CHINA AGRI-INDUSTRIES HOLDINGS LIMITED

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a stockbroker or other registered dealer in securities, a bank manager, solicitor, professional accountant or other professional adviser. 14A.59(1) 14A.58(3b) If you have sold or transferred all your shares in China Agri-Industries Holdings Limited, you should at once pass this circular together with the enclosed form of proxy to the purchaser, the transferee, the bank, the stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee. This circular does not constitute an offer or invitation to subscribe for or purchase any securities nor is it calculated to invite any such offer or invitation. APP1B 1 CHINA AGRI-INDUSTRIES HOLDINGS LIMITED (Incorporated in Hong Kong with limited liability) Stock Code: 606 REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRASACTIONS UNDER THE MUTUAL SUPPLY AGREEMENT 13.51A Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders A letter from the Independent Board Committee to the Independent Shareholders in respect of the revised caps of the transactions under the Mutual Supply Agreement is set out on page 12 of this circular and a letter of advice from Somerley Limited to the Independent Board Committee and the Independent Shareholders in respect of the same is set out on pages 13 to 31 of this circular. A notice convening a extraordinary general meeting ( EGM ) of China Agri-Industries Holdings Limited ( Company ) to be held at Salon II, Level 3, The Ritz Carlton, 3 Connaught Road Central, Hong Kong, at 10:00 a.m. on 18 December 2007 is set out on pages 39 to 40 of this circular. Whether or not you are able to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the branch share registrar and transfer office of the Company in Hong Kong, Tricor Progressive Limited, at 26/F Tesbury Centre, 28 Queen s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time scheduled for the holding of the EGM or any adjournments thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournments thereof should you so desire. 27 November, 2007

2 CONTENTS Page Definitions... 1 Letter from the Board... 3 Introduction... 3 Mutual Supply Agreement... 4 Information on the company, China Agri and COFCO Extraordinary general meeting Recommendations Letter from the Independent Board Committee Letter from the independent financial adviser Appendix General information Notice of Extraordinary General Meeting i

3 DEFINITIONS In this circular, unless the context otherwise requires, the following expressions have the following meanings: Anhui BBCA Anhui BBCA Biochemical Co., Ltd. ( ), a company listed on the Shenzhen Stock Exchange and a subsidiary of COFCO Board China Agri the board of the Directors China Agri-Industries Limited, a company incorporated in Bermuda with limited liability, which is a wholly owned subsidiary of the Company China Foods Limited previously known as COFCO International Limited, a company incorporated in Bermuda with limited liability, the shares of which are listed on the Stock Exchange, and which is a subsidiary of COFCO COFCO COFCO Limited ( ), a wholly state-owned company incorporated in the PRC in September 1952 currently under the purview of the State-owned Assets Supervision and Administration Commission of the State Council of the PRC, the ultimate controlling shareholder of the Company and China Foods Limited COFCO Group COFCO (HK) COFCO and its subsidiaries other than the Group and China Foods Limited and its subsidiaries COFCO (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability and a wholly owned subsidiary of COFCO Company China Agri-Industries Holdings Limited ( ), a company incorporated on 18 November 2006 with limited liability under the laws of Hong Kong Companies Ordinance Director(s) EGM Group Companies Ordinance (Chapter 32 of the Laws of Hong Kong) the director(s) of the Company the extraordinary general meeting of the Company to be held to approve the proposed annual caps for 2007 and 2008 in respect of the transactions under the Mutual Supply Agreement the Company and its subsidiaries 1

4 DEFINITIONS Independent Board Committee Independent Shareholders the independent board committee of the Company comprising Mr. Lam Wai Hon, Ambrose, Mr. Victor Yang and Mr. Patrick Vincent Vizzone who are independent non-executive Directors Shareholders of the Company other than COFCO (HK) and its associates Latest Practicable Date means 23 November 2007 Listing Listing Rules Mutual Supply Agreement PRC the listing of the Company s shares on the main board of the Stock Exchange on 21 March 2007 The Rules Governing the Listing of Securities on the Stock Exchange an agreement entered into on 8 December 2006 and its supplementary agreement entered into on 12 January 2007 between COFCO and China Agri in respect of the mutual supply of raw materials and products as well as ancillary equipment and services People s Republic of China Prospectus the prospectus of the Company dated 8 March 2007 Registrar RMB Shareholder(s) Somerley Stock Exchange the branch share registrar and transfer office of the Company in Hong Kong, Tricor Progressive Limited the lawful currency Renminbi of the PRC the shareholder(s) of the Company Somerley Limited, a licensed corporation under the SFO permitted to engage in types 1, 4, 6, 9 of the regulated activities as defined in the SFO, being the independent financial adviser appointed by the Company to advise the Independent Board Committee and the Independent Shareholders The Stock Exchange of Hong Kong Limited 2

