth knowledge of the industry and customer demands. Accordingly, it is very important for the Group to be able to maintain a strong procurement team. The Group emphasises much of its training and succession of its procurement staff through on the job training and coaching by senior procurement staff members. 104

110 BUSINESS Pearls Pearls that the Group purchases are mainly either for (i) the Group s wholesale distribution or (ii) use in the Group s jewellery products. During the Track Record Period, the Group principally purchased (1) South Sea pearls mainly from pearl farmers and suppliers in Hong Kong, Australia and the Philippines; (2) Tahitian pearls mainly from pearl farmers and suppliers in French Polynesia; and (3) freshwater pearls from pearl farmers and suppliers in Zhejiang Province, the PRC. The majority of the Group s pearls are purchased in lot format where a lot usually includes an assortment of pearls. Purchases of pearls in the lot are made based on the specifications stated including, calibre (i.e. size), number of pearls, weight, colour and/or shape. The Group typically purchases pearls prior to the annual trade shows attended by the Group, including, among other events, the three more significant jewellery exhibition and trade shows held annually in Hong Kong in March, June and September and the one held in Basel Switzerland in March or April. Traditionally, the Group would source freshwater pearls and process the pearls at its production facilities in Shenzhen, the PRC. More recently, the Group has sourced a greater amount of freshwater pearls which have been processed, for example, pearls which have been sorted and drilled based on size and shapes. This is because freshwater pearls usually involve a large number of smaller sized pearls of lower value in many different shapes thus requiring substantial labour to process these pearls. In order to allocate more resources to the making of jewellery products which can potentially earn a higher profit, the Group has decided to purchase more processed freshwater pearls. The procurement team inspects the pearls to be purchased to ensure that the pearls are of acceptable quality and standard. They visit the Group s suppliers from time to time to understand their stock availability. The Group s procurement staff may also give verbal advice to some major suppliers on ways to improve their pearl farming techniques. When procuring pearls, the procurement staff will take into consideration the 5 Virtues which are: Lustre, Complexion, Shape, Colour and Size, and which is considered by many in the industry as the industry standard in determining the quality of a pearl and in effect the value of the pearl. As these virtues are of a subjective nature, the Group relies heavily on the experience of the management and procurement staff and their knowledge of the pearl industry to accurately value pearls that are procured. To control the risk of fluctuations in cost of sales and gross profit margin, the Group purchases pearls mainly with reference to the estimated market demands in the next six months, and only purchases other major materials for the production of jewellery products, including precious metals, diamond and other gemstones when there are confirmed orders on hand. The Directors believes that this will help shorten the inventory turnover cycle and thus help control and mitigate the related risks arising from fluctuations in material prices. The Group does not carry out any hedging activities in respect of its precious metal requirements. 105

111 BUSINESS Other materials The Group purchases precious metals (including gold and silver), diamonds, gemstones, accessories and parts and packaging materials for the production of jewellery products for sale and marketing purposes and these raw materials are mostly purchased as and when required according to the designs of the jewellery products and orders on hand. The Group s precious metals, diamonds, gemstones, accessories, parts and packaging materials are mainly purchased from suppliers in Hong Kong and the PRC with a relatively small amount of other materials (mainly parts and accessories) are sourced from countries like Japan, Italy and Germany. During the Track Record Period, the Group purchased all of its gold requirements from one supplier in Hong Kong, which was also the Group s largest supplier (in terms of dollar value). Whilst there is a significant concentration on one supplier during the Track Record Period, the Directors do not believe that there will be any difficulty in sourcing its precious metal requirements from other available sources in the event that the current supplier ceases to supply the Group with its precious metal requirements as there are other sources of gold supply in Hong Kong at market prices. Since the quality of the precious metals purchased will have a direct impact on the production efficiency and quality of the Group s products, during the Track Record Period, the Group has only purchased its precious metals requirements from one globally reputable supplier which they have had a relationship with for over 10 years. Given the need to consistently produce high quality products, the Directors believe that for the Group to purchase its precious metal requirements from one supplier that has historically proven to be reliable is appropriate and in its best interests. During the Track Record Period, the Group has not experienced any difficulties in sourcing for its raw materials for the production of its jewellery products. As for the diamonds and gemstones of common standard size and specifications that are used in the Group s jewellery products, suppliers will send diamonds and/or gemstones to the Group for the Group s production craftsmen to inspect and select the diamonds and/or gemstones that fit the design requirements. The Group is not required to make any deposit or advance payment for the diamond or gemstones stock sent to the Group for selection. After the Group has decided which diamonds and/or gemstones they would purchase, the Group is invoiced on the diamonds and/or gemstones selected and agreed to be purchased. Diamonds not selected for use by the Group will be returned to the suppliers. The Group may also purchase diamonds and gemstones with other specifications. These diamonds and gemstones will be supplied to the Group on an open account basis. For some products which are produced based on a customer s specific design, the customer may sell to the Group related supplies or may specify a supplier that the Group is to source the parts and accessories for the design which are then further used by the Group in the production of that particular customer s jewellery products at the Group s production facilities. Credit and payment terms For the three financial years ended 31 March 2014, most of the Group s procurement of saltwater pearls and precious metals was made on cash on delivery basis. For freshwater pearls and other raw materials, the purchases were made either on cash on delivery or an open account basis with credit terms ranging from 30 days to 120 days. Most of the pearl purchases are settled via bank transfers from the Group to the suppliers with the exception that historically, some purchases of pearls in Tahiti were settled by cheques written by the procurement team on an overseas bank account in Tahiti as some suppliers preferred cash payments 106

112 BUSINESS when the Group first started purchasing Tahitian pearls in around mid 1990s. Such overseas bank account is a personal bank account operated by Mr. Chen, an executive Director, solely for the purpose of settling purchases of pearls in Tahiti and covering the expenses incurred by the procurement team during purchase trips. Mr. Chen is responsible for overseeing the Group s procurement function and he is also the chief buyer of the Group in respect of the purchasing of pearls in Tahiti. He, together with some other procurement team members, visits the suppliers, inspects the stocks available for purchase and, having discussed with the Group s management in Hong Kong, finalises the purchase selections in Tahiti. The Group maintained a tight control over such bank balance which was less than 1% of the Group s cash and cash equivalents as at 31 March 2012, 2013 and 2014 and money was transferred to such account based on the estimated purchasing budget for each of the purchase trips and as approved by Ms. Yan (an executive Director and the CEO) from time to time. Bank reconciliations were performed regularly. Prior to setting up the abovementioned account, the Company made enquiry with that Tahiti bank in around mid 1990s to set up a corporate bank account and was given the understanding that a corporate bank account could not be set up for the Group as the Group had not established a local company in Tahiti. To promote better internal control, starting in May 2014, all settlements of purchases of pearls from suppliers in Tahiti are settled by direct bank transfer from the Group s corporate bank accounts in Hong Kong to relevant suppliers. Purchases of other raw materials are usually settled by cheque (mostly in respect of suppliers in Hong Kong) or telegraphic transfer. Purchases in Tahiti are settled in Euro or CFP. Purchases in the Philippines are settled in USD. Purchases in the PRC are settled in RMB. Purchases in Hong Kong (including those at auctions held in Hong Kong organised by overseas farmers) are settled in USD, HKD or Yen. The Group prices its products based on the expenses, costs of production and target margins. As purchases of raw materials are generally made shortly before the expected sales (with inventory turnover days of ranging from 120 days to 162 days during the Track Record Period), the Group has substantially been able to transfer material fluctuations in raw materials prices (including those due to foreign currency fluctuations) to customers. The Group does not maintain a large balance of foreign currency save for RMB and USD. It exchanges the necessary amount of foreign currency when needed. Therefore, the Directors consider that the Group is not subject to any material foreign exchange fluctuation arising from its operations. For the three financial years ended 31 March 2014, the Group did not experience any significant gain or loss arising from foreign currency fluctuations as a result of its operations. The Group recorded a loss on exchange of approximately HK$6.1 million, HK$1.7 million and HK$0.6 million, respectively, as a result of consolidating the PRC subsidiaries financial statements to the Group s accounts for the three financial years ended 31 March 2014 as a result of an appreciation of RMB against HKD. Purchase policies For pearls, the procurement department and the executive Directors closely monitor the prices of raw materials, and at the same time, regularly monitor and maintain an inventory level that would be sufficient for an efficient operation of the Group. The Group will typically procure pearls to maintain a higher level of inventory for the more commonly requested pearls such as those ranging from 8 mm to 107

113 BUSINESS 13 mm in size. The Group nevertheless, also maintains a lower basic level of inventory in respect of larger pearls such as those ranging from 14 mm and above, due to the lower expected demand, limited availability and cost. With regard to larger pearls which are more expensive, the Group will usually try to source and purchase them where there is an actual specific demand. The Group does not enter into any fixed term purchase contracts with pearl farmers and suppliers and as confirmed by the Directors, entering into fixed term contracts is not a market practice in the pearl industry. This allows the Group to maximise flexibility in price negotiations, to maintain a tight control on the inventory level and to maintain marketing flexibility for different types of pearl products. The Directors believe that the Group s ability to order sizeable quantity and its good relationships with pearl farmers and suppliers enable it to secure a better bargain for the purchases of pearls generally. The Directors believe that there are sufficient alternative sources of its major raw materials in the market at competitive prices and that the termination of the Group s relationship with any of its existing suppliers would not materially or adversely affect the operations of the Group. The Group has maintained a good relationship with all its suppliers, has not experienced any major difficulty in securing pearl supplies and other materials. In respect of other raw materials, the Group mainly purchases those raw materials where there are specific orders in order to minimise inventory risk. The Group has been able to maintain a good inventory turnover. For each of the financial years during the Track Record Period, the Group s inventory turnover days were approximately 120 days, 150 days and 162 days respectively. This helps control the risk of fluctuation of raw material prices between purchases and orders placed by customers. Delivery All of the raw materials purchased by the Group are delivered to the Group s Hong Kong office or its production facilities in Shenzhen, the PRC. Typically, the Group will request the South Sea pearl and Tahitian pearl suppliers to arrange the shipment to the Group s Hong Kong office premises via air freight. For freshwater pearls sourced in the PRC, the Group will request the suppliers to arrange shipment directly to the Group s production facilities in Shenzhen, the PRC. The Group engages transportation companies to transport raw materials and goods between the Group s office in Hong Kong and the production facilities in Shenzhen, the PRC. Generally, the shipping costs and insurance for pearls sourced from outside of the PRC are borne by the Group and the delivery costs and insurance for pearls sourced within the PRC are borne by the suppliers and are included as part of the Group s purchase cost. Five largest suppliers For the three financial years ended 31 March 2014, the five largest suppliers of the Group accounted for approximately 51.3%, 48.3% and 44.8% of the Group s total purchases respectively and the largest supplier accounted for approximately 20.7%, 20.9% and 12.2% of the Group s total purchases respectively. The Group s largest supplier supplies precious metals, in particular gold. Other top 5 suppliers during each financial year during the Track Record Period are suppliers of pearls and jewellery accessories. None of the Directors or their close associates or any Shareholder who owns 5% or more of the issued share capital of the Company had any interest in any of the above five largest suppliers for the three financial years ended 31 March

114 BUSINESS Below is some information on the top 5 suppliers during the Group s Track Record Period: Financial year ended 31 March 2014 Name of supplier Location Business activities Number of years relationship (approximate) Material supplied Credit Terms Payment method Supplier A Hong Kong Refining, trading, manufacturing and marketing of precious metals and precious metal containing products Over 10 Precious metals including gold and silver COD Cheque Supplier B The Philippines South Sea pearl farmer 8 Pearls COD TT Supplier C Hong Kong (Note) South Sea pearl farmer Over 9 Pearls COD TT/Cheque Supplier D French Polynesia South Sea pearl farmer Supplier E Hong Kong South Sea pearl trader 2 Pearls COD TT/Cheque 13 Pearls COD TT Note: The supplier s farms are located in Australia and the Group deals with its sales office in Hong Kong. Financial year ended 31 March 2013 Name of supplier Location Business activities Number of years relationship (approximate) Material supplied Credit Terms Payment method Supplier A Hong Kong Refining, trading, manufacturing and marketing of precious metals and precious metal containing products Over 10 Precious metals including gold and silver COD Cheque Supplier B The Philippines South Sea pearls farmer Supplier F French Polynesia South Sea pearls farmer Supplier G The Philippines South Sea pearls farmer 8 Pearls COD TT 3 Pearls COD TT/Cheque Over 10 Pearls COD TT Supplier H (Note) The PRC/ Hong Kong Freshwater pearls wholesaler, farming, processing and trading Over 10 Pearls COD/60 days (Note) TT/Cheque (Note) Note: The supplier is based in the PRC with an office in Hong Kong. The Group purchases from the supplier s PRCand Hong Kong offices. When purchase is made in the PRC, the credit term is COD and payment method is TT. When purchase is made through the supplier s Hong Kong office, the credit term is 60 days and the payment method is cheque. 109

115 BUSINESS Financial year ended 31 March 2012 Name of supplier Location Business activities Number of years relationship (approximate) Material supplied Credit Terms Payment method Supplier A Hong Kong Refining, trading, manufacturing and marketing of precious metals and precious metal containing products Over 10 Precious metals including gold and silver COD Cheque Supplier B The Philippines South Sea pearls farmer Supplier I North America Jewellery and accessories/ retailer Supplier J Hong Kong Accessories manufacturer Supplier K French Polynesia South Sea pearls farmer 8 Pearls COD TT 7 Accessories 90 days (Note) 12 Accessories End of month Cheque 4 Pearls COD Cheque/TT Note: The supplier is also the Group s customer. The accounts payable to this supplier is netted off against accounts receivable due from it. PROCESSING OF PEARLS Processing facilities Pearl processing is conducted at the Group s production facilities in Shenzhen, the PRC which are leased from the Remaining Group. Details of the leases is set out in the section headed Continuing Connected Transactions 1. Lease of Shenzhen plant in this listing document. Further information on the processing and production facilities are set out in the paragraph headed Production facilities below. For the financial year ended 31 March 2014, the Group had a pearl processing capacity of approximately 18,400 kg for pearls per year. For the three financial years ended 31 March 2014, the Group processed approximately 12,600 kg, 12,200 kg and 9,400 kg of pearls respectively. Details of the Group s pearl processing capacity are set out on pages 117 to 118 in the section headed Business Production Capacity of this listing document. Only freshwater pearls require bleaching and dyeing. Saltwater pearls are sold in their natural colours but will still undergo a colour enhancement process. The Group has trained its employees in the processing department to implement advanced Japanese bleaching technology. Each processing employee performs a specific function and is supervised by an officer and technical assistants. Each of the Group s processing employees also receives specialised 110

116 BUSINESS training by industry specialists from Japan. Prior to participation in pearl processing operations, each employee involved in processing is required to participate in an extensive on the job training programme. Pearl processing takes place in batches and each batch may vary on the number of pearls to be processed. Raw pearls and other materials (such as precious metals and accessories) are transported to the Group s processing facilities in Shenzhen, the PRC and the pearls are first sorted, chemically bleached and dyed (in the case of freshwater pearls), colour enhanced (in the case of saltwater pearls) and polished. Freshwater pearls undergo bleaching, dyeing or colour enhancement process but saltwater pearls only undergo colour enhancement. Next, the pearls are cleaned, dried, waxed, graded, paired, strung, and if necessary, packaged. Where appropriate, the processed pearls are then used for the production of the Group s jewellery products. Finishing may include the addition of clasps, decorative jewellery pieces, or other specialty work requested by the customers to produce finished jewellery pieces as more fully described in next section. Processing procedures Details of each of the processing procedure for pearls (South Sea pearls and Tahitian pearls will only undergo certain steps of the process shown below) are set out as follows: Sorting Pearls are firstly sorted according to their size, shape, colour, grade and other qualities. Drilling After sorting, holes are drilled based on the shapes of the pearls. Depending on the order requirements, pearls are drilled from both ends for stringing or drilled halfway for making jewellery products. Bleaching/natural colour enhancement Freshwater pearls are bleached with certain mild chemical solutions. Saltwater pearls are not bleached but may undergo a chemical process to enhance their colours. The bleaching and colour enhancement time varies from a few hours to a few months, depending on the techniques used, the conditions of the pearls and the required results. After the bleaching/colour enhancement process, the pearls are cleaned with water and then left to dry on a shelf. Polishing Pearls are tumbled together with pieces of broken walnut shells or chips of bamboo in a barrel. After the tumbling, the lustre of the pearls will be reflected. 111

117 BUSINESS Stringing (if required) Polished pearls are sorted according to their size, shape, colour and lustre into strands. Pearls are strung into strands of an average length of 16 inches (about 40 cm). Grading and packaging Strands of processed pearls are grouped in bundles depending on appropriate types of pearls, size, length and grading of the pearl. Sorted and processed loose pearls can also be packed and labelled into transparent plastic bags for wholesale. On 10 March 2014, Arcadia Jewellery, a wholly owned subsidiary of the Group, entered into a consultancy agreement with an Independent Third Party (the Consultant ), whereby the Consultant will provide consultation services, including advice and guidance on pre-processing treatment, enhancement, sorting and grading techniques for all kind of pearls. The fees payable to the Consultant are of a fixed nature and was agreed at arm s lengths basis taking into consideration, the experience of the Consultant and the potential benefit to the Group in upgrading its product quality. The Consultant is experienced in pearl farming and processing in Japan. The Directors believe that engaging the Consultant will further help the Group improve its pearl bleaching and dyeing techniques and process and thus improve the quality of the Group s freshwater pearls. Subject to termination by either party by giving one month s notice, the term of the agreement is from 1 April 2014 to 31 March JEWELLERY PRODUCTS The Group is also engaged in the design and production of jewellery products and may include, among other things, the Group s processed pearls. The relevant procedures may include the addition of clasps, setting of decorative jewellery pieces, or other specialty work based on the jewellery designs and other specifications as may be requested by the customers from time to time. There is no material difference in terms of design, production and craftsmanship for jewellery products with or without pearls. Details of the production process for all jewellery products (both jewellery products with and without pearls) are set out below. Design The Group has its own design and CAD engineering teams and as at the Latest Practicable Date comprised 6 and 5 staff members respectively. The design of jewellery products is also carried in-house at the Group s facilities in Hong Kong and Shenzhen. The head of the Group s design team has over 15 years of jewellery design experience and is supported by a team of 5 design staff. On average, each of the Group s design staff creates approximately 100 to 200 designs per month. The Group s sales team will then choose the designs which they consider will be accepted by customers. For the three financial years ended 31 March 2014, the Group s design team created approximately 7,000, 15,000 and 13,000 new jewellery product designs. For each of the financial years ended 31 March 2012, 2013 and 2014, 2,900, 3,350 and 2,800 in-house designs of the Group were used and made into products respectively. Members of the design team, will at times, also participate in meetings with customers to better understand customers design requirements to enable them to create designs suitable to the Group s range of customers. 112

118 BUSINESS Members of the design team meet regularly to discuss the latest jewellery designs and trends, and exchange new ideas. When designing a product, the Group s design team applies its knowledge of raw materials, production process and market trends of jewellery products to select appropriate quantity and size of raw materials, perform stone matching and provide recommendations on the production procedures of such product. The design team also strives to strike the right balance between material cost, production cost and production time required to design a jewellery product that is cost effective, affordable and meets customers tastes so as to enhance the Group s competitiveness in the market. Working together with the CAD engineering team and the craftsmen, the Group s design team has acquired practical knowledge on the conventional jewellery setting techniques such as pave, micro and claw setting methods and has applied these techniques in designing a majority of the Group s jewellery products during the Track Record Period. Most of the designs created by the in-house design team are hand drawn 2D designs. With the increasing complexity of jewellery product designs, the Group has established an in-house CAD engineering team which uses CAD software to transform these 2D designs to 3D digital images. By creating these 3D digital images, the Group s designers and jewellery craftsmen are able to better visualise the final products and make necessary adjustments and better plan the assembly techniques used and the process. Further, with the latest automated 3D modelling and moulding technology, these 3D digital images are transformed into 3D models. The Directors believe that this CAD engineering team will efficiently facilitate communications between the Group s design team and its jewellery craftsmen and help promote better assembly craftsmanship. During the Track Record Period, the Group has not received any complaints or notifications alleging that the Group s jewellery product designs have breached third party intellectual property rights. For each of the three years ended 31 March 2014, the Group spent approximately HK$0.8 million, HK$1.3 million and HK$1.3 million on product designs representing salary expenses of the Group s design and CAD engineering teams. Production process The below chart shows the typical production process for the Group s jewellery products: Establish product specifications Design Platemaking Compression moulding Stone setting and finishing Filing Casting Waxing Polishing Pearl setting Packaging Shipment 113

119 BUSINESS The Group s jewellery production process for its precious metal parts is typically known as a lost waxcastingprocess. The major steps for the creation of the jewellery products are as follows: Establish product specifications Design Platemaking Compression moulding Waxing Casting/Filing Prior to the actual commencement of a jewellery design, members of the design team will discuss with the Group s sales staff market trends and product design specifications. 2D design drawings are created by the design team staff taking into consideration the design requirements. 3D computer drawings are created from the 2D drawings to give the Group s designers a better visual representation of the end product. Designs are presented by members of the sales team to customers. Sample products may be made to show to target customers. The platemaking process first requires the production by hand of a wax prototype of the part(s) required for the jewellery products design from an approved 2D design drawing. Rubber models can also be made based on 3D computer drawings. The prototype is modified by craftsmen before being made into a master prototype made of sterling silver. The master prototype is then used to produce rubber moulds which are used in the mass production process. Rubber moulds are used to prepare individual exact wax replicas of the sterling silver prototype through compression moulding. Each wax replica of the prototype is then individually mounted to a wax spine to create a tree like structure to allow for mass production. The tree structure is put into a container and encased in a casting substance. A vacuum machine is used to remove all air bubbles in the plaster. The cast is then put into a kiln and heated to high temperature to burn out the wax creating a hollow cast. Molten precious metal alloy is prepared to the required purity (for instance silver and other alloys are mixed to produce sterling silver) and is poured into the hollow cast to form a precious metal tree structure. Each individual replica made of precious metal is then cut from the tree structure and the rough edges are smoothened. Stone setting and finishing Polishing and quality check Stones will be mounted/adhered to the jewellery part if required by the design. The products will be polished and the quality control team will perform quality checks on each individual item to review whether the products fully comply with the product specifications. Products that do not fully comply with the product specifications will be returned to the relevant department for further processing and resubmitted for quality check. 114

120 BUSINESS Pearl setting Packaging If required, suitable pearls will then be set on the jewellery product. Different components of the products will be assembled prior to packaging. The products will then be packaged in accordance with the Group s customers specifications. Warehousing/Shipment The packed jewellery products will be shipped to the Group s warehouse in Hong Kong for storage and delivery to the Group s customers. During the production process, there are dust, grindings and chippings of precious metals that may be created at different stages, like sizing, shaping, setting and polishing of jewellery products etc. The Group carefully monitors precious metal usage and controls the amount of precious metal wastage to ensure that there is no substantial loss of precious metals during the production process. The Group sets a maximum amount of precious metal wastage for each jewellery product, which varies according to, among other things, the weight and type of material. Scrap precious metals recovered and collected by the Group will be reused or sold. Craftsmen and workers salary and wage are adjusted based on the variance between the target wastage and the actual wastage of precious metals. Skilled craftsmen/workers The processing of pearls and production of jewellery products require trained and experienced craftsmen and workers. Each craftsman performs a specific function. More junior workers are supervised by more experienced staff members. A newly-recruited worker is trained with the assistance of an experienced team member for a probation period of six-month period to determine his or her level of skills prior to being assigned to a specific function. On the job training is also provided from time to time. As at the Latest Practicable Date, the Group had a total of 175 workers working for the production of jewellery products and 208 workers working for the processing of pearls. Subcontractors The Group carries out most of the pearl processing and jewellery product design and production process. However, some of the Group s jewellery products require certain parts e.g. rings, earring pins to be further coated with a protective coating to reduce potential oxidation. The Group does not have this production process and as such sub-contracts this intermediary production step to Independent Third Parties. The Group has, during the Track Record Period, engaged various subcontractors for such processes as these subcontractors are flexible with the number of products are that required to be processed. The Group has between approximately 2 years to 5 years of relationship with these subcontractors. The Group has not entered into any long-term contract with these subcontractors and services are provided on an as required basis. Each invoice for the work to be done will specify, among other things, a description of the product, weight of the product, cost and the work required to be done. The fee payable to these subcontractors is calculated based on the type and amount of products processed. For each of the financial years ended 31 March 2014, the Group incurred total subcontracting fees of approximately HK$1.1 million, HK$0.8 million and HK$0.7 million respectively whichformedpartofthegroup s costs of sales and in total accounted for less than 1% of the Group s 115

121 BUSINESS costs of sales for each respective financial year. The Directors understand that there are many factories in Shenzhen, the PRC which have the capacity to carry out such coating process with acceptable quality and at acceptable cost. As advised by the PRC Legal Adviser, under the current PRC law, subject to making the appropriate filings with the China Customs under the relevant PRC laws and regulations, a processing plant may sub-contract the processing work to other sub-contractors. In practice, the work-in-progress inventory of SZ Factory (and MS Factory prior to the Reorganisation) is delivered to the sub-contractors for processing and returned to SZ Factory (or MS Factory prior to the Reorganisation as the case may be) after the specified sub-contracting work is completed. Also, as advised by the PRC Legal Adviser, prior to 12 March 2014 before sub-contracting any production process, SZ Factory (and MS Factory prior to the Reorganisation) was required to seek approval from the China Customs authority, and after 12 March 2014, all sub-contracting transactions only need to be filed with the China Customs authority within 3 days after the subcontracting work. During the Track Record Period, SZ Factory and MS Factory (prior to the Reorganisation) had failed to seek approval from or make necessary filings with the China Customs authority in respect of all subcontracting work due to an inadvertent oversight of the requirements under the applicable PRC rules and regulations. The Group has tried to make the necessary filing with the China Customs however, has been informed that such filings should be made together with the application for a new import/export contract, the last time being in September 2013, and therefore such filing cannot be accepted. The Group has confirmed that SZ Factory will undertake to make the necessary filing at the next application for new import/export contract. The Group also confirmed that the two processing plants did not receive any penalty or fine for any historical sub-contraction work during the Track Record Period. Information on this non-compliance is set out in the business section Legal Proceedings and Noncompliances of this listing document. Shipping and delivery All finished jewellery products are delivered from Shenzhen, the PRC to the Group s Hong Kong office and the Hong Kong staff will make the necessary delivery arrangements to the Group s customers. The Group will typically arrange delivery by way of air freight for customers outside Hong Kong and title will pass to the customers upon their acknowledgement of receipt. For customers within Hong Kong, delivery is arranged internally by the Group or customers will pick up the goods from the Group s office and title is passed upon confirmation of receipt of the goods. For the three financial years ended 31 March 2012, 2013 and 2014, the Group recorded approximately HK$1.7 million, HK$1.3 million and HK$1.5 million respectively for shipping transportation. The Company maintains insurance policies covering, among other things, stock and merchandise, properties, equipment and other assets. Information on the Group s insurance is set out in the section headed Business Insurance in this listing document. Most of the Group s deliveries to its customers overseas are by way of express courier, which in some circumstances is not fully covered under the Group s general insurance. As such, the Group may need to purchase additional insurance to cover such shipment of goods by courier. For each of the three financial years ended 31 March 2014, the Group has incurred additional insurance costs of approximately HK$146,000, HK$55,000 and HK$58,000 respectively for such additional insurance. 116

122 BUSINESS PRODUCTION CAPACITY During the Track Record Period, the Group s processing and production operation was carried out at SZ Factory, MS Factory and MH Shenzhen, located within Man Sang Industrial City in the PRC. SZ Factory makes pearl jewellery products. MS Factory was primarily involved in the drilling and stringing of pearls and making of some simple pearl products. Their production capacities are measured in terms of the number of products that they might process or produce each year. MH Shenzhen primarily processed pearls including sorting, bleaching and dyeing. Its production capacity is measured by the weight of pearls processed. As part of the Reorganisation, after 31 March 2014, the Pearls and Jewellery Business of MH Shenzhen and MS Factory has been transferred to HBF Jewellery. Save for the transfer of the ownership of the business, assets and liabilities, the Company confirms that there has not been any material change to the production scale and capacity of the related processing and production operations. The following table sets out the theoretical production capacities, actual production volume and utilisation rate of theoretical production capacity during the Track Record Period of each of the Group s three factories in the PRC: Financial year ended 31 March 2012 Financial year ended 31 March 2013 Financial year ended 31 March 2014 Theoretical Production Capacity (1) Volume in number of pieces (approximate) Utilisation Rate on Actual Theoretical Production Production Volume (2) Capacity (3) Volume in number of pieces (approximate) % Theoretical Production Capacity (1) Volume in number of pieces (approximate) Actual Production Volume (2) Utilisation Rate on Theoretical Production Capacity (3) Volume in number of pieces (approximate) % Theoretical Production Capacity (1) Volume in number of pieces (approximate) Actual Production Volume (2) Utilisation Rate on Theoretical Production Capacity (3) Volume in number of pieces (approximate) % SZ Factory 281, , , , , , MS Factory (4) 673, , , , , , Pearls processed in weight (kg) (approximate) Pearls processed in weight (kg) % Pearls processed in weight (kg) (approximate) Pearls processed in weight (kg) % Pearls processed in weight (kg) (approximate) Pearls processed in weight (kg) % MH Shenzhen (4) 18,400 12, ,400 12, ,400 9, Notes: (1) The above production capacity of each of SZ Factory, MS Factory and MH Shenzhen during any time period refers to the theoretical number of products the Group s production facilities may be able to produce during such period. The estimation of such amount is based on, among other things, the historical highest number of workers that the existing plant premises and setting housed, the annual average number of products that produced/average amount of pearls that processed per employee per hour during the Track Record Period assuming production/processing operations were carried on eight hours a day and working days a month. The time required for the production of one jewellery product depends significantly on the complexity of the jewellery product and the skill of the craftsman and worker. In general, a jewellery product with a more complicated design will require a longer production time. The processing of pearls also involves steps which are highly labour intensive like sorting, drilling, polishing, stringing and grading. Accordingly, the production capacity of the Group varies depending on the design of the jewellery product and the number and skill of craftsmen and workers. The number and skill of craftsmen and workers are key drivers of the Group s production capacity. The above production capacities are measured based on 117

123 BUSINESS the average number of jewellery products that a worker produced in one year during the Track Record Period. This should help even out the variance from the different jewellery product designs. The Directors believe that the above the capacity numbers represent reasonable estimations. (2) Production volume refers to the total number of products the Group actually produced at SZ Factory and MS Factory and the amount of pearls actually processed by MH Shenzhen in the financial year as stated. (3) Utilisation rate equals actual production volume divided by theoretical production capacity. (4) As at the Latest Practicable Date, the Group has ceased the Pearls and Jewellery Business operations at MH Shenzhen and MS Factory and these operations have been transferred to and taken over by HBF Jewellery under the Reorganisation. Details of the restructuring are set out in the section headed History, Reorganisation and Corporate Structure in this listing document. The Group s production utilisation was adversely affected by the decrease in sales during the Track Record Period. The pearl processing utilisation was also affected by the decrease in the total amount of freshwater pearls purchased and the increase in the proportion of freshwater pearls purchased which are drilled and/or strung. The production operations of the Group do not require substantial capital investments. The production cost comprises mainly variable costs rather than depreciation/amortisation of fixed costs. For each of the financial years ended 31 March 2012, 2013 and 2014, depreciation expenses only accounted for approximately 4.9%, 4.8% and 4.6% of the Group s cost of sales (excluding cost of materials and provisions or reversal for stock obsolescence) respectively. The remaining cost of sales during the Track Record Period was mostly variable cost. Accordingly, fluctuations in production utilisation did not materially affect the Group s cost of sales structure. QUALITY CONTROL The Group has implemented stringent quality control procedures in respect of its pearl purchasing and processing as well as for its jewellery products production. During the pearl procurement process, the Group s experienced staff members will carefully inspect the pearls available for sale taking into consideration the 5 virtues as mentioned above. For pearls sourced from Tahiti, they are delivered to the Service De la Perliculture of the Ministère Des Ressources Marines ( Department of Marine Resources *) where the pearls are inspected and examined to ensure their quality is in compliance with the local laws and regulations. Once the pearls have passed Department of Marine Resources, the pearls are then arranged to be delivered directly to transportation companies for delivery to the Group s office in Hong Kong. The Group is only liable for purchasing the net amounts of pearls that have passed the Department of Marine Resources. During the Track Record Period, the Group has not experienced any material damage to pearls purchased from Tahiti upon receipt in Hong Kong as a result of transportation. In respect of the purchase of pearls from other sources, quality of pearls will be checked by the Group s staff members before purchase and after shipment. During the pearl processing process, there are control staff that help ensure that procedures are carried out properly and any sub-standard processed pearls will not be used but will be put into storage for further consideration. Final inspection of the processed pearls is carried out by experienced staff to ensure that the quality of the final pearl meets the Group s quality standards. 118

124 BUSINESS For the Group s jewellery products, to ensure that its products are produced at the necessary standards set by the Group or required by its customers, quality control procedures are implemented at different stages of the Group s jewellery product production processes, which includes rigorous quality tests of the Group s raw materials and products in process. The Group has established a quality control department headed by Mr. Chen Mu Sheng (the general manager of SZ Factory and the deputy general managerofhbfjewellery)andasatthelatestpracticable Date comprised 25 staff members who are experienced in jewellery making. Each piece of jewellery product is required to undergo quality control testing to ensure that the quality of the finished product is in compliance with the customers specifications and the Group s standards. The Group visits its major suppliers regularly with a view to understanding the quality of their goods and their available stock for sale. Before purchasing from a new supplier, the Group will usually try to understand the supplier s background and reputation in the market, quality and quantity of pearls or the goods that they can supply to assess its suitability. In addition, the Group s pearl procurement staff physically inspects and examines all pearls before they are purchased and upon their delivery to ensure their quality. In respect of purchasing of precious metals, the Group is sourcing from reputable suppliers in Hong Kong. The Group will also perform testing of samples of precious metals purchased before they are used for production. The Group has equipment to test the authenticity of the diamonds on a sample basis before they are used in the production of the Group s jewellery products. In compliance with common social responsibility standards, the Group also requires diamonds suppliers to confirm that the diamonds that they supply are not from illegal sources such as blood diamonds. Some customers may from time to time make special requests about quality of a jewellery product. For example, a customer may request that jewellery products to be free of nickel. The Group s quality control department will also conduct checks which may include sending samples to external laboratories for testing. In general, the Group ensures that the jewellery products are produced to the specifications in accordance with its customer s orders. If any of the jewellery products are damaged during delivery, the Group will endeavour to repair or replace the damaged goods. As at the Latest Practicable Date, the Group had not encountered any significant quality issues relating to the Group s finished products nor had the Group received any material complaints or claims in relation to the products sold that would affect the Group s financial position or results of operations. CERTIFICATIONS On 6 October 1999, the Group s production facilities in Shenzhen was accredited by DNV (Det Norske Veritas Quality Assurance Limited) with a Management System Certification of ISO9001:2008 and is valid until 14 September As required by one of the Group s customers, the Group is required to ensure that its business operations are in compliance with BSCI s code of conduct. The BSCI is a business driven initiative for companies committed to improving working conditions in the global supply chain. Based on an audit conducted on 26 April 2013 and a re-audit conducted on 20 May 2014, the Group s SZ Factory has passed BSCI requirements and is considered BSCI compliant. 119

125 BUSINESS SALES AND MARKETING As at the Latest Practicable Date, the Group s sales and marketing department had 12 staff and is overseen by Ms. Yan, who has over 25 years of experience in the pearl industry. Further information on Ms. Yan is set out in the section headed Directors and Senior Management in this listing document. Pricing Pricing of pearls generally depends on the size, grade, colour and type of the pearls. In general, larger pearls are more expensive than smaller pearls of the same type. Pearls with better grade are generally more expensive. Rounder pearls are generally more expensive than other shapes. On the basis of similar size and grading, South Sea pearls are generally more expensive than Tahitian pearls and freshwater pearls. When pearls are sold in strands, a strand comprising pearls with bigger size, higher grade and rarer colour can attract a higher selling price. When determining the selling prices, the Group s management and sales team will also consider, among other things, the cost of purchase and the expected margins. Senior staff members of the Group s management and procurement team, like Mr. Chen may also be involved in the Group s pricing decision making process. The Group prices its jewellery products primarily based on the costs (which included the costs of the jewellery components (if any) and the costs of design (if any) and production) as well as market demands and price trends. Credit Policy For the Group s sales to its customers, the Group typically sells on cash on delivery basis with some customers being given a credit period of between 30 days to 120 days. However, some of the Group s major customers may not settle trade receivables pursuant to the granted credit terms. The Group may allow them to settle the related outstanding trade receivables on a rolling basis and some of the trade receivables from these customers were overdue up to 222 days as at 31 March As at 31 March 2014, except for the amount due from one of the top five customers, provisions have been made in respect of all trade receivables overdue for over 90 days unless the amounts have subsequently been settled. As at 31 March 2014, the amount of trade receivables (net of provisions) was approximately HK$60.5 million. Up to 31 July 2014, subsequent settlement of these trade receivables amounted to approximately HK$32.3 million. The Group s finance department works closely with its sales department to monitor the payment and overdue situation of the Group s customers with a view to evaluating the risk of recoverability of the related receivables. The Group s management will also monitor the settlement and ageing records regularly as a risk management control procedure. The Directors are provided with ageing information quarterly. Follow up actions, such as contacting the responsible person of the customers and sending payment reminders are carried out when considered necessary. Further details about the trade receivables turnover and settlement records are stated in the section headed Financial Information trade and other receivables in this listing document. 120

126 BUSINESS Goods return policy One of the Group s top 5 customers during the Track Record Period is a company in Europe that engages in the retail sale, through channels including television video shows and e-commerce, of, among other things, the Group s jewellery products to end-consumers. As part of the agreement with this customer, this customer is allowed to return to the Group, (1) a certain percentage of products that were supplied to this customer within 12 months since the last marketing event of such customer which were unable to be sold depending on the types of product; and (2) products returned to this customer by its end-customers in accordance with its return policy for credit on a percentage as agreed with this customer. This customer is entitled to offset claims resulting from the returns against claims of the Group. The below table sets out the total sales to this customer for the three financial years ended 31 March 2014 and the amount of refunds/sales credit during each of the relevant years: Financial year ended 31 March HK$ 000 HK$ 000 HK$ 000 Total sales this customer 64,321 39,364 35,134 Total returns from this customer for refund/ sales credit 10,109 4,611 5,651 % of returns 15.7% 11.7% 16.1% The Group s sales staff will check the sales return from this customer and verify if such sales return complies with the terms of the above return policy. The sales return will then be approved by the management of the Group. Save for the arrangement with the abovementioned customer, return of goods from customers is generally not allowed as there is no contractual obligation on the Group in this respect but may on a case-by-case basis be negotiated and agreed between the Group and the customers as the Group considers it important to maintain good long-term business relationships with its customers. The Group would take into account different considerations before approving return of goods, including but not limited to the relationship with the customer involved, the overall sales to the customer and the percentage of returns, the potential growth in business with this customer, damages or other conditions of the goods sold, reasons for such damage and whether the Group would be able to resell the products to be returned. The Group aims to keep a low percentage of sales return. During the Track Record Period, the percentage of sales return to total sales ranged from 4.0% to 5.3% as detailed in the table below. Financial year ended 31 March HK$ 000 HK$ 000 HK$ 000 Total sales return 16,619 10,808 13,717 Percentage to gross revenue of the Group 5.3% 4.0% 4.9% 121

127 BUSINESS Branding The Group does not sell its products under its own brand name, save for the sales of jewellery products to a major customer in Europe. Such customer of the Group is a retailer in Europe selling many different products (including jewellery and other products) under various brand names (if any). At the request of this customer, the Company s jewellery products under Man Sang Collections are exclusively sold to this customer and such terms are part of the agreement entered with this customer. This customer has the exclusive right to sell jewellery products under Man Sang Collections through television shopping or other distribution channels of others offering TV shopping services in Germany and Austria. The Group can sell Man Sang Collections jewellery products through other distribution channels in Germany and Austria or in countries other than Germany and Austria. Nevertheless, the Group does not plan to sell products under Man Sang Collections other than to this customer as (i) the Group currently focuses on wholesale market rather than retail market and the Group principally manufactures and sells jewellery products for customers on OEM and ODM bases; accordingly, save for the arrangement with this customer, the Group does not market its products to its wholesale customers under a specific brand and as a result the Group has no intention to sell products under Man Sang Collections in other areas or through other channels or to other customers; (ii) the Group believes that it may affect the business relationship between the Group and this customer; (iii) each year the Group s design team generates thousands of jewellery product designs, the Group is of the view that excluding those product designs exclusively sold to this customer, there are still sufficient product designs for other customers; (iv) the gross profit margin of the sales to this customer is justifiable and acceptable and that the profit margins on products sold to such customer are comparable to the profit margins in respect of the sales of the Group of the jewellery products to its other top five customers during the Track Record Period; (v) the Directors also understand that it is common for this customer to require exclusivity terms to be imposed on some of their suppliers in order to maintain a competitive edge in the medium in which it operates. All sales to this customer are subject to similar terms including pricing which is determined with reference to, among other things, the cost of production and expected profit margins of the Group, and a credit term of 30 days as compared with sales to other major customers. There are no minimum purchase requirements on such customer. As stated in the paragraph headed Business strategies on future development in this section, the Group plans to expand its branded jewellery products business by building up new brands like Arcadia ( 薈寶 ) targeting retailers and Dear Pearl ( 珍飾 ) targeting online sales. Marketing The Group regularly attends trade shows and exhibitions to display and market products (including pearls and jewellery products), establish contacts with existing and potential customers, and collect market information and evaluate market trends. During the Track Record Period, the Group participated in major pearl and jewellery trade shows in, among other places, Hong Kong, Switzerland, Las Vegas and Tokyo where many major international pearl and jewellery manufacturers and retailers attend and visit. 122

128 BUSINESS Below is the Group s booth at the Hong Kong International Jewellery Show held in March 2014: The Group primarily focuses on marketing its activities on corporate buyers and retailers. The Group will also conduct marketing activities such as placing advertisements in jewellery related magazines and circulation of electronics flyers. With regard to the sales of jewellery products, the Group s sales staff will show the Group s customers/target customers designs of the products and actual samples made. The Group s sales staff, which is divided into groups organised by geographical regions and customers, currently markets freshwater pearls, Tahitian pearls, South Sea pearls, and jewellery products. The Group s marketing and sales staff maintains on-going communications with a broad range of jewellery distributors, manufacturers and retailers worldwide to assure that customers pearl and jewellery requirements are fully satisfied. The Group s sales staff will also visit major customers from time to time to obtain feedback and in order to better understand their specific product needs. Customers may also visit the Group s offices from time to time where the Group s products will be shown to them to promote sale. In order to further promote the sale of the Group s products, the Group may also support the marketing activities of some of the Group s customers by paying them (including members of the customer groups) advertising contributions which are usually based on the amounts of the Group s sales to them or some other amounts as agreed between the customers and the Group from time to time. For each of the three financial years ended 31 March 2014, the total amount of advertising contributions incurred by the Group amounted to approximately HK$1.4 million, HK$1.7 million and HK$3.2 million respectively. In addition to the Group s own marketing efforts, since 2011, it also has appointed an Independent Third Party, who has experience in working with jewellery retailers in Europe to help the Group source new customers. The Group will pay a commission to this sales agent for sales generated from the agent calculated based on a percentage up to 3.0% of sales generated by the sale agent. For the three financial years ended 31 March 2014, the Group has only appointed one sales agent and amounts paid to this sales agent were nil, approximately HK$0.5 million and HK$0.4 million, respectively. During the Track Record Period, in connection with its sales to and at the requests of two of its customers, the Group had also made payments to designated persons of such customers under the following arrangements: (i) One of the customers requested the Group to pay a fee (representing approximately not more than 10% of the Group s sales to such customer) to such customer s designated person in respect of certain services provided by such designated person to the customer, and the Company understands that some of the design drawings of the products manufactured by the 123

129 BUSINESS Group for such customer might have been prepared by such designated person. The amounts paid to this designated person for each of the three financial years ended 31 March 2014 were approximately HK$3.8 million, HK$2.9 million and HK$2.1 million, respectively. As agreed with this customer, such payment arrangement to this designated person will cease by December (ii) Another customer requested the Group to pay a fee (representing approximately 4% of the Group s sales to such customer) to such customer s designated person. The Company has not been informed by this customer of the underlying reasons for such payments to this designated person. The amounts paid to this designated person for each of the three financial years ended 31 March 2014 were approximately HK$0.5 million, HK$0.8 million and HK$0.6 million, respectively. As agreed with this customer, such payment arrangement to this designated person has ceased since June The above arrangements was made pursuant to verbal agreements with those customers, and the Group discussed and agreed with each of the abovementioned two customers on the exact amount payable to such customer s designated person each year in arrears. The Group has had long-established business relationships with each of the two customers for approximately 17 years and 26 years, respectively. One of the customers is a European jewellery retailer with its own brands of jewellery products (pearls and diamonds) and it is also the agent for certain jewellery products for certain European countries, whilst the other customer is an Asian company which is principally engaged in distribution and online sale of pearls and jewellery, as well as the wholesale and retail of pearls, jewellery, ornaments and watch parts. Despite the Group not knowing the reason for the payments as required by the customer in Asia, the Group agreed to make those payments at the two customers requests because (i) the Group has been conducting business with these two customers for a long time and had established business and working relationships with them over the years; (ii) it would like to maintain good business relationships with such customers; (iii) the gross profit margins of the sales to these two customers are acceptable and that the profit margins on products sold to such two customers were comparable to the profit margins in respect of the sales of the Group s jewellery products to its other top five customers during the Track Record Period (before and after taking into account the payments made to the customers or their respective designated persons); and (iv) and the payments did not infringe any related laws (as further explained below). Having taken into consideration of the above factors, the Company considers that the overall terms of the sales to the said two customers (including the payments to their respective designated persons) were fair and reasonable and on normal commercial terms for the Group. With regard to the designated payments requested by the above two customers, such payments were made at the request of, and thus with the consent of, the related customers; the sales and purchases between the Group and the related customers were genuine transactions and all payments made by the Group to the designated persons of the two customers were made via bank transfers; and the Company also considers that there is nothing to suggest that the source of monies was proceeds of an indictable offence or came from an unlawful origin; in respect of the customer which is a European jewellery retailer, the Company understands from such customer that the designated person is an independent third party which provided services to such customer and that no damage was suffered by the parties; and in respect of the other customer which is an Asian company, the Group has no actual knowledge of there being any illegal purposes regarding the payments requested to be paid to such customer s designated person. Based on the above, the Company has sought legal advice which confirmed that in the above 124

