ACQUISITION OF LI & FUNG S ASIA CONSUMER AND HEALTHCARE DISTRIBUTION BUSINESS

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser for independent advice. If you have sold or transferred all your shares in Dah Chong Hong Holdings Limited, you should at once hand this circular to the purchaser(s) or the transferee(s) or to the bank manager, licensed securities dealer or registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s). Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, 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 circular. (Incorporated in Hong Kong with limited liability) (Stock Code: 01828) MAJOR TRANSACTION ACQUISITION OF LI & FUNG S ASIA CONSUMER AND HEALTHCARE DISTRIBUTION BUSINESS Financial Adviser to the Company A letter from the Board is set out on pages 4 to 11 of this circular. 24 May 2016

2 CONTENTS Page Definitions... 1 Letter From the Board... 4 Appendix I Financial Information of the Group Appendix II Financial Information of the Target Group Appendix III Unaudited Pro Forma Financial Information of the Enlarged Group Appendix IV General Information i

3 DEFINITIONS In this circular, unless the context otherwise requires, the following expressions shall have the following meanings: Acquisition the acquisition of the Target Shares and the transactions contemplated under the Sale and Purchase Agreement; Announcement the announcement of the Company dated 3 May 2016 in relation to, among other things, the Acquisition; Board Business Business Day Buyer close associate(s), connected person(s), percentage ratio(s), subsidiary(ies) the board of Directors; the business carried on by the Target Group as at the date of the Sale and Purchase Agreement including the distribution of fast moving consumer products and healthcare products and the contract manufacturing of food and beverage products; a day other than a Saturday, Sunday or public holiday in Hong Kong when banks in Hong Kong are open for business; Neosota Corp., a company incorporated in the British Virgin Islands with limited liability and is wholly owned by the Company; each has the meaning ascribed to it under the Listing Rules; Company Completion Completion Accounts Dah Chong Hong Holdings Limited, a company incorporated in Hong Kong with limited liability, the shares of which are listed on the Stock Exchange (Stock Code: 01828); completion of the sale and purchase of the Target Shares in accordance with the terms of the Sale and Purchase Agreement; combined financial statements of the Target Group as at the Completion Date which shall be prepared in accordance with the terms of the Sale and Purchase Agreement; 1

4 DEFINITIONS Completion Date Conditions Consideration Director(s) Enlarged Group EUR Group HK$ Hong Kong Latest Practicable Date LF LF Group Listing Rules 30 June 2016 or (if the Conditions have not been satisfied (or waived) on or before such date) the fifth Business Day after all the Conditions having been satisfied (or waived) or any other date agreed in writing by the parties to the Sale and Purchase Agreement; the Conditions to Completion, as more particularly described under the paragraph Conditions in the Letter from the Board of this circular; the consideration payable by the Buyer to the Seller pursuant to the Sale and Purchase Agreement, as more particularly described under the paragraph Consideration in the Letter from the Board of this circular; the director(s) of the Company; the Group as enlarged by the Acquisition; Euro, the lawful currency of the Eurozone; the Company and its subsidiaries; Hong Kong Dollars, the lawful currency of Hong Kong; the Hong Kong Special Administrative Region of the People s Republic of China; 19 May 2016, being the latest practicable date for prior to the printing of this circular for the purpose of ascertaining certain information for inclusion in this circular; Li & Fung Limited, a company incorporated in Bermuda with limited liability, the shares of which are listed on the Stock Exchange (Stock Code: 00494); LF and its subsidiaries; The Rules Governing the Listing of Securities on the Stock Exchange; 2

5 DEFINITIONS Longstop Date Restructuring 31 December 2016 or such later date agreed in writing by the Buyer and the Seller; the pre-completion restructuring of the Business as more particularly described under the paragraph Restructuring in the Letter from the Board of this circular; Sale and Purchase Agreement the sale and purchase agreement dated 3 May 2016 entered into between the Company, the Buyer, LF and the Seller in relation to the sale and purchase of the Target Shares; Seller SFO Share(s) Shareholder(s) Stock Exchange LF Distribution Limited, a company incorporated in Bermuda with limited liability and is wholly owned by LF; Securities and Futures Ordinance, Chapter 571 of the Laws of Hong Kong; the share(s) of the Company; the shareholder(s) of the Company; The Stock Exchange of Hong Kong Limited; Target Company LF Distribution Holding Limited, a company incorporated in the British Virgin Islands with limited liability and is wholly owned by the Seller prior to Completion; Target Group Target Shares US$ the Target Company and its subsidiaries after the completion of the Restructuring and as at Completion; such number of shares which represent the entire issued share capital of the Target Company; United States Dollar, the lawful currency of the United States of America; and % per cent. 3