5 LETTER FROM THE BOARD CHINA AGRI-INDUSTRIES HOLDINGS LIMITED (Incorporated in Hong Kong with limited liability) Stock Code: 606 Chairman and Non-executive Director Ning Gaoning Executive Directors Yu Xubo Managing Director Lu Jun Deputy general manager Yue Guojun Deputy general manager Registered Office: 33rd Floor, Top Glory Tower 262 Gloucester Road Causeway Bay Hong Kong 2.14 APP1B 1 Non-executive Directors Chi Jingtao Ma Wangjun Independent Non-Executive Directors Lam Wai Hon, Ambrose Victor Yang Patrick Vincent Vizzone 27 November 2007 To the Shareholders Dear Sir or Madam, REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRASACTIONS UNDER THE MUTUAL SUPPLY AGREEMENT I. INTRODUCTION Reference is made to the announcement of the Company dated 8 November As disclosed in the Prospectus, the Group is a party to a number of existing continuing connected transactions. In this connection, the Company was granted waivers by the Stock Exchange from strict compliance with the relevant requirements under Chapter 14A of the Listing Rules in respect of certain continuing connected transactions for the year 2007 and

6 LETTER FROM THE BOARD Pursuant to the terms of the waivers granted by the Stock Exchange, certain of continuing connected transactions of the Company including, among other things, transactions entered into under the Mutual Supply Agreement are subject to annual caps. In accordance with Rule 14A.36(1) of the Listing Rules, if the annual cap is exceeded in respect of certain given transactions, the Company will have to re-comply with the provisions of Chapter 14A of the Listing Rules in relation to such connected transactions. It has come to the Company s attention during the course of preparing the financial statement for the six months ended 30 June 2007 that the annual caps for transactions entered into under the Mutual Supply Agreement for the year 2007 will be exceeded due to, among other things, rising raw material prices and business expansion. The Company expects that the annual caps for the year 2008 will need to be revised as well. The revised caps for the year 2007 and 2008 under the Mutual Supply Agreement are subject to reporting, announcement and independent shareholders approval requirements under the Chapter 14A of the Listing Rules. The Independent Board Committee has been formed to advise the Independent Shareholders in connection with the revised caps of the continuing connected transactions under the Mutual Supply Agreement. Somerley has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on the same. The purpose of this circular is: (1) to provide Shareholders with information on the revised caps of the continuing connected transactions under the Mutual Supply Agreement; (2) to set out the letter from the Independent Board Committee which contains its recommendation to the Independent Shareholders as regards voting on the revised caps of the continuing connected transactions under the Mutual Supply Agreement; (3) to set out the advice letter from Somerley which contains its recommendation to the Independent Board Committee and the Independent Shareholders on the revised caps of the continuing connected transactions under the Mutual Supply Agreement; and (4) to give notice to Shareholders on convening the EGM. II. MUTUAL SUPPLY AGREEMENT Background Before the Listing, China Agri and COFCO entered into the Mutual Supply Agreement to regulate the mutual supply relationship between COFCO Group and the Group in respect of the mutual supply of raw materials and products as well as ancillary equipment and services. The principal terms of the Mutual Supply Agreement are as follows: raw materials and ancillary equipment and services to be supplied by COFCO Group to the Group include soybeans, palm oil, oil tanks, wheat, white rice, and other relevant products as well as logistics and support services; products to be supplied by the Group to COFCO Group include bulk edible oils, soybean feed, soybean meal and other relevant products; 4

7 LETTER FROM THE BOARD the Mutual Supply Agreement is for a term commencing from its effective date to 31 December 2008 and may be renewed by mutual agreement between the parties subject to the compliance with the Listing Rules by the Company; the terms offered by each party pursuant to the Mutual Supply Agreement shall not be less favorable than the terms offered by independent third parties; if the terms and conditions of the supply of similar products, equipment or services offered by one party to the other party are better than those offered by any independent third party, the other party shall give priority to that party when sourcing the supplies; the Mutual Supply Agreement may be terminated by mutual agreement by the parties; the above raw materials and products as well as the ancillary equipment and services shall be provided at the market price or negotiated price based on the market price; and both parties have a non-exclusive right with regard to their respective sales and purchases. The raw materials supplied by COFCO Group to the Group under the Mutual Supply Agreement have been and will continue to be used as raw materials by the Group for processing, while the products sold by the Group to COFCO Group are final products and by-products after processing. Soybeans and palm oil supplied by COFCO Group to the Group are processed by the Group into bulk edible oil, soybean meals and soybean feed for subsequent supply to the Group s clients, including COFCO Group. 5

8 LETTER FROM THE BOARD Historical Transaction Values For the years ended 31 December 2004, 2005 and 2006 and the nine months ended 30 September 2007, the unaudited aggregate expenditures for the raw materials and ancillary equipment and services supplied by COFCO Group to the Group, being the subject matter of the Mutual Supply Agreement, are set out below: Historical transaction values for Nine months ended 30 the year ended 31 December September Transactions (RMB millions) Soybeans and palm oil 6, , , ,783.5 Oil tanks Wheat White rice Logistics and support services Barley Total 6, , , ,859.4 For the years ended 31 December 2004, 2005 and 2006 and the nine months ended 30 September 2007, the unaudited aggregate revenues for the products supplied by the Group to COFCO Group, being the subject matter of the Mutual Supply Agreement, are set out below: Historical transaction values for Nine months ended 30 the year ended 31 December September Transactions (RMB millions) Bulk edible oil Soybean feed and soybean meal Alcohol and rice husk powder Malt Feed Total

