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If you are in doubt as to any aspect of this circular, you should consult your stockbroker or other registereddealer in securities, bank manager, solicitor, professional accountant or other professional adviser.
If you have sold or transferred all your shares in Lee & Man Holding Limited (Company), you should atonce hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank,stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser ortransferee.
The information contained in this circular is subject to amendment and finalisation and approval of the ListingDocument (as defined herein). In additional, unless otherwise stated, the historical financial information of theSpin-off Group (as defined herein) in this circular is unaudited and may differ from the audited financialinformation of the Spin-off Group which will be included in the Listing Document. Shareholders andprospective investors of the Company should therefore exercise extreme caution in interpreting the informationcontained in this circular and when dealing in such securities.
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited (StockExchange) take no responsibility for the contents of this circular, make no representation as to its accuracy orcompleteness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in relianceupon the whole or any part of the contents of this circular.
LEE & MAN HOLDING LIMITED
*
(incorporated in the Cayman Islands with limited liability)
(Stock Code: 746)
MAJOR TRANSACTION
DEEMED DISPOSAL OF A SUBSIDIARY IN RELATION TOTHE PROPOSED SPIN-OFF OF
LEE & MAN HANDBAGS HOLDING LIMITED
ON THE MAIN BOARD OF
THE STOCK EXCHANGE OF HONG KONG LIMITED AND
ADOPTION OF THE NEW LISTCO SHARE OPTION SCHEME
Independent financial adviser to
the Independent Board Committee and the Shareholders
A letter from OSK, the independent financial adviser to the Independent Board Committee and theShareholders, containing its advice in relation to the Proposed Spin-off is set out on pages 35 to 52 of thiscircular.
A notice convening the EGM to be held at Unit A, 29/F., Admiralty Centre 1, 18 Harcourt Road, Hong Kong,on Monday, 13 June 2011 at 10:30 a.m. is set out on pages N-1 to N-3 of this circular. Whether or not youintend to attend the EGM, you are requested to complete and return the accompanying form of proxy inaccordance with the instructions printed thereon as soon as possible and in any event not less than 48 hoursbefore the time appointed for holding of the EGM or any adjournment thereof. Completion and return of theform of proxy will not preclude you from attending and voting in person at the EGM or any adjournmentthereof should you so wish.
* For identification purposes only
THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
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2011
Last day of dealing in the Shares on a cum entitlement basis . . . . . . . . . . . . Friday, 3 June
First day of dealing in the Shares on a ex entitlement basis . . . . . . . . . . . . Tuesday, 7 June
Latest time for lodging transfers of Shares
cum entitlement to New Listco Shares pursuant to
the Distribution at (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 4:30 p.m. on Wednesday, 8 June
Latest time for return of proxy forms
in respect of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . 10:30 a.m. on Saturday, 11 June
Register of members of the Company closes
(both dates inclusive) (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thursday, 9 June
to Monday, 13 June
Distribution Record Date and the record date fordetermining the eligibility of Shareholders
to attend and vote at the EGM (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . Monday, 13 June
EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10:30 a.m. on Monday, 13 June
Register of members of the Company re-opens on . . . . . . . . . . . . . . . . . . Tuesday, 14 June
Note s:
(1) All time refers to Hong Kong local time.
(2) The Board may determine another date for closure of the register of members of the Company and fordetermination of entitlements to the Distribution and the eligibility of Shareholders to attend and vote at the
EGM, in which case a further announcement will be made by the Company.
The above timetable is tentative only and is subject to change depending on the final
timetable of the Proposed Spin-off. Further announcement(s) will be made by the Company
as and when necessary.
EXPECTED TIMETABLE (NOTES 1 AND 2)
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Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Letter from OSK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Appendix I Financial information of the Remaining Group . . . . . . . . . . . . . I-1
Appendix II Summary of the principal terms of
the New Listco Share Option Scheme . . . . . . . . . . . . . . . . . . . . II-1
Appendix III General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N-1
CONTENTS
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In this circular, unless the context otherwise requires, the following expressions shall have
the following meanings:
Articles the articles of association of the Company as amended
from time to time
associate has the meaning ascribed to it under the Listing Rules
Board the board of Directors
BVI the British Virgin Islands
CAGR compound annual growth rate
CCAON China Chlor-Alkali Online, an independent third party
consultancy entity, which provides market reports and
consultation services on the chloro-alkali and relatedchemical industries in China to enterprises or business
units since 2004
CCASS the Central Clearing and Settlement System established
and operated by HKSCC
Chemease Chemease (http://www.chemease.com) is a professional
business information provider focusing on the chemical
commodity market in China. Chemease provides
customised information on energy, organic chemicals,
chemical fibres, plastics, rubbers and polyurethanes
CMS dichloromethane and chloroform
Company Lee & Man Holding Limited, a company incorporated
in the Cayman Islands with limited liability, the Shares
of which are listed on the Main Board of the Stock
Exchange
Companies Law the Companies Law, Cap 22 (Law 3 of 1961, as
consolidated and revised) of the Cayman Islands, as
amended, supplemented or modified from time to time
connected person(s) has the meaning ascribed to it under the Listing Rules
CTC carbon tetrachloride, a by-product in the production
process of CMS
Directors directors of the Company
DEFINITIONS
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Distribution the payment of a special interim dividend by the
Company to the Shareholders to be satisfied:
(a) by way of distribution in specie of such number
of New Listco Shares to the Qualifying
Shareholders in the proportion of one New ListcoShare for every one Share held by them as at the
close of business on the Distribution Record Date;
and
(b) by way of cash payment (after deducting
expenses) to the Excluded Shareholders which
equals to the net proceeds of the sale by the
Company on their behalf the New Listco Shares
to which the Excluded Shareholders would
otherwise be entitled to receive,
in either case, on the terms and conditions contained in
this circular
Distribution Record Date 13 June 2011, being the record date for ascertaining
entitlements to the Distribution
Eastern China region covers the eastern coastal area of China, which,
for this circular only, include the provinces of Anhui,
parts of Fujian, Jiangsu, Jiangxi, Shandong and
Zhejiang, as well as the municipality of Shanghai
EGM the extraordinary general meeting to be held on 13
June 2011 by t he Company for the purpose of
approving the Proposed Spin-off and the adoption of
the New Listco Share Option Scheme
Euro Chlor Euro Chlor is the European federation which represents
the producers of chlorine and its primary derivatives in
Europe. Based in Brussels, the federation works with
national, European and international authorities to
ensure that legislation affecting the industry is
workable, efficient and effective
Excluded Shareholder(s) the Overseas Shareholder(s) whom the Board, after
making enquiries and based on the legal opinion
provided by legal advisers, considers it necessary or
expedient not to transfer the New Listco Shares to, on
account either of legal restrictions under the laws of
the relevant place or the requirements of the relevant
regulatory body or stock exchange in that place
DEFINITIONS
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Fortune Star Fortune Star Tradings Ltd., a Shareholder which was
interested in 75% of the Companys issued share
capital as at the Latest Practicable Date and a company
incorporated in the BVI and was owned by each of Mr.