6 LETTER FROM THE BOARD (Incorporated in Hong Kong with limited liability) (Stock Code: 01828) Directors: Zhang Jijing* (Chairman) Yip Moon Tong (Chief Executive Officer) Lau Sei Keung (Executive Director) Glenn Robert Sturrock Smith (Executive Director) Kwok Man Leung* Fei Yiping* Cheung Kin Piu, Valiant** Hsu Hsung, Adolf** Yeung Yue Man** Chan Kay Cheung** Chan Hui Dor Lam, Doreen** Registered office: 8th Floor DCH Building 20 Kai Cheung Road Kowloon Bay Hong Kong * Non-executive Director ** Independent non-executive Director 24 May 2016 To the Shareholders Dear Sir or Madam, MAJOR TRANSACTION ACQUISITION OF LI & FUNG S ASIA CONSUMER AND HEALTHCARE DISTRIBUTION BUSINESS 1. INTRODUCTION Reference is made to the Announcement in relation to the Acquisition. On 3 May 2016, the Company, the Buyer (a wholly owned subsidiary of the Company), LF and the Seller (a wholly owned subsidiary of LF) entered into the Sale and Purchase Agreement, pursuant to which the Buyer conditionally agreed to purchase and the Seller conditionally agreed to sell LF s Asia consumer and healthcare distribution business (i.e. the Target Group) for a cash consideration of US$350 million (subject to customary closing adjustments on a cash-free, debt-free basis) as more particularly described below. 4

7 LETTER FROM THE BOARD The main purpose of this circular is to provide you with, among other things, further information relating to the Sale and Purchase Agreement and the Acquisition and other information required under the Listing Rules. 2. THE SALE AND PURCHASE AGREEMENT Date 3 May 2016 Parties (a) (b) (c) (d) the Company, as guarantor of the Buyer; the Buyer, as buyer of the Target Shares; LF, as guarantor of the Seller; and the Seller, as seller of the Target Shares. To the best of the Directors knowledge, information and belief having made all reasonable enquiries, LF, the Seller and their respective ultimate beneficial owners are third parties independent of and not connected with the Company and its connected persons. Subject matter The Target Shares, representing the entire issued share capital of the Target Company. Upon Completion, the Target Company will become a wholly owned subsidiary of the Buyer. Consideration The Consideration under the Sale and Purchase Agreement shall be US$350 million, subject to customary closing adjustments by (a) adding the amount of cash of the Target Group as at the Completion Date, (b) deducting the amount of indebtedness of the Target Group as at the Completion Date, and (c) adjusting for the difference between the amounts of the actual working capital and the target working capital of the Target Group as at the Completion Date. The Consideration was determined after arm s length negotiations between the Buyer and the Seller with reference to the Target Group s historical financial performance as set out in the paragraph 3. Information on Target Group below and future business prospect taking into consideration the higher growth in Greater China and Southeast Asia markets as well as comparable trading and transaction multiples. 5

8 LETTER FROM THE BOARD The Directors consider that the Consideration is fair and reasonable and in the interests of the Company and the Shareholders as a whole. Payment The Consideration shall be payable in cash according to the following schedule: (a) Initial Payment: at Completion, the Buyer shall pay to the Seller an amount equal to the sum of (i) US$350 million and (ii) an amount representing the cash-free, debt-free and working capital adjustments as estimated in accordance with the provisions of the Sale and Purchase Agreement (the Initial Payment ); and (b) Adjustment Payment: within five Business Days after agreement or determination of the Completion Accounts, the Buyer shall pay to the Seller any amount by which the Consideration (as determined according to the Completion Accounts) exceeds the Initial Payment, or the Seller shall pay to the Buyer any amount by which the Consideration (as determined according to the Completion Accounts) is less than the Initial Payment. Conditions Completion is subject to the following Conditions being satisfied (or waived) on or before the Longstop Date: (a) the completion of the Restructuring; and (b) the Sale and Purchase Agreement and other transaction documents to be entered into pursuant to or in connection with the Sale and Purchase Agreement and the transactions contemplated thereunder shall have been approved by the Shareholders in accordance with the requirements of the Listing Rules. Condition (a) above may be waived by the Buyer as it thinks fit. As at the Latest Practicable Date, Condition (b) above has been satisfied. Completion Completion shall take place on the Completion Date. Guarantee The Company has agreed to guarantee the performance of the Buyer s obligations under the Sale and Purchase Agreement and LF has agreed to guarantee the performance of the Seller s obligations under the Sale and Purchase Agreement. 6