130 BUSINESS circumstances the said payments have not infringed any laws and regulations considered applicable in Hong Kong and the countries where the two customers are located, including the relevant prevention of bribery laws and anti-money laundering laws. For the financial years ended 31 March 2012, 2013 and 2014, the Group incurred marketing expenses of approximately HK$14.1 million, HK$10.7 million and HK$12.8 million respectively, comprising mainly advertising contributions, commission and customers designated payments, trade shows and travel expenses. The Group, during the Track Record Period, also, on a trial basis, sold its jewellery products through two Kasiao branded online shops (one operated by the Group and another one operated by an Independent Third Party business partner), established at another online marketplace which facilitates B2C retail. For the three financial years ended 31 March 2012, 2013 and 2014, sales generated from the Group s online shops amounted to nil, nil and approximately HK$0.2 million respectively. Given the maturing online market and growing opportunity, the Group is in the process of restructuring its online strategy, and as at the Latest Practicable Date has ceased the two online shops with a view to better organising its online selling activities. The Group plans to set up new online shops to be operated by the Group at other B2C online marketplaces which the Directors consider to be higher end and better fit the Group s products. According to the Company s PRC Legal Adviser, the Group s online selling activities through an established website do not contravene any related laws in the PRC. Customer base For the three financial years ended 31 March 2014, the Group had approximately 480, 370 and 400 customers, respectively. The Group has no long-term supply contracts with any customers. Most of its major customers have been in business with the Group for a number of years. The Group s customer base consists principally of corporate customers such as wholesale distributors, mass merchandisers, department store merchandisers in Europe, North America, Hong Kong and other Asian countries. During the Track Record Period, the Group predominantly used USD, HKD and Euro when transacting with its customers. The Group has a small portion of its revenue generated from sales to retail customers in cash. These retail customers include: (i) customers that purchase the Group s products during exhibitions and trade shows that the Group attends, (ii) individuals who are referred to the Group by its staff and (iii) sales to customers who have purchase products available through online shopping B2C websites which in aggregate accounted for only approximately 2.7%, 3.9% and 3.7% of the Group s total revenue for each of the three years ended 31 March 2012, 2013 and 2014 respectively. Five largest customers For the three financial years ended 31 March 2014, the Group s five largest customers accounted for approximately 57.9%, 50.8% and 45.1% of its total sales, respectively, with the largest customer accounting for approximately 18.1%, 13.3% and 11.5% of its total sales, respectively. None of the Directors or their close associates or any Shareholder who owns 5% or more of the issued share capital of the Company had any interest in any of the above five largest customers during the Track Record Period. 125

131 BUSINESS The table below sets forth the Group s top five customers during the Track Record Period: Name of customer Location Business activities No. of years relationship (approximate) Product purchased Credit Terms Payment method Trade receivables outstanding as at 31 March 2014 HK$ 000 (approximate) Amount not past due as at 31 March 2014 HK$ 000 (approximate) Amount past due as at 31 March 2014 but no provision has been provided for HK$ 000 (approximate) Customer A (Note 1) North America Jewellery retailer 7 Jewellery products COD TT 7,136 7,136 Customer B Europe Retailer 12 Jewellery products collection 30 days TT 4,199 1,082 2,896 Customer C (Note 2) Asia Jewellery/pearl trader 26 Jewellery products/ pearls 120 days TT 13,950 6,333 7,617 Customer D Europe Jewellery retailer 17 Jewellery products COD TT 9, ,353 Customer E (Note 3) Europe Jewellery trader 12 Jewellery products 60 days TT 1,886 1,885 1 Notes: (1) This customer is also a supplier of parts and accessories which are used in the production of this customer s specific jewellery products. Part of the amounts of trade receivable are set net off against the trade payables. (2) For some small amount of materials purchased from Japan, the Group may request this customer to source raw materials on the Group s behalf and the Group will credit this customer (by offsetting any outstanding trade receivables for such customer) for such purchases. (3) Purchases by this customer are originated by its Hong Kong affiliate office on behalf of its European operations. INVENTORY CONTROL The Group s inventory comprises pearls, raw materials such as precious metals, diamonds, gemstones, parts and accessories, packaging materials and processing chemicals, and finished products. According to the Group s inventory policy for pearls that the Group purchases for its wholesale operations, the Group typically maintains a sufficient selection of pearls based on expected demand and orders. For the Group s jewellery products, the Group only maintains sufficient stock to satisfy orders on hand and sufficient stock for showroom and marketing purposes. For valuable inventory such as pearls, precious metals, diamonds, gemstones and work in progress, the Group has set up secure warehouses/storage rooms when they are not in use. Storage of valuable inventory is closely monitored by CCTV. Further, access to the Group s locked warehouses/storerooms are monitored and controlled by designated staff members. There are clear records (in terms of types of material, number and/or weight) showing (i) the materials or components each worker gets when he/she begins work each day and (ii) the materials or components each worker returns when he/she leaves work each day. These records help ensure physical security of the Group s inventory and at the same time help control any material wastage. As described in the paragraph headed Jewellery products Production Process, as part of the Group s incentive programme to promote efficient processing and production, the Group sets a wastage threshold and the salary payable to a worker will be adjusted based 126

132 BUSINESS on the actual wastage. There are also clear records (in terms of type of materials, number and/or weight) showing any inventory taken and returned by any salespersons or other management staff (if needed) usually for the purpose of marketing a specific product or stock. During the Track Record Period and up to the Latest Practicable Date, there has been no material loss of inventory as a result of theft or other acts of misappropriation. WORKPLACE SAFETY The Group is subject to various relevant PRC laws and regulations relating to workplace safety. Further details on the relevant PRC laws and regulations are set out in the section headed Regulatory Overview. Mr. Chen Mu Sheng, the Group s general manager of SZ Factory and deputy general manager of HBF Jewellery is mainly responsible for monitoring the Group s compliance with workplace safety related laws and regulations in the PRC. The Group has also adopted a handbook on workplace safety which sets out the Group s in-house workplace safety rules. A copy of the handbook is provided to each of the Group s staff at the time of hiring and it is stressed that such handbook should be strictly followed. During the Track Record Period, none of the Group s employees had been involved in any major accidents in the course of their employment. SEASONALITY The Group s sales are seasonal in nature and past experience indicates that this seasonality will continue in the future. The bulk of the Group s sales occur around the months of March, June and September which the Directors believe is a result of major international jewellery trade shows held in Hong Kong in these three months and purchase pearls and jewellery products in preparation for festive seasons including Christmas. Accordingly, results of any interim period are not necessarily indicative of results that might be expected during a full year. COMPETITION The pearl and pearl jewellery industry is highly fragmented with very keen competition. Customers preference is generally a function of design, appeal, perceived value and quality in relationship to price. The Group faces intense competition in respect of the pearls processing and the design and production of jewellery products. AccordingtotheIpsosReport,summarisedinthesectionheaded Industry Overview, there were approximately 3,100 pearl processing companies/entities in the PRC and Hong Kong in 2013 supplying pearls to different companies around the world. Most of the pearl processing companies/entities are located in Zhejiang province, the PRC, focusing on freshwater pearls. Processing companies/entities focusing on saltwater pearls are mainly located in southern provinces of the PRC like Guangdong and Guangxi. Economy of scale and processing techniques are key competitive edge. 127

133 BUSINESS There were approximately 900 jewellery manufacturers in the PRC and Hong Kong in Over the years, the Group has been establishing a market position as being capable of making a wide range of pearl jewellery and other jewellery products. High quality saltwater pearls are also a strong product being offered by the Group. The Company believes that this will assist them to capitalise on the opportunity to promote pearls as a high-end jewellery. A good source of pearls, designs capacity and customer relationship are key factors that the Company believes will provide the Group with major competitive advantages. The Group believes that it is competitive in the industry due to its relationship with suppliers and its ability to purchase pearls in bulk quantity. In addition, the Group provides onestop shopping convenience to customers and have historically maintained a close relationship with its customers. Therefore, although competition is intense, the Group believes that it is well positioned in the pearl and jewellery industry. The Company also believes that established relationships with pearl farmers and processing, design and production capability are major entry barriers to new competitors. However, in a highly competitive industry where many competitors have substantially better technical, financial and marketing resources than the Group and new competitors may enter the market and customer preferences may change unpredictably, the Group cannot assure it will remain competitive in the future. PRODUCTION FACILITIES During the Track Record Period, the Group s pearl and jewellery operations were carried out at three factories in the PRC with a total gross floor area of approximately 8,200 square metres and located within Man Sang Industrial City: (1) MH Shenzhen processing of freshwater pearls mainly including bleaching, dyeing and sorting (Note) ; (2) MS Factory mainly including drilling, stringing and making of simple jewellery products (Note) ;and (3) SZ Factory manufacturing and processing jewellery products. Note: As at the Latest Practicable Date, MH Shenzhen and MS Factory have transferred all their related Pearls and Jewellery Business to HBF Jewellery, a wholly-owned subsidiary of the Group under the Reorganisation. Processing arrangement Each of MS Factory and SZ Factory was operating under a processing plant arrangement ( 來料加工 ) set up pursuant to the MS Processing Agreement and the SZ Processing Agreement entered into between the Group and the Processing Party, an Independent Third Party in the PRC on 25 August 2004 and 9 May 2004, respectively. Under such contractual arrangements, the Group is engaged in a processing trade in which the production operations are undertaken by the Processing Party utilising the raw materials, accessories, machinery and equipment and packing materials owned and supplied by the Group. The manufacturing and quality control processes are carried out under close supervision of the Group s management with a high level of involvement and control. In addition, the Group also advises on all employment matters, provides guidance, monitoring and training to the staff and management of 128

134 BUSINESS MS Factory and SZ Factory during their daily operations. As such, the Group has full control over the key areas of the manufacturing process undertaken by MS Factory and SZ Factory including but not limited to raw materials sourcing, manufacturing, quality control, warehousing and product delivery. The Group has been responsible for paying all expenses of MS Factory and SZ Factory including their labour cost and utility services for their production process. Under the Reorganisation, the operations of MS Factory have been transferred to HBF Jewellery since 30 April The processing arrangement under the MS Processing Agreement has then ceased. No compensation is required to be paid to the Processing Party as a result. Tax savings enjoyed by the Group during the Track Record Period Pursuant to DIPN21, the Group is only required to regard 50% of its taxable profit from the sales of products processed or manufactured by MS Factory or SZ Factory during the Track Record Period. As a result, for the three financial years ended 31 March 2014, the total tax savings enjoyed by the Group from the processing arrangements were approximately HK$2.6 million, HK$0.8 million and HK$2.1 million respectively. Subsequent to the Reorganisation, the Group no longer engages in the processing arrangement under the MS Processing Agreement. The Group will no longer be entitled to the above favourable tax treatment under DIPN21 in respect of profit derived from the sale of products processed or manufactured pursuant to the MS Processing Agreement. The Group will continue to be entitled to the tax benefits under the SZ Processing Agreement until the expiry of the SZ Processing Agreement on 9 May Further details of the tax saving effect under DIPN21 are stated in the section headed Financial Information income tax expense in this listing document. Changes under the Reorganisation As part of the Reorganisation, the assets and liabilities relating to the pearl and jewellery operation carried out at MH Shenzhen and MS Factory have been transferred to or assumed by the Group pursuant to a business transfer agreement dated 30 April Subsequent to the transfer, the operations previously carried out at MH Shenzhen and MS Factory have now been carried out by HBF Jewellery, a wholly-owned subsidiary of the Group but not under a processing plant arrangement. All employees and workers of MH Shenzhen and MS Factory have been transferred to the Group. Subsequent to the Reorganisation, SZ Factory will continue to operate pursuant to the SZ Processing Agreement but its business licence for the operation as a processing plant is due to expire on 9 May After the expiry of the business licence for SZ Factory, the operations, assets, liabilities and workers of SZ Factory are proposed to be transferred to a wholly-owned subsidiary of the Group in the PRC. The Directors do not consider there to be any material impact on the Group as a result of the Reorganisation. Information on the Reorganisation is set out on pages 82 to 89 in the section headed History, Reorganisation and Corporate Structure Reorganisation of this listing document. 129

135 BUSINESS Location of the production facilities The Group s production premises (including premises occupied by SZ Factory), located at Man Sang Industrial City with a total gross floor area of approximately 8,200 sq.m. is leased from MH Shenzhen, a connected person, pursuant to certain lease agreements. The leases will constitute exempt continuing connected transactions for the Company under the Listing Rules. For the financial years ended 31 March 2012, 2013 and 2014, the rental expenses recorded by the Group in its financial statements in respect of the leases of the factory premises from MH Shenzhen amounted to approximately HK$1.6 million, HK$1.7 million and HK$2.3 million respectively. Details of the leases are set out on pages 149 to 155 in the section headed Continuing Connected Transactions in this listing document. Workforce of the production facilities As at the Latest Practicable Date, the Group had approximately 383 production workers in connection with the processing or making of the Group s products. Processing services provided by SZ Factory and MS Factory during the Track Record Period SZ Factory was set up under the SZ Processing Agreement solely for carrying out the customer orders received from Arcadia Jewellery. SZ Factory has only entered into the SZ Processing Agreement with Arcadia Jewellery to undertake the processing services. During the Track Record Period, MS Factory and SZ Factory provided processing services exclusively to the Group. The salient terms of the processing operations which will continue to be carried out by SZ Factory pursuant to the SZ Processing Agreement subsequent to the Reorganisation are, among others: Current contracting parties: (a) 深圳市寶安區公明鎮上村經濟發展公司 (Shenzhen Bao an Gongming Upper Economic Development Company*) as the Processing Party (an Independent Third Party), also known as undertaking party ( 承辦單位 ). (b) (c) Arcadia Jewellery as the foreign party 深圳市寶安外經發展有限公司 (Shenzhen Bao an Foreign Economic Development Corporation Company*) as the foreign trade agent, also known as business enterprise ( 商務單位 ), because the processing arrangement involves importing and exporting that need particular licences and the Processing Party does not have these licences. In 2008, 深圳市光明新區經濟發展公司 (Shenzhen Guangming New District Economic Development*) took over 深圳市寶安外經發展有限公司 (Shenzhen Bao an Foreign Economic Development Company*) as the business enterprise because of a local administrative policy of Shenzhen. 130

136 BUSINESS Approving authority: 深圳市經濟貿易局 (Economic and Trade Bureau of Shenzhen Municipality) (it has been reformed to 深圳市經濟貿易和信息化委員會 (Economy, Trade and Information Commission of Shenzhen Municipality)) Date: 9 May 2004 (as amended by agreements dated 2 November 2007 and 10 October 2008) Duration: 9 May 2004 to 9 May 2015 Responsibilities: (a) the Processing Party shall (i) provide the factory premises, labour, water and electricity for production of jewellery made of gold, silver, metal and pearl and assembled jewellery, and all the processed products shall be passed to the foreign party for export to Hong Kong and other countries; and (ii) appoint the factory manager, accounting staff, inventory management staff for the plant and financial management of SZ Factory. Despite the above terms of the SZ Processing Agreement regarding the responsibilities of the Processing Party, the premises of the production facilities of SZ Factory has been leased from MH Shenzhen, a fellow subsidiary of the Company; and all the employees and workers of SZ Factory are employed as approved by the Group. Accordingly, the Group has actual control over all the operations of SZ Factory. The PRC Legal Adviser is of the view that this does not contradict the SZ Processing Agreement and neither the Processing Party nor Arcadia Jewellery has breached the SZ Processing Agreement in this regard. (b) Arcadia Jewellery as foreign party shall provide machinery (for the use by SZ Factory), production materials, ancillary materials and packaging materials and it should also pay processing fee and provide technical guidance and training to factory workers during the trial production period. Processing fee: Processing fees are charged on a piece rate basis depending on the specification, design and ease of production to be agreed between the Processing Party and Arcadia Jewellery. For the three financial years ended 31 March 2012, 2013 and 2014, the annual processing fee paid by the Group to SZ Factory amounted to approximately HK$0.9 million, HK$1.2 million and HK$1.5 million respectively. 131

137 BUSINESS For the purposes of preparing the financial statements of the Group as included in the Accountant s Report set out in Appendix I to this listing document, the Group treats SZ Factory as a member of the Group. The fee paid or payable by Arcadia Jewellery to SZ Factory (save for the portion paid to the Chinese Processing Party amounting to approximately HK$53,800, HK$57,400 and HK$52,000 respectively for the three years ended 31 March 2012, 2013 and 2014) are treated as inter-group transactions and are eliminated in the combined financial statements of the Group. The Group treats all expenses of SZ Factory as expenses of the Group in its combined financial statements. The Group is responsible for paying all expenses of SZ Factory. No expenses of SZ Factory are borne by the Processing Party. Renewal and termination: For renewal or termination of the SZ Processing Agreement, Processing Party or foreign party shall negotiate and confirm with each other three months prior to the proposed renewal or termination. In the event that one party terminates the SZ Processing Agreement unilaterally, such party shall compensate the loss of the other party. The Group does not expect to renew the licence of SZ Factory after its expiry on 9 May The SZ Processing Agreement will also then expire. It is proposed that the assets, liabilities and operations of SZ Factory will be transferred to the Group s subsidiary in the PRC on or before the expiry date similar to the transfer arrangements between MS Factory and HBF Jewellery under the Reorganisation. According to the SZ Processing Agreement, the ownership of the dutyfree imported machinery and equipment in SZ Factory vested in Arcadia Jewellery and are required to be returned to Arcadia Jewellery upon expiry of the SZ Processing Agreement. The Group has confirmed that there is no such machinery and equipment which is required to be returned by SZ Factory to Arcadia Jewellery when the SZ Processing Agreement expires. As at 31 March 2014, SZ Factory had total assets of HK$5.8 million comprising mainly tools, equipment and cash. Before the Reorganisation, the Processing Party had entered into the MS Processing Agreement with Man Sang HK. The arrangements and terms under the MS Processing Agreement are materially similar to those of the SZ Processing Agreement. Under the Reorganisation, the pearl trading business of Man Sang HK has been transferred to MS Jewellery, a wholly-owned subsidiary of the Group and the processing arrangement under the MS Processing Agreement has since then stopped. For the three financial years ended 31 March 2012, 2013 and 2014 the annual processing fee paid by the Group to MS Factory amounted to approximately HK$1.1 million, HK$1.5 million and HK$2.0 million respectively, of which HK$61,000, HK$71,000 and HK$64,000 were paid to the Chinese Processing Party. 132

138 BUSINESS PROPERTIES Owned property The Group owns a residential property in Hong Kong, which is used by Mr. CH Cheng, the Chairman and non-executive Director of the Group, as Chairman s quarters at nil consideration which forms part of his remuneration package. According to a rental indication letter issued for reference purpose by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the current market rental of the said residential property in Hong Kong ranges from about approximately HK$140,000 to HK$150,000 per month, including government rates and rent and management fee. For the purposes of the Spin-off, some management and back office expenses (including the rental expenses of providing of the Chairman s quarters which included the estimated market rental value, actual government rates, management fee and car park expenses) were shared between the Group and the Remaining Group. As set out in the Accountant s Report contained in Appendix I to this listing document, the amount under the item Other benefits, being the rental expenses including the estimated market rental value, actual government rates, management fee and car park rental expenses in respect of the Chairman s quarters (as explained above) apportioned and attributable to the Group was approximately HK$0.31 million, HK$0.34 million and HK$0.34 million for each of the financial year ended 31 March 2012, 2013 and 2014 respectively. The full amount of the rental expenses of the said Chairman s quarters was approximately HK$1.6 million, HK$1.7 million and HK$1.7 million for each of the financial year ended 31 March 2012, 2013 and 2014 respectively. Among the Other benefits, the portion representing the estimated market rental value is included for disclosure purposes only and is not actually recorded in the Group s profit and loss account. Mr. CH Cheng is a non-executive Director and the Chairman of the Company and he is also a founder of the Group. The provision of the Chairman s quarters to Mr. CH Cheng is a benefit provided to him pursuant to the service contract entered into between the Company and Mr. CH Cheng. As at the Latest Practicable Date, Mr. CH Cheng was a non-executive director of MSIL and he will resign as a director and Chairman of MSIL prior to the Listing. As mentioned above, according to a rental indication letter issued for reference purpose by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the current market rental of the said residential property in Hong Kong ranges from about approximately HK$140,000 to HK$150,000 per month, including government rates and rent, and management fee. For illustrative purposes, for the year ending 31 March 2015, based on such estimated market rental, the full amount of the rental expenses of the said Chairman s quarters is estimated to be in the range of approximately HK$1.68 million to HK$1.80 million, part of which will be shared between the Group and the Remaining Group prior to Listing. As the related cost is shared between the Group and the Remaining Group, it is estimated that out of the amount of the above estimated rental expenses for the financial year ending 31 March 2015, approximately HK$1.0 million to HK$1.1 million will be allocated to and shared by the Group. After Listing, the full amount of the rental expenses of the said Chairman s quarters will be reflected in the Group s consolidated statement of comprehensive income in the financial year ending 31 March 2015 (with the portion on the estimated market rental only showing in the notes to the financial statements for disclosure purpose only and will not be recognised in the Group s profit and loss account). 133

139 BUSINESS Leased properties The Group leases production premises and staff quarters in the PRC from MH Shenzhen for a term up to November 2016 at a total annual rental of about RMB1.5 million. Details of the leased production premises in the PRC are set out above in the section headed Business Production Facilities above andinthesectionheaded Continuing Connected Transactions below in this listing document. Other than the leased production premises, the Group s also leases its Hong Kong headquarters with a gross floor area of 19,903 square feet from an Independent Third Party for a period up to 16 March 2017 at a total annual rental of approximately HK$10.7 million. Part of the leased office space of approximately 1,139 square feet is subleased to the Remaining Group and approximately 3,873 square feet is subleased to the CSC Group. The Group leases a warehouse in Hong Kong from an Independent Third Party with a gross floor area of 1,564 square feet at actual annual rental of HK$144,000. The Group leases apartments located in Shenzhen, the PRC with a total area of square metres from a member of the CSC Group for a period from 1 June 2013 to 31 May 2019 as office and for display purposes. The monthly rental ranges from RMB5,810 to RMB7,745 and an aggregate annual rental ranging from RMB69,720 to RMB92,940. Both the Remaining Group and the CSC Group are connected persons of the Company. The above leases with each of the Remaining Group and the CSC Group will constitute exempt continuing connected transactions for the Company under the Listing Rules. Details of the leases/sub-lease are set out on pages 149 to 155 in the section headed Continuing Connected Transactions in this listing document. INTELLECTUAL PROPERTY As of at the Latest Practicable Date, the Group has registered 7 logos which have obtained trademarks registrations in 18 jurisdictions and has 1 trademark application which has been submitted for registration. There are 10 logos which have been registered in the PRC and as at the Latest Practicable Date are in the process of being transferred to the Group pursuant to the Reorganisation. The Group does not market its products to its customers under a specific brand as its products are principally manufactured on OEM and ODM basis. However, as set out in the paragraph headed Branding above in this section the Group manufactures a line of products for sale under the trademark which is exclusively sold to one of the Group s top 5 customers. Further details of this arrangement are set out on page 122 of this listing document. The Group takes all appropriate actions to register and protect these trademarks in the jurisdictions in which the Groupsellsto.DuringtheTrackRecordPeriodandup to the Latest Practicable Date, the Group is not aware of any infringements against its trademarks. The Group s jewellery products are mainly designed in-house and the copyright to these designs are owned by the Group. As part of the Group s restructuring, the Man Sang trademark has been transferred to the Group. The Group has entered into a perpetual licence with MSIL for the use of the Man Sang trademark so long as the Group and MSIL are under common control. The licence with MSIL will constitute an exempt continuing connected transaction for the Company. As each of the applicable 134

140 BUSINESS percentage ratios on an annual basis falls below 0.1%, pursuant to Rule 14A.76(1)(a) of the Listing Rules, the said transaction is exempt from the relevant reporting, annual review, announcement and independent shareholders approval requirements. Further information on this continuing connected transaction is set out on pages 153 to 154 in the section headed Continuing Connected Transactions in this listing document. During the Track Record Period, the Group did not have any pending or threatened claims against it, nor has any claim made by the Group against third parties, with respect to the infringement of intellectual property rights owned by the Group or third parties. Further details of the Group s intellectual property are set out in the Appendix V to this listing document. ENVIRONMENTAL MATTERS The Group is subject to various environmental laws and regulations set by the PRC national, provincial and municipal governments with respect to its manufacturing and operations. These include regulations on air pollution, noise emissions, as well as water and waste discharge. As advised by the PRC Legal Adviser, the Group (including SZ Factory and the pre-reorganisation operations of MS Factory and MH Shenzhen) has complied with all applicable environmental laws and regulations relating to its businesses in the PRC, and has obtained all of the environmental permits necessary to conduct its business in the PRC. The Group s operations are subject to regulation and periodic monitoring by local environmental protection authorities. If the Group fails to comply with present or future environmental laws and regulations, it could be subject to fines, suspension of production or a cessation of operations. During the Track Record Period and up to the Latest Practicable Date, the Group has not been punished for any breach of the relevant environmental laws and regulations in the PRC. Regarding the working environment for the Group s employees, a hygienic and safe working environment is maintained at the Group s production facilities in Shenzhen, the PRC. The Group believes its manufacturing processes do not generate excess levels of noise, wastewater, gaseous wastes or other industrial wastes and the Group has adopted internal policies to ensure that its manufacturing processes are in compliance with relevant environmental laws and regulations. INSURANCE Insurance is important to the Group s business. The Directors consider that the Group maintains sufficient insurance covering its inventory stored within its premises (including inventories and finished goods held by the Group), inventory in transit within Hong Kong and inventory for display and sale in exhibitions or tradeshows in Hong Kong or elsewhere and during customers visits by the Group s staff. The Group also maintains insurance policies against loss or damage to its office, business interruption and employees compensation. The Group currently adopts appropriate security measures in accordance with the terms of the relevant insurance policies including but not limited to the use of an alarm system and security safe. The Directors believe that the coverage from these insurance policies is adequate to cover the Group s assets. However, significant loss or damage to the Group s inventory, whether as a result of theft, fire and/or other causes, may still have an adverse impact on the results of its operations or 135

141 BUSINESS financial condition. The insurance expenses paid by the Group in each of the financial three years ended 31 March 2012, 2013 and 2014 amounted to approximately HK$1.1 million, HK$1.4 million and HK$0.7 million, respectively. The Group had not made any material claim on insurance since the commencement of the Track RecordPeriodanduptotheLatestPracticableDate. EMPLOYEES As of the Latest Practicable Date, the Group had 539 employees, of which 490 were located in the PRC and 49 are located in Hong Kong. The following table sets forth the number of employees in its different departments as of the Latest Practicable Date: The PRC Hong Kong Senior management 1 6 Marketing and sales 12 Pearl processing and jewellery production Purchasing and logistics 5 Design and engineering 10 1 Quality control 25 Warehousing 8 3 Finance and accounting 13 5 Human resources and administration Information technology 1 1 Total In accordance with the Labour Contract Law that became effective on 1 January 2008, the Group has entered into labour contracts with all of the Group s employees in the PRC. The Group recruits personnel from the open market. During the Track Record Period, the Group has not paid any fees to any recruitment agencies for recruitment/employment services. For the staff in Hong Kong, the Group will provide on the job training and for the staff in the PRC the Group provides technical as well as operational training to the new employees and on-going training for all employees. As part of the Group s continuing efforts to improve its Hong Kong staff s skills and knowledge, the Group will also subsidise its Hong Kong staff to enrol in external courses relevant to their job duties. The compensation package of the Group s employees includes salary, bonus and other cash subsidies. In general, the salaries of the Group s employees largely depend on their performance and length of service with the Group. During the Track Record Period and as of the Latest Practicable Date, the Group did not experience any material labour disputes with its employees. For additional information about certain of the Group s employees, see the section headed Directors and Senior Management in this listing document. In accordance with the relevant national and local labour and social welfare laws and regulations in the PRC, the Group is required to pay for and on behalf of its employees a monthly social insurance and housing provident fund. As advised by the PRC Legal Adviser, during the Track Record Period, the 136

142 BUSINESS Group did not fully comply with the requirements on making contributions to the social insurance and housing provident funds for its employees in the PRC. If the Group were to make the required contributions for each of the financial years during the Track Record Period, the Group s labour costs in relation to its production would have increased by approximately HK$3.4 million, HK$3.1 million and HK$1.3 million for the financial years ended 31 March 2012, 2013 and 2014 respectively and the Group s total cost of sales would have been approximately HK$191.3 million, HK$182.9 million and HK$176.1 million for the financial years ended 31 March 2012, 2013 and 2014 respectively. Details relating to this non-compliance is set out in the section headed Business Legal Proceedings and Non-Compliances on pages 137 to 141 of this listing document. In Hong Kong, the Group participates in a mandatory provident fund scheme established under the Mandatory Provident Fund Schemes Ordinance. Under such ordinance, an employer in Hong Kong and its employees are each required to make monthly contributions to the plan at 5% of the employee s relevant income. For this purpose, the monthly relevant income is subject to a cap of HK$30,000. As confirmed by the Directors, as at the Latest Practicable Date, the Group is in compliance with applicable HK laws and regulations in relation to the mandatory provident fund scheme and as at the Latest Practicable Date has not received any notice from any government department in Hong Kong that it has failed to make contribution to the mandatory provident fund. For the three financial years ended 31 March 2014, the Group made a total contribution to the mandatory provident fund of approximately HK$561,000, HK$600,000 and HK$598,000, respectively for its employees in Hong Kong. During the Track Record Period, the Group did not have any violation, material safety claims, lawsuits, penalties, disciplinary actions or any material work accidents. None of the employees in Hong Kong belong to labour unions. The employees working at SZ Factory and HBF Jewellery are members of a labour union. LEGAL PROCEEDINGS AND NON-COMPLIANCES As at the Latest Practicable Date, the Group is not engaged in any litigation, arbitration or claim of material importance, and no litigation, arbitration or claim of material importance is known to the Directors to be pending or threatened by or against the Group, that would have a material adverse effect on the Group s operating results or financial condition. The PRC Legal Adviser has confirmed that the Company and its the PRC subsidiaries have obtained all licences, permits and certificates necessary to conduct their operations and save as disclosed below, operations of the Company and its the PRC subsidiaries comply with all the relevant PRC rules and regulations in all material aspects. 137

143 BUSINESS Below sets out the non-compliances relating to the Group during the Track Record Period: Non-compliance incidents in the PRC Reason(s) for the noncompliance Remedial actions/ latest status Legal Consequences Internal control measures MH Shenzhen, MS Factory and SZ Factory failed to make full social insurance contributions as required under the related PRC law based on the actual wages for the Group s employees in the Track Record Period. These employees were not willing to co-contribute their part of social insurance contribution above the amount based on the minimum wage as required in Shenzhen. The Group has made a provision on potential claim of unpaid social insurance contributions for the Group s employees in the PRC as at 31 March 2014 for a period of 2 years before 31 March 2014 of approximately HK$2.6 million at 31 March Mr. CH Cheng has undertaken to the Company to indemnify the Group in respect of any payment of any social insurance and any potential penalty imposed on the Group in respect of this non-compliance exceeding the accrual amount provided by the Group in its combined financial statements as at 31 March On 15 May 2014, 深圳市社會保險基金管理局公明管理站 (Gongming Branch Station of Shenzhen Social Insurance Fund Management Centre) (a competent PRC authority as confirmed by the PRC Legal Adviser) verbally confirmed that there had been no investigation on MH Shenzhen, MS Factory or SZ Factory in respect of the outstanding social insurance contribution. The Group had not received any complaints from MH Shenzhen or MS Factory or SZ Factory employees. The PRC Legal Adviser advised that, (i) for the unpaid social insurance contributions there was only a system to allow the payment of one of the social insurance contribution but not other insurance contributions; (ii) 行政處罰法 (Laws of the People s Republic of China on Administrative Punishments) should only allow the social insurance authority to lawfully enforce the Group to pay the unpaid contribution for a period of two years before the non-compliance is identified by the authority; (iii) the relevant authority may order the Group to pay the repayable unpaid contributions within a prescribed time limit, failing which, for any outstanding contribution in respect of the social insurance payable prior to 1 July 2011, the Group would have to pay a late penalty of 0.2% per day and for the unpaid contribution on or after 1 July 2011, a late penalty of 0.05% per day of the unpaid amount, and a further fine equivalent to one to three times of the unpaid amount if the Group fails to rectify it within the prescribed time limit. The PRC Legal Adviser advised that, based on the consultation result with the competent authority, the latter was unlikely to take action against MH Shenzhen, MS Factory and SZ Factory if it did not receive complaints from their employees. As at the Latest Practicable Date, the Group has not received any notification from the relevant authority ordering it to make unpaid social insurance contributions or imposing any penalty. To ensure that the Group is in compliance with the PRC laws, in particular the payment of employees social insurances, the Directors have appointed Mr. Chen Mu Sheng and Mr. Mok Kin Kwan to oversee that all necessary social insurance contributions are made from June Mr. Chen Mu Sheng and Mr. Mok Kin Kwan will then on a monthly basis provide a report update to the Board and the audit committee. The Group s audit committee will on a regular basis review the payment of the social insurance contributions and also the effectiveness of the internal control measures implemented and make further recommendations to the Directors if necessary. Factors determined by the Sponsor to support that the incident does not raise concern on the Directors competence, integrity and character The breach was not conducted intentionally by the Group given that some employees were unwilling to make their social insurance contribution. 138

144 BUSINESS Non-compliance incidents in the PRC Shenzhen Kasiao failed to set up a housing provident fund account and MH Shenzhen, MS Factory and SZ Factory failed to contribute to some of its employees housing provident fund accounts during the Track Record Period. Reason(s) for the noncompliance These employees were not willing to co-contribute the housing provident fund. Remedial actions/ latest status Legal Consequences Internal control measures The Group has made a provision for potential claims of unpaid housing provident fund for the Group s employees in the PRC as at 31 March 2014 for a period of two years before 31 March 2014, after having considered the related regulations or practice in the PRC (including the 2 year limits of 行政處罰法 The Law of the People s Republic of China on Administrative Punishments) of approximately HK$1.8 million as at 31 March Mr. CH Cheng has undertaken to the Company to indemnify the Group in respect of any payment of housing provident fund contributions unpaid and any potential penalty imposed on the Group in respect of this non-compliance exceeding the accrual amount provided by the Group in its combined financial statements as at 31 March As at the Latest Practicable Date, the related PRC subsidiaries/operations of the Company have completed the registration and the process of opening housing provident accounts and have made the required contributions for its employees in the PRC. As at the Latest Practicable Date, the Group has not received any notice from the relevant authority ordering it to make unpaid housing provident fund contributions or imposing any fine or administrative penalty on it. The PRC Legal Adviser has advised that failure to make contribution or deposit registration of housing provident fund or failure to go through the formalities of opening housing provident fund accounts for its staff and workers, the housing provident fund management centre may order it to pay the necessary contributions or make registration within a prescribed time limit; where failing to make registration by the expiration of the time limit, a fine of not less than RMB10,000 and not more than RMB50,000 shall be imposed. The PRC Legal Adviser has opined that the relevant authority is unlikely to impose any penalty or request the Group to pay the unpaid housing provident fund as: (i) Shenzhen Kasiao has completed the registration in June 2014; (ii) the implementation of the Housing Provident Fund in Shenzhen is still in its early stage and has not reached the situation that all the entities and all the individuals pay the housing provident funds in strict accordance with the standards specified in the measures; and (iii) the Group has not received any notice from the relevant authority requesting the Group to make the unpaid contribution and that the Group has made appropriate provision. On 23 June 2014, SZ Factory and HBF Jewellery received a confirmation from 深圳市住房公積金管理中心 (Shenzhen Housing Provident Fund Management Centre) ( Confirmation ) that housing provident fund accounts were set up for their employees by SZ Factory and HBF Jewellery on 9 March 2011 and 16 May 2014, respectively and since then and up to the date of the Confirmation, SZ Factory and HBF Jewellery have not imposed any penalties on them for breach of the relevant PRC laws. To ensure that the Group is in compliance with the PRC laws, in particular the payment of employees housing provident fund, the Directors have appointed Mr. Chen Mu Sheng and Mr. Mok Kin Kwan to oversee that such housing provident fund contributions are made. Mr. Chen Mu Sheng and Mr. Mok Kin Kwan will then on a monthly basis provide a report update to the Board and the audit committee. The Group s audit committee will also on a regular basis review the housing provident fund payment and also the effectiveness of the internal control measures implemented and make further recommendations to the Directors if necessary. Factors determined by the Sponsor to support that the incident does not raise concern on the Directors competence, integrity and character The breach was not conducted intentionally given that some employees were unwilling to participate in the housing provident fund. 139

145 BUSINESS Non-compliance incidents in the PRC During the Track Record Period, the Group s PRC operations under the processing plant arrangements failed to comply with the approval/filing requirements in respect of its subcontracting arrangements under PRC laws. Reason(s) for the noncompliance Remedial actions/ latest status Legal Consequences Internal control measures Inadvertent oversight The Company has tried to make the required filing with China Customs but has been informed that registration of subcontracting arrangements can only be made at the time when a new import/export contract is filed with them. The PRC Legal Adviser has opined that the relevant authority is unlikely to impose any penalty as: (i) the non-compliance does not involve evasion of tax; and (ii) the Group has passed its latest annual inspection by the China Customs. The Directors have appointed Mr. Chen Mu Sheng and Mr. Mok Kin Kwan to oversee that all future subcontracting work is registered with China Customs. Mr. Chen and Mr. Mok will report to the Board and the audit committee every month. The Group s audit committee will review the related filing arrangement and the effectiveness of the internal control measures implemented and make further recommendations to the Directors if necessary. Factors determined by the Sponsor to support that the incident does not raise concern on the Directors competence, integrity and character This is only a minor inadvertent oversight as confirmed by the Group and is not uncommon. The Company has designated management staff to take immediate actions to rectify the situation. 140

146 BUSINESS The Directors are of the view that they have taken all reasonable steps to strengthen the Group s internal control system to prevent future non-compliance with the above PRC laws and regulations. Based on the enhanced internal control procedures of the Group, the due diligence discussions carried out with the Company s Directors and the PRC Legal Adviser on the reasons for and remedial measures that the Company has taken to prevent the recurrence of similar non-compliance incidents, other similar cases identified by the Sponsor among other recent new listing cases on the Stock Exchange, the Sponsor is of the view that the above non-compliances will not materially affect the Company s suitability for listing on the Stock Exchange. 141

147 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS INFORMATION ON THE CONTROLLING SHAREHOLDER As at the Latest Practicable Date, Mr. CH Cheng directly held approximately 26.70% of the issued share capital of MSIL, and further, through his 100% shareholding in Rich Men Limited, indirectly held approximately 36.62% of the issued share capital of MSIL. Hence, Mr. CH Cheng was directly or indirectly interested in a total of approximately 63.32% of the issued share capital of MSIL as at the Latest Practicable Date. As disclosed in the sub-section headed History, Reorganisation and Corporate Structure The MSIL Distribution and the Capitalisation Issue, the MSIL Distribution will be satisfied by way of a distribution in specie to the Qualifying MSIL Shareholders of the entire issued share capital of the Company, in proportion to their respective shareholdings in MSIL, on the basis of one Share for every five MSIL Shares held on the Record Date. As a result, based on the issued share capital of MSIL as at the Latest Practicable Date and assuming that it will remain unchanged on the Record Date, following completion of the Spin-off, Mr. CH Cheng will directly hold approximately 26.70% of the issued share capital of the Company, and will, through his 100% shareholding in Rich Men Limited, indirectly hold approximately 36.62% of the issued share capital of the Company. Hence, Mr. CH Cheng and Rich Men Limited will become the Controlling Shareholders following the completion of the Spin-off. Save and except for their interests in the Company, the Directors and the Controlling Shareholders have separately confirmed that they do not have interest in any business which is competing with that of the Group. For detailed background of the Controlling Shareholders, please refer to the sections headed History, Reorganisation and Corporate Structure and Directors and Senior Management of this listing document. INDEPENDENCE FROM THE CONTROLLING SHAREHOLDERS AND THE REMAINING GROUP Having considered the following factors, the Directors are satisfied that the Group will be able to conduct its business operationally and financially independent of the Controlling Shareholders and the Remaining Group: Clear delineation of business Following the completion of the Reorganisation, the Group has been carrying on the business of purchasing, processing, designing, production, merchandising and wholesale distribution of pearls and jewellery products while the principal business of the Remaining Group is the development, sales and leasing of properties. By the nature of the products and services provided by the Group and the Remaining Group, there is a clear delineation between the business retained by the Remaining Group and the business of the Group and there will not be any overlapping of businesses. 142

148 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS Management independence The Company has a board of directors and senior management that function independently from the Remaining Group and the Controlling Shareholders. Following the Spin-off, the composition of the board of directors of the Company and that of MSIL will be as follows: The Company MSIL (Note 1) Executive directors Ms. Yan Sau Man, Amy (CEO) Mr. Chen Zhi Wei (Note 2) Mr. Cheng Sai Mr. Leung Alex Ms. Cheng Ka Man, Carman Non-executive director Mr. Cheng Chung Hing (Chairman) (Note 3) Mr. Cheng Tai Po (Chairman) Independent non-executive directors Mr. Fung Yat Sang Mr. Look Andrew Mr. Tsui Francis King Chung Mr. Kiu Wai Ming Mr. Lau Chi Wah, Alex Notes: 1. Mr. Cheng Chung Hing and Ms. Yan Sau Man, Amy and Mr. Fung Yat Sang, being directors of MSIL as at the Latest Practicable Date, will resign as directors of MSIL immediately prior to the Listing. 2. Mr. Chen Zhi Wei is a brother-in-law of Mr. CH Cheng, Mr. Cheng Tai Po and Mr. Cheng Sai. He is also the uncle of Ms. Cheng Ka Man, Carman. 3. Mr. CH Cheng is the father of Ms. Cheng Ka Man, Carman. He is also the younger brother of Mr. Cheng Tai Po and Mr. Cheng Sai. Following the Listing, there will not be any overlap of directors and senior management between the Group and the Remaining Group. Each of the Directors is fully aware of his/her fiduciary duties as a Director which require, among other things, that he/she acts for the benefit and the best interests of the Company and does not allow any conflict between his/her duties as a Director and his/her personal interest to exist. In the event that there is a potential conflict of interest arising out of any transaction to be entered into between the Company and the Directors or their respective associates, the interested Director(s) will abstain from voting at the relevant meeting of the Board in respect of such transactions and shall not be counted in the quorum. Furthermore, the Board acts collectively by at least a majority decision in accordance with the Articles, and no single Director is allowed to enter into any agreement or transaction or decide on any matters on behalf of the Company unless authorised by the Board or in accordance with the Articles. On the basis of the above, the Directors consider that the Group maintains sufficient level of independence of directorship and management from the Remaining Group and the Controlling Shareholders. 143

149 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS Operational independence Although the Controlling Shareholders will retain a controlling interest in the Company and the Remaining Group, the Board shall make decisions on, and to carry out, the business operations of the Company independently. Furthermore, as disclosed in the paragraph headed Clear delineation of business above, the business nature of the Group and the Remaining Group are distinct and the Group operates independently from the Remaining Group. In light of the above and further having considered the following reasons, the Directors are of the view that the Group s operations do not depend on the Controlling Shareholders or the Remaining Group: (a) the Group has established its independent key operating functions, including, sales and marketing procurement, quality control, design and production; and accounting and finance; (b) whilst the Group s support departments, including human resources, information technology, administration will continue to provide back office support to the Remaining Group, resources spent on the provision of services to the Remaining Group is not material and will not affect the normal business operations of the Group; (c) (d) (e) save as disclosed in the section headed Continuing Connected Transactions in this listing document, the Group has not entered into any other continuing connected transactions with the Controlling Shareholders or members of the Remaining Group that will continue after the Listing; although the Group has leased its production site in the Man Sang Industrial City from the Remaining Group (details of which are set out in the section headed Continuing Connected Transactions in this listing document), the Directors are of the opinion that the leases are in the ordinary and usual in the course of business of the Group, the terms of such leases are on normal commercial terms and there are other nearby factory premises available in the market and a suitable replacement can be obtained on a timely and commercially viable basis at market rate from independent third parties; and although the Group has sub-leased certain office space in Hong Kong to the Remaining Group and to the CSC Group, respectively (details of which are set out in the section headed Continuing Connected Transactions in this listing document), the Directors are of the opinion that these transactions mutually benefit both the Group, the Remaining Group and the CSC Group and if such parties decide not to renew the relevant sub-lease agreements upon their expiry, the Group would adjust the area continued to be rented from the landlord to the extent sufficient to meet its own need, and no material adverse impact is expected. Financial independence The Group has its own accounting and finance department and independent financial system and will make financial decisions according to its own business needs. 144