Lee Wan Keung and Mr. Norman Lee as to 55% and
45% respectively as at the Latest Practicable Date
GDP gross domestic product
Group the Company and its subsidiaries
HKSCC Hong Kong Securities Clearing Company Limited
HK$ Hong Kong dollars, the lawful currency of Hong Kong
Hong Kong the Hong Kong Special Administrative Region of the
PRC
Independent Board Committee the independent board committee formed by the
independent non-executive Directors to advise the
Shareholders on the Proposed Spin-off
Latest Practicable Date 13 May 2011, being the latest practicable date prior to
the printing of this circular for the purpose of
ascertaining certain information contained in this
circular
Listing the listing of the New Listco Shares on the Main Boardof the Stock Exchange
Li sting Committee the listing sub-committee of the board of directors of
the Stock Exchange
Li sting Document the listing document to be issued by the New Listco in
relation to the Proposed Spin-off
Listing Rules the Rules Governing the Listing of Securities on the
Stock Exchange
Mr. Norman Lee Mr. Lee Man Yan, an executive Director
Ms. Wai Ms. Wai Siu Kee, the chairman of the Group and a
Director, and the proposed chairman and an executive
director of the New Listco
DEFINITIONS
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New Listco Lee & Man Handbags Holding Limited (formerly
known as Heng Sing Holdings Limited), an exempted
company incorporated in the Cayman Islands on 4
January 2011 under the Companies Law with limited
liability
New Listco Share Option
Scheme
the share option scheme which will be conditionally
adopted by the New Listco which will take effect
subject to, among others things, the commencement of
dealings in the New Listco Shares on the Main Board
of the Stock Exchange
New Listco Shares ordinary shares of nominal value of HK$0.10 each in
the capital of the New Listco
OSK OSK Capital Hong Kong Limited, a corporation
licensed to carry out business in type 1 (dealing insecurities) and type 6 (advising on corporate finance)
regulated activities under the SFO and is t he
independent financial adviser to the Independent Board
Committee and the Shareholders in connection with the
Proposed Spin-off
Overseas Shareholder(s) Shareholders whose addresses appear on the register of
members of the Company at the close of business on
the Distribution Record Date are in jurisdictions
outside of Hong Kong
PN15 practice note 15 to the Listing Rules
PRC or China the Peoples Republic of China, but for the purpose of
this circular and for geographical reference only, does
not include Hong Kong, the Macao Special
Administrative Region of the PRC and Taiwan
Proposed Spin-off the proposed separate listing of the New Listco Shares
on the Main Board of the Stock Exchange, which is
expected to be effected by way of introduction,
together with the Distribution
Qualifying Shareholder(s) Shareholder(s) at the cl ose of business on the
Distribution Record Date other than the Excluded
Shareholders
Registrar the Hong Kong branch share registrar of the Company,
Tricor Secretaries Limited, of 26th Floor, Tesbury
Centre, 28 Queens Road East, Wanchai, Hong Kong
DEFINITIONS
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Remaining Group the Group excluding the Spin-off Group
RMB Renminbi, the lawful currency of the PRC
SFC The Securities and Futures Commission of Hong Kong
SFO the Securities and Futures Ordinance (Chapter 571 of
the Laws of Hong Kong), as amended, supplemented or
otherwise modified from time to time
Shares ordinary shares of HK$0.10 each in the issued share
capital of the Company
Shareholder(s) the holder(s) of the Share(s)
Spin-off Group the New Listco and its subsidiaries
Stock Exchange The Stock Exchange of Hong Kong Limited
substantial shareholder has the meaning ascribed to it under the Listing Rules
km kilometres
sq.m. or m2 square metres
% per cent.
Unless otherwise specified, for the purpose of this circular and for the purpose ofillustration only, Hong Kong dollar amounts have been translated using the following rates:
US$1: HK$7.8
RMB1: HK$1.1765
No representation is made that any amounts in US$, RMB or HK$ were or could have been
converted at the above rate or at any other rates or at all.
For ease of reference, the names of certain PRC laws and regulations or the PRC
established companies or entities have been included in this circular in both the Chinese
and English languages. The English names of these companies and entities are only Englishtranslation of their respective official Chinese names and they are denoted with *. In the
event of any inconsistency as to the names of such laws, regulations, companies or entities,
the Chinese version shall prevail.
DEFINITIONS
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LEE & MAN HOLDING LIMITED
*
(incorporated in the Cayman Islands with limited liability)
(Stock Code: 746)
Executive Directors:
Ms. WAI Siu Kee (Chairman)
Ms. POON Lai Ming
Mr. LEE Man Yan
Mr. KUNG Phong
Independe nt non-e xecutive Directors:Mr. WONG Kai Tung, Tony
Mr. WAN Chi Keung, Aaron BBS JP
Mr. HENG Victor Ja Wei
Registered office:
Cricket Square
Hutchins Drive
P.O. Box 2681
Grand Cayman KY1-1111
Cayman Islands
Principal place of business in Hong Kong:
8th Floor, Liven House
61-63 King Yip Street
Kwun Tong
Kowloon
Hong Kong
19 May 2011
To the Shareholders
Dear Sirs
MAJOR TRANSACTION
DEEMED DISPOSAL OF A SUBSIDIARY IN RELATION TO
THE PROPOSED SPIN-OFF OF
LEE & MAN HANDBAGS HOLDING LIMITED
ON THE MAIN BOARD OF
THE STOCK EXCHANGE OF HONG KONG LIMITED AND
ADOPTION OF THE NEW LISTCO SHARE OPTION SCHEME
INTRODUCTION
Reference is made to the announcements of the Company dated 26 January 2011 and 16
May 2011 in relation to the Proposed Spin-off.
The Board announced that on 26 January 2011, the New Listco submitted a listing
application form (for equity securities and debt securities) to the Stock Exchange for the
separate listing of, and permission to deal in, the New Listco Shares in issue or to be issued
* For identification purposes only
LETTER FROM THE BOARD
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under the Proposed Spin-off (including the New Listco Shares to be issued upon the exercise
of the options that may be granted under the New Listco Share Option Scheme) on the Main
Board of the Stock Exchange. The Directors confirm that the Company will implement the
Proposed Spin-off in compliance with the requirements under PN15 and other relevant
provisions of the Listing Rules.
The Proposed Spin-off is expected to be effected by way of introduction. Upon completion
of the Distribution, the New Listco will cease to be a subsidiary of the Company. It is
expected that the New Listco will be beneficially owned as to 75% in aggregate by Mr. Lee
Wan Keung and Mr. Norman Lee, an executive Director, through an investment holding
company which was held by them in the proportion of 55% and 45% respectively as at the
Latest Practicable Date, immediately following the Proposed Spin-off.
The New Listco Share Option Scheme will be conditionally adopted by the New Listco prior
to the date of this circular for the purposes of the Proposed Spin-off.
The Proposed Spin-off is conditional upon the fulfillment of the conditions set out in theparagraph headed Conditions precedent for the Proposed Spin-off below.
Completion of the Proposed Spin-off will not affect the listing of the Shares on the Main
Board of the Stock Exchange. The Shares will continue to be separately listed and traded on
the Main Board of the Stock Exchange after completion of the Proposed Spin-off.
The purposes of this circular are, among others:
(1) to provide Shareholders with information on the reasons for, and the benefits of, the
Proposed Spin-off (together with such other information relating to the Proposed
Spin-off as required by the Listing Rules for a major transaction of the Company) andthe adoption of the New Listco Share Option Scheme which will be conditionally
adopted by the New Listco;
(2) to provide Shareholders with general information of the chemical business carried out
by the Remaining Group;
(3) to set out the recommendations of the Independent Board Committee to the
Shareholders regarding the Proposed Spin-off;
(4) to set out the letter of advice from OSK containing its recommendation to the
Independent Board Committee and the Shareholders regarding the terms of theProposed Spin-off and its recommendation to the Shareholders regarding voting on the
Proposed Spin-off; and
(5) to give notice to Shareholders of the EGM at which ordinary resolutions will be
proposed to approve the Proposed Spin-off (including the Distribution) and transactions
related thereto and the adoption of the New Listco Share Option Scheme.
LETTER FROM THE BOARD
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Shareholders and potential investors of the Company should note that the Proposed
Spin-off (including the Distribution) is subject to, among others, the final decision of
the Board and the board of directors of the New Listco and the approvals from the
Shareholders and the Stock Exchange, and may or may not proceed. Accordingly,
Shareholders and potential investors of the Company are reminded to exercise caution
when dealing in the Shares.
The Proposed Spin-off
As at the Latest Practicable Date, the Proposed Spin-off had not been approved by the
Board. The Board will hold a meeting to conditionally approve the Proposed Spin-off on 18
May 2011. The Proposed Spin-off is expected to be conducted by way of an introduction
together with the Distribution whereby all issued New Listco Shares will be (i) distributed to
the Qualifying Shareholders by way of distribution in specie without raising any new fund;
and (ii) as regards those New Listco Shares to which the Excluded Shareholders shall be
entitled to under the Distribution, they will be sold to independent third party(ies) who
purchased such shares; and will be accompanied by a separate listing of the New ListcoShares on the Main Board of the Stock Exchange. The final structure of the Proposed
Spin-off will be decided by the Board and the board of the New Listco. Upon successful
conclusion of the Proposed Spin-off, the New Listco Shares will be separately listed on the
Main Board of the Stock Exchange.
The Distribution
As at the Latest Practicable Date, the Distribution had not been approved by the Board. The
Board will hold a meeting to conditionally approve the Distribution on 18 May 2011.
