Last checked at 31 Oct 2011 11:34
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THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
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If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a licensed securities dealer, bank manager, solicitor, professional accountant or other professional adviser.
If you have sold or transferred all your shares in DATANG INTERNATIONAL POWER GENERATION CO., LTD., you should at once hand this circular to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.
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DATANG INTERNATIONAL POWER GENERATION CO., LTD. (a sino-foreign joint stock limited company incorporated in the People's Republic of China) (Stock Code: 00991) DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTIONS Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders Mizuho Securities Asia Limited
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A letter from the Board is set out on pages 5 to 14 of this circular. A letter from the Independent Board Committee is set out on pages 15 to 16 of this circular. A letter from Mizuho Securities containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 17 to 26 of this circular.
The Company will convene the EGM at the meeting room of 5/F, InterContinental Hotel, No. 11 Financial Street, Xicheng District, Beijing, the PRC on 30 November 2011 (Wednesday) at 9:00 a.m. The notice convening the EGM has been despatched to the Shareholders on 13 October 2011.
Completion and return of the proxy form shall not preclude you from attending and voting in person at the EGM or at any adjourned meetings should you so wish.
1 November 2011
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CONTENTS
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DEFINITIONS
LETTER FROM THE BOARDLETTER FROM THE INDEPENDENT BOARD COMMITTEELETTER FROM MIZUHO SECURITIESAPPENDIX - GENERAL INFORMATION
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DEFINITIONS
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In this circular, unless the context otherwise requires, the following expressions have the following meanings:"A Share(s)" the domestic ordinary share(s) of the Company with a nominal value of RMB1.00 each and are listed on the Shanghai Stock Exchange"Auditor" RSM China Certified Public Accountants Limited Company"Board" the board of Directors of the Company
"Capital Contribution Agreement" the agreement entered into between the Company, Datang
Fuel Company and Group Fuel Company on 12 October 2011 in respect of the capital contribution and share enlargement to Datang Fuel Company, the details of which are set out in this circular"CCB Diao Yu Tai Branch" the Diao Yu Tai Branch of China Construction Bank Corporation, a bank incorporated in the PRC and is principally engaged in banking, financial and other finance-related services"CDC" China Datang Corporation, a State-owned enterprise established under the laws of the PRC and is the controlling Shareholder of the Company pursuant to the Listing Rules which, together with its subsidiaries, own approximately 34.71% of the issued share capital of the Company as at the Latest Practicable Date"Company" Datang International Power Generation Co., Ltd., a sino-foreign joint stock limited company incorporated in the PRC on 13 December 1994, whose H Shares are listed on the Stock Exchange and the London Stock Exchange and whose A Shares are listed on the Shanghai Stock Exchange"connected person" has the meaning ascribed to it under the Listing Rules"connected transaction" has the meaning ascribed to it under the Listing Rules"Datang Fuel Company" Beijing Datang Fuel Company Limited, a wholly-owned subsidiary of the Company"Directors" the director(s) of the Company
"Duolun Coal Chemical Company" Datang Inner Mongolia Duolun Coal Chemical Company
Limited, which constructs and operates the Duolun Coal Chemical Project
"Duolun Coal Chemical Project" the project located in Duolun County in the Inner
Mongolia Autonomous Region which uses the brown coal from the East Unit 2 coal mine of Shengli Coal Mine as raw materials for the production of polypropylene chemical products by employing the pulverised coal gasification technology, the synthetic gas purification technology, large-scale methanol synthesis technology, the methanol-to-propylene technology and the propylene polymerisation technology"EGM" the extraordinary general meeting of the Company to be held on the meeting room of 5/F, InterContinental Hotel, No. 11 Financial Street, Xicheng District, Beijing, the PRC on 30 November 2011 (Wednesday) at 9:00 a.m. to consider and approve, among others, the Framework Entrusted Loan Agreement and the Capital Contribution Agreement
"Energy and Chemical Company" Datang Energy and Chemical Company Limited, a