9 LETTER FROM THE BOARD Non-compete The Seller has undertaken with the Buyer (for itself as agent for the Target Group) that it will not, and will procure no other member of LF Group (excluding the Target Group) will, without the written consent of the Buyer, for a period of three years immediately following the Completion Date, engage in the distribution of fast moving consumer products and healthcare products in Brunei, China, Hong Kong, Indonesia, Japan, Macao, Malaysia, Myanmar, Philippines, Singapore, Taiwan and Thailand, or employ or solicit or endeavour to entice away from the Target Group any of its material employees. Restructuring Prior to the entering into of the Sale and Purchase Agreement, the Business has been conducted by certain subsidiaries of LF. Pursuant to the Sale and Purchase Agreement, the Seller has agreed to procure a pre-completion Restructuring of the Business, which shall involve an internal transfer of assets, liabilities and shares of such subsidiaries to create the Target Group. The Restructuring is expected to complete by Completion. To the extent legal transfers of certain subsidiaries or businesses to the Target Group are not perfected and pending such perfection (which are immaterial in the context of the Acquisition taken as a whole), Completion will still proceed on the basis that the economics of these subsidiaries or businesses will be retained by Target Group as from Completion. 3. INFORMATION ON TARGET GROUP The Target Group is principally engaged in distribution of consumer and healthcare products across Asia. The Target Group has been operating in geographical areas including China, Hong Kong, Macao, Taiwan, Thailand, Malaysia, Singapore, Philippines, Indonesia and Brunei. The combined net assets of the Target Group as at 31 December 2015 and as at 31 December 2014 were approximately US$321.4 million and US$287.4 million respectively. The core operating profit of the Target Group for the years ended 31 December 2015 and 31 December 2014 were approximately US$16.1 million and US$24.8 million respectively. The combined net profits (before and after taxation) of the Target Group for the year ended 31 December 2015 were approximately US$13.0 million and US$11.2 million respectively, and the combined net profits (before and after taxation) of the Target Group for the year ended 31 December 2014 were approximately US$23.3 million and US$20.3 million respectively. 4. INFORMATION ON LF GROUP LF Group is recognised as the world s leader in consumer goods design, development, sourcing and logistics. It specialises in responsibly managing supply chains of high-volume, time-sensitive goods for leading retailers and brands worldwide. The Seller is an investment holding company and a wholly owned subsidiary of LF. 7

10 LETTER FROM THE BOARD 5. INFORMATION ON THE GROUP The Group is an integrated trading and distribution company operating in Asia with a focus on Greater China, supported by an extensive logistics network. The Company is a leading distributor and dealer of motor vehicles in Greater China, and it also provides a full range of motor related services. The Company s consumer business distributes food, personal care and lifestyle products. Established in 1949 and listed on the Stock Exchange, the Company has business operations in Hong Kong, mainland China, Taiwan, Macao, Singapore, Japan and Myanmar. The Buyer is an investment holding company and a wholly owned subsidiary of the Company. 6. THE GROUP S FINANCING The Group intends to finance the Acquisition with a combination of its internal resources and external financing, and has, for this purpose, secured commitment for bank term loan facilities. 7. REASONS FOR AND BENEFITS OF THE ACQUISITION Better balances the Company s motor and consumer businesses The Company believes that the Acquisition will expand the Company s consumer business, creating a better balance between motor and consumer products. The Company s enlarged consumer products portfolio will boast a broad range of leading food, personal care and healthcare brands. Extends the Company s geographic reach Geographically, the Company believes that the Acquisition will enhance the Company s position in high-growth markets in Southeast Asia. This, together with the Company s leading position in Greater China will immediately create a Pan-Asian business that will be able to leverage its increased distribution and logistics channels to further enhance the services provided to brand owners. Gains strong foothold in the high-growth Asian healthcare market The Target Company s healthcare portfolio includes a wide range of leading brands. The Company believes that this will provide the Company with an immediate position in Asia s rapidly growing healthcare market on a strong and stable platform. Enhances the Company s earnings profile The Company believes that the Acquisition will give the Company economies of scale as it continues to build on well-established relationships to capture growth opportunities. The Company believes that the Acquisition will diversify the Company s income streams and is expected to be earnings accretive. The Directors are of the view that the terms of the Acquisition are fair and reasonable and in the interests of the Company and the Shareholders as a whole. 8

11 LETTER FROM THE BOARD 8. FINANCIAL EFFECTS OF THE ACQUISITION Upon Completion, the Target Company would become a wholly owned subsidiary of the Group and thus the assets, liabilities and financial results of the Target Company and its subsidiaries will be consolidated into those of the Group. Assets and liabilities As illustrated in the unaudited pro forma financial information as set out in Appendix III to this circular, had the Completion taken place on 31 December 2015, the total assets of the Enlarged Group would increase from HK$21,158 million to approximately HK$27,782 million on a pro forma basis, and the total liabilities of the Enlarged Group would increase from HK$11,670 million to approximately HK$18,285 million on a pro forma basis. Earnings As set out in the Accountant s Report on the Target Group included as Part A of Appendix II to this circular, the turnover and net profit attributable to shareholders of the Target Company were approximately US$1,171 million and US$12 million for the year 31 December 2015, respectively. The attention of the Shareholders is drawn to the unaudited pro forma financial information of the Enlarged Group set out in Appendix III to this circular. 9. FINANCIAL AND TRADING PROSPECTS OF THE GROUP On the whole, prevailing condition remains weak as reported in the Chairman s Letter to Shareholders of the Company s 2015 annual report published on 23 March A number of trade and market factors worth noting are: (a) mainland China s gross domestic product growth slowed to 6.7% in the first quarter of 2016, the weakest since 2009; (b) mainland China s motor market shows some signs of improvement in early 2016, as a result of (i) major motor makers becoming more in tune with the market when setting their sales targets for 2016, and (ii) the consolidation of dealership network gradually easing off the unhealthy competitions in the market; (c) Japanese currency has strengthened considerably since the beginning of 2016 which will impact the margin of the Group s motor business in Hong Kong and other markets; 9