9 LETTER FROM THE BOARD Annual caps The breakdown of the original annual caps set for the supply of raw materials and ancillary equipment and services by COFCO Group to the Group for the year 2007 and 2008 and the revised annual caps for the transactions are as follow: Original annual caps for the year ending 31 December Revised annual caps for the year ending 31 December Transactions (RMB millions) (RMB millions) Soybeans and palm oil 8, , ,851.5 Oil tanks Wheat White rice Logistics and support services Barley N/A N/A Total 8, , ,326.2 The breakdown of the original annual caps set for the supply of products by the Group to COFCO Group for the year 2007 and 2008 and the revised annual caps for the transactions are as follow: Original annual caps for the year ending 31 December Revised annual caps for the year ending 31 December Transactions (RMB millions) (RMB millions) Bulk edible oil Soybean feed and soybean meal Alcohol and rice husk powder N/A N/A Malt N/A N/A Feed N/A N/A Total , ,

10 LETTER FROM THE BOARD Reason for revising the annual caps 14A.59(9) Based on the transaction amounts for the nine months ended 30 September 2007 which are the latest available figures, the caps for year 2007 have not been exceeded. The Directors anticipate that the total values of transactions under the Mutual Supply Agreement for the two years ending 31 December 2007 and 2008 will exceed the annual caps as disclosed in the Prospectus. The reasons for the supply of raw materials and ancillary equipment and services by COFCO Group to the Group exceeding the annual caps are as follows: 14A.58(1) 14A.58(3) Soybean prices rose from RMB 2,204 per metric ton in 2006 to RMB 3,062 per metric ton in June, The Company intended to establish a new entity within the Group which would set up the Group s own purchase channels to replace COFCO as its primary supplier of soybeans. However, the time for establishing such purchase channels by the Company has been longer than expected as it has taken a long time for the new entity to build up a financing system for its purchases of soybean. As a result, the Group had to continue its transaction with COFCO Group to ensure a steady supply of soybeans. The Company expects the new purchase channels will be established by the end of 2007, and therefore, the Group will reduce its purchases of soybeans from COFCO Group from the beginning of However, the revision of the original cap for 2008 in respect of purchases of soybeans is still required because certain transactions commenced in 2007 will only be closed in 2008 which leads to the increase of estimated transaction values for A.58(3) Compared to 2006, the wheat prices rose 10% in Due to an adjustment in the flour product mix to include more high-end products, the Group started to use more imported wheat as raw materials in its flour production than previously. Given that COFCO is the only licensed importer of wheat in the PRC, the Group s purchases of wheat from COFCO rose accordingly. The Company expects that in 2008 the Group s purchases of imported wheat for flour production will be as great as five times of its 2007 purchases. The purchases of wheat are generally affected by seasonality. The Company expects the purchases of wheat from COFCO Group for the three months ending 31 December 2007 will increase, compared to the total purchase amount for nine months ended 30 September 2007, because the last three months in a year is a peak season for the operations of wheat processing business. In setting its original caps, the Company previously expected that transactions with COFCO in respect of white rice would be reduced in 2007 and terminate in 2008 because the Company expected COFCO to cease supplying white rice in However, in mid-2007, COFCO Group clarified that it would continue to supply white rice thereafter. Considering that the Group had maintained a stable relationship with COFCO Group for purchases of white rice during the three years ended 31 December 2006, the Company believes that continuing such transactions with COFCO will provide greater certainty for the Group s operations. Although the Group had purchased barley from COFCO Group from time to time during the period of three years ended 31 December 2006, the Company, at the time of the Listing, expected that it would purchase barley from overseas third parties from After 8