wholly-owned subsidiary of the Company, principally engaged in the production and sales businesses for the products including coal-alkene, coal-natural gas and extraction of alumina from pulverized fuel ash "Entrusted Loan" the entrusted loan of a principal amount of RMB2 billion"Entrusted Loan Agreement" the entrusted loan agreement entered into on 12 October 2011 between the Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company in respect of the provision of the first tranche of the Entrusted Loan in the sum of RMB500 million by the Company, details of which were set out in the announcement dated 12 October 2011"Framework Entrusted Loan the framework entrusted loan agreement entered into Agreement" on 24 October 2011 between the Company, Energy and Chemical Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company in respect of the Framework Entrusted Loan Arrangement"Framework Entrusted Loan the arrangement where CCB Diao Yu Tai Branch is Arrangement" designated by the Company or Energy and Chemical Company to act as the lending agent to, inter alia, release the Entrusted Loan in various tranches to Duolun Coal Chemical Company"Group" the Company and its subsidiaries "Group Fuel Company" CDC Power Fuel Company Limited, a wholly-owned subsidiary of CDC"H Share(s)" the overseas listed foreign shares of the Company with a nominal value of RMB1.00 each, which are listed on the Stock Exchange and the London Stock Exchange"Hong Kong" the Hong Kong Special Administrative Region of the PRC
"Independent Board Committee" the independent board committee of the Company,
comprising five independent non-executive Directors, and each of them does not have any material interest in the Framework Entrusted Loan Agreement and the Capital Contribution Agreement"Independent Shareholders" has the meaning ascribed to it under the Listing Rules"Latest Practicable Date" 26 October 2011, being the latest practicable date prior to the printing of this circular for ascertaining certain information in this circular"Listing Rules" the Rules Governing the Listing of Securities on the Stock Exchange"Mizuho Securities" Mizuho Securities Asia Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement, and a licensed corporation for types 1 (dealing in securities), 2 (dealing in futures contracts), 4 (advising on securities), 5 (advising on futures contracts), 6 (advising on corporate finance) and 9 (asset management) regulated activities under the SFO"Operational Entrusted Loan the separate operational entrusted loan agreements to Agreements" be entered into in relation to the provision of the Entrusted Loan by various tranches pursuant to the Framework Entrusted Loan Agreement"PRC" the People's Republic of China"RMB" Renminbi, the lawful currency of the PRC"SFO" the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)"Shareholder(s)" the holder(s) of the Share(s) "Shares" the ordinary shares of the Company with a nominal value of RMB1.00 each, comprising domestic Shares and H Shares"Stock Exchange" The Stock Exchange of Hong Kong Limited"Valuation Report on Datang the valuation report on Datang Fuel Company issued by Fuel Company" Zhong Tong Hua Appraisal Co. (Zhong Tong Hua Ping Bao Zi (2011) No.360)"Zhong Tong Hua Assets Beijing Zhong Tong Hua Assets Appraisal Co., Ltd.Appraisal Co.""%" percent
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LETTER FROM THE BOARD
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DATANG INTERNATIONAL POWER GENERATION CO., LTD. (a sino-foreign joint stock limited company incorporated in the People's Republic of China) (Stock Code: 00991)Executive Directors: Office address:Mr. Cao Jingshan No.9 Guangningbo StreetMr. Zhou Gang Xicheng District Beijing, 100033 the PRCNon-executive Directors:Mr. Liu Shunda (Chairman) Principal place of business in Hong Kong:Mr. Hu Shengmu Mr. Fang Qinghai c/o Stephen Mok & Co.Mr. Liu Haixia 21/F, Gloucester TowerMs. Guan Tiangang The LandmarkMr. Su Tiegang 15 Queen's Road CentralMr. Ye Yonghui Hong KongMr. Li Gengsheng
Independent non-executive Directors:
Mr. Li YanmengMr. Zhao ZunlianMr. Li HengyuanMs. Zhao JieMr. Jiang Guohua 1 November 2011To the ShareholdersDear Sir or Madam, DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTIONSBACKGROUND
On 12 October 2011, Datang Fuel Company, a wholly-owned subsidiary of the Company, entered into the Capital Contribution Agreement with the Company and Group Fuel Company, a wholly-owned subsidiary of CDC. Pursuant to the agreement, Group Fuel Company agreed to make capital contribution in the sum of approximately RMB557 million to Datang Fuel Company. The Company will not participate in this capital contribution. Upon completion of the increase in capital contribution and share enlargement, the shareholders and the shareholding structure of Datang Fuel Company will be adjusted as follows: the Company will hold 51% and Group Fuel Company will hold 49% equity interest in Datang Fuel Company.