150 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS During the Track Record Period and prior to the Spin-off, MSIL has provided guarantees in connection with a bank borrowing provided by a financial institution to a member of the Group. The Directors have confirmed that, the relevant lender has agreed to release the said guarantees upon the Listing becoming effective. As at 31 March 2014, the Group had a net amount due from the Remaining Group which amount was fully settled in the manner as set out in the section headed Financial Information Discussion of combined statements of financial position items Amounts due from and due to related companies (the Remaining Group). Save and except for the outstanding balances arising from the continuing connected transactions mentioned in the section headed Continuing Connected Transactions in this listing document, the Group will not have any outstanding non-trading balances with, and guarantees from or to, the Remaining Group upon Listing. The Group has mainly been operating cash flow positive and principally self-financing. The Company believes that the Group will be able to support its financing needs based on its internally generated cash flow and, if necessary, the Company may either obtain loans from financial institutions or raise funds through equity financing, and will not be dependent on the Remaining Group for future financing. Based on the above, the Directors believe that the Group is financially independent of the Controlling Shareholders and the Remaining Group. Administrative capability While the Company maintains its own staff for various administrative support functions, namely, human resources services, administration and information technology functions, pursuant to an administrative services agreement entered into between the Company and Remaining Group (details of which are set out in the section headed Continuing Connected Transactions in this listing document), the Group has agreed to provide certain administrative support services to the Remaining Group. The Company believes that the sharing of the administrative support services between the Group and the Remaining Group represents a cost effective arrangement which is in the interests of both the Group and the Remaining Group. Whilst the relevant administrative functions will be supported by common teams, the costs of such services will be shared fairly and equitably between the Group and the Remaining Group. Save for the above, the business operations of the Group have been and will continue to be carried out by distinct teams of management, sales and marketing, procurement, design, storage and transportation. The Group and the Remaining Group also have separate accounting and finance teams. Accordingly, the Company considers that this proposed sharing arrangement does not adversely affect the independence of the Group from the Remaining Group. NON-COMPETITION UNDERTAKINGS On 26 September 2014, Mr. CH Cheng entered into a non-competition deed (the Deed of Noncompetition ) with the Company under which Mr. CH Cheng has undertaken that he will not, and will procure that his close associates (other than members of the Group) will not: (a) directly or indirectly whether as principal or agent or through any person, firm or company carry on, participate or be interested or engaged in any business in any form or manner that is, directly or indirectly, in competition with the principal business of the Group of 145

151 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS purchasing, processing, designing, production and sale of pearls and jewellery products in the PRC, Hong Kong or any part of the world in which any member of the Group may from time to time operate; and (b) directly or indirectly, solicit, interfere with or entice away from any member of the Group any person, firm or company who, to Mr. CH Cheng s knowledge, as at the date of the deed, was or had been or would after the date of the deed be, a customer, supplier, distributor or management, technical staff or employees (of managerial grade or above) of any member of the Group. The above undertakings are subject to the following exceptions: (i) (ii) Mr. CH Cheng and/or his close associates are entitled to invest, participate and be engaged in any activity as mentioned in paragraphs (a) and (b) above ( Restricted Activity ), regardless of value, which has first been offered or made available to the Company, provided always that (1) information about the principal terms thereof has been disclosed to the Company and the Company has, after review and based on the opinion of the independent non-executive Directors, within one month from the date of receipt of such information confirmed that it does not wish to be involved or engaged, or to participate, in the relevant Restricted Activity, and (2) the principal terms on which Mr. CH Cheng and/or his close associate(s) invest, participate or engage in the Restricted Activities are substantially the same as or not more favourable than those disclosed to the Company. Subject to the aforesaid, if Mr. CH Cheng and/or his close associate(s) (as the case may be) decide to be involved, engaged, or participate in the relevant Restricted Activity, whether directly or indirectly, the terms of such involvement, engagement or participation must be disclosed to the Company as soon as practicable but in any event before any binding commitment is entered into by Mr. CH Cheng and/or his close associate(s) (as the case may be); the above undertakings do not apply to the holding of or interests in shares or other securities in any company which conducts or is engaged in any Restricted Activity, provided that, in the case of such shares, they are listed on a stock exchange and either: (a) (b) the relevant Restricted Activity and assets relating thereto account for less than 20% of the relevant company s consolidated revenue and consolidated assets, respectively, as shown in that company s latest audited consolidated accounts; or the total number of shares held by Mr. CH Cheng and his close associates (as the case may be) or in which they are together interested does not amount to more than 20% of the issued shares of the company in question. Mr. CH Cheng s above undertakings will cease to have any effect on the earlier of: (i) the date on which the Listing is withdrawn; or (ii) the date on which Mr. CH Cheng and his close associates, individually and collectively, cease to be a substantial shareholder of the Company. 146

152 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS CORPORATE GOVERNANCE MEASURES The Company will adopt the following measures to manage the potential conflicts of interests between the Group, the Controlling Shareholders and the Remaining Group; and to safeguard the interests of the Shareholders: (a) (b) (c) (d) the independent non-executive Directors will review, on an annual basis, the compliance with the Deed of Non-competition; the Company will disclose decisions on matters reviewed by the independent non-executive Directors relating to compliance and enforcement of the Deed of Non-competition in the annual reports of the Company; the Directors will operate in accordance with the Company s Articles which require the interested Directors not to vote (nor be counted in the quorum) on any resolution of the Board approving any contract or arrangement or other proposal in which he or any of his close associates is materially interested; and pursuant to the CG Code, the Directors, including the independent non-executive Directors, will be able to seek independent professional advice from external parties in appropriate circumstances at the Company s cost. The Company is expected to comply with the CG Code which sets out principles of good corporate governance in relation to, among others, Directors, the chairman and chief executive officer, Board composition, the appointment, re-election and removal of Directors, their responsibilities and remuneration and communications with the Shareholders. The Company will state in its interim and annual reports whether it has complied with the CG Code, and will provide details of, and reasons for, any deviation from it in the corporate governance report which will be included in the Company s annual report. NON-DISPOSAL UNDERTAKINGS Pursuant to Rule of the Listing Rules, each of the Controlling Shareholders has undertaken to the Stock Exchange and to the Company that other than pursuant to the Spin-off, he/it will not and will procure that the relevant registered holder(s) of the Shares in which the Controlling Shareholders are beneficially interested will not: (a) in the period commencing on the date by reference to which disclosure of its shareholding is made in this listing document and ending on the date which is six months from the Listing Date, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of the Shares in respect of which he/it is shown by this listing document to be the beneficial owner; and 147

153 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS (b) in the period of six months commencing on the date on which the period referred to in paragraph (a) above expires, dispose of, nor enter into any agreement to dispose of or otherwise create any options, rights interests or encumbrances in respect of, any of the Shares if, immediately following such disposal or upon the exercise or enforcement of such options, rights, interests or encumbrances, he/it would cease to be the Controlling Shareholder of the Company. Pursuant to Note 3 to Rule 10.07(2) of the Listing Rules, each of the Controlling Shareholders has undertaken to the Stock Exchange and to the Company that within the period commencing on the date by reference to which disclosure of its shareholding in the Company is made in this listing document and ending on the date which is 12 months from the date on which dealings in the Shares commence on the Stock Exchange, he/it will: (a) (b) when he/it pledges or charges any of the securities of the Company beneficially owned or ultimately controlled by him/it in favour of an authorised institution pursuant to Note 2 to Rule 10.07(2) of the Listing Rules, immediately inform the Company of such pledge or charge together with the number of securities so pledged or charged; and when he/it receives indications, either verbal or written, from the pledgee or chargee that any of the pledged or charged securities will be disposed of, immediately inform the Company in writing of such indications. The Company will inform the Stock Exchange as soon as it has been informed of matters referred to above by any of the Controlling Shareholders and disclose such matters by way of announcement pursuant to the requirements under the Listing Rules as soon as possible. 148

154 CONTINUING CONNECTED TRANSACTIONS CONTINUING CONNECTED TRANSACTIONS After the Listing, the following on-going transactions will constitute continuing connected transactions of the Company under the Listing Rules: Continuing connected transactions fully exempt from shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules 1. Lease of Shenzhen plant Following the Reorganisation, the Group has continued to utilise its existing facilities located in the Man Sang Industrial City, which is owned and managed by the Remaining Group, for the processing and manufacturing of pearls and jewellery products. For such purposes, the following lease agreements (the PRC Lease Agreements ) were entered into between the Group and MH Shenzhen, particulars of which are set out below: Date of the relevant PRC Lease Agreement Lessor Lessee Usage Term Monthly rental Premises 30 April 2014 MH Shenzhen HBF Jewellery Industrial operations and office 1 May 2014 to 15 November 2016 RMB7,888 1st Floor, Block 101, Man Sang Industrial City, Gongming Street, Guangming New District, Shenzhen, Guangdong Province, the PRC with a gross floor area of 493 square metres 31 July 2013 MH Shenzhen SZ Factory Factory 1 August 2013 to 31 May 2015 RMB41,600 2nd to 6th Floors, Block 101, Man Sang Industrial City, Gongming Street, Guangming New District, Shenzhen, Guangdong Province, the PRC with a gross floor area of 2,600 square metres 30 April 2014 MH Shenzhen HBF Jewellery Industrial operations and office 1 May 2014 to 15 November 2016 RMB12, nd and 3rd Floors, Block 102, Man Sang Industrial City, Gongming Street, Guangming New District, Shenzhen, Guangdong Province, the PRC with a gross floor area of square metres 149

155 CONTINUING CONNECTED TRANSACTIONS Date of the relevant PRC Lease Agreement Lessor Lessee Usage Term Monthly rental Premises 16 December 2013 MH Shenzhen HBF Jewellery Factory 16 December 2013 to 15 November 2016 RMB17, Block 103, Man Sang Industrial City, Gongming Street, Guangming New District, Shenzhen, Guangdong Province, the PRC with a gross floor area of 1,202.4 square metres 30 April 2014 MH Shenzhen HBF Jewellery Industrial operations and office 1 May 2014 to 15 November 2016 RMB19, Block 104, Man Sang Industrial City, Gongming Street, Guangming New District, Shenzhen, Guangdong Province, the PRC with a gross floor area of 1,202.4 square metres 30 April 2014 MH Shenzhen HBF Jewellery Staff quarters 1 May 2014 to 15 November 2016 RMB24,000 Units 101 to 106, 201 to 203, 207, 209 to 215, 301 to 306, 310 to 312, 315 to 317, 320, 401, 404, 405, 407 to 409, 511, 512, 515 and 519, Block 116, Man Sang Industrial City, Gongming Street, Guangming New District, Shenzhen, Guangdong Province, the PRC with a gross floor area of 1,920 square metres For the three financial years ended 31 March 2014, the rentals apportioned and attributable to the Group in respect of the use of the abovementioned premises and the relevant staff quarters as recorded in the Accountant s Report set out in Appendix I to this listing document on a pro forma basis were approximately HK$1.6 million, HK$1.7 million and HK$2.3 million, respectively. The Directors are of the view that by entering into the PRC Lease Agreements, the Group can ensure the continuous use of the premises for the processing and manufacturing of its pearls and jewellery products. 150

156 CONTINUING CONNECTED TRANSACTIONS According to the rental appraisal reports issued by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the relevant terms under the PRC Lease Agreements are fair and reasonable and the monthly rental payable by the Group to MH Shenzhen under the PRC Lease Agreements reflects the prevailing market rates. In light of the above, the Directors consider that the PRC Lease Agreements are on normal commercial terms. Mr. CH Cheng, a Controlling Shareholder, was interested in approximately 63.32% of the shareholding of MSIL (which in turn indirectly owns the entire equity interest in MH Shenzhen) as at the Latest Practicable Date and hence the PRC Lease Agreements will constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules after the Listing. As all relevant percentage ratios for the transactions contemplated under the PRC Lease Agreements are in aggregate less than 5% on an annual basis and the aggregate annual consideration payable by the Group to MH Shenzhen is less than HK$3 million, such transactions are fully exempt from shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules. 2. Sub-lease of portions of the HK Premises to theremaininggroupandthecscgroup, respectively (a) MSIL Sub-lease Agreement On 3 July 2014, MS Jewellery entered into a tenancy arrangement with its landlord (an independent third party) in relation to the rental of certain office premises with a total floor area of approximately 19,903 square feet (the HK Premises ) by MS Jewellery for its use as office space for a term commencing from 1 May 2014 and expiring on 16 March 2017, in place of the tenancy agreement entered into between Man Sang HK, a member of the Remaining Group, and the said landlord on 6 November From prior to the Reorganisation, the Pre Spin-off MSIL Group has been occupying a portion of the HK Premises as its headquarters. In view of the Spin-off, on 26 September 2014, MS Jewellery entered into a sub-lease agreement (the MSIL Sub-lease Agreement ) with Man Sang HK, pursuant to which MS Jewellery has agreed to sub-lease a portion of the HK Premises, namely, the premises located at suite 2201, 22/F Sun Life Tower, The Gateway, 15 Canton Road, Tsimshatsui, Kowloon, Hong Kong with a total floor area of approximately 1,139 square feet (the MSIL Premises ) to Man Sang HK for a period commencing on 1 October 2014 to 16 March 2017 for a monthly rental of approximately HK$51,255 (exclusive of management fees, air-conditioning fees and of utility fees) such that MSIL can continue to use the MSIL Premises as its headquarters following the Spin-off and the Listing. The increase in the rental expenses in the head lease after its latest renewal in March 2014 (as further described in the section headed Financial Information Recent Developments in this listing document) has been passed to MSIL. Although the Group did not enter into any sub-lease agreement in respect of the MSIL Premises during the Track Record Period, for the three financial years ended 31 March 2014, the rentals apportioned and shared by the Remaining Group in respect of the MSIL Premises on a pro forma basis were approximately HK$0.6 million, HK$0.6 million and HK$0.6 million, respectively. The Directors are of the view that the Group will benefit from the MSIL Sub-lease Agreement as a result of obtaining a more cost-effective rental rate since if MS Jewellery and MSIL were to rent their office spaces from the landlord separately, the rental rate that MS Jewellery would have to pay for a comparable office space would be higher. 151

157 CONTINUING CONNECTED TRANSACTIONS The rental fees, management fees, air-conditioning fees and utilities fees payable by MSIL to MS Jewellery under the MSIL Sub-lease Agreement were apportioned on a prorated basis based on the total floor area of the MSIL Premises over the total floor area of the HK Premises, which was arrived at after arm s length negotiations and with reference to the prevailing market rate. According to a rental appraisal report issued by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the relevant terms under the MSIL Sub-lease Agreement are fair and reasonable and the monthly rental and expenses payable by MSIL to MS Jewellery under the MSIL Sub-lease Agreement reflects the prevailing market rates. In light of the above, The Directors consider that the MSIL Sub-lease Agreement is on normal commercial terms. Mr. CH Cheng, a Controlling Shareholder, is interested in approximately 63.32% of the shareholding of MSIL as at the Latest Practicable Date and hence the MSIL Sub-lease Agreement will constitute a continuing connected transaction for the Company under Chapter 14A of the Listing Rules after the Listing. As all relevant percentage ratios for the transactions contemplated under the MSIL Sub-lease Agreement are less than 5% on an annual basis and the annual consideration payable by MS Jewellery is less than HK$3 million, such transaction is fully exempt from the shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules. (b) CSC Sub-lease Agreement Prior to the Reorganisation, the Pre Spin-off MSIL Group entered into a sharing of office agreement with CSC Management on 13 March 2014, pursuant to which the Pre Spinoff MSIL Group has sub-leased to the CSC Group part of the HK Premises, namely, the premises located at Suite 2205, 22/F Sun Life Tower, The Gateway, 15 Canton Road, Tsimshatsui, Kowloon, Hong Kong with a total floor area of approximately 3,873 square feet (the CSC Premises ) for a monthly rental of approximately HK$193,650 (exclusive of management fees, air-conditioning fees and utility fees), details of which are set out in the announcement of the MSIL dated 13 March 2014 (the MSIL Announcement ). The increase in the rental expenses in the head lease after its latest renewal in March 2014 (as further described in the section headed Financial Information Recent Developments in this listing document) has been passed to the CSC Group. As mentioned above under the paragraph headed MSIL Sub-lease Agreement, MS Jewellery entered into a tenancy arrangement with its landlord (an independent third party) on 3 July 2014 in relation to the rental of the HK Premises by MS Jewellery, in place of the tenancy agreement entered into between Man Sang HK, a member of the Remaining Group and the said landlord on 6 November On 1 August 2014, MS Jewellery entered into a sub-lease novation agreement (the CSC Sub-lease Agreement ) with CSC Management and Man Sang HK, pursuant to which MS Jewellery has agreed to sub-lease the CSC Premises to the CSC Group for a period commencing from 1 August 2014 to 16 March 2017 such that CSC Group could continue to use the CSC Premises in the same terms as those mentioned in the MSIL Announcement. For the three financial years ended 31 March 2014, the annual rentals and related expenses paid by the CSC Group to the Pre Spin-off MSIL Group for leasing of the CSC Premises were approximately HK$1.8 million, HK$1.8 million and HK$1.9 million, respectively. 152

158 CONTINUING CONNECTED TRANSACTIONS The Directors are of the view that the Group will benefit from the CSC Sub-lease Agreement as a result of obtaining a more cost-effective rental rate since if MS Jewellery and the CSC Group were to rent their office spaces from the landlord separately, the rental rate that MS Jewellery would have to pay for a comparable office space would be higher. The rental fees, management fees, air-conditioning fees and utilities fees payable by CSC Management to MS Jewellery under the CSC Sub-lease Agreement were apportioned on a prorated basis based on the total floor area of the CS Premises over the total floor area of the HK Premises, which was arrived at after arm s length negotiation and with reference to the prevailing market rate. According to a rental appraisal report issued by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the relevant terms under the CSC Sub-lease Agreement are fair and reasonable and the monthly rental and expenses payable by CSC Management to MS Jewellery under the MSIL Sub-lease Agreement reflects the prevailing market rates. In light of the above, the Directors consider that the CSC Sub-lease Agreement is on normal commercial terms. Mr. CH Cheng and Mr. Cheng Tai Po are brothers. As at the Latest Practicable Date, Mr. CH Cheng and Mr. Cheng Tai Po held a 65% interest and a 35% interest, respectively, in an investment holding company which in turn was the holder of an approximately 16.47% interest in China South City. Moreover, as at the Latest Practicable Date, Mr. CH Cheng and Mr. Cheng Tai Po also held a 41.08% interest and a 58.92% of the interest, respectively, in another investment holding company which in turn was the holder of an approximately 14.03% interest in China South City. Apart from the above, Mr. CH Cheng and Mr. Cheng Tai Po are personally interested as to approximately 0.98% and 0.06% respectively in the issued shares of China South City, respectively. In view of the above relationships between Mr. CH Cheng, Mr. Cheng Tai Po and China South City as described in the MSIL Announcement, the transaction contemplated under the CSC Sub-lease Agreement will constitute a continuing connected transaction for the Company under Chapter 14A of the Listing Rules after the Listing. As all relevant percentage ratios for the transaction contemplated under the CSC Sub-lease Agreement are less than 5% on an annual basis and the annual consideration payable by CSC Management to MS Jewellery is less than HK$3 million, such transaction is fully exempt from the shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules. 3. License of use of the Man Sang Trademark As disclosed in the section headed History, Reorganisation and Corporate Structure Reorganisation in this listing document and the paragraph headed Intellectual property rights of the Group Trademarks in Appendix V to this listing document, the business of purchasing, processing, designing, production and wholesale distribution of pearls and jewellery products pearl products has been transferred to the Group together with the Pre Spin-off MSIL Group s ownership of the trademark (the ManSangTrademark ). Pursuant to a license agreement (the License Agreement ) dated 26 September 2014 entered into between MS Innovation, MS Jewellery and MSIL, MSIL has been granted a non-exclusive right to use the Man Sang Trademark as its corporate logo and the trade names comprising the words Man Sang and/or 民生 (the Trade Names ) as part of its company name for an aggregate nominal consideration of HK$2.00 and MSIL is not entitled to grant sub-licences to any 153

159 CONTINUING CONNECTED TRANSACTIONS other entities. The License Agreement will be terminated if MSIL is no longer under the control of Mr. CH Cheng and the Directors are of the view that this transaction is conducted on normal commercial terms. Mr. CH Cheng, a Controlling Shareholder, was interested in approximately 63.32% of the shareholding of MSIL as at the Latest Practicable Date and hence the License Agreement will constitute a continuing connected transaction for the Company under Chapter 14A of the Listing Rules. As each of the applicable percentage ratios on an annual basis falls below 0.1%, pursuant to Rule 14A.76(1)(a) of the Listing Rules, the said transaction is fully exempt from the shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules. 4. Provision of administrative services The Company entered into an administrative services agreement (the Administrative Services Agreement ) with MSIL on 26 September 2014 in respect of the provision of human resources, administration and information technology functions by the Company to MSIL. The charges payable by MSIL to the Company under the Administrative Services Agreement have been determined on cost basis which is calculated based on the proportion of the number of employees in the Remaining Group in Hong Kong to the total number of employees in the Remaining Group and the Group in Hong Kong. The Directors are of the view that such transaction is conducted on normal commercial terms. Mr. CH Cheng, a Controlling Shareholder, was interested in approximately 63.32% of the shareholding of MSIL as at the Latest Practicable Date and hence the Administrative Services Agreement will constitute a continuing connected transaction of the Company under Chapter 14A of the Listing Rules. Pursuant to Rule 14A.98 of the Listing Rules, the said transaction is fully exempt from the shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules. 5. Lease of the PRC office On 1 June 2013, Shenzhen Kasiao entered into six lease agreements (the Shenzhen Kasiao Lease Agreements ) with 華南國際工業原料城 ( 深圳 ) 有限公司 (China South International Materials City (Shenzhen) Co., Ltd.*) ( China South International ), a member of the CSC Group, under which China South International has agreed to lease the offices located at 深圳市龍崗區平湖街道華南大道一號華南國際工業原料城華南國際皮革皮具原輔料物流區 ( 二期 ) (1 號交易廣場六層 G 區 ) (Units 6G-007 to 6G-012, Zone G, 6th Floor, No. 1 Trade Square, China South City International Convention and Exhibition Centre 2, 1 Huanan Ave Longgang, Shenzhen, Guangdong, the PRC) to Shenzhen Kasiao for a period commencing on 1 June 2013 to 31 May 2019 as office and for display usage for an aggregate average monthly rental ranging from RMB5,810 to RMB7,745 (exclusive of management fees and air-conditioning fee). According to a rental appraisal report issued by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the relevant terms under the Shenzhen Kasiao Lease Agreements are fair and reasonable and the rentals and expenses payable by Shenzhen Kasiao to China South International under the Shenzhen Kasiao Lease Agreements reflect the prevailing market rates. In light of the above, the Directors consider that the Shenzhen Kasiao Lease Agreements are on normal commercial terms. 154

160 CONTINUING CONNECTED TRANSACTIONS In view of the relationship between Mr. CH Cheng, Mr. Cheng Tai Po and South China City as mentioned in the paragraph headed 2. Sub-lease of portions of the HK Premises to the Remaining Group and the CSC Group, respectively (b) CSC Sub-lease Agreement above, the Shenzhen Kasiao Lease Agreements will constitute continuing connected transactions for the Company under Chapter 14A of the Listing Rules after the Listing. As each of the applicable percentage ratios on an annual basis falls below 0.1%, pursuant to Rule 14A.76(1) of the Listing Rules, the said transactions are fully exempt from the shareholders approval, annual review and all disclosure requirements under Chapter 14A of the Listing Rules. 155

161 DIRECTORS AND SENIOR MANAGEMENT DIRECTORS The Board of Directors consists of six Directors, three of whom are independent non-executive Directors. The table below shows certain informationconcerningthedirectors: Name Age Position/Title in the Company Date of appointment Roles and responsibilities in the Group Mr. Cheng Chung Hing ( 鄭松興 ) 53 Non-executive Director and Chairman 13 May 2014 Responsible for foundation of corporate policies and business strategies Ms. Yan Sau Man, Amy ( 甄秀雯 ) 51 Executive Director and CEO 13 May 2014 Responsible for the strategic management, planning and business development Mr. Chen Zhi Wei ( 陳志偉 ) 51 Executive Director 17 June 2014 Responsible for overseeing the Group s procurement Mr. Fung Yat Sang ( 馮逸生 ) 62 Independent Non-Executive Director 26 September 2014 Responsible for overseeing the management independently Mr. Look Andrew ( 陸東 ) 49 Independent Non-Executive Director 26 September 2014 Responsible for overseeing the management independently Mr. Tsui Francis King Chung ( 崔勁中 ) 53 Independent Non-Executive Director 26 September 2014 Responsible for overseeing the management independently Save as disclosed below in this section and in the section headed Statutory and General Information in Appendix V to this listing document, as at the Latest Practicable Date, each of the Directors had no interests in the Shares within the meaning of Part XV of the SFO and is independent from and is not related to any other Directors, senior management, or the substantial shareholders of the Company. Save as disclosed below, each of the Directors has not held any directorship in any other public companies the securities of which are listed on any securities market in Hong Kong or overseas (apart from the Company) in the three years immediately preceding the date of this listing document, and has not been involved in any of the events described under Rules 13.51(2)(h) to 13.51(2)(v) of the Listing Rules. Save as disclosed below, there are no other matters concerning each of the Directors directorship with the Company that need to be brought to the attention of the Shareholders and the Stock Exchange and there are no other matters in connection with each of the Directors appointment which are required to be disclosed pursuant to Rule 13.51(2) of the Listing Rules. 156

162 DIRECTORS AND SENIOR MANAGEMENT Non-executive Director Mr.CHENGChungHing( 鄭松興 ), aged 53, is a non-executive Director and the Chairman of the Company. Mr. Cheng is also a director of MS Holdings, Arcadia BVI, MS Investments, Arcadia Investment, MS Innovations, MS Jewellery and Arcadia Jewellery, all being subsidiaries of the Group. He provides leadership to the Company, and, with the support from other members of the Board, is responsible for the formulation and development of corporate policies and business strategies of the Group. Mr. Cheng has been an executive director and the Chairman of MSIL since 1997 and has been re-designated as a non-executive director of MSIL since 6 October He was awarded the Young Industrialist Awards of Hong Kong 1997 by the Federation of Hong Kong Industries and the Distinguished International Entrepreneur of the Year Award 1997 by San Francisco State University and the Chinese Outstanding Entrepreneur Award 2008 by the China Enterprise Confederation and the China Enterprise Directors Association. He is currently a member of the Guangxi Committee of the Chinese People s Political Consultative Conference and the Shenzhen Committee of the Chinese People s Political Consultative Conference, vice chairman of the China Chamber of International Commerce, honorary life president of the Hong Kong Gemstone Manufacturers Association Limited, foundation honorary chairman of the Gem and Jewellery Committee of China General Chamber of Commerce and honorary chairman of the Zhejiang Pearl Trade Association. He has over 30 years of experience in the pearls and jewellery business. Mr. Cheng is currently a co-chairman and executive director of China South City Holdings Limited (a company listed on Stock Exchange (stock code: 1668)), which is principally engaged in developing and operating large-scale integrated logistics and trade centres, developing supporting residential and commercial facilities, property management and operation of hotels. Mr. Cheng was also a director of China Metro-Rural Holdings Limited, a company listed on NYSE MKT (ticker symbol: CNR) from September 1995 to December 2013, which is a company principally engaged in the development and operation of integrated agricultural logistics platform and rural-urban migration redevelopment in mainland China. Mr. Cheng is also a substantial shareholder of China Metro-Rural Holdings Limited. As at the Latest Practicable Date, Mr. Cheng was a non-executive director of MSIL and he will resign as a director and Chairman of MSIL prior to the Listing. Mr. Cheng is a brother-in-law of Mr. Chen Zhi Wei. Executive Directors Ms. YAN Sau Man, Amy ( 甄秀雯 ), aged 51, is an executive Director and the chief executive officer of the Company. She is also a director of MS Holdings, Arcadia BVI, MS Investments, Arcadia Investment and MS Jewellery, all being subsidiaries of the Group. She, together with other members of the Board, is responsible for the overall management of the Group as well as the formulation, development and implementation of the Group s corporate policies, business strategies and overall sales and marketing strategies. Her experience in relation to the Pearls and Jewellery Business dates back to when she joined the Pre Spin-off MSIL Group in She left the Pre Spin-off MSIL Group for a short period of time from October 1986 to June 1987 and rejoined in June She has since then been involved in implementing the relevant sales and marketing strategies of the Pre Spin-off MSIL Group and she has been appointed as an executive director of MSIL since August Ms. Yan has over 25 years of experience in the selling and marketing of pearls and she also has extensive experience in the jewellery business. 157

163 DIRECTORS AND SENIOR MANAGEMENT As at the Latest Practicable Date, Ms. Yan was an executive director of MSIL and she will resign as an executive director of MSIL prior to the Listing. Save as disclosed herein, Ms. Yan has not held any directorship in any other public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years. Mr. CHEN Zhi Wei, aged 51, is an executive Director and he is responsible for overseeing the Group s procurement and assisting the Group s sales team on the pricing of the Group s pearls. He joined the Pre Spin-off MSIL Group in January 1998 as a procurement manager and has since then developed his experience in pearl procurement related to the Pearls and Jewellery Business. He has developed close working relationships with many pearl suppliers which enable the Group to build up a strong and reliable supply network. He was appointed as an executive director of a subsidiary of MSIL, Man Sang HK, since May He has over 15 years of experience in the pearl business. He is a brother-in-law of Mr. Cheng Chung Hing. Mr. Chen has not held any directorship in any other public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years. Independent non-executive Directors Mr. FUNG Yat Sang ( 馮逸生 ), aged 62, was appointed as an independent non-executive Director on 26 September He has been an independent non-executive director of MSIL since September 2009 and will resign as an independent non-executive director of MSIL prior to the Listing. He has over 30 years of financial management experience and held senior management positions in various multinational corporations in Hong Kong, Australia, Thailand and China. Mr. Fung obtained in a Higher Diploma in Accountancy from Hong Kong Polytechnic in Mr. Fung is a fellow member of the Hong Kong Institute of Certified Public Accountants, a fellow member of the Association of Chartered Certified Accountants in United Kingdom and a member of the CPA Australia. Mr. LOOK Andrew ( 陸東 ), aged 49, was appointed as an independent non-executive Director on 26 September Mr. Look has over 20 years of experience in equity investment analysis of Hong Kong and China stock markets. He served as managing director and head of Hong Kong research, strategy and product at UBS AG from June 2000 to August He was an investment manager at Prudential Portfolio Managers (Asia) Limited from late 1994 to early He was responsible for corporate finance from August 1990 to late 1994 as an investment manager at Lai Sun Development Company Limited, a company listed on the Stock Exchange (stock code: 488). He was an investment officer at Hang Seng Bank Limited, a company listed on the Stock Exchange (stock code: 11), from August 1986 to June Mr. Look founded Look s Asset Management Limited, a Securities and Futures Commission of Hong Kong licensed corporation based in Hong Kong, in September 2009, and currently serves as its chief investment officer and managing director. He obtained a Bachelor of Commerce from the University of Toronto in June Mr. Look is currently an independent non-executive director of Hung Fook Tong Group Holdings Limited, a company listed on the Stock Exchange (stock code: 1446), Ka Shui International Holdings Limited, a company listed on the Stock Exchange (stock code: 822), and TCL Communication Technology Holdings Limited, a company listed on the Stock Exchange (stock code: 2618). Mr. TSUI Francis King Chung, aged 53, was appointed as an independent non-executive Director on 26 September He has extensive experience in financial advisory services, investor relations, corporate restructuring, direct investment and business development consultancy. His experience with listed entities include serving as director to Man Sang Holdings Inc., a company whose 158

164 DIRECTORS AND SENIOR MANAGEMENT shares were listed on the American Stock Exchange, from 2006 to 2009, and China Metro-Rural Holdings Limited, a company listed on the NYSE MKT (ticker symbol: CNR), since China Metro- Rural Holdings Limited was the successor of Man Sang Holdings Inc. pursuant to a reorganisation in He also served on the audit committee of Man Sang Holdings Inc. and China Metro-Rural Holdings Limited. Since 2000, Mr. Tsui has founded and served as the President and director of DMC Investment Co. Ltd., a private investment company in Hong Kong active in direct investment. From 2007 to 2011, he was the President of Asian Outreach International. Currently, he serves as the Chairman of the Board of AsiaCMS Berhad headquartered at Kuala Lumpur, Malaysia. Mr. Tsui received his Bachelor of Arts and M. Phil. from the University of Hong Kong. SENIOR MANAGEMENT The senior management of the Group comprises all of the executive Directors, the chief financial officer, the financial controller and the company secretary, and certain managerial positions. The senior management is responsible for the day-to-day management of the Company s business. For the biographical details of Directors who form part of the senior management, please see the section headed Directors above. The table below set forth certain information concerning the senior management, apart from the executive Directors: Name Age Year of joining the Group Position Mr. TSE Chi Keung chief financial officer Mr. MOK Kin Kwan financial controller and company secretary Ms. MA Wai Han senior sales manager Ms. CHEUNG Lai Fong senior sales manager Mr. CHEN Mu Sheng general manager of SZ Factory and the deputy general manager of HBF Jewellery Mr. TSE Chi Keung, aged 33, is the chief financial officer of the Group. He obtained his Bachelor of Accounting degree from The Hong Kong Polytechnic University in Mr. Tse worked in Ernst & Young in Hong Kong before joining the Group in July He is responsible for the financial and accounting management, corporate governance affairs and merger and acquisition activities of the Group. Mr. Tse is a member of the Hong Kong Institute of Certified Public Accountants. He has more than 9 years of experience in auditing, accounting and management. Mr. MOK Kin Kwan, aged 43, is the financial controller and company secretary of the Group. He is responsible for the financial and accounting management and corporate governance matters of the Group. He obtained his Master s degree in Applied Finance from University of Western Sydney, Australia in 2003 through long distance learning courses and his Bachelor s degree in Business 159

165 DIRECTORS AND SENIOR MANAGEMENT Administration in Finance from Hong Kong Baptist College in Mr. Mok is a member of the Hong Kong Institute of Certified Public Accountants and is a fellow member of the Association of Chartered Certified Accountants of the United Kingdom. From 2009 to 2013, he served as the company secretary of Perennial International Limited (a company listed on the Stock Exchange (stock code: 725)). He has more than 18 years of experience in accounting and corporate management. Ms. MA Wai Han, aged 48, is a senior sales manager of the Group. Ms. Ma assists in the formulation of sales and marketing strategies of the Group s pearl products and is responsible for the implementation of those strategies. She joined the Pre Spin-off MSIL Group in November 1996 and got promoted as a senior sales manager in April Ms. Ma has over 18 years of experience in the selling and marketing of pearls. Ms. CHEUNG Lai Fong, aged 30, is a senior sales manager of the Group. Ms. Cheung assists in the formulation of sales and marketing strategies of the Group s jewellery products and is responsible for the implementation of those strategies. She joined the Pre Spin-off MSIL Group in September 2007 and got promoted as a senior sales manager in April She obtained her Bachelor of Social Science degree from the Hong Kong Baptist University in Ms. Cheung has over 7 years of experience in the selling and marketing of jewellery. Mr. CHEN Mu Sheng, aged 46, is the General Manager of SZ Factory and deputy general manager of HBF Jewellery. Mr. Chen joined the Pre Spin-off MSIL Group in He has more than 20 years of experience in managing production facilities in the PRC. He is responsible for the overall management of the PRC production facilities, in particular the formulation and continual improvement of the related jewellery production process and resource planning. Working closely with the CEO, he is also responsible for the implementation of policies set by the Board of Directors. DIRECTORS AND SENIOR MANAGEMENT S REMUNERATION The aggregate amount of compensation (including fees, salaries, contributions to pension schemes, housing and other allowances, benefits in kind and discretionary bonuses) paid to the Directors and apportioned and attributable to the Group for the Track Record Period was approximately HK$5.0 million, HK$5.0 million and HK$5.0 million, respectively. The aggregate amount of salaries and other benefits, bonus and retirement benefits scheme contribution in kind paid to the Group s five highest paid individuals (excluding the emoluments included as compensations to the Directors) and apportioned and attributable to the Group for the Track Record Period was approximately HK$1.5 million, HK$1.4 million and HK$1.2 million, respectively. The Directors and senior management of the Group receive compensation in the form of fees, salaries, allowances, benefits in kind and/or discretionary bonuses relating to the performance of the Group. The Group has also established the Share Option Scheme to incentivise its senior management and employees. The Group reimburses its Directors and senior management for expenses which are necessarily and reasonably incurred for providing services to the Group or discharging their duties in relation to its operations. When reviewing and determining the specific remuneration packages for its Directors and senior management, the Group takes into consideration factors such as their individual performance, qualification, experience and seniority, salaries paid by comparable companies, time commitment and responsibilities of such persons, employment elsewhere in the Group and desirability of performance-based remuneration. 160

166 DIRECTORS AND SENIOR MANAGEMENT BOARD COMMITTEES Audit Committee The Company has established an audit committee in compliance with Rule 3.21 of the Listing Rules and the CG Code. The primary duties of the audit committee are to review and consider the application of the financial reporting and internal control principles of the Company, and to maintain an appropriate relationship with the Company s auditor. The audit committee currently consists of three independent non-executive Directors. The members currently are Mr. Fung Yat Sang, Mr. Look Andrew and Mr. Tsui Francis King Chung. It is currently chaired by Mr. Fung Yat Sang, an independent non-executive Director. Remuneration Committee The Company has established a remuneration committee in compliance with Rule 3.25 of the Listing Rules and the CG Code. The primary duties of the remuneration committee are to make recommendations to the Board on the Company s policy and structure for all directors and senior management s remuneration and on the establishment of a formal and transparent procedure for developing such remuneration policy. The remuneration committee currently comprises three independent non-executive Directors, one non-executive Director and one executive Director. The members currently are Mr. Fung Yat Sang, Mr. Look Andrew, Mr. Tsui Francis King Chung, Mr. CH Cheng and Ms. Yan. It is currently chaired by Mr. Look Andrew, who is an independent non-executive Director. Nomination Committee The Company has established a nomination committee in compliance with the CG Code. The primary duties of the nomination committee are to review the structure, size and composition (including the skills, knowledge and experience) of the Board at least annually and make recommendations on any proposed changes to the Board to complement the Company s corporate strategy. The nomination committee currently comprises three independent non-executive Directors, one non-executive Director and one executive Director. The members currently are Mr. Fung Yat Sang, Mr. Look Andrew, Mr. Tsui Francis King Chung, Mr. CH Cheng and Ms. Yan. It is currently chaired by Mr. Tsui Francis King Chung, who is an independent non-executive Director. COMPLIANCE ADVISER The Company has appointed REORIENT Financial Markets Limited as its compliance adviser in compliance with Rule 3A.19 of the Listing Rules. The material terms of the compliance adviser s agreement that the Company entered into with the compliance adviser are as follows: 1. the compliance adviser s term of appointment shall be for a period commencing on the Listing Date and ending on the date on which the Company complies with Rule of the Listing Rules in respect of its financial results for the first full financial year commencing after the Listing Date, or until the agreement is terminated, whichever is the earlier; 161

167 DIRECTORS AND SENIOR MANAGEMENT 2. the Company may terminate the appointment of the compliance adviser by giving reasonable notice to the compliance adviser. The Company will exercise such right in compliance with Rule 3A.26 of the Listing Rules. The compliance adviser will have the right to terminate its appointment as compliance adviser under certain specific circumstances and upon notification of the reason of its resignation to the Stock Exchange; and 3. pursuant to Rule 3A.23 of the Listing Rules, the compliance adviser will advise the Company on the following matters: (a) before the publication of any regulatory announcement, circular or financial report; (b) where a transaction, which might be a notifiable or connected transaction, is contemplated, including share issues and share repurchases; (c) (d) where the Group s business activities, developments or results deviated from any forecast, estimate, or other information in this listing document; and where the Stock Exchange makes an inquiry of the Company regarding unusual movements in the price or trading volume of its listed securities under to Rule of the Listing Rules. 162

168 SUBSTANTIAL SHAREHOLDERS SUBSTANTIAL SHAREHOLDERS So far as is known to the Directors, immediately following completion of the Spin-off (without taking into account any Shares that may be allotted and issued upon the exercise of any options which may be granted under the Share Option Scheme), based on the information available on the Latest Practicable Date, the following persons (not being a Director or the chief executive of the Company) will have an interest or a short position in Shares or underlying Shares which would be required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or will be, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group: Name of Substantial Shareholder Capacity/ Nature of interest Approximate percentage of interest in the Number of Shares Company s issued held immediately share capital after completion of immediately after the Spin-off the Spin-off (Note 1) (Note 2) Rich Men Limited (Note 3) Ms. Ong Ying Lai (Note 4) Beneficial owner 93,756,331 (L) 36.62% Interest of spouse 162,111,021 (L) 63.32% Notes: 1. The letter L denotes the person s long position in the relevant Shares. 2. The relevant percentages have been calculated by reference only to the aggregate number of Shares expected to be in issue on the Listing Date. Based on the issued share capital of MSIL as at the Latest Practicable Date and assuming that it will remain unchanged on the Record Date, the Company has assumed that 256,038,041 Shares will be in issue on the Listing Date. 3. Rich Men Limited is wholly owned by Mr. CH Cheng. 4. This is the spouse of Mr. CH Cheng. For details of the Director s interests in Shares immediately following the Listing please refer to the paragraph headed C. Further Information about the Directors and Substantial Shareholders 3. Disclosure of Directors Interests in Appendix V to this listing document. Save as disclosed herein, the Directors are not aware of any person (who is not a Director or chief executive of the Company) who will, immediately upon completion of the Listing, have an interest or short position in the shares or underlying shares which would fall to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the Securities and Futures Ordinance, or be directly or indirectly interested in 10.0% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any member of the Group. The Directors are not aware of any arrangement that may at a subsequent date result in a change of control of the Company. 163

169 SHARE CAPITAL AUTHORISED AND ISSUED SHARE CAPITAL The following sets out details of the authorised and issued share capital of the Company in issue and to be issued as fully paid or credited as fully paid immediately prior to completion of the Listing. Number of Shares Nominal Value (in HK$) Authorised share capital 1,000,000,000 10,000,000 Issued share capital immediately before completion of the Listing 256,038,041 2,560, Assumptions The above table assumes that the Spin-off becomes unconditional and it takes no account of any Shares which may be allotted and issued upon the exercise of the share options which may be granted under the Share Option Scheme or pursuant to the general mandate to issue new Shares or which the Company may repurchase pursuant to the share repurchase mandate described below. Further, the issued share capital of the Company immediately before completion of the Listing illustrated in the above table is calculated based on the issued share capital of MSIL as at the Latest Practicable Date and assuming it will remain unchanged on the Record Date. As at the Latest Practicable Date, there were options (granted pursuant to the share option scheme of MSIL adopted on 2 August 2002 and the option agreement dated 23 August 2011) outstanding under which the holders thereof were entitled to subscribe for 52,415,608 new shares of MSIL. For illustrative purposes, assuming all such outstanding options (excluding 1,000,000 share options which will only be vested on 2 March 2015) were exercised on or before the Record Date, the issued share capital of the Company immediately before completion of the Listing shall be HK$2,663, divided in to 266,321,163 Shares of HK$0.01 each. Ranking The Shares are ordinary shares in the share capital of the Company and will rank equally in all respects with each other, and will qualify for all dividends, income and other distributions declared, made or paid and any other rights and benefits attaching or accruing to the Shares following the completion of the Spin-off. Share Option Scheme The Company has conditionally adopted the Share Option Scheme whereby certain eligible participants (including, without limitation, directors, employees, advisers and consultants of the Company or its subsidiaries) may be granted options to subscribe for Shares. The principal terms of the Share Option Scheme are summarised in the paragraph headed Share Option Scheme in Appendix V to this listing document. 164

170 SHARE CAPITAL General Mandate to Issue Shares The Directors have been granted a general unconditional mandate to exercise all the powers of the Company to allot, issue and deal with additional Shares and to make or grant offers, agreements, options or securities which will or might require the exercise of such powers, provided that the aggregate nominal amount of Shares allotted or agreed conditionally or unconditionally to be allotted (whether pursuant to an option or otherwise) and issued by the Directors, otherwise than pursuant to a rights issue, or upon the exercise of rights of subscription or conversion under any outstanding warrants to subscribe for Shares or any securities which are convertible into Shares or any scrip dividend in lieu of the whole or part of a dividend on the Shares, shall not exceed the aggregate of 20% of the aggregate nominal amount of the Shares in issue as at the date on which dealings in the Shares commence on the Stock Exchange, immediately following the completion of the Capitalisation Issue, plus the aggregate nominal value of the Shares repurchased by the Company under the general mandate to repurchase Shares referred to below. This mandate will expire at the earliest of: (i) (ii) the conclusion of the next annual general meeting of the Company; the expiration of the period within which the next annual general meeting of the Company is required by law to be held; and (iii) the revocation or variation of the authority given by an ordinary resolution of the Shareholders. For further details of this mandate, see the paragraph A. Further Information About the Company 4. Written Resolutions of the sole shareholder dated 26 September 2014 in the section headed Statutory and General Information in Appendix V to this listing document. General Mandate to Repurchase Shares The Directors have been granted a general unconditional repurchase mandate to exercise all the powers of the Company to make repurchases of such number of Shares which shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue as at the date on which dealings in the Shares commence on the Stock Exchange. On the basis of the issued share capital of MSIL as at the Latest Practicable Date and assuming it will remain unchanged on the Record Date, immediately after the MSIL Distribution and the Capitalisation Issue, the maximum number of Shares which can be repurchased pursuant to this repurchase mandate will be 25,603,804 Shares, representing (but not more than) 10% of the issued Shares. This repurchase mandate only relates to repurchases made on the Stock Exchange, or on any approved stock exchange(s) on which the securities of the Company may be listed and which is recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for that purpose, and which are made in accordance with all applicable laws and requirements of the Listing Rules or equivalent rules or regulations of any other stock exchange as amended from time to time. Such mandate will expire at the earliest of: (i) the conclusion of the next annual general meeting of the Company; 165

