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746 Lee&Man Spin Off

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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

    19 May 2011

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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

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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

    LETTER FROM THE BOARD

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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

    LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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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


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