On 24 October 2011, the Company and Energy and Chemical Company entered into the Framework Entrusted Loan Agreement with CCB Diao Yu Tai Branch and Duolun Coal Chemical Company in relation to the provision of the Entrusted Loan by the Company or Energy and Chemical Company to Duolun Coal Chemical Company through the Framework Entrusted Loan Arrangement, in which CCB Diao Yu Tai Branch acts as the lending agent.
The purpose of this circular is: (1) to provide you with further details of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement; (2) to set out the recommendation of the Independent Board Committee in respect of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement; and (3) to set out the letter of advice from Mizuho Securities to the Independent Board Committee and the Independent Shareholders in respect of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement. A. FRAMEWORK ENTRUSTED LOAN AGREEMENT Date and Subject Matter On 24 October 2011, the Company entered into the Framework Entrusted Loan Agreement with Energy and Chemical Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company in relation to the provision of the Entrusted Loan by the Company or Energy and Chemical Company to Duolun Coal Chemical Company through the Framework Entrusted Loan Arrangement, in which CCB Diao Yu Tai Branch acts as the lending agent. Parties (1) the Company; (2) Energy and Chemical Company; (3) CCB Diao Yu Tai Branch; (4) Duolun Coal Chemical Company. Major terms of the Framework Entrusted Loan Agreement Framework Entrusted Loan Arrangement Pursuant to the Framework Entrusted Loan Agreement, CCB Diao Yu Tai Branch is designated by the Company or Energy and Chemical Company to act as the lending agent to, inter alia, release the Entrusted Loan by various tranches to Duolun Coal Chemical Company through the Framework Entrusted Loan Arrangement. The parties agreed that they shall enter into separate Operational Entrusted Loan Agreements in relation to the provision of various tranches of the Entrusted Loan through the Framework Entrusted Loan Arrangement during the term of the Framework Entrusted Loan Agreement provided that such separate Operational Entrusted Loan Agreements shall always be in line with the principles of the Framework Entrusted Loan Agreement and the terms and conditions of the Entrusted Loan Agreement. The Entrusted Loan Agreement in relation to the provision of the first tranche of the Entrusted Loan amounting to RMB500 million has been entered into between the Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company on 12 October 2011. Principal amount of the Entrusted Loan The principal amount of the Entrusted Loan is RMB2 billion. Since the Entrusted Loan Agreement in relation to the provision of the first tranche of the Entrusted Loan amounting to RMB500 million has been entered into, the remaining balance of the Entrusted Loan amounts to RMB1.5 billion. Term The term for the Framework Entrusted Loan Agreement is 36 months commencing from 12 October 2011 to 11 October 2014. The term of each of the entrusted loan to be drawn down shall not be more than three years. Interest rate At a floating interest rate, being the benchmark interest rate to be charged for the same level of loans in RMB by the People's Bank of China for the same period as announced by the People's Bank of China on the date when each tranche of borrowing is withdrawn and such interest rate is to be adjusted annually. The adjustment date is 21st December of each year. The adjusted interest rate will be the benchmark interest rate for the same level of loans in RMB for the same period announced by the People's Bank of China on the adjustment date. Such interest rate is arrived at after arm's length negotiation between the Company and Duolun Coal Chemical Company in consideration of the overall reduction in capital costs to the Group after the accounts of Duolun Coal Chemical Company (being the controlled subsidiary of the Company) are consolidated into the accounts of the Company. Repayment schedule of the principal of the Entrusted Loan One-off repayment of the principal by Duolun Coal Chemical Company upon maturity of the relevant Operational Entrusted Loan Agreements. Payment schedule of interests of the Entrusted Loan Interests shall be settled by Duolun Coal Chemical Company on a quarterly basis. The settlement date falls on the twentieth (20th) day of the last month of each quarter. Effective Date The Framework Entrusted Loan Agreement and the Entrusted Loan Agreement shall become effective when it is duly signed by the parties and is approved by the internal authorities of the parties (or the internal approval procedures of the parties are implemented by the parties), i.e. including