11 LETTER FROM THE BOARD surveying in the market, the Company believed that the purchase prices and services provided by COFCO Group in respect of providing barley are more favourable than those offered by third-party suppliers. Therefore the Company decided to continue its purchases of barley from COFCO Group in 2007 and Due to a large volume of barley in stock at the beginning of 2007, the transaction amount of the Group s purchases of barley from COFCO Group for the nine months ended 30 September 2007 was relatively small. The Company expects the purchases of barley from COFCO Group for the three months ending 31 December 2007 will increase due to a shortage of barley in stock. The better-than-expected sales of the Group s products have increased the Group s demand for raw materials and logistics services. The reasons for the supply of products by the Group to COFCO Group exceeding the annual caps are as follows: Compared to 2006, the price of bulk edible oil increased approximately 40% in Due to a positive outlook for the edible oil market, COFCO Group has increased its purchases of edible oil from the Group, which has resulted in an increase in transaction amounts in 2007 and prospective transaction values in 2008, compared to original caps. COFCO became the controlling shareholder of Anhui BBCA on 3 April 2007 and purchases of alcohol and rice husk powder by the Group from Anhui BBCA became continuing connected transactions under the Mutual Supply Agreement thereafter. The caps for the Group s sales of alcohol and rice husk powder to Anhui BBCA are determined by reference to the historical transaction values between the parties and considering the fact that the alcohol production capacity of the Company has increased since the phase three of the Company s facility in Zhaodong, Heilongjiang Province, commenced operations in July, A.58(3) The Group started to sell malt and feed to COFCO Group from year Listing Rules implications of the transactions COFCO, through COFCO (HK) and its associates, holds approximately 57.67% of the Company s issued share capital. Therefore, it is a substantial shareholder and a connected person of the Company. Since China Agri is a wholly owned subsidiary of the Company, transactions under the Mutual Supply Agreement have constituted continuing connected transactions for the Company under the Listing Rules. The applicable percentage ratios in respect of the aggregate values for the transactions under the Mutual Supply Agreement have exceeded 2.5% on an annual basis. Transactions thereunder are therefore subject to the reporting, announcement and independent shareholders approval requirements in Rule 14A.35 of the Listing Rules. COFCO (HK) and its associates are required to abstain from voting at the EGM in relation to the resolution approving the proposed annual caps for year 2007 and 2008 in respect of Mutual Supply Agreement. 14A.59(5) 9

12 LETTER FROM THE BOARD The Directors (including all of the independent non-executive Directors) believe that the continuing connected transactions above were entered into in the ordinary and usual course of business of the Group and on normal commercial terms which are fair and reasonable and in the interests of the Shareholders as a whole, and that the revised annual caps mentioned above are fair and reasonable. III. INFORMATION ON THE COMPANY, CHINA AGRI AND COFCO The Company is a leading producer and supplier of processed agricultural products in China. It offers a diverse range of products to its customers in and outside China and it enjoys market leading positions in the majority of its businesses. China Agri is a wholly owed subsidiary of the Company which is the holding company of the agri-industrial business of the Group. COFCO is the holder of approximately 57.67% of the total issued share capital of the Company. COFCO is a state-owned company in the PRC with business interest in agricultural commodities trading, agricultural products processing, food and beverages, hotel management, real estate, logistics and financial services. IV. EXTRAORDINARY GENERAL MEETING A notice convening the EGM to be held at Salon II, Level 3, The Ritz Carlton, 3 Connaught Road Central, Hong Kong, at 10:00 a.m. on 18 December 2007 is set out on pages 39 to 40 of this circular for the purpose of considering and, if thought fit, passing the ordinary resolution in relation to the revised caps of the transactions under the Mutual Supply Agreement. 14A.59(5) In accordance with the Listing Rules, COFCO (HK) and its associates (which together hold 57.67% of the issued share capital of the Company as at the Latest Practicable Date) will abstain from voting on the resolution to be proposed at the EGM. The resolution to be proposed at the EGM will be voted by poll. The Company will announce the results of the polls on the next business day following the EGM. 14A.59(5) A form of proxy for use at the EGM is enclosed with this circular. Whether or not you are able to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the Registrar at 26/F Tesbury Centre, 28 Queen s Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time scheduled for the holding of the EGM or any adjournments thereof. Completion and return of the form of proxy will not preclude you from attending and voting in person at the EGM or any adjournments thereof should you so desire. V. RECOMMENDATIONS An Independent Board Committee has been formed to advise the Independent Shareholders in connection with the revised caps for the continuing connected transactions under the Mutual Supply Agreement, and Somerley has been appointed to advise the Independent Board Committee and the Independent Shareholders on the same. 10

13 LETTER FROM THE BOARD The Directors (including all of the independent non-executive Directors) are of the opinion that the continuing connected transactions under the Mutual Supply Agreement were entered into and have been carried out in the ordinary and usual course of business and on normal commercial terms which are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and their caps are fair and reasonable. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of ordinary resolution set out in the notice of EGM enclosed to this circular. APP1B 30 Yours faithfully, By Order of the Board Yu Xubo Managing Director 11

14 LETTER FROM THE INDEPENDENT BOARD COMMITTEE CHINA AGRI-INDUSTRIES HOLDINGS LIMITED (Incorporated in Hong Kong with limited liability) Stock Code: November 2007 To the Independent Shareholders 14A.58(3c) 14A.59(7) Dear Sir or Madam, REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS UNDER THE MUTUAL SUPPLY AGREEMENT We have been appointed as the Independent Board Committee to give a recommendation to the Independent Shareholders in connection with the revised caps of the continuing connected transactions under the Mutual Supply Agreement, details of which are set out in the Letter from the Board contained in the circular to the Shareholders dated 27 November 2007 (the Circular ), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires. Having considered the reasons for the revision of the annual caps of the continuing connected transactions under the Mutual Supply Agreement and the advice and opinion of Somerley Limited in relation thereto as set out on pages 13 to 31 of the Circular, we are of the opinion the continuing connected transactions under the Mutual Supply Agreement were entered into and carried out in the ordinary and usual course of business and on normal commercial terms which are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and their respective caps are fair and reasonable. We therefore recommend that the Independent Shareholders vote in favour of ordinary resolution enclosed to the Circular regarding the revised caps of the continuing connected transactions under the Mutual Supply Agreement as set out in the notice of EGM contained in the Circular. Yours faithfully, For and on behalf of the Independent Board Committee Lam Wai Hon, Ambrose Independent Non-executive Director Victor Yang Independent Non-executive Director Patrick Vincent Vizzone Independent Non-executive Director 12

