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BUSINESS OVERVIEW

A1A 28(1)(a) SchIII(1) SchIII(3) SchIII(29)

The Group is principally engaged in the design, printing and sale of cigarette packages in the PRC with a leading position in Jiangxi Province, the PRC. According to the Euromonitor Reports, the Group ranked second with a market share of approximately 17.7% in terms of the sales value of paper cigarette packages in Jiangxi Province, the PRC in 2012. Jiangxi Province accounted for approximately 2.4% of the overall cigarette production volume in the PRC in 2012. During the Track Record Period, the Group only supplied paper cigarette packages to its customers and all of its sales were made to customers in the PRC. The Group has over 10 years of experience in the cigarette package printing industry in the PRC and has established long business relationship with its customers. Products of the Group include cigarette packages for two of the 30 Key Cigarette Brands, namely Hongtashan (紅塔山) and Jinsheng (金聖), and for Cigarette Brand A, which together with Hongtashan (紅塔山), were two of the four largest cigarette brands in the PRC in terms of retail sales volume in 2011 according to the Euromonitor Reports. Products of the Group are primarily sold to provincial tobacco industrial companies (省級中煙工業公司) which are state-owned cigarette manufacturers in the PRC. During the Track Record Period, the Group had altogether nine customers, four of which were provincial tobacco industrial companies (省級中煙工業公司). China Tobacco Jiangxi was the largest customer of the Group during the Track Record Period. During the Track Record Period, the Group carried out its cigarette package design and production activities solely at the Shenzhen Production Base. Since its commencement of business in 2001, the Shenzhen Production Base has been operated by Shenzhen Oceania. The Shenzhen Production Base is currently leased by the Group and has an aggregate gross floor area of approximately 16,481 sq.m.. As at 31 December 2012, the Shenzhen Production Base had a maximum production capacity of approximately 300,000 cases of cigarette packages per annum. Shenzhen Oceania has been accredited as a High-tech Enterprise in Shenzhen Municipality (深圳市高新技術企 業) since 2007 and was one of the Top 500 Small and Medium Growth Industrial Enterprises in Shenzhen Municipality (深圳市成長型中小工業企業500強) in 2010. To expand its production capacity, the Group has commenced the construction of the Huizhou Production Base with an estimated aggregate gross floor area of approximately 60,658 sq.m. on the Huizhou Site located at Huizhou City of Guangdong Province, the PRC. The construction work and the relevant completion and acceptance procedures of phase I of the Huizhou Production Base with an aggregate gross floor area of approximately 9,644.16 sq.m. have been completed. For each of the years ended 31 December 2010, 2011 and 2012, the Group generated revenue of approximately RMB162.6 million, RMB179.5 million and RMB183.3 million and recorded profit attributable to owners of the Company of approximately RMB32.8 million, RMB32.6 million and RMB31.0 million, respectively.

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SchIII(27)

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BUSINESS BUSINESS DEVELOPMENT MILESTONES The following sets out the business development milestones of the Group: Year

Business development milestone

2000



Established Shenzhen Oceania, the major operating subsidiary of the Company in the PRC which operates the Shenzhen Production Base.

2001



Commenced business with Nanchang Cigarette Factory (南昌卷烟廠) and Gannan Cigarette Factory (贛南捲烟廠) (both of which later became part of China Tobacco Jiangxi) and commenced production of cigarette packages for the Jinsheng (金聖) brand.

2004



Commenced business with China Tobacco Yunnan and commenced production of cigarette packages for the Yuxi (玉溪) brand.

2006



Commenced production of cigarette packages for the Hongtashan (紅塔山) brand which were sold to China Tobacco Yunnan.

2007



Shenzhen Oceania accredited as a High-tech Enterprise in Shenzhen Municipality (深圳市高新技術企業).



Registered two utility model patents in the PRC in relation to anti-counterfeit labels and cigarette packages.

2008



Entered into an agreement to acquire the land use right to the Huizhou Site which has a site area of approximately 54,886 sq.m..

2009



Procured Customer A, a provincial tobacco industrial company, as a new customer.

2010



Procured Customer B, a provincial tobacco industrial company, as a new customer.



Shenzhen Oceania accredited as one of the Top 500 Small and Medium Growth Industrial Enterprises in Shenzhen Municipality (深圳市成長型中小工業企業500強).

2011



Shenzhen Oceania re-accredited as a High-tech Enterprise in Shenzhen Muncipality (深圳市高新技術企業).

2012



Commenced the construction work of phase I of the Huizhou Production Base.

2013



Completion and acceptance procedures of phase I of the Huizhou Production Base completed.

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BUSINESS COMPETITIVE STRENGTHS

A1A 34(1)(b)

Approved cigarette package supplier for key cigarette brands in the PRC The Group is a cigarette package supplier in the PRC. According to the Euromonitor Reports, the Group ranked second with a market share of approximately 17.7% in terms of the sales value of paper cigarette packages in Jiangxi Province, the PRC in 2012. As detailed in the section headed “Industry overview” in this document, the cigarette industry in the PRC has undergone restructuring and consolidation in the recent decade and the sixteen state-owned provincial tobacco industrial companies altogether accounted for 86.2% of the cigarette market in terms of sales volume in the PRC in 2012. During the Track Record Period, four of the sixteen state-owned provincial tobacco industrial companies were customers of the Group. Leveraging on the efforts of its senior management and sales and marketing staff, the Group has been an approved supplier of, and has developed long-term relationships with, its major customers. In particular, the Group has supplied cigarette packages to China Tobacco Jiangxi, the largest customer of the Group, for its Jinsheng (金聖) brand for more than 10 years and has supplied cigarette packages to China Tobacco Yunnan, which manufactures the Hongtashan (紅塔山) brand cigarette, for over eight years. The Directors believe that these long-term relationships can help the Group to secure a stable customer network and revenue source and are crucial to the long-term business development of the Group. In 2008, the STMA identified the 30 Key Cigarette Brands (重點骨幹卷烟品牌). During the Track Record Period, the Group supplied cigarette packages for two of the 30 Key Cigarette Brands, namely Hongtashan (紅塔山) and Jinsheng (金聖), of which Hongtashan (紅塔山) was ranked first in terms of retail sales volume among all cigarette brands in the PRC in 2011 according to the Euromonitor Reports. Revenue from the sales of cigarette packages for Hongtashan (紅塔山) and Jinsheng (金聖) accounted for approximately 81.5%, 80.4% and 79.6% of the total revenue of the Group in aggregate for each of the years ended 31 December 2010, 2011 and 2012, respectively. In addition to Hongtashan (紅塔山) and Jinsheng (金聖), the Group also supplied cigarette packages for Cigarette Brand A, which was one of the four largest cigarette brands in terms of retail sales volume in the PRC in 2011 according to the Euromonitor Reports. The Directors believe that being an approved supplier of these key cigarette brands, the Group is well-positioned to maintain and expand its business as a result of the consolidation of the cigarette industry in the PRC. Management team with extensive experience and knowledge in the cigarette package industry The management team of the Group, which include the executive Directors and the senior management, has extensive experience and knowledge in the cigarette package industry in the PRC. In particular, Ms. Huang, the founder and the chairman of the Group, has engaged in the cigarette package industry for over 12 years. Mr. Zheng, an executive Director and the chief executive officer of the Company, also has more than 12 years experience in the cigarette package industry. Mr. Wu Ying, the deputy general manager of the Company, has been engaged in the cigarette package industry for over 20 years. The Directors believe that such extensive experience of the management team has allowed them to possess in-depth knowledge in, amongst others, the latest competitive landscape and the market development of the cigarette package industry, such that they can understand the needs of the customers and satisfy them with corresponding quality products and services. The Directors also

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BUSINESS believe that the industry experience and knowledge of the management team are one of the crucial factors leading to the growth and business success of the Group. Further details of the qualifications and working experience of the Directors and the senior management of the Group are set out in the section headed “Directors, senior management and staff” in this document. Possession of technical know-how, equipment and machinery and product design capability The Group is experienced in cigarette package production and possesses relevant technical know-how, equipment and machinery and product design capability. With over 10 years of experience in the cigarette package industry and given the continuous technological development of the Group, the Directors consider the Group possesses competitive technical know-how in terms of printing techniques, including offset printing on areas that have undergone foil stamping and printing large proportion of area with foil stamping. For the implementation of its technical know-how, the Group has invested in the procurement of a full range of equipment and machinery which ensures the efficiency of production and provides the Group with high flexibility in meeting different requirements of its customers on cigarette package production. In order to produce quality products that meet the specifications demanded by the customers of the Group, some of the major equipment and machinery used by the Group were imported from overseas manufacturers, such as MAN Roland from Germany and Bobst from Switzerland. Moreover, the product design staff of the Group are capable of designing the cigarette packages including the artwork, the health warning sign, the printing methods and the type of raw material to be used. In addition, the Group is the holder of two utility model patents in the PRC, details of which are set out in the paragraph headed “Intellectual property” in this section. The Directors believe that the possession of technical know-how, equipment and machinery and product design capability enables the Group to produce quality products that can meet the requirements of its customers and remain competitive in the industry. Implementation of a series of quality control measures Cigarette manufacturers in the PRC place strong emphasis on the quality of cigarette packages to ensure smooth production and to distinguish their authentic products from counterfeit ones. Therefore, the Group is committed to producing quality cigarette packages that consistently meet or exceed the expectations of its customers. As such, the Group has implemented a series of quality control measures to ensure that its products can meet or exceed the requirements on cigarette packages as set forth by its customers and under relevant regulations. The quality control measures conducted by the Group include thorough testing of raw materials before they are put into production, inspection of quality at each production stage, two rounds of complete inspection of all finished goods and two rounds of sample inspection before they are packaged and delivered to the customers. As at the Latest Practicable Date, the Group had a total number of 121 quality control staff and the Group has also imported a variety of quality control equipment from overseas to facilitate the quality control processes of the Group. The Directors consider that the capability of the Group in quality assurance is evidenced by the fact that the Group had not experienced any significant product return, redelivery or material quality disputes with its customers during the Track Record Period. In addition, Universal Certification Service Co., Ltd. has accredited Shenzhen Oceania with ISO9001:2008 since 2009.

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BUSINESS Provision of comprehensive sales and after-sales services The sales and marketing staff of the Group regularly visit customers to understand their needs and to ensure that delivery of the products of the Group meets the production schedule of the customers. The sales and marketing staff of the Group also proactively and promptly understand and investigate problems confronted by the customers in their production process which are related to the products of the Group. It is the policy of the Group to provide solution to customers within 24 hours upon receipt of verbal or written requests or complaints and take appropriate remedial actions. For instance, should customers complain about defects of the products of the Group, the Group would immediately investigate and rectify such defects to the extent possible and, if necessary, re-deliver the required products to customers within 72 hours. Leveraging on the proximity to its customers, the Group could better understand customers’ needs and the latest market trends so as to provide tailor-made solutions such as innovative designs and sample products to its customers. The Directors believe that such comprehensive services have differentiated the Group from its competitors, increased the customer satisfaction and further solidified the business relationship between the Group and its customers. BUSINESS STRATEGIES

A1A 34(1)(c)

The Group has over ten years of experience in the cigarette package printing industry in the PRC and has established a proven track record among its customers. The Group seeks to further strengthen its established market position and achieve sustainable growth of its businesses and remain competitive by the implementation of the following strategies. Strengthen sales and marketing efforts to enhance relationship with existing customers and develop business with potential customers The Group plans to devote more resources to strengthen its sales and marketing capabilities primarily for the enhancement of relationship with existing customers and the development of business with potential customers. The Group has four major provincial tobacco industrial company customers which are located in Jiangxi Province, Yunnan Province, Hubei Province and Sichuan Province, respectively. For these existing customers, the Group endeavours to leverage its existing approved supplier status to expand its product portfolio to other cigarette brands or sub-brands manufactured by these customers. For instance, the Group intends to develop new business with a subsidiary of China Tobacco Yunnan for the supply of cigarette packages for more brands which the Group has not previously produced. The Group also intends to more proactively participate in the design, sample production and tendering of packages for other cigarette brands or sub-brands manufactured by these customers which are not currently mass-produced by the Group. To cope with such business strategy, the Group proposes to set up sales offices in the cities where these four major customers are located, namely Nanchang City of Jiangxi Province, Kunming City of Yunnan Province, Wuhan City of Hubei Province and Chengdu City of Sichuan Province. The Group also plans to recruit two more sales and marketing staff to strengthen its existing sales team. The Directors believe that by establishing a close presence near its major customers, the Group could maintain a better relationship with its customers and enhance its after-sales services to be provided to its customers which, in turn, will enhance customers’ satisfaction.