12 LETTER FROM THE BOARD (d) (e) Hong Kong retail sales recorded negative growth for 13 months in a row since March 2015; and more stable commodity prices in recent months will benefit the Group s food trading business. The Acquisition marks the achievement of the Company s major milestone to enlarge its food and consumer products businesses as set out in the Chairman s Letter to Shareholders of the Company s 2015 annual report. The Acquisition represents a rare opportunity to create a major platform of leading consumer and healthcare business in the fast growing Greater China and Southeast Asia market. The Company believes that the Group s turnover in the non-motor business will increase substantially in the first year after Completion, resulting in a balanced portfolio with two delineated business lines managed by dedicated management teams which the Group could leverage on to optimise the values of both businesses in the future. The Company believes that the Acquisition will not dilute the Company s investment in the motor and motor related businesses. Looking ahead, the Company will continue to focus on improving the profitability of its motor business in mainland China, while actively exploring acquisition opportunities to expand its 4S network and investigating new business opportunities, such as the distribution of electric vehicles in the region. 10. LISTING RULES IMPLICATION As the highest applicable percentage ratio for the Company in respect of the Acquisition is 25% or more but is less than 100%, the Acquisition constitutes a major transaction for the Company and is subject to the reporting, announcement and shareholders approval requirements under Chapter 14 of the Listing Rules. The Company would like to note for completeness that Mr. Wai King Fai, Francis ( Mr. Wai ), a director of the Company at the date of Announcement and a shareholder of the Company had declared a personal shareholding in 16,000 shares in LF, which had a market value of a mere HK$76,000 based on the closing price of the shares of LF of HK$4.75 as at the date of the Announcement. Mr. Wai, whose retirement from the Company was announced in February 2016, was no longer a director of the Company as at the Latest Practicable Date. Having considered the monetary value involved in Mr. Wai s shares in LF and the role of Mr. Wai in the Acquisition and all the relevant circumstances, the Company does not consider Mr. Wai has a material interest in the Acquisition. To the best of the knowledge, information and belief of the Directors having made all reasonable enquiries, no Shareholders or any of their respective close associates have any material interest in the Acquisition. As such, no Shareholders would be required to abstain from voting under the Listing Rules if the Company were to convene a general meeting for the approval of the Acquisition. 10

13 LETTER FROM THE BOARD As at the Latest Practicable Date, a closely allied group of Shareholders together held 1,027,307,000 Shares, representing approximately % of the total number of issued Shares. Such closely allied group of Shareholders comprises 10 investment holding companies, all of which are wholly owned subsidiaries of CITIC Pacific Limited ( CITIC Pacific, a wholly owned subsidiary of CITIC Limited ( CITIC )). These 10 investment holding companies are Silver Ray Enterprises Inc. ( Silver Ray ) which held 55,877,800 Shares, Grogan Inc. ( Grogan ) which held 81,000,000 Shares, Greenlane International Holdings Inc. ( Greenlane ) which held 81,000,000 Shares, Chadacre Developments Limited ( Chadacre ) which held 245,102,000 Shares, Cornaldi Enterprises Limited ( Cornaldi ) which held 95,317,400 Shares, Corton Enterprises Limited ( Corton ) which held 54,467,000 Shares, Dashing Investments Limited ( Dashing ) which held 13,616,800 Shares, Karaganda Limited ( Karaganda ) which held 13,616,800 Shares, Colton Pacific Limited ( Colton ) which held 378,802,200 Shares and Hainsworth Limited ( Hainsworth ) which held 8,507,000 Shares. Pursuant to Rule of the Listing Rules, the Company has obtained a written approval of the Acquisition from such closely allied group of Shareholders. As such, the Company is not required to convene a general meeting to consider and approve the Sale and Purchase Agreement and the Acquisition. 11. RECOMMENDATION The Directors consider that the Acquisition is on normal commercial terms and in the usual course of business of the Group, and that the terms and conditions of the Sale and Purchase Agreement are fair and reasonable and in the interests of the Group and the Shareholders as a whole and would have recommended the Shareholders to vote in favour of the resolutions to approve the Acquisition if it had been necessary to hold a general meeting for such purpose. 12. ADDITIONAL INFORMATION Your attention is drawn to the additional information set out in the appendices to this circular. By Order of the Board Dah Chong Hong Holdings Limited Zhang Jijing Chairman 11