15 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER The following is the letter of advice from the independent financial adviser, Somerley Limited, to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of inclusion in this circular. SOMERLEY LIMITED 10th Floor The Hong Kong Club Building 3A Chater Road Central Hong Kong 27 November 2007 To: the Independent Board Committee and the Independent Shareholders Dear Sirs, REVISED ANNUAL CAPS FOR CONTINUING CONNECTED TRANSACTIONS UNDER THE MUTUAL SUPPLY AGREEMENT We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders on the revised caps (the Revised Caps ) for certain continuing connected transactions contemplated under the Mutual Supply Agreement for 2007 and 2008, in respect of which the Independent Shareholders approval is being sought (the Revised Cap Transactions ). Details of the Revised Caps are set out in the letter from the Board contained in the circular of the Company to the Shareholders dated 27 November 2007 (the Circular ), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular. As at the Latest Practicable Date, based on the records of the Company, COFCO indirectly owned approximately 57.67% of the issued share capital of the Company. COFCO is therefore a connected person (as defined under the Listing Rules) of the Company and the Revised Cap Transactions constitute continuing connected transactions for the Company under the Listing Rules. At the time of the Listing, the Stock Exchange granted waivers to the Company from strict compliance with the relevant requirements under Chapter 14A of the Listing Rules in respect of the aforesaid continuing connected transactions for each of the two financial years ending 31 December 2007 and However, due to rising raw material prices and the continued growth of both the Group s and the COFCO Group s businesses, the Company anticipates that the respective cap amounts for 2007 and 2008 for the Revised Cap Transactions are not sufficient for the Group s requirements for 2007 and 2008 respectively, and therefore proposes to revise the relevant cap amounts. As certain percentage ratios represented by the aggregate values for the transactions contemplated under the Mutual Supply Agreement exceed 2.5% on an annual basis, in accordance with Rule 14A.36(1) of the Listing Rules, the Company must comply with the Independent Shareholders approval requirements contained in 13

16 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Rule 14A.48 in respect of the Revised Cap Transactions, in addition to the reporting and announcement requirements as stipulated in Rules 14A.45 to 14A.47 of the Listing Rules. In this connection, the Company will seek the Independent Shareholders approval for the Revised Caps for 2007 and 2008 at the EGM. The Independent Board Committee, comprising all of the three independent non-executive Directors, namely Messrs Lam Wai Hon, Ambrose, Victor Yang and Patrick Vincent Vizzone, has been established to make a recommendation to the Independent Shareholders on whether (1) the Revised Cap Transactions are in the ordinary and usual course of business; (2) the terms of the Mutual Supply Agreement in relation to the Revised Cap Transactions are on normal commercial terms which are fair and reasonable; and (3) the Revised Caps are fair and reasonable in so far as the Independent Shareholders are concerned. We, Somerley Limited, have been appointed to advise the Independent Board Committee and the Independent Shareholders in this regard. In formulating our opinion, we have relied on the information and facts supplied, and the opinions expressed, by the executive Directors and management of the Company and have assumed that the information and facts provided and opinions expressed to us are true, accurate and complete in all material aspects at the time they were made and up to the time of the EGM. We have also sought and received confirmation from the executive Directors that no material facts have been omitted from the information supplied and opinions expressed to us. We have relied on such information and consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter and to justify our reliance on such information. We have no reason to believe that any material information has been withheld, nor doubt the truth or accuracy of the information provided. We have, however, not conducted any independent investigation into the business and affairs of the Group and the COFCO Group, nor have we carried out any independent verification of the information supplied. We have not relied on the opinion or advice of any third party expert in formulating our opinion. PRINCIPAL FACTORS AND REASONS CONSIDERED In considering whether the Revised Caps and the terms of the Revised Cap Transactions are fair and reasonable in so far as the Independent Shareholders are concerned, we have taken into account the principal factors and reasons set out below: 1. Background to and reasons for the Revised Cap Transactions The Company was a wholly-owned subsidiary of China Foods Limited (formerly known as COFCO International Limited ) ( China Foods ) prior to the spin-off of the Group from China Foods (the Spin-off ) and the Listing. A corporate reorganisation (the Reorganisation ) was undertaken within the COFCO Group, the Group and China Foods group before the Spin-off and the Listing with a view to establishing the Group as the operating platform for the agri-industrial businesses comprising biofuel and biochemical, oilseed processing, rice trading and processing, brewing materials and wheat processing businesses. The Revised Cap Transactions were carried out between the Group and the COFCO Group prior to the Spin-off and the Listing, and entered into in their respective ordinary courses of business. Following the Spin-off and the Listing, the COFCO Group retained certain assets and businesses and continues to provide certain raw materials, products, 14