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BUSINESS In addition to enhancing the relationship with existing customers with a view to expanding its business scale, the Group also intends to invest in markets in the PRC that the Group does not currently have a presence to further enlarge its customer base. For instance, the Group is in the course of exploring potential opportunity to supply packages for a cigarette brand manufactured by a cigarette manufacturer in Henan Province, the PRC. The Group also intends to set up sales office in Henan Province when the Group’s business in Henan Province further develops. Expand production capacity As discussed in more details in the paragraph headed “Production facilities” in this section, the Group has been operating at high capacity utilisation rates at the Shenzhen Production Base during the first and the fourth quarters of the year during the Track Record Period. The Directors believe that the expansion of the production capacity of the Group will allow the Group to better control and manage its production and respond to market demand in a more timely manner. To ensure better production quality and stability during peak seasons and to cope with its future development, the Group has commenced the construction of the Huizhou Production Base with an estimated aggregate gross floor area of approximately 60,658 sq.m. on the Huizhou Site located at Huizhou City of Guangdong Province, the PRC. The Huizhou Production Base has three planned phases. As at the Latest Practicable Date, the construction work and the relevant completion and acceptance procedures of phase I of the Huizhou Production Base with an aggregate gross floor area of approximately 9,644.16 sq.m. have been completed. Subject to the then production schedule of the Group, the Directors intend to procure and install additional equipment and machinery at phase I of the Huizhou Production Base and relocate certain existing equipment and machinery from the Shenzhen Production Base to phase I of the Huizhou Production Base during the second to the third quarters of 2014, being the slack season of the Group. The Directors consider that implementing the relocation during the second to the third quarters of 2014 is appropriate as (i) the second and the third quarters of the year are usually slack season of the Group so that the impact of relocation on the Group’s operation could be minimised; (ii) the Group was advised by its machinery supplier that the ordering lead time for a gravure printer would be at least six months; and (iii) the Group plans to utilise [●] for the procurement of additional equipment and machinery, including a new gravure printer. After the relocation and the addition of equipment and machinery, the total production capacity of the Group will be increased from approximately 300,000 cases to 400,000 cases per year. As at the Latest Practicable Date, the Group has spent or committed approximately RMB26.1 million on phase I of the Huizhou Production Base, primarily for the construction work. The Directors intend to commence the construction of phase II of the Huizhou Production Base in the fourth quarter of 2013. It is expected that the construction work will take about one year, upon the completion of which the Company plans to relocate the remaining production facilities at the Shenzhen Production Base to phase II of the Huizhou Production Base. Enhance design and development capabilities The major customers of the Group, which are cigarette manufacturers, revise the designs of their cigarette packages from time to time and may invite cigarette package supplier to submit new designs for their consideration. The design of cigarette packages may cover the artwork, the health warning sign, the printing methods and the type of raw material to be used. The Directors believe that the

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BUSINESS enhancement of the design and development capabilities of the Group, in particular, the ability to design and develop cigarette packages that are adopted by its customers for mass production, can secure the sales of such products by the Group and strengthen the business relationship with customers. Accordingly, a portion of [●] will be utilised for, among others, the hiring of professional design and development staff, purchase of design and development software and hardware, attending national and international design exhibitions and production of innovative product samples for evaluation by the major customers of the Group. Strategically explore value-enhancing vertical integration opportunities Apart from expanding the scale of the Group’s existing operations, it is also the intention of the Group to strategically explore vertical integration opportunities to enhance its competitiveness and profitability. Potential vertical integration includes, among others, the expansion of operation to cover the manufacture of transfer paper, which is one of the major raw materials used in cigarette packages printing. During each of the years ended 31 December 2010, 2011 and 2012, approximately 33.8%, 39.1% and 30.3% of the Group’s total purchase amount of raw materials was attributable to the purchase of transfer paper, respectively. Transfer paper is produced via the processing of ivory board paper and the process is similar to printing images on paper. The Directors consider that the Group possesses the requisite knowledge for the production of transfer paper given its similarity to the existing production processes of the Group. The Group may expand into such businesses through the purchase of relevant equipment and machinery or conduct merger or acquisition of relevant businesses, depending on the then opportunities available to the Group and after the evaluation of the costs and potential synergies. Factors to be considered for the selection of merger and acquisition target include its production scale, production quality, historical financial performance, reputation in the industry and proximity to the production facilities of the Group. As at the Latest Practicable Date, the Group was not in negotiation with any specific counterparty and had not identified any potential acquisition target. Diversify product mix Since its commencement of business, the Group has been focusing on the production of cigarette packages, mainly due to its relatively higher profit margin and the specialised expertise of the Group in the cigarette package printing industry. However, the technical know-how and equipment and machinery possessed by the Group can also be applied to produce paper packages for goods other than cigarette. To continue to leverage on its expertise in package printing and utilise its production capacity especially during the slack season of the cigarette package industry, the Group aims to expand its product portfolio to paper packages for products such as medicine, wine, tea or other luxury goods, and paper cups, depending on the opportunities available to the Group and after the evaluation of the profitability of such products and the production schedule of the Group. Based on the feasibility study carried out by the Group, in order to produce paper packages for medicine, wine, tea or other luxury goods, the Group needs to procure two additional folding gluing machines to supplement its existing machinery which are estimated to cost approximately RMB350,000 each. For production of paper cups, the Group needs to procure five additional paper cup machines which are estimated to cost approximately RMB80,000 each. Two additional staff needs to be hired to operate each folding gluing machine or paper cup machine which, based on the current salary level of the Group, is not expected to significantly increase the staff cost of the Group. The funding required to purchase additional

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BUSINESS machinery or hire additional staff for the production of non-cigarette package products, as and when necessary, will be satisfied by the Group’s internal resources. As at the Latest Practicable Date, the Group has not finalised with any specific counterparty to mass produce products other than cigarette packages. PRODUCTS The Group is principally engaged in the design, printing and sale of cigarette packages in the PRC. All of the revenue of the Group during the Track Record Period was generated from the sale of paper cigarette packages. Paper cigarette packages are packaging materials made of laminated papers to pack and carry cigarettes. Cigarette packages enhance the physical protection of cigarettes and also preserve the humidity and fragrance of cigarettes, such that cigarettes can be kept for a longer period. Moreover, rectangular box-shaped cigarette packages provide convenience to wholesalers, retailers and customers in terms of ease of transportation and storage of cigarettes. The types of cigarette packages produced by the Group generally include (i) hard or soft packet packages, which are usually rectangular containers used to pack and carry 20 sticks of cigarettes; and (ii) carton packages, which are usually long boxes used to pack and carry 10 packet packages. While the size and dimension of the cigarette packages are often standard across brands, their layouts differ from brand to brand. The layouts of the cigarette packages are usually designed with a purpose to convey designated information to the customers, and to promote the names and images of the cigarette brands so as to differentiate from other brands and enhance brand recognition and customer loyalty. During the Track Record Period, the Group primarily supplied packages for four cigarette brands to provincial tobacco industrial companies in the PRC, including Jinsheng (金聖) and Hongtashan (紅塔山), which are two of the 30 Key Cigarette Brands (重點骨幹卷煙品牌). The Group also supplied packages for Cigarette Brand A, which together with Hongtashan (紅塔山), were two of the four largest brands in the PRC in terms of retail sales volume in 2011 according to the Euromonitor Reports. The Group usually supplies packages for more than one sub-brands of each cigarette brand to its customers. The following table sets forth the breakdown of the revenue of the Group by cigarette brands during the Track Record Period:

Cigarette Brand (Customer) Jinsheng (金聖) brand (China Tobacco Jiangxi*) Hongtashan (紅塔山) brand (China Tobacco Yunnan) Cigarette Brand A (Customer A) Cigarette Brand B (Customer B) Others

*

For the year ended 31 December 2010 2011 2012 RMB’000 % RMB’000 % RMB’000

%

97,589

60.0%

98,573

54.9%

123,477

67.3%

34,906 19,890 9,121 1,069

21.5% 12.2% 5.6% 0.7%

45,787 23,160 6,809 5,180

25.5% 12.9% 3.8% 2.9%

22,436 25,067 8,542 3,825

12.2% 13.7% 4.7% 2.1%

162,575

100.0%

179,509

100.0%

183,347

100.0%

For the year ended 31 December 2010, the Group’s sales to China Tobacco Jiangxi amounted to approximately RMB98.3 million, of which approximately RMB97.6 million was attributable to the Jinsheng (金聖) brand.

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BUSINESS Set out below are samples of packet packages and carton packages of Jinsheng (金聖) and Hongtashan (紅塔山) brands produced by the Group: Samples of packet package and carton package of two sub-brands of Jinsheng ( 金聖 )

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BUSINESS Samples of packet package and carton package of two sub-brands of Hongtashan ( 紅塔山 )

Product design The layouts of cigarette packages that the Group sells to its customers are usually (i) designed by product design staff of the Group; or (ii) directly provided by the customers. The Directors consider that product design is one of the key factors to secure production orders and to differentiate the Group from its competitors, therefore the Directors endeavour to devote resources to enhance its product design capabilities. As at the Latest Practicable Date, the Group had two product design staff, who are responsible for the designing of cigarette packages, including artwork, health warning sign, printing methods and type of raw material to be used. The product design staff communicate with the customers from time to time to understand their requirements and the finalised designs are usually produced into prototypes that are delivered to customers for approval prior to mass production.

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BUSINESS CUSTOMERS According to the Euromonitor Reports, the cigarette manufacturing market in the PRC is monopolized by the government, primarily the STMA and the CNTC. By the end of 2011, the number of cigarette manufacturers in the PRC had declined to 26 companies. These 26 companies, including 16 provincial tobacco industrial companies, are wholly-owned subsidiaries of the CNTC. According to the Euromonitor Reports, the 16 state-owned provincial tobacco industrial companies altogether accounted for approximately 86.2% of the total cigarette market in terms of sales volume in the PRC in 2012. The Group had altogether nine customers during the Track Record Period, four of which were provincial tobacco industrial companies. All of the sales of the Group during the Track Record Period were made to customers in the PRC. Revenue from the four provincial tobacco industrial companies accounted for approximately 99.8%, 97.1%, and 97.9% of the total revenue of the Group during each of the years ended 31 December 2010, 2011 and 2012, respectively. The table below sets out the information of the four provincial tobacco industrial company customers of Group:

Name of the customer

Major cigarette brand package produced by the Group during the Track Record Period

China Tobacco Jiangxi China Tobacco Yunnan Customer A Customer B

Jinsheng (金聖) Hongtashan (紅塔山) Cigarette Brand A Cigarette Brand B

Business with the customer commenced since 2001 2004 2009 2010

The four provincial tobacco industrial company customers of the Group have adopted an “approved supplier” system, pursuant to which they usually purchase packaging materials only from their respective lists of “approved suppliers”. To become an approved supplier of a cigarette manufacturer, a cigarette package supplier needs to go through a recognition process under which required information of the supplier needs to be submitted to the cigarette manufacturer for review and approval and the cigarette manufacturer may perform site visits to verify the submitted information and to physically inspect the facilities and production process of the supplier. Once a supplier is recognized as an approved supplier, such status is subject to periodic review by the cigarette manufacturer every one to two years, where the cigarette manufacturers might (i) assess the overall production capability, production quality, technological strengths, after-sales services and business development potential of the supplier; (ii) physically inspect the facilities and production process of the supplier; and (iii) review the latest business licence (營業執照) and printing operation permit (印刷經營許可證) of the supplier. The Group has been an approved supplier of China Tobacco Jiangxi, China Tobacco Yunnan, Customer A and Customer B since 2006, 2007, 2008 and 2009, respectively and was in full compliance with the requirements imposed by these customers as their approved suppliers during the Track Record Period. The Group has not encountered any difficulty in maintaining

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BUSINESS its “approved supplier” status of its provincial tobacco industrial company customers in the past and, as at the Latest Practicable Date, the Directors are not aware of any circumstances that the Group may lose such “approved supplier” status in the future. China Tobacco Yunnan is currently undergoing the review process of the approved supplier status of the Group. China Tobacco Jiangxi, Customer A and Customer B, whose previous reviews were carried out in June 2012, August 2010 and October 2009, respectively, have not yet indicated when their upcoming reviews would be carried out as at the Latest Practicable Date. The Directors consider that being an approved supplier of its major customers has demonstrated the Group’s capability to consistently provide quality products and services at its customers’ required standards. Leveraging on its competitive strengths and the continued efforts of its sales and marketing staff, the Group was able to expand its customer base during the Track Record Period with the successful procurement of Customer B as a new provincial tobacco industrial company customer in 2010. Five largest customers during the Track Record Period Revenue from the five largest customers accounted for approximately 99.9%, 99.8% and 99.9% of the total revenue of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively.

A1A 28(1)(b)(iv)

China Tobacco Jiangxi China Tobacco Jiangxi was the largest customer of the Group during the Track Record Period. According to the Euromonitor Reports, China Tobacco Jiangxi is the exclusive cigarette manufacturer in Jiangxi Province, the PRC. Jiangxi Province accounted for approximately 2.4% of the overall cigarette production volume in the PRC in 2012. As at the Latest Practicable Date, China Tobacco Jiangxi primarily manufactured two cigarette brands, namely Jinsheng (金聖) and Lushan (廬山). Both of these brands have several sub-brands. According to the Euromonitor Reports, China Tobacco Jiangxi had over 20 cigarette package suppliers in 2012. The Group first supplied cigarette packages to China Tobacco Jiangxi for its Jinsheng (金聖) brand in 2001 and has maintained good relationship and continuously conducted business with it since then. During the Track Record Period and up to the Latest Practicable Date, the Group has been the sole supplier of paper cigarette packages for three sub-brands of Jinsheng (金聖). Sales to China Tobacco Jiangxi accounted for approximately 60.5%, 54.9% and 67.3% of the total revenue of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. The Directors are of the view that the Group’s business does not unduly rely on its relationship with China Tobacco Jiangxi as: (i)

since 2011, the sales contracts with China Tobacco Jiangxi have been secured through tendering process, which has demonstrated the competitiveness of the Group’s cigarette package products in terms of quality, services and pricing;

(ii)

in addition to China Tobacco Jiangxi, the Group has developed business relations with China Tobacco Yunnan, Customer A and Customer B since 2004, 2009 and 2010, respectively, which has demonstrated the Group’s capability to attract other customers;

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A1A 28(1)(b)(iii)