171 SHARE CAPITAL (ii) the expiration of the period within which the next annual general meeting of the Company is required by law to be held; and (iii) the revocation or variation of the authority given by an ordinary resolution of the Shareholders. As at the Latest Practicable Date, the Company has no outstanding convertible debt securities. 166

172 FINANCIAL INFORMATION You should read the following discussion and analysis with the Group s audited combined financial information, including the notes thereto, as of and for the financial years ended 31 March 2012, 2013 and 2014 included in the Accountant s Report set out in Appendix I to this listing document. The Accountant s Report has been prepared in accordance with HKFRS. The following discussion and analysis and other parts of this listing document contain forward-looking statements that reflect the Company s current views with respect to future events and financial performance that involve risks and uncertainties. These statements are based on assumptions and analysis made by the Company in light of the Group s experience and perception of historical events, current conditions and expected future developments, as well as other factors the Company believes are appropriate under the circumstances. In evaluating the Group s business, you should carefully consider the informationprovidedinthesectionheaded Risk Factors. BASIS OF PRESENTATION The Company is a holding company incorporated as an exempted company with limited liability in the Cayman Islands on 13 May Pursuant to the Reorganisation, the Company became the holding company of the companies now comprising the Group on 17 June See section headed History, Reorganisation and Corporate Structure Reorganisation in this listing document for more information. The companies now comprising the Group and the Pearls and Jewellery Business were under the common control of the Controlling Shareholders before and after the Reorganisation. The Reorganisation is merely a reorganisation of the Pearls and Jewellery Business with no change in management of the Pearls and Jewellery Business. Accordingly, the combined financial information of the companies now comprising the Group is presented using the carrying values of the Pearls and Jewellery Business for all periods presented. As set out in note 1.3 Basis of presentation in the Accountant s Report, the combined statements of comprehensive income set out therein include all revenues, related costs, expenses and charges directly generated and incurred by the Pearls and Jewellery Business, and the combined statements of financial position include all assets and liabilities that are directly and clearly identified to the Pearls and Jewellery Business. No adjustments are made to reflect fair value of these assets and liabilities, or recognise any new assets or liabilities as a result of the Reorganisation. All intra-group transactions and balances have been eliminated when preparing the combined financial statements of the Group. Whilst the operations of the Group have been carried out substantially independently from the other businesses and operations of the Remaining Group, the Group is part of the Pre Spin-off MSIL Group and has been managed as part of the Pre Spin-off MSIL Group. You may refer to the section headed Relationships with Controlling Shareholders in this listing document for further information. There are some costs which were shared between the Group and the Remaining Group, like the salaries of the directors and management office of MSIL (including, among other persons, Mr. CH Cheng and Ms. Yan) and some back office staff members (including those employees of the Group s human resources department, information technology department and administration department) and other miscellaneous office expenses. Allocations of these expenses between the Group and the Remaining Group have been made on a basis which the Directors consider fair and reasonable and represented the contributions of the related management and other staff members to the Group and the Remaining Group. For each of the financial year ended 31 March 2012, 2013 and 2014, these expenses allocated to the Group amounted to approximately HK$14.8 million, HK$15.2 million and HK$13.0 million respectively. 167

173 FINANCIAL INFORMATION The Sponsor has discussed the allocation basis with the Directors and the related key officers and staff members of the Group and has obtained confirmation from the Company on the fairness and reasonableness of the allocations. The Sponsor considers that the allocation is consistent with the representations of the Directors and those key officers and staff members that the Sponsor has interviewed and its understanding of operations and development of the Group and of the Remaining Group gained during its due diligence process. Accordingly the Sponsor concurs with the Company that allocations as described above are fair and reasonable. After the Listing, the Company will not share the cost of the directors of MSIL. It has established its own Board with its own independent non-executive Directors and has established its own company secretarial function. Accordingly the historical level of the related expenses of the Group as stated in the financial statements set out in the Accountant s Report for the Track Record Period may not be a good indication as to the possible amount of expenses that the Group may incur in future after Listing. The Company would like to refer you to the risk factor headed Historical expenses may not be a good indicator of the level of expenses after Listing in the Risk Factors section of this listing document. KEY FACTORS AFFECTING THE RESULTS OF OPERATIONS Economic conditions The Group sells pearls and jewellery products which are a kind of luxury accessory. The Company believes that sales of the Group heavily depend on the global economy and sentiments. The Group sells a substantial portion of its products to customers in Europe and North America. The global financial crisis and European debt problems have imposed significant difficulties and challenges to the market the Group is facing. The Group s sales in the last two financial years have significantly been adversely affected. In order to maintain the Group s profitability, the Group has expanded its effort on selling loose pearls in the financial year ended 31 March 2014 in particular in view of the market opportunity of a shortage of supply in freshwater pearls. The Group also expanded its customers to other markets, like Japan, with a view to compensating the decrease in sales to the European market. Fluctuations in material prices Cost of pearls is the major cost component of the Group s cost of sales. Pearl purchase prices have generally been increasing during the Track Record Period. Precious metals, including gold and silver, are another major cost item. Gold and silver prices were volatile during the Track Record Period. The Group prices its products with reference to the cost of purchase and production. It tries to transfer the risk of fluctuating material costs to the customers by purchasing pearls based on anticipated demands in the next few months and purchasing precious metals mainly after orders have been received. Nevertheless, the Company may not always be able to transfer all increase in material prices to customers, and a high material price may adversely affect demand for the related end products and customers may then switch to alternative products of lower prices. During the Track Record Period, the Group s profit margin was partly adversely affected by the increase in material prices. The Group also experienced a higher demand for silver products than gold products when gold price was high. These factors may materially affect the Group s results. 168

174 FINANCIAL INFORMATION Market competition The Group faces keen market competition. There are many jewellery manufacturers in the region. In order to differentiate itself from other competitors, the Group establishes cooperative relationships with pearl suppliers, works closely with its customers to meet their product and marketing needs. The Group has also been focusing on its design and production capability in order to keep abreast with the market trend. Results of the Group are affected by its ability to remain competitive, which in turn depends on its ability increase its clienteles, sales channels and product range. CRITICAL ACCOUNTING POLICIES AND JUDGEMENT AND ESTIMATES The Company has identified certain accounting policies that are significant to the preparation of the Group s financial statements. Significant accounting policies, which are important for the understanding of the Group s financial condition and results of operations, are set forth in detail in note 2 of the Accountant s Report set out in Appendix I to this listing document. Critical accounting policies are those that are both most important to the portrayal of the Group s financial conditions and results of operations and require management s subjective, or judgement, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company continually evaluates these estimates based on its own historical experience, knowledge and assessment of current business and other conditions, its expectations regarding the future based on available information and the Company s best assumptions, which together form the basis for making judgements about matters that are not readily apparent from other sources. Some of the Group s accounting policies require a higher degree of judgement than others in their application. The Company believes the following critical accounting policies involve the most significant estimates and judgements used in the preparation of the Group s financial statements and pose a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Judgement In the process of applying the Group s accounting policies, the Group s management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the Accountant s Report set out in Appendix I to this listing document. Tax provision Determining income tax provisions involves judgement on the future tax treatment of certain transactions. The Company carefully evaluates the tax implications of transactions and makes tax provisions accordingly. The tax treatment of such transactions is assessed periodically to take into account all the changes in tax legislation and practices. Recognition of deferred tax assets Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences can be utilised. This requires significant judgement on the tax treatments of certain transactions and also assessment on the probability that adequate future taxable profits will be available for the deferred tax assets to be recovered. 169

175 FINANCIAL INFORMATION Deferred tax liabilities for withholding taxes Deferred tax liabilities have not been established for withholding tax that would not be payable on unremitted earnings of certain subsidiaries in the PRC as the Company can control the dividend policies of these subsidiaries and it is not probable that these subsidiaries would distribute earnings in the foreseeable future. Estimation uncertainties The key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. Useful lives of property, plant and equipment In determining the useful life an item of property, plant and equipment, the Company has considered various factors, such as technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the product or service output of the asset, expected usage of the asset, expected physical wear and tear, the repair and maintenance of the asset, and legal or similar limits on the use of the asset. The estimation of the useful life of the asset is based on the Company s experience with similar assets that are used in a similar way. Additional depreciation is made if the estimated useful lives of items of property, plant and equipment are different from the previous estimation. Useful lives are reviewed at each financial year end date based on changes in circumstances. Relevant carrying amounts of the property, plant and equipment were disclosed in note 14 to the Accountant s Report in Appendix I to this listing document. Impairment of trade receivables The policy for provision for impairment losses of the Group is based on the evaluation of collectability, the ageing analysis of trade receivables and on its management s judgement. A considerable amount of judgement is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each customer. If the financial conditions of the Group s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Write-down of inventories to net realisable value The Group purchases most of the valuable inventory, including pearls, precious metals, diamonds and gemstones on a short-term cycle basis. During the Track Record Period, the Group s average inventory turnover of about 120 days, 150 days and 162 days for each of the financial years ended 31 March 2012, 2013 and 2014 respectively. Pearls are the major valuable inventory that the Group purchases based on estimated demand. Other valuable inventories are purchased by the Group mainly on a need to use basis (mostly for making of jewellery products based on sales orders received). The Group will perform a net realisable value test on all inventory at each year-end date. Write-down of inventories to their respective net realisable values is made based on the estimated net selling prices (net of expenses) of the inventories. The Group purchases pearls mainly by lots which comprise pearls of various grade, quality and thus of different value. It is the business strategy of the Group to sell or use the better quality pearls in the six to twelve months after purchase with a view to generating sufficient 170

176 FINANCIAL INFORMATION revenue to cover the cost of the whole lot of pearls and a reasonable gross profit margin. The Group will not normally allocate significant resources to promote the sale of the remaining stock unsold/unused after six to twelve months. Accordingly, any remaining stock which remains unsold six months after purchase and/or is unlikely to be sold/used in the next six months (depending on the type of pearls) is considered to be obsolete for the Group s business purposes and thus is estimated to have a minimal net realisable value. Thus full provision for such pearls stock will be made. This accounting policy of the Group is in compliance with the related HKFRS regarding inventory and has consistently been applied for many years since the time when MSIL s shares were listed on the Stock Exchange in With regard to other inventories, the Group will perform a net realisable value test to determine their carrying cost as at each balance sheet date. For example, net realisable value of precious metals is estimated based on market quoted prices, net realisable value of jewellery products is estimated with reference to their expected selling price net of direct selling expenses, and market price of their respective precious metal contents. The assessment of the provision involves the Group s management s judgement and estimates on market conditions in terms of estimating the net realisable value. Where the actual outcome or expectation in future is different from the original estimate, such differences will have an impact on the carrying amounts of inventories and the write-down charge/write-back of inventories in the period in which such estimate has changed. In the case of pearls, write-back of any related inventory provision will take place when the related pearls are subsequently actually used or sold. 171

177 FINANCIAL INFORMATION DESCRIPTIONS OF CERTAIN INCOME STATEMENT ITEMS AND YEAR ON YEAR COMPARISON The following table sets out a summary of the Group s combined income statements (based on the statements of comprehensive income) during the Track Record Period. This information should be read in conjunction with the Group s combined financial information and the related notes of the Accountant s Report as set out in Appendix I to this listing document. The operating results in any period are not necessarily indicative of results that may be expected for any future period. Financial year ended 31 March HK$ 000 % HK$ 000 % HK$ 000 % Revenue 300, , , Cost of sales (187,929) (62.6) (179,862) (68.8) (174,827) (65.1) Gross profit 112, , , Other gains/(losses), net (5,783) (1.9) (289) (0.1) 1, Selling expenses (16,879) (5.6) (13,448) (5.1) (15,627) (5.8) Administrative expenses (43,419) (14.5) (52,062) (19.9) (47,580) (17.7) Operation profit 46, , , Finance income 1, Finance costs (169) (0.1) Profit before income tax 47, , , Income tax expenses (4,966) (1.7) (2,121) (0.8) (2,428) (0.9) Profit for the year 42, , , The Accountant s Report has not provided information on the earnings per share during the Track Record Period. It is stated in note 12 to the Accountant s Report that earnings per share information is not presented as its inclusion, for the purposes of the Accountant s Report, is not considered meaningful due to the Reorganisation and the presentation of the results for the financial years ended 31 March 2012, 2013 and 2014 on a combined basis as set out in note 1.3 to the Accountant s Report. Revenue The Group s revenue represents the actual sales amount from the sale of pearls and jewellery products processed and produced by the Group. The Group issues invoices and records revenue when goods are delivered. The Group does not have an agreed sales return arrangement in respect of most of its sales, except for the sales to one customer, the sales to which accounted for approximately 18.1%, 13.3% and 11.0% of the Group s total sales for the three financial years ended 31 March 2012, 2013 and 2013 respectively. All other sales returns are negotiated on a case-by-case basis while the Company would take into consideration, among other factors, reasons for return and conditions of the goods to be returned, the relationship with the customer involved and the potential growth in business with this customer. Please refer to the section headed Business sales and marketing in this listing document for details of the Group s sales return policy. As sales returns are in general given to customers during the Track Record Period on a case-by-case basis, therefore, the Company does not consider that reliable 172

178 FINANCIAL INFORMATION estimates of the return amount can be made at the time when sales are recorded. Accordingly, sales returns from customers are netted off against the Group s revenue on an actual basis when the Group agrees on the goods return. The following table sets forth the major components of the Group s revenue during the Track Record Period which was derived from the sale of pearls and jewellery products (after sales return). Financial year ended 31 March HK$ 000 % HK$ 000 % HK$ 000 % Saltwater pearls 79, , , Freshwater pearls 6, , , Jewellery products 213, , , Total 300, , , For the three financial years ended 31 March 2012, 2013 and 2014, sales returns from customers amounted to approximately HK$16.6 million, HK$10.8 million and HK$13.7 million which were almost entirely jewellery products. Further details are set out in the section headed Business Sales and Marketing goods return policy. There has been no major change in the Group s major types of product being sold since the commencement of the Track Record Period. A majority of the Group s revenue was generated from the sale of jewellery products. The Group also sells and trades pearls in loose packs and strands. Whilst the Group sells its pearls and jewellery products to other merchandisers and retailers on a wholesale basis, the Company believes that pearls and jewellery products that the Group sells are essentially consumer goods driven materially by non-government discretionary spending of consumers; and thus the Group s performance and profit have materially been affected by the general economic conditions and sentiments. The table below sets out the Group s revenue based on its sales to customers in different geographical regions. Financial year ended 31 March HK$ 000 % HK$ 000 % HK$ 000 % Europe 150, , , North America 76, , , Asian countries (excluding Hong Kong) 50, , , Hong Kong 13, , , Others 8, , , Total 300, , ,

179 FINANCIAL INFORMATION Europe and North America are the two major markets of the Group. Economic and political conditions in countries in Europe and North America where the Group s major customers are located have a particularly significant impact on the Group s performance, profitability and prospects. For the financial year ended 31 March 2013, the Group s revenue decreased by approximately 12.9% as compared with the Group s total sales for the financial year ended 31 March The Company considers that this was mainly a result of the poor economy in many European countries. The Group s sales to customers in Europe and North America decreased by approximately 20.0% and 12.4% respectively during the financial year ended 31 March 2013 as compared with the sales to the European and North American customers for the financial year ended 31 March The Company considers that the aftermath of the global financial crisis in 2008 and the ongoing European debt crisis since 2009 have had a significant impact on the Group s sales to both the European and the North America markets. As stated in the Industry Overview section in this listing document, in 2011, 2012 and 2013, the EU recorded lower growth in GDP as compared with the global average and ranked lowest among the EU, North America, Hong Kong and the PRC. The EU only recorded a slight growth in GDP of 1.7% in 2011, a decrease in GDP of 0.4% in 2012 and a marginal growth in GDP of 0.1% in As compared to the EU, the North American market experienced a better situation than the EU. The average annual personal consumption expenditure in the EU even decreased by 16.0% in 2011 and continued to drop slightly by approximately 0.7% in The average annual personal consumption in Europe increased by about 3.0% in 2013, to about US$12,284. However such amount is still about 14.2% lower than the amount in 2010 of about US$14,309. North America recorded a growth in GDP of 1.9% in 2011, 2.7% in 2012 and 2.0% in Whilst the economy in North America relatively stabilised during the Track Record Period as compared with the situation in the EU, it took some time for consumer spending to recover. The average annual personal consumption expenditure in North America increased by only 1.7% in 2011, by another 1.3% in 2012 and more strongly by 4.5% in For the financial year ended 31 March 2013, the sales of the Group to customers in North America was particularly affected by the decrease in orders from a major customer in the U.S. During such financial year, sales to such major customer decreased by approximately HK$15.4 million, representing approximately 40% of the Group s sales to the same customer in the financial year ended 31 March The Company believes that the related customer had accumulated inventory purchased in the previous financial years when the retail market in the U.S. was more difficult and thus purchased less jewellery products from the Group with a view to selling its then accumulated inventory. The Group s sales to that U.S. major customer recovered and increased by approximately HK$8.0 million in the financial year ended 31 March In order to compensate the decrease in sales to customers in Europe and North America, the Group put more effort on the development of sales of pearls to customers in other countries and areas, such as Japan during the financial year ended 31 March Sales in areas outside Europe and North America for the financial year ended 31 March 2013 increased slightly by approximately 1.5% as compared with the sales in the same areas for the financial year ended 31 March 2012 and accounted for approximately 28.2% of the Group s total revenue that financial year. 174

180 FINANCIAL INFORMATION Overall the Group s sales slightly increased by approximately 2.7% to approximately HK$268.5 million for the financial year ended 31 March 2014 from that for the financial year ended 31 March Retail markets in Europe continued to be sluggish for the financial year ended 31 March The Group s sales to customers in Europe continued to decrease to approximately HK$91.3 million for the financial year ended 31 March 2014, representing a reduction of approximately 24.1% from that for the financial year ended 31 March On the other hand, sales to customers in North America increased by approximately 18.3% to approximately HK$79.8 million for the financial year ended 31 March During the financial year ended 31 March 2014, the Group continued to promote the sale of the Group s pearls and jewellery products to customers outside Europe and North America, like customers in the PRC, Japan and Myanmar. This led to an increase of the Group s sales to customers in other regions by approximately 32.3% from approximately HK$73.6 million to approximately HK$97.4 million. During the Track Record Period, sales of the Group s jewellery products decreased by approximately 17.7% from approximately HK$213.9 million in the year ended 31 March 2012 to approximately HK$176.0 million for the financial year ended 31 March 2013 and then further decreased by approximately 7.1% to approximately HK$163.5 million in the financial year ended 31 March The Company understands that the poor market environment has also led to a higher demand for jewellery products of lower selling prices, such as jewellery products made of sterling silver instead of gold. This increased the proportion of lower priced jewellery products sold by the Group and thus contributed to the decrease in the Group s sales of jewellery products for the financial year ended 31 March The Company noted that during the Track Record Period, there was a general decrease in supply of freshwater pearls. This gave the Group opportunities to sell its freshwater pearl inventory. Thus for the financial year ended 31 March 2014, the Group sold more freshwater pearls including some old inventory, the cost of which had previously been written-off, amounting to approximately HK$10.5 million. This resulted in an increase in the Group s sales of freshwater pearls in that financial year. 175

181 FINANCIAL INFORMATION Cost of sales The Group s cost of sales comprised mainly raw material costs, labour costs and other overheads. The table below sets out a breakdown of the Group s cost of sales during the Track Record Period by major components. Financial year ended 31 March HK$ 000 % HK$ 000 % HK$ 000 % Cost of materials 147, , , Provision/(Reversal of provision) for stock obsolescence (7,800) (4.2) (3,636) (2.0) 1, Manufacturing overheads: Labour costs 35, , , Consumables 2, , , Tax 2, , Depreciation 2, , , Subcontracting fee 1, Rent , Utilities , , Declaration and Transportation Others Subtotal 47, , , Total 187, , ,

182 FINANCIAL INFORMATION Cost of materials Purchase costs of pearls are the major component of the Group s cost of sales. The Group s purchase price of pearls generally increased during the Track Record Period. The Group s purchasecost of pearls mainly depends on the size and quality of the pearls purchased which vary based on the demands of the Group s customers. During the Track Record Period, the most expensive South Sea pearl and Tahitian pearl purchased by the Group amounted to approximately HK$16,925 per piece and approximately HK$2,000 per piece respectively, whilst the cheapest saltwater pearl and Tahitian pearl purchased by the Group amounted to only approximately HK$72 per piece and approximately HK$15 per piece respectively. The average purchase price of South Sea pearls, Tahitian pearls and freshwater pearls during the Track Record Period were summarised below. Financial year ended 31 March HK$ HK$ HK$ (approximate) (approximate) (approximate) South Sea pearls 132/piece 177/piece 267/piece Tahitian pearls 43/piece 54/piece 52/piece Freshwater pearls 900/kg 2,200/kg 3,500/kg As described in the section headed Business Processing of pearls processing procedures, after the purchase of pearls in lots (in different sizes and quality), the Group sorts the pearls by size, colour and quality of the pearls, the Group then allocates the purchase cost to the different groups of sorted pearls based on estimated realisable value of each group. For the three financial years ended 31 March 2012, 2013 and 2014, the Group purchased saltwater pearls of approximately HK$56.9 million, approximately HK$56.6 million and approximately HK$68.6 million respectively and freshwater pearls of approximately HK$12.5 million, approximately HK$20.2 million and approximately HK$6.3 million respectively. The Group purchased a less amount of freshwater pearls in the financial year ended 31 March 2014 in view of the high market price of freshwater pearls. During the Track Record Period, there was an increasing trend on the market price of saltwater pearls and freshwater pearls. The average purchase price of freshwater pearls by the Group increased very substantially because of (i) the increased market price of freshwater pearls and (ii) the focus on orders from customers which demanded better quality freshwater pearls at higher prices. The second major component of the Group s cost of sales during the Track Record Period was the purchase cost of precious metals (mainly gold). The Group purchases precious metals to fulfil actual orders from customers. During the Track Record Period, gold price fluctuated significantly. Gold price peaked in September 2011 at a price of approximately HK$14,803 per ounce. The lowest price of gold was recorded in December 2013 at a price of approximately HK$9,274 per ounce. As at the Latest Practicable Date, gold price was approximately HK$9,435 per ounce. The Group purchased a total amount of approximately HK$33.2 million, approximately HK$29.9 million and approximately HK$16.1 million of gold for the financial years ended 31 March 2012, 2013 and 2014 respectively. The Group s average purchase price of gold amounted to approximately HK$409,200 per kg for the financial year ended 31 March 2012, HK$415,100 per kg for the financial year ended 31 March 2013 and HK$329,500 per kg for the financial year ended 31 March

183 FINANCIAL INFORMATION Silver is another major precious metal that the Group purchases for the production of jewellery products. During the Track Record Period, silver price ranged from the lowest of approximately HK$145 per ounce in June 2013 to the highest of approximately HK$377 per ounce in April As at the Latest Practicable Date, silver price was approximately HK$138 per ounce. The Group purchased a total amount of approximately HK$3.6 million, approximately HK$2.0 million and approximately HK$2.7 million of silver for the financial years ended 31 March 2012, 2013 and 2014 respectively. The Group s average purchase price of silver amounted to approximately HK$9,000 per kg for the financial year ended 31 March 2012, HK$7,800 per kg for the financial year ended 31 March 2013 and HK$5,500 per kg for the financial year ended 31 March Small diamonds for decorative purposes are another kind of major raw materials. The Group purchased a total amount of approximately HK$22.5 million, approximately HK$18.2 million and approximately HK$22.5 million of diamonds for the financial years ended 31 March 2012, 2013 and 2014 respectively. The Group had not experienced any major fluctuation in diamond purchase price during the Track Record Period. The total purchase of materials decreased in the financial year ended 31 March 2013 as compared with that for the financial year ended 31 March 2012 as the Group s sales decreased. The cost of materials further decreased in the financial year ended 31 March 2014 despite a slight increase in the Group s sales during the financial year mainly due to the sale by the Group of approximately HK$10.5 million of freshwater pearls which carrying cost had been written off and the fall in precious metal prices. To control the risk of fluctuations in cost of sales and gross profit margin, the Group purchases pearls mainly with reference to the estimated sales of the related stock in the next six months (which shall allow the Group to achieve an acceptable margin based on the purchase cost of that whole lot of stock), and only purchases other major materials for the production of jewellery products, including precious metals, diamond and other gemstones when there are confirmed orders on hand. The Directors believes that this will help control the Group s inventory turnover cycle and thus help control and mitigate the related risks arising from fluctuations in material prices. While the Group does not carry out any hedging activities in respect of its precious metal requirements, the Company believes that the above measures have helped the Group remained profitable despite the significant market difficulties during the Track Record Period. Despite the above efforts, as the market environment changes (like worsening of the general market environment in the financial year ended 31 March 2013 and the increase in market price for pearls during the Track Record Period) from time to time, the Group s inventory turnover days increased from 120 days for the financial year ended 31 March 2012, to 150 days for the financial year ended 31 March 2013 and 162 days for the financial year ended 31 March Labour costs Labour cost is a significant component of the Group s overheads, comprising mainly workers salary and wages and welfare expenses decreased by approximately 5.4% and 3.1% during the financial years ended 31 March 2013 and 2014 respectively. The Group s production facilities are located in Shenzhen, the PRC. Whilst there was an increase in the minimum labour monthly wage in Shenzhen from approximately RMB1,320 on 1 April 2011, to approximately RMB1,500 on 1 February 2012, to 178

184 FINANCIAL INFORMATION approximately RMB1,600 on 1 March 2013, and to approximately RMB1,808 on 1 February 2014, the Group has been working hard to control the Group s labour costs. The Group sourced freshwater pearls which had partly been processed, like drilled and sorted, and have introduced the use of an automated wax modelling and moulding machine to shorten the time required for wax modelling in the Group s jewellery production process. The number of workers working for the Group s production facilities in the PRC reduced from 632 as at 31 March 2012, to 551 as at 31 March 2013 and to 371 as at 31 March The reduction in the Group s production headcount during the Track Record Period was partly a result of the decrease in the Group s production as sales decreased and partly a result of the Group s initiatives to reduce labour cost as explained above. As a result of the above factors, the Group s labour costs decreased by approximately 5.4% in the financial year ended 31 March 2013 and by approximately 3.1% in the financial year ended 31 March Reference is made to the section headed Business Legal Proceedings and Non-compliances, the Group did not make all necessary social insurance and housing provident fund contributions for its workers in the PRC as required under the related PRC laws. If the Group were to make the required contributions for each of the financial years during the Track Record Period, the Group s labour costs in relation to its production would have increased by approximately HK$3.4 million, HK$3.1 million and HK$1.3 million for the financial years ended 31 March 2012, 2013 and 2014 respectively and its total cost of sales would have been approximately HK$191.3 million, HK$182.9 million and HK$176.1 million for the years ended 31 March 2012, 2013 and 2014 respectively. Please also refer to the paragraph headed Potential financial impact from the Group s non-compliances below. Other overheads Apart from labour cost, other overheads mainly comprised the use of consumables (such as chemicals used in pearl processing and jewellery product production), depreciation of moulds and plant and equipment relating to the Group s production facilities in Shenzhen, the PRC, subcontracting expenses, utility expenses, rent and tax. During the Track Record Period, the total amount of other overheads amounted to approximately HK$12.1 million, HK$12.3 million and HK$9.0 million, representing approximately 6.5%, 6.8% and 5.1% of the Group s total cost of sales for the three financial years ended 31 March 2012, 2013 and 2014 respectively. The changes in the other overheads were mainly driven by the changes in value added tax charged in respect of the purchase of freshwater pearls in the PRC. The Group significantly reduced its purchase of freshwater pearls in the financial year ended 31 March 2014 as explained in the paragraph headed Revenue above. Rental cost increased substantially in the financial year ended 31 March 2014 because of a rental review upon renewal in that financial year. 179

185 FINANCIAL INFORMATION Gross profit and gross profit margin The table below sets out the gross profit and gross profit margin by the Group s major products during the Track Record Period. Year ended 31 March Gross profit Gross profit margin Gross profit Gross profit margin Gross profit Gross profit margin HK$ 000 % HK$ 000 % HK$ 000 % Saltwater pearls 30, , , Freshwater pearls 3, , , Jewellery products 69, , , Gross profit before provision 104, , , (Provision)/Reversal of provision for stock obsolescence/slow moving stock 7,800 3,636 (1,357) Gross profit after provision 112, , , The Group makes provision or reverse or write-off a provision of inventory consistently based on the policy as described in the paragraph headed Inventory below in this section of the listing document. The provision previously made for slow-moving stock or obsolete stock is reversed when the aged inventory is subsequently sold or used. Major factors affecting gross profit and gross profit margin The Group s profit margin decreased from approximately 37.4% for the financial year ended 31 March 2012 to approximately 31.2% for the financial year ended 31 March 2013, and increased to approximately 34.9% of the financial year ended 31 March During the Track Record Period, the fluctuation of the Group s gross profit and gross profit margin was mainly affected by: (i) fluctuations in the cost of materials during the Track Record Period, as described above in the paragraph headed cost of materials ; (ii) an increase in the sales of sterling silver made jewellery products which generally had higher gross profit margins than gold made jewellery products for the financial year ended 31 March 2014; (iii) the sale of certain aged inventories (freshwater pearls) where the purchase cost of which had been fully provided for in prior financial years; (iv) an increase in the proportion of the Group s sales of pearls in the financial year ended 31 March 2014; and (v) a higher demand for jewellery products of lower selling prices due to poor market environment. The Group s gross profit margin is affected by the Group s ability to set and negotiate the selling price of its products with the customers and the ability to transfer the risk of fluctuations in the cost of materials and other production costs to the customers. The price of jewellery products are mainly 180

186 FINANCIAL INFORMATION determined with reference to the cost of production. The Company believes that the ability to set and negotiate the selling price, and thus the ability to maintain a stable and healthy gross product margin, depends on a number of factors, including, among other things, the general economic and market sentiment and competition, the rareness of the pearls used, the uniqueness of the jewellery design, the required level of production fineness of the jewellery products, etc. The cost of major raw materials fluctuated significantly during the Track Record Period, in particular, the average purchase price of saltwater pearls and freshwater pearls increased significantly. In view of the increase in pearl purchase price, the Group will adjust its product and pricing strategy with a view to maintaining a stable gross profit margin. However, the difficult market environment in the financial year ended 31 March 2013 led to an increase in competition. This made the Group unable to transfer all increases in material purchase prices to customers and thus adversely affected the gross profit margin. During the Track Record Period, the average purchase price of South Sea pearls and freshwater pearls increased significantly whilst the average purchase price of Tahitian pearls remained relatively stable. The gross profit margin in respect of the sale of saltwater pearls was approximately 38.7% for the financial year ended 31 March 2012, it then decreased to approximately 31.3% and increased to approximately 33.8% for the year ended 31 March The difficult market environment of the pearl jewellery product market during the financial year ended 31 March 2013 also adversely affected the down-stream demand for pearls (including saltwater pearls and freshwater pearls). This resulted in an increase in competition among suppliers and more intensive bargain in terms of selling prices of the Group s products. The Group was unable to transfer part of the increase in cost of materials to the customers and materially led to a decrease in the gross profit margin of saltwater pearls and freshwater pearls for the year ended 31 March The market for saltwater pearls improved in the financial year ended 31 March 2014 as the pearl jewellery market improved. This made the Group in a better position to bargain for better selling price and transfer the increasing purchase price of South Sea pearls to customers. Accordingly, the overall gross profit margin of the Group improved in the financial year ended 31 March 2014 as compared with that of the financial year ended 31 March Saltwater pearls and freshwater pearls of two major components of the Group s cost of sale structure. The following sensitivity analysis illustrates the impact of hypothetical fluctuations in saltwater pearls and freshwater pearls on the Group s profit during the Track Record Period, assuming all other factors affecting the Group s profit remain unchanged. 181

187 FINANCIAL INFORMATION (a) Hypothetical fluctuations on average cost of freshwater pearls ChangeinnetprofitoftheGroup Increase by 30% HK$ 000 Increase by 35% HK$ 000 Financial year ended 31 March 2012 (4,078) 9.5% Financial year ended 31 March 2013 (4,461) 31.2% Financial year ended 31 March 2014 (3,762) 12.7% (4,758) 11.1% (5,204) 36.5% (4,388) 14.8% Note: According to the Ipsos Report, the average price of freshwater pearls in global market increased by approximately 31.3% from 2012 to (b) Hypothetical fluctuations on average cost of saltwater pearls ChangeinnetprofitoftheGroup Increase by 10% HK$ 000 Increase by 15% HK$ 000 Financial year ended 31 March 2012 (4,703) 11.0% Financial year ended 31 March 2013 (5,258) 36.8% Financial year ended 31 March 2014 (5,593) 18.9% (7,054) 16.4% (7,887) 55.2% (8,390) 28.3% Note: According to the Ipsos Report, the average price of saltwater pearls in global market increased by approximately 13.8% respectively from 2012 to During the financial year ended 31 March 2014, there was a higher demand for silver made jewellery products, which generally have higher gross profit margin than gold made jewellery products. This partly contributed to the higher gross profit margin of the Group s jewellery products for the financial year ended 31 March The gross profit margin for the sales of freshwater pearls increased significantly for the financial year ended 31 March 2014 mainly due to the sale of aged inventory, the purchase cost of which had been fully provided for in prior financial years and/or written off. This contributed to the higher gross profit margin of the Group for the year ended 31 March The Group s gross profit margin is also affected by the product mix. Whilst the sale of jewellery products generally has a lower gross profit margin than the sale of pearls (including trading of processed loose pearls and processed pearl in strands), the Company believes that the sale of jewellery products has a bigger potential market in terms of volume. Customers in Europe and North America are mainly retailers to which the Group sells its jewellery products. During the Track Record Period, the Group s sales of jewellery products decreased by approximately 23.5% and sales to Europe and North America in 182

188 FINANCIAL INFORMATION respect of the jewellery products in aggregate also decreased by approximately 25.6%. The proportion of sales of jewellery products decreased from approximately 71.3% for the financial year ended 31 March 2012 to approximately 60.9% for the financial year ended 31 March During the Track Record Period, the Group put more effort on promoting the sale of pearls (including some slow moving pearl inventory) to customers in other regions (including other Asian Countries) which helped counter the downward pressure on the Group s gross profit margin from the decrease in market demand for jewellery products. The increase in the proportion of the Group s salesof pearls from approximately 32.7% in the financial year ended 31 March 2013 to approximately 39.1% in the financial year ended 31 March 2014 also contributed to a higher overall gross profit margin of the Group in the financial year ended 31 March As explained in the paragraph headed Revenue above in this section, the Group s sales of jewellery products decreased during the Track Record Period which in turn led to the decrease in the Group s gross profit. The poor market sentiment particularly adversely affected the demand for higher price products and led to a higher proportion of sales of jewellery products of lower selling prices, including sliver made jewellery products as described above. Selling expenses Selling expenses are expenses in relation to selling and marketing activities of the Group, comprising mainly commission to the Group s agent, and payments to agents or designated parties of the Group s customers, advertising contributions paid to the Group s customers and exhibition expenses for sale and marketing purposes. The table below sets out the components of the Group s selling and distribution costs for the periods indicated: Financial year ended 31 March HK$ 000 % HK$ 000 % HK$ 000 % Exhibition expenses 5, , , Advertising contribution 1, , , Commission and customers designated payments 6, , , Declaration and licence fee , , Transportation and delivery expenses 1, , , Advertising and promotion Insurance for transportation Total 16, , , The Group s selling expenses go mainly in line with its revenue. Advertising contribution represented payments made to customers or its associated companies to support their marketing activities in respect of the Group s products. For marketing, the Group pays commissions to an agent to help source new customers as described in the section headed Business Marketing in this listing document. In connection with sales to certain customers, they requested the Group to make payments to their designated persons. The Group agrees to such payment arrangements, which are in compliance with 183

189 FINANCIAL INFORMATION the laws and regulations in Hong Kong, as it considers the overall margin in respect of the related sales reasonable. For the financial years ended 31 March 2012, 2013 and 2014, the Group s selling expenses represented approximately 5.6%, 5.1% and 5.8% of its revenue respectively. For the financial year ended 31 March 2013, the Group s selling expenses decreased by approximately 20.3% as compared with that for the financial year ended 31 March The decrease was mainly a result of a decrease in the Group s revenue for the financial year which led to a corresponding decrease in advertising contribution, commission and delivery related expenses. Participating in trade shows and exhibitions is one major marketing effort of the Group as described in the section headed Business Sales and Marketing. The Group participated in less exhibitions in the financial year ended 31 March 2013 which resulted in lower exhibition expenses that financial year. For the financial year ended 31 March 2014, the Group s selling expenses increased by approximately HK$2.2 million or approximately 16.2% to approximately HK$15.6 million. The increase was mainly a result of the increase in exhibition expenses as discussed above. Advertising contribution also increased based on the related customers requirements. Administrative expenses Administrative expenses are expenses of the headquarters and other back office support functions comprising mainly salary expenses of the Group s management and back office supporting departments, office rentals, depreciation of the Company s Chairman s quarters and other professional and audit fees. The table below sets out the components of the Group s administrative expenses for the periods indicated: Financial year ended 31 March HK$ 000 % HK$ 000 % HK$ 000 % Staff cost 22, , , Directors remuneration 4, , , Depreciation 4, , , Insurance , Rent and rates 7, , , Overseas travelling 1, , , Building management fee and air conditioning charges 1, , , Entertainment 1, , Motor vehicle expenses 1, , , Legal and professional fee Audit fee , Donations , Provision/(reversal of provision) for bad and doubtful debt (7,918) (18.2) (3,763) (7.2) (6,797) (14.3) Others 5, , , Total 43, , ,

190 FINANCIAL INFORMATION The administrative expenses accounted for approximately 14.5%, 19.9% and 17.7% of the Group s revenue for the financial years ended 31 March 2012, 2013 and The Company considers that the nature of administrative expenses does not tend to fluctuate with sales in short-term. For the financial year ended 31 March 2013, the Group s administrative expenses increased by approximately 19.9% as compared with that for the financial year ended 31 March The increase was mainly a result of a decrease in the reversal of provision for bad and doubtful debts and an increase in donations. The Group has been actively following up the amount of outstanding trade receivables from customers. Reversal of the provision for bad and doubtful debts represented actual cash recovery and receipt of trade receivables, in respect of which provisions had previously been made, or returns of goods sold from the customers back to the Group under the related sales. For the financial year ended 31 March 2013, the Group made a donation of approximately HK$1.2 million in respect of an independent water supply system development project in the PRC. For the financial year ended 31 March 2014, the Group s administrative expenses decreased by approximately HK$4.5 million or approximately 8.6% to approximately HK$47.6 million. Whilst staff cost increased by approximately HK$4.8 million in the financial year ended 31 March 2014 as a result of an additional accrual of approximately HK$2.5 million made for outstanding social security contribution and housing provident fund and salary increment (as further explained in the section headed Business Legal Proceedings and Non-compliances ), the amount of administrative expenses decreased mainly as a result of an increase in the reversal of provision of bad and doubtful debt (as explained above) by approximately HK$3.0 million, a reduction in other administrative expenses, which included expenses such as security service charges, bank charges, utilities, office supplies, etc, and a reversal of a long outstanding accrued charge of over 7 years. Other gains/(loss), net Other gain or loss of the Group during the Track Record Period comprised mainly exchange losses and gain on disposal of fixed assets as shown below: Financial year ended 31 March HK$ 000 HK$ 000 HK$ 000 Exchange losses (6,120) (1,669) (640) Gains/(losses) on disposal of property plant and equipment Others ,730 Total (5,783) (289) 1,170 The exchange losses during the Track Record Period were mainly results of increases of exchange rate of RMB to HK$ as part of the operations of the Group are in the PRC and the related financial statements of such PRC operations are prepared in RMB; whilst the combined financial statements of the Group are prepared in HK$. Based on the exchange rates published by The People s BankofChina, the exchange rate of HK$ to RMB was approximately as at 31 March 2011, approximately

191 FINANCIAL INFORMATION as at 30 March 2012 (being the last business day of that financial year), approximately as at 29 March 2013 (being the last business day of that financial year) and approximately as at 31 March The significant appreciation of RMB against HK$ led to a significant exchange loss in the financial year ended 31 March Other gain or loss included mainly reversal of a long outstanding payable and gains or loss on disposal of fixed assets. Finance income The Group puts most of its cash at banks. Finance income mainly represented interest income earned by the Group in respect of bank deposits. Finance expenses These were interest expenses on a bank borrowing facility drawn during the financial year ended 31 March 2014 at an interest rate of Hong Kong Interbank Offer Rate plus 1.9% per annum. Before the financial year ended 31 March 2014, the Group was debt free. Income tax expense The Group s operations in Hong Kong were subject to a statutory tax rate of 16.5% for each of the three financial years ended 31 March 2012, 2013 and The Group s subsidiaries in the PRC (including MS Factory and SZ Factory, based on their deemed profit) are subject to an income tax rate of 25%. The Company has no operations in the Cayman Islands and is not subject to any income tax in the Cayman Islands. Most of the Group s sales took place in Hong Kong during the Track Record Period and were subject to Hong Kong tax. Save for the financial year ended 31 March 2013, most of the Group s taxable profits during the Track Record Period were derived from the Group s operations in Hong Kong. The proportion of PRC tax increased in the financial year ended 31 March 2013 as a result of the decrease in sales that year which in turn led to a decrease in the Group s taxable profit in Hong Kong. As mentioned in the section headed Business Production Facilities in this listing document. During the Track Record Period, Man Sang HK and Arcadia Jewellery engaged MS Factory and SZ Factory respectively under the Processing Agreements to carry out the processing and manufacturing work of their products. As a result, Man Sang HK and Arcadia Jewellery were entitled to regard 50% of their taxable profits derived from the sales of goods processed or manufactured by MS Factory and SZ Factory as offshore income and these were not subject to Hong Kong profit tax pursuant to DIPN21 issued by the IRD. During the Track Record Period and up to the Latest Practicable Date, the Group had not received any objection from the IRD in this respect. During each of the financial years ended 31 March 2012, 2013 and 2014, the above mentioned profit treatment allowed the Group to enjoy tax saving of approximately HK$2.6 million, HK$0.8 million and HK$2.1 million respectively. After the Reorganisation, the processing and manufacturing work carried out by MS Factory has been taken up by HBF Jewellery (which is not a processing plant), and Man Sang HK has since 1 May 2014 no longer engaged in any pearl processing business and is not entitled to the favourable tax treatment under DIPN

192 FINANCIAL INFORMATION The business licence of SZ Factory will expire on 9 May It is not expected that SZ Factory will be able to renew its processing plant status and the Company plans to transfer the operation of SZ Factory to HBF Jewellery or another subsidiary of the Group in the PRC on or before 9 May After such transfer of operation, Arcadia Jewellery will no longer be entitled to the favourable tax treatment under DIPN21. The effective tax rates for each of the three financial years ended 31 March 2012, 2013 and 2013 were approximately 10.4%, 12.9% and 7.6% respectively. The Group recorded a relatively low effective tax rates during the Track Record Period, which was mainly due to, among other factors, the tax benefit enjoyed by the Group under DIPN21. The higher effective tax rate in the financial year ended 31 March 2013 was mainly due to (1) an increase in donation expenses which were not tax deductible; and (2) an increase in the proportion of profit generated by the Group s operation in the PRC (which is subject to a higher tax rate) to the Group s total profit (as explained above). The decrease in the effective tax rate for the financial year ended 31 March 2014 was mainly due to the cease of the processing arrangement under the MS Processing Agreement and the related tax benefit under DIPN21 which has led to a deferred tax asset credit as a result of an increase in the deferred tax assets from unrealised inventory gain at a higher applicable tax rateasshowninnote18totheaccountant s Report. Profit for the year All members of the Group prior to the Reorganisation and the Spin-off are wholly owned by MSIL. Profit of the Group during the Track Record Period equals profit attributable to equity holders of the Company. The Group recorded a profit of approximately HK$42.9 million for the financial year ended 31 March The Group s profit for the financial year ended 31 March 2013 decreased to approximately HK$14.3 million. The decrease in the Group s profit was mainly the combined results of the poor economic conditions and sentiments in Europe and North America in 2012 which in turn affected the demand for the Group s products and increased competition in terms of selling price, the decrease of selling and distributions expenses in a rate lower than the percentage fall in the Group s revenue and the increase in its administration expenses. The Group recorded a profit of approximately HK$29.6 million for the financial year ended 31 March The improvement in profit as compared to that for the financial year ended 31 March 2013 was mainly a result of a higher revenue and a higher gross profit margin as a result of the Group s increase in sales to customers in other regions and sales of slow moving stock of freshwater pearls during the financial year. Potential financial impact from the Group s non-compliances As discussed above and in the section headed Business Legal Proceedings and Noncompliances, the Group did not make all necessary social insurance contributions and housing provident funds for its workers in the PRC as required under the related PRC laws. If the Group had made the required contributions for each of the financial years during the Track Record Period, the Group s profit would have been reduced to approximately HK$39.2 million, HK$10.8 million and HK$28.2 million for the financial years ended 31 March 2012, 2013 and 2014 respectively. 187

193 FINANCIAL INFORMATION DISCUSSION OF COMBINED STATEMENTS OF FINANCIAL POSITION ITEMS The following table sets out the Group s combined assets and liabilities during the Track Record Period. This information should be read in conjunction with the Group s combined statements of financial position and the related notes as set out in the Accountant s Report as set out in Appendix I to this listing document. As at 31 March HK$ 000 HK$ 000 HK$ 000 ASSETS Non-current assets Property, plant and equipment 89,826 93,838 97,004 Deferred income tax assets 1,797 2,376 2,929 91,623 96,214 99,933 Current assets Inventories 71,156 76,771 78,282 Amount due from related companies (i.e. the Remaining Group) 216, ,215 70,841 Trade and other receivables 61,114 69,337 74,469 Cash and cash equivalents 198, , , , , ,187 Total assets 638, , ,120 LIABILITIES Non-current liabilities Deferred income tax liabilities 9,570 10,665 11,430 9,570 10,665 11,430 Current liabilities Trade and other payables 40,662 33,831 32,853 Amounts due to related companies (i.e. the Remaining Group) 143, ,585 Bank borrowing 47,600 Current income tax liabilities 1,030 1, , ,416 81,829 Total liabilities 195, ,081 93,259 Net assets 443, , ,