14 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 1. FINANCIAL INFORMATION OF THE GROUP The financial information of the Group (i) for the year ended 31 December 2015 is disclosed in the 2015 annual report of the Company published on the website of Hong Kong Exchanges and Clearing Limited ( SEHK/2016/0323/LTN pdf) and the website of the Company ( on 23 March 2016, from pages 76 to 151; (ii) for the year ended 31 December 2014 is disclosed in the 2014 annual report of the Company published on the website of Hong Kong Exchanges and Clearing Limited ( LTN pdf) and the website of the Company ( upload/invs_news_rpt/26/en/fulldoc/e01828_dchh_ar2014.pdf) on 27 March 2015, from pages 79 to 154; and (iii) for the year ended 31 December 2013 is disclosed in the 2013 annual report of the Company published on the website of Hong Kong Exchanges and Clearing Limited ( and the website of the Company ( 24/en/fulldoc/E01828-AR_ pdf) on 25 March 2014 from pages 80 to STATEMENT OF INDEBTEDNESS As at the close of business on 31 March 2016, being the latest practicable date for the purpose of determining this indebtedness of the Group and the Target Group prior to the printing of this circular, the indebtedness of the Group and the Target Group was as follows: (i) Bank and other borrowings The Group had bank and other borrowings of approximately HK$5,791 million, of which HK$251 million were secured, HK$1,025 million were guaranteed and HK$4,515 million were unsecured and unguaranteed. The Target Group had bank borrowings of approximately US$21 million, of which US$3 million were secured and guaranteed, US$18 million were unsecured and guaranteed. (ii) Other indebtedness The Group had amounts due to holders of non-controlling interests and joint ventures of approximately HK$312 million and HK$9 million respectively, which were unsecured, non-interest bearing and repayable on demand, except for the amounts due to holders of non-controlling interests of HK$23 million which were interest bearing at 2% per annum and of HK$42 million which were repayable after one year. The Target Group had amount due to related companies of approximately US$49 million, which was unsecured, non-interest bearing and not repayable within one year. 12

15 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (iii) Pledge of assets As at 31 March 2016, the Group s inventories of HK$170 million, bank deposits of HK$125 million, trade debtors and other receivables of HK$83 million and property, plant and equipments of HK$3 million were pledged to secure certain bank and other borrowings. As at 31 March 2016, the Target Group s land and buildings of US$3 million were pledged as security for the Target Group s short-term bank loan. Contingent liabilities In addition, as at 31 March 2016, the Group had the following contingent liabilities: (a) (b) the Group has issued guarantees to bank in respect of banking facilities of HK$75 million granted to and utilised by an associate of HK$46 million. the Group has issued a guarantee of EUR1.2 million to a trade creditor of an associate. Save as aforementioned and apart from intra-group liabilities within the Group or the Target Group and normal trade business, at the close of business on 31 March 2016, the Group and the Target Group did not have any other outstanding borrowings, loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills), acceptance credits, debentures, mortgages, charges, finance leases, hire purchase commitments, guarantees or other material contingent liabilities. 3. WORKING CAPITAL Taking into account the financial resources available to the Enlarged Group, including the internally generated funds, cash and cash equivalents on hand, and the existing available committed and uncommitted borrowing facilities, the Directors are of the opinion that in the absence of unforeseeable circumstances, the Enlarged Group has sufficient working capital available for its requirements, that is for at least the next 12 months from the date of this circular. 13

16 A. ACCOUNTANT S REPORT ON THE TARGET GROUP 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 Circular. 24 May 2016 The Directors Dah Chong Hong Holdings Limited Dear Sirs, We report on the financial information of the Business (as defined in Note 1.1 of Section II headed General Information below). The financial information comprises the combined statements of financial position of the Target Group as at 31 December 2013, 2014 and 2015, and the combined profit and loss accounts, the combined statements of comprehensive income, the combined statements of changes in equity and the combined cash flow statements of the Target Group for each of the years ended 31 December 2013, 2014 and 2015 (the Relevant Periods ) and a summary of significant accounting policies and other explanatory information. This financial information has been prepared by the directors of Dah Chong Hong Holdings Limited (the Company ) and is set out in Sections I to IV below for inclusion in Appendix II to the circular of the Company dated 24 May 2016 (the Circular ) in connection with the proposed acquisition of LF Distribution Holding Limited (the Target Company ) by the Company. The Target Company was incorporated in the British Virgin Islands on 16 December 2013 as an exempted company with limited liability under the BVI Business Company Act Pursuant to a group reorganisation as described in Note 1.2 of Section II headed Reorganisation below, the Target Company will become the holding company of the subsidiaries comprising the Target Group (the Reorganisation ). As at the date of this report, the Target Group has direct and indirect interests in the subsidiaries after completion of Reorganisation as set out in Note 32 of Section II below. 14