Pursuant to the Distribution, each Qualifying Shareholder or Excluded Shareholder will be
entitled to one New Listco Share or equivalent cash payment (net of expenses) (asappropriate) for each Share held as at the close of business on the Distribution Record Date,
as explained below. Based on the issued share capital of the Company as at the Latest
Practicable Date and assuming it will remain unchanged on the Distribution Record Date, to
effect the Distribution, subject to the Stock Exchange granting approval for the separate
listing of, and permission to deal in, the New Listco Shares on the Main Board of the Stock
Exchange, a total of 825,000,000 New Listco Shares will be issued representing the entire
issued share capital of the New Listco. There will be no dilution of the attributable interests
of the Qualifying Shareholders in the Spin-off Group.
If there are any Overseas Shareholders at the close of business on the Distribution Record
Date, the Overseas Shareholders may not be eligible to receive the New Listco Shares asexplained below.
The Directors will make enquiries, based on legal opinions provided by legal advisers if the
Directors consider it necessary, as to whether the transfer of the New Listco Shares to the
Overseas Shareholders may contravene the applicable securities legislation of the relevant
overseas places or the requirements of the relevant regulatory body or stock exchange. If,
after making such enquiry, the Directors are of the opinion that it would be necessary or
expedient, on account either of the legal restrictions under the laws of the relevant place or
any requirement of the relevant regulatory body or stock exchange in that place, not to
LETTER FROM THE BOARD
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transfer the New Listco Shares to such Overseas Shareholders, the Excluded Shareholders (if
any) will be entitled to the Distribution but will not receive the New Listco Shares. Instead,
they will receive a cash amount equals to the net proceeds of the sale by the Company on
their behalf of the New Listco Shares to which they would otherwise be entitled pursuant to
the Distribution after dealings in the New Listco Shares commence on the Stock Exchange
at the prevailing market price. The Company will ensure that the purchaser(s) of such NewListco Shares will be independent third party(ies). The proceeds of such sale, net of
expenses, will be paid to the relevant Excluded Shareholders in Hong Kong dollars. Cheques
for such net proceeds are expected to be despatched within approximately two weeks
following the commencement of dealings in the New Listco Shares on the Main Board of
the Stock Exchange. As at the Latest Practicable Date, there was no Overseas Shareholder.
Subject to the granting of the separate listing of, and permission to deal in, the New Listco
Shares on the Main Board of the Stock Exchange as well as compliance with the stock
admission requirements of HKSCC, the New Listco Shares will be accepted as eligible
securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the
date of Listing or such other date as may be determined by HKSCC. Settlement oftransactions between participants of the Stock Exchange is required to take place in CCASS
on the second business day after any trading day. All activities under CCASS are subject to
the General Rules of CCASS and CCASS Operational Procedures in effect from time to
time.
Further announcement(s) will be made by the Company to update Shareholders and
prospective investors of the Company of any significant development relation to the
Proposed Spin-off as and when appropriate.
Shareholding effect of the Distribution
Shareholding structure upon completion of the Distribution
As at the Latest Practicable Date, the Company directly held the entire interest of the New
Listco.
Upon completion of the Distribution, taking no account of any New Listco Shares which
may be allotted and issued pursuant to the exercise of the options which may be granted
under the New Listco Share Option Scheme, the Company will no longer be interested in
the then issued share capital of the New Listco.
LETTER FROM THE BOARD
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The following chart sets out the corporate structure of the Spin-off Group immediately after
certain reorganisation (which has not been completed as at the Latest Practicable Date but
will be completed as of the date of this circular) and the Distribution:
Lee & Man Development
Company Limited
Lee &Man
Company
Limited
Lee & ManHandbag
ManufacturingCompany
Limited
WellKnown
AssociatesLimited
Lee & ManManagement
CompanyLimited
Lee & ManLuggage
ManufacturingCompany
Limited
Lee & ManHandbag
(Thailand)Company
Limited
Lee WaiHandbag
ManufacturingCompany
Limited
Catini Bags,Inc.
Catini Bags(Hong Kong)
Limited
Dongguan LeeWai Handbag
Company
Limited
100%
55%
Mr. Lee Wan Keung Mr. Norman Lee
Full Gold Trading Limited(Notes ii and iii)
New Listco (Note i)
Public shareholders
25% 75%
100%
100%100%
45%
Note s:
(i) As at the date of this circular, the New Listco is a wholly-owned subsidiary of the Company, and is the sole
shareholder of Lee & Man Development Company Limited, which, together with its subsidiaries, are
wholly-owned subsidiaries of the Company.
(ii) Subject to the conditions disclosed in the paragraph headed The Distribution above being satisfied, the
New Listco Shares held by the Company will be (i) distributed to the Qualifying Shareholders in the
Distribution; (ii) and as regards those New Listco Shares to which the Excluded Shareholders shall be
entitled to under the Distribution, they will be sold to independent third party(ies) who purchased such
LETTER FROM THE BOARD
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shares. Fortune Star, which is an investment holding company held as to 55% by Mr. Lee Wan Keung and
45% by Mr. Norman Lee, being the Shareholder holding 75% of the issued Shares as at the Latest
Practicable Date, will direct the New Listco Shares to be issued to and held by Full Gold Trading Limited.
(iii) Upon completion of the Distribution 75% of the New Listco Shares will be held by Full Gold Trading
Limited, which is an investment holding company owned as to 55% by Mr. Lee Wan Keung and 45% by
Mr. Norman Lee.
The shareholding structure of the New Listco set out above is indicative only and the final
percentage of relevant shareholdings will be published in the Listing Document.
Businesses of the Group and the Spin-off Group
The New Listco was incorporated as an exempted company in the Cayman Islands on 4
January 2011 and as at the Latest Practicable Date was wholly-owned by the Company. On
22 March 2011, the name of the New Listco changed from Heng Sing Holdings Limited to
Lee & Man Handbags Holding Limited. Before the Distribution, the major businesses of the
Group are (i) the manufacture and sale of handbags and (ii) the manufacture and sale ofchloro-alkali chemical products which consist of dichloromethane, chloroform and other
ancillary products such as hydrogen peroxide and sodium hydroxide. Both businesses in the
Group continued to develop stably with clear delineation.
Immediately following completion of the Distribution, the Remaining Group will be
principally engaged in the manufacture and sale of chloro-alkali chemical products which
consist of dichloromethane, chloroform and other ancillary products such as hydrogen
peroxide and sodium hydroxide. On the other hand, the Spin-off Group, which is the subject
of the Proposed Spin-off, will focus on the manufacture and sale of handbags. The core
businesses of the Remaining Group and Spin-off Group, by their very nature, are separate
and distinct businesses which are independently operated in distinct markets. Further details
of the business of the Remaining Group are set out in the paragraph headed Information of
the Remaining Group below.
By the nature of the products and services provided by the Remaining Group and the
Spin-off Group, there is a clear delineation between the business retained by the Remaining
Group and the business of the Spin-off Group and there will not be any overlapping of
business of the Remaining Group and that of the Spin-off Group.
Directorship of the Remaining Group and the Spin-off Group
The Board currently comprises a total of seven Directors. The board of directors of the New
Listco is expected to comprise seven directors. None of the directors of the New Listco,
except Ms. Wai and Mr. Heng Victor Ja Wei, will assume any employment, role or function
in any company that will form part of the Remaining Group after completion of the
Proposed Spin-off.
Ms. Wai, an executive Director and the chairman of the Company, will remain as an
executive Director after the Proposed Spin-off. Ms. Wai had been concentrated on strategic
planning and overseeing the overall operation and general management of the Spin-off
Group since her appointment as an executive Director and the chairman of the Company in
2001. It is expected that Ms. Wai will serve the same function and will not be involved in
LETTER FROM THE BOARD
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the day-to-day operation of business of the Spin-off Group after the Proposed Spin-off. It is
also expected that Ms. Wai will be responsible for overall management of the Remaining
Group without involving in its day-to-day operation after the Proposed Spin-off.
Mr. Heng Victor Ja Wei, who was appointed as an independent non-executive Director on 30
June 2010, did not participate in the day-to-day operation of the Remaining Group and theSpin-off Group before Listing and it is expected that Mr. Heng will not participate in such
work in both the Remaining Group and the Spin-off Group after the Proposed Spin-off.
Mr. Kung Phong and Ms. Poon Lai Ming, each being an executive Director, will resign from
his/her directorship subject to Listing.