17 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER ancillary equipment and services to the Group s core businesses on an arm s length basis at market price or negotiated price based on the market price. In addition, the Group continues to supply certain products on an arm s length basis at market price or negotiated price based on the market price to the COFCO Group. The raw materials, products, ancillary equipment and services specified in the Mutual Supply Agreement are principally day-to-day production and services ancillary to the respective core businesses of the Group and the COFCO Group. The executive Directors consider that the Mutual Supply Agreement serves to provide mutual benefits to both the Group and the COFCO Group. From the Group s point of view, the stable supply of raw materials by the COFCO Group allows the Group to have an assured level of quantity in the raw materials supply for its daily production, while the sale of products to the COFCO Group contributes to the Group s turnover. As advised by the executive Directors, a stable trading relationship has been maintained with the COFCO Group since the Spin-off and the Listing, and the Group has not encountered any difficulties in collecting sales proceeds from the COFCO Group in the past. Moreover, the Group is satisfied with the quality of raw materials, products and services provided by the COFCO Group. Accordingly, the executive Directors are of the view that it is in the interests of the Company and the Shareholders as a whole to continue the Revised Cap Transactions. The Mutual Supply Agreement was entered into with a view to regulating the relationship between the Group and the COFCO Group on the aforesaid provision of raw materials, products, ancillary equipment and services, including the Revised Cap Transactions. In light of the principal activities of the Group, we consider that the Revised Cap Transactions contemplated under the Mutual Supply Agreement are entered into in the ordinary and usual course of business of the Group. 2. Principal terms of the Revised Cap Transactions The Mutual Supply Agreement sets out the major terms such as the pricing basis in respect of the mutual supply relationship between the COFCO Group and the Group in relation to the provision of raw materials, products, ancillary equipment and services. The Revised Cap Transactions include (1) supply of soybeans, palm oil, wheat, white rice and barley together with provision of logistics and support services by the COFCO Group to the Group; and (2) sales of bulk edible oils, malt, feed, alcohol and rice husk powder by the Group to the COFCO Group. The detailed terms as to (1) specific raw materials, products and services requested by the relevant party; (2) detailed requirements on, among other things, (a) quality; (b) quality assurance packaging standards; (c) terms of delivery; (d) terms on examination of samples; and (e) terms on return of goods, which may be relevant to those raw materials, products or services; and (3) the quantities and costs for the raw materials, products and services will be agreed from time to time based on the principal provisions as set out in the Mutual Supply Agreement. Details of the Revised Cap Transactions contemplated under the Mutual Supply Agreement are as follows: (i) Purchase of soybeans and palm oil The oilseed processing division of the Group processes mainly soybeans, palm oil, rapeseeds, cottonseeds, peanuts and other oilseeds into bulk edible oils, specialty oils and fats, oilseeds meals and 15

18 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER other products. Oilseed meal products are produced with varying protein content, which are primarily sold as animal feed ingredients. Soybeans are the most important raw material for the Group s oilseed processing production. The Group purchases soybeans and palm oil from the COFCO Group from time to time for its oilseed processing division. (ii) Purchase of wheat The Group purchases wheat mainly for production of a broad range of flour and noodles through its wheat processing division. The Group processes a variety of flour in two main categories, namely (1) customised flour produced from high-quality wheat to customer specifications, which is widely used by catering suppliers to produce western and traditional Chinese foods; and (2) general purpose flour, a lower-end product, used generally for making a wide range of cooked foods and for everyday use by consumers. The Group also produces a wide range of dried noodles including wheat, multigrain, vegetable, algae and nutritionally fortified noodles. The Group has commenced to produce a variety of freshly baked bread, frozen dough and cakes since July Since COFCO is the only licensed importer of wheat in the PRC, the Group has sourced imported wheat from the COFCO Group. The Group also purchases domestically sourced wheat from the COFCO Group. The wheat purchased from the COFCO Group is mainly used for the aforesaid production purposes. (iii) Purchase of white rice The rice trading and processing division of the Group is primarily engaged in exporting the parboiled rice produced by the Group, and white rice produced by the Group or purchased from other producers. The Group purchases white rice (comprising long grain and short grain rice) from the COFCO Group to polish, sieve and pack, and export such processed rice under the rice import and export agency agreement with COFCO. (iv) Provision of logistics and support services This category of services principally relates to the Group s rice trading and processing business, which involves logistics, warehousing and other support services provided by the COFCO Group. (v) Purchase of barley Barley is purchased by the Group for producing malt, the basic ingredient used for the brewing of beer, through the Group s brewing materials division. By-products of the malting process include malt root and barley husk, which are sold for production of animal feed. The Group purchases barley from the COFCO Group for its brewing materials business. (vi) Sale of bulk edible oil Bulk edible oil is produced from soybeans, palm oils, and other raw materials such as rapeseeds, cottonseeds and peanuts. The Group sells a portion of its bulk edible oil to the COFCO Group for its oil business. 16