17 No statutory audited financial statements have been prepared by the Target Company as it has not involved in any significant business transactions since its date of incorporation, other than the Reorganisation. The statutory audited financial statements of other companies comprising the Target Group as at 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 place of incorporation. Details of the statutory auditors of these companies are set out in Note 32 of Section II. The directors of the Target Company are solely responsible for the preparation of the combined financial statements of the Target Company and its subsidiaries comprising the Target Group for the Relevant Periods that give a true and fair view in accordance with Hong Kong Financial Reporting Standards ( HKFRSs ) issued by the Hong Kong Institute of Certified Public Accountants (the HKICPA ) (the Underlying Financial Statements ), and for such internal control as the directors determine is necessary to enable the preparation of the Underlying Financial Statements that are free from material misstatement, whether due to fraud or error. 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. 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 in accordance with HKFRSs and accounting policies adopted by the Company and its subsidiaries (together, the Group ) as set out in Note 2 of Section II below. The financial information has been prepared based on the Underlying Financial Statements, for which the directors of the Target Company are solely responsible. 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 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 2.1 of Section II below, a true and fair view of the combined financial position of the Target Group as at 31 December 2013, 2014 and 2015 and of the Target Group s combined financial performance and cash flows for the Relevant Periods. 15

18 I FINANCIAL STATEMENTS OF THE TARGET GROUP The following is the financial information of the Target Group prepared by the directors of the Company as at 31 December 2013, 2014 and 2015 and for each of the years ended 31 December 2013, 2014 and 2015 (the Financial Information ), presented on the basis set out in Note 1.3 below: Combined Profit and Loss Accounts Year ended 31 December Note US$ 000 US$ 000 US$ 000 Turnover 4 1,311,502 1,232,083 1,171,241 Cost of sales (1,122,164) (1,047,874) (971,688) Gross profit 189, , ,553 Other income 1, Total margin 190, , ,553 Selling and distribution expenses (58,372) (62,298) (88,171) Administrative expenses (91,922) (97,518) (95,301) Core operating profit 40,580 24,819 16,081 Amortisation of other intangible assets 5 (501) (525) (525) One-off restructuring costs 5 (700) Operating profit 5 40,079 24,294 14,856 Interest expenses 6 Non-cash interest expenses (247) (154) (78) Cash interest expenses (254) (872) (1,749) (501) (1,026) (1,827) Profit before taxation 39,578 23,268 13,029 Taxation 7 (5,444) (2,945) (1,839) Net profit for the year 34,134 20,323 11,190 Attributable to: Shareholders of the Target Company 34,291 22,003 12,336 Non-controlling interests (157) (1,680) (1,146) 34,134 20,323 11,190 Earnings per share Basic and diluted 9 N/A N/A N/A Details of dividends to Shareholders of the Target Company are set in Note

19 Combined Statements of Comprehensive Income Year ended 31 December US$ 000 US$ 000 US$ 000 Profit for the year 34,134 20,323 11,190 Other comprehensive income/(expense): Item that will not be reclassified to profit or loss Movement of other reserves, net of tax 2,654 (133) (116) Item that may be reclassified subsequently to profit or loss Currency translation differences (2,315) (3,571) (7,747) Total other comprehensive income/(expense) for the year, net of tax 339 (3,704) (7,863) Total comprehensive income for the year, net of tax 34,473 16,619 3,327 Attributable to: Shareholders of the Target Company 35,244 18,120 4,743 Non-controlling interests (771) (1,501) (1,416) 34,473 16,619 3,327 17

20 Combined Statements of Financial Position As at 31 December Note US$ 000 US$ 000 US$ 000 Non-current assets Intangible assets , , ,020 Property, plant and equipment 12 34,139 30,573 27,679 Prepaid premium for land leases 13 2,627 2,328 1,795 Deferred tax assets 22 11,595 15,910 20, , , ,703 Current assets Inventories , , ,421 Trade receivables , , ,143 Due from related companies 15 4,979 6,286 3,459 Other receivables, prepayments and deposits 16 44,138 50,205 62,778 Cash and bank balances 17 77,211 56,667 43, , , ,966 Current liabilities Trade payables , , ,945 Due to related companies 15 9,164 6,440 2,863 Accrued charges and sundry payables , , ,659 Purchase consideration payable for acquisitions 21 2,448 3,236 3,271 Taxation 2, ,329 Short-term bank loans 19 74,119 40,660 6,704 Bank overdrafts 17, 19 16,982 19,535 18, , , ,884 Net current assets 22,234 37,560 68,082 Total assets less current liabilities 301, , ,785 18

21 Combined Statements of Financial Position (Continued) As at 31 December Note US$ 000 US$ 000 US$ 000 Financed by: Combined capital , , ,578 Reserves 69,792 87,912 89,775 Shareholders fund attributable to the Target Company s Shareholders 257, , ,353 Non-controlling interests 9,001 7,500 6,084 Total equity 266, , ,437 Non-current liabilities Purchase consideration payable for acquisitions 21 6,404 3,241 Due to related companies 15 21,938 21,924 22,118 Post-employment benefit obligations 23 2,028 1,082 1,130 Deferred tax liabilities 22 4,427 3,432 3,100 34,797 29,679 26, , , ,785 19