Each of Ms. Wai and Mr. Kung Phong was appointed as an executive director of the New
Listco on 4 January 2011. Each of Ms. Poon Lai Ming and Mr. Heng Victor Ja Wei will be
appointed as an executive director of the New Listco and an independent non-executive
director of the New Listco respectively.
Ms. Wong Yuet Ming, the company secretary of the Company, will remain as the common
company secretary for both the Company and the New Listco and will become an executive
Director. Ms. Wong will lead two separate company secretarial personnel to carry out the
daily general secretarial work for each of the Company and the New Listco while Ms. Wong
will mainly be responsible for overseeing compliance and reporting obligations of the
Company and the New Listco. To discharge her role as executive Director, Ms. Wong will
be responsible for giving advice in financial aspects when the Remaining Group makes
strategic plan and decision without involving day-to-day operation of the business of the
Remaining Group.
Other than Ms. Wai and Mr. Heng Victor Ja Wei, who will be the common executivedirector and independent non-executive director for both the Company and the New Listco
respectively, all of the other three executive Directors will be independent from the Spin-off
Group. The daily operations and management of the Spin-off Group will continue to be
handled by the other three executive directors of the New Listco and a group of experienced
senior management with extensive experience in handbag business and other employees of
the Spin-off Group. Hence, it is expected that there will not be any conflict of interests
arising as a result of the overlapping of the roles of the two directors. It is the intention of
the Board to maintain continued management independence of the Remaining Group and the
Spin-off Group. All directors of the New Listco, except Ms. Wai and Mr. Heng Victor Ja
Wei, will not have any official capacity or involvement in, or be remunerated by the
Remaining Group after the Proposed Spin-off. Save as disclosed above, it is also expectedthat there will not be any overlapping senior management between the Remaining Group and
the Spin-off Group after the Proposed Spin-off.
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Financial effects of the Distribution
Effe ct on net assets value
Upon completion of the Distribution, the New Listco will cease to be a subsidiary of the
Company and the financial information of the Spin-off Group will no longer be consolidatedinto the financial statements of the Company.
The consolidated total assets, total liabilities and net assets of the Company immediately
after the Distribution will be reduced by the amount of the total assets, total liabilities and
net assets of the Spin-off Group, respectively. As at 31 December 2010, the audited
consolidated total assets, total liabilities and net assets of the Company were approximately
HK$2,256.6 million, HK$879.2 million and HK$1,377.4 million respectively. As at 31
December 2010, the Spin-off Group had total assets of HK$471.3 million, total liabilities of
HK$259.3 million and net assets of HK$212.0 million.
Effe ct on earnings
Upon completion of the Distribution, the New Listco will no longer be a subsidiary of the
Company and the financial information of the Spin-off Group will no longer be consolidated
into the financial statements of the Company. For each of the two years ended 31 December
2010, the consolidated profit before taxation and extraordinary items of the Company
amounted to approximately HK$244.3 million and HK$529.5 million respectively while the
Spin-off Group recorded consolidated profit before taxation and extraordinary items of
approximately HK$117.5 million and HK$111.1 million for the respective year. For each of
the two years ended 31 December 2010, the consolidated net profit of the Company
amounted to approximately HK$233.8 million and HK$457.5 million respectively while the
Spin-off Group recorded consolidated net profit of approximately HK$106.9 million andHK$102.2 million for the respective year. On the assumption that the Distribution had taken
place at the beginning of the year ended 31 December 2010, the consolidated profit of the
Company for the year ended 31 December 2010 would have been reduced by the amount of
consolidated profit of the Spin-off Group.
As the Distribution will be accounted for by the Company as a distribution in specie at
carrying value, neither gain nor loss will be recognised by the Company as a result of the
Distribution.
Reasons for and benefits of the Proposed Spin-off
The Board believes that the separate listing of the Spin-off Group will be beneficial to both
the Company and the New Listco based on the following reasons:
(i) the Company and the New Listco are believed to have different growth paths and
different business strategies and the Proposed Spin-off will allow separate platforms for
the businesses of the two groups;
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(ii) the Proposed Spin-off will create two groups of companies and will offer investors
with an opportunity to participate in the future development of both the Remaining
Group as well as the Spin-off Group and flexibility to invest in both or either of the
groups;
(iii) the Proposed Spin-off will be by way of a distribution in specie whereby upon listingof the New Listco Shares, all such shares will be held by the Qualifying Shareholders
and the independent third party(ies) who purchased the New Listco Shares which the
Excluded Shareholders shall be entitled to under the Distribution. Excluded
Shareholders will be entitled to receive the net proceeds from the disposal of such New
Listco Shares to which they are entitled under the Distribution. The Company will thus
be able to return value to the Shareholders in the form of liquid securities or cash;
(iv) the Proposed Spin-off will enable the management team of the Company to continue to
focus on building the core businesses of the Remaining Group (i.e. the manufacture
and sale of chloro-alkali chemical products including dichloromethane, chloroform, and
other by-products such as hydrogen peroxide and sodium hydroxide), therebyenhancing the decision-making process and its responsiveness to market changes;
(v) the Proposed Spin-off will provide a mechanism to attract and motivate the Spin-off
Groups management directly in line with the financial performance of the Spin-off
Group on a standalone basis;
(vi) the Proposed Spin-off is expected to improve the operational and financial transparency
of the Spin-off Group and provide investors, the market and rating agencies with
greater clarity on the businesses as well as the respective financial status of the
Spin-off Group and the Remaining Group; and
(vii) the Proposed Spin-off will provide separate fundraising platforms for the Remaining
Group and the Spin-off Group with respect to their respective operations and future
expansion.
Conditions precedent for the Proposed Spin-off
The Proposed Spin-off will be conditional on, among others, the following:
(i) the Stock Exchange approving the Proposed Spin-off;
(ii) the Listing Committee granting separate listing of, and permission to deal in, the NewListco Shares in issue and any New Listco Shares which may be issued pursuant to the
exercise of the options granted under the New Listco Share Option Scheme, on the
Main Board of the Stock Exchange; and
(iii) the Shareholders passing ordinary resolutions at the EGM approving the Proposed
Spin-off and the New Listco Share Option Scheme.
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If any of these and other applicable conditions are not fulfilled or waived, if applicable,
prior to the dates and times to be specified, the Proposed Spin-off (including the
Distribution) will not proceed and the Stock Exchange will be notified immediately and an
announcement will be published by the Company as soon as practicable thereafter.
No proceeds from the Proposed Spin-off
The Proposed Spin-off does not involve an offering of new Shares or any other securities
and no new proceeds will be raised pursuant to the Proposed Spin-off.
CLOSURE OF REGISTER
The register of members of the Company will be closed from 9 June 2011 to 13 June 2011
(both dates inclusive) (or such other date(s) as the Board may determine and announce) for
the purpose of determining the entitlements to the Distribution and the eligibility of
Shareholders to attend and vote at the EGM. No transfer of Shares may be registered during
that period. In order to qualify for the Distribution, all transfers must be lodged with theRegistrar by no later than 4:30 p.m. on 8 June 2011 (or such later date as the Board may
determine and announce). The last day of dealing in the Shares on a cum entitlement basis
is expected to be on 3 June 2011.
SHARE OPTION SCHEME
The New Listco Share Option Scheme
As at the Latest Practicable Date, the New Listco Share Option Scheme had not been
adopted. The board of the New Listco will conditionally adopt its own share option scheme
prior to the date of this circular. The purpose of the New Listco Share Option Scheme is toenable the Spin-off Group to grant options to selected participants as incentives or rewards
for their contribution to the Spin-off Group. It will thus enable the Spin-off Group to reward
its employees, its directors and other selected participants for their contributions to the
Spin-off Group and to motivate them to contribute to the development of the Spin-off
Group.
The New Listco Share Option Scheme constitutes share option scheme governed by Chapter
17 of the Listing Rules. As the directors of the New Listco are entitled to determine any
performance targets and minimum holding period which apply to an option on a case by
case basis, and fix the subscription price, it is expected that grantees of an option will have
an incentive to contribute to the development of the Spin-off Group.