19 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (vii) Sale of alcohol and rice husk powder The Group s biofuel and biochemical division is principally engaged in producing alcohol products including fuel ethanol, consumable ethanol and anhydrous ethanol, and other food and feed ingredients such as crude corn oil and dried distiller s grain with solubles. Fuel ethanol is primarily used as a gasoline blending additive. Consumable ethanol is commonly used as a raw material in the food and beverage industry and as an important basic chemical raw material. Anhydrous ethanol is primarily used as an underlying raw material and solvent in the chemical reagent, pharmaceutical, cosmetics and fragrance industries. Rice husk powder is produced from burning rice husk and is used as a type of biochemical raw material. The Group sells alcohol and rice husk powder products to Anhui BBCA. (viii) Sale of malt The Group sells malt to the COFCO Group for export to a new Asian market in The malt is used to produce beer. Malt provides most of the complex carbohydrates that are necessary to give beer its distinctive flavor, nutritional value, and alcohol content. (ix) Sale of feed The feed sold to the COFCO Group is the dried residual co-product of the grain fermentation and distillation process produced by the Group s biofuel and biochemical division. It is high in protein, as most of the grain starch has been removed, and can be used for hog feeds. (x) Pricing and other terms of the Revised Cap Transactions The Mutual Supply Agreement is for a term up to 31 December 2008 and can be renewed by mutual agreement between China Agri, a wholly-owned subsidiary of the Company, and COFCO subject to compliance with the Listing Rules. Pursuant to the Mutual Supply Agreement, the Revised Cap Transactions have to be conducted, after arm s length negotiations among parties, on normal commercial terms or on terms no less favourable to the Group and the COFCO Group than those offered by independent third parties. Moreover, each of the Group and the COFCO Group has a right to choose freely which party to trade with. Should the terms and conditions on which the provision of similar products and services are offered by one party to the other be better than those offered by any independent third party, the acquiring party shall give priority to the supplying party when sourcing such products and services. It is further stipulated in the Mutual Supply Agreement that the prices should be determined by reference to market prices or negotiated prices based on market prices. 17

20 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER We understand from the executive Directors that when sourcing raw materials, products and services relating to the Revised Cap Transactions, it is the Group s policy to request the COFCO Group to provide, along with other independent parties, quotations in respect of the requested raw materials, products and services. Following the receipt of quotations from the COFCO Group and other independent parties, the Group will compare and negotiate the terms of quotations with them and determine the selection of suppliers and/or service providers by taking into account factors such as prices, quality of products and services, ability in meeting delivery schedules requested by the Group and payment terms. The Group will award the contract to the party who offers the best overall commercial terms. Accordingly, the COFCO Group may or may not be awarded the contracts. Similarly, should the COFCO Group consider that the terms offered by the Group are not commercially acceptable, it may choose not to accept the contract. We are further advised by the executive Directors that when the COFCO Group sources products, it will request the Group to submit quotations together with other independent third party suppliers. A similar aforesaid price quotation process must take place before the COFCO Group awards a sale contract. The Group will refuse to accept any terms which in its view are not commercially acceptable. We consider that this price quotation process helps to safeguard the interests of the Independent Shareholders. Based on the above, we consider that the terms of the Mutual Supply Agreement are fair and reasonable. 3. Revised Caps The Revised Cap Transactions are subject to the Revised Caps whereby for each of the two financial years ending 31 December 2007 and 2008, the value of the Revised Cap Transactions will not exceed the applicable annual amounts stated in the letter from the Board contained in the Circular. In assessing the reasonableness of the Revised Caps, we have discussed with the executive Directors and management of the Company the basis and underlying assumptions for the purpose of setting the Revised Caps. 18