194 FINANCIAL INFORMATION Net current assets The table below sets out the current assets and current liabilities of the Group as of the dates as indicated: As at 31 March As at 31 July HK$ 000 % HK$ 000 % HK$ 000 % HK$ 000 % (unaudited) Current Assets Inventories 71, , , , Amount due from related companies (the Remaining Group) 216, , , , Trade and other receivables 61, , , , Cash and cash equivalents 198, , , , Total 547, , , , Current liabilities Trade and other payables 40, , , , Amount due to related companies (the Remaining Group) 143, , Bank borrowings 47, , Current income tax liabilities 1, , , Total 185, , , , Net current assets 361, , , ,188 The Group had net current assets of approximately HK$361.7 million, HK$279.0 million and HK$310.4 million as of 31 March 2012, 2013 and 2014 respectively. The Group recorded significant amounts due to and due from related companies (i.e., the Remaining Group) during the Track Record Period. These current accounts were recorded mainly due to dividends declared, fund transfers between the Group and the Remaining Group and the allocations of shared expenses between the Group and the Remaining Group. As at 31 March 2012, the Group recorded a net amount due from the Remaining Group of approximately HK$72.8 million. The Group recorded a net amount due to the Remaining Group of approximately HK$27.4 million as at 31 March 2013 and an amount due from the Remaining Group of approximately HK$70.8 million as at 31 March The amount due from the Remaining Group has been netted off against the liability arising from the Deemed Distribution (as further described in the paragraph headed Deemed Distribution below in this section of the listing document) in relation to the Reorganisation. The Group has made a payment of approximately HK$54.7 million in cash to the Remaining Group. The remaining balance of such liability will be settled in full by the Capitalisation Issue before Listing. Please refer to the section headed History, Reorganisation and Corporate Structure for details of the Capitalisation Issue. During the Track Record Period, the fluctuations of the net amount due from/due to the Remaining Group was mainly affected by funding transferred between the Group and the Remaining Group as described in more details in the paragraph headed Cash flow below in this section. 189

195 FINANCIAL INFORMATION The decrease in the Group s net current assets in the financial year ended 31 March 2013 was mainly an increase in the net amounts due to related parties (i.e., the Remaining Group) during the financial year ended 31 March 2013 which in turn was a result of a net repayment from the Remaining Group to the Group in respect of certain funding previously provided by the Pearls and Jewellery Business to the Remaining Group. The increase in Group s net current assets in the financial year ended 31 March 2014 was mainly due to the provision of funding by the Pearls and Jewellery Business to the Remaining Group to facilitate some payment obligations of the Remaining Group including dividend payment by MSIL and other capital requirements during the financial year ended 31 March Inventory The table below categories the Group s inventory (after provision) into different raw materials, work-in-progress and finished goods. As at 31 March HK$ 000 % HK$ 000 % HK$ 000 % Raw materials 22, , , Work-in-progress (Note) 21, , , Finished goods 27, , , Total 71, , , Note: As at 31 March 2012, 2013 and 2014, there were work-in-progress amounting to approximately HK$20.7 million, HK$17.9 million and HK$7.5 million which were aged over 90 days and were mainly slow moving freshwater pearls processed by the Group which may be used to produce jewellery products or to be sold. The Group purchases pearls based on the suppliers stock available for sale and estimated demand of customers. The Group will maintain a relatively higher level of inventory of pearls with sizes ranging from 8 mm to 13 mm. With regard to other valuable materials, like precious metals, diamonds and other gemstones, they are mainly purchased based on actual orders from customers. Apart from some sample jewellery products for marketing purposes, the Group makes jewellery products principally only based on customers orders. Finished goods of the Group comprised processed saltwater pearls, processed freshwater pearls and jewellery products. The significant increase in the Group s finished goods as at 31 March 2014 as compared with that as at 31 March 2012 and 2013 was mainly due to an increase in purchase of Tahitian pearls in the second half of the financial year ended 31 March 2014 and the transfer of some processed freshwater pearls to the Hong Kong office to be sold as finished goods during the financial year ended 31 March 2014 which were previously stored in the Group s production facilities in the PRC and classified as work-in-progress as such freshwater pearls might at such time be used for further processing into jewellery products. 190

196 FINANCIAL INFORMATION The Group s major inventory includes pearls, precious materials, diamonds and gemstones, and work-in-progress and finished goods. In respect of saltwater pearls not sold within six months from their purchases, based on the Group s experience, these unsold/unused pearls are estimated to have a minimal net realisable value and thus full provision for their remaining carrying value will be made. In respect of freshwater pearls, diamonds, gemstones and some other sundry materials, the Group makes provisions for these inventories based on the anticipated sale or usage in the next six to twelve months (and thus their net realisable value). The Group also makes provisions based on estimated net realisable value of all other inventories, including, precious metals and finished goods. As stated in the paragraph headed Description of certain income statement items and year on year comparison cost of sales above in this section, upon the Group has received a lot of pearl after purchase, the Group will sort the lot of pearls into different groups of pearl by different quality and grades, sizes, colours and shapes, etc, and, after sorting, the Group will allocate the purchase cost to every group of pearl (including some better quality pearls and some lower quality pearls) based on estimated selling price of each group of pearls based on the Group s management experience. This means that those groups of pearls of better quality and thus a higher estimated selling price will be allocated with a higher portion of the purchase cost; and those lower quality pearls will be allocated with a smaller portion of the purchase cost. The composition of pearls from one lot of pearls can differ substantially from another lot of pearls. Accordingly, the cost allocation of every lot of pearls is different. Based on the experience of the management of the Company, in general, some lower quality pearls are more difficult to be sold. In the case of saltwater pearls, full provision will be made against the allocated purchase cost of those pearls which are remain unused or unsold six months after purchase; and full provision will be made against the allocated cost of those freshwater pearls if they are not anticipated to be used or sold in the next six months as at a reporting date. For reference purposes only, based on the Group pearl purchases in the last 10 completed financial years from the financial year ended 31 March 2005 to the financial year ended 31 March 2014, on the average, approximately 5.4% of the purchase costs were allocated to those pearls which have subsequently been provided for or written off in accordance with the Group s provisioning policy in respect of pearls as stated above; and the remaining 94.6% of the purchase costs were allocated to those pearls which have been used/sold. 191

197 FINANCIAL INFORMATION As the Group purchases pearls mainly on a lot basis comprising pearls of various quality, shapes and colours. It is usual that there will be stock that remains unused or unsold for every lot of stock purchased. The Group has been carrying out pearl trading and pearl products design, production and sale for over 30 years and thus has accumulated slow moving pearls purchased as part of its normal operations. Under the above accounting provisioning policy, which has been consistently applied, as of 31 March 2012, 2013 and 2014, the Group had outstanding provision against inventory of approximately HK$117.0 million, HK$113.3 million and HK$104.2 million, mainly in respect of saltwater pearls purchased but unsold for more than six months after their purchase dates and freshwater pearls that are not expected to be sold in the next six months and were estimated to have a minimal net realisable value. The table below sets out the movement of the provision against inventory: HK$ 000 As at 31 March ,755 Provision amount 2,661 Reversal amount (10,461) As at 31 March ,955 Provision amount 2,721 Reversal amount (6,357) As at 31 March ,319 Inventory written-off (10,458) Provision amount 11,503 Reversal amount (10,146) As at 31 March ,218 If those stocks, the cost of which has been fully provided, are subsequently used/sold by the Group, such provision will be reversed. During the Track Record Period, the Group recorded net reversals of inventory provision. Provisions of inventory are reversed only when the related stocks are sold or used. These selling opportunities arose as the market changed from time to time during the Track Record Period. In particular, as explained in the section headed Industry Overview and the paragraph headed Description of certain income statement items and year on year comparison above in this section, there were a decrease in supply of freshwater pearls and saltwater pearls and a relatively substantial increase in their selling prices during the Track Record Period. This gave the Group the opportunity to sell some of the aged pearl stock which full provision had been made by the Group based on their previously estimated minimal net realisable value. The Group has been able to maintain a good inventory turnover. For the financial three years ended 31 March 2012, 2013 and 2014, the Group s inventory turnover was approximately 120 days, 150 days and 162 days respectively. The increase in inventory turnover during the Track Record Period was partly affected by the increase in purchase cost of South Sea pearls and are partly due to an increase in purchase amounts of Tahitian pearls purchased by the Group in the second half of the related financial years. 192

198 FINANCIAL INFORMATION Up to 31 July 2014, approximately 71.5% of the raw materials as at 31 March 2014 have been consumed, 9.6% of the work-in-progress inventory outstanding as at 31 March 2014 have been sold/used and approximately 63.2% of the finished goods as at 31 March 2014 has been delivered and sold to customers. Trade and other receivables The table below shows the amount of trade and other receivables as of each of the dates as indicated. As at 31 March HK$ 000 HK$ 000 HK$ 000 Trade receivables 80,382 78,779 74,309 Less: Provision for impairment of trade receivables (25,208) (20,562) (13,765) Trade receivables, net 55,174 58,217 60,544 Deposits, prepayments and other receivables 5,940 11,120 13,925 61,114 69,337 74,469 Trade receivables Trade receivables of the Group represented trade receivables from customers mainly for the sale of jewellery products. The Group sells goods to most customers on a cash on delivery basis but offers credit period to selected customers ranging from 30 days to 120 days. However, some of the major customers of the Group may not settle the related trade receivables on a timely manner. The Company considers that given the long term business relationships with the major customers, it is essential to the Group s business to accommodate their actual payment arrangements despite the credit terms offered by the Group to them. The Group s management, sales and finance personnel will closely monitor the ageing and settlement of trade receivables from its customers, and take necessary follow up actions, such as contacting their responsible staff members, sending reminders and/or taking legal actions. The Group has since the financial year ended 31 March 2014 adopted a policy of making provision for doubtful debts based on specific circumstances taking into account different factors, such as existing trading relationship between the customer and the Group, recent settlement records and the financial conditions of the customer based on understanding of the Group s management (in some cases, the Group refers to credit reports purchased from a reputable credit information provider on a customer). In general, the Group will make provision for trade receivable overdue for more than 3 months unless the Company is satisfied with the specific circumstances of the customer and recoverability of the related trade receivable. In respect of the trade receivable which has not yet overdue or is only overdue for not more than three months, no doubtful debt provision will usually be made unless the Company is aware of any special recoverability issue. Prior to the financial year ended 31 March 2014, the Group made 193

199 FINANCIAL INFORMATION specific full provision in respect of trade receivables overdue over 90 days. During the three financial years ended 31 March 2012, 2013 and 2014, the Group recorded doubtful debt provision of approximately HK$2.0 million, HK$6.2 million and HK$3.1 million respectively. As at 31 March 2014, except for the amount due from one of the top five customers, provisions have been made in respect of all trade receivables overdue for over 90 days unless the amounts have subsequently been settled. The Group has been following up the outstanding trade receivables from customers. The Group reversed doubtful debt provisions of approximately HK$9.9 million for the financial year ended 31 March 2012, approximately HK$9.8 million for the financial year ended 31 March 2013 and approximately HK$9.8 million for the financial year ended 31 March 2014, based on actual cash recovery and receipt of trade receivables, in respect of which provisions had previously been made, or actual returns of goods sold from customers back to the Group under the related sales. Based on the above new provisions made and reversal of previous provisions, the Group recorded a net reversal income of approximately HK$7.9 million for the financial year ended 31 March 2012, approximately HK$3.8 million for the financial year ended 31 March 2013 and approximately HK$6.8 million for the financial year ended 31 March Approximately 60.0% of the Group s trade receivable and approximately 62.5% of the Group s overdue trade receivables as at 31 March 2014 were due from the Group s top five customers. The Group had not made any significant provision (only about approximately HK$0.2 million) against its trade receivables due from its top five customers as at 31 March 2014 due to the good ongoing business relationships and settlement records of those customers. Up to 31 July 2014, 100% of the Group s trade receivables (net of provision made) outstanding as at 31 March 2012 have been settled; 100% of the Group s trade receivables (net of provision made) outstanding as at 31 March 2013 have been settled; and approximately 53.3% of the Group s trade receivables (net of provision made) outstanding as at 31 March 2014 have been settled. The following table sets forth an ageing analysis of the Group s trade receivables (net of provision made) as of the date indicated. As at 31 March HK$ 000 % HK$ 000 % HK$ 000 % Not past due 14, , , to 60 days past due 21, , , to 120 days past due 9, , , More than 120 days past due 9, , , Total 55, , , The Group s trade receivables had an average turnover of approximately 61.8 days, 79.2 days and 80.7 days for the three financial years ended 31 March 2012, 2013 and 2014 respectively. Overall, the Group maintained a stable trade receivable turnover days. The Company considers that the difficult economic situations in the financial year ended 31 March 2013 and 2014 were a reason for the increase in the trade receivables turnover days after the financial year ended 31 March

200 FINANCIAL INFORMATION Other receivables Other receivables comprised deposits, prepayments and other receivables amounting to approximately HK$5.9 million, HK$11.1 million and HK$13.9 million as at 31 March 2012, 2013 and 2014 respectively. The increase in the other receivable amounts as at 31 March 2013 was mainly due to deposits paid for the new ERP system of approximately HK$2.6 million, which will be ready for use by the end of The increase in the other receivable amounts as at 31 March 2014 was mainly due to a deposit placed with China Customs of approximately HK$2.7 million as required for carrying out import and export operation by a newly incorporated subsidiary in the PRC, HBF Jewellery. Trade and other payables The table below sets forth the composition of the Group s trade and other payables as at the date indicated. As at 31 March HK$ 000 HK$ 000 HK$ 000 Trade payables 10,208 7,937 6,028 Accrued payroll and employee benefits 11,383 11,049 13,504 Other accruals and other payables 19,071 14,845 13,321 Trade payables 40,662 33,831 32,853 Saltwater pearls and precious metals are purchased principally on a cash on delivery basis. The Group s trade payables mainly related to the purchase of other materials, like freshwater pearls, diamonds, gemstones, packaging materials and other consumables, and were non-interest bearing. The following table sets forth an ageing analysis of the Group s trade payables as of the dates indicated: As at 31 March HK$ 000 % HK$ 000 % HK$ 000 % 0 to 60 days 9, , , to 120 days More than 120 days , Total 10, , , The Group s suppliers, other than saltwater pearls and precious metals, offer the Group credit periods ranging from 30 days to 120 days. The Group s trade payables had an average turnover of approximately 29.5 days, 23.1 days and 18.9 days for the three financial years ended 31 March 2012, 2013 and 2014 respectively. Purchases of saltwater pearls and precious metals are mainly made cash on delivery. The increase in the portion of the purchase of saltwater pearls and precious metals to the total 195

201 FINANCIAL INFORMATION purchases from approximately 58% for the financial year ended 31 March 2012 to approximately 62% for the financial year ended 31 March 2013 and approximately 65% for the financial year ended 31 March 2014 was a reason for the decrease in the trade payable turnover days during the Track Record Period. Up to 31 July 2014, 100% of the Group s trade payables outstanding as at 31 March 2012 have been settled; 100% of the Group s trade payables outstanding as at 31 March 2013 have been settled; and approximately 95.8% of trade payables outstanding as at 31 March 2014 have been settled. Accrued payroll and employee benefits Accrued payroll and employee benefits represented salary payable and accruals for other staff benefits like contributions to be made to the social insurance and housing provident funds. Accrued payroll and employee benefits as at 31 March 2013 remained stable as compared with that as at 31 March 2012 as the Group s employee benefit expenses did not fluctuate materially during the financial year. The Group s total employee benefit expenses amounted to approximately HK$62.4 million and HK$61.2 million for the financial year ended 31 March 2012 and 2013 respectively. As at 31 March 2014, the accruals for staff cost increased by approximately 22.2% as compared to that as at 31 March This was a result of an increase in provision in respect of the underpayment of social insurance contributions and housing provident fund as further described in the section headed Business Legal proceedings and Non-compliances in this listing document. Other accruals and other payables Other accruals and other payables mainly comprised (1) commission and customers designated payments in respect of sales made; (2) accruals for purchases which invoices had not been received; (3) purchases of materials which the Group has not yet received invoices from the vendors; and (4) deposits received representing sales money received by the Group in respect of sales pending collection by customer as at 31 March 2012 and deposits received from the CSC Group outstanding as at 31 March 2013 and 2014 in respect of the sub-lease of the office unit in Hong Kong as described in more details in the section headed Continuing Connected Transactions in this listing document. Accrued operating expenses and others included various different items like, rent and utilities. 196

202 FINANCIAL INFORMATION The table below sets out other accruals and other payables of the Group as of the dates as indicated: As at 31 March HK$ 000 % HK$ 000 % HK$ 000 % Accruals for commission and customers designated payments 9, , , Accruals for purchases 2, , , Accruals for audit fee Deposits received 2, Accrued operating expenses 1, , , Others 1, , Total 19, , , The decrease of approximately 22.2% and 10.3% in the amounts of other accruals and other payables as of 31 March 2013 and 2014 was mainly due to the reduction in the accruals for commission and customers designated payments which in turn was affected by the decrease in sales of jewellery products to the related customers and that there was no more deposit from customers as at 31 March 2013 and Bank borrowing The Group has a bank loan secured by the Group s propertyinhongkongasmentionedinthis section above. The Group drew down the full loan amount of HK$48 million in January Before that the Group did not have any interest bearing indebtedness during the Track Record Period. As at 31 March 2014, the carrying value of the bank loan amounted to HK$47.6 million representing the outstanding amount of the bank loan which is lower than the fair value of the related mortgaged property as at the reporting date. The loan will mature in December The bank loan is guaranteed by MSIL, which shall be released upon Listing as agreed with the lending bank. This loan is classified as a current liability because the related loan agreement provides a clause which gives the lender an unconditional right to call the loan at any time when the loan is outstanding. There is no covenant in the loan agreement that imposes any requirement or restriction on the Group s liquidity or financial position. As at the Latest Practicable Date, there was no default in respect of such bank loan. Save for this bank loan, the Group had no other borrowing during the Track Record Period. 197

203 FINANCIAL INFORMATION Amounts due from and due to related companies (the Remaining Group) As explained above, the Group recorded amounts due to and due from related companies (i.e., the Remaining Group) during the Track Record Period. These current accounts were recorded mainly due to dividends declared, fund transfers between the Group and the Remaining Group and the allocations of shared expenses between the Group and the Remaining Group. As at 31 March 2012, 2013 and 2014, the amounts due from/to related companies (i.e., the Remaining Group) were as follows: As at 31 March HK$ 000 HK$ 000 HK$ 000 Amounts due from the Remaining Group 216, ,215 70,841 Amounts due (to) the Remaining Group (143,805) (338,585) Net amounts due from/(to) the Remaining Group 72,763 (27,370) 70,841 The fluctuations of the net amounts due to the Remaining Group was mainly affected by dividends declared, and the amount of funds transferred between the Group and the Remaining Group (as further explained in the paragraph headed cash flow below in this section). The entire amount due from the Remaining Group has been netted off against the liability arising from the Deemed Distribution (as further described in the paragraph headed Deemed Distribution below in this section of this listing document). The Group has made a cash payment of approximately HK$54.7 million to the Remaining Group. The resulting remaining balance due to the Remaining Group after the Deemed Distribution will be fully settled by the Capitalisation Issue before Listing. Save for the continuing connected transactions between the Group and the Remaining Group as further disclosed in the section headed Continuing Connected Transactions, it is not expected that there will be any material inter-group transactions between the Group and the Remaining Group and thus there should be no material inter-group balance between the Group and the Remaining Group after Listing. Other current liabilities Apart from the above major balances of the Group s current assets and liabilities as at each financial year end date during the Track Record Period, save for cash and cash equivalents, the Group also recorded income tax payable of approximately HK$1.0 million, nil and HK$1.4 million as at 31 March 2012, 2013 and 2014, respectively. 198

204 FINANCIAL INFORMATION Non-current assets and liabilities Property, plant and equipment The table below sets out the net carrying value of the major classes of property, plant and equipment as of the dates indicated. As at 31 March HK$ 000 % HK$ 000 % HK$ 000 % Chairman s quarters 82, , , Equipment and tools 5, , , Motor vehicles 1, , , Leasehold improvement Total 89, , , The Group owns a property located at The Mayfair, 1 May Road, Hong Kong which is being provided to Mr. CH Cheng, the Group s founder and non-executive Director, as part of his employment contract as his quarters. The carrying value of this leasehold property was recorded based on its fair value as estimated based on an independent valuer as of each financial year end date during the Track Record Period. As of 31 July 2014, this property s fair value was estimated to be HK$91.0 million based on the valuation report issued by DTZ Debenham Tie Leung Limited as set out in Appendix III to this listing document. Any changes in the fair value of the leasehold property will be credited/debited to an equity reserve account of the Group and will not affect profit or loss of the Group. As set out in the Accountant s Report contained in Appendix I to this listing document, the amount under the item Other benefits, being the rental expenses including the estimated market rental value, actual government rates, management fee and car park rental expenses in respect of the Chairman s quarters apportioned and attributable to the Group was approximately HK$0.31 million, HK$0.34 million and HK$0.34 million for each of the financial year ended 31 March 2012, 2013 and 2014 respectively. The full amount of the rental expenses of the said Chairman s quarters was approximately HK$1.6 million, HK$1.7 million and HK$1.7 million for each of the financial year ended 31 March 2012, 2013 and 2014 respectively. Among the Other benefits, the portion representing the estimated market rental value is included for disclosure purposes only and is not actually recorded in the Group s profit and loss account. Mr. CH Cheng is a non-executive Director and the Chairman of the Company and he is also a founder of the Group. The provision of the Chairman s quarters to Mr. CH Cheng is a benefit provided to him pursuant to the service contract entered into between the Company and Mr. CH Cheng. As at the Latest Practicable Date, Mr. CH Cheng was a non-executive director of MSIL and he will resign as a director and Chairman of MSIL prior to the Listing. According to a rental indication letter issued for reference purpose by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the current market rental of the said residential property in Hong Kong ranges from about approximately HK$140,000 to HK$150,000 per month, including government rates and rent, and management fee. For illustrative purposes, for the year ending 31 March 2015, based on such estimated 199

205 FINANCIAL INFORMATION market rental, the full amount of the rental expenses of the said Chairman s quarters is estimated to be in the range of approximately HK$1.68 million to HK$1.80 million, part of which will be shared between the Group and the Remaining Group prior to Listing. As the related cost is shared between the Group and the Remaining Group, it is estimated that out of the amount of the above estimated rental expenses for the financial year ending 31 March 2015, approximately HK$1.0 million to HK$1.1 million will be allocated to and shared by the Group. After Listing, the full amount of the rental expenses of the said Chairman s quarters will be reflected in the Group s consolidated statement of comprehensive income of the Group after Listing in the financial year ending 31 March 2015 (whilst the portion on the estimated market rental value will only be included in the notes to the financial statements for disclosure purposes only and will not be recognised in the Group s profit and loss account). The leasehold improvement, and equipment and tools of the Group s production facilities include those of the plant operated and owned by its wholly owned subsidiary in the PRC (which were previously owned by MH Shenzhen and MS Factory, a processing plant) and those owned by SZ Factory, another processing plant of the Group in Shenzhen, the PRC. Under the PRC laws, the Group did not and does not own the assets owned by the processing plants. As at 31 March 2014, the aggregate net carrying value of production equipment and tools and leasehold improvement owned by MS Factory and SZ Factory amounted to approximately HK$0.7 million. On 30 April 2014, all those assets owned by MH Shenzhen and MS Factory in relation to the Pearls and Jewellery Business were transferred to a wholly owned subsidiary of the Group in the PRC. Deferred income tax assets The Group recorded deferred income tax assets of approximately HK$1.8 million, HK$2.4 million and HK$2.9 million as at 31 March 2012, 2013 and 2014, respectively. They were resulted from unrealised profits in respect of sales and purchases of inventories between members of the Group, netting off the effect of deferred tax arising from accelerated depreciated allowance for tax purposes. Deferred income tax liabilities The Group recorded deferred income tax liabilities of approximately HK$9.6 million, HK$10.7 million and HK$11.4 million as at 31 March 2012, 2013 and 2014, respectively. These deferred tax liabilities arose principally from the increase in the value of the property owned by the Group during the Track Record Period as shown above. KEY FINANCIAL RATIOS The table sets forth the Group s key financial ratios as of the dates or for the periods as indicated. Financial year ended 31 March % % % Gross profit margin Net profit margin Return on equity Return on total assets

206 FINANCIAL INFORMATION As of 31 March Current ratio Debt-to-equity ratio 0.12 Notes: (1) Gross profit margin represents gross profit for the year divided by revenue. (2) Net profit margin represents net profit attributable to equity holders of the Company for the year divided by revenue. (3) Return on equity represents net profit attributable to equity holders of the Company for the year divided by the equity attribution to equity holders of the Company. (4) Return on total assets represents the net profits for the year divided by total assets. (5) Current ratio represents current assets divided by current liabilities. (6) Debt-to-equity ratio is calculated by dividing total borrowings by total equity attribution to equity holders of the Company. The Group s gross profit margin, net profit margin, return on equity and return on total assets fluctuated quite significantly during the Track Record Period as a result of fluctuations in the Group s revenue and net profit. Please refer to the paragraph headed Descriptions of certain income statement items and year on year comparison above in this section for discussion and analysis of the Group s performance during the Track Record Period. As a result of the decrease in the Group s net profit for the financial year ended 31 March 2013, net profit margin, return on equity and return on total assets all decreased as compared with those for the financial year ended 31 March The Group s net profit increased in the financial year ended 31 March 2014 and drove the increase in net profit margin, return on equity and return on total assets. Save for the bank loan drawn down during the financial year ended 31 March 2014, the Group s Pearls and Jewellery Business has substantially been financed by internally generated cash flow from operations and the Group did not have any other borrowings during the Track Record Period. During the Track Record Period, the Group maintained a healthy level of current ratio. The Group s current ratio decreased from approximately 2.95 as at 31 March 2012 to approximately 1.75 as at 31 March 2013 and increased to approximately 4.79 as at 31 March The fluctuations in the current ratio mainly directly related to the fluctuation of the current accounts between the Group and the Remaining Group. The significant increase in the net amount due to the Remaining Group in the financial year ended 31 March 2013 after a fund transfer by the Remaining Group to the Group resulted in the decrease in the current ratio (as detailed in the paragraph headed Cash flow in this section below). The netting off of the current accounts between the Group and the Remaining Group and the increase in the net amount due from the Remaining Group in the financial year ending 31 March 2014 resulted in the improvement in the current ratio. After 31 March 2014, the Group has paid to the Remaining Group of approximately HK$54.7 million in cash and the net amount due from the Remaining Group as at 31 March 2014 of HK$70.8 million has also been settled in full after netting off against the accounting liability arose from the Deemed Distribution (as further described in the paragraph headed Deemed Distribution below in 201

207 FINANCIAL INFORMATION this section of the listing document) in relation to the Reorganisation. This will lower the current assets of the Group by approximately HK$125.5 million as a result of a decrease in cash balance and the net amount due from the Remaining Group. The current ratio of the Group would have decreased to approximately 3.3 had this took place on 31 March LIQUIDITY AND CAPITAL RESOURCES The Group s Pearls and Jewellery Business has mostly been financed by internally generated cash flow from operations. There were funds transfer between the Group and the Remaining Group during the Track Record Period. As at 31 March 2012, the Group recorded net amounts due from the Remaining Group of approximately HK$72.8 million. The Group then recorded a net amount due to the Remaining Group of approximately HK$27.4 million as at 31 March 2013 and a net amount due from the Remaining Group of approximately HK$70.8 million as at 31 March All the current accounts between the Group and the Remaining Group will be settled prior to the Listing by way of the Capitalisation Issue before Listing and it is not expected that the cash flow of the Group will be materially affected by the Remaining Group after the Listing. Despite fluctuations in market demand and material prices, the Group has been managing the market risks by keeping the Group s inventory turnover days short. Save for pearls, many other materials are only purchased shortly before production based on actual orders from customers. As a purchase policy, for every lot of pearls purchased, the Group expects to generate sufficient sales proceeds to cover the cost of such lot of pearls and the expected margin within six months after the purchase. This policy emphasises short-term cash flow and liquidity management, which the Company considers a key factor of its continual success over various market fluctuations for the last 30 years. This also allows the Group to quickly adjust its development strategy depending on the market situations from time to time. The Group believes that it has been able to maintain a stable and healthy level of working capital and cash balance during the Track Record Period. The Group had a current ratio and quick asset ratio of approximately 2.95 and 2.57 respectively as at 31 March 2012, approximately 1.75 and 1.54 respectively as at 31 March 2013 and approximately 4.79 and 3.84 respectively as at 31 March Cash and cash equivalents accounted for approximately 36.3%, 29.8% and 43.0% respectively of the Group s total current assets as at 31 March 2012, 2013 and Based on the Group s experience and knowledge of the industry and the available financial resources, the Directors believe that the Group has sufficient working capital for its future development. 202

208 FINANCIAL INFORMATION Cash flows The table sets forth selected cash flow information from the Group s combined cash flow statements as of and for the financial years indicated. Financial year ended 31 March HK$ 000 HK$ 000 HK$ 000 Net cash generated from/(used in) operating activities 13,433 (11,643) 22,520 Net cash (used in)/generated from investing activities (305,684) 7,378 (95,429) Net cash generated from financing activities 47,600 Net decrease in cash and cash equivalents (292,251) (4,265) (25,309) Cash and cash equivalents at the beginning of the financial year 490, , ,110 Effect of foreign exchange rate changes (18) (206) Cash and cash equivalents at the end of the financial year 198, , ,595 Cash flow from operating activities The Group recorded a net cash in flow from operating activities of approximately HK$13.4 million and HK$22.5 million for the financial years ended 31 March 2012 and 2014 respectively. For the financial year ended 31 March 2013, the Group recorded a net cash outflow from operating activities of approximately HK$11.6 million. The cash flow from operations was significantly affected by sales, profitability, payments from customers and payments to suppliers and other creditors. Most of the purchases of South Sea pearls and precious metals are carried on cash on delivery. On the other hand, sales to major customers are mostly settled some time after the sales are made. The Group s trade receivable turnover days are consistently significantly longer than the trade payable turnover days. Please refer to the paragraphs headed trade and other receivables and trade payables above in this section for further details of the general settlement terms and turnover days in respect of the Group s sales and the related trade receivables, and purchases and the related trade payables. The Group purchases pearls mainly based on anticipated sales in the next six to twelve months and purchases other materials, like precious metals, diamonds and gemstones mainly after it has received actual orders. This helps monitor and control the Group s operating cash requirements. During the Track Record Period, the operating cash flow was significantly affected by the Group s sales performance. The decrease in the Group s sales and profit in the financial year ended 31 March 2013 by approximately 12.9% and 66.7% respectively and the lengthened of the Group s trade receivable turnover from approximately 61.8 days to 79.2 days significantly affected the Group s cash flow from operations during that financial year and resulted in a net cash out flow from operations in that financial year. As the Group s sales and profit increased in the financial year ended 31 March 2014 by approximately 2.7% and 107.3% respectively and the Group s trade receivable turnover stabilised at approximately 80.7 days, the Group s cash flow from operations strengthened significantly in the financial year ended 31 March

209 FINANCIAL INFORMATION Cash flow from/used in investing activities Cash flow used in investing activities mainly affected by the changes in the currents accounts between the Group and the Remaining Group which in turn was significantly affected by fund transfer between the Group and the Remaining Group. For the financial year ended 31 March 2012, among other things, the Group transferred an amount of approximately HK$127 million (net of a dividend amount declared by the Group to the Remaining Group of HK$200 million) to the Remaining Group to finance the development of the Remaining Group a new business opportunity and payments of dividend by MSIL. For the financial year ended 31 March 2013, among other things, the Remaining Group refunded some unused funding of approximately HK$100 million (net of the dividend of HK$100 million declared by the Group to the Remaining Group) to the Group. In the financial year ended 31 March 2014, the Group provided approximately HK$83 million funding to the Remaining Group to facilitate its dividend payment, and some other capital requirements, like an acquisition and working capital requirements. Other items affecting cash flow from/used in investing activities included purchases of fixed assets like tools and machinery, moulds, furniture and fixtures and motor vehicles during the Track Record Period after netting off interest incomes and proceeds from disposal of fixed assets. The Group has established production facilities and did not require material capital expenditures during the Track Record Period. Accordingly the Group did not record significant cash out flow from investing activities. The current accounts between the Group and the Remaining Group will be fully settled before Listing by the Capitalisation Issue and are not expected to materially affect the Group s cash flow after Listing. Cash from financing activities During the financial year ended 31 March 2014, the Group drew down the bank loan of HK$48 million, and during the same financial year repaid HK$0.4 million of such loan. INDEBTEDNESS Bank borrowing As mentioned above, the Group has a bank loan, the outstanding value of which was HK$46.8 million as at 31 July The bank loan is secured by the leasehold property of the Group in Hong Kong with a fair value of HK$91 million as at 31 July It is estimated that the remaining loan will be repaid in full by December The lender has an unconditional right to call for repayment at any time when the loan is outstanding. The bank loan is guaranteed by MSIL, which shall be released upon Listing as agreed with the lending bank. Banking facility As at the Latest Practicable Date, the Group had applied for a banking facility of up to HK$15 million, which had not yet been approved and granted by the related bank. If the Group is able to obtain this banking facility, the Company believes that it will provide extra flexibility to the Group in its business planning, cash and liquidity management. Apart from this banking facility, the Directors have confirmed that the Group is not planning for any other external financing plans. 204

210 FINANCIAL INFORMATION Other Save for the above, the Group did not have outstanding mortgages, charges, debentures, loan capital, bank overdrafts, loans, debt securities or other similar indebtedness, finance lease on hire purchase commitments, liabilities under acceptances and acceptance credits or any guarantees on other materials contingent liabilities outstanding as of 31 July 2014 (being the latest practicable date for the purpose of the indebtedness statement). The Company confirms that there has not been any material change in the indebtedness since that date. CAPITAL AND OTHER COMMITMENTS The Group is leasing plant premises from the Remaining Group, an office in Shenzhen from the CSC Group and offices in Hong Kong from an Independent Third Party landlord. Please refer to the sections headed Business Properties and Continuing Connected Transactions in this listing document for details of the leases. The following table sets forth the Group s future minimum lease payments under non-cancellable operating leases falling due as of the dates indicated. As at 31 March HK$ 000 % HK$ 000 % HK$ 000 % Within 1 year 7, , , Later than 1 year and no later than 5 years 7, , More than 5 years Total 14, , , The Group had capital commitments contracted but not provided for relating to the purchase of property, plant and equipment of approximately HK$0.7 million as at 31 March 2013 and CONTINGENT LIABILITIES During the Track Record Period and as of the Latest Practicable Date, the Group did not have any material contingent liabilities or guarantee. 205

211 FINANCIAL INFORMATION CAPITAL EXPENDITURE The Group s capital expenditures during the Track Record Period primarily related to expenditures on purchases of moulds, the purchase of tools and equipment and motor vehicles, and leasehold improvement. The table below sets forth expected capital expenditures which the Group is planning to incur for the year ending 31 March 2015: Nature Planned amount HK$ 000 (approximate) Equipment, plant and machinery acquisition of computer hardware and software for implementation of a new ERP system and other replacements 5,255 Leasehold improvement renovation of the Chairman s quarters 3,500 Mould making new moulds for the production of new jewellery products 4,500 The Group plans to finance future capital expenditures mainly through its internally generated cash flow from operations. As the Group will continue its business expansion, it may incur additional capital expenditures. The above list of expected capital expenditures is only for the Group s internal planning and budgeting purposes and may change as a result of any change to the Group s operating and market situations. DIVIDEND POLICY The Directors are responsible for submitting proposals in respect of dividend payments, if any, to the Shareholders general meeting for approval. Whether the Company pays a dividend, the amount paid is based on its results of operations, cash flows, financial condition, cash dividends it receives from its subsidiaries, future business prospects, statutory and regulatory restrictions on the payment of dividends by us and other factors that the Directors deem relevant. Dividends may be paid only out of distributable profits as determined under HKFRS. The Group paid dividends of HK$200 million, HK$100 million and nil to the Remaining Group for the financial years ended 31 March 2012, 2013 and 2014, respectively. In the future, the Company expects to distribute no less than 30% of its annual distributable profit as dividends. There is, however, no assurance that the Company will be able to distribute dividends of such amount or any amount each year or in any year. The Group s future dividend policy will be determined by the Board based on the Group s results of operations, cash flows, financial position, capital adequacy ratio, cash dividends the Company receives from its subsidiaries, future business prospects, statutory and regulatory restrictions on the payment of dividends by us, and other factors that the Board may consider relevant. 206

212 FINANCIAL INFORMATION OFF BALANCE SHEET ARRANGEMENT The Group had no material off-balance sheet transactions or arrangements as of the Latest Practicable Date. MAJOR MARKET RISK The Group s principal financial assets and liabilities comprise trade receivables and payables, amounts due from/to related companies, and cash and cash equivalents. The current accounts between the Group and related companies (i.e., the Remaining Group) will be settled in full prior to the Listing. The main risks arising from such financial assets and liabilities are credit risk, liquidity risk, currency exchange risk and interest risk in the normal course of the Group s business. Credit risk The major credit risk arises from the Group s exposure to trade receivables and cash and cash equivalents. Trade receivables are typically unsecured and derived from sales earned from the Group s customers, which are exposed to credit risk. The Group monitors the balance of trade receivables and settlement records of customers on an ongoing basis and takes follow-up actions promptly. The Group reviews the collectability of its trade receivables regularly and makes specific provision in respect of any doubtful trade receivables. The Directors do not consider that there is a significant exposure to bad debts in respect of the net carrying book value of the trade receivables as reported in the Group s financial statements from time to time. Further quantitative data in respect of its exposure to credit risk arising from trade receivables are disclosed in note 5.2 of the Accountant s Report set out in Appendix I to this listing document. Cash and short-term deposits are mainly deposited with reputable registered banks in Hong Kong and the PRC. The Company considers that the related credit risk to which the Group is exposed is very limited. The carrying amounts of trade receivables, and cash and cash equivalents included in the combined statements of financial position represent the Group s maximum exposure to credit risk in relation to its financial assets. The Directors do not consider that there is other significant credit risk arising from other financial assets of the Group. Liquidity risk Liquidity risk relates to the risk that the Group will not be able to meet obligations associated with its financial liabilities. The Group is exposed to liquidity risk in respect of settlement of trade payables, and also in respect of its cash flow management. It is the Group s policy to maintain a stable and healthy level of working capital and cash balance. The Group had a current ratio and quick asset ratio of approximately 2.95 and 2.57 respectively as at 31 March 2012, approximately 1.75 and 1.54 respectively as at 31 March 2013 and approximately 4.79 and 207

213 FINANCIAL INFORMATION 3.84 respectively as at 31 March Accordingly, the Directors do not consider the Group is being exposed to significant liquidity risk. Please refer to note 5.3 of the Accountant s Report in Appendix I to this listing document for further details on the above risk. Foreign Currency Risk The Group s headquarters is located in Hong Kong and is using HKD as its reporting currency, whilst certain members of the Group located in the PRC are using RMB as their functional currency and there are sales, purchases and other operating expenses of the Group which are settled in other currencies mainly including USD, RMB and HKD, as well as some other currencies like Euro, Yen, CPF, which expose the Group to foreign currency risk. It is the Group s policy to maintain a low holding level of foreign currencies other than USD, HKD and RMB and does not engage in foreign currency hedging transactions. As at 31 March 2012, 2013 and 2014, there was only approximately 3.3%, 2.1% and 1.6% of the Group s cash and cash equivalents which were denominated in currencies other than RMB, USD and HKD. The Group tries to limit its foreign currency risk by purchasing the necessary foreign currencies at the time when a purchase transaction is entered into. Over approximately 91.1%, 87.5%, 84.5% of the Group s sales for each of the three financial years ended 31 March 2012, 2013, 2014 were denominated in USD (which is pegged with HKD) as the transaction currency. The Group considers there is no significant exposure to foreign exchange fluctuations as long as the Hong Kong-United States dollar exchange rate remains pegged. The carrying amounts of the Group s cash and cash equivalents were denominated in the following currencies: As at 31 March HK$ 000 HK$ 000 HK$ 000 Renminbi 1,277 15,524 22,714 United Stated dollar 177,089 91,203 96,466 Hong Kong dollar 13,403 83,211 46,680 Others 6,606 4,172 2, , , ,595 The Group manages its foreign currency risk against other currencies by closely monitoring the movement of the foreign currency rates and may use hedging derivative, such as foreign currency forward contract, to manage its foreign currency risk as appropriate. Interest rate risk The Group s exposure to the risk of changes in market interest rates relates primarily to the Group s bank borrowing which is subject to changes in Hong Kong Interbank Offer Rate. The Group only drew down the bank borrowing in January Before that, the Group had been debt free. Due to the Group s limited exposure to borrowings and interest rate risk, the Group s currently do not use any interest rate swaps to hedge the Group s exposure to interest rate risk. 208

214 FINANCIAL INFORMATION RELATED PARTY TRANSACTIONS With regard to the related parties transactions set out in this listing document, including those set out in the section headed Continuing Connected Transactions and those set out in the Accountant s Report, the Directors confirm that these transactions were conducted on normal commercial terms and/or that such terms were no less favourable to the Group than terms available to independent third parties and were fair and reasonable and in the interests of the Shareholders as a whole. DISTRIBUTABLE RESERVES As at the Latest Practicable Date, the Company did not have any distributable reserves. PROPERTY INTEREST AND PROPERTY VALUATION Particulars of the Chairman s quarters, are disclosed in the Property Valuation Report issued by DTZ Debenham Tie Leung Limited as set out in Appendix III to this listing document. For other property interests of the Group, they are leases withoutanycommercialvalueandnocarryingvaluesof such leases are included in the Group s financial statements for the financial years ended 31 March 2012, 2013 and There is no change in the valuation of the Group s property interests as at 31 July 2014 as per the Property Valuation Report and the net book value as at 31 March 2014 as per the Accountant s Report. Accordingly, no reconciliation of the Group s property interests from 31 March 2014 to 31 July 2014 under Rule 5.07 of the Listing Rules is required. PROFIT WARNING THE COMPANY MAY ISSUE A PROFIT WARNING AFTER LISTING IN RESPECT OF THE GROUP S VERY SUBSTANTIAL REDUCTION IN THE FINANCIAL RESULTS FOR THE SIX MONTHS ENDING 30 SEPTEMBER IT IS PRELIMINARILY REVIEWED AND ESTIMATED BY THE BOARD THAT THERE WILL BE A VERY SUBSTANTIAL REDUCTION IN THE PROFIT OF THE GROUP FOR THE SIX MONTHS ENDING 30 SEPTEMBER 2014 AS A RESULT OF THE LISTING EXPENSES AMOUNTING TO APPROXIMATELY HK$11.3 MILLION, WHICH ARE ONE-OFF NON-RECURRING EXPENSES, AND THE PROFIT OF THE GROUP FOR THE FINANCIAL YEAR ENDING 31 MARCH 2015 WILL ALSO BE SIGNIFICANTLY ADVERSELY AFFECTED BY THE LISTING EXPENSES AMOUNTING TO APPROXIMATELY HK$15.8 MILLION AND TO A LESSER EXTENT, BY THE EXPECTED INCREASE IN THE RENTAL EXPENSES FOR THE GROUP S HEADQUARTERS IN HONG KONG AND THE LOSS OF ENTITLEMENT TO THE FAVOURABLE TAX TREATMENT UNDER DIPN21. RECENT DEVELOPMENTS After 31 March 2014, the Group has completed the last parts of the Reorganisation, including transferring all related assets and liabilities in relation to the Pearls and Jewellery Business from Man Sang HK, MH Shenzhen and MS Factory to MS Jewellery and HBF Jewellery, both wholly-owned subsidiaries of the Group on 30 April All related employees who worked for Man Sang HK, MH Shenzhen and MS Factory on 30 April 2014 have been transferred to the Group and have commenced 209

215 FINANCIAL INFORMATION working for the Group since 1 May Save for the consideration payable under the Reorganisation, no material incremental liability has been recorded by the Group or the Remaining Group as a result of such business transfer and reorganisation. There was no material interruption to the Group s operations as a result of such transfer and reorganisation. The consideration for the above transfer, together with all other consideration payable under the Reorganisation, of approximately HK$430.0 million (which shall equal to the Deemed Distribution amount) has been netted off against other inter-company balances between the Group and the Remaining Group, a payment of approximately HK$54.7 million by the Group to the Remaining Group and the remaining balance will be settled in full by the Capitalisation Issue before Listing. Please also refer to the section headed History, Reorganisation and Corporate Structure for details of the Reorganisation. Pursuant to DIPN21, the Group was only required to regard 50% of its taxable profit from the sales of products processed or manufactured by MS Factory or SZ Factory during the Track Record Period. For the three financial years ended 31 March 2014, the total tax savings enjoyed by the Group from the processing arrangements were approximately HK$2.6 million, HK$0.8 million and HK$2.1 million respectively. Subsequent to the Reorganisation, the Group no longer engages in the processing arrangement under the MS Processing Agreement. The Group will no longer be entitled to the above favourable tax treatment under DIPN21 in respect of profit derived from the sale of products processed or manufactured pursuant to the MS Processing Agreement. The Group will continue to be entitled to the tax benefits under the SZ Processing Agreement until the expiry of the SZ Processing Agreement on 9 May Further details of the tax saving effect under DIPN21 are stated in the paragraph headed Financial Information income tax expense in this listing document. The business of the Group continues to grow after the year ended 31 March Based on the unaudited consolidated financial statements for the three months ended 30 June 2014 prepared by the DirectorsinaccordancewithHongKongAccountingStandard34 Interim Financial Reporting issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ),whichhavebeenreviewedby the Company s reporting accountant, PricewaterhouseCoopers, in accordance with the Hong Kong Standards on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the HKICPA, the unaudited total revenue of the Group for the three months ended 30 June 2014 was approximately HK$66.6 million. The gross profit of the Group amounted to approximately HK$23.6 million representing a gross profit margin of approximately 35.3% for the three months ended 30 June The Group s initiative in strengthening its sales channels, such as the setting up of the VIP room in April 2014 and improving the product mix have contributed to the Group s results in terms of sales and gross profit margin for the said period. After 17 March 2014, the monthly rental cost of the Group s offices premises in Hong Kong increased from approximately HK$31 per square feet to approximately HK$45 per square feet representing an increase of approximately 45%. Based on this, it is estimated that the rental expenses of the Group s headquarters in Hong Kong for the year ending 31 March 2015 will amount to approximately HK$7.2 million, representing an increase of approximately 30% over that for the financial year ended 31 March