A summary of the principal terms of the New Listco Share Option Scheme is set out in
Appendix II to this circular. The New Listco Share Option Scheme will become effective
upon: (i) the Shareholders passing an ordinary resolution at the EGM to approve and adopt
the New Listco Share Option Scheme and the shareholders of the New Listco passing an
ordinary resolution to approve and adopt the New Listco Share Option Scheme; (ii) the
Listing Committee granting the listing of, and permission to deal in, such number of the
New Listco Shares to be issued pursuant to the exercise of any options which may be
granted under the New Listco Share Option Scheme; and (iii) the commencement of dealings
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in the New Listco Shares on the Main Board of the Stock Exchange. Pursuant to Rule
17.03(3) of the Listing Rules, the total number of the New Listco Shares which may be
issued upon exercise of all options to be granted under the New Listco Share Option
Scheme and other share option scheme of the New Listco (if any) must not in aggregate
exceed 10% of the number of all issued New Listco Shares on the date of the EGM. The
total number of the issued New Listco Shares as at the date of this circular is 825,000,000and assuming that no New Listco Shares will be issued before the date of the EGM, the
maximum number of the New Listco Shares to be issued under the General Scheme Limit
(as defined in Appendix II to this circular) is 82,500,000.
The Directors consider it inappropriate to disclose the value of options which may be
granted under the New Listco Share Option Scheme as if they had been granted as at the
Latest Practicable Date. Any such valuation will have to be made on the basis of certain
option pricing model or other methodology, which depends on various assumptions
including, the exercise price, the exercise period, interest rate, expected volatility and other
variables. As no options have been granted, certain variables are not available for calculating
the value of options. The Directors and the directors of the New Listco believe that anycalculation of the value of options as at the Latest Practicable Date based on a number of
speculative assumptions would not be meaningful and would be misleading to investors.
INFORMATION OF THE REMAINING GROUP
Upon the completion of the Distribution, the Spin-off Group, which is principally engaged in
the manufacture and sale of handbags, will cease to be the Companys subsidiaries. The
Remaining Group will focus on manufacture and sale of chloro-alkali chemical products
which consist of dichloromethane, chloroform and other ancillary products such as hydrogen
peroxide and sodium hydroxide.
The Company set up its chemical business in 2005. Production of our chemical production
plant commenced in May 2008 and its principal products are dichloromethane, chloroform
and other ancillary products such as hydrogen peroxide and sodium hydroxide.
CMS products have a broad spectrum of usages. The major usage of chloroform is as the
major upstream raw material of chlorodifluoromethane (HCFC-22), which is mainly used as
feedstock for fluorochemical products and also used in refrigerants for air-conditioners and
refrigerators. Other usages of chloroform include being the feedstuff in the synthesis of
dyestuffs, pharmaceutical products and pesticides. Dichloromethane also has a broad
spectrum of applications including adhesives, pharmaceuticals (as processing solvent for the
manufacture of steroids, antibiotics, vitamins, and tablet coatings), blowing agent forpolyurethanes, degreasing solvent, refrigerant (HFC-32) production and paint removers.
As at the Latest Practicable Date, the Remaining Groups chemical production plant had an
annual designed production capacity of 120,000 tons CMS, 160,000 dry tons sodium
hydroxide and 120,000 tons hydrogen peroxide.
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Industry overview
Source of information
The CCAON Report
The Company commissioned CCAON, an independent third party consultancy entity, to
conduct a market research report on, among other things, the market conditions of
dichloromethane and chloroform market in China. The market research report is not an
official government publication and is prepared in the ordinary course of business of
CCAON. According to CCAON, CCAON has been providing market reports and
consultation services on the chloro-alkali and related chemical industries in China to
enterprises or business units since 2004. The Company decided to commission CCAON as
there is no readily available public information on dichloromethane and chloroform market
in China.
Overview of the China economy
GDP and GDP per capita
Chinas economy has been growing rapidly since the implementation of market liberalisation
policies by the PRC government in the late 1970s. Economic growth was further reinforced
by the launch of special economic zones along the coastal PRC regions since the 1980s.
According to the National Bureau of Statistics of China, the national GDP increased from
approximately RMB18,493.7 billion in 2005 to approximately RMB34,050.7 billion in 2009,
representing a CAGR of approximately 16.49%, reflecting a rapid growth. The GDP per
capita also increased from approximately RMB14,185 in 2005 to approximately RMB25,575
in 2009, representing a CAGR of approximately 15.88%. The following chart sets forth
Chinas GDP and GDP per capita for the periods indicated.
GDP & GDP per capita in China, 2005-2009
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2005 2006 2007 2008 2009
GDP(R
MBbillion)
0
5,000
10,000
15,000
20,000
25,000
30,000
GDPpercapita(RMB)
GDP GDP per capita
Source: National Bureau of Statistics of China
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In view of the global financial crisis which started in 2008, the PRC government
implemented a RMB4 trillion economic stimulus plan in November 2008, which mainly
targeted at areas of domestic consumption, infrastructures, residential housing etc.. As
evident from the above figures, the PRC economy has responded positively to the plan, with
the national GDP boosted by approximately 8.4% in 2009 over that of 2008.
Disposable income growth of urban households
The consumer purchasing power in China has been increasing along with the economic
growth. According to the National Bureau of Statistics of China, the annual disposable
income per capita of urban households in China has increased from approximately
RMB10,493 in 2005 to approximately RMB17,175 in 2009, representing a CAGR of
approximately 13.11%. The following chart sets out the annual disposable income per capita
of urban households in China for the periods indicated.
Annual disposable income per capita of urban households in China, 2005-2009
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2005 2006 2007 2008 2009
RMB
Source: National Bureau of Statistics of China
Chinas dichloromethane market
Consumption for dichloromethane in the China market
According to Euro Chlor, dichloromethane, a versatile chlorinated solvent, is produced by
chlorination of either methanol or methyl chloride. It is used in a broad spectrum of
applications including adhesives, pharmaceuticals (as processing solvent for the manufacture
of steroids, antibiotics, vitamins, and tablet coatings), blowing agent for polyurethanes,
degreasing solvent, refrigerant (HFC-32) production and paint removers. The following chart
sets forth a breakdown of the consumption of dichloromethane in the China market in 2010.
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Breakdown of consumption of dichloromethane in China, 2010
Adhesives35%
Pharmaceuticals32%
Others2%
Refrigerant(HFC-32)Production
3%
DegreasingSolvent
8%
Blowing Agentfor
Polyurethanes20%
Source: CCAON
According to CCAON, the domestic consumption volume of dichloromethane in China grew
from approximately 257.22 thousand tons in 2005 to approximately 467.25 thousand tons in
2010, representing a CAGR of approximately 12.68%. Due to deteriorating global and
domestic market conditions in 2008, many domestic enterprises suspended their production
operations and resulted in a low level of domestic consumption volume. However, since the
second half of 2009, the domestic consumption volume increased substantially due to the
market recovery with increasing demand from the downstream industries. With the
development of the aeronautical and aviation technology and the construction of high speed
railway in China, together with the applications of the new energy sector, the demand for
adhesives in the China market demonstrated a rising trend with a stable growth rate of
approximately 10% per annum in recent years. Moreover, given the reform of the medical
system in China and the continuous improvement of Chinas medical insurance system, the
pharmaceutical sector in China is undergoing a rapid growth period with an annual growth
rate of approximately 20% in recent years and it is expected that the demand for
pharmaceutical products in China would maintain a continuous rapid growth trend.
Production for dichloromethane in China
According to CCAON, the production volume of dichloromethane in China grew from
approximately 213.90 thousand tons in 2005 to approximately 485.64 thousand tons in 2010,
representing a CAGR of approximately 17.82%. With the success of anti-dumping measures
of dichloromethane implemented in China, the imports of dichloromethane to China showed
a downward trend from 2005 to 2010. The import of dichloromethane to China decreased
from approximately 47.98 thousand tons in 2005 to approximately 7.44 thousand tons in
2010, representing a negative CAGR of approximately 31.12%. The net export of
dichloromethane from China was at a level of approximately 18.39 thousand tons in 2010,
accounted for approximately 3.79% of the total production volume of dichloromethane in
China in 2010. The table below sets forth the annual dichloromethane production and
domestic consumption levels in the China market for the periods indicated.
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Annual production volume and domestic consumption levels of dichloromethane in
China, 2005-2010
0
100
200
300
400
500
600
2005 2006 2007 2008 2009 2010
thousand
tons
Total production volume Total domestic consumption
Source: CCAON
Chinas chloroform market
Consumption for chloroform in the China market
Chloroform can be generated by the chlorination of methanol and chloromethane on
hydrodechlorination of CTC. Chloroform is the major raw material of chlorodifluoromethane
(HCFC-22), which is mainly used as feedstock for fluorochemical products and also used in
refrigerants for air-conditioners and refrigerators. Chloroform is also used as feedstock in thesynthesis of dyestuffs, pharmaceutical products and pesticides.