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BUSINESS (iii) there is mutual reliance between the Group and China Tobacco Jiangxi, given that the Group is the sole supplier of three sub-brands of Jinsheng (金聖), which is a major cigarette brand manufactured by China Tobacco Jiangxi; and (iv) as a result of the state-monopolised nature of the cigarette manufacturing industry in the PRC, it is not uncommon for cigarette package suppliers to focus on a limited number of cigarette manufacturers in order to maintain a better relationship with the customers and to ensure better quality of products. Nonetheless, the Group aims to reduce its reliance on China Tobacco Jiangxi in the future by implementing the following measures: (i)

expanding the business scale with the existing customers of the Group other than China Tobacco Jiangxi. For instance, the Group has won the tender for the supply of packages for a sub-brand of Cigarette Brand B, which the Group had not previously mass-produced, and has entered into a sales contract with Customer B that covers the period from 1 January 2013 to 31 December 2014. The Directors confirm that the Group possesses the expertise, technical knowhow and equipment required to manufacture such new products for Customer B. The Group also plans to explore opportunities to supply packages for cigarette brands other than the Hongtashan (紅塔山) brand manufactured by China Tobacco Yunnan;

(ii)

further expanding its customer base, including exploring business opportunities for the supply of packages for cigarette brands manufactured by other cigarette manufacturers. For instance, the Group is in the course of exploring the potential opportunity to supply packages for a cigarette brand manufactured by a cigarette manufacturer in Henan Province. As at the Latest Practicable Date, such business opportunity was still at a preliminary stage and no legally binding agreement has been entered into by the Group; and

(iii) expanding the Group’s product mix to paper containers other than cigarette packages, including packages for products such as medicine, wine, tea or other luxury goods and paper cups. As at the Latest Practicable Date, the Group has been conducting preliminary market research and has commenced the design of certain tea package products. The Group also intends to recruit two additional sales and marketing staff with specific experience in the non-cigarette paper container markets, assign relevant staff to gather relevant market information on the opportunities for the tendering for design and production of such non-cigarette paper containers and more actively submit tenders for these potential businesses. The Directors are of the view that the manufacturing process and technology and machinery required for producing non-cigarette paper containers are substantially the same as those for cigarette package printing, with only a few peripheral equipment to be added. Based on the feasibility study carried out by the Group, in order to produce paper packages for medicine, wine, tea or other luxury goods, the Group needs to procure two additional folding gluing machines to supplement its existing machinery which are estimated to cost approximately RMB350,000 each. For production of paper cups, the Group needs to procure five additional paper cup machines which are estimated to cost approximately RMB80,000 each. Two additional staff will have to be hired to operate each folding gluing machine or paper cup machine which, based on the current salary level of

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BUSINESS the Group, is not expected to significantly increase the staff cost of the Group. The funding required to purchase additional machinery and hire additional staff for the production of paper packages for non-cigarette products, as and when necessary, will be satisfied by the Group’s internal resources. However, the plan to explore the potential opportunities in the paper packages for non-cigarette products market is still at a very preliminary stage and the Group has not procured any sales order from any potential customer as at the Latest Practicable Date. The Directors are of the view that cigarette package production will continue to be the major business of the Group in the foreseeable future. China Tobacco Yunnan China Tobacco Yunnan was the second largest customer of the Group during the Track Record Period. According to the Euromonitor Reports, China Tobacco Yunnan is the largest cigarette manufacturer in the PRC which had an approximately 17.7% market share in the PRC in terms of cigarette retail sales volume in 2012. According to the Euromonitor Reports, two of the top five cigarette brands in the PRC in terms of retail sales volume in 2012, one of which being the Hongtashan (紅塔山) brand, were produced by China Tobacco Yunnan. In addition, Yunnan Province accounted for approximately 15.5% of the overall cigarette production volume in the PRC in 2012. According to the Euromonitor Reports, China Tobacco Yunnan had over 120 cigarette package suppliers in 2012. The Group commenced business with China Tobacco Yunnan in 2004 and has been supplying cigarette packages for the Hongtashan (紅塔山) brand to China Tobacco Yunnan since 2006. Sales to China Tobacco Yunnan accounted for approximately 21.5%, 25.5% and 12.2% of the total revenue of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. In addition to being a major customer of the Group, China Tobacco Yunnan was also a major supplier of the Group during the Track Record Period. The Group was contractually required to source paper from a subsidiary of China Tobacco Yunnan for the manufacture of paper cigarette packages to be supplied to China Tobacco Yunnan during the Track Record Period. Certain products supplied to China Tobacco Yunnan require transfer paper as raw material, which is produced from the processing of ivory board paper. During the Track Record Period, the subsidiary of China Tobacco Yunnan supplied ivory board paper but not transfer paper. Therefore, the Group typically procured ivory board paper from such subsidiary of China Tobacco Yunnan and sold the ivory board paper to a supplier of the Group for processing the same into transfer paper, and subsequently purchased the processed transfer paper back from such supplier, which is an Independent Third Party. To the best knowledge of the Directors, although it is not an industry practice among other provincial tobacco industrial companies, China Tobacco Yunnan usually requires its cigarette package suppliers to purchase paper from its subsidiary at a unified price for each paper product. There was no formal agreement between the Group and China Tobacco Yunnan in respect of the sales and purchase of ivory board paper during the Track Record Period. The Group usually settled the payment by way of telegraphic transfer shortly after receiving invoice from China Tobacco Yunnan. The Directors confirm that the purchases of ivory board paper from the subsidiary of China Tobacco Yunnan during the Track Record Period were conducted on normal commercial terms. Despite the fact that the Group was contractually required to source ivory board paper from a subsidiary of China Tobacco Yunnan for the manufacture of paper cigarette packages to be supplied to China Tobacco Yunnan, the Directors confirm that the Group did not act as a sub-contractor of China Tobacco Yunnan. Besides, based on the terms of the sales contracts and the Group’s transaction documents, the PRC Legal Advisers opine that the nature of the Group’s

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BUSINESS sales transactions with China Tobacco Yunnan was sale as opposed to processing of goods and the relevant sales of paper cigarette packages and the purchases of ivory board paper should be treated as separate transactions as (i) the Group did not charge China Tobacco Yunnan any processing fee or sub-contracting fee. Instead, the prices charged by the Group for the sales of paper cigarette packages to China Tobacco Yunnan and the prices charged by China Tobacco Yunnan for the ivory board paper supplied to the Group were based on the respective values of the relevant goods supplied; and (ii) the risks and benefit of the purchased ivory board paper have been transferred to the Group after the receipt of the paper by the Group. Purchases from China Tobacco Yunnan accounted for approximately 7.7%, 8.8% and 5.7% of the total purchases of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. The Group also purchased paper from an associated company of China Tobacco Yunnan during the Track Record Period, the amount of which accounted for approximately 15.1%, 14.2% and 15.5% of the total amount of purchases of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. Other five largest customers Customer A was the third largest customer of the Group during the Track Record Period. According to the Euromonitor Reports, Customer A is the largest cigarette manufacturer in Hubei Province, the PRC and produces cigarettes under brands including Cigarette Brand A. Hubei Province accounted for approximately 5.5% of the overall cigarette production volume in the PRC in 2012. According to the Euromonitor Reports, Customer A had over 40 cigarette package suppliers in 2012. The Group commenced business with Customer A in 2009 and has been supplying cigarette packages for Cigarette Brand A since 2009. Sales to Customer A accounted for approximately 12.2%, 12.9% and 13.7% of the total revenue of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. Customer B was the fourth largest customer of the Group during the Track Record Period. According to the Euromonitor Reports, Customer B is the largest cigarette manufacturer in the combined market of Sichuan Province and Chongqing City, the PRC and produces cigarettes under brands including Cigarette Brand B. Sichuan Province and Chongqing City accounted for approximately 4.0% and 2.2% of the overall cigarette production volume in the PRC in 2012, respectively. According to the Euromonitor Reports, Customer B had over 30 cigarette package suppliers in 2012. The Group commenced business with Customer B in 2010 and has been supplying cigarette packages for Cigarette Brand B since 2010. Sales to Customer B accounted for approximately 5.6%, 3.8% and 4.7% of the total revenue of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. The fifth largest customer of the Group during the Track Record Period was a cigarette package trader in the PRC. Cigarette package products supplied by the Group to the fifth largest customer during the Track Record Period were for cigarette brands not manufactured by the PRC provincial tobacco industrial companies. Sales to this customer accounted for approximately 0.1%, 2.7% and 2.0% of the total revenue of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively.

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BUSINESS None of the Directors, their respective associates, nor Shareholders who own more than 5% of the issued share capital of the Company has any interest in the five largest customers of the Group during the Track Record Period. All of the five largest customers of the Group during the Track Record Period were Independent Third Parties. SALES AND MARKETING Approved supplier system and tendering system Before the implementation of the tendering system, provincial tobacco industrial companies in the PRC had adopted an “approved supplier” system, under which these state-owned tobacco companies usually sourced packaging materials only from their respective lists of “approved suppliers”. Each of the four provincial tobacco industrial company customers of the Group, namely China Tobacco Jiangxi, China Tobacco Yunnan, Customer A and Customer B, have adopted such “approved supplier” system and the Group became an “approved supplier” of each of these customers in 2006, 2007, 2008 and 2009 respectively. Please refer to the paragraph headed “Customers” in this section for a more detailed discussion of the initial recognition and ongoing review process that a packages supplier is required to go through as an approved supplier of a provincial tobacco industrial company in the PRC and the current “approved supplier” status of the Group. As required by the PRC government, cigarette manufacturers in the PRC have gradually adopted the tendering system for the selection of cigarette package suppliers since 2011. In general, only approved suppliers would be invited by the cigarette manufacturers to participate in the tendering process. Suppliers that are invited to the tender are usually required to submit tender documents that contain, amongst others, (i) information and background of the supplier; (ii) unit prices of the products under bidding; (iii) information on the equipment and machinery possessed by the supplier; and (iv) information on the production and quality control process of the supplier. Based on these factors, cigarette manufacturers determine the tender result at their sole discretion. After the tender result is decided, the cigarette manufacturer would enter into sale and purchase contracts with the cigarette package supplier that had won the tenders. Maturities of the contracts usually range from one to two years and terms governed by the contracts vary among different tobacco companies but usually include: (i) types and specifications of materials to be supplied; (ii) indicative quantity; (iii) unit price; (iv) manner of delivery; and (v) settlement terms. Generally, unit prices of the products to be supplied during the contract period are fixed and quantity is subject to the customer’s monthly order. Each of the four provincial tobacco industrial company customers of the Group, namely China Tobacco Jiangxi, China Tobacco Yunnan, Customer A and Customer B, has adopted the tendering process for the purchase of cigarette package products since 2011. Prior to the implementation of the tendering system in 2011, the Group obtained business from its customers, including the four provincial tobacco industrial companies of which the Group had been an approved supplier, through direct negotiations. Since 2011, the Group has been actively participating in the tenders. In determining the tender price, the management of the Group endeavoured to maximise the chance of winning the tender by taking into account factors including the result determination mechanism of the

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A1A 28(1)(b)(v)

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BUSINESS relevant tender, expected pricing of its competitors, expected production costs and gross profit margin, existing production schedule, product specifications, raw material requirements, production volume and delivery arrangement. Up to the Latest Practicable Date, the Group has participated in all seven tenders arranged by its four provincial tobacco industrial company customers and managed to win the tenders for at least one product in each tender. The Group was generally able to win the tenders of sub-brands of Jinsheng (金聖), Hongtashan (紅塔山) and Cigarette Brand B, the cigarette packages of which were mass-produced by the Group immediately before the adoption of the tendering system with commensurate sales volume. In 2011, the Group did not win the tenders of three sub-brands of Cigarette Brand A, the cigarette packages of which were mass-produced by the Group before the adoption of the tendering process by Customer A. Revenue generated by the Group from these three sub-brands of Cigarette Brand A was approximately RMB19.9 million and RMB21.6 million for each of the years ended 31 December 2010 and 2011, respectively and dropped to approximately RMB1.4 million for the year ended 31 December 2012. Nonetheless, in 2011, the Group was able to win the tenders of two other sub-brands of Cigarette Brand A, the cigarette packages of which were not previously mass-produced by the Group, which compensated for the loss of revenue from those three sub-brands. As a result, the Group managed to achieve a continued growth of revenue generated from Customer A during the Track Record Period, which amounted to approximately RMB19.9 million, RMB23.2 million and RMB25.1 million for each of the years ended 31 December 2010, 2011 and 2012, respectively. In addition, in 2012, the Group won the tender for a sub-brand of Cigarette Brand B, which had not been previously mass-produced by the Group. The intense market competition in the cigarette package production market together with the adoption of the tendering process by the provincial tobacco industrial company customers has resulted in a general decline of the average selling prices of the products of the Group. Nonetheless, since the Group was generally able to win the tenders for the sub-brands that were mass-produced by the Group before the adoption of the tendering process and the revenue of the Group increased steadily during the Track Record Period, the Directors do not consider the adoption of the tendering system by the provincial tobacco industrial company customers had a material adverse impact on the overall business results of the Group during the Track Record Period.