216 FINANCIAL INFORMATION The Company s listing expenses include the fees of the Sponsor, reporting accountant, legal advisers fees and other professional fees for the Reorganisation and listing application. Listing expenses expected to be incurred in relation to the Listing which are expected to be charged to the statement of comprehensive income of the Group for the financial year ending 31 March 2015 amount to approximately HK$15.8 million. Save for the listing expenses as mentioned above, the Group has not incurred any material non-recurring expenses. As far as the Directors are aware, there have been no other material changes in the general economic and market conditions, related laws and regulations or the pearl and jewellery product industry in which the Group operates, market trend the Group s major customers and suppliers that have materially and adversely affected the Group s results of operation or financial condition since 31 March 2014 and up to the Latest Practicable Date. Save for as disclosed above, the Directors confirm that, having performed reasonable due diligence on the Group, there has been no material adverse change in the Group s financial or trading position or prospects since 31 March 2014 and up to the Latest Practicable Date. DEEMED DISTRIBUTION The financial statements of the Group has been prepared on the basis that the Company had always been the owner of the Pearls and Jewellery Business through the Group throughout the Track Record Period and do not reflect the liabilities of the Company towards the Remaining Group under the Reorganisation and the transfer of the related bank balance belonging to the Pearls and Jewellery Business from the Remaining Group to the Group. The purpose of the Deemed Distribution is to replicate the liability due from the Company to MSIL under the Reorganisation. For the settlement of the current account between the Group and the Remaining Group (including the actual liability of the Group incurred under the Reorganisation), the payment of approximately HK$54.7 million to the Remaining Group has been made and the Capitalisation Issue of HK$283,146,000 will be carried out on the Record Date. Assuming the Listing (including the Deemed Distribution and the Capitalisation Issue) had taken place on 31 March 2014, the unaudited pro forma adjusted combined net tangible assets of the Group would have been approximately HK$236.2 million. Please refer to the Unaudited Pro Forma Statement of Adjusted Combined Net Tangible Assets in Appendix II to this listing document for the effect of, among other things, the Listing (including the Deemed Distribution and the Capitalisation Issue) on the net tangible assets of the Group. WORKING CAPITAL SUFFICIENCY The Directors are of the opinion that, taking into account the financial resources available to the Group, including internally generated funds, the Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the expected date of the Listing Document. NO MATERIAL ADVERSE CHANGE The Directors confirm that they have performed sufficient due diligence to confirm that, up to the date of this listing document, other than the increase in rental expenses for the Group s headquarters in Hong Kong, the listing expenses in relation to the spin-off and the loss of entitlement to the favourable 211

217 FINANCIAL INFORMATION tax treatment under DIPN21, there has been no material adverse change in the Group s financial and trading positions or prospects since 31 March 2014 and there is no event since 31 March 2014 which would materially affect the information shown in the Accountant s Report set out in Appendix I to this listing document. As far as the Directors are aware, there was no material change in the general market conditions that had affected or would affect the Group s business operations or financial conditions materially and adversely. DISCLOSURE REQUIRED UNDER THE LISTING RULES The Directors have confirmed that, as of the Latest Practicable Date, they were not aware of any circumstances that would give rise to a disclosure obligation under Rules to Rules of the Listing Rules. 212

218 FUTURE PLANS FUTURE PLANS It is the Group s objective to maintain a leading position among pearl and jewellery product designers and suppliers in Hong Kong. For a detailed description of the Group s future plans, please see the section headed Business Business Strategies on Future development on pages 97 to 101 of this listing document. 213

219 APPENDIX I ACCOUNTANT S REPORT The following is the text of a report received from the Company s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this listing document. It is prepared and addressed to the directors of the Company and to the sole sponsor pursuant to the requirements of Auditing Guideline Prospectuses and the Reporting Accountant issued by the Hong Kong Institute of Certified Public Accountants. 30 September 2014 The Board of Directors Man Sang Jewellery Holdings Limited REORIENT Financial Markets Limited Dear Sirs, We report on the financial information of Man Sang Jewellery Holdings Limited (the Company ) and its subsidiaries (together, the Group ) which comprises the combined statements of financial position as at 31 March 2012, 2013 and 2014, and the combined statements of comprehensive income, the combined statements of changes in equity and the combined statements of cash flows for each of the years ended 31 March 2012, 2013 and 2014 (the Relevant Periods ), and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of the Company and is set out in Sections I to IV below for inclusion in Appendix I to the listing document of the Company dated 30 September 2014 (the Listing Document ) in connection with the initial listing of shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited. The Company was incorporated in the Cayman Islands on 13 May 2014 as an exempted company with limited liability under the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands. Pursuant to a group reorganisation as described in Note 1.2 of Section II headed Reorganisation below, which was completed on 17 June 2014, the Company became the holding company of the subsidiaries now comprising the Group (the Reorganisation ). As at the date of this report, the Company has direct and indirect interests in the subsidiaries as set out in Note 1.2 of Section II below. All of these companies are private companies. No audited financial statements have been prepared by the Company as it is newly incorporated and has not involved in any significant business transactions since its date of incorporation, other than the Reorganisation. The audited financial statements of the other companies now comprising the Group as of the date of this report for which there are statutory audit requirements have been prepared in accordance with the relevant accounting principles generally accepted in their places of incorporation. The details of the statutory auditors of these companies are set out in Note 1.2 of Section II below. I-1

220 APPENDIX I ACCOUNTANT S REPORT The directors of the Company have prepared the combined financial statements of the Company and its subsidiaries now comprising the Group for the Relevant Periods, in accordance with the Hong Kong Financial Reporting Standards (the HKFRSs ) issued by the Hong Kong Institute of Certified Public Accountants (the HKICPA ) (the Underlying Financial Statements ). The directors of the Company are responsible for the preparation of the Underlying Financial Statements that gives a true and fair view in accordance with HKFRSs. We have audited the Underlying Financial Statements in accordance with Hong Kong Standards on Auditing (the HKSAs ) issued by the HKICPA pursuant to separate terms of engagement with the Company. The financial information has been prepared based on the Underlying Financial Statements, with no adjustment made thereon, and on the basis set out in Note 1.3 of Section II below. Directors Responsibility for the Financial Information The directors of the Company are responsible for the preparation of the financial information that gives a true and fair view in accordance with the basis of presentation set out in Note 1.3 of Section II below and the HKFRSs, and for such internal control as the directors determine is necessary to enable the preparation of financial information that is free from material misstatement, whether due to fraud or error. Reporting Accountant s Responsibility Our responsibility is to express an opinion on the financial information and to report our opinion to you. We carried out our procedures in accordance with the Auditing Guideline Prospectuses and the Reporting Accountant issued by the HKICPA. Opinion In our opinion, the financial information gives, for the purpose of this report and presented on the basis set out in Note 1.3 of Section II below, a true and fair view of the combined state of affairs of the Group as at 31 March 2012, 2013 and 2014 and of the Group s combined results and cash flows for the Relevant Periods. I-2

221 APPENDIX I ACCOUNTANT S REPORT I FINANCIAL INFORMATION OF THE GROUP The following is the financial information of the Group prepared by the directors of the Company as at 31 March 2012, 2013 and 2014, and for each of the years ended 31 March 2012, 2013 and 2014 (the Financial Information ), presented on the basis set out in Note 1.3 below: COMBINED STATEMENTS OF COMPREHENSIVE INCOME Year ended 31 March Note HK$ 000 HK$ 000 HK$ 000 Revenue 7 300, , ,473 Cost of sales 8 (187,929) (179,862) (174,827) Gross profit 112,095 81,549 93,646 Other (losses)/gains, net 7 (5,783) (289) 1,170 Selling expenses 8 (16,879) (13,448) (15,627) Administrative expenses 8 (43,419) (52,062) (47,580) Operating profit 46,014 15,750 31,609 Finance income 10 1, Finance costs 10 (169) Finance income, net 10 1, Profit before income tax 47,902 16,398 32,024 Income tax expense 11 (4,966) (2,121) (2,428) Profit for the year attributable to equity holders of the Company 42,936 14,277 29,596 Other comprehensive income: Items that will not be subsequently reclassified to profit or loss Increase in fair value of leasehold land and buildings, net of deferred tax 4,912 6,520 4,869 Items that may be subsequently reclassified to profit or loss Exchange difference on translation of foreign operation (170) Other comprehensive income, netoftax 4,912 6,520 4,699 Total comprehensive income for the year attributable to equity holders of the Company 47,848 20,797 34,295 Earnings per share for profit attributable to equity holders of the Company Basic and diluted 12 N/A N/A N/A Dividends , ,000 I-3

222 APPENDIX I ACCOUNTANT S REPORT COMBINED STATEMENTS OF FINANCIAL POSITION As at 31 March Note HK$ 000 HK$ 000 HK$ 000 ASSETS Non-current assets Property, plant and equipment 14 89,826 93,838 97,004 Deferred income tax assets 18 1,797 2,376 2,929 91,623 96,214 99,933 Current assets Inventories 15 71,156 76,771 78,282 Amounts due from related companies , ,215 70,841 Trade and other receivables 16 61,114 69,337 74,469 Cash and cash equivalents , , , , , ,187 Total assets 638, , ,120 Equity Capital and reserves attributable to the Company s equity holders Combined share capital Reserves 443, , ,851 Total equity 443, , ,861 LIABILITIES Non-current liabilities Deferred income tax liabilities 18 9,570 10,665 11,430 9,570 10,665 11,430 Current liabilities Trade and other payables 19 40,662 33,831 32,853 Amounts due to related companies , ,585 Bank borrowing 20 47,600 Current income tax liabilities 1,030 1, , ,416 81,829 Total liabilities 195, ,081 93,259 Total equity and liabilities 638, , ,120 Net current assets 361, , ,358 Total assets less current liabilities 453, , ,291 I-4

223 APPENDIX I ACCOUNTANT S REPORT COMBINED STATEMENTS OF CHANGES IN EQUITY Combined share capital Attributable to equity holders of the Company Property revaluation reserve Translation Retained Total reserve earnings equity HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Balance at 1 April , , ,921 Profit for the year 42,936 42,936 Other comprehensive income: Increase in fair value of leasehold land and buildings, net of deferred income tax 4,912 4,912 Total comprehensive income for the year 4,912 42,936 47,848 Interim dividends (note 13) (200,000) (200,000) Release of property revaluation reserve upon depreciation of leasehold land and buildings (1,088) 1,088 Total transactions with owners (1,088) (198,912) (200,000) Balance at 31 March , , ,769 Balance at 1 April , , ,769 Profit for the year 14,277 14,277 Other comprehensive income: Increase in fair value of leasehold land and buildings, net of deferred income tax 6,520 6,520 Total comprehensive income for the year 6,520 14,277 20,797 Interim dividends (note 13) (100,000) (100,000) Release of property revaluation reserve upon depreciation of leasehold land and buildings (981) 981 Total transactions with owners (981) (99,019) (100,000) Balance at 31 March , , ,566 I-5

224 APPENDIX I ACCOUNTANT S REPORT Combined share capital Attributable to equity holders of the Company Property revaluation reserve Translation Retained Total reserve earnings equity HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Balance at 1 April , , ,566 Profit for the year 29,596 29,596 Other comprehensive income: Increase in fair value of leasehold land and buildings, net of deferred income tax 4,869 4,869 Exchange difference on translation of foreign operation (170) (170) Total comprehensive income for the year 4,869 (170) 29,596 34,295 Release of property revaluation reserve upon depreciation of leasehold land and buildings (1,129) 1,129 Total transactions with owners (1,129) 1,129 Balance at 31 March ,839 (170) 346, ,861 I-6

225 APPENDIX I ACCOUNTANT S REPORT COMBINED STATEMENTS OF CASH FLOWS Year ended 31 March Note HK$ 000 HK$ 000 HK$ 000 Cash flows from operating activities Profit before income tax 47,902 16,398 32,024 Adjustments for: Interest income (1,888) (648) (584) Interest expenses 169 Depreciation of property, plant and equipment 6,685 6,272 5,657 Gain on disposals of property, plant and equipment (41) (407) (80) Operating cash flows before working capital changes 52,658 21,615 37,186 Change in working capital: Increase in inventories (19,052) (5,615) (1,511) Increase in trade and other receivables (7,681) (7,965) (5,390) Decrease in trade and other payables (3,782) (6,831) (978) Increase/decrease in amounts due from/to related companies (10,418) (7,076) (5,719) Cash generated from/(used in) operations 11,725 (5,872) 23,588 Interest paid (169) Income taxes refund/(paid) 1,708 (5,771) (899) Net cash generated from/(used in) operating activities 13,433 (11,643) 22,520 Cash flows from investing activities Purchase of property, plant and equipment (2,253) (2,479) (3,021) Proceeds from disposals of property, plant and equipment Interest received 1, Amounts due from/to related companies (305,491) 8,788 (93,344) Net cash generated from/(used in) investing activities (305,684) 7,378 (95,429) Cash flows from financing activities Proceeds from borrowings 48,000 Repayments of borrowings (400) Net cash generated from financing activities 47,600 Net decrease in cash and cash equivalents 25 (292,251) (4,265) (25,309) Cash and cash equivalents at beginning of the year 490, , ,110 Effect of foreign exchange rate changes (18) (206) Cash and cash equivalents at end of the year , , ,595 I-7

226 APPENDIX I ACCOUNTANT S REPORT II NOTES TO THE COMBINED FINANCIAL INFORMATION 1 GENERAL INFORMATION, REORGANISATION AND BASIS OF PRESENTATION 1.1 General information Man Sang Jewellery Holdings Limited ( the Company ) was incorporated in the Cayman Islands on 13 May 2014 as an exempted company with limited liability under the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands. The address of its registered office is Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands. The Company is an investment holding company. The Company and its subsidiaries now comprising the Group (together the Group ) are principally engaged in purchasing, processing, assembling, merchandising and wholesale distribution of pearls and jewellery products ( the Pearls and Jewellery Business ). The ultimate holding company of the Company is Man Sang International Limited ( MSIL ), a company whose shares are listed on the Main Board of The Stock Exchange of Hong Kong. 1.2 Reorganisation Prior to the completion of the reorganisation as described below, the Pearls and Jewellery Business was principally conducted through Arcadia Jewellery Limited ( Arcadia HK ), Man Sang Jewellery Company Limited ( ManSangHK ) and Man Hing Industry Development (Shenzhen) Co., Ltd. ( MH SZ ), which are indirectly wholly owned subsidiaries of MSIL. In preparation for listing of the Company s shares on the Main Board of the Stock Exchange of Hong Kong Limited, the Group underwent the reorganisation to transfer the Pearls and Jewellery Business to the Company ( Reorganisation ) principally through the following steps: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) On 30 April 2014, MSIL transferred the entire issued share capital of Man Sang Innovations Limited to Arcadia Global Holdings Limited ( Arcadia BVI ) for a consideration of HK$1. On 30 April 2014, Man Sang HK transferred the entire issued share capital of Arcadia HK to Arcadia Investment Holdings Limited for a consideration of HK$2,288,000. On 30 April 2014, Man Sang HK entered into an agreement pursuant to which Man Sang HK assigned the relevant assets and liabilities of the Pearls and Jewellery Business to Man Sang Jewellery (Hong Kong) Limited ( MS Jewellery HK ). On 29 May 2014, MH SZ transferred the entire equity interest in Kasiao (Shenzhen) Jewellery Company Limited to Hui Bao Feng Jewellery (Shenzhen) Limited ( HBF Jewellery ) for a consideration of RMB1,327,000. On 30 April 2014, MH SZ entered into an agreement pursuant to which MH SZ assigned the relevant assets and liabilities of the Pearls and Jewellery Business to HBF Jewellery. On 30 April 2014, Man Sang Development Company Limited, a wholly owned subsidiary of MSIL, transferred the entire issued share capital of Hong Kong Man Sang Investments Limited to Man Sang International Holdings Limited ( MS Holdings ) for a consideration of HK$50,930,000. On 13 May 2014, the Company was incorporated in the Cayman Islands. A share was allotted and issued at par and subsequently transferred to MSIL, and the Company became a wholly-owned subsidiary of MSIL. On 17 June 2014, the Company subscribed the 1,500 issued share capital of MS Holdings and 1,000 issued share capital of Arcadia BVI in a consideration of US$1 per share and US$1 per share, respectively. On 17 June 2014, MS Holdings and Arcadia BVI repurchased the one share each issued to MSIL in a consideration of US$1. I-8

227 APPENDIX I ACCOUNTANT S REPORT Upon the completion of the Reorganisation and as at the date of this report, the Company has direct or indirect interests in the following subsidiaries: Name Place and date of incorporation/ establishment Principal activities Type of legal status Issued and paid up/registered capital Effective interest held Note Directly held Arcadia Global Holdings Limited Man Sang International Holdings Limited British Virgin Islands/ 15 February 2013 British Virgin Islands/ 15 February 2013 Investment holding Limited company Ordinary US$1, % (a) Investment holding Limited company Ordinary US$1, % (a) Indirectly held Arcadia Investment Holdings Limited Hong Kong/ 28 February 2013 Investment holding Limited company Ordinary HK$1 100% (b) Arcadia Jewellery Limited Hong Kong/ 18 March 1993 Trading and manufacturing of jewellery products Limited company Ordinary HK$500, % (c) Hong Kong Man Sang Investments Limited Hong Kong/ 5 December 1997 Director s quarter holding Limited company Ordinary HK$5, % (c) Man Sang Innovations Limited Hong Kong/ 4 March 1998 Trademark holding Limited company Ordinary HK$5, % (c) Man Sang Jewellery (Hong Kong) Limited Hong Kong/ 5 July 2013 Trading of pearl products Limited company Ordinary HK$1 100% (d) Kasiao (Shenzhen) Jewellery Company Limited ( 深圳市卡斯奧珠寶有限公司 ) The People s Republic of China (the PRC )/ 20 December 2012 Jewellery and pearl business Limited company Registered capital RMB2,000, % (a), (e) Hui Bao Feng Jewellery (Shenzhen) Limited ( 匯寶豐珠寶 ( 深圳 ) 有限公司 ) The PRC/ 6 November 2013 Purchasing and processing of pearls and assembling of pearl jewellery Wholly owned foreign enterprise Registered capital US$2,000, % (a), (e) Notes: (a) (b) (c) No audited financial statements were issued for the company as it is either newly incorporated or not required to issue audited financial statements under the statutory requirements of its place of incorporation. The statutory financial statements for the period from 28 February 2013 (date of incorporation) to 31 March 2014 were audited by PricewaterhouseCoopers. The statutory financial statements for the years ended 31 March 2012, 2013 and 2014 were audited by PricewaterhouseCoopers. I-9

228 APPENDIX I ACCOUNTANT S REPORT (d) The statutory financial statements for the period from 5 July 2013 (date of incorporation) to 31 March 2014 were audited by PricewaterhouseCoopers. (e) The English names of certain subsidiaries represent the best effort by the management of the Company in translating their Chinese names as they do not have official English names. 1.3 Basis of presentation Immediately prior to the Reorganisation, the Pearls and Jewellery Business is held by MSIL and operated mainly through the three wholly owned subsidiaries (namely Acadia HK, Man Sang HK and MH SZ). Pursuant to the Reorganisation, the Pearls and Jewellery Business is transferred to and held by the Company. The Company has not been involved in any other business prior to the Reorganisation and does not meet the definition of a business. The Reorganisation is merely a reorganisation of the Pearls and Jewellery Business with no change in management of such business and the ultimate owner of the Pearls and Jewellery Business remains the same. Accordingly, the combined financial information of the companies now comprising the Group is presented using the carrying values of the Pearls and Jewellery Business under the Company for all periods presented. For the purpose of this report, the Financial Information has been prepared on a basis in accordance with the principles of the Auditing Guideline Prospectuses and the Reporting Accountant issued by the HKICPA. Intercompany transactions, balances and unrealised gains/losses on transactions between group companies are eliminated on combination. Prior to the Reorganisation, MH SZ engaged in the Pearls and Jewellery Business and another dissimilar business. The combined statements of financial position include assets and liabilities that are directly related and clearly identified to the Pearls and Jewellery Business. The combined statements of comprehensive income include all revenues, related costs, expenses and charges directly generated and incurred by the Pearls and Jewellery Business. Certain administrative expenses and employee benefit expenses for which specific identification method is not practicable are allocated to the Pearls and Jewellery Business according to the ratio of headcount of the Pearls and Jewellery Business to the total headcount of MSIL and the actual time incurred of the Pearls and Jewellery Business. The directors consider that the above method of allocation and presentation provides the fairest approximation of the amounts attributable to the financial information of the Pearls and Jewellery Business for each of the years ended 31 March 2012, 2013 and SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of the Financial Information are set out below. These policies have been consistently applied throughout the Relevant Periods, unless otherwise stated. 2.1 Basis of preparation The principal accounting policies applied in the preparation of the Financial Information which are in accordance with the Hong Kong Financial Reporting Standards ( HKFRS ) issued by the HKICPA are set out below. The Financial Information has been prepared under the historical cost convention, as modified by the revaluation of leasehold land and buildings, which is carried at fair value. The preparation of the Financial Information in conformity with HKFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Information, are disclosed in Note 3, and all relevant standards, amendments and interpretation to the existing standards that are effective during the Relevant Period have been adopted by the Group consistently. I-10

229 APPENDIX I ACCOUNTANT S REPORT The following are new standards and amendment to existing standards and interpretations which have been issued but are not effective for financial year beginning on or after 1 April 2014 and have not been early adopted: Effective for annual periods beginning on or after Amendment to HKAS 32 Financial instruments: Presentation Offsetting 1 January 2014 financial assets and financial liabilities Amendment to HKAS 19 Defined benefit plans 1 July 2014 Amendment to HKFRS 10, Consolidation for investment entities 1 January 2014 HKFRS 12 and HKAS 27 Amendment to HKFRSs Annual improvements to HKFRSs July2014 cycle Amendment to HKFRSs Annual improvements to HKFRSs July2014 cycle Amendment to HKAS 36 Recoverable amount disclosures for 1 January 2014 non-financial assets Amendment to HKAS 39 Financial instruments: Recognition and 1 January 2014 measurement Novation of derivatives HKFRS 14 Regulatory deferral accounts 1 January 2016 Amendment to HKFRS 11 Accounting for acquisitions of interests in 1 January 2016 joint operation Amendments to HKAS16 and Clarification of acceptable methods of 1 January 2016 HKAS 38 depreciation and amortisation HKFRS 15 Revenue from contracts with customers 1 January 2017 HKFRS 9 Financial instruments effective date to be determined HK(IFRIC)-Int 21 Levies 1 January 2014 The Group is assessing the impact of these standards, amendments and interpretations and does not anticipate that the adoption will result in any material impact on the Group s results of operation and financial position. The Group intends to adopt the above standards, amendments and interpretations when they become effective. 2.2 Subsidiaries Subsidiaries are all entities (including a structured entity) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Inter-company transactions, balances, income and expenses on transactions between group companies are eliminated. Profits and losses resulting from inter-company transactions that are recognised in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the executive directors of the Group that make strategic decisions. 2.4 Foreign currency translation (a) Functional and presentation currency Items included in the Financial Information of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The Financial Information is presented in Hong Kong dollars ( HK$ ), which is the functional and presentation currency of the Company. I-11

230 APPENDIX I ACCOUNTANT S REPORT (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currency are recognised in the profit or loss. All foreign exchange gains and losses are presented in the combined statement of comprehensive income within other (losses)/gains net. (c) Group companies The results and financial position of all the Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:. assets and liabilities for each statements of financial position presented are translated at the closing rate at the date of that statements of financial position;. income and expenses for each statements of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and. all resulting currency translation differences are recognised as a separate component of equity. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income. 2.5 Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the combined statement of comprehensive income during the year in which they are incurred. Leasehold land and buildings are stated in the combined statement of financial position at their revalued amount, being the fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses. Revaluation are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair valued at the combined statement of financial position date. Any revaluation increase is credit to the property revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense, in which case the increase is credit to the statement of comprehensive income to the extent of the decrease previously charged. A decrease in the net carrying amount arising on revaluation of an asset is dealt with as an expense to the extent that it exceeds the balance, if any, on the property revaluation reserve relating to a previous revaluation of that asset. On subsequent sale or retirement of a revalued asset, the attributable revaluation surplus is transferred to retained earnings. I-12

231 APPENDIX I ACCOUNTANT S REPORT Depreciation is provided to write off the cost less accumulated impairment losses over their estimated useful lives from the date on which they are available for use and after taking into account of their estimated residual values, using the straight-line method, at the following rates per annum: Leasehold land and buildings Over the shorter of the term of the lease or 50 years Leasehold improvements 25% 33% Plant and machinery 20% 25% Furniture, fixtures and equipment 25% Motor vehicles 25% An asset s carrying amount is written down immediately to its recoverable amount if the asset s carryingamountis greater than its estimated recoverable amount. Useful lives are reviewed at each combined statement of financial position date. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within Other (losses)/gains net in the combined statement of comprehensive income. 2.6 Impairment of non-financial assets Assets that have an indefinite useful life for example, goodwill or intangible assets not ready to use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the combined statement of financial position date. 2.7 Financial assets (i) Classification The Group classifies its financial assets in the following categories: loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.. Loans and receivables Loans and receivable are non-derivative financial assets with fixed or determinable payments that are notquotedinanactivemarket.theyare included in current assets, except for maturities greater than 12 months after the combined statement of financial position date. These are classified as non-current assets. The Group s loans and receivables comprise trade and other receivable, amount due from related companies and cash and cash equivalents in the combined statement of financial position. (ii) Recognition and measurement Regular way purchases and sales of financial assets are recognised on the trade-date thedateonwhichthe Group commits to purchase or sell the assets. Loans and receivables are carried at amortised cost using the effective interest method. (iii) Assets carried at amortised cost The Group assesses at each combined statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or I-13

232 APPENDIX I ACCOUNTANT S REPORT more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the combined statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in the combined statement of comprehensive income. 2.8 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the combined statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. 2.9 Inventories Inventories are stated at the lower of cost and net realisable value. Cost, which comprises all costs of purchase and, where applicable, cost of conversion and other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average cost method. Net realisable value represents the estimated selling price in the ordinary course of business less the estimated selling expenses Trade and other receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment Cash and cash equivalents Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments with original maturities of three months or less, in the combined statement of financial position Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses. I-14

233 APPENDIX I ACCOUNTANT S REPORT Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense Bank borrowings Bank borrowings are recognised initially at fair value, net of transaction costs incurred. Bank borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the combined statement of comprehensive income over the period of the bank borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the bank borrowings to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the drawdown occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Bank borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Borrowing costs are recognised in profit or loss in the period in which they are incurred Current and deferred income tax The tax expense for the period comprises current and deferred income tax. Tax is recognised in the combined statement of comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. (a) Current income tax The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the combined statement of financial position date in the countries where the Group operates and generates taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. (b) Deferred income tax Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Information. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the combined statement of financial position date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. I-15

234 APPENDIX I ACCOUNTANT S REPORT Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis Revenue recognition Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts returns and value added taxes. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met. The Group bases its estimates of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Sale of goods is recognised on transfer of risks and rewards of ownership, which generally coincides with the time when the goods are delivered to customers and title has passed Interest income Interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that discounts the estimated future cash receipts through the expected life of the financial asset to that asset s net carrying amount Retirement benefits scheme Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the combined statement of financial position. Employee entitlements to sick leave and maternity leave are not recognised until the time of leave. In accordance with the rules and regulations in the PRC, the PRC based employees of the Group participate in various defined contribution retirement benefit plans organised by the relevant municipal and provincial governments in the PRC under which the Group and the PRC based employees are required to make monthly contributions to these plans calculated as a percentage of the employees salaries. The employees of the Group s subsidiaries in the PRC are members of a state-managed retirement benefits scheme being operated by the local PRC government. The subsidiaries are required to contribute 10% to 15% of the average basic salary to the retirement benefits scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefits scheme is to make the specified contributions. The municipal and provincial governments undertake to assume the retirement benefit obligations of all existing and future retired the PRC based employees payable under the plans described above. Other than the monthly contributions, the Group has no further obligation for the payment of retirement and other post-retirement benefits of its employees. The assets of these plans are held separately from those of the Group in independently administered funds managed by the PRC government. The Group also participates in a pension scheme under the rules and regulations of the Mandatory Provident Fund Scheme Ordinance ( MPF Scheme ), which is a defined contribution retirement scheme for all employees in Hong Kong. The contributions to the MPF Scheme are based on minimum statutory contribution requirement of 5% of eligible employees relevant aggregate income. The monthly contributions of each of the employer and the employee are subject to a cap of HK$1,000, HK$1,250 and HK1,250 during each of the years ended 31 March 2012, 2013 and 2014 respectively, and thereafter contributions are voluntary. The assets of this pension scheme are held separately from those of the Group in independently administered funds. The Group s contributions to the defined contribution retirement schemes are expensed as incurred. I-16

235 APPENDIX I ACCOUNTANT S REPORT 2.18 Operating leases Lease in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentivise received from the lessor), including upfront payment made for land use right, are charged to the combined statement of comprehensive income on a straight-line basis over the period of these leases. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENT In the application of the Group s accounting policies, which are described in note 2, the Group s management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are the key assumptions concerning the future, and other key areas of judgement that may have a significant impact in determining the carrying amounts of assets and liabilities. (a) Estimated useful lives of property, plant and equipment The Group s management determines the estimated useful lives and related depreciation charges for its property, plant and equipment. This estimate is based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to market conditions. Management will increase the depreciation charge where useful lives are less than previously estimated lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. (b) Impairment of trade receivables The Group s management determines the provision for impairment of trade receivables on a regular basis. This estimate is based on the credit history of its customers and prevailing market conditions. Management reassesses the provision for impairment of trade receivables at the end of each reporting date. (c) Net realisable value of inventories Net realisable value of inventories is the estimated selling price in the ordinary course of business, less estimated selling expenses. These estimates are based on the current market condition and the historical experience of selling products of similar nature. It could change significantly as a result of competitor actions in response to severe industry cycles. Management reassesses these estimations at the end of each reporting date to ensure inventories are shown at the lower of cost and net realisable value. (d) Current and deferred income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. I-17

236 APPENDIX I ACCOUNTANT S REPORT 4 CAPITAL RISK MANAGEMENT The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. Management of the Group reviews the capital structure periodically. As a part of this review, Management of the Group considers costs of capital, its bank covenant obligations and the risks associated with issued share capital and will balance its overall capital structure through the drawn down of bank borrowings, the repayment of existing borrowings or the adjustment of dividend to shareholders. 5 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group s major financial instruments are trade and other receivables, cash and cash equivalents, trade and other payables, amounts due from/to related companies and bank borrowing. Details of these financial instruments are disclosed in respective notes. The risks associated with these financial instruments, include market risk (foreign exchange risk and interest rate risk), credit risk and liquidity risk, and the policies on how to mitigate these risks are set out below. The Group does not have written risk management policies and guidelines. However, the Group s management meets periodically to analyse and formulate measures to manage the Group s exposure to different risks arising from the use of financial instruments. Generally, the Group employs conservative strategies regarding its risk management. The Group s management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. 5.1 Market risk (a) Foreign exchange risk The Group s foreign currency assets, liabilities and transactions are largely denominated in Chinese Renminbi ( RMB ) and United States dollar ( US$ ). These currencies are not the functional currencies of the Group entities to which these balances relate. The Group is exposed to foreign currency risk arising from the movements in the exchange rates of these different currencies against the functional currencies of the Group entities. The Group manages its foreign currency risks by closely monitoring the movement of the foreign currency rates. Most of the Group s business transactions are denominated in HK$, US$ and RMB. The Group considers there is no significant exposure to foreign exchange fluctuations as long as the Hong Kong-United States dollar exchange rate remains pegged. As at 31 March 2012, 2013 and 2014, if HK$ had strengthened/weakened by 3% against RMB with all other variables held constant, post-tax profit for the years would have been approximately HK$136,000 higher/lower, and HK$257,000 and HK$464,000 lower/higher, respectively, mainly as a result of foreign exchange gains/losses on translation of RMB denominated receivables and payables. (b) Interest rate risk Except for the cash held at banks, the Group has no other significant interest bearing assets. The Group s income and operating cash flows are substantially independent of changes in market interest rates. As at 31 March 2012, 2013 and 2014, if interest rates on cash held at banks had been 25 basis points higher/ lower with all other variables held constant, post-tax profit for the year would have been approximately HK$492,000, HK$474,000 and HK$403,000 higher/lower, mainly as a result of higher/lower interest income on cash at banks. As at 31 March 2014, the Group s exposure to interest rate risk relates primarily to variable-rate borrowings of HK$47,600,000. Borrowings at variable rates expose the Group to cash flow interest rate risk which is partially offset by cash deposit held at variable rates. It is the Group s policy to keep the majority of borrowings at floating interest rate so as to minimise the cash flow interest rate risk. The Group s exposures to interest rates on financial liabilities are detailed in the liquidity risk section of this note. The Group s interest rate risk is mainly concentrated on the fluctuation of market interest rates arising from the Group s deposits and borrowings. I-18

237 APPENDIX I ACCOUNTANT S REPORT At 31 March 2014, if interest rates had been 25 basis points higher/lower with all other variables held constant, post-tax interest expense on floating rate borrowing would have been approximately HK$99,000 higher/ lower. 5.2 Credit risk The credit risk of the Group mainly arises from trade receivables, deposits and other receivables, amounts due from related companies and bank balances. In respect of cash and cash equivalents, the Group will place its cash in banks and financial institutions with high credit ratings assigned by international credit-rating agencies. As at 31 March 2012, 2013 and 2014, the cash and cash equivalents in the PRC, were deposited in the major financial institutions in the PRC with good credit rating. The Group categorises its major counterparties into the following groups: Group 1 Group 2 Group 3 Top 4 banks in the PRC (China Construction Bank, Bank of China, Agriculture Bank of China, and Industrial and Commercial Bank of China); Other major listed banks in the PRC; and Regional banks in the PRC. All cash at bank balances in the PRC as at 31 March 2012, 2013 and 2014 are placed with Group 1 institutions. As at 31 March 2012, 2013 and 2014, top five customers of the Group accounted for approximately 71%, 69% and 69% respectively, to the trade receivables of the Group. Most of the Group s customers do not have independent rating. Before accepting any new customer, where available at reasonable cost, the Group obtains credit report from commercial information provider to assess the potential customer s credit and defines credit limits by customer. Credit limits of customers are reviewed periodically. In order to minimise the credit risk, the management of the Group has established credit limits, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. I-19

238 APPENDIX I ACCOUNTANT S REPORT 5.3 Liquidity risk The following tables show the remaining contractual maturities at the balance sheet date of the Group s tradeand other payables, amounts due to related companies and bank borrowing, based on undiscounted cash flows (include interest payments computed using contractual rates or, if floating, based on rates current at the balance sheet date) and the earliest date the Group can be required to pay. Specifically, for bank borrowing which contain a repayment on demand clause which can be exercised at the bank s sole discretion, the analysis shows the cash outflow based on the earliest period in which the Group can be required to pay, that is if the lenders were to invoke their unconditional rights to call the loans with immediate effect. The Group s financial liabilities have contractual undiscounted cash flows as follows: On demand and within 1year Between 1and 2 years Between 2and 5 years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 As at 31 March 2012 Trade and other payables 38,968 38,968 Amounts due to related companies 143, , , ,773 As at 31 March 2013 Trade and other payables 33,239 33,239 Amounts due to related companies 338, , , ,824 As at 31 March 2014 Trade and other payables 32,187 32,187 Bank borrowing 47,600 47,600 79,787 79,787 The following table summarises the maturity analysis of bank borrowings with a repayment on demand clause based on agreed scheduled repayments set out in the loan agreement. The amounts include interest payments computed using contractual rates. As a result, these amounts were greater than the amounts disclosed in the on demand time band in the maturity analysis above. Taking into account the Group s financial position, the directors do not consider that it is probable that the bank will exercise its discretion to demand immediate repayment. The directors believe that such bank borrowings will be repaid in accordance with the scheduled repayment dates set out in the loan agreement. Maturity analysis Bank borrowings subject to a repayment on demand clause based on scheduled repayments Within 1year Between 1 and 2 years Between 2 and 5 years Total HK$ 000 HK$ 000 HK$ 000 HK$ March ,377 3,326 45,023 51,726 I-20

239 APPENDIX I ACCOUNTANT S REPORT 5.4 Fair value estimation The different levels of the fair value measurement hierarchy have been defined as follows:. Quoted prices (unadjusted) in active markets for identifiable assets and liabilities ( level 1 ). Inputs other than quoted prices included with in level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) ( level 2 ). Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs) ( level 3 ) Leasehold land and buildings are stated in the combined statement of financial position at their revalued amount, which are classified as level 2 for the purpose of measuring fair value. See Note14 for disclosures of the leasehold land and buildings that are measured at fair value. 6 SEGMENT INFORMATION The Group s management reviews the Group s internal reporting in order to assess performance and allocate resources. They have determined the operating segments based on these reports. The Group is principally engaged in purchasing, processing, assembling merchandising and wholesale distribution of pearls and jewellery products. Information reported to the Group s management for the purpose of resources allocation and performance assessment focuses on the operation results of the Group as a whole as the Group s resources are integrated. Accordingly, the Group has identified one operating segment pearls and jewellery operation, and segment disclosures are not presented. The Group operates its business in Hong Kong and places other than Hong Kong. The Group s revenue by geographical locations (as determined by the area or country in which the customer is located) is analysed as follows: Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Europe 150, ,337 91,304 North America 76,991 67,472 79,801 Asian countries (excluding Hong Kong) 50,867 56,014 81,776 Hong Kong 13,027 9,284 9,742 Others 8,636 8,304 5, , , ,473 The following is an analysis of the carrying amounts of the Group s segment assets analysed by geographical area in which the assets are located: Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Hong Kong 593, , ,911 The PRC Mainland 45,598 77,884 72, , , ,120 Revenue from the transactions with three individual customers amounted to HK$54,211,000, HK$38,384,000 and HK$37,951,000 were more than 10% of total revenue of the Group for the financial year ended 31 March Revenue from the transactions with two individual customers amounted to HK$34,753,000 and HK$28,763,000 were more than 10% of total revenue of the Group for the financial year ended 31 March I-21

240 APPENDIX I ACCOUNTANT S REPORT Revenue from the transactions with two individual customers amounted to HK$30,946,000 and HK$29,483,000 were more than 10% of total revenue of the Group for the financial year ended 31 March REVENUE AND OTHER (LOSSES)/GAINS, NET The Group s revenue recognised during the Relevant Periods are as follows: Revenue Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Sale of pearls and jewellery 300, , ,473 Other (losses)/gains, net Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Exchange losses (6,120) (1,669) (640) Gain on disposals of property, plant and equipment Reversal of other payables 1,000 Others (5,783) (289) 1,170 8 EXPENSES BY NATURE Year ended 31 March Note HK$ 000 HK$ 000 HK$ 000 Cost of inventories sold 153, , ,089 Employee benefit expense (including directors) 9 62,350 61,263 64,977 Audit remuneration ,235 Depreciation 14 6,685 6,272 5,657 Bad and doubtful debts 16 (7,918) (3,763) (6,797) Provision for/(reversal of provision) of stock obsolescence 15 (7,800) (3,636) 1,357 Operating lease 8,360 8,099 8,026 Exhibition 5,953 4,801 6,555 Commission and customers designated payments 8,106 5,857 6,255 Utility 1,289 1,538 1,498 Transportation 1,693 1,300 1,507 Travelling 1,995 2,393 2,465 Others 13,108 17,134 11,210 Total 248, , ,034 I-22

241 APPENDIX I ACCOUNTANT S REPORT 9 EMPLOYEE BENEFIT EXPENSES (INCLUDING DIRECTORS EMOLUMENTS) Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Salaries, wages and other benefits 60,029 58,820 59,560 Pension costs defined contribution plans and social security costs 2,321 2,443 5,417 62,350 61,263 64,977 (a) Directors emoluments The emoluments of the directors of the Company during the Relevant Periods are set out below: Financial year ended 31 March 2012 Performance Fees Salaries and other allowances related incentive payment Retirement benefit contributions Other benefits Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Executive directors Ms. Yau Sau Man, Amy 1,620 1, ,891 Mr. Chen Zhi Wei ,097 Non-executive director Mr. Cheng Chung Hing ,033 3,185 1, ,021 Financial year ended 31 March 2013 Performance Fees Salaries and other allowances related incentive payment Retirement benefit contributions Other benefits Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Executive directors Ms. Yau Sau Man, Amy 1,620 1, ,893 Mr. Chen Zhi Wei ,077 Non-executive director Mr. Cheng Chung Hing ,061 3,210 1, ,031 I-23

242 APPENDIX I ACCOUNTANT S REPORT Financial year ended 31 March 2014 Performance Fees Salaries and other allowances related incentive payment Retirement benefit contributions Other benefits (Note) Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Executive directors Ms. Yau Sau Man, Amy 1,620 1, ,894 Mr. Chen Zhi Wei ,115 Non-executive director Mr. Cheng Chung Hing ,121 1, ,953 The remuneration shown above represents remuneration received from the Group by these directors in their capacity as employees to the Group and/or in their capacity as directors of the companies now comprising the Group during the Relevant Periods. No directors waived or agreed to waive any emoluments during the Relevant Periods. No incentive payment for joining the Group or compensation for loss of office was paid or payable to any directors during the Relevant Periods. Mr. Fung Yat Sang, Mr. Look Andrew and Mr. Tsui Francis King Chung were appointed as the Company s independent non-executive directors on 26 September During the Relevant Periods, the independent non-executive directors have not yet been appointed and did not receive any remuneration. Note: Other benefits for each of the years ended 31 March 2012, 2013 and 2014 represented the portion of the approximate director s quarters expenses, including the estimated market rental value in respect of a Group s property of HK$1,553,000, HK$1,692,000 and HK$1,704,000 respectively, (which is included here for disclosure purposes only and has not been actually recorded in the Group s profit and loss account), actual government rates, management fee and car park rental expenses, which are attributable to the services provided by the director to the Pearl and Jewellery Business during the Track Record Period. Subsequent to 31 March 2014, the board of directors approved the director to continue occupying the property for the year ending 31 March 2015 (note 27). (b) Five highest paid individuals For each of the years ended 31 March 2012, 2013 and 2014, the five individuals whose emoluments were the highest in the Group include 3, 3 and 3 directors, respectively, whose emoluments are reflected in the analysis above. The emoluments paid/payable to the remaining 2, 2 and 2 individuals, during each of the years ended 31 March 2012, 2013 and 2014 respectively, are as follows: Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Salaries, wages and other benefits 1,457 1,416 1,207 Pension costs-defined contribution plans and social security costs ,471 1,445 1,237 I-24

243 APPENDIX I ACCOUNTANT S REPORT During the Relevant Periods, the emoluments of the highest paid individuals fell within the following bands: Number of individuals Emolument band HK$0 HK$500,000 HK$500,000 HK$1,000, During the Relevant Periods, no emoluments were paid respectively by the Group to the five highest paid individuals, including directors, as inducement to join or upon joining the Group or a compensation for loss of office. 10 FINANCE INCOME, NET Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Finance income Interest income on short-term bank deposits 1, Finance costs Interest expenses on borrowings (169) (169) Finance income net 1, INCOME TAX EXPENSE Hong Kong profits tax Hong Kong profits tax has been provided at the rate of 16.5% on the estimated assessable profit for the Relevant Periods. The PRC enterprise income tax The PRC enterprise income tax in respect of operations in Mainland China is calculated at the applicable tax rates on the estimated assessable profits for the Relevant Periods based on existing legislation, interpretations and practices in respect thereof. Withholding tax on distributed/undistributed profits The PRC tax law imposes a withholding tax at 10%, unless reduced by a tax treaty, for dividends distributed by the PRC subsidiaries to its immediate holding company outside the PRC for earnings generated beginning on 1 January Deferred income tax liabilities has not been recognised for withholding tax that would be payable on the unremitted retained earnings of certain subsidiaries as the Company controls the dividend policies of these subsidiaries and it is not probable that these subsidiaries would distribute earnings in the foreseeable future. I-25

244 APPENDIX I ACCOUNTANT S REPORT The amount of income tax expense charged to the combined statements of comprehensive income represents: Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Current tax: Hong Kong profits tax 4,227 1,321 3,178 The PRC enterprise income tax 783 1, ,010 2,402 3,980 (Over)/under-provision in prior years: Hong Kong profits tax (380) The PRC enterprise income tax (490) (380) Deferred income tax: Net charge/(credit) (note 18) 336 (383) (1,662) 336 (383) (1,662) 4,966 2,121 2,428 The amount of taxation charge for the Relevant Periods can be reconciled to the profit before income tax as follows: Year ended 31 March HK$ 000 HK$ 000 HK$ 000 Profit before income tax 47,902 16,398 32,024 Tax calculated at domestic income tax rate of 16.5% 7,904 2,706 5,284 Effect of different tax rates of subsidiaries operating in other jurisdictions 430 (65) (312) Tax effect of: Changes in tax rate (29) Expenses that are not deductible for tax purpose 1,290 1,506 1,233 Income not subject to tax (4,737) (3,208) (4,677) (Over)/under-provision in prior year (380) Others 488 1, Income tax expense for the year 4,966 2,121 2, EARNINGS PER SHARE Earnings per share information is not presented as its inclusion, for the purpose of this report, is not considered meaningful due to the Reorganisation and the presentation of the results for the Relevant Periods on a combined basis as set out in Note 1.3 of this section. I-26