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The demand for chloroform in China is closely correlated with its downstream production
activities. In particular, the consumption of chloroform is highly driven by the production of
HCFC-22. According to CCAON, the production of HCFC-22 accounted for 84% of the total
consumption of chloroform in China. The following chart sets forth a breakdown of the
demand for chloroform in the China market:
Breakdown of consumption of chloroform in China, 2010
HCFC-22Production
84%
Others3%
DegreasingSolvent
3%
Pharmaceuticals &Pesticide
10%
Source: CCAON
According to CCAON, the domestic consumption volume of chloroform in China grew from
approximately 501.18 thousand tons in 2005 to approximately 603.55 thousand tons in 2010,
representing a CAGR of approximately 3.79%. Due to the financial crisis in the third quarter
of 2008 and also the strengthening of the environmental protection efforts in China, there
was a decrease in demand of chloroform from its downstream industries in 2009. As the
domestic consumption volume of chloroform is highly driven by the production and marketdevelopment potential of HCFC-22, the analysis of the HCFC-22 market is shown as
follows:
Refrigerant market in China
HCFC-22 is used in refrigerants for air-conditioners and refrigerators. According to the
National Bureau of Statistics of China, the annual production volume of air-conditioners was
approximately 67,650 thousand units in 2005 and approximately 80,780 thousand units in
2009, representing a CAGR of approximately 4.53% and the annual production volume of
household refrigerators was approximately 29,870 thousand units in 2005 and approximately
59,300 thousand units in 2009, representing a CAGR of approximately 18.70%. Thefollowing chart sets forth the annual production volume of air-conditioners and household
refrigerators in China for the periods indicated.
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Annual production volume of air-conditioners and household refrigerators in China,
2005-2009
0
10,000
20,000
30,000
40,000
50,000
60,00070,000
80,000
90,000
2005 2006 2007 2008 2009
Thousandunits
Total production volume of air conditioners
Total production volume of household refrigerators
Source: National Bureau of Statistics of China
According to the discussion paper entitled HFC-23 (CHF3) emission trend response to
HCFC-22 (CHCIF2) production and recent HFC-23 emission abatement measures published
by Copernicus Publications on behalf of the European Geosciences Union (Note), use of
HCFC-22 in the commercial refrigeration, air-conditioning and extruded polystyrene foam
industries is considered to be a dispersive use and results in emissions to the atmosphere.
HCFC-22 has an ozone depletion potential (ODP) of 0.055 and is included in the
phase-out of HCFC consumption and production for dispersive uses in developed countries
under the Montreal Protocol and its amendments. Decision XIX/6 of the 2007 Meeting of
the Montreal Protocol Parties stipulates a phase-out timetable for production andconsumption of HCFCs for dispersive applications in developed and developing countries
(Decision XIX/6). Developing countries will be subject to a phase-out beginning with a
freeze in 2013, with the baseline for that phase-out based on the average ODP-weighted
consumption of 2009 and 2010. The production of HCFC-22 for use as feedstock (such as in
in fluoropolymer manufacture), however, is considered to be a non-dispersive use and thus
unrestricted.
According to CCAON, the demand for HCFC-22 used in refrigerants is expected to maintain
at a high level within a certain period in the future, and is mainly due to ( i) the
implementation of the Home Appliances Go Rural policy in China which increased the
demand for HCFC-22 from air-conditioner manufacturers; (ii) the development ofrefrigerating sector in other developing countries; and (iii) the drastic fall in the global
production capacity of HCFC-22, particularly in developed countries, which, the Directors
believed was due to Decision XIX/6. Moreover, there is temporarily no foreseeable
Note : The authors of this paper are B. R. Miller, M. Rigby, L. J. M. Kuijpers, P. B. Krummel, L. P. Steele, M.
Leist, P. J. Fraser, A. McCulloch, C. Harth, P. Salameh, J. Muhle, R. F. Weiss, R. G. Prinn, R. H. J.
Wang, S. ODoherty, B. R. Greally and P. G. Simmonds.
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replacement of chloroform for its existing applications in the short run, and also with the
development of new energies, the features of chloroform will also be developed which will
then enable chloroform to be used in more applications.
Fluorochemcial market in China
HCFC-22 is also used as feedstock of fluorochemical products and is not restricted under
Decision XIX/6. Fluorochemical products are widely used in infrastructure projects due to
its chemical resistance properties. Driven by the increasing trend of urbanisation and
industrialisation in recent years, total fixed asset investments in China also increased
substantially, growing at a CAGR of approximately 26.12% from approximately
RMB8,877.36 billion in 2005 to approximately RMB22,459.88 billion in 2009 according to
the National Bureau of Statistics of China. The following chart sets out the total fixed asset
investments in China for the periods indicated.
Total fixed asset investments in China, 2005-2009
0
5,000
10,000
15,000
20,000
25,000
2005 2006 2007 2008 2009
RMBbillion
Total fixed asset investments in China
Source: National Bureau of Statistics of China
The Directors believe that as a result of Chinas growth in total fixed asset investments and
an infrastructure boom due to the economic stimulus plan implemented in China after the
financial crisis broke out in 2008, Chinas construction industry experienced rapid growth in
recent years. According to the National Bureau of Statistics of China, the total output of
Chinas construction industry increased at a CAGR of approximately 22.10% from
approximately RMB3,455.21 billion in 2005 to approximately RMB7,680.77 billion in 2009.
The following chart sets forth the total output of construction industry in China for the
periods indicated.
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Total output of construction industry in China, 2005-2009
0
2,000
4,000
6,000
8,000
10,000
2005 2006 2007 2008 2009
RMBbillio
n
Total output of construction industry in China
Source: National Bureau of Statistics of China
Production for chloroform in the China market
According to CCAON, the production volume of chloroform in China grew from
approximately 264.60 thousand tons in 2005 to approximately 497.84 thousand tons in 2010,
representing a CAGR of approximately 13.47%. Chloroform produced in China is mainly
used for domestic applications. The table below sets forth the annual chloroform production
and domestic consumption levels in the China market for the periods indicated.
Annual production volume and domestic consumption levels of chloroform in China,
2005-2010
0
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009 2010
thousandtons
Total production volume Total domestic consumption
Source: CCAON
According to CCAON, with the success of anti-dumping measures of chloroform which was
implemented in China and also listing of HCFC-22 in the Product Catalogue of Prohibited
Processing Business announced on 5 April 2008, which banned the export of HCFC-22 and
indirectly banned the import of chloroform under processing business and chloroforms
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re-export as HCFC-22, the import of chloroform to China showed a downward trend from
2005 to 2010. The import of chloroform to China decreased from approximately 236.58
thousand tons in 2005 to approximately 105.71 thousand tons in 2010, representing a
negative CAGR of approximately 14.88%.
Pricing dynamics
Pricing of raw materials
The manufacturing system of the Company achieves overall material balance and makes use
of every by-product as feedstock to produce value-added chemicals, such as converting
chlorine into CMS and hydrogen into hydrogen peroxide. As such, there are two major raw
materials used, which are salt and methanol.
Salt
The electrolysis of salt and in the form of brine, which produces sodium hydroxide, chlorineand hydrogen. According to CCAON, the average price of salt in the Eastern China was
approximately RMB321 per ton in 2009 and approximately RMB386 per ton in 2010.
Methanol
Methanol is used for the production of CMS. According to Chemease, the average price of
methanol in the Jiangsu Province was approximately RMB2,005 per ton in 2009 and
approximately RMB2,554 per ton in 2010.