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BUSINESS Major sales contracts The Group generally entered into sales contracts with its provincial tobacco industrial company customers every one to two years. The principal terms of the Group’s existing sales contracts with its provincial tobacco industrial company customers are as follows: Contract with China Tobacco Jiangxi Date of contract:

12 December 2012

Term of contract:

1 January 2013 — 31 December 2013

Products:

Paper cigarette packages for three sub-brands of Jinsheng (金聖)

Contracted amount:

Approximately RMB148.1 million

Price:

Fixed during the contract period

Trading terms:

Seller to pay for the transportation costs

Payment terms:

Buyer to pay upon satisfactory receipt of goods

Other terms:

Actual sales quantity and specification are subject to buyer’s monthly order to be placed with the seller

Contract with China Tobacco Yunnan Date of contract:

28 May 2012

Term of contract:

June 2012 — December 2013

Products:

Paper cigarette packages for two sub-brands of Hongtashan (紅塔山)

Contracted quantity:

Approximately 64,000 cases in aggregate

Price:

Fixed during the contract period

Trading terms:

Seller to pay for the transportation costs, which are included in the selling price

Payment terms:

Not specified

Other terms:

Buyer has the right to replace the purchase obligation stipulated under this contract with orders for paper cigarette packages of different specification. However, no commensurable quantity or amount is guaranteed

Contract No. 1 with Customer A Date of contract:

17 January 2013

Term of contract:

1 January 2013 — 31 December 2013

Products:

Paper packages for one sub-brand of Cigarette Brand A

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BUSINESS Contracted quantity:

To be specified in buyer’s monthly purchase order

Price:

Fixed in the contract and in principle not to be changed during the contract period

Trading terms:

Seller to pay for the transportation costs

Payment terms:

Buyer to inform seller to issue invoice upon satisfactory receipt of goods and to arrange payment within 40 days after receipt of invoice

Contracts No. 2 and No. 3 with Customer A Date of contracts:

30 November 2011 and 20 April 2012

Term of contracts:

1 December 2011 — 31 December 2012 and 20 April 2012 — 31 December 2012, respectively. According to a confirmation letter issued by the buyer on 17 December 2012, the buyer will implement public tenders in 2013, and the terms of Contracts No. 2 and No. 3 were extended to the ending date of the public tender in 2013

Products:

Paper cigarette packages for two sub-brands of Cigarette Brand A

Contracted quantity:

Not specified

Price:

Price is in principle fixed during the contract period unless mutually agreed

Trading terms:

Seller to pay for the transportation costs

Payment terms

Buyer to inform seller to issue invoice upon satisfactory receipt of goods and to arrange payment within 40 days after receipt of invoice

Other terms

Actual sales quantity and specifications are subject to buyer’s monthly order to be placed with the seller

Contract with Customer B Date of contract:

1 January 2013

Term of contract:

1 January 2013 — 31 December 2014

Products:

Paper packages for two sub-brands of Cigarette Brand B

Contracted quantity:

To be specified in buyer’s monthly purchase order

Price:

Fixed in the contract and in principle not to be changed during the contract period

Trading terms:

Seller to pay for the transportation costs

Payment terms:

Not specified

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BUSINESS As advised by the PRC Legal Advisers, the contracts set forth above are legally binding and enforceable under the PRC law. During the Track Record Period, sales amounts or quantities were not specified in the sales contracts entered into by the Group with Customer A and Customer B. In respect of the sales to China Tobacco Jiangxi and China Tobacco Yunnan, the actual sales quantities were not materially different from the relevant contracted quantities during the Track Record Period except for the lower sales to China Tobacco Yunnan in 2012. The lower sales to China Tobacco Yunnan in 2012 was primarily due to the decline in revenue from a sub-brand of Hongtashan (紅塔山), for which the Group has won the tender for the supply of packages. Pursuant to the sales contract between the Group and China Tobacco Yunnan dated 28 May 2012, the contracted quantity and amount for such sub-brand of Hongtashan (紅塔山) was 14,000 cases and approximately RMB18.9 million for the period from June 2012 to December 2013. However, no order has been placed to the Group for such sub-brand since June 2012. Consequently, the revenue of the Group generated from its sales to China Tobacco Yunnan dropped from approximately RMB45.8 million for the year ended 31 December 2011 to approximately RMB22.4 million for the year ended 31 December 2012. Please refer to the paragraph headed “Major components of the combined statements of comprehensive income — Revenue” in the “Financial information” section for further discussion on the revenue of the Group during the Track Record Period. Pricing and credit control The pricing of the majority of the sales of the Group is based on the tender results of the provincial tobacco industrial company customers of the Group. In determining the tender bidding prices, the management team of the Group endeavoured to maximise the chance of winning the tender by taking into account factors including, but not limited to, the result determination mechanism of the relevant tender, the expected pricing of its competitors, expected gross profit margin, existing production pipeline, product specifications, raw material requirements, production volume and delivery arrangement. Factors that the management team of the Group may take into account to conjecture the pricing range of its competitors include the guiding price range indicated in the tender documents provided by the cigarette manufacturer and the recent tender results for similar products. The payments of the majority of the sales of the Group are received upon the satisfactory receipt of the products by the customers of the Group. The Group generally allows credit period of 90 days to its customers. For certain major customers, the Group accepts settlement of trade receivables by bank bills primarily with 90-day maturity period which extends the effective collection period from such customers to 180 days. In order to minimise the credit risk, the management of the Group has delegated a team responsible for determination of credit limits, credit approvals and other monetary procedures to ensure that follow-up action is taken to recover overdue receivables. The Directors consider that the Group’s credit risk is significantly reduced under such credit control policy. The Group had not experienced any material difficulties in collecting payments from its customers during the Track Record Period. As at 31 December 2012, approximately 99.1% of the trade and bills receivables balances were below 90 days. Please refer to the paragraph headed “Major components of the combined statements of financial position — Trade and bills receivables” in the section headed “Financial information” in this document for detailed discussion of the aged analysis and the turnover days of the trade and bills receivables of the Group.

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BUSINESS After-sales services The Group endeavours to provide a full range of after-sales services to satisfy the needs of its customers. After-sales services are primarily provided by the sales and marketing staff of the Group. The sales and marketing staff of the Group regularly visit customers to understand their needs and to ensure that delivery of the products of the Group meets the production schedule of the customers. By doing so, the sales and marketing staff of the Group can also proactively and promptly understand and investigate problems confronted by the customers in their production process which are related to the products of the Group. It is the policy of the Group to provide solution to customers within 24 hours upon receipt of verbal or written requests or complaints and take appropriate remedial actions. For instance, should customers complain about defects of the products of the Group, the Group would immediately investigate and rectify such defects to the extent possible and, if necessary, re-deliver the required products to customers within 72 hours. Sales and marketing staff The Group has eight sales and marketing staff as at the Latest Practicable Date. The Group arranges its sales and marketing staff to regularly visit customers to understand their needs and the latest market trends such that the Group can provide tailor-made solutions, such as innovative designs and sample products, to foster and develop the businesses of the Group. The sales and marketing staff report customers’ feedback to the management team of the Group on a quarterly basis. The sales and marketing staff also hold quarterly market analysis meetings to discuss latest industry trends and sales and marketing strategies. PRODUCTION FACILITIES Shenzhen Production Base During the Track Record Period, the Group carried out its cigarette package production activities solely at the Shenzhen Production Base. Since its commencement of production in 2001, the Shenzhen Production Base has been operated by Shenzhen Oceania. The properties at the Shenzhen Production Base are currently leased by the Group, which comprise three 4-storey factory buildings used by the Group as production plant and three 5-storey dormitory buildings used by the Group as staff quarters with an aggregate gross floor area of approximately 16,481 sq.m..

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BUSINESS Set out in the table below are the details of the production volume, production capacity and capacity utilisation rate at the Shenzhen Production Base for each of the years ended 31 December 2010, 2011 and 2012: For the year ended 31 December 2010 2011 2012 Peak season (first and fourth quarters) Production volume (thousand cases) Production capacity (thousand cases) Capacity utilisation rate

128.0 150.0 85.3%

128.5 150.0 85.7%

123.9 150.0 82.6%

Slack season (second and third quarters) Production volume (thousand cases) Production capacity (thousand cases) Capacity utilisation rate

69.7 150.0 46.5%

90.1 150.0 60.1%

97.8 150.0 65.2%

Full year Production volume (thousand cases) Production capacity (thousand cases) Capacity utilisation rate

197.7 300.0 65.9%

218.6 300.0 72.9%

221.7 300.0 73.9%

Notes: 1.

Production capacity represents the maximum practicable output of the Shenzhen Production Base during the relevant period after exclusion of the time necessary for regular configuration, repair and maintenance and holidays, being continuous production for 16 to 20 hours a day and 300 days a year, based on the equipment in place.

2.

Capacity utilisation rates are determined by dividing actual production volume by production capacity for the relevant period.

The annual production capacity of the Shenzhen Production Base was approximately 300,000 cases for each of the years ended 31 December 2010, 2011 and 2012. The increase in the capacity utilisation rate from approximately 65.9% for the year ended 31 December 2010 to approximately 72.9% for the year ended 31 December 2011 was primarily attributable to the increase in the orders received by the Group. Due to the seasonal factor of the Group’s business, the utilisation rates were significantly higher during peak seasons, being the first and the fourth quarters of the year, as compared with those during slack seasons, being the second and the third quarters of the year. The peak season utilisation rates reached approximately 85.3%, 85.7% and 82.6%, whereas the slack season utilisation rates were approximately 46.5%, 60.1% and 65.2%, for each of the years ended 31 December 2010, 2011 and 2012, respectively. In certain months during the peak seasons, the capacity utilisation rates of the Group were even over 90% as a result of the congestion of orders received. As detailed under the paragraph headed “Properties” in this section, the Leased Properties at the Shenzhen Production Base have been registered as illegal buildings left over from the process of rural urbanisation* (農村城市化歷史遺留違法建築) in Shenzhen, the PRC. The lessor does not possess

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BUSINESS relevant building ownership certificates and construction permits for the Leased Properties. The PRC Legal Advisers have advised that, by reason of such title defects, there is a potential risk that the governmental authorities in the PRC may deem the leases of the Leased Properties invalid and unenforceable and hence, the Group may not be able to continue to occupy and conduct operation at the Shenzhen Production Base if the Leased Properties are ordered to be demolished by the relevant authorities as illegal buildings. The PRC Legal Advisers further advised, however, based on the confirmation from the relevant authorities, that the chance for the relevant PRC authority to order a mandatory eviction of the Group from the Shenzhen Production Base within two to three years is remote. As at the Latest Practicable Date, the Group has not received any challenge to its rights to occupy and use the Leased Properties or any notification to vacate from the Shenzhen Production Base. Huizhou Production Base As the Shenzhen Production Base has been operating at high utilisation rate during peak seasons and in order to further increase the Group’s production capacity in anticipation of potential business growth, the Group has, since 2012, commenced the construction of the Huizhou Production Base with an estimated aggregate gross floor area of approximately 60,658 sq.m. on the Huizhou Site located at Huizhou City of Guangdong Province, the PRC. The Huizhou Production Base has three planned phases. As at the Latest Practicable Date, the construction work and the relevant completion and acceptance procedures of phase I of the Huizhou Production Base with a gross floor area of approximately 9,644.16 sq.m. have been completed. The PRC Legal Advisers have advised that, as at the Latest Practicable Date, they were not aware of any legal impediment for the Group to obtain all necessary government approvals or certificates for commencing the operation of packaging material printing at phase I of the Huizhou Production Base. The Directors currently intend to commence the construction of phase II of the Huizhou Production Base in the fourth quarter of 2013. It is expected that the construction work of phase II of the Huizhou Production Base will take about one year and the construction cost is currently estimated to be approximately RMB29.0 million (equivalent to approximately HK$36.5 million). As at the Latest Practicable Date, the Group has not formulated the timeframe and the detailed plan for the construction of phase III of the Huizhou Production Base. Relocation plans The Directors intend to relocate and centralise all the production facilities at the Shenzhen Production Base to the Huizhou Production Base. Such relocation plan will be implemented by two phases. The Group plans to relocate certain existing equipment and machinery from the Shenzhen Production Base to phase I of the Huizhou Production Base (the “Phase I Relocation”) and procure and install additional equipment and machinery, including a gravure printer, during the second to the third quarters of 2014. After completion of the Phase I Relocation with the machinery being installed thereon, the Group will have parallel manufacturing operations at both the Shenzhen Production Base and the Huizhou Production Base and the total production capacity of the Group will be increased from 300,000 cases per annum to 400,000 cases per annum. The Directors consider that implementing the Phase I Relocation during the second to the third quarters of 2014 is appropriate as (i) the second and third quarters of the year are usually the slack season of the Group so that the impact on the

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BUSINESS Group’s operation could be minimised; (ii) the Group was advised by its machinery supplier that the ordering lead time for the gravure printer would be at least six months; and (iii) the Group plans to utilise the [●] for the procurement of additional equipment and machinery, including a new gravure printer. The Group plans to order the gravure printer shortly after [●] and other new equipment will be procured before the Phase I Relocation. It is estimated that the Phase I Relocation could be completed within two months and the Directors confirm that there will be no material interruption to production or loss of revenue as a result of the Phase I Relocation. The total costs of the Phase I Relocation, including relocation and testing expenses, are expected to be approximately RMB0.3 million, which will be funded by the Group’s internal resources, and funds required to procure new equipment and machinery will amount to approximately RMB17 million (equivalent to approximately HK$21.4 million), which will be satisfied from [●]. Upon the completion of the construction of phase II of the Huizhou Production Base, the Company plans to relocate the remaining production facilities at the Shenzhen Production Base to phase II of the Huizhou Production Base (the “Phase II Relocation”). The Company will consider the then production schedule of the Group to determine the exact time of the Phase II Relocation. It is currently estimated that the Phase II Relocation could be completed within two months and the relocation and equipment testing costs are estimated to be approximately RMB0.8 million, which will be funded by the Group’s internal resources. No major equipment is anticipated to be procured together with the Phase II Relocation. After the Phase I Relocation and before the Phase II Relocation, the Group will be concurrently operating two production bases. It is expected that additional depreciation of approximately RMB3.0 million per annum will be incurred by the Group after the Phase I Relocation. The Group will employ certain production staff locally in Huizhou City to support its operation at phase I of the Huizhou Production Base. No major lay-off is expected at the Shenzhen Production Base as a majority of production facilities will be maintained at the Shenzhen Production Base before the Phase II Relocation. After the Phase II Relocation, the Group plans to terminate the current leases of the Shenzhen Production Base and will no longer have any production operation in Shenzhen. Pursuant to the prevailing lease agreements, the early termination of the leases of the Shenzhen Production Base will lead to the forfeiture of rental deposits amounting to RMB144,000. Accordingly, the Group expects to save rental expenses of approximately RMB1.8 million per annum after the termination of the leases. The Group intends to relocate its staff from the Shenzhen Production Base to the Huizhou Production Base after the Phase II Relocation. If any staff is not willing to be relocated to Huizhou City, the Group will dismiss such staff and compensate them in accordance with the applicable laws and the terms of their employment contracts. Severance payment expenses in accordance with the relevant labour law in the PRC will be incurred by the Group. Based on the number of employees of the Group and their average ages of working as at 31 December 2012 and the average salary level of the Group’s employees in 2012, it is estimated that the total severance payment in the case of dismissal of all staff at the Shenzhen Production Base will amount to approximately RMB3.0 million. Other than