21 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (i) Purchase of soybeans and palm oil Set out below are the approximate values of the purchase of soybeans and palm oil from the COFCO Group for each of the three financial years ended 31 December 2004, 2005 and 2006 and for the nine months ended 30 September 2007: Nine months ended Financial year ended 31 December 30 September RMB million RMB million RMB million RMB million Aggregate value of purchase of soybeans and palm oil 6, , , ,783.5 Approximate increase as compared to the previous year (%) 17.0% 2.9% The Group s edible oil business continued to expand in each of the past three financial years ended 31 December 2004, 2005 and Accordingly, there was an increasing trend for the purchase of soybeans and palm oil from the COFCO Group for the past three years. The main reason for revising the 2007 annual cap from RMB8,647.0 million to RMB11,072.5 million is the increase of soybean prices during the year Soybean prices surged by approximately 38.9% from approximately RMB2,204 per metric tonne in 2006 to approximately RMB3,062 per metric tonne in June As informed by the executive Directors, soybean prices continue to rise in the second half of In estimating the original caps for the purchase of soybeans and palm oil for 2007 and 2008, the executive Directors also took into account the possible termination of the soybean purchasing from the COFCO Group before 2008 because the Group planned to develop its own overseas purchase channels to import soybeans directly from overseas suppliers instead of from the COFCO Group from The unexpected delay in the set up of the financing system for the purchase of soybeans resulted in the delay in the establishment of the new purchase channels. Based on current schedule, the executive Directors expect that the new purchasing channels should be established by the end of Accordingly, the Group has purchasing more soybeans from the COFCO Group than expected. As advised by the executive Directors, the fourth quarter is the peak season of the Group for the purchase of soybeans due to the harvest season for this crop. Moreover, the increase of soybean prices continues in the fourth quarter of 2007, rising by approximately 30% as compared to the second quarter of These factors explain why the proposed Revised Cap in respect of the purchase of soybeans and palm oil for 2007 of RMB11,072.5 million exceeds the annualised purchase amount of soybeans and palm oil for the nine months ended 30 September 2007 of approximately RMB7,711.3 million. In view of the delay in establishing the new purchase channels, the Group has entered into contracts with the COFCO Group to acquire soybeans which will be delivered to the Group around early 2008 to ensure that the Group will have sufficient raw materials for its oilseed processing operation in early

22 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER This would result in a substantial increase in the anticipated annual cap in 2008 from the original amount of RMB22.0 million to the revised amount of RMB3,851.5 million. Taking into account the aforesaid factors, the annual caps for the purchase of soybeans and palm oil are proposed to be revised as follows: Original caps for financial year ending 31 December Revised Caps for financial year ending 31 December RMB million RMB million RMB million RMB million Annual caps for the purchase of soybeans and palm oil 8, , ,851.5 Approximate increase/ (decrease) as compared to the annual cap of previous year (%) 28.1% # (65.2%)* # Compared to the original cap of 2007 * Compared to the Revised Cap of 2007 (ii) Purchase of wheat Set out below are the approximate values of purchase of wheat from the COFCO Group for each of the three financial years ended 31 December 2004, 2005 and 2006 and for the nine months ended 30 September 2007: Nine months ended Financial year ended 31 December 30 September RMB million RMB million RMB million RMB million Aggregate value of the purchase of wheat Approximate decrease as compared to the previous year (%) (88.9%) (100.0%) The Group purchased domestically sourced wheat from the COFCO Group in However, no domestically sourced wheat purchase was made in 2005 and 2006 because the terms offered by independent suppliers were more favourable than those offered by the COFCO Group. With a view to introducing new products and improving quality of products, the Group purchased some imported wheat from the COFCO Group in Due to the continued sharp rise in the import price of wheat and the fact that the Group was unable to pass along the increased wheat price to customers, the Group ceased all imported wheat purchases in

23 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER As a result of the accelerating economic development and urbanization in the PRC, the PRC consumers are putting more emphasis on quality rather than the price of food. In response to this, the Group adjusted its flour product mix in 2007 to include more high-end products that can yield higher profit margins. Since the quality of imported wheat is generally better than that of domestically sourced wheat and the Group is now more able to pass on the increase in cost to customers through higher selling prices for high-end products, the Group purchased imported wheat as raw materials for its flour production starting in Such change is also adopted to overcome stiff competition in the PRC. As COFCO is the only licensed importer of wheat in the PRC, the Group purchased more wheat from the COFCO Group in 2007 than expected. As advised by the executive Directors, the overall terms offered by the COFCO Group regarding domestically sourced wheat purchases have become more competitive than those offered by independent third party suppliers. Therefore, the Group has started to purchase domestically sourced wheat from the COFCO Group in This also contributes to the need to revise the annual cap for Based on our discussions with the executive Directors, the purchase of wheat is seasonal in nature. The imported wheat purchased by the Group from the COFCO Group has been sourced from geographical areas where the harvest seasons for the wheat run from the third quarter of each year to the first quarter of the following year. Moreover, some of the Group s distributors prefer to maintain a lower level of stock in late spring and summer due to relatively higher storage costs in these seasons. They only begin to build up inventories from August or September. Accordingly, the Group experiences higher sales in the period from August to February for its wheat processing division. This explains why the Revised Cap for the year 2007 was RMB100.0 million while the actual purchase amount for the nine months ended 30 September 2007 was just approximately RMB31.7 million. The increase of wheat prices by approximately 10% in 2007 as compared to 2006 also contributed to the need to increase the annual cap for Based on the current business plan to include more high-end products, the executive Directors anticipate that the weighting of imported wheat in the Group s total wheat purchases will increase by approximately four times in 2008 as compared to Based on such assumptions, the executive Directors estimate that the Revised Caps for the purchase of domestically sourced and imported wheat are proposed to be set as follows: Original caps for financial year ending 31 December Revised Caps for financial year ending 31 December RMB million RMB million RMB million RMB million Annual caps for the purchase of wheat Approximate increase as compared to the annual cap of previous year (%) 400.0% # 400.0%* # Compared to the original cap of 2007 * Compared to the Revised Cap of