Pricing of products
Dichloromethane and chloroform
In general, the price of CMS is influenced by the costs of raw materials, including salt and
methanol, and also the supply-demand balance within the CMS market. The prices of CMS
increased significantly since 2009. According to CCAON, the average price of
dichloromethane in the China market was approximately RMB1,900 per ton in January 2009
and approximately RMB7,000 per ton in December 2010, representing a CAGR of
approximately 91.94%. The average price of chloroform in the China market was
approximately RMB2,000 per ton in January 2009 and approximately RMB8,100 per ton in
December 2010, representing a CAGR of approximately 101.25%. In September 2010, as a
consequence of the implementation of the energy saving and emission reduction policy ofthe Eleventh Five-Year Plan of the PRC, many of the CMS suppliers in China had to reduce
their production volume, which resulted in a shortage of supply in the CMS market and thus
drove the price of CMS up. Moreover, due to a high demand of chloroforms downstream
product, HCFC-22, the price of chloroform reached a record high. In February 2011, the
highest price of dichloromethane was approximately RMB7,200 per ton, while the highest
price of chloroform went up to approximately RMB11,500 per ton. The following charts set
forth the historical prices of salt in the Eastern China market and methanol in the Jiangsu
Province market, dichloromethane and chloroform in the China market for the periods
indicated.
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Selling price of salt, methanol, dichloromethane and chloroform, 2009-2010
0
2,000
4,000
6,000
8,000
10,000
RMB/ton
Dichloromethane Chloroform Salt Methanol
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Source: Chemease and CCAON
Competitive strengths
The Directors believe that the following competitive strengths of the Remaining Groups
chemical business had contributed to the success of the business to date and will contribute
to its potential for future long-term growth:
Proximity to customers
The production plant of our chemical business is situated in Changshu City, Suzhou, which
is in the southern part of the Jiangsu Province, the PRC. Changshu City is withinapproximately 100 km from Shanghai, and is adjacent to the Zhejiang Province and on the
southern bank of Yangtze River.
All of the top ten customers for our chemical business for the year ended 31 December 2010
are located in the Jiangsu Province and the Zhejiang Province, the PRC. With close
proximity to our customers, our Directors believe that the transportation costs for delivering
our products to our customers incurred by us will be lower when compared to products
sourced by them from manufacturers in other parts of China or overseas. With the close
proximity, we can also offer better after-sales services to our customers as we can respond
to their needs more efficiently.
Convenient water transportation
Our chemical production plant is situated in (Changshu Economic
Development Region Coastal Industrial Park*), which is on the southern part of Yangtze
River, a part of Changjiang, the largest river in the PRC, the rivulet of which passed through
seven provinces and two municipalities in the PRC and is the only water transportation
channel which passes through eastern, central and western parts of the PRC. We deliver our
chemical products which are in liquid form from our production plant to the ports at Yangtze
River directly through the pipelines connecting our production plant and the ports, from
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where we deliver our products mainly by water transportation. Water transportation can
generally carry larger volume of liquid than truck transportation for each shipment, and the
unit cost of water transportation is significantly lower than that of truck transportation. Our
proximity to Yangtze River and our facilities for delivery of products from our production
plant to the ports allow us to make full use of the more efficient water transportation and
enjoy cost advantages.
Efficient production process utilisation of by-products
In our production system, most of the by-products are being used as feedstock to produce
more value-added products for sale. For example, chlorine produced after electrolysis of
brine is used for production for CMS. Hydrogen, another by-product through electrolysis, is
further processed to produce hydrogen peroxide for sale. We are also able to convert CTC, a
by-product in the production of our CMS into chloroform. The Directors believe that our
efficient utilisation of the by-products from our production processes reduces wastages and
enable us to lower our overall costs and improves our profitability.
High entry barriers
We believe that the CMS industry has a relatively high entry barrier to new entrants. The
high entry barrier to potential new-comers helps avoid over competition in this industry.
According to the revisions to the (Foreign Investment Industrial
Guidance Catalogue) issued by the Ministry of Commerce of the PRC and the National
Development and Reform Commission on 31 October 2007 and took effect on 1 December
2007, enterprises with foreign ownership were restricted from engaging in the business of
the production of CMS products. According to our PRC legal advisers, enterprises existed
prior to the coming into force of the revisions to the Catalogue are not affected.
CTC is a by-product in the production of CMS. Pursuant to the Vienna Convention for the
Protection of the Ozone Layer adopted on 22 March 1985, to which the government of the
PRC acceded on 11 September 1989, and its protocols The Montreal Protocol on
Substances that Deplete the Ozone Layer which came into force on 1 January 1989 with
their respective adjustments and ratifications, parties to such protocols agreed to ensure that
from 1 January 1996 (for developed countries) and 1 January 2010 (for developing
countries) the calculated level of production and consumption of CTC will not exceed zero,
unless under special circumstances. In 2004, the PRC government formulated a plan for the
acceleration of elimination of Halon/CFC/CTC production (Halon/CFCs/CTC
(Plans for the acceleration of elimination of Halon/CFCs/CTC production inChina*)) which set down a plan for the acceleration of the elimination of the production and
consumption of, among other substances, CTC to 1 July 2007. In order to implement the
Vienna Convention for the Protection of the Ozone Layer and The Montreal Protocol on
Substances that Deplete the Ozone Layer, the State Council of the PRC further promulgated
the (Depletion of Ozone Substance Management Regulation*) (the
Ozone Regulation) on 1 June 2010, pursuant to which entities are not allowed to sell,
produce and consume CTC unless being granted a quota permit and in accordance with such
quota permit. The quota permit can only be obtained if the entity has, among others, the
approved environmental protection facilities. In our production of CMS, CTC produced will
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be converted into chloroform, one of our main products, by using a PRC patented
technology invented by us, namely (A gas phase catalytic
hydrodechlorination plant*), the patent for utility model of which was obtained by us on 16
September 2009. Hence, we will not be affected by the Ozone Regulation. However, we
believe that the Ozone Regulation would be a barrier to new entrants and also existing
players which do not have the capability to treat CTC produced during their productionprocesses.
Business outlook and strategies
We are optimistic about the business outlook of the CMS industry. Chinas economy enjoyed
robust growth in recent years, according to the National Bureau of Statistics of China, the
national GDP increased from approximately RMB18,493.7 billion in 2005 to approximately
RMB34,050.7 billion in 2009, representing a CAGR of approximately 16.49%. The GDP per
capita also increased from approximately RMB14,185 in 2005 to approximately RMB25,575
in 2009, representing a CAGR of approximately 15.88%. As CMS products have a wide
spectrum of usage, we believe that with Chinas growing economy and increasing per capitaspending power, there will be an increasing demand for CMS products and other related
products, in particular products for use in the fluorochemical industry.
Since the commencement of our chemical business, we have always been putting our efforts
on improving production efficiency of existing products and developing new products. In
March 2010, we modified and refined our production process and increased the annual
production capacity of our hydrogen peroxide from approximately 60,000 tons to
approximately 120,000 tons. We also plan to start the commercial operation of our fourth
CMS production line with a designed capacity of 40,000 tons within the first half of 2011.
As to new products, we plan to develop perchloroethylene (PCE) to broaden our product
range.
We have also entered into land use rights transfer agreement with the government of
Ruichang City, Jiangxi Province of the PRC (the Ruichang Government) on 18 January
2011, whereby the Ruichang Government agreed to grant us state-owned land use rights in
respect of an area of around 1,241 mu (approximately 827,333.33 sq.m.) located in Ruichang
City, Jiangxi Province of the PRC, the details of which were disclosed in the announcement
of the Company dated 18 January 2011. The acquisition of land was part of our business
plan to develop our chemical business.
Products and customers
Our main products are chloromethane products (CMS) which consist of chloroform and
dichloromethane, which are principally made from salt. The sales of CMS accounted for
over 60% of the total revenue of the Remaining Group for the year ended 31 December
2010. The major use of chloroform is as the major upstream raw material of
chlorodifluoromethane (HCFC-22), which is mainly used as feedstock for fluorochemical
products, and also used in refrigerants for air-conditioners and refrigerators. Other usages of
chloroform include being feedstuff in the synthesis of dyestuffs, pharmaceutical products and
pesticides. Dichloromethane also has a broad spectrum of applications including adhesives,
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pharmaceuticals (as processing solvent for the manufacture of steroids, antibiotics, vitamins,
and tablet coatings), blowing agent for polyurethanes, degreasing solvent, refrigerant
(HFC-32) production and paint removers.
We also sell ancillary products including hydrogen peroxide and sodium hydroxide, which
are produced in the production process of CMS. We are also capable of producing hydrogenperoxide of different concentration for different customers needs.
Our customers are mainly fluorochemical manufacturers which are located in the PRC.
Production and raw materials
Raw materials for the production of our products include salt and methanol, which
accounted for approximately 73.9% of the total costs of sales for the Remaining Group for
the year ended 31 December 2010.