245 APPENDIX I ACCOUNTANT S REPORT 13 DIVIDENDS No dividend has been declared and paid by the Company since its incorporation. Dividends during each of the years ended 31 March 2012 and 2013 represented dividends declared by Man Sang HK to Man Sang Enterprise Limited on 30 September 2011 and 29 November 2012, respectively, no other dividends were declared by the companies now comprising the Group to their then respective shareholders during the Relevant Periods. The rates for dividends and the number of shares ranking for dividends are not presented as such information is not considered meaningful for the purpose of this report. 14 PROPERTY, PLANT AND EQUIPMENT Leasehold land and buildings Leasehold improvements Plant and machinery Furniture, fixtures and equipment Motor vehicles Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 April 2011 Cost 7,721 22,865 5,383 5,975 41,944 Valuation 78,500 78,500 Accumulated depreciation (5,808) (17,614) (4,502) (4,057) (31,981) Net book value 78,500 1,913 5, ,918 88,463 Year ended 31 March 2012 Opening net book amount 78,500 1,913 5, ,918 88,463 Additions 1, ,253 Disposals (9) (122) (131) Depreciation (2,183) (1,114) (2,257) (473) (658) (6,685) Increase in fair value 3,700 3,700 Eliminated on revaluation 2,183 2,183 Exchange difference Closing net book amount 82, , ,174 89,826 At 31 March 2012 Cost 7,781 24,773 5,687 5,496 43,737 Valuation 82,200 82,200 Accumulated depreciation (6,981) (19,878) (4,930) (4,322) (36,111) Net book value 82, , ,174 89,826 Year ended 31 March 2013 Opening net book amount 82, , ,174 89,826 Additions 1, ,479 Disposals (14) (14) Depreciation (2,419) (779) (2,162) (424) (488) (6,272) Increase in fair value 5,400 5,400 Eliminated on revaluation 2,419 2,419 Closing net book amount 87, , ,432 93,838 I-27

246 APPENDIX I ACCOUNTANT S REPORT Leasehold land and buildings Leasehold improvements Plant and machinery Furniture, fixtures and equipment Motor vehicles Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 31 March 2013 Cost 7,781 26,108 5,858 4,214 43,961 Valuation 87,600 87,600 Accumulated depreciation (7,760) (21,897) (5,284) (2,782) (37,723) Net book value 87, , ,432 93,838 Year ended 31 March 2013 Opening net book amount 87, , ,432 93,838 Additions 658 1, ,021 Disposals (148) (124) (272) Depreciation (2,643) (144) (1,877) (317) (676) (5,657) Increase in fair value 3,400 3,400 Eliminated on revaluation 2,643 2,643 Exchange difference Closing net book amount 91, , ,254 97,004 At 31 March 2014 Cost 8,439 24,599 5,936 4,527 43,501 Valuation 91,000 91,000 Accumulated depreciation (7,904) (21,086) (5,234) (3,273) (37,497) Net book value 91, , ,254 97,004 The net book value of leasehold land and buildings shown above comprises: HK$ 000 HK$ 000 HK$ 000 Land and buildings situated in Hong Kong and held under leases of between 10 and 50 years 82,200 87,600 91,000 The Group s leasehold land and buildings at eachreportingperiodwererevaluedbybmiappraisalslimitedin2012and 2013, and DTZ Debenham Tie Leung Limited in 2014, both are independent professional property valuers, on market value basis. The valuations were arrived at by reference to comparable market transactions. The increase in value arising from revaluation of the land and buildings of for each of the years ended 31 March 2012, 2013 and 2014 was HK$5,883,000, HK$7,819,000 and HK$6,043,000, respectively, and have been credited to the property revaluation reserve. If the leasehold land and buildings had not been revalued, they would have been included in these combined financial statements at historical cost less accumulated depreciation and impairment loss of HK$29,623,221, HK$28,777,329 and HK$27,931,437, respectively for each of the years ended 2012, 2013 and Depreciation charges of HK$2,331,000, HK$2,228,000 and HK$1,926,000 has been included in cost of goods sold, and HK$4,354,000, HK$4,044,000 and HK$3,731,000 in administrative expenses for each of the years ended 31 March 2012, 2013 and 2014, respectively. As at 31 March 2014, the Group s bank borrowing of HK$47,600,000 was secured by leasehold land and buildings located in Hong Kong with carrying amount of HK$91,000,000 (note 20). I-28

247 APPENDIX I ACCOUNTANT S REPORT 15 INVENTORIES As at 31 March HK$ 000 HK$ 000 HK$ 000 Raw materials 22,857 21,042 23,327 Work in process 21,185 26,843 7,509 Finished goods 27,114 28,886 47,446 71,156 76,771 78,282 For each of the years ended 31 March 2012, 2013 and 2014, the Group had a reversal of provision for inventory obsolescence of HK$7,800,000 and HK$3,636,000 and a provision for inventory obsolescence of HK$1,357,000, respectively. Such reversal of provision/provision has been included in cost of sales in the combined statements of comprehensive income. 16 TRADE AND OTHER RECEIVABLES As at 31 March HK$ 000 HK$ 000 HK$ 000 Trade receivables 80,382 78,779 74,309 Less: Provision for impairment of trade receivables (25,208) (20,562) (13,765) Trade receivables, net 55,174 58,217 60,544 Deposits, prepayments and other receivables 5,940 11,120 13,925 61,114 69,337 74,469 Note: The Group grants an average credit period of 60 days to its customers. The carrying amounts of the trade and other receivables approximate to their fair values as these financial assets, which are measured at amortised cost, are expected to be paid within a short period of time, such that the impact of the time value of money is not significant. At each balance sheet date, the recoverability of the Group s trade receivables due from individual customers are assessed based on the credit history of its customers, their financial conditions and current market conditions. Consequently, specific impairment provision is recognised. The carrying amounts of the trade and other receivables are denominated in the following currencies: As at 31 March HK$ 000 HK$ 000 HK$ 000 Renminbi 1,039 2,154 4,512 United States dollar 51,768 54,646 53,560 Hong Kong dollar 7,505 12,356 15,974 Others ,114 69,337 74,469 I-29

248 APPENDIX I ACCOUNTANT S REPORT The Group has provided fully for all receivables where recovery of the amounts is remote, unless the Group has determined that such balances are not recoverable, in which case the impairment loss is directly written off against the corresponding trade receivables. Based on past experience and the Group s assessment, the management believes that no impairment provision is necessary in respect of the remaining balances as there had not been a significant change in credit quality of such receivables and the balances are considered to be fully recoverable. The maximum exposure to credit risk at the combined statement of financial position date is the carrying value of each class of receivable mentioned above. Movements in the provision for impairment of trade receivables are as follows: HK$ 000 HK$ 000 HK$ 000 At 1 April 34,390 25,208 20,562 Reversal of impairment losses (7,918) (3,763) (6,797) Amounts written off as uncollectible (1,264) (883) At 31 March 25,208 20,562 13,765 The reversals of impairment losses on trade receivables have been included in administrative expenses in the combined statement of comprehensive income (Note 8). Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash. As at 31 March 2012, 2013 and 2014, included in trade and other receivables of the Group are trade receivables of HK$80,382,000, HK$78,779,000 and HK$74,309,000 and their ageing analysis based on due date is as follows: As at 31 March HK$ 000 HK$ 000 HK$ 000 Not past due 14,447 18,690 17,344 1 to 60 days past due 21,734 24,583 31, to 120 days past due 11,062 5,478 8,463 More than 120 days past due 33,139 30,028 17,358 80,382 78,779 74,309 Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default. As at 31 March 2012, 2013 and 2014, trade receivables of HK$40,727,000, HK$39,527,000 and HK$43,200,000 were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. Based on past experience, management believes that no impairment provision is necessary in respect of these balances as there has not been a significant change in credit quality of these receivables and the balances are still considered to be fully recoverable. The ageing analysis of these trade receivables is as follows: As at 31 March HK$ 000 HK$ 000 HK$ to 60 days past due 21,734 24,583 31, to 120 days past due 9,462 3,460 7,767 More than 120 days past due 9,531 11,484 4,289 40,727 39,527 43,200 I-30

249 APPENDIX I ACCOUNTANT S REPORT As at 31 March 2012, 2013 and 2014, trade receivables of HK$25,208,000, HK$20,562,000 and HK$13,765,000 were impaired and provided for. The individually impaired receivables mainly relate to customers which are in unexpectedly difficult economic situations. The ageing analysis of these receivables is as follows: As at 31 March HK$ 000 HK$ 000 HK$ 000 Notpastdue 1to60dayspastdue 61 to 120 days past due 1,600 2, More than 120 days past due 23,608 18,544 13,069 25,208 20,562 13, CASH AND CASH EQUIVALENTS As at 31 March HK$ 000 HK$ 000 HK$ 000 Bank balance and cash 166, , ,411 Time deposits 31,586 5,462 53,184 Total 198, , ,595 The carrying amounts of the cash and cash equivalents approximate to their fair values. The carrying amounts of cash and cash equivalents are denominated in the following currencies: As at 31 March HK$ 000 HK$ 000 HK$ 000 Renminbi 1,277 15,524 22,714 United States dollar 177,089 91,203 96,466 Hong Kong dollar 13,403 83,211 46,680 Others 6,606 4,172 2, , , ,595 The periods of time deposits approximately range from 1 month to 2 months and they carry interest at short-term deposit rates of below 1%. The conversion of RMB-denominated balances into foreign currencies and the remittance of such foreign currencies denominated bank balances and cash out of the PRC are subject to relevant rules and regulations of foreign exchange control promulgated by the PRC government. I-31

250 APPENDIX I ACCOUNTANT S REPORT 18 DEFERRED INCOME TAX The analysis of deferred income tax assets and deferred income tax liabilities is as follows: The Group Revaluation of properties Accelerated tax depreciation Unrealised profit in inventories Others Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 1 April ,755 (304) (2,043) (419) 5,989 Net (credit)/charge to income statement (note 11) (156) 130 (24) Net charge to equity Reallocated to related companies At 31 March , (2,067) 7,773 Net (credit)/charge to income statement (note 11) (204) (156) (474) 451 (383) Net charge to equity 1,299 1,299 Reallocated to related companies 51 (451) (400) At 31 March , (2,541) 8,289 Net (credit)/charge to income statement (note 11) (409) 65 (742) (576) (1,662) Net charge to equity 1,174 1,174 Reallocated to related companies At 31 March , (3,283) 8,501 Note: For the purpose of balance sheet presentation, certain deferred income tax assets and liabilities have been offset in accordance with conditions set out in HKAS 12. The following is the analysis of the deferred income taxation for financial reporting purposes: As at 31 March HK$ 000 HK$ 000 HK$ 000 Deferred income tax liabilities 9,570 10,665 11,430 Deferred income tax assets (1,797) (2,376) (2,929) 7,773 8,289 8,501 At 31 March 2012, 2013 and 2014, the Group has unused tax losses of HK$39,000, HK$39,000 and HK$28,000, respectively, available for offsetting against future profits. No deferred income tax asset has been recognised due to unpredictability of future profit streams. Tax losses of HK$39,000, HK$39,000 and HK$28,000 have no expiry date. I-32

251 APPENDIX I ACCOUNTANT S REPORT 19 TRADE AND OTHER PAYABLES As at 31 March HK$ 000 HK$ 000 HK$ 000 Trade payables 10,208 7,937 6,028 Accrued payroll and employee benefits 11,383 11,049 13,504 Other accruals and other payables 19,071 14,845 13,321 40,662 33,831 32,853 The ageing analysis of trade payables based on invoice date is as follows: As at 31 March HK$ 000 HK$ 000 HK$ to 60 days 9,749 6,277 5, to 120 days More than 120 days 409 1, ,208 7,937 6,028 The carrying amounts of trade and other payables approximate to their fair values. The carrying amounts of trade and other payables are denominated in the following currencies: As at 31 March HK$ 000 HK$ 000 HK$ 000 Hong Kong dollar 23,435 12,697 15,029 United States dollar 9,416 14,324 9,533 Renminbi 7,727 6,668 8,291 Others ,662 33,831 32, BANK BORROWING As at 31 March HK$ 000 HK$ 000 HK$ 000 Current Bank borrowing 47,600 The maturity of the above borrowing is as follows: As at 31 March HK$ 000 HK$ 000 HK$ 000 Within 1 year 47,600 As at 31 March 2014, the Group s bank borrowing of HK$47,600,000 was secured by leasehold land and buildings located in Hong Kong with a carrying amount of HK$91,000,000, and the corporate guarantee of Man Sang International Limited. The guarantee will be released upon listing of the Company. I-33

252 APPENDIX I ACCOUNTANT S REPORT The carrying amount of bank borrowing approximates to its fair value and is carried at HIBOR+1.9% per annum as at 31 March The carrying amount of the bank borrowing is denominated in HK$. As at 31 March 2014, the borrowing was classified as a current liability because the related loan agreement contained a repayment on demand clause which gives the lender the unconditional right to call the loan at any time. This bank borrowing will mature in December COMBINED SHARE CAPITAL Combined share capital represented the aggregated share capital of the companies now comprising the Group after elimination of inter-company transactions and balances. 22 RELATED PARTY BALANCES AND TRANSACTIONS For the purposes of these combined financial statements, parties are considered to be related to the Group if the party has the ability, directly or indirectly, to exercise significant influence over the Group in making financial and operating decisions. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities and include entities which are under the significant influence of related parties of the Group where those parties are individuals. Parties are also considered to be related if they are subject to common control. The directors are of the view that the following companies were related parties that had transactions or balances with the Group during each of the years ended 31 March 2012, 2013 and 2014: Name of the related party MSIL ManSangEnterpriseLimited MH SZ M.S. Collections Limited Market Leader Technology Limited AseanGoldLimited Smartest Man Man Sang Investment Development Limited Swift Millions 4376zone.com Limited Cyber Bizport Limited Peking Pearls Company Limited Man Sang Development Company Limited China Pearls and Jewellery City Holdings Limited Excel Access Limited China South City Holdings Limited Relationship with the Group Ultimate holding company Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Entity which is significant influenced by a common director (a) Amounts due from/(to) related companies Amounts due from/(to) the related companies are unsecured, interest-free and repayable on demand. I-34

253 APPENDIX I ACCOUNTANT S REPORT The Group had the following material non-trade balances due from related parties: Amounts due from related companies As at 31 March HK$ 000 HK$ 000 HK$ 000 MSIL (Note) 120, ,261 70,841 Man Sang Enterprise Limited 4,120 M.S. Collections Limited Market Leader Technology Limited 89,671 74,779 AseanGoldLimited 31 Smartest Man Holdings Limited ,044 Man Sang Investment Development Limited 1,098 1,114 Swift Millions Limited 300 4,527 Man Sang Development Company Limited 28,363 China Pearls and Jewellery City Holdings Limited , ,215 70,841 Amounts due from related parties are denominated in Hong Kong dollars. The amounts due from related companies which a director of the Company holds a controlling interests: Name of related parties in which a director holds a controlling interests At beginning of year Amount of the loan At end of the year Maximum outstanding during the year Term Interest rate 2012 MSIL 120, ,645 Repayment on demand 0% Man Sang Enterprise Limited 4,113 4,120 4,120 Repayment on demand 0% M.S. Collections Limited Repayment on demand 0% Market Leader Technology Limited 88,031 89,671 89,671 Repayment on demand 0% AseanGoldLimited Repayment on demand 0% Smartest Man Holdings Limited Repayment on demand 0% Man Sang Investment Development Limited 1,098 1,098 Repayment on demand 0% Swift Millions Limited Repayment on demand 0% Man Sang Development Company Limited Repayment on demand 0% China Pearls and Jewellery City Holdings Repayment on demand 0% Limited Excel Access Limited 4 4 Repayment on demand 0% 2013 MSIL 120, , ,261 Repayment on demand 0% Man Sang Enterprise Limited 4,120 4,120 Repayment on demand 0% M.S. Collections Limited Repayment on demand 0% Market Leader Technology Limited 89,671 74,779 89,671 Repayment on demand 0% AseanGoldLimited Repayment on demand 0% Smartest Man Holdings Limited ,044 29,044 Repayment on demand 0% Man Sang Investment Development Limited 1,098 1,114 1,114 Repayment on demand 0% Swift Millions Limited 300 4,527 4,527 Repayment on demand 0% Man Sang Development Company Limited 28,363 28,363 Repayment on demand 0% China Pearls and Jewellery City Holdings Limited Repayment on demand 0% I-35

254 APPENDIX I ACCOUNTANT S REPORT Name of related parties in which a director holds a controlling interests At beginning of year Amount of the loan At end of the year Maximum outstanding during the year Term Interest rate 2014 MSIL 173,261 70, ,239 Repayment on demand 0% Man Sang Enterprise Limited Repayment on demand 0% M.S. Collections Limited Repayment on demand 0% Market Leader Technology Limited 74,779 74,779 Repayment on demand 0% AseanGoldLimited Repayment on demand 0% Smartest Man Holdings Limited 29,044 46,523 Repayment on demand 0% Man Sang Investment Development Limited 1,114 1,114 Repayment on demand 0% Swift Millions Limited 4,527 4,527 Repayment on demand 0% Man Sang Development Company Limited 28,363 28,365 Repayment on demand 0% China Pearls and Jewellery City Holdings Limited Repayment on demand 0% The Group had the following material non-trade balances due to related parties: Amounts due to related companies As at 31 March HK$ 000 HK$ 000 HK$ 000 MSIL (Note) (71,978) Man Sang Enterprise Limited (11,670) (107,544) Swift Millions (7,381) (11,000) 4376zone.com Limited (17,329) (17,317) Cyber Bizport Limited (1,310) (1,308) Peking Pearls Company Limited (104,938) (129,410) Man Sang Development Company Limited (1,160) China Pearls and Jewellery City Holdings Limited (17) Excel Access Limited (28) (143,805) (338,585) Amounts due to related parties are denominated in Hong Kong dollars. Note: During the year ended 31 March 2014, the amount due from/to related companies were netted-off and assigned to MSIL. I-36

255 APPENDIX I ACCOUNTANT S REPORT (b) Related parties transactions (a) Transactions with related parties The following transactions were undertaken by the Group with related parties during the Relevant Periods: (i) Continuing transactions The Group entered into the following material related party transactions. These transactions are made of terms mutually agreed by the relevant parties. Related party relationship Nature of transaction HK$ 000 HK$ 000 HK$ 000 An entity which is significantly influenced by acommondirector Reimbursement of rental chargespaidonbehalf 1,676 1,682 1,749 A fellow subsidiary Rental expenses 1,640 1,670 2,276 Ultimate holding company Recharge of administrative expenses 10,418 7,076 5,719 13,734 10,428 9,744 (ii) Key management compensation Key management includes directors (executive and non-executive) and the senior management of the Group. The compensations paid and payable to key management are shown below: HK$ 000 HK$ 000 HK$ 000 Salaries, wages and other benefits 4,765 5,048 4,997 Pension costs-defined contribution plans and social security costs ,790 5,082 5,032 Save as disclosed in this note and Note 20 to the combined financial information, there were no other significant related party transactions. 23 RETIREMENT BENEFITS SCHEMES For each of the years ended 31 March 2012, 2013 and 2014, the total costs charged to the combined statements of comprehensive income of HK$2,321,000, HK$2,443,000 and HK$5,417,000, respectively, represent contributions payable to the retirement benefits schemes by the Group. I-37

256 APPENDIX I ACCOUNTANT S REPORT 24 OPERATING LEASES COMMITMENTS The Group as lessee As at 31 March 2014, the Group had outstanding commitments for the future minimum lease payments noncancellable operating leases which fall due as follows: As at 31 March HK$ 000 HK$ 000 HK$ 000 Not later than 1 year 7,495 7,204 10,991 Later than 1 year and no later than 5 years 7, ,758 More than 5 years 20 14,663 7,216 32,769 Leases are negotiated for an average term of one to five years and rentals are fixed during the relevant lease period. 25 NOTE TO THE STATEMENTS OF CASH FLOWS Non-cash transaction Dividends declared by Man Sang HK to Man Sang Enterprise Limited of HK$200,000,000 and HK$100,000,000 during each of the years ended 31 March 2012 and 2013, respectively, has not been settled and recorded as amounts due from/to related companies. 26 CONTINGENT LIABILITIES The Group did not have any significant contingent liabilities as of 31 March 2012, 2013 and SUBSEQUENT EVENTS Save as disclosed elsewhere in this report, the following significant events took place subsequent to 31 March 2014: (i) The Reorganisation was completed on 17 June 2014 and the details are summarised on note 1.2. (ii) (iii) The board of directors approved that a property held by the Group (note 9(a)) would continue to be provided to a director as his quarter for the year ending 31 March According to a rental indication letter dated 30 September 2014 issued for reference purpose by DTZ Debenham Tie Leung Limited, an independent firm of professional property valuer, the current market rental of the property ranges from approximately HK$1.68 million to HK$1.80 million per annum, including government rates and rent and management fee. By a shareholders resolution dated 26 September 2014, the Company conditionally adopted a share option scheme under which the board of directors may grant options to the employees, directors or other selected participants of the Group to acquire shares of the Company. No options have been granted up to the date of this report. III FINANCIAL INFORMATION OF THE COMPANY As at 31 March 2014, the Company had not been incorporated and, accordingly, it had no assets, liabilities or distributable reserves on that day. I-38

257 APPENDIX I ACCOUNTANT S REPORT IV SUBSEQUENT FINANCIAL INFORMATION No audited financial statements have been prepared for the Company or any of the companies now comprising the Group in respect of any period subsequent to 31 March No dividend or distribution has been declared or paid by the Company or any of the companies now comprising the Group in respect of any period subsequent to 31 March Yours faithfully, PricewaterhouseCoopers Certified Public Accountants Hong Kong I-39

258 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION The following information does not form part of the Accountant s Report from the Company s reporting accountant, PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, as set out in Appendix I to this listing document, and is included herein for information purposes only. The unaudited pro forma financial information should be read in conjunction with the section headed Financial Information in this listing document and the Accountant s Report set out in Appendix I to this listing document. UNAUDITED PRO FORMA STATEMENT OF ADJUSTED COMBINED NET TANGIBLE ASSETS The following unaudited pro forma statement of adjusted combined net tangible assets of the Group attributable to equity holders of the Company prepared based on the audited combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 as set out in the Accountant s Report contained in Appendix I to this listing document in accordance with Rule 4.29 of the Listing Rules is for illustration purpose only, and is set out here to illustrate the effect of the Listing (including the Deemed Distribution and the Capitalisation Issue under the Reorganisation) on the combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 as if the Listing had taken place on that date. Due to its hypothetical nature, the unaudited pro forma statement of adjusted combined net tangible assets of the Group attributable to equity holders of the Company may not give a true picture of the combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 or any future date following the Listing and adjusted as described below. Audited combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 Estimated expenses relating to the Listing Effect of the Deemed Distribution and the Capitalisation Issue Unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company Unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company per Share HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ (note 1) (note 2) (note 3) (note 4) (note 5) 398,861 (15,796) (146,893) 236, Notes: 1. The audited combined net tangible assets of the Group attributable to equity holders of the Company as at 31 March 2014 is extracted from the financial information contained in the Accountant s Report set out in Appendix I to this listing document. 2. The amount represents estimated expenses relating to the Listing expected to be incurred by the Group subsequent to 31 March 2014 which mainly include professional fees for the Sponsor, the Company s legal advisers and the reporting accountant, and other listing expenses. II-1

259 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION 3. For the purpose of this pro forma statement, it is assumed that the Deemed Distribution of HK$430,039,000 had been settled by netting off against the Group s net amount due from the Remaining Group (amounted to HK$92,146,000 as at 31 July 2014), a cash payment of approximately HK$54,747,000 and the Capitalisation Issue of HK$283,146,000. Pursuant to the Capitalisation Issue as stated in the section headed History, Reorganisation and Corporate Structure of this listing document, certain new Shares will be issued to MSIL by way of capitalising of the amounts due from the Company to MSIL of HK$283,146, Except for the listing expenses, the Deemed Distribution and the Capitalisation Issue, the unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company have not taken into account any trading results or other transactions entered into subsequent to 31 March The unaudited pro forma adjusted combined net tangible assets of the Group attributable to equity holders of the Company per Share is based on 256,038,041 Shares in issue subsequent to the share sub-division of the Company on 26 September 2014 and the Capitalisation Issue prior to the Listing, but takes no account of any Shares which may fall to be issued upon the exercise of the share options under the Share Option Scheme. II-2

260 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION The following is the text of a report received from PricewaterhouseCoopers, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this listing document. INDEPENDENT REPORTING ACCOUNTANT S ASSURANCE REPORT ON THE COMPILATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION INCLUDED IN A LISTING DOCUMENT TO THE DIRECTORS OF MAN SANG JEWELLERY HOLDINGS LIMITED We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of Man Sang Jewellery Holdings Limited (the Company ) and its subsidiaries (collectively the Group ) by the directors for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma statement of adjusted net tangible assets of the Group as at 31 March 2014, and related notes (the Unaudited Pro Forma Financial Information )asset out on pages II-1 to II-2 of the Company s listing document dated 30 September 2014, in connection with the proposed listing of the shares of the Company. The applicable criteria on the basis of which the directors have compiled the Unaudited Pro Forma Financial Information are described on pages II-1 to II-2 of the listing document. The Unaudited Pro Forma Financial Information has been compiled by the directors to illustrate the impact of the proposed listing of the shares of the Company on the Group s financial position as at 31 March 2014 as if the proposed listing of the shares of the Company had taken place at 31 March As part of this process, information about the Group s financial position has been extracted by the directors from the Group s financial information for the year ended 31 March 2014, on which an accountant s report has been published. Directors Responsibility for the Unaudited Pro Forma Financial Information The directors are responsible for compiling the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules ) and with reference to Accounting Guideline 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars ( AG 7 ) issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ). II-3

261 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION Reporting Accountant s Responsibilities Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue. We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus, issued by the HKICPA. This standard requires that the reporting accountant complies with ethical requirements and plans and performs procedures to obtain reasonable assurance about whether the directors have compiled the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA. For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Unaudited Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Unaudited Pro Forma Financial Information. The purpose of unaudited pro forma financial information included in a listing document is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the entity as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the proposed listing of the shares of the Company at 31 March 2014 would have been as presented. A reasonable assurance engagement to report on whether the unaudited pro forma financial information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the directors in the compilation of the unaudited pro forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether:. The related pro forma adjustments give appropriate effect to those criteria; and. The unaudited pro forma financial information reflects the proper application of those adjustments to the unadjusted financial information. The procedures selected depend on the reporting accountant s judgement, having regard to the reporting accountant s understanding of the nature of the company, the event or transaction in respect of which the unaudited pro forma financial information has been compiled, and other relevant engagement circumstances. The engagement also involves evaluating the overall presentation of the unaudited pro forma financial information. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. II-4

262 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION Opinion In our opinion: (a) (b) (c) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated; such basis is consistent with the accounting policies of the Group; and the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 30 September 2014 II-5

263 APPENDIX III PROPERTY VALUATION The following is the text of a letter and valuation certificate prepared for the purpose of incorporation in this listing document received from DTZ Debenham Tie Leung Limited, an independent property valuer, in connection with its opinion of market value of the Property in Hong Kong as at 31 July th Floor Jardine House 1 Connaught Place Central Hong Kong 30 September 2014 The Board of Directors Man Sang Jewellery Holdings Limited Suites , 22nd Floor Sun Life Tower, The Gateway 15 Canton Road, Tsimshatsui Kowloon Hong Kong Dear Sirs, Re: Flat B on 20th Floor, The Mayfair, No. 1 May Road, Mid-Levels, Hong Kong (the Property ) INSTRUCTIONS, PURPOSE & VALUATION DATE We refer to your instructions for us to carry out market valuation of the Property held by Man Sang Jewellery Holdings Limited (referred to as the Company ) or its subsidiary (together the Group ) located in Hong Kong, we confirm that we have carried out inspection, made relevant enquiries and searches and obtained such further information as we considered necessary for the purpose of providing you with our opinion of market value in existing state of the Property as at 31 July 2014 (the Valuation Date ). DEFINITION OF MARKET VALUE Our valuation of the Property represents its market value which in accordance with The HKIS Valuation Standards 2012 Edition published by The Hong Kong Institute of Surveyors is defined as the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm s-length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. VALUATION BASIS AND ASSUMPTION Our valuation of the Property excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangement, special considerations or concessions granted by anyone associated with the sale, or any element of special value. III-1

264 APPENDIX III PROPERTY VALUATION No allowance has been made in our valuation for any charges, mortgages or amounts owing on the Property nor any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the Property is free from encumbrances, restrictions and outgoings of an onerous nature which could affect its value. The Government introduced a Special Stamp Duty (SSD) on transactions of residential properties of all values acquired on or after 20 November 2010 and resold within 2 years of acquisition or 3 years if acquired on or after 27 October 2012, in addition to the current ad valorem Stamp Duty. Since both the vendor and purchaser will be held jointly and severally liable for the SSD, this may have impact on the transaction price, including resale by mortgagee within 24 or 36 months after acquisition. Unless otherwise specified in our report, we assume that such liability of SSD (if applicable on the Property) would be borne by the vendor in the course of our valuation. METHOD OF VALUATION In forming our opinion of the market value of the Property, we have valued the Property by Direct Comparison Approach assuming sale of the Property in its existing state with the benefit of vacant possession and by making reference to comparable sales evidence as available in the relevant market. In undertaking our valuation for the Property, we have made reference to available sales evidence of similar use type ranging from about HK$43,200 per square foot saleable area to HK$44,400 per square foot saleable area. The unit rate adopted in our valuation for the Property is about HK$42,600 per square foot saleable area. It is generally consistent with the comparables after due adjustments. According to Rating and Valuation Department Property Information Online, saleable area is defined as the floor area exclusively allocated to the unit including balconies, verandahs, utility platforms and other similar features but excluding common areas such as stairs, lift shafts, pipe ducts, lobbies and communal toilets. It is measured to the exterior face of the external walls and walls onto common parts or the centre of party walls. Bay windows, flat roofs, top roofs, stairhoods, cocklofts, gardens, terraces, yards, air-conditioning plant rooms, air-conditioning platforms, planters/flower boxes and car parking spaces are excluded. In valuing the Property, we have complied with the requirements set out in Chapter 5 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and The HKIS Valuation Standards 2012 Edition published by the Hong Kong Institute of Surveyors. SOURCE OF INFORMATION We have relied to a very considerable extent on the information given by the Company and have accepted advice given to us on such matters as statutory notices, orders, easements, tenure, licences, particulars of occupancy, identification of property, site and floor areas and all other relevant matters. Dimension, measurements and areas included in this valuation report are based on the information provided to us and are therefore only approximation. We have had no reason to doubt the truth and accuracy of the information provided to us by the Company which is material to the valuation. We were also advised that no material facts have been omitted from the information supplied. III-2

265 APPENDIX III PROPERTY VALUATION TITLE INVESTIGATION We have not been provided with copies of the title documents relating to the Property but have caused searches to be made at The Land Registry. However, we have not searched the original documents to verify ownership or to ascertain any amendments. All documents have been used for reference only and all dimensions, measurements and areas are approximate. SITE INSPECTION Our valuer, Mr. Samuel Luk has inspected the exterior of the Property in May However, no structural survey has been made, but in the course of our inspection, we did not note any serious defects. We are, however, not able to report whether the Property is free or rot, infestation or any other structural defects. No test was carried out on any of the building services. Unless otherwise stated, we have not been able to carry out detailed on-site measurements to verify the site and floor areas of the Property and we have assumed that the areas shown on the documents handed to us are correct. CURRENCY Unless otherwise stated, all sums stated in our valuations are in Hong Kong dollars, the official currency of Hong Kong. We attach herewith our valuation certificate. Yours faithfully, For and on behalf of DTZ Debenham Tie Leung Limited Philip C Y Tsang Registered Professional Surveyor (General Practice) Registered China Real Estate Appraiser MSc, MHKIS Director Note: Mr. Philip C Y Tsang is a Registered Professional Surveyor (General Practice) who has over 23 years experience in the valuation of properties in Hong Kong. III-3

266 APPENDIX III PROPERTY VALUATION VALUATION CERTIFICATE Property held by the Group for owner-occupation in Hong Kong Property Description and tenure Particulars of occupancy Market Value in existing state as at 31 July 2014 Flat B on 20th Floor, The Mayfair, No. 1 May Road, Mid-Levels, Hong Kong 251/17334th equal and undivided shares of Inland Lot No Mayfair is a 31-storey residential building on a multi-storey car park/residents club house podium completed in th to 41st Floors are designated for residential use (floor nos. 13th, 14th, 24th and 34th are omitted). The Property comprises a residential unit on the 20th Floor of The Mayfair with a gross floor area of approximately 2,838 square feet ( square metres). As quoted from Rating and Valuation Department Property Information Online, the saleable area of the Property is approximately 2,131 square feet (198 square metres); bay window area of 42 square feet (3.9 square metres); airconditioning plant room area of 56 square feet (5.2 square metres). According to the information provided by the Company, the Property is currently owner-occupied as Chairman s resident. HK$91,000,000 The Property is zoned for Residential (Group B) use under Mid-Levels West Outline Zoning Plan No. S/H11/15. The locality of the Property is characterised by residential developments. There is no plan to change the current use of the Property. The Property is held under Conditions of Exchange No for a lease term from 17 November 1993 until 30 June The Government Rent per annum of Inland Lot No is HK$322,794. Note: (i) The registered owner of the Property is Wealth-In Investment Limited registered vide Memorial No. UB with consideration of HK$39,732,000 dated 8 April Wealth-in Investment Limited (now known as Hong Kong Man Sang Investments Limited) is a company incorporated in Hong Kong on 5 December 1997 and indirectly wholly-owned by Man Sang International Limited immediately prior to the Reorganisation. As part of the Reorganisation, it became an indirect wholly-owned subsidiary of the Company from 17 June III-4

267 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW Set out below is a summary of certain provisions of the Memorandum and Articles of Association of the Company and of certain aspects of Cayman company law. The Company was incorporated in the Cayman Islands as an exempted company with limited liability on 13 May 2014 under the Companies Law. The Memorandum of Association (the Memorandum ) and the Articles comprise its constitution. 1. MEMORANDUM OF ASSOCIATION (a) (b) The Memorandum states, inter alia, that the liability of members of the Company is limited to the amount, if any, for the time being unpaid on the Shares respectively held by them and that the objects for which the Company is established are unrestricted (including acting as an investment company), and that the Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, as provided in section 27(2) of the Companies Law and in view of the fact that the Company is an exempted company that the Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands. The Company may by special resolution alter its Memorandum with respect to any objects, powers or other matters specified therein. 2. ARTICLES OF ASSOCIATION The Articles were conditionally adopted on 26 September 2014 with effect from Listing. The following is a summary of certain provisions of the Articles: (a) Directors (i) Power to allot and issue shares and warrants Subject to the provisions of the Companies Law and the Memorandum and Articles and to any special rights conferred on the holders of any shares or class of shares, any share may be issued with or have attached thereto such rights, or such restrictions, whether with regard to dividend, voting, return of capital, or otherwise, as the Company may by ordinary resolution determine (or, in the absence of any such determination or so far as the same may not make specific provision, as the board may determine). Subject to the Companies Law, the rules of any Designated Stock Exchange (as defined in the Articles) and the Memorandum and Articles, any share may be issued on terms that, at the option of the Company or the holder thereof, they are liable to be redeemed. The board may issue warrants conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on such terms as it may fromtimetotimedetermine. IV-1

268 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW Subject to the provisions of the Companies Law and the Articles and, where applicable, the rules of any Designated Stock Exchange (as defined in the Articles) and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, all unissued shares in the Company shall be at the disposal of the board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times, for such consideration and on such terms and conditions as it in its absolute discretion thinks fit, but so that no shares shall be issued at a discount. Neither the Company nor the board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such allotment, offer, option or shares to members or others with registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever. (ii) Power to dispose of the assets of the Company or any subsidiary There are no specific provisions in the Articles relating to the disposal of the assets of the Company or any of its subsidiaries. The Directors may, however, exercise all powers and do all acts and things which may be exercised or done or approved by the Company and which are not required by the Articles or the Companies Law to be exercised or done by the Company in general meeting. (iii) Compensation or payments for loss of office Pursuant to the Articles, payments to any Director or past Director of any sum by way of compensation for loss of office or as consideration for or in connection with his retirement from office (not being a payment to which the Director is contractually entitled) must be approved by the Company in general meeting. (iv) Loans and provision of security for loans to Directors There are provisions in the Articles prohibiting the making of loans to Directors. (v) Disclosure of interests in contracts with the Company or any of its subsidiaries A Director may hold any other office or place of profit with the Company (except that of the auditor of the Company) in conjunction with his office of Director for such period and, subject to the Articles, upon such terms as the board may determine, and may be paid such extra remuneration therefor (whether by way of salary, commission, participation in profits or otherwise) in addition to any remuneration provided for by or pursuant to any other Articles. A Director may be or become a director or other officer of, or otherwise interested in, any company promoted by the Company or any other company in which the Company may be interested, and shall not be liable to account to the Company or the members for any remuneration, profits or other benefits received by him as a director, officer or member of, or from his interest in, such other company. Subject as otherwise provided by the Articles, the IV-2

269 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW board may also cause the voting power conferred by the shares in any other company held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favour of any resolution appointing the Directors or any of them to be directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company. Subject to the Companies Law and the Articles, no Director or proposed or intended Director shall be disqualified by his office from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatsoever, nor shall any such contract or any other contract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company or the members for any remuneration, profit or other benefits realised by any such contract or arrangement by reason of such Director holding that office or the fiduciary relationship thereby established. A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company shall declare the nature of his interest at the meeting of the board at which the question of entering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case, at the first meeting of the board after he knows that he is or has become so interested. A Director shall not vote (nor be counted in the quorum) on any resolution of the board approving any contract or arrangement or other proposal in which he or any of his close associates (as defined in the Articles) is materially interested, but this prohibition shall not apply to any of the following matters, namely: (aa) any contract or arrangement for giving to such Director or his close associate(s) any security or indemnity in respect of money lent by him or any of his close associates or obligations incurred or undertaken by him or any of his close associates at the request of or for the benefit of the Company or any of its subsidiaries; (bb) any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his close associate(s) has himself/themselves assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security; (cc) any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director or his close associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer; IV-3

270 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (dd) any contract or arrangement in which the Director or his close associate(s) is/are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company; or (ee) any proposal or arrangement concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death, or disability benefits scheme or other arrangement which relates both to Directors, his close associates and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director, or his close associate(s), as such any privilege or advantage not accorded generally to the class of persons to which such scheme or fund relates. (vi) Remuneration The ordinary remuneration of the Directors shall from time to time be determined by the Company in general meeting, such sum (unless otherwise directed by the resolution by which it is voted) to be divided amongst the Directors in such proportions and in such manner as the board may agree or, failing agreement, equally, except that any Director holding office for part only of the period in respect of which the remuneration is payable shallonlyrankinsuchdivisioninproportion to the time during such period for which he held office. The Directors shall also be entitled to be prepaid or repaid all travelling, hotel and incidental expenses reasonably expected to be incurred or incurred by them in attending any board meetings, committee meetings or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties as Directors. Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration as a Director. An executive Director appointed to be a managing director, joint managing director, deputy managing director or other executive officer shall receive such remuneration (whether by way of salary, commission or participation in profits or otherwise or by all or any of those modes) and such other benefits (including pension and/or gratuity and/or other benefits on retirement) and allowances as the board may from time to time decide. Such remuneration may be either in addition to or in lieu of his remuneration as a Director. The board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in business) in establishing and making contributions out of the Company s monies to any schemes or funds for providing pensions, sickness or compassionate allowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include IV-4

271 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW any Director or ex-director who may hold or have held any executive office or any office of profit with the Company or any of its subsidiaries) and ex-employees of the Company and their dependents or any class or classes of such persons. The board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions, pensions or other benefits to employees and ex-employees and their dependents, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or exemployees or their dependents are or may become entitled under any such scheme or fund as is mentioned in the previous paragraph. Any such pension or benefit may, as the board considers desirable, be granted to an employee either before and in anticipation of, or upon or at any time after, his actual retirement. (vii) Retirement, appointment and removal At each annual general meeting, one third of the Directors for the time being (or if their number is not a multiple of three, then the number nearest to but not less than one third) will retire from office by rotation provided that every Director shall be subject to retirement at an annual general meeting at least once every three years. The Directors to retire in every year will be those who have been longest in office since their last re-election or appointment but as between persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise agree among themselves) be determined by lot. There are no provisions relating to retirement of Directors upon reaching any age limit. The Directors shall have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy on the board or as an addition to the existing board. Any Director appointed to fill a casual vacancy shall hold office until the first general meeting of members after his appointment and be subject to re-election at such meeting and any Director appointed as an addition to the existing board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election. Neither a Director nor an alternate Director is required to hold any shares in the Company by way of qualification. A Director may be removed by an ordinary resolution of the Company before the expiration of his period of office (but without prejudice to any claim which such Director may have for damages for any breach of any contract between him and the Company) and may by ordinary resolution appoint another in his place. Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than two. There is no maximum number of Directors. The office of director shall be vacated: (aa) if he resigns his office by notice in writing delivered to the Company at the registered office of the Company for the time being or tendered at a meeting of the Board; (bb) becomes of unsound mind or dies; IV-5

272 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (cc) if, without special leave, he is absent from meetings of the board (unless an alternate director appointed by him attends) for six (6) consecutive months, and the board resolves that his office is vacated; (dd) if he becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors; (ee) (ff) if he is prohibited from being a director by law; if he ceases to be a director by virtue of any provision of law or is removed from office pursuant to the Articles. The board may from time to time appoint one or more of its body to be managing director, joint managing director, or deputy managing director or to hold any other employment or executive office with the Company for such period and upon such terms as the board may determine and the board may revoke or terminate any of such appointments. The board may delegate any of its powers, authorities and discretions to committees consisting of such Director or Directors and other persons as the board thinks fit, and it may from time to time revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or purposes, but every committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations that may from time to time be imposed upon it by the board. (viii) Borrowing powers The board may exercise all the powers of the Company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to the Companies Law, to issue debentures, bonds and other securities of the Company, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party. Note: These provisions, in common with the Articles in general, can be varied with the sanction of a special resolution of the Company. (ix) Proceedings of the Board The board may meet for the despatch of business, adjourn and otherwise regulate their meetings as they think fit. Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have an additional or casting vote. IV-6

273 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (x) Register of Directors and Officers The Companies Law and the Articles provide that the Company is required to maintain at its registered office a register of directors and officers which is not available for inspection by the public. A copy of such register must be filed with the Registrar of Companies in the Cayman Islands and any change must be notified to the Registrar within thirty (30) days of any change in such directors or officers. (b) Alterations to constitutional documents The Articles may be rescinded, altered or amended by the Company in general meeting by special resolution. The Articles state that a special resolution shall be required to alter the provisions of the Memorandum, to amend the Articles or to change the name of the Company. (c) Alteration of capital The Company may from time to time by ordinary resolution in accordance with the relevant provisions of the Companies Law: (i) (ii) (iii) (iv) (v) increase its capital by such sum, to be divided into shares of such amounts as the resolution shall prescribe; consolidate and divide all or any of its capital into shares of larger amount than its existing shares; divide its shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively any preferential, deferred, qualified or special rights, privileges, conditions or restrictions as the Company in general meeting or as the directors may determine; sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum, subject nevertheless to the provisions of the Companies Law, and so that the resolution whereby any share is sub-divided may determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares may have any such preferred or other special rights, over, or may have such deferred rights or be subject to any such restrictions as compared with the others as the Company has power to attach to unissued or new shares; or cancel any shares which, at the date of passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its capital by the amount of the shares so cancelled. The Company may subject to the provisions of the Companies Law reduce its share capital or any capital redemption reserve or other undistributable reserve in any way by special resolution. IV-7

274 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (d) Variation of rights of existing shares or classes of shares Subject to the Companies Law, all or any of the special rights attached to the shares or any class of shares may (unless otherwise provided for by the terms of issue of that class) be varied, modified or abrogated either with the consent in writing of the holders of not less than threefourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate general meeting the provisions of the Articles relating to general meetings will mutatis mutandis apply, but so that the necessary quorum (other than at an adjourned meeting) shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class and at any adjourned meeting two holders present in person or by proxy whatever the number of shares held by them shall be a quorum. Every holder of shares of the class shall be entitled to one vote for every such share held by him. The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. (e) Special resolution majority required Pursuant to the Articles, a special resolution ofthecompanymustbepassedbyamajorityof not less than three-fourths of the votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their duly authorised representatives or, where proxies are allowed, by proxy at a general meeting of which notice of not less than twenty-one (21) clear days and not less than ten (10) clear business days specifying the intention to propose the resolution as a special resolution, has been duly given. Provided that if permitted by the Designated Stock Exchange (as defined in the Articles), except in the case of an annual general meeting, if it is so agreed by a majority in number of the members having a right to attend and vote at such meeting, being a majority together holding not less than ninety-five per cent. (95%) in nominal value of the shares giving that right and, in the case of an annual general meeting, if so agreed by all Members entitled to attend and vote thereat, a resolution may be proposed and passed as a special resolution at a meeting of which notice of less than twenty-one (21) clear days and less than ten (10) clear business days has been given. A copy of any special resolution must be forwarded to the Registrar of Companies in the Cayman Islands within fifteen (15) days of being passed. An ordinary resolution is defined in the Articles to mean a resolution passed by a simple majority of the votes of such members of the Company as, being entitled to do so, vote in person or, in the case of corporations, by their duly authorised representatives or, where proxies are allowed, by proxy at a general meeting held in accordance with the Articles. (f) Voting rights Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with the Articles, at any general meeting on a poll every member present in person or by proxy or, in the case of a member being a corporation, by its duly IV-8