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BUSINESS the above, there will not be any material change in the cost and expense structure of the Group as a result of the Phase I Relocation and the Phase II Relocation and based on the Directors’ knowledge, it is not likely that the Group will encounter material difficulty in recruiting production staff in Huizhou City. In the event that the Group receives notice from the relevant governmental authorities and is required to move out from the Shenzhen Production Base prior to the Phase I Relocation, the Group will implement a contingency relocation plan to the Huizhou Production Base instead. In order not to cause material disruption to the production of the Group, the contingency relocation plan will be carried out by three phases. In the first phase, an offset printer and a foil stamping machine will be relocated from the Shenzhen Production Base to the Huizhou Production Base, and two new foil stamping machines and an automatic die-cutter will be purchased and installed at the Huizhou Production Base which altogether could provide a monthly production capacity of approximately 6,300 cases of cigarette packages. The second phase of the contingency relocation plan will involve the relocation of the other offset printer, four foil stamping machines and one automatic die-cutter from the Shenzhen Production Base to the Huizhou Production Base, which together with the machinery that have already been installed at the Huizhou Production Base, will provide a monthly production capacity of not less than 20,000 cases of cigarette packages. The third phase of the contingency relocation plan will involve the relocation of all the remaining equipment and machinery from the Shenzhen Production Base to the Huizhou Production Base. The Directors estimate that the contingency relocation could be completed within four months and would cost approximately RMB7.2 million, including approximately RMB6 million for the procurement of supplemental equipment and machinery and approximately RMB1.2 million for relocation and testing expenses, which will be financed by the Group’s internal resources. As the Directors are of the view that even if the Group is required to vacate from the Shenzhen Production Base, a reasonable period of not less than six months will be granted to the Group for its arrangement of relocation and production schedule, and with the new equipment to be purchased to supplement the three-phase contingency relocation plan, the Directors believe that the contingency relocation will not have any material adverse impact on the Group’s operation and will not result in any significant loss of revenue or adversely affect the Group’s relationship with its customers. The Controlling Shareholders have agreed to fully indemnify the Group from any potential costs or losses should the Group be forced to move out from the Shenzhen Production Base due to the title defects of the Leased Properties. The Group has not experienced any interruptions in its business which may have or have had a significant effect on its financial position in the 12 months up to the Latest Practicable Date. For further details of the property interests of the Group and the title defects of the Leased Properties, please refer to the paragraph headed “Properties” in this section and Appendix III to this document. Equipment and machinery The Group puts emphasis on the possession of a full range of equipment and machinery to ensure its production efficiency, which also allows greater flexibility for it to meet custom requirements of its customers on cigarette package production in general. The principal equipment and machinery of the Group include those for offset printing, gravure printing, screen printing, foil stamping and

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A1A 28(6)

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BUSINESS die-cutting. In order to produce quality products that meet the specifications demanded by the customers of the Group, some of the major equipment and machinery used by the Group are acquired from overseas manufacturers, including two offset printers from Germany, three screen printers from Japan and a foil stamping machine and two automatic die-cutters from Switzerland. The following is a list of the principal equipment and machineries of the Group as at the Latest Practicable Date: Number of unit

Type

Brand

Offset printer Gravure printer Gravure printer Screen printer Screen printer Foil stamping machine Foil stamping machine

MAN Roland, Germany Sotech, PRC Zhenhengli (貞亨利), PRC Sakurai, Japan Sicaite (絲彩特), PRC Bobst, Switzerland Yawa, PRC

2 1 2 3 1 1 8

Automatic die-cutter Automatic die-cutter

Bobst, Switzerland Yawa, PRC

2 1

Year of purchase 2000 and 2006 2009 2003 and 2008 2002, 2003 and 2004 2004 2001 2004, two in 2005, 2007, two in 2009, and two in 2012 2006 and 2009 2007

The equipment and machinery of the Group are operated by the production staff of the Group. As at the Latest Practicable Date, a total of 126 production staff were employed by the Group. The Group provides on-going technical training to the production staff on, amongst others, the safety operation and maintenance of the equipment and machinery. The equipment and machinery of the Group are routinely maintained on every working day to ensure their smooth operation. In order to further enhance the stability of production, inspections of the equipment and machinery are carried out weekly to identify and perform necessary repair and maintenance procedures. Under circumstances where in-house engineers are not able to repair the equipment and machinery, the Group would employ services from external professional technicians for assistances. The repair and maintenance costs of the Group amounted to approximately RMB320,000, RMB352,000 and RMB305,000 for each of the years ended 31 December 2010, 2011 and 2012, respectively. The Directors consider that, with adequate repair and maintenance, the existing principal equipment and machinery of the Group do not have to be replaced within the upcoming two years. As confirmed by the Directors, the relocation of the equipment and machinery of the Group from the Shenzhen Production Base to the Huizhou Production Base is not expected to cause any write-off of plant and machinery of the Group. Seasonality The products of the Group are solely used in the cigarette manufacturing industry, hence production season of the Group highly correlates with that of the cigarette manufacturing industry. As discussed in the “Industry overview” section in this document, the peak season of the cigarette package production industry in the PRC is around the first and the fourth quarters of a year given the

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BUSINESS high demand of cigarettes which are used as gifts during the Chinese New Year and the Mid-Autumn Festival. During the slack seasons, the Group reduces the operating hour of equipment and machinery, arranges maintenance of equipment and machinery, places more resources on product design and organises trainings to employees. Subcontracting During the Track Record Period, the Group engaged a subcontractor, who is an Independent Third Party, to perform certain gravure printing procedures in 2010 as the Group did not possess the suitable gravure printer at that time. The Group supplied the required paper to the sub-contractor and the sub-contractor was responsible for the arrangement of various resources, such as ink and equipment and machinery. The Group subsequently completed its set up of a suitable gravure printer in mid 2010 and hence, such subcontracting arrangements were no longer necessary since then. The subcontracting fees amounted to approximately RMB364,000, nil and nil, which represented approximately 0.4%, none and none of the total cost of sales of the Group, for each of the years ended 31 December 2010, 2011 and 2012, respectively. The Directors consider that the Group currently possesses sufficient production capacity and owns a full range of equipment and machinery to meet customer requirements in general.

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BUSINESS PRODUCTION PROCESSES The following chart illustrates the major steps for the Group to produce cigarette packages:-

Pre-Press Stage

Customer’s Specification

In-house Artwork Design

Customer’s Artwork Design

Film and Plate Making

Sample Production

Customer’s Approval

Mass Production Preparation

Press Stage

Post-Press Stage

Offset Printing

Gravure Printing

Foil Stamping

Embossing

Die-cutting

Finished Products

Packaging, Storage and Delivery

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Screen Printing

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BUSINESS The production process of cigarette packages may vary for individual designs, but can generally be divided into three stages, namely, pre-press, press and post-press, details of which are set out below: Pre-press stage The pre-press stage involves primarily the preparation works performed by the Group prior to mass production. The product design of cigarette packages are usually either (i) designed by the in-house product design staff of the Group which collaborate with customers to understand their product design specifications; or (ii) directly provided by customers. After finalising the in-house design or obtaining the customer’s design, films and plates will then be produced in accordance with the product design. The plates, which act as moulds, will then be used to produce a small batch of prototypes, which are sent to the customers for approval. Upon obtaining approval from customers on the prototypes, the Group prepares to mass-produce the approved design by procuring the necessary raw materials, setting up the relevant equipment and machinery and arranging the mass production procedures. Press stage The customers’ approved designs are mass-produced in the press stage, where papers are bulk printed with the specified colours and textures. There are a number of printing methods available to the Group, namely offset printing, gravure printing and screen printing. The number and sequence of the printing methods adopted to produce the required products depend on the design and specifications for the production batch. A brief description of the printing methods is as follows: •

Offset printing refers to the form of printing which involves the transfer or “offset” of image from the original image-carrier (such as a plate), to an intermediate image-carrier (such as a rubber blanket), then to the designated printing surface.



Gravure printing is an intaglio printing technique, where the image to be printed is made up of small depressions in the surface of the printing plate. The cells are filled with ink and the excess is scraped off the surface, then a rubber-covered roller presses paper onto the surface of the plate and into contact with the ink in the cells.



Screen printing refers to the form of printing in which ink is applied through a stencil attached to a finely-woven mesh screen, where ink is transferred to the designated printing area not covered by the stencil.

The Directors believe that the Group is equipped with quality multi-colour printers and a variety of equipment and machinery that is able to offer a variety of printing methods to meet the general market requirements on cigarette package production.

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BUSINESS Post-press stage During the post-press stage, foil stamping may be conducted where a die is pressed onto the aluminium foils or anti-counterfeit labels as they pass above the designated printing area, making the aluminium foils or anti-counterfeit labels adhere to the designated printing area. Embossing may also be conducted to produce raised or sunken images by pressing two dies against both sides of the designated area. Subsequent to the above production processes, each piece of paper will be printed with several identical cigarette package images that can be individually cut out via the die-cutting process. The individual piles of cigarette packages, which have not yet been folded into box shape, will be stored in the warehouse and/or delivered to customers. Cigarette manufacturers would fold the cigarette packages produced by the Group into box shape and fill cigarettes in them using automated machinery. Precise production of cigarette packages by the Group, including but not limited to accurate printing and die-cutting processes, is required to ensure stable production of the cigarette manufacturers. PROCUREMENT Raw materials Raw materials required by the Group for production of cigarette packages principally include paper, anti-counterfeit labels, aluminium foil and ink. As the production lead time of most of the Group’s products with order quantity of 1,000 cases or more is below four days and given the abundance and stability of raw material supply, the Group usually procures all raw materials after its customers have indicated to the Group their production/order schedules. The cost of raw materials accounted for approximately 78.0%, 78.3% and 80.2% of the total cost of sales of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. Paper, in particular, is the major raw material used by the Group, where the amount of paper procurement accounted for approximately 64.4%, 67.8% and 59.6% of the total raw material procurement amounts of the Group for each of the years ended 31 December 2010, 2011 and 2012, respectively. The Shenzhen Production Base is strategically located in Shenzhen Municipality of Guangdong Province, the PRC which the Directors believe to be a hub of raw materials suppliers for the cigarette package production industry, allowing the Group quick access to raw materials as well as more efficient logistics in the procurement of raw materials. During the Track Record Period, a majority of the suppliers of the Group are located in Guangdong Province, the PRC. The Group usually selects its suppliers based on their pricing, quality, delivery terms, after-sales services and technological understanding. However, the customers of the Group may have strict requirements on the specifications of paper and the customers of the Group usually require the production of anti-counterfeit labels to be outsourced to only a limited number of producers. Therefore, the selection of suppliers by the Group, especially for the procurement of paper and anti-counterfeit labels, may sometimes be limited accordingly. For instance, the Group was contractually required to purchase paper from a subsidiary of China Tobacco Yunnan for the manufacture of cigarette packages to be

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BUSINESS supplied to China Tobacco Yunnan. Please refer to the paragraph headed “Customers — Five largest customers during the Track Record Period — China Tobacco Yunnan” in this section for detailed discussion of the relationship of the Group with China Tobacco Yunnan and the transactions conducted with China Tobacco Yunnan during the Track Record Period. During the Track Record Period, the Group generally entered into one-year term legally binding and enforceable procurement contracts with its suppliers. Except for the contracts in relation to the purchase of anti-counterfeit labels for certain products produced by the Group, procurement contracts entered into by the Group were generally not supported by relevant back-to-back sales contracts. In most of the procurement contracts entered into by the Group during the Track Record Period, prices were fixed in the contracts while quantity, detailed specification of the raw materials to be supplied and the exact delivery time and location was subject to actual purchase order to be placed by the Group. Delivery costs were usually borne by the suppliers. For each of the years ended 31 December 2010, 2011 and 2012, raw materials purchases under fixed-price procurement contracts represented around 70% of the total amount of raw material purchase of the Group. During the Track Record Period, the Group had more than ten major suppliers and all of them are domestic suppliers. The Directors consider that it is generally not difficult to replace its existing suppliers given that the raw materials required by the Group, such as paper, are usually available in the market with a variety of alternative suppliers. The Directors confirm that, during the Track Record Period, the Group has not experienced any shortage of raw material supply. For each of the years ended 31 December 2010, 2011 and 2012, purchases from the largest supplier of the Group represented approximately 21.0%, 21.8% and 20.6% of the total purchases of the Group and purchases from the five largest suppliers of the Group represented approximately 68.8%, 74.8% and 69.3% of the total purchases of the Group, respectively. None of the Directors, their respective associates, nor

A1A 28(1)(b)(i)

Shareholders who own more than 5% of the issued share capital of the Company has any interest in the five largest suppliers of the Group during the Track Record Period.