Set out below is a simplified chart showing our production process:
Salt
Brine
Electrolysis
chlorine hydrogen
+ water
+ oxygen
Chlorination
+ methanol
chloroform dichloromethane CTC
CTC converted to chloroform
Our products
hydrogen
peroxide
sodium
hydroxide
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As the first step of our production, water is added to salt to form brine as a medium for
electrolysis. Electrolysis is a process of using an electric current to separate elements in a
mixture of ions. Hydrogen, sodium hydroxide and chlorine are produced after the
electrolysis of brine. Methanol is then added to chlorine by chlorination to produce
dichloromethane and chloroform, our major products, while hydrogen will react with oxygen
to produce hydrogen peroxide. CTC produced during the production process ofdichloromethane and chloroform in chlorination will be converted into chloroform by our
patented technology, further details of which are disclosed in the paragraph headed
Research and development below.
The table below illustrates the annual production capacity and utilisation rate of our
production facilities for the year ended 31 December 2010:
For the year ended 31 December 2010
Annual production capacity (Notes 1 and 2)
dichloromethane 60,000 tons chloroform 60,000 tons
Approximate annual production volume
dichloromethane 70,000 tons
chloroform 78,000 tons
Approximate utilisation rate
dichloromethane 117%
chloroform 130%
Note s:
1. Production capacity for the production lines is based on its designed annual capacity according to
equipment manufacturers specifications. However, the actual production capacity may exceed its designed
capacity due to machine and process optimisation.
2. As confirmed by the Directors, the production capacity of 120,000 tons for CMS products is typically
allocated to 50% and 50% to dichloromethane and chloroform (i.e. 60,000 tons for each), although
theoretically we can allocate the production capacity in some other ratios.
Research and development
Our research and development team, which has about 30 members, focuses on improving
production efficiency. Despite our short operating history since 2007, we have obtained onepatent for utility model registration in the PRC in respect of CTC conversion, namely
(A gas phase catalytic hydrodechlorination plant*), by using which CTC
produced will be converted into chloroform, one of our main products. We have another four
patent applications being announced and three other patent applications being filed in the
PRC from 2008 to 2010.
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LISTING RULES IMPLICATIONS
As at the Latest Practicable Date, the Company directly held the entire equity interest of the
New Listco. Under the current structure of the Proposed Spin-off, immediately upon
completion of the Distribution, the Company will no longer be interested in the then issued
share capital of the New Listco and it is expected that the New Listco will beneficiallyowned as to 75% in aggregate by Mr. Lee Wan Keung and Mr. Norman Lee, an executive
Director, through an investment holding company which was held by them in the proportion
of 55% and 45% respectively as at the Latest Practicable Date. The Proposed Spin-off will
constitute a deemed disposal of the Companys equity interest in its subsidiary under Rule
14.29 of the Listing Rules. Given that one of the applicable percentage ratios calculated in
accordance with Rule 14.06 of the Listing Rules is more than 25% but less than 75%, the
Proposed Spin-off, if proceeds, will constitute a major transaction for the Company under
Chapter 14 of the Listing Rules and be subject to the reporting, announcement and
shareholders approval requirements under the Listing Rules. Approval from the
Shareholders for the Proposed Spin-off is also required under PN 15 of the Listing Rules. In
addition, the New Listco Share Option Scheme will also be subject to approval of theShareholders under Chapter 17 of the Listing Rules.
EGM
As no Shareholder has a material interest in the Proposed Spin-off and the New Listco Share
Option Scheme which is different from that of the other Shareholders, all Shareholders are
entitled to vote on the ordinary resolutions to approve the Proposed Spin-off and the
adoption of the New Listco Share Option Scheme.
A notice convening the EGM to be held on Monday, 13 June 2011 at 10:30 a.m. at Unit A,
29/F., Admiralty Centre 1, 18 Harcourt Road, Hong Kong is set out on pages N-1 to N-3 ofthis circular. Whether or not you intend to attend the EGM, you are requested to complete
the accompanying form of proxy in accordance with the instructions printed thereon and
deposited together with a power of attorney or other authority, if any, under which it is
signed or a notarially certified copy of that power or authority, at the offices of the
Companys Hong Kong branch share registrar, Tricor Secretaries Limited, at 26th Floor,
Tesbury Centre, 28 Queens Road East, Wanchai, Hong Kong not less than 48 hours before
the time appointed for holding of the EGM or any adjournment thereof.
Completion and return of the form of proxy will not preclude you from attending and voting
in person at the EGM or any adjournment thereof should you so wish.
RECOMMENDATIONS
The Directors (including the independent non-executive Directors) are of the view that the
terms of the Proposed Spin-off and the adoption of the New Listco Share Option Scheme are
fair and reasonable so far as the Shareholders and the Company are concerned and in the
interests of the Company and the Shareholders as a whole. An Independent Board
Committee has been formed to advise the Shareholders in connection with the Proposed
Spin-off. OSK has been appointed as an independent financial adviser to advise the
Independent Board Committee and the Shareholders on the same. OSK considers that the
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Proposed Spin-off and the terms thereof are fair and reasonable so far as the Shareholders
and the Company are concerned and that the Proposed Spin-off is in the interest of the
Company and the Shareholders as a whole. Accordingly, OSK advises the Independent Board
Committee to recommend, and OSK themselves recommend, the Shareholders to vote in
favour of the resolutions in relation to the Proposed Spin-off. The letter from OSK
containing its advice in relation to the Proposed Spin-off, together with the factors andreasons it considered in arriving at its opinion, is set out on pages 35 to 52 of this circular.
The Independent Board Committee, having taken into account the advice of OSK, considers
that the terms of the Proposed Spin-off are fair and reasonable and are in the interests of the
Company and the Shareholders as a whole. Accordingly, the Independent Board Committee
recommends the Shareholders to vote in favour of the ordinary resolutions to approve the
Proposed Spin-off and transactions related thereto as set out in the notice of EGM on pages
N-1 to N-3 of this circular.
GENERAL
CIMB Securities (HK) Limited has been appointed as the sole sponsor of the Proposed
Spin-off. The Board expects that the Listing Document containing, among other matters,
details of the Distribution will be published in due course.
ADDITIONAL INFORMATION
This circular is being distributed to the Shareholders. 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. Neither this circular nor anything contained therein shall form
the basis of any contract or commitment whatsoever.
Your attention is drawn to the additional information set out in the appendices to this
circular.
Yours faithfully
For and on behalf of the board of directors of
Lee & Man Holding Limited
Wai Siu Kee
Chairman
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LEE & MAN HOLDING LIMITED
*
(incorporated in the Cayman Islands with limited liability)
(Stock Code: 746)
19 May 2011
To the Shareholders
Dear Sir or Madam,
MAJOR TRANSACTION -DEEMED DISPOSAL OF A SUBSIDIARY IN RELATION TO
THE PROPOSED SPIN-OFF OF
LEE & MAN HANDBAGS HOLDING LIMITED
ON THE MAIN BOARD OF
THE STOCK EXCHANGE OF HONG KONG LIMITED AND
ADOPTION OF THE NEW LISTCO SHARE OPTION SCHEME
We refer to the circular issued by the Company to its shareholders and dated 19 May 2011
(Circular) of which this letter forms part. Terms defined in the Circular have the same
meanings when used in this letter unless the context otherwise requires.
Under the Listing Rules, the Proposed Spin-off constitutes a major transaction and a deemed
disposal of subsidiary by the Company under Rule 14.29 and pursuant to PN15 to the
Listing Rules, it will be subject to the approval of the Shareholders.
We have been appointed by the Board to consider the terms of the Proposed Spin-off and to
advise the Shareholders as to whether, in our opinion, the terms of the Proposed Spin-off are
fair and reasonable and in the interests of the Company and the Shareholders as a whole.
OSK has been appointed as the independent financial adviser to advise us and the
Shareholders in this respect.
* For identification purposes only
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We wish to draw your attention to the letter from the Board and the letter from OSK as set
out in the Circular. Having considered the principal factors and reasons considered by, and
the advice of, OSK as set out in its letter of advice, we consider that the terms of the
Proposed Spin-off are fair and reasonable and are in the interests of the Company and the
Shareholders as a whole. Accordingly, we would recommend the Shareholders to vote in
favour of the ordinary resolutions to approve the Proposed Spin-off at the EGM.
Yours fai