22 Combined Statements of Changes in Equity Combined capital Attributable to Shareholders of the Target Company Noncontrolling interests Other reserves Exchange reserves Retained earnings Total Total Equity US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Note 20 Note Balance at 1 January ,154 1,542 10,048 25, ,523 9, ,295 Comprehensive income/(expense) Profit or loss 34,291 34,291 (157) 34,134 Other comprehensive (expense)/income Currency translation differences (1,701) (1,701) (614) (2,315) Movement of other reserves, net of tax 2,654 2,654 2,654 Total other comprehensive income/(expense) , (1,701) (614) Total comprehensive income/(expense) 2,654 (1,701) 34,291 35,244 (771) 34,473 Transactions with owners Capital distribution (13,278) (13,278) (13,278) Dividends paid (2,821) (2,821) (2,821) Total transactions with owners (13,278) (2,821) (16,099) (16,099) Balance at 31 December ,876 4,196 8,347 57, ,668 9, ,669 Note: Other reserves include defined benefit obligation reserve and legal reserve. 20

23 Combined Statements of Changes in Equity (Continued) Combined capital Attributable to Shareholders of the Target Company Noncontrolling interests Other reserves Exchange reserves Retained earnings Total Total Equity US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Note 20 Note Balance at 1 January ,876 4,196 8,347 57, ,668 9, ,669 Comprehensive income/(expense) Profit or loss 22,003 22,003 (1,680) 20,323 Other comprehensive (expense)/income Currency translation differences (3,750) (3,750) 179 (3,571) Movement of other reserves, net of tax (133) (133) (133) Total other comprehensive (expense)/income (133) (3,750) (3,883) (3,704) Total comprehensive (expense)/income (133) (3,750) 22,003 18,120 (1,501) 16,619 Transactions with owners Capital injection 4,140 4,140 4,140 Total transactions with owners 4,140 4,140 4, Balance at 31 December ,016 4,063 4,597 79, ,928 7, ,428 Note: Other reserves include defined benefit obligation reserve and legal reserve. 21

24 Combined Statements of Changes in Equity (Continued) Combined capital Attributable to Shareholders of the Target Company Noncontrolling interests Other reserves Exchange reserves Retained earnings Total Total Equity US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 Note 20 Note Balance at 1 January ,016 4,063 4,597 79, ,928 7, ,428 Comprehensive income/(expense) Profit or loss 12,336 12,336 (1,146) 11,190 Other comprehensive expense Currency translation differences (7,477) (7,477) (270) (7,747) Movements of other reserves, net of tax (116) (116) (116) Total other comprehensive expense (116) (7,477) (7,593) (270) (7,863) Total comprehensive (expense)/income (116) (7,477) 12,336 4,743 (1,416) 3,327 Transactions with owners Capital injection 33,562 33,562 33,562 Dividends paid (2,880) (2,880) (2,880) Total transactions with owners 33,562 (2,880) 30,682 30, Balance at 31 December ,578 3,947 (2,880) 88, ,353 6, ,437 Note: Other reserves include defined benefit obligation reserve and legal reserve. 22

25 Combined Cash Flow Statements Year ended 31 December Note US$ 000 US$ 000 US$ 000 Operating activities Net cash inflow generated from operations 24 (a) 18,662 26,132 11,702 Profits tax paid (7,710) (7,697) (6,756) Net cash inflow from operating activities 10,952 18,435 4,946 Investing activities Settlement of consideration payable for prior years acquisition of businesses 31 (2,448) (3,236) Acquisition of businesses 25 (13,646) Purchases of property, plant and equipment 12 (7,272) (5,031) (7,458) Payments for system development, software and other intangible assets 11 (178) (586) (39) Net cash outflow from investing activities (21,096) (8,065) (10,733) Net cash (outflow)/inflow before financing activities (10,144) 10,370 (5,787) Financing activities Increase/(decrease) in due to related companies 2,020 (1,949) 572 Net drawdown/(repayment) of bank loans 24(b) 37,850 (33,459) (33,956) Capital (distribution)/injection 24(b) (13,278) 4,140 33,562 Interest paid (254) (872) (1,749) Dividends (2,821) (2,880) Net cash inflow/(outflow) from financing activities 23,517 (32,140) (4,451) Increase/(decrease) in cash and cash equivalents 13,373 (21,770) (10,238) Cash and cash equivalents at 1 January 46,937 60,229 37,132 Effect of foreign exchange rate changes (81) (1,327) (1,842) Cash and cash equivalents at 31 December 60,229 37,132 25,052 Analysis of the balances of cash and cash equivalents: Cash and bank balances 17 77,211 56,667 43,165 Bank overdrafts 17 (16,982) (19,535) (18,113) 60,229 37,132 25,052 23