A1A 28(1)(b)(v)

Utilities The operations of the Group require a substantial and continuous supply of electricity. Therefore, the availability and cost of electricity are key considerations in the operations of the Group. During the Track Record Period, the Group purchased electricity from regional power grid, namely Shenzhen Electricity Supply Bureau of Guangdong Power Grid Corporation (廣東電網公司深圳供電局). Electricity purchased by the Group amounted to approximately RMB2.6 million, RMB3.3 million and RMB2.7 million for each of the years ended 31 December 2010, 2011 and 2012, respectively, accounting for approximately 2.7%, 3.0% and 2.3% of the cost of sales of the Group during the same periods. Since the availability of electricity is important to the Group’s operations, the Group has installed backup power generators at the Shenzhen Production Base in case there is any electricity shortage or interruptions in electricity supply. The Directors confirm that the Group has not experienced any material disruption to its utilities supply during the Track Record Period.

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A1A 28(1)(b)(ii)

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BUSINESS INVENTORY CONTROL AND DELIVERY ARRANGEMENT Inventory control The inventories of the Group comprise raw materials, work in progress and finished goods. The Group maintains close relationship with its customers and its customers usually inform the Group their production/order schedules for the upcoming week or month, such that the Group is allowed sufficient time to plan its procurement schedules and liaise with its suppliers in advance. The Group aims to minimise its inventory level and endeavours to procure raw materials only after its customers have indicated their production/order schedules. Several other factors that facilitated the Group to plan its procurement schedule and minimise its inventory level include (i) the understanding of the Group in relation to the seasonal demand of the cigarette and cigarette package industry, where the Group may liaise with its suppliers in advance for the procurement of larger quantity of raw materials before its peak seasons; (ii) the ability of the Group to share certain raw materials given that cigarette package is the only product category of the Group, and thus new orders can usually utilise raw materials procured for similar orders that have not yet been utilised; (iii) the abundance and proximity of suppliers, from whom the Group can procure raw materials in a prompt manner; and (iv) the short production lead time of the Group, where the Group can have higher flexibility to control the timing for the procurement of raw materials. Raw materials, work in progress and finished goods are stored under suitable environment to maintain their quality. The inventory balances of the Group as at 31 December 2010, 2011 and 2012 were as follows:

2010 RMB’000

As at 31 December 2011 2012 RMB’000 RMB’000

Raw materials Work in progress Finished goods

12,779 1,573 11,083

2,921 6,131 14,542

4,465 4,008 1,820

Total

25,435

23,594

10,293

In accordance with the accounting policies of the Group, the Group writes down inventories for obsolescence based on an assessment of the net realisable value of inventories. Write-down is applied to inventories where events or changes in circumstances indicate that the net realisable value is lower than the carrying amount of inventories. During the Track Record Period, the Group recorded reversal of write-down on obsolete inventories of approximately RMB29,000 for the year ended 31 December 2010 and recognised write-down on obsolete inventories of approximately RMB105,000 and RMB246,000 for each of the years ended 31 December 2011 and 2012, representing approximately 0.1%, 0.4% and 2.4% of the inventories of the Group as at the end of each year, respectively.

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BUSINESS The following table sets out the aged analysis of the inventories of the Group as at 31 December 2010, 2011 and 2012:

2010 RMB’000

As at 31 December 2011 2012 RMB’000 RMB’000

Within 90 days 91 to 180 days 181 days to 1 year Over 1 year

23,851 360 1,213 11

20,139 3,122 221 112

9,004 761 380 148

Total

25,435

23,594

10,293

As at 31 March 2013, approximately 93.6% of the inventories of the Group as at 31 December 2012 had been used or sold. Delivery arrangement The suppliers of the Group are responsible for the delivery of raw materials to the Group and, after production, the Group endeavours to deliver all its finished goods as soon as possible. During the Track Record Period, the Group engaged logistics service providers, who were Independent Third Parties, for all the delivery of finished goods to its customers. The Group generally did not enter into long term service contracts with the logistics service providers. The logistics service providers are responsible for the safe delivery of the finished goods and would bear the losses should the finished goods be damaged during delivery. The Group has also maintained delivery insurance to further enhance the protection of the Group against potential accidental losses to its finished goods during delivery. The delivery destinations are located in different provinces in the PRC, depending on the location of the customer. The deliveries were primarily by road and the delivery expenses were insignificant, which amounted to approximately RMB1.4 million, RMB1.7 million and RMB1.7 million for each of the years ended 31 December 2010, 2011 and 2012, respectively. The Directors confirmed that, during the Track Record Period, the Group has not experienced any material loss associated with product delivery. QUALITY CONTROL Cigarette manufacturers in the PRC place strong emphasis on the quality of cigarette packages to ensure their smooth production operation and to distinguish their authentic products from the counterfeit ones. As such, the Group has implemented a series of quality control measures to ensure its products can meet or exceed the requirements on cigarette packages as set forth by its customers and also the PRC government. According to the quality control measures of the Group, quality control procedures are routinely performed on (i) raw materials; (ii) work in progress; and (iii) finished goods. As at the Latest Practicable Date, the Group has a total number of 121 quality control staff members dedicated to the quality control of the products of the Group and the Group has also imported a variety

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BUSINESS of quality control equipment from the overseas, which include, among others, two spectrophotometers and a VOC analyzer from the United States, three bar-code assessment devices from Germany and a crease and board stiffness tester from the United Kingdom to facilitate the quality control processes of the Group. Sample inspections of raw materials are performed on, amongst others, the surface quality of paper, the pattern of anti-counterfeit labels, the colour of aluminium foils, the expiry date of inks and the amount of VOC of the raw materials. Raw materials that do not meet the requirements of the Group are returned to the relevant suppliers and only the raw materials that meet the requirements are stored in the warehouse of the Group. Prior to the commencement of mass production, prototypes are produced for quality inspection to avoid mass production of defective products. For work in progress, including prototypes before mass production and goods in mass production, sample inspections are performed for each production procedure on, amongst others, the colour and surface effects after different printing procedures, the quality of paper edges after die-cutting procedures and the amount of VOC of the work in progress, such that the sources of defects can be identified and rectified as soon as practicable. After the completion of production, finished goods undergo two rounds of full inspection, each of which followed by a round of sample inspection, and only those that meet the requirements, which include but not limited to those related to the coloring and positioning of artwork and the amount of VOC of the finished goods, are packaged to be stored and subsequently delivered. The Directors consider that the capability of the Group in quality assurance is evidenced by the fact that the Group had not experienced any significant product return, defect products, redelivery or material quality disputes with its customers during the Track Record Period. In addition, Universal Certification Service Co., Ltd. has accredited Shenzhen Oceania with ISO9001:2008 since 2009. According to Euromonitor, there are counterfeit products of the cigarette products of the Group’s major customers in the market. However, to the best knowledge of the Directors, such counterfeit products had not caused any material adverse impact on the business of the Group during the Track Record Period. PROPERTIES As at the Latest Practicable Date, the Group has obtained the land use rights to the Huizhou Site with a site area of 54,886 sq.m. located in Huizhou City, Guangdong Province, the PRC. The construction work and the relevant completion and acceptance procedures of phase I of the Huizhou Production Base with an aggregate gross floor area of approximately 9,644.16 sq.m. have been completed. The Group leased the Leased Properties located in Longgang District, Shenzhen, Guangdong Province, the PRC, which have been the main place of operation of the Group during the Track Record Period and up to the Latest Practicable Date. The Leased Properties comprise three 4-storey factory buildings used by the Group as production plant and three 5-storey dormitory buildings used by the Group as staff quarters with an aggregate gross floor area of approximately 16,481 sq.m.. As at the Latest Practicable Date, the Group leased one property with a gross floor area of approximately 745 sq. ft. in Hong Kong as its principal place of business in Hong Kong.

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R5.01B(4)

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BUSINESS A summary of the properties owned and leased by the Group in the PRC and Hong Kong is set forth below: a)

b)

Property interests owned by the Group in Huizhou City, Guangdong Province, the PRC Location

Use

Site area Owner (sq.m.)

Yuan Xi Qu Ke Ji Gong Ye District, Dayawan Economic and Technology Development Zone, Huizhou, Guangdong Province, the PRC (中國廣東省 惠州市大亞灣經濟技術 開發區)

Proposed production base erected upon a parcel of land

54,886 Huizhou Jin Cai

Property interests leased by the Group in Shenzhen City, Guangdong Province, the PRC Gross Expiry of floor area lease (sq.m.)

Location

Use

Workshop No. 1, No. 21 Jianlong Street, Bao’an Community, Henggang Sub-district, Longgang District, Shenzhen, Guangdong Province, the PRC

Production plant

3,688 15 April 2016

深圳市橫崗保安股份 合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*)

Levels 1 to 4, Workshop No. 2, No. 21 Jianlong Street, Bao’an Community, Henggang Sub-district, Longgang District, Shenzhen, Guangdong Province, the PRC

Production plant

3,701 15 April 2016

深圳市橫崗保安股份 合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*)

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Lessor

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BUSINESS

c)

Gross Expiry of floor area lease (sq.m.)

Location

Use

Levels 1 to 4, Workshop, No. 39 Jianlong Street, Bao’an Community, Henggang Sub-district, Longgang District, Shenzhen, Guangdong Province, the PRC

Production plant

Levels 1 to 5, Dormitory Building No. 1, No. 21 Jianlong Street, Bao’an Community, Henggang Sub-district, Longgang District, Shenzhen, Guangdong Province, the PRC

Lessor

3,740.72 15 April 2016

深圳市橫崗保安股份 合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*)

Staff quarter

1,588 15 April 2016

深圳市橫崗保安股份 合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*)

Levels 1 to 5, Dormitory Building No. 2, No. 21 Jianlong Street, Bao’an Community, Henggang Sub-district, Longgang District, Shenzhen, Guangdong Province, the PRC

Staff quarter

1,597 15 April 2016

深圳市橫崗保安股份 合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*)

Levels 1 to 5, Dormitory Building, No. 39 Jianlong Street, Bao’an Community, Henggang Sub-district, Longgang District, Shenzhen, Guangdong Province, the PRC

Staff quarter

2,166.02 15 April 2016

深圳市橫崗保安股份 合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*)

Property interests leased by the Group in Hong Kong

Location

Use

Gross floor area

Expiry date of lease

Suite 2312, Tower One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong

Office use

745 sq. ft.

14 March 2015

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BUSINESS The Directors confirm that: •

the Group did not have any property interest that formed part of its property activities as at the Latest Practicable Date; and



save and except the disclosure as set out in Appendix III to this document in relation to the Huizhou Site, no single property interest that formed part of the Group’s non-property activities has a carrying amount of 15% or more of the Group’s total assets as at 31 December 2012.

Title defects of the Leased Properties As at the Latest Practicable Date, 深圳市橫崗保安股份合作公司 (Shenzhen Henggang Baoan Share Co-operative Company*), the lessor of the Leased Properties (the “Lessor”), does not possess the relevant valid building ownership certificates and construction permits for the Leased Properties. Pursuant to the Decision of the Standing Committee of Shenzhen Municipal People’s Congress for Handling Illegal Buildings Left over from the Process of Rural Urbanisation* (深圳市人民代表大會 常務委員會《關於農村城市化歷史遺留違法建築的處理決定》) (the “Decision”), the Leased Properties, which did not possess the required title certificates and construction permits, might be deemed as illegal buildings left over from the process of rural urbanisation (the “Historical Illegal Buildings”). Pursuant to the Decision, Historical Illegal Buildings will be handled by the Shenzhen Government by ways of confirming ownership, demolishing, expropriating or granting temporary use of the properties. The Lessor has reported the Leased Properties to the Leading Group Office of the Henggang Sub-district of Shenzhen Longgang District which handles the Historical Illegal Buildings Issue* (深圳市龍崗區橫崗街道處理農村城市化歷史遺留違法建築工作領導小組辦公室) and received an acknowledgement on 3 August 2010. The Henggang Sub-district Office of Shenzhen Longgang District* (深圳市龍崗區橫崗街道辦事 處) (the “Henggang Sub-district Office”) issued a certificate letter on 22 March 2011, confirming that (i) the Leased Properties were beneficially owned by the Lessor; (ii) the Lessor has reported the situation of the Leased Properties as Historical Illegal Buildings to the competent authorities pursuant to the relevant regulations in Shenzhen; (iii) the Leased Properties comply with relevant structure and fire safety requirements and therefore are permitted to be temporarily used; and (iv) the Leased Properties did not fall within any demolition plan and the Henggang Sub-district Office will not retrieve the Leased Properties or forbid the use of such properties. Furthermore, Longgang branch of Urban Planning, Land & Resources Commission of Shenzhen Municipality* (深圳市規劃和國土資源 委員會龍崗管理局) (the “Shenzhen Land Commission”) issued a letter on 27 May 2011, confirming that the Lessor had the right to use and make profit out of the land of which the Leased Properties form part, and that such land was not part of any city reconstruction plan and will not be demolished. Notwithstanding the above and that the Group has not received any challenges to its rights to occupy and use the Leased Properties or any notification to vacate from such properties as at the Latest Practicable Date, the PRC Legal Advisers are of the opinion that there still exists the risk that the relevant authorities in the PRC may deem the lease of the Leased Properties invalid and unenforceable and the Group may be required to vacate from the premises should the relevant governmental authorities order so.