275 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW authorised representative shall have one vote for every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or instalments is treated for the foregoing purposes as paid up on the share. A member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way. At any general meeting a resolution put to the voteofthemeetingistobedecidedbywayof a poll save that the chairman of the meeting may in good faith, allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands in which case every member present in person (or being a corporation, is present by a duly authorised representative), or by proxy(ies) shall have one vote provided that where more than one proxy is appointed by a member which is a clearing house (or its nominee(s)), each such proxy shall have one vote on a show of hands. If a recognised clearing house (or its nominee(s)) is a member of the Company it may authorise such person or persons as it thinks fit to act as its representative(s) at any meeting of the Company or at any meeting of any class of members of the Company provided that, if more than one person is so authorised, the authorisation shall specify the number and class of shares in respect of which each such person is so authorised. A person authorised pursuant to this provision shall be deemed to have been duly authorised without further evidence of the facts and be entitled to exercise the same powers on behalf of the recognised clearing house (or its nominee(s)) as if such person was the registered holder of the shares of the Company held by that clearing house (or its nominee(s)) including, where a show of hands is allowed, the right to vote individually on a show of hands. Where the Company has any knowledge that any shareholder is, under the rules of the Designated Stock Exchange (as defined in the Articles), required to abstain from voting on any particular resolution of the Company or restricted to voting only for or only against any particular resolution of the Company, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted. (g) Requirements for annual general meetings An annual general meeting of the Company must be held in each year, other than the year of adoption of the Articles (within a period of not more than fifteen (15) months after the holding of the last preceding annual general meeting or a period of eighteen (18) months from the date of adoption of the Articles, unless a longer period would not infringe the rules of any Designated Stock Exchange (as defined in the Articles)) at such time and place as may be determined by the board. (h) Accounts and audit The board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Companies Law or necessary to give a true and fair view of the Company s affairs and to explain its transactions. IV-9

276 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW The accounting records shall be kept at the registered office or at such other place or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorised by the board or the Company in general meeting. A copy of every balance sheet and statement of comprehensive income (including every document required by law to be annexed thereto) which is to be laid before the Company at its general meeting, together with a printed copy of the Directors report and a copy of the auditors report, shall not less than twenty-one (21) days before the date of the meeting and at the same time as the notice of annual general meeting be sent to every person entitled to receive notices of general meetings of the Company under the provisions the Articles; however, subject to compliance with all applicable laws, including the rules of the Designated Stock Exchange (as definedinthearticles),thecompanymaysendtosuchpersonssummarisedfinancialstatements derived from the Company s annual accounts and the directors report instead provided that any such person may by notice in writing served on the Company, demand that the Company sends to him, in addition to summarised financial statements, a complete printed copy of the Company s annual financial statement and the directors report thereon. Auditors shall be appointed and the terms and tenure of such appointment and their duties at all times regulated in accordance with the provisions of the Articles. The remuneration of the auditors shall be fixed by the Company in general meeting or in such manner as the members may determine. The financial statements of the Company shall be audited by the auditor in accordance with generally accepted auditing standards. The auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the auditor shall be submitted to the members in general meeting. The generally accepted auditing standards referred to herein may be those of a country or jurisdiction other than the Cayman Islands. If so, the financial statements and the report of the auditor should disclose this fact and name such country or jurisdiction. (i) Notices of meetings and business to be conducted thereat An annual general meeting shall be called by notice of not less than twenty-one (21) clear days and not less than twenty (20) clear business days and any extraordinary general meeting at which it is proposed to pass a special resolution shall (save as set out in sub-paragraph (e) above) be called by notice of at least twenty-one (21) clear days and not less than ten (10) clear business days. All other extraordinary general meetings shall be called by notice of at least fourteen (14) clear days and not less than ten (10) clear business days. The notice must specify the time and place of the meeting and, in the case of special business, the general nature of that business. In addition notice of every general meeting shall be given to all members of the Company other than such as, under the provisions of the Articles or the terms of issue of the shares they hold, are not entitled to receive such notices from the Company, and also to the auditors for the time being of the Company. IV-10

277 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW Notwithstanding that a meeting of the Company is called by shorter notice than that mentioned above if permitted by the rules of the Designated Stock Exchange, it shall be deemed to have been duly called if it is so agreed: (i) (ii) in the case of a meeting called as an annual general meeting, by all members of the Company entitled to attend and vote thereat; and in the case of any other meeting, by a majority in number of the members having a right to attend and vote at the meeting, being a majority together holding not less than ninety-five per cent (95%) in nominal value of the issued shares giving that right. All business shall be deemed special that is transacted at an extraordinary general meeting and also all business shall be deemed special that is transacted at an annual general meeting with the exception of the following, which shall be deemed ordinary business: (aa) the declaration and sanctioning of dividends; (bb) the consideration and adoption of the accounts and balance sheet and the reports of the directors and the auditors; (cc) the election of directors in place of those retiring; (dd) the appointment of auditors and other officers; (ee) (ff) the fixing of the remuneration of the directors and of the auditors; the granting of any mandate or authority to the directors to offer, allot, grant options over or otherwise dispose of the unissued shares of the Company representing not more than twenty per cent (20%) in nominal value of its existing issued share capital; and (gg) the granting of any mandate or authority to the directors to repurchase securities of the Company. (j) Transfer of shares All transfers of shares may be effected by an instrument of transfer in the usual or common form or in a form prescribed by the Designated Stock Exchange (as defined in the Articles) or in such other form as the board may approve and which may be under hand or, if the transferor or transferee is a clearing house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the board may approve from time to time. The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the board may dispense with the execution of the instrument of transfer by the transferee in any case in which it thinks fit, in its discretion, to do so and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the register of members in respect thereof. The board may also resolve either generally or in any particular case, upon request by either the transferor or the transferee, to accept mechanically executed transfers. IV-11

278 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW The board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon the principal register to any branch register or any share on any branch register to the principal register or any other branch register. Unless the board otherwise agrees, no shares on the principal register shall be transferred to any branch register nor may shares on any branch register be transferred to the principal register or any other branch register. All transfers and other documents of title shall be lodged for registration and registered, in the case of shares on a branch register, at the relevant registration office and, in the case of shares on the principal register, at the registered office in the Cayman Islands or such other place at which the principal register is kept in accordance with the Companies Law. The board may, in its absolute discretion, and without assigning any reason, refuse to register a transfer of any share (not being a fully paid up share) to a person of whom it does not approve or any share issued under any share incentive scheme for employees upon which a restriction on transfer imposed thereby still subsists, and it may also refuse to register any transfer of any share to more than four joint holders or any transfer of any share (not being a fully paid up share) on which the Company has a lien. The board may decline to recognise any instrument of transfer unless a fee of such maximum sum as any Designated Stock Exchange (as defined in the Articles) may determine to be payable or such lesser sum as the Directors may from time to time require is paid to the Company in respect thereof, the instrument of transfer, if applicable, is properly stamped, is in respect of only one class of share and is lodged at the relevant registration office or registered office or such other place at which the principal register is kept accompanied by the relevant share certificate(s) and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer (and if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do). The registration of transfers may be suspended and the register closed on giving notice by advertisement in a relevant newspaper and, where applicable, any other newspapers in accordance with the requirements of any Designated Stock Exchange (as defined in the Articles), at such times and for such periods as the board may determine and either generally or in respect of any class of shares. The register of members shall not be closed for periods exceeding in the whole thirty (30) days in any year. (k) Power for the Company to purchase its own shares The Company is empowered by the Companies Law and the Articles to purchase its own Shares subject to certain restrictions and the Board may only exercise this power on behalf of the Company subject to any applicable requirements imposed from time to time by any Designated Stock Exchange (as defined in the Articles). (l) Power for any subsidiary of the Company to own shares in the Company and financial assistance to purchase shares of the Company There are no provisions in the Articles relating to ownership of shares in the Company by a subsidiary. IV-12

279 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW Subject to compliance with the rules and regulations of the Designated Stock Exchange (as defined in the Articles) and any other relevant regulatory authority, the Company may give financial assistance for the purpose of or in connection with a purchase made or to be made by any person of any shares in the Company. (m) Dividends and other methods of distribution Subject to the Companies Law, the Company in general meeting may declare dividends in any currency to be paid to the members but no dividend shall be declared in excess of the amount recommended by the board. The Articles provide dividends may be declared and paid out of the profits of the Company, realised or unrealised, or from any reserve set aside from profits which the directors determine is no longer needed. With the sanction of an ordinary resolution dividends may also be declared and paid out of share premium account or any other fund or account which can be authorised for this purpose in accordance with the Companies Law. Except in so far as the rights attaching to, or the termsofissueof,anysharemayotherwise provide, (i) all dividends shall be declared and paid according to the amounts paid up on the shares inrespectwhereofthedividendispaidbutnoamountpaiduponashareinadvanceofcallsshall for this purpose be treated as paid up on the share and (ii) all dividends shall be apportioned and paid pro rata according to the amount paid up on the shares during any portion or portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or other monies payable to any member or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise. Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment, or (b) that shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as the board may think fit. The Company may also upon the recommendation of the board by an ordinary resolution resolve in respect of any one particular dividend of the Company that it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive such dividend in cash in lieu of such allotment. Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his registered address, or in the case of joint holders, addressed to the holder whose name stands first in the register of the Company in respect of the shares at his address as appearing in the register or addressed to such person and at such addresses as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of IV-13

280 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable in respect of the shares held by such joint holders. Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared the board may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind. All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and shall revert to the Company. No dividend or other monies payable by the Company on or in respect of any share shall bear interest against the Company. (n) Proxies Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company and shall be entitled to exercise the same powers on behalf of a member who is an individual and for whom he acts as proxy as such member could exercise. In addition, a proxy shall be entitled to exercise the same powers on behalf of a member which is a corporation and for which he acts as proxy as such member could exercise if it were an individual member. Votes may be given either personally (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy. (o) Call on shares and forfeiture of shares Subject to the Articles and to the terms of allotment, the board may from time to time make such calls upon the members in respect of any monies unpaid on the shares held by them respectively (whether on account of the nominal value of the shares or by way of premium). A call may be made payable either in one lump sum or by instalments. If the sum payable in respect of any call or instalment is not paid on or before the day appointed for payment thereof, the person or persons from whom the sum is due shall pay interest on the same at such rate not exceeding twenty per cent. (20%) per annum as the board may agree to accept from the day appointed for the payment thereof to the time of actual payment, but the board may waive payment of such interest wholly or in part. The board may, if it thinks fit, receive from any member willing to advance the same, either in money or money s worth, all or any part of the monies uncalled and unpaid or instalments payable upon any shares held by him, and upon all or any of the monies so advanced the Company may pay interest at such rate (if any) as the board may decide. IV-14

281 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW If a member fails to pay any call on the day appointed for payment thereof, the board may serve not less than fourteen (14) clear days notice on him requiring payment of so much of the call as is unpaid, together with any interest which may have accrued and which may still accrue up to the date of actual payment and stating that, in the event of non-payment at or before the time appointed, the shares in respect of which the call was made will be liable to be forfeited. If the requirements of any such notice are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the board to that effect. Such forfeiture will include all dividends and bonuses declared in respect of the forfeited share and not actually paid before the forfeiture. A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him to the Company in respect of the shares, together with (if the board shall in its discretion so require) interest thereon from the date of forfeiture until the date of actual payment at such rate not exceeding twenty per cent. (20%) per annum as the board determines. (p) Inspection of register of members Pursuant to the Articles the register and branch register of members shall be open to inspection for at least two (2) hours during business hours by members without charge, or by any other person upon a maximum payment of HK$2.50 or such lesser sum specified by the board, at the registered office or such other place at which the register is kept in accordance with the Companies Law or, upon a maximum payment of HK$1.00 or such lesser sum specified by the board, at the Registration Office (as defined in the Articles), unless the register is closed in accordance with the Articles. (q) Quorum for meetings and separate class meetings No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment of a chairman. Save as otherwise provided by the Articles the quorum for a general meeting shall be two members present in person (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote. In respect of a separate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights the necessary quorum shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class. A corporation being a member shall be deemed for the purpose of the Articles to be present in person if represented by its duly authorised representative being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative at the relevant general meeting of the Company or at any relevant general meeting of any class of members of the Company. IV-15

282 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (r) Rights of the minorities in relation to fraud or oppression There are no provisions in the Articles relating to rights of minority shareholders in relation to fraud or oppression. However, certain remedies are available to shareholders of the Company under Cayman law, as summarised in paragraph 3(f) of this Appendix. (s) Procedures on liquidation A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution. Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares (i) if the Company shall be wound up and the assets available for distribution amongst the members of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such members in proportion to the amount paid up on the shares held by them respectively and (ii) if the Company shall be wound up and the assets available for distribution amongst the members as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be bornebythemembersinproportiontothecapital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively. If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Companies Law divide among the members in specie or kind the whole or any part of the assets of the Company whether the assets shall consist of property of one kind or shall consist of properties of different kinds and the liquidator may, for such purpose, set such value as he deems fair upon any one or more class or classes of property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority, shall think fit, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability. (t) Untraceable members Pursuant to the Articles, the Company may sell any of the shares of a member who is untraceable if (i) all cheques or warrants in respect of dividends of the shares in question (being not less than three in total number) for any sum payable in cash to the holder of such shares have remained uncashed for a period of 12 years; (ii) upon the expiry of the 12 year period, the Company has not during that time received any indication of the existence of the member; and (iii) the Company has caused an advertisement to be published in accordance with the rules of the Designated Stock Exchange (as defined in the Articles) giving notice of its intention to sell such shares and a period of three (3) months, or such shorter period as may be permitted by the Designated Stock Exchange (as defined in the Articles), has elapsed since the date of such advertisement and the Designated Stock Exchange (as defined in the Articles) has been notified of IV-16

283 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW such intention. The net proceeds of any such sale shall belong to the Company and upon receipt by the Company of such net proceeds, it shall become indebted to the former member of the Company for an amount equal to such net proceeds. (u) Subscription rights reserve The Articles provide that to the extent that it is not prohibited by and is in compliance with the Companies Law, if warrants to subscribe for shares have been issued by the Company and the Company does any act or engages in any transaction which would result in the subscription price of such warrants being reduced below the par value of a share, a subscription rights reserve shall be established and applied in paying up the difference between the subscription price and the par value of a share on any exercise of the warrants. 3. CAYMAN ISLANDS COMPANY LAW The Company is incorporated in the Cayman Islands subject to the Companies Law and, therefore, operates subject to Cayman law. Set out below is a summary of certain provisions of Cayman company law, although this does not purport to contain all applicable qualifications and exceptions or to be a complete review of all matters of Cayman company law and taxation, which may differ from equivalent provisions in jurisdictions with which interested parties may be more familiar: (a) Operations As an exempted company, the Company s operations must be conducted mainly outside the Cayman Islands. The Company is required to file an annual return each year with the Registrar of Companies of the Cayman Islands and pay a fee which is based on the amount of its authorised share capital. (b) Share capital The Companies Law provides that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the value of the premiums on those shares shall be transferred to an account, to be called the share premium account. At the option of a company, these provisions may not apply to premiums on shares of that company allotted pursuant to any arrangement in consideration of the acquisition or cancellation of shares in any other company and issued at a premium. The Companies Law provides that the share premium account may be applied by the company subject to the provisions, if any, of its memorandum and articles of association in (a) paying distributions or dividends to members; (b) paying up unissued shares of the company to be issued to members as fully paid bonus shares; (c) the redemption and repurchase of shares (subject to the provisions of section 37 of the Companies Law); (d) writingoff the preliminary expenses of the company; and (e) writing-off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company. No distribution or dividend may be paid to members out of the share premium account unless immediately following the date on which the distribution or dividend is proposed to be paid, the company will be able to pay its debts as they fall due in the ordinary course business. IV-17

284 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW The Companies Law provides that, subject to confirmation by the Grand Court of the Cayman Islands (the Court ), a company limited by shares or a company limited by guarantee and having a share capital may, if so authorised by its articles of association, by special resolution reduce its share capital in any way. The Articles includes certain protections for holders of special classes of shares, requiring their consent to be obtained before their rights may be varied. The consent of the specified proportions of the holders of the issued shares of that class or the sanction of a resolution passed at a separate meeting of the holders of those shares is required. (c) Financial assistance to purchase shares of a company or its holding company Subject to all applicable laws, the Company may give financial assistance to Directors and employees of the Company, its subsidiaries, its holding company or any subsidiary of such holding company in order that they may buy Shares in the Company or shares in any subsidiary or holding company. Further, subject to all applicable laws, the Company may give financial assistance to a trustee for the acquisition of Shares in the Company or shares in any such subsidiary or holding company to be held for the benefit of employees of the Company, its subsidiaries, any holding company of the Company or any subsidiary of any such holding company (including salaried Directors). There is no statutory restriction in the Cayman Islands on the provision of financial assistance by a company to another person for the purchase of, or subscription for, its own or its holding company s shares. Accordingly, a company may provide financial assistance if the directors of the company consider, in discharging their duties of care and acting in good faith, for a proper purpose and in the interests of the company, that such assistance can properly be given. Such assistance should be on an arm s-length basis. (d) Purchase of shares and warrants by a company and its subsidiaries Subject to the provisions of the Companies Law, a company limited by shares or a company limited by guarantee and having a share capital may, if so authorised by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder and the Companies Law expressly provides that it shall be lawful for the rights attaching to any shares to be varied, subject to the provisions of the company s articles of association, so as to provide that such shares are to be or are liable to be so redeemed. In addition, such a company may, if authorised to do so by its articles of association, purchase its own shares, including any redeemable shares. However, if the articles of association do not authorise the manner and terms of purchase, a company cannot purchase any of its own shares unless the mannerandtermsofpurchasehavefirstbeenauthorisedbyanordinaryresolutionofthecompany. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the company other than shares held as treasury shares. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business. IV-18

285 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW Shares purchased by a company shall be treated as cancelled unless, subject to the memorandum and articles of association of the company, the directors of the company resolve to hold such shares in the name of the company as treasury shares prior to the purchase. Where shares of a company are held as treasury shares, the company shall be entered in the register of members as holding those shares, however, notwithstanding the foregoing, the company shall not be treated as a member for any purpose and shall not exercise any right in respect of the treasury shares, and any purported exercise of such a right shall be void, and a treasury share shall not be voted, directly or indirectly, at any meeting of the company and shall not be counted in determining the total number of issued shares at any given time, whether for the purposes of the company s articles of association or the Companies Law. Further, no dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the company s assets (including any distribution of assets to members on a winding up) may be made to the company, in respect of a treasury share. A company is not prohibited from purchasing and may purchase its own warrants subject to and in accordance with the terms and conditions of the relevant warrant instrument or certificate. There is no requirement under Cayman Islands law that a company s memorandum or articles of association contain a specific provision enabling such purchases and the directors of a company may rely upon the general power contained in its memorandum of association to buy and sell and deal in personal property of all kinds. Under Cayman Islands law, a subsidiary may hold shares in its holding company and, in certain circumstances, may acquire such shares. (e) Dividends and distributions With the exception of section 34 of the Companies Law, there is no statutory provisions relating to the payment of dividends. Based upon English case law, which is regarded as persuasive in the Cayman Islands, dividends may be paid only out of profits. In addition, section 34 of the Companies Law permits, subject to a solvency test and the provisions, if any, of the company s memorandum and articles of association, the payment of dividends and distributions out of the share premium account (see paragraph 2(m) above for further details). (f) Protection of minorities The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against or derivative actions in the name of the company to challenge (a) an act which is ultra vires the company or illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority. In the case of a company (not being a bank) having a share capital divided into shares, the Court may, on the application of members holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine into the affairs of the company and to report thereon in such manner as the Court shall direct. IV-19

286 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW Any shareholder of a company may petition the Court which may make a winding up order if the Court is of the opinion that it is just and equitable that the company should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct of the company s affairs in the future, (b) an order requiring the company to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorising civil proceedings to be brought in the name and on behalf of the company by the shareholder petitioner on such terms as the Court may direct, or (d) an order providing for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself and, in the case of a purchase by the company itself, a reduction of the company s capital accordingly. Generally claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by the company s memorandum and articles of association. (g) Management The Companies Law contains no specific restrictions on the power of directors to dispose of assets of a company. However, as a matter of general law, every officer of a company, which includes a director, managing director and secretary, in exercising his powers and discharging his duties must do so honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. (h) Accounting and auditing requirements A company shall cause proper books of account to be kept with respect to (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company. Proper books of account shall not be deemed to be kept if there are not kept such books as are necessary to give a true and fair view of the state of the company s affairs and to explain its transactions. (i) Exchange control There are no exchange control regulations or currency restrictions in the Cayman Islands. (j) Taxation Pursuant to section 6 of the Tax Concessions Law (2011 Revision) of the Cayman Islands, the Company has obtained an undertaking from the Governor-in-Cabinet: (1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciation shall apply to the Company or its operations; and IV-20

287 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on or in respect of the shares, debentures or other obligations of the Company. The undertaking for the Company is for a period of twenty years from 23 May The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to the Company levied by the Government of the Cayman Islands save certain stamp duties which may be applicable, from time to time, on certain instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not party to any double tax treaties. (k) Stamp duty on transfers No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands. (l) Loans to directors There is no express provision in the Companies Law prohibiting the making of loans by a company to any of its directors. (m) Inspection of corporate records Members of the Company will have no general right under the Companies Law to inspect or obtain copies of the register of members or corporate records of the Company. They will, however, have such rights as may be set out in the Company s Articles. An exempted company may maintain its principal register of members and any branch registers at such locations, whether within or without the Cayman Islands, as the directors may, from time to time, think fit. A branch register shall be kept in the same manner in which a principal register is by the Companies Law required or permitted to be kept. The company shall cause to be kept at the place where the company s principal register is kept a duplicate of any branch register duly entered up from time to time. There is no requirement under the Companies Law for an exempted company to make any returns of members to the Registrar of Companies of the Cayman Islands. The names and addresses of the members are, accordingly, not a matter of public record and are not available for public inspection. However, an exempted company shall make available at its registered office, in electronic form or any other medium, such register of members, including any branch register of members, as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Law (2009 Revision) of the Cayman Islands. IV-21

288 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW (n) Winding up A company may be wound up compulsorily by order of the Court voluntarily; or, under supervision of the Court. The Court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the Court, just and equitable to do so. A company may be wound up voluntarily when the members so resolve in general meeting by special resolution, or, in the case of a limited duration company, when the period fixed for the duration of the company by its memorandum or articles expires, or the event occurs on the occurrence of which the memorandum or articles provides that the company is to be dissolved, or, the company does not commence business for a year from its incorporation (or suspends its business for a year), or, the company is unable to pay its debts. In the case of a voluntary winding up, such company is obliged to cease to carry on its business from the time of passing the resolution for voluntary winding up or upon the expiry of the period or the occurrence of the event referred to above. For the purpose of conducting the proceedings in winding up a company and assisting the Court, there may be appointed one or more than one person to be called an official liquidator or official liquidators; and the Court may appoint to such office such qualified person or persons, either provisionally or otherwise, as it thinks fit, and if more persons than one are appointed to such office, the Court shall declare whether any act hereby required or authorised to be done by the official liquidator is to be done by all or any one or more of such persons. The Court may also determine whether any and what security is to be given by an official liquidator on his appointment; if no official liquidator is appointed, or during any vacancy in such office, all the property of the company shall be in the custody of the Court. A person shall be qualified to accept an appointment as an official liquidator if he is duly qualified in terms of the Insolvency Practitioners Regulations. A foreign practitioner may be appointed to act jointly with a qualified insolvency practitioner. In the case of a members voluntary winding up of a company, the company in general meeting must appoint one or more liquidators for the purpose of winding up the affairs of the company and distributing its assets. A declaration of solvency must be signed by all the directors of a company being voluntarily wound up within twenty-eight (28) days of the commencement of the liquidation, failing which, its liquidator must apply to Court for an order that the liquidation continue under the supervision of the Court. Upon the appointment of a liquidator, the responsibility for the company s affairs rests entirely in his hands and no future executive action may be carried out without his approval. A liquidator s duties are to collect the assets of the company (including the amount (if any) due from the contributories), settle the list of creditors and, subject to the rights of preferred and secured creditors and to any subordination agreements or rights of set-off or netting of claims, discharge the company s liability to them (pari passu if insufficient assets exist to discharge the liabilities in full) and to settle the list of contributories (shareholders) and divide the surplus assets (if any) amongst them in accordance with the rights attaching to the shares. IV-22

289 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW As soon as the affairs of the company are fully wound up, the liquidator must make up an account of the winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon call a general meeting of the company for the purposes of laying before it the account and giving an explanation thereof. At least twenty-one (21) days before the final meeting, the liquidator shall send a notice specifying the time, place and object of the meeting to each contributory in any manner authorised by the company s articles of association and published in the Gazette in the Cayman Islands. (o) Reconstructions There are statutory provisions which facilitate reconstructions and amalgamations approved by a majority in number representing seventy-five per cent. (75%) in value of shareholders or class of shareholders or creditors, as the case may be, as are present at a meeting called for such purpose and thereafter sanctioned by the Court. Whilst a dissenting shareholder would have the right to express to the Court his view that the transaction for which approval is sought would not provide the shareholders with a fair value for their shares, the Court is unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management. (p) Compulsory acquisition Where an offer is made by a company for the shares of another company and, within four (4) months of the offer, the holders of not less than ninety per cent. (90%) of the shares which are the subject of the offer accept, the offeror may at any time within two (2) months after the expiration of the said four (4) months, by notice in the prescribed manner require the dissenting shareholders to transfer their shares on the terms of the offer. A dissenting shareholder may apply to the Court within one (1) month of the notice objecting to the transfer. The burden is on the dissenting shareholder to show that the Court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders. (q) Indemnification Cayman Islands law does not limit the extent to which a company s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the court to be contrary to public policy (e.g. for purporting to provide indemnification against the consequences of committing a crime). 4. GENERAL Conyers Dill & Pearman (Cayman) Limited, the Company s special legal counsel on Cayman Islands law, have sent to the Company a letter of advice summarising certain aspects of Cayman Islands company law. This letter, together with a copy of the Companies Law, is available for inspection as referred to in the section headed Documents available for inspection in Appendix VI. Any person wishing to have a detailed summary of Cayman Islands company law or advice on the differences between it and the laws of any jurisdiction with which he is more familiar is recommended to seek independent legal advice. IV-23

290 APPENDIX V STATUTORY AND GENERAL INFORMATION A. FURTHER INFORMATION ABOUT THE COMPANY 1. Incorporation The Company was incorporated in the Cayman Islands under the Companies Law as an exempted company with limited liability on 13 May The Company has established a place of business in Hong Kong at Suites , 22/F, Sun Life Tower, The Gateway, 15 Canton Road, Tsimshatsui, Kowloon, Hong Kong on 9 June 2014 and was registered with the Registrar of Companies in Hong Kong as a non-hong Kong company under Part 16 of the Companies Ordinance on 25 June 2014, with Mr. Mok Kin Kwan appointed as the authorised representative of the Company for the acceptance of service of process and notices in Hong Kong. As the Company was incorporated in the Cayman Islands, it operates subject to the Companies Law and to its constitution comprising the Memorandum and the Articles. A summary of certain provisions of the Memorandum and Articles of the Company and relevant aspects of the Companies Law is set out in Appendix IV to this listing document. 2. Changes in the share capital of the Company The authorised share capital of the Company as at the date of its incorporation was HK$380,000 divided into 380,000 Shares of HK$1.00 each. Upon its incorporation, one Share was allotted and issued to its initial subscriber. On the same day, the said one Share was transferred to MSIL. On 26 September 2014, pursuant to the written resolutions of the sole shareholder of the Company, the authorised share capital of the Company was increased from HK$380,000 to HK$10,000,000 and each issued and unissued share of HK$1.00 each was sub-divided into 100 Shares of HK$0.01 each. On the Record Date, the Company will capitalise the amount of approximately HK$283.1 million due from the Company to MSIL (such amount arose out of the netting-off of inter-group company balances (including, among other things, the purchase consideration arising out of the Reorganisation steps as mentioned above and certain cash amounts constituting the working capital required for the Pearls and Jewellery Business which are paid by MSIL to the Company) between members of the Group and the Remaining Group and the assignment and transfer of the relevant balances to MSIL such that the net asset value of the Group will become approximately HK$254.0 million) by allotting and issuing such number of Shares required for the purpose of effecting the MSIL Distribution, credited as fully paid, to MSIL. Save as disclosed in this listing document, there has been no alteration in the share capital of the Company within two years immediately preceding the date of this listing document up to the Latest Practicable Date. V-1

291 APPENDIX V STATUTORY AND GENERAL INFORMATION 3. Changes in the share capital of the Company s subsidiaries The principal subsidiaries of the Company are set out in the Accountant s Report, the text of which is set out in Appendix I to this listing document. Save as disclosed in the section headed History, Reorganisation and Corporate Structure of this listing document, there are no changes in the registered capital of the Company s subsidiaries during the two years preceding the date of this listing document. 4. Written resolutions of the sole shareholder dated 26 September 2014 Pursuant to the written resolutions of MSIL, the sole Shareholder of the Company, passed on 26 September 2014: (a) (b) (c) the Listing was approved and any Director was authorised to sign and execute such documents and do all such acts and things incidental to the Listing or as he or she considered necessary, desirable or expedient in connection with the implementation of or giving effect to the Listing; the adoption of the Articles (the terms of whicharesummarisedinappendixivtothis listing document) with effect from the Listing was approved; subject to the fulfilment of the Spin-off Condition, a general unconditional mandate was given to the Directors to exercise all the powers of the Company to allot, issue and deal with, additional Shares or securities convertible into Shares, and to make or grant offers, agreements, options or securities (including but not limited to warrants, bonds and debentures convertible into Shares) which would or might require Shares to be allotted or issued, (such approval to include authorisation of the Directors to, during the validity of this mandate, make or grant offers, agreements, options or securities (including but not limited to warrants, bonds and debentures convertible into Shares) which would or might require Shares to be allotted and issued either during the validity of this mandate or after it has expired) provided that the aggregate nominal amount of Shares allotted and issued or agreed conditionally or unconditionally to be allotted and issued (whether pursuant to an option or otherwise), otherwise than pursuant to a rights issue, or pursuant to the exercise of any rights of subscription or conversion under any outstanding warrants to subscribe for Shares or any securities which are convertible into Shares or any scrip dividend in lieu of the whole or part of a dividend on the Shares, shall not exceed 20% of the aggregate nominal value of the Shares in issue as at the Listing Date. Such mandate will expire at the earliest of: (i) (ii) (iii) the conclusion of the next annual general meeting of the Company following the passing of the resolution; the expiration of the period within which the next annual general meeting of the Company is required by law to be held; or the revocation or variation of the authority given to the Directors by the passing of an ordinary resolution of the Shareholders. V-2

292 APPENDIX V STATUTORY AND GENERAL INFORMATION (d) subject to the fulfilment of the Spin-off Conditions, a general unconditional mandate (the Repurchase Mandate ) was given to the Directors to exercise all the powers of the Company to make repurchases of Shares on the Stock Exchange, or on any other stock exchange on which the securities of the Company may be listed and which is recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose, provided that such number of Shares shall not exceed 10% of the aggregate nominal value of the Shares in issue as at the Listing Date. Such mandate will expire whichever is the earliest of: (i) (ii) (iii) the conclusion of the next annual general meeting of the Company following the passing of the resolution; the expiration of the period within which the next annual general meeting of the Company is required by the Articles or any applicable law to be held; or the revocation or variation of the authority given to the Directors by the passing of an ordinary resolution of the Shareholders; and (e) subject to the fulfilment of the Spin-off Condition and the passing of the resolutions referred to in sub-paragraphs (c) and (d) above, the extension of the general mandate to allot, issue and deal with Shares as mentioned in sub-paragraph (c) by the addition to the aggregate nominal value of the Shares which may be allotted and issued or agreed conditionally or unconditionally to be allotted and issued by the Directors pursuant to such general mandate of an amount representing the aggregate nominal value of the Shares repurchased by us pursuant to subparagraph (d) above, provided that such extended amount shall not exceed 10% of the aggregate nominal value of the Shares in issue as at the Listing Date. 5. Repurchase by the Company of its own Shares This section sets out information required by the Stock Exchange to be included in this listing document concerning the repurchase by the Company of its own securities. (a) Relevant legal and regulatory requirements in Hong Kong The Listing Rules permit shareholders of a listed company to grant a general mandate to the directors to repurchase shares of such company that are listed on the Stock Exchange. Such mandate is required to be given by way of an ordinary resolution passed by shareholders in general meeting. With regard to the Company, certain relevant laws and regulations are as follows: (i) Shareholders approval All proposed repurchases of Shares (which must be fully paid up) must be approved in advance by an ordinary resolution of the shareholders in general meeting, either by way of general mandate or by specific approval of a particular transaction. V-3

293 APPENDIX V STATUTORY AND GENERAL INFORMATION Pursuant to a resolution passed by the sole shareholder of the Company on 26 September 2014, a general unconditional mandate (being the Repurchase Mandate referred to above) was given to the board of Directors authorising any repurchase by the Company of the Shares on the Stock Exchange or on any other stock exchange on which the securities may be listed and which is recognised by the Securities and Futures Commission of Hong Kong and the Stock Exchange for this purpose, provided that such number of Shares shall not exceed 10% of the aggregate nominal value of the Shares in issue as at the Listing Date. (ii) Source of funds Repurchases by the Company must be funded out of funds legally available for the purpose in accordance with the Articles and the applicable laws and regulations of the Cayman Islands. A listed company may not repurchase its own securities on the Stock Exchange for a consideration other than cash or for settlement otherwise than in accordance with the trading rules of the Stock Exchange in effect from time to time. Subject to the foregoing, any repurchases by the Company may be made out of funds which would otherwise be available for dividend or distribution, or out of the Company s share premium account or out of an issue of new shares made for the purpose of the repurchase or, if authorised by the Articles and subject to the Companies Law, out of capital. (iii) Trading restrictions The total number of shares which the Company may repurchase on the Stock Exchange is the number of shares representing up to a maximum of 10% of the aggregate number of shares in issue as at the Listing Date. The Company may not issue or announce a proposed issue of new Shares for a period of 30 days immediately following a repurchase (other than an issue of Shares pursuant to an exercise of warrants, share options or similar instruments requiring the Company to issue Shares which were outstanding prior to such repurchase) without the prior approval of the Stock Exchange. In addition, the Company is prohibited from repurchasing its shares on the Stock Exchange if the purchase price is higher by 5% or more than the average closing market price for the five preceding trading days on which its shares were traded on the Stock Exchange. The Listing Rules also prohibit the Company from repurchasing its shares if that repurchase would result in the number of Shares which are in the hands of the public falling below the relevant prescribed minimum percentage as required by the Stock Exchange. A company is required to procure that the broker appointed by it to effect a repurchase of securities discloses to the Stock Exchange such information with respect to the repurchase as the Stock Exchange may require. (iv) Status of repurchased Shares All repurchased securities (whether effected on the Stock Exchange or otherwise) will be automatically delisted and the certificates for those securities must be cancelled and destroyed. Under Cayman Islands Companies Law, a company s repurchased shares V-4

294 APPENDIX V STATUTORY AND GENERAL INFORMATION shall be treated as cancelled and the amount of the company s issued share capital shall be reduced by the aggregate value of the repurchased shares accordingly although the authorised share capital of the company will not be reduced. (v) Suspension of repurchase Pursuant to the Listing Rules, the Company may not make any repurchase of Shares on the Stock Exchange after inside information has come to its knowledge until the information is made publicly available. In particular, during the period of one month immediately preceding the earlier of: (i) the date of the board meeting (as such date is first notified to the Stock Exchange in accordance with the Listing Rules) for the approval of the Company s results for any year, half-year, quarterly or any other interim period (whether or not required under the Listing Rules); and (ii) the deadline for publication of an announcement of the Company s results for any year or half-year under the Listing Rules, or quarterly or any other interim period (whether or not required under the Listing Rules), the Company may not repurchase its Shares on the Stock Exchange other than in exceptional circumstances. (vi) Reporting requirements Certain information relating to repurchases of Shares on the Stock Exchange or otherwise must be reported to the Stock Exchange not later than 30 minutes before the earlier of the commencement of the morning trading session or any pre-opening session on the business day following any day on which the Company may make a purchase of Shares. The report must state the total number of Shares purchased the previous day, the purchase price per Share or the highest and lowest prices paid for such purchases. In addition, the Company s annual report is required to disclose details regarding repurchases of Shares made during the year, including a monthly analysis of the number of securities repurchased, the purchase price per share or the highest and lowest price paid for all such purchase, where relevant, and the aggregate prices paid. (vii) Connected persons The Listing Rules prohibit the Company from knowingly repurchasing Shares on the Stock Exchange from a core connected person, that is, a director, chief executive or substantial shareholder of the Company or any of its subsidiaries or their respective close associates, and a core connected person is prohibited from knowingly selling his/ her/its Shares to the company on the Stock Exchange. (b) Exercise of the Repurchase Mandate Exercise in full of the Repurchase Mandate, on the basis of 256,038,041 Shares in issue immediately after listing of the Shares (which is calculated based on the issued share capital of MSIL as at the Latest Practicable Date and assuming it will remain unchanged on the Record Date), could accordingly result in up to 25,603,804 Shares being repurchased by the Company during the period in which the Repurchase Mandate remains in force. V-5

295 APPENDIX V STATUTORY AND GENERAL INFORMATION On the basis of the current financial position of the Group as disclosed in this listing document and taking into account the current working capital position of the Group, the Directors consider that, if the Repurchase Mandate were to be exercised in full, there might be a material adverse impact on the working capital and/or gearing position of the Group (as compared with the position disclosed in this listing document). However, the Directors do not propose to exercise the Repurchase Mandate to such an extent as would, in the circumstances, have a material adverse effect on the working capital requirements of the Group or the gearing levels which in the opinion of the Directors are from time to time appropriate for the Group. (c) Reasons for repurchases The Directors believe that the ability to repurchase Shares on the market is in the interests of the Company and the Shareholders. The Directors sought the grant of a general mandate from the sole Shareholder to repurchase Shares to give the Company the flexibility to do so if and when appropriate. Repurchases may, depending on the circumstances, result in an increase in the net assets and/or earnings per Share. The number of Shares to be repurchased on any occasion and the price and other terms upon which the same are repurchased will be decided by the Directors at the relevant time having regard to the circumstances then pertaining, and will only be made where the Directors believe that such repurchases will benefit the Company and the Shareholders. (d) General None of the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their close associates currently intends to sell any Shares to the Company or its subsidiaries if the Repurchase Mandate is exercised. The Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules and the applicable laws and regulations of the Cayman Islands. If, as a result of a repurchase of the Shares, a Shareholder s proportionate interest in the voting rights of the Company is increased, such increase will be treated as an acquisition for the purposes of the Hong Kong Code on Takeovers and Mergers (the Takeovers Code ). Accordingly, a Shareholder or a group of Shareholders acting in concert could obtain or consolidate control of the Company and become obliged to make a mandatory offer in accordance with rule 26 of the Takeovers Code as a result of any such increase. Save as aforesaid, the Directors are not aware of any consequences which would arise under the Takeovers Code as a consequence of any repurchases pursuant to the Repurchase Mandate. Any repurchase of Shares which results in the number of Shares held by the public being reduced to less than 25% of the Shares then in issue could only be implemented with the approval of the Stock Exchange to waive the Listing Rules requirements regarding the public shareholding referred to above. It is believed that a waiver of this provision would not normally be given other than in exceptional circumstances. V-6

296 APPENDIX V STATUTORY AND GENERAL INFORMATION No core connected person (as defined in the Listing Rules) has notified the Company that he has a present intention to sell Shares to the Company, or has undertaken not to do so, if the Repurchase Mandate is exercised. The Company has not made any repurchase of the Shares since its incorporation. B. FURTHER INFORMATION ABOUT THE BUSINESS OF THE GROUP 1. Summary of material contracts The following contracts (not being contracts in the ordinary course of business) have been entered into by members of the Group within the two years preceding the date of this listing document and are or may be material: (a) (b) (c) (d) (e) (f) (g) a sale and purchase agreement entered into between MSIL and Arcadia BVI on 30 April 2014, pursuant to which MSIL transferred 5,000 shares of MS Innovations to Arcadia BVI for a consideration of HK$1.00; a sale and purchase agreement entered into between Man Sang HK and Arcadia Investment on 30 April 2014, pursuant to which Man Sang HK transferred 500,000 shares of Arcadia Jewellery to Arcadia Investment for a consideration of approximately HK$2.3 million; a business transfer agreement entered into between Man Sang HK and MS Jewellery on 30 April 2014, pursuant to which the business of the trading of pearl products operated by Man Sang HK was transferred from Man Sang HK to MS Jewellery for a consideration of approximately HK$105.1 million; an assets transfer master agreement entered into between MS Factory and HBF Jewellery on 30 April 2014, pursuant to which MS Factory transferred certain operating assets to HBF Jewellery for nil consideration; an equity transfer agreement entered into between MH Shenzhen and HBF Jewellery on 29 May 2014, pursuant to which MH Shenzhen transferred the entire equity interest of Shenzhen Kasiao to HBF Jewellery for a consideration of approximately RMB1.3 million; an assets transfer master agreement entered into between MH Shenzhen and HBF Jewellery on 30 April 2014, pursuant to which the business of the processing of pearls operated by MH Shenzhen was transferred to HBF Jewellery for a consideration of approximately HK$123.6 million; a sale and purchase agreement entered into between Man Sang Development Company Limited and MS Holding on 30 April 2014, pursuant to which Man Sang Development Company Limited transferred 5,000 shares of MS Investments to MS Holdings for a consideration of approximately HK$50.9 million; V-7

297 APPENDIX V STATUTORY AND GENERAL INFORMATION (h) a subscription agreement entered into between the Company and MS Holdings on 17 June 2014, pursuant to which the Company subscribed for 1,500 shares in MS Holdings for a consideration of US$1,500; (i) a subscription agreement entered into between the Company and Arcadia BVI on 17 June 2014, pursuant to which the Company subscribed for 1,000 shares in Arcadia BVI for a consideration of US$1,000; (j) a repurchase agreement entered into between MSIL and MS Holdings on 17 June 2014, pursuant to which MS Holdings repurchased one share in MS Holdings held by MSIL for a consideration of US$1.00; (k) a repurchase agreement entered into between MSIL and Arcadia BVI on 17 June 2014, pursuant to which MS Holdings repurchased one share in Arcadia BVI held by MSIL for a consideration of US$1.00; and (l) a deed of non-competition undertaking dated 26 September 2014 entered into between Mr. CH Cheng and the Company, under which Mr. CH Cheng has given certain noncompetition undertakings to the Company. 2. Intellectual property rights of the Group (a) Trademarks As at the Latest Practicable Date, the Group had registered the following trademarks: Trademark registration number Trademark Registered owner Place of registration Class Expiry date Arcadia Jewellery Hong Kong Arcadia Jewellery Hong Kong Arcadia Jewellery Hong Kong Arcadia Jewellery Hong Kong B00035 MS Innovations Hong Kong MS Innovations Hong Kong MS Innovations Hong Kong V-8

298 APPENDIX V STATUTORY AND GENERAL INFORMATION Trademark registration number Trademark Registered owner Place of registration Class Expiry date MS Innovations Hong Kong MS Innovations Hong Kong MS Innovations Hong Kong MS Innovations Hong Kong B10623 MS Innovations Hong Kong B00060 MS Innovations Hong Kong B10624 MS Innovations Hong Kong MS Innovations Hong Kong MS Innovations Hong Kong MS Innovations Hong Kong MS Innovations Australia MS Innovations Brazil TMA MS Innovations Canada MS Innovations EU MS Innovations Japan N/ MS Innovations Macau MS Innovations Malaysia MS Innovations Mexico V-9

299 APPENDIX V STATUTORY AND GENERAL INFORMATION Trademark registration number Trademark Registered owner Place of registration Class Expiry date MS Innovations New Zealand T E MS Innovations Singapore MS Innovations Switzerland MS Innovations Taiwan Kor MS Innovations Thailand MS Innovations USA MS Innovations Australia TMA MS Innovations Canada MS Innovations EU 14, 35, MS Innovations Hong Kong 14, 35, IDM MS Innovations Indonesia MS Innovations Japan N/ MS Innovations Macau MS Innovations Malaysia MS Innovations Mexico MS Innovations New Zealand MS Innovations The Philippines T Z MS Innovations Singapore MS Innovations South Korea V-10

300 APPENDIX V STATUTORY AND GENERAL INFORMATION Trademark registration number Trademark Registered owner Place of registration Class Expiry date MS Innovations Switzerland 14, 35, MS Innovations Taiwan Kor MS Innovations Thailand MS Innovations USA As at the Latest Practicable Date, the Group had applied for registration of the relevant transfer of the following trademarks from the Pre Spin-off MSIL Group to the Group: Trademark registration number Trademark Transferor (registered owner) Transferee Place of registration Class Expiry date (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 1) (Note 2) 大唐珍珠 Man Sang HK MS Innovations Hong Kong Man Sang HK MS Innovations Hong Kong Man Sang HK MS Innovations Hong Kong Man Sang HK MS Innovations Hong Kong Man Sang HK MS Innovations Hong Kong Man Sang HK MS Innovations Hong Kong MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC V-11

301 APPENDIX V STATUTORY AND GENERAL INFORMATION Trademark registration number Trademark Transferor (registered owner) Transferee Place of registration Class Expiry date (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MSP MH Shenzhen HBF Jewellery The PRC (Note 2) 大唐 MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) 民生 Man Sang MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC (Note 2) MH Shenzhen HBF Jewellery The PRC V-12