26 II NOTES TO THE FINANCIAL INFORMATION 1 GENERAL INFORMATION, REORGANISATION AND BASIS OF PREPARATION 1.1 General information The Target Company was incorporated in the British Virgin Islands on 16 December 2013 as an exempted company with limited liability under the BVI Business Company Act The address of the Target Company s registered office is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The Target Company is an investment holding company. The Target Company and other group companies are principally engaged in the business focuses on distribution of consumer healthcare products and providing contract manufacturing services for consumer products in China and South East Asia (the Business and collectively with the Target Company, the Target Group ). LF Distribution Limited, a company incorporated in Bermuda, is the immediate holding company of the Target Company. The ultimate holding company of the Target Company is Li & Fung Limited ( Li & Fung ), a company whose shares are listed on the Main Board of The Stock Exchange of Hong Kong Limited. 1.2 Reorganisation In the preparation for the acquisition of the Target Company by the Company, the Target Company and other companies comprising the Target Group will undergo a reorganisation (the Reorganisation ) pursuant to which group companies engaged in the Business will be transferred to the Target Company. The Target Company s principal subsidiaries comprising the Target Group after the completion of the Reorganisation are set out in Note 32 below. 1.3 Basis of presentation Immediately prior to and after the Reorganisation, the Business is controlled and managed by Li & Fung. The Reorganisation is merely a reorganisation of the Business with no change in the ultimate holding company and management of the Business. Accordingly, the Financial Information of the Business is presented on a combined basis, using the carrying values of the Business for all years presented or since their respective dates of incorporation/establishment, or since the date when the combining companies first came under the control of Li & Fung, whichever is the shorter period. For companies acquired from a third party during the years presented, they are included in the combined financial statements of the Business from the date of the acquisition. Inter-company transactions, balances and unrealised gains/losses on transactions between companies in the Business are eliminated on combination. The combined statements of financial position as at 31 December 2013, 2014 and 2015 include the assets and liabilities of the Business that are directly related and clearly identified to the Business and the combined profit and loss accounts include all revenues, related costs, expenses and charges directly generated or incurred by the Business. The financial information do not include certain assets, liabilities, income and expenses that are unrelated to the Business. Certain cash and bank balances and the entire bank overdrafts of the Target Group were used by related companies and the corresponding interest income and interest expenses were not incurred and recognised by the Target Group and the bank borrowings of the Target Group were used by related companies and the corresponding interest expenses were not incurred and borne by the Target Group. For details, please refer to the Note 17, Note 19 and Note 28 of this Financial Information. 24

27 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 Business for the years ended 31 December 2013, 2014 and SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these combined financial statements is set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The Financial Information have been prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRSs ). They have been prepared under the historical cost convention, as modified by the inclusion of financial assets and financial liabilities at fair value through profit or loss. 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 Target 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. The following new standards and amendments to existing standards have been issued and are mandatory for the Target Group s accounting periods beginning on or after 1 January 2016 or later periods, but the Target Group has not early adopted them: HKAS 1 Amendment Disclosure Initiative 1 HKAS 16 and HKAS 38 Amendment Clarification of Acceptable Methods of Depreciation and Amortisation 1 HKAS 16 and HKAS 41 Amendment Agriculture: Bearer Plants 1 HKAS 27 Amendment Equity Method in Separate Financial Statements 1 HKFRS 9 Financial Instruments 2 HKFRS 10 and HKAS 28 Amendment Sale or Contribution of Assets between an Investor and its Associate or Joint Venture 3 HKFRS 10, HKFRS 12 and HKAS 28 Investment Entities: Applying the Consolidation Exception 1 Amendment HKFRS 11 Amendment Accounting for Acquisitions of Interests in Joint Operations 1 HKFRS 14 Regulatory Deferral Accounts 1 HKFRS 15 Revenue from Contracts with Customers 2 Annual Improvements Project Annual Improvements Cycle 1 Notes: 1. Effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after 1 January Effective date to be determined The Target Group is in the process of making an assessment of the impact of these new standards and amendments to existing standards upon initial application. 2.2 Basis of combination (a) Subsidiaries Subsidiaries are all entities over which the Target Group has control. The Target Group controls an entity when the Target 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 fully consolidated from the date on which control is transferred to the Target Group. They are de-consolidated from the date that control ceases. 25

28 Except for the Reorganisation, the Target Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Target Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Target Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. Any contingent consideration to be transferred by the Target Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with HKAS 39 in profit or loss. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill (Note 2.5). If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. Inter-company transactions, balances and unrealised gains on transactions between Target Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies and financial information of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Target Group. (b) Transactions with non-controlling interests The Target Group treats transactions with non-controlling interests that do not result in loss of control as transactions with equity owners of the Target Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. 2.3 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Target Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The Financial Information are presented in United States dollar (US$), which is the Target Company s functional and presentation currency. (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 revaluation 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 currencies are recognised in the combined profit and loss accounts, except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount are recognised in other comprehensive income. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets are included in other comprehensive income. 26