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BUSINESS The PRC Legal Advisers have further advised that: (i)

based on the confirmation letters issued by the relevant governmental authorities, the Lessor (i) is the beneficial owner of the Leased Properties; (ii) has the right to construct workshop, dormitory and other ancillary facilities on the land of which the Leased Properties form part; and (iii) has the right to gain profit from leasing the Leased Properties to the Group;

(ii)

according to the Decision, Historical Illegal Buildings are permitted to be used temporarily for business operation and the application for the registration of lease of such illegal buildings will be processed if the relevant fire safety and construction structure safety requirements have been complied with. The relevant safety certificates in respect of the Leased Properties have been obtained and the Lessor and the Group have completed the registration of the Leases with the relevant governmental authorities in Shenzhen, Guangdong Province, the PRC;

(iii) the Group is not liable to any fine or administrative penalty should the leases of the Leased Properties be deemed to be invalid and unenforceable by the PRC court; (iv) according to a confirmation and undertaking letter issued by the Lessor on 15 January 2013, there was no dispute, litigation or other disagreement between the Lessor and Shenzhen Oceania regarding the title of the Leased Properties and there has not been any breach of lease agreements in respect of the Leased Properties by either party or any investigation or penalty initiated by the government relating to the Leases or the titles of the Leased Properties as at the date of the confirmation. The Lessor further undertook that (i) unless required by laws and regulations or due to factors that are beyond its control, the Lessor would not repossess the Leased Properties from Shenzhen Oceania prior to the expiry of the relevant lease agreements; and (ii) in the event of early termination of the relevant lease agreements due to the title defects of the Leased Properties, the Lessor will grant a relocation period of not less than 120 days to Shenzhen Oceania; (v)

according to the PRC Legal Advisers’ interview on 31 October 2012 with the Shenzhen Land Commission which, as confirmed by the PRC Legal Advisers, is competent to give the confirmation, the chance of the Leased Properties being demolished as illegal buildings in the coming two to three years is remote; and

(vi) considering the contingency plans adopted by the Group, which are discussed in more details in the paragraph headed “Production Facilities — Huizhou Production Base” in this section, the PRC Legal Advisers opined that the title defects of the Leased Properties will not have material adverse impact on the operation and financial condition of the Group. In order to minimise the ongoing risk of any disruption to the operation of the Group and to cope with the future business development of the Group, it is the intention of the Group to relocate the existing production facilities from the Shenzhen Production Base to the Huizhou Production Base. Please refer to the paragraph headed “Production facilities — Huizhou Production Base — Relocation plans” in this section for more details regarding the relocation plans of the Group.

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BUSINESS In addition, the Controlling shareholders have jointly and severally agreed to fully indemnify the Group from any potential costs or losses should the Group be forced to move out from the Shenzhen Production Base due to the title defects of the Leased Properties. INTELLECTUAL PROPERTY

A1A 28(4)

The Group has been developing new production techniques and designing innovative products so as to build up its competitive edges in the market. The Group currently holds two utility model patents in the PRC for anti-counterfeit cigarette package with visual identification and ratio frequency identification combined (視覺識別與射頻識別相結合的防偽煙盒) and printing equipment of dual identification anti-counterfeit labels (雙重識別防偽標籤的印刷設備). Both of these patents were granted in May 2007 and listed Ms. Huang as one of the inventors. Although these patents have not yet been utilised by the Group for mass production as at the Latest Practicable Date, the Directors believe that the holding of such patents provides flexibility to the Group to develop innovative designs to customers. The Group has also registered the domain name of www.jincaiholding.com, which is currently used as the website of the Group. For further details of patents and trademarks registered or being applied for registration by the Group, please refer to Appendix V to this document. The Directors confirm that, during the Track Record Period, the Group had not encountered any proceedings concerning any actual, pending or threatened claims of actual or potential infringement of any intellectual property rights in which the Group was the claimant or respondent. COMPETITION The Group primarily competes with domestic cigarette package manufacturers of various scales. In general, the Directors consider that the number of competitors in the cigarette package production industry is limited by several entry barriers including: •

the substantial initial capital investment required to possess suitable plant and equipment and machinery to produce quality products that can meet the demands of customers;



the requirement of industry knowledge, technical know-how and product design capability to understand and satisfy the needs of customers;



the requirement of business relationship with cigarette manufacturers to secure a stable network of customers to facilitate the maintenance and development of business;



the requirement of significant time for cigarette manufacturers to assess the new cigarette package producer before granting an “approved supplier” status to such producer; and



the tendering process that a new cigarette package producer needs to go through in order to procure orders.

Despite the existence of entry barriers, the Directors are of the view that the cigarette package production industry in the PRC is competitive and fragmented with both large-scaled and small-scaled competitors and many of the competitors are based in the Pearl River Delta and Yangtze River Delta.

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BUSINESS Furthermore, cigarette manufacturers in the PRC have gradually adopted the tendering system for the selection of cigarette package producers, which has intensified the price competition in the industry and narrowed the profit margin of the Group. However, the Directors consider that the Group is capable of competing and has growth potential in the industry given that the Group possesses the competitive strengths as detailed in the paragraph headed “Competitive strengths” in this section. AWARDS AND RECOGNITIONS Since the establishment of the Group, it has been granted a number of awards and recognition in respect of, among other things, its business operation, quality management system and credit rating. Set out below are information on the major awards and recognitions of Shenzhen Oceania: Year of issue

Award or recognition

Awarding body

Validity

2004

ISO 9001:2000 for design and manufacture of cigarette boxes

SGS United Kingdom Ltd

Three years

2007

High-tech Enterprise in Shenzhen Municipality (深圳市高新技術企業)

Shenzhen Bureau of Science Technology and Information (深圳市科技和信息局)

Four years

2007

Honor Title of Credit List for Small and Medium Enterprise Clients of Shenzhen Banks 2007 (深圳市2007年度銀行中 小企業客戶誠信榜誠信企業)

Shenzhen Credit Association (深圳市信用協會) and Shenzhen Small & Medium Enterprises Credit Guarantee Center (深圳市中小企業信用擔 保中心)

Not applicable

2009

Credit rating of “A-”

Dagong Global Credit Ratings Co., Ltd (大公國際資信評估有 限公司)

Not applicable

2009

ISO 9001:2000 and ISO 9001:2008 for the printing (contain design) and service of tobacco’s packing

Universal Certification Service Co., Ltd.

Three years

2010

Top 500 Small and Medium Growth Industrial Enterprise in Shenzhen Municipality (深圳市 成長型中小工業企業500強)

Shenzhen SITIC and Shenzhen Service Centre of Medium-Small Enterprises (深圳市中小企業服務中心).

Two years

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BUSINESS Year of issue

Award or recognition

Awarding body

Validity

2010

Integrity Exemplary Enterprise of Guangdong Province (廣東省誠信示範企業)

Guangdong Provincial Enterprise Confederation (廣東省企業聯合會) and Guangdong Entrepreneurs Association (廣東省企業家協會)

Three years

2011

High-tech Enterprise in Shenzhen Municipality (深圳市高新技術企業)

Shenzhen Bureau of Science Three years Technology and Information (深圳市科技工貿和信息化委員 會) and Shenzhen Financial Committee (深圳市財政委員會)

2011

ISO 9001:2008 for the printing Universal Certification Service (contain design) and service of Co., Ltd. tobacco’s packing

Three years

2011

Credit rating of “A+”

Not applicable

Dagong Global Credit Ratings Co., Ltd (大公國際資信評估有 限公司)

LABOUR AND SAFETY MATTERS The PRC operations of the Group are subject to various labour and safety laws and regulations in the PRC, which include, the PRC Labour Law 《 ( 中華人民共和國勞動法》), the PRC Labour Contract Law 《 ( 中華人民共和國勞動合同法》), the Regulations on Work Injury Insurance 《 ( 工傷保險 條例》), the Provision Regulations on Collection of Social Insurance Premiums 《 ( 社會保險費徵繳暫 行條例》) and the PRC Social Insurance Law 《 ( 中華人民共和國社會保險法》). The Group places emphasis on the compliance with the labour and safety laws and regulations in the PRC and has established necessary measures to comply with those laws and regulations. The Group has participated in various mandatory insurance plans, including pension insurance plan, unemployment insurance plan, maternity insurance plan, injury insurance plan and medical insurance plan as required by the relevant laws and regulations. The Group has established internal work place safety guidelines and conducted occupational safety trainings to promote safety awareness of its employees. The Group has also established a system of recording and handling significant labour accidents and the Directors confirm that the Group had not experienced any significant labour accident which had a material adverse impact on the Group during the Track Record Period. The PRC Legal Advisers advised that, based on the confirmation issued by the relevant PRC authorities, save as disclosed in the paragraph headed “Regulatory and legal matters — Non-compliance matters” in this section, the Group has complied with all relevant mandatory local and national labour and safety laws and regulations during the Track Record Period. No penalty has been imposed on the Group by the relevant PRC authorities in respect of the Group’s non-compliance of the labour, social insurance and safety matters during the Track Record Period.

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BUSINESS ENVIRONMENTAL PROTECTION The Directors are aware of the importance of environmental protection and hence, the Group pays close attention to ensure its operations comply with the environmental protection laws and regulations in the PRC. The Directors are also of the view that the production process of the Group does not generate hazards that will cause any significant adverse impact on the environment. Wastes generated by the production process of the Group primarily consist of paper and ink. The Group takes steps to ensure that industrial wastes and by-products produced as a result of the operations are properly disposed of in order to minimise adverse effects to the environment. The Group has also arranged professional industrial wastage processor to collect pollutants produced by the Group during its operations, which primarily include waste paper and ink. Furthermore, the Group endeavours to procure raw materials that are environmentally friendly. Expenses incurred by the Group for compliance with the environmental protection laws and regulations amounted to approximately RMB64,000, RMB90,000 and RMB50,000 for each of the years ended 31 December 2010, 2011 and 2012, respectively. The ongoing expenses of the Group for compliance with environmental laws and regulations are expected to be less than RMB100,000 per year. Based on the confirmation issued by the relevant PRC authorities, the PRC Legal Advisers advised that save as disclosed in the paragraph headed “Regulatory and legal matters — Non-compliance matters” in this section, the Group has complied with all relevant mandatory local and national environmental protection laws and regulations during the Track Record Period. No penalty has been imposed on the Group by the authorities in respect of the Group’s non-compliance of the environmental protection matters during the Track Record Period. INSURANCE During the Track Record Period, the insurance policies maintained by the Group primarily include (i) social insurance for its employees as required by the PRC rules and regulations; (ii) integrated insurance for certain of its equipment and machinery; and (iii) delivery insurance against accidental losses to its products during delivery. The insurance premium paid by the Group for each of the years ended 31 December 2010, 2011 and 2012 amounted to approximately RMB678,000, RMB996,000 and RMB1.2 million, respectively. The PRC Legal Advisers advised that, save as disclosed in the paragraph headed “Regulatory and legal matters — Non-compliance matters” below, during the Track Record Period, the Group has maintained employees’ insurance policies that are mandatory under PRC laws. Moreover, the Directors consider that the Group’s insurance coverage is sufficient and in line with the general practice in the PRC. The Directors further confirm that the Group has not experienced any material claims or liabilities arising from any accidents relating to the Group’s operations or product liabilities during the Track Record Period and up to the Latest Practicable Date. LEGAL PROCEEDINGS The Group is not involved in any litigation, arbitration or claim of material importance, and no litigation, arbitration or claim of material importance was known to be pending or threatened against any member of the Group as of the Latest Practicable Date.

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BUSINESS REGULATORY AND LEGAL MATTERS The Group is required to possess the printing operation permit (印刷經營許可證), which has to be renewed every three years, for its cigarette package printing business in the PRC and the current printing operation permit of Shenzhen Oceania and Huizhou Jin Cai will both expire on 31 December 2013. Historically, the relevant regulatory authority would issue a notice regarding the relevant requirements for the application of permit renewal during the final two months of the term of the permit. The Group has not yet received such notice as at the Latest Practicable Date. For the most recent permit renewal of the Group, the applicants were required to fill out and submit an evaluation form, which covered areas including, but not limited to, the production site area of the applicant, equipment and machinery possessed by the applicant, product type of the applicant and the non-compliance records of the applicant. The Group has had no instance of failing to obtain or renew its printing operation permit (印刷經營許可證) in the past. With reference to the historical requirements and assuming that there will not be any major changes in the upcoming renewal requirements, the PRC Legal Advisers are of the view that there is no legal impediment for each of Shenzhen Oceania and Huizhou Jin Cai in their renewal of the printing operation permit (印刷經營許可證). The Group has adopted internal control measures to ensure that all the existing licences, permits and approvals of Shenzhen Oceania remain valid during its operation period and all relevant title certificates, licences and approvals for the Huizhou Production Base have been obtained before its commencement of operation. The Group has prepared a licensing and approval requirement checklist, which has been reviewed by the PRC Legal Advisers. The Group has also assigned designated staff to closely monitor the compliance status of each of the operating subsidiaries of the Group in accordance with the checklist. Mr. Li Wei, the chief administrative officer of the Group, will review the work of such staff and report the compliance status of the Group to the Directors on a quarterly basis. In addition, the Group has internal guidelines to prevent bribery which include prohibition of undue receipt of hospitalities from suppliers by the employees of the Group and prevention of offering unlawful advantage to the employees or agents of the Group’s customers or other business partners, such as strict prohibition against provision of improper economic benefits to counterparties of the Group. The PRC Legal Advisers have confirmed that, save as disclosed below, the Group has obtained all necessary licences, approvals and permits from appropriate regulatory authorities for conducting the Group’s business operations in the PRC and the Group has complied with the relevant PRC laws and regulations in all material respects during the Track Record Period and up to the Latest Practicable Date.

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BUSINESS Non-compliance matters Title defects of the Leased Properties As detailed in the paragraph headed “Properties” in this section, the lessor of the Leased Properties at which the Shenzhen Production Base is situated does not possess the relevant valid building ownership certificates and construction permits for the Leased Properties. The PRC Legal Advisers advised that there exists the risk that the relevant authorities in the PRC may deem the lease of the Leased Properties invalid and unenforceable and the Group may be required to vacate from the premises should the relevant governmental authorities order so. Please refer to the paragraphs headed “Properties” and “Production facilities” in this section for details of the title defects of the Leased Properties and the remedial actions of the Group. Unemployment social insurance contributions Prior to August 2011, Shenzhen Oceania did not pay the requisite contribution for unemployment social insurance for its employees according to relevant social insurance regulations in the PRC. Such non-compliance was mainly attributable to the insufficient understanding of the Group’s staff on the requirements of the relevant PRC social insurance regulations. According to the PRC Legal Advisers, if employers fail to make unemployment social insurance contributions on time, the authorities have the right to issue a notice to order such employers to make unemployment social insurance contributions within thirty days from the receipt of the notice by the employers, plus a late payment surcharge of (i) 0.5% per day before July 2011; and (ii) 0.05% per day after July 2011 of the unpaid amount. In the event of continuous non-payment for the unemployment social insurance, the maximum fine will amount to two times the unpaid amount. Based on the Group’s calculation, the total amount of unpaid unemployment social insurance during the Track Record Period and late payment surcharge was approximately RMB0.2 million as at the Latest Practicable Date. On 24 January 2013, the PRC Legal Advisers interviewed the officer of Shenzhen Longgang Social Insurance Bureau (the “Bureau”) regarding the historic non-compliance of Shenzhen Oceania and was advised that the Bureau will not automatically require Shenzhen Oceania to make the historic unpaid unemployment social insurance and usually will not impose any fine or penalty on Shenzhen Oceania. The PRC Legal Advisers further advised that according to the Administrative Penalty Law of the PRC (中華人民共和國行政處罰法), no administrative penalty shall be imposed two years after the termination of the relevant continuous or consecutive non-compliance incidents. Since Shenzhen Oceania has been making unemployment social insurance contributions for its employees in accordance with the relevant laws and regulations from August 2011, the relevant governmental authorities should not impose any fine or administrative penalty on Shenzhen Oceania after July 2013. As at the Latest Practicable Date, the Group has not received any notice from the relevant governmental authorities requiring it to settle the unpaid amount, nor has it been imposed any fine or administrative penalty relating to the unpaid unemployment social insurance contributions. On the contrary, the relevant governmental authority has issued a confirmation letter certifying that the Group had been making social insurance contributions on time and there was no record that the Group was fined or penalised due to any breach of the relevant social insurance laws and regulations.

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BUSINESS Housing provident fund contributions On 20 December 2010, the relevant housing provident fund authority in Shenzhen required enterprises in Shenzhen to undergo the necessary registration procedures and make housing provident fund contributions for their employees. However, prior to December 2010, Shenzhen Oceania did not make housing provident fund contributions for its employees as it was the understanding of the then staff of Shenzhen Oceania that it was not a mandatory requirement for enterprises to make housing provident fund contributions for its employees. Based on the Group’s calculation, the total amount of unpaid housing provident fund during the Track Record Period was approximately RMB0.4 million. The PRC Legal Advisers advised that in the case of failure to make housing provident fund contributions, the relevant PRC housing provident fund authority could demand the Group to pay the outstanding amount within a prescribed period of time, failing which the court may order for a compulsory enforcement according to the application from the aforesaid authority. The PRC Legal Advisers further advised that, as Shenzhen Oceania has been making housing provident fund contributions for its employees according to the relevant requirements since December 2010 and more than two years have elapsed since the non-compliance was rectified, Shenzhen Oceania should no longer be required to pay the outstanding contributions or subject to any fine or administrative penalty according to the Administrative Penalty Law of the PRC 《 ( 中華人民共和國行政處罰法》). The Directors confirm that as at the Latest Practicable Date, Shenzhen Oceania has not received any notice from the relevant governmental authorities ordering it to make unpaid housing provident fund contributions or imposing any fine or administrative penalty on the Group. The PRC Legal Advisers are of the opinion that the non-compliance of the Group in relation to the housing provident fund contributions will not have any material impact on the Group’s operation. Registered capital of Shenzhen Oceania As detailed in the section headed “History, Corporate Reorganisation and group structure” in this document, Shenzhen Oceania, the major operating subsidiary of the Group, was established under the PRC laws in March 2000. At the time of its establishment, the amount required to be paid up as the original registered capital of Shenzhen Oceania was RMB24,000,000. Such amount was required to be fully paid up within six months of the establishment of Shenzhen Oceania. However, the then shareholders of Shenzhen Oceania did not strictly comply with the requirement to fully pay up the original registered capital within the six-month period. Besides, Shenzhen Jiayang and Shenzhen Zitaiyang did not contribute their share of registered capital to Shenzhen Oceania in exactly the same manner as stated in the relevant approval letter issued by the Foreign Trading and Investment Bureau of Shenzhen (深圳市外商投資局) dated 1 February 2000. Given that: (i) the original registered capital of Shenzhen Oceania had been fully paid up on 22 November 2000; (ii) the relevant Industry and Commerce Bureau did not impose any penalty on Shenzhen Oceania when it issued updated business licenses to Shenzhen Oceania; and (iii) Shenzhen Oceania has passed all industry and commerce annual inspections in the subsequent years, the PRC Legal Advisers are of the view that the delay in capital contribution and changing the manner of contribution does not, and will not, affect the due establishment and valid existence of Shenzhen Oceania.

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BUSINESS Loans and advances to a related party During the Track Record Period, Shenzhen Oceania made unsecured and non-interest bearing loans and advances to Shenzhen Zhuowei Jiaqi, a former shareholder of Shenzhen Oceania. The outstanding balance of the Group due from Shenzhen Zhuowei Jiaqi amounted to approximately nil, RMB5.0 million and RMB3.8 million as at 31 December 2010, 2011 and 2012, respectively. The maximum outstanding balance of the Group due from Shenzhen Zhuowei Jiaqi amounted to approximately RMB26.0 million, RMB5.0 million and RMB6.9 million for each of the years ended 31 December 2010, 2011 and 2012, respectively. As advised by the PRC Legal Advisers, the advances made by the Group did not comply with the Lending General Provisions 《 ( 貸款通則》) formulated by the People’s Bank of China in 1996, pursuant to which enterprises engaged in lending could be subject to a penalty between one to five times of the income generated from such activities. Since the loans and advances between Shenzhen Oceania and Shenzhen Zhuowei Jiaqi are non-interest bearing, no fines will be imposed on Shenzhen Oceania according to the foregoing provision. As at the Latest Practicable Date, the outstanding balance of the advances made to Shenzhen Zhuowei Jiaqi by the Group has been fully repaid and the Group has not been fined or penalised by the relevant authorities in relation to such lending activities. In view of the above, the PRC Legal Advisers are of the view that the lending activities conducted by the Group during the Track Record Period would not have any material impact on the business of the Group. Environmental impact assessment procedures According to the PRC environmental laws and regulations, Shenzhen Oceania was required to undertake the relevant environmental impact assessment procedures for the construction project when it commenced operation at the Shenzhen Production Base in 2000. As confirmed by the PRC Legal Advisers, Shenzhen Oceania has obtained the relevant approval for the environmental impact assessment in January 2000 (the “First Approval”). The First Approval expired in five years after its issuance. According to the relevant PRC environmental laws and regulations, Shenzhen Oceania was required to file an application to renew the environmental impact assessment approval immediately upon its expiry. However, due to staff ’s lack of relevant legal knowledge and experience, Shenzhen Oceania failed to complete such procedures when the First Approval expired in January 2005. Shenzhen Oceania completed the relevant environmental impact assessment procedures and obtained the required approval in May 2011 for all of its production facilities. According to the PRC environmental laws and regulations, where an enterprise commences production or use its facilities without completing the required environmental impact assessment procedures, the competent authority has the right to order the enterprise to stop the production and impose a fine of less than RMB100,000 on the enterprise. As (i) Shenzhen Oceania has obtained the necessary environmental impact assessment approvals for all of its production facilities in May 2011 such that the non-compliance has been rectified for over two years as at the Latest Practicable Date; (ii) the competent PRC environmental protection authority did not impose any fine or penalty on Shenzhen Oceania when it issued the relevant approvals to Shenzhen Oceania in 2011; and (iii) the competent environmental protection authority in the PRC issued a confirmation letter on 18 December 2012, certifying that there was no record that Shenzhen Oceania was the subject of any administrative

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BUSINESS penalty with regard to environmental protection regulations, the PRC Legal Advisers opined that the relevant governmental authorities should not impose any fine or administrative penalty on Shenzhen Oceania after May 2013 and the delay in the completion of requisite environmental impact assessment procedures by Shenzhen Oceania will not have any material impact on the operation of the Group. Non-compliance with Companies Ordinance Ms. Huang is the sole director of Super Future, a subsidiary of the Company. She has failed to cause the audited accounts of Super Future for the period ended 31 December 2011 (i.e. the first audited accounts of Super Future since its incorporation on 19 January 2011) (the “Super Future Accounts”) to be laid before Super Future at its annual general meeting by way of shareholder’s written resolutions passed on 19 January 2012. The aforesaid constituted non-compliance of section 122 of the Companies Ordinance. Super Future is an investment holding company and, save and except the opening of bank account and incurring incorporation expenses, has had since its incorporation no business activity in Hong Kong or elsewhere until September 2012 when Super Future acquired Shenzhen Oceania. Owing to the lack of familiarity with the Hong Kong legal requirements in light of Super Future’s very limited operations in Hong Kong, Ms. Huang, the then and existing sole director of Super Future, was not aware of the statutory obligations under the Companies Ordinance to present audited accounts at the company’s annual general meeting. Immediately upon becoming aware of the above requirement, Super Future engaged an auditor to prepare the Super Future Accounts. On 21 January 2013, the sole shareholder of Super Future passed a written resolution to approve the Super Future Accounts. On 22 January 2013, Ms. Huang, the sole director of Super Future, filed an application to the Court of First Instance of the High Court of Hong Kong to apply for an order of the Court to substitute the requirement of laying the audited accounts before Super Future at its annual general meeting by written resolution of the sole shareholder of Super Future passed on 21 January 2013, and extend the time for approving the Super Future Accounts. On 31 January 2013, the Court of First Instance granted an order allowing the aforementioned substitution and the time for approving the Super Future Accounts be extended to 21 January 2013. Based on the above, Loong & Yeung, the Hong Kong legal advisers to the Company, advised that the non-compliance has been duly rectified and Super Future and its sole director will not be subject to any further penalties. In order to avoid any further or other non-compliance, the Company has appointed Ms. Lam Kit Yan as its company secretary for, among other things, overseeing compliance issues of the Company and other members of the Group regarding the Hong Kong regulatory requirements. Ms. Lam holds a degree of bachelor of business administration from the Chinese University of Hong Kong and she has been a member of the Hong Kong Institute of Certified Public Accounts since February 2001. Ms. Lam, together with the Board, will oversee the compliance matters of the Company and its subsidiaries pursuant to the relevant laws and regulations. Professional accountants and legal advisers will be retained to advise the Group on compliance and accounting matters where required. Controlling Shareholders’ indemnity and impact on financial statements The Controlling Shareholders have agreed to fully indemnify the Group for any loss or penalty resulting from the above non-compliance matters. As the quantified maximum potential liabilities (including retrospective penalty, if any) of the above non-compliance incidents were not material, no provision was made in the financial statements of the Group for each of the years ended 31 December 2010, 2011 and 2012 in relation to the non-compliance matters.

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THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack.

BUSINESS Internal control measures to prevent the recurrence of non-compliance incidents To prevent the recurrence of any non-compliance incident in the future, the Group has implemented the following internal control measures: (i)

regarding the title defects of the Leased Properties and the licensing and approval procedures relevant to the PRC operations of the Group, such as the renewal of environmental impact assessment approval, the Group has prepared a licensing and approval requirement checklist which has been reviewed by the PRC Legal Advisers and will be closely monitored by designated staff of the Group and reviewed by Mr. Li Wei, the chief administrative officer of the Group, on a quarterly basis to ensure that all the existing licenses and approvals of Shenzhen Oceania are effective during its operation period and all relevant title certificates, licenses and approvals for the Huizhou Production Base have been obtained before its commencement of operation. Moreover, Mr. Li Wei will also ensure that the subject property has the relevant title documents before the Group enters into any material lease agreement in the future;

(ii)

regarding contributions of unemployment social insurance and housing provident fund, the Group has assigned Mr. Li Wei, the chief administrative officer of the Group, to assess the amounts payable by the Group and ensure punctual payments on a monthly basis;

(iii) regarding loans and advances to related parties, the Group has adopted internal guidelines on fund management, which prohibit all loans and advances of the Group that does not comply with the Lending General Provisions 《 ( 貸款通則》) formulated by the People’s Bank of China or other applicable laws and regulations; (iv) regarding the contribution of registered capital of PRC subsidiaries and the statutory obligations under the Companies Ordinance to present audited accounts at annual general meetings, the Group has assigned Mr. Li Wei, the chief administrative officer of the Group and/or Ms. Lam Kit Yan, the chief financial officer of the Group, who is also its company secretary, to ensure that the contribution of registered capital of PRC subsidiaries will be made on a timely basis and the relevant audited accounts will be presented at annual general meetings in accordance with the Companies Ordinance; (v)

the Group has appointed [●] as its [●] to advise the Company on compliance matters in relation to [●];

(vi) an audit committee has been established to review the internal control systems and procedures of the Group for compliance with the requirements of the [●] and relevant laws and regulations; (vii) the Company has engaged an external legal adviser in respect of PRC laws which will provide on-going legal advice and training to the management and staff of the Group and, in particular, provide specific advices to the management of the Group on licensing, social insurance and other PRC laws related matters as discussed in paragraphs (i), (ii) and (iv) above;

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THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack.

BUSINESS (viii) Loong & Yeung, the Hong Kong legal advisers to the Company, have provided a training session to all Directors on various issues in connection with the compliance with [●]; and (ix) if necessary, the Group would proactively seek advice from relevant advisers in a prompt manner to prevent the recurrence of any similar incidents. The Directors believe, after reviewing the above internal control measures, is satisfied, that the above measures could effectively ensure a proper internal control system and maintain good corporate governance practices to prevent future non-compliance with the relevant laws and regulations by the Group.

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