obtaining the approval of the Framework Entrusted Loan Agreement by the Independent Shareholders of the Company at the EGM. Entrusted Loan Agreement The Entrusted Loan Agreement in relation to the provision of the first tranche of the Entrusted Loan amounting to RMB500 million has been entered into between the Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company on 12 October 2011. The term of the Entrusted Loan Agreement is 36 months commencing from 12 October 2011 to 11 October 2014. The interest rate is at a floating interest rate, being the benchmark interest rate to be charged for the same level of loans in RMB by the People's Bank of China for the same period as announced by the People's Bank of China on the date when each trench of borrowing is withdrawn and such interest rate is to be adjusted annually. The adjustment date is 21st December of each year. The adjusted interest rate will be the benchmark interest rate for the same level of loans in RMB for the same period announced by the People's Bank of China on the adjustment date. The principal shall be repaid by Duolun Coal Chemical Company upon maturity of the Entrusted Loan Agreement and the interest shall be settled by Duolun Coal Chemical Company on a quarterly basis. The settlement date falls on the twentieth (20th) day of the last month of each quarter. The entrusted loan under the Entrusted Loan Agreement will only be provided after the Framework Entrusted Loan Agreement is approved by the Independent Shareholders at the EGM. REASONS FOR AND BENEFITS OF ENTERING INTO THE FRAMEWORK ENTRUSTED LOAN AGREEMENT In order to ensure the smooth progress of the Duolun Coal Chemical Project, the Company and Energy and Chemical Company intend to provide the Entrusted Loan amounting to RMB2 billion (including the first tranche of the Entrusted Loan amounting to RMB500 million) to Duolun Coal Chemical Company according to the actual situation of the Duolun Coal Chemical Project. The Entrusted Loan is beneficial for the smooth progress of subsequent project construction of the Duolun Coal Chemical Project and is to ensure repayment of due borrowings by Duolun Coal Chemical Company. It is also considered that the overall capital costs to the Group will be reduced after the accounts of Duolun Coal Chemical Company (being the controlled subsidiary of the Company) are consolidated into the accounts of the Company. The Directors are of the view that the terms of the Framework Entrusted Loan Agreement are fair and reasonable, have been entered into after arm's length negotiation between all parties thereto and determined on normal commercial terms and is in the interests of the Company and the Shareholders as a whole. B. CAPITAL CONTRIBUTION AGREEMENT Date and Subject Matter On 12 October 2011, Datang Fuel Company, a wholly-owned subsidiary of the Company, entered into the Capital Contribution Agreement with the Company and Group Fuel Company, a wholly-owned subsidiary of CDC. Pursuant to the agreement, Group Fuel Company agreed to make capital contribution in the sum of approximately RMB557 million to Datang Fuel Company. The Company will not participate in this capital contribution. Upon completion of the increase in capital contribution and share enlargement, the shareholders and the shareholding structure of Datang Fuel Company will be adjusted as follows: the Company will hold 51% and Group Fuel Company will hold 49% equity interest in Datang Fuel Company. Parties (1) The Company (2) Datang Fuel Company (3) Group Fuel Company Major terms of the Capital Contribution Agreement (1) Pursuant to the Valuation Report on Datang Fuel Company issued by Zhong Tong Hua Assets Appraisal Co., an independent valuer of the Company, as at the valuation date on 31 August 2011, the total equity of Datang Fuel Company was valued at approximately RMB1,041 million by adopting the cost method. (2) Group Fuel Company agreed to make capital contribution in the sum of approximately RMB557 million to Datang Fuel Company and agreed to make its capital contribution by way of cash within 20 working days from the date of entering into the Capital Contribution Agreement. The Company will not participate in this capital contribution. In the event that the Capital Contribution Agreement is not approved by the Independent Shareholders at the EGM, the contribution amount already made by Group Fuel Company will be refunded by Datang Fuel Company. The capital contribution to be made by Group Fuel Company is arrived at after arms length negotiation between the parties with prime consideration on the market circumstances and the capital needs of Datang Fuel Company for its operation and development under consideration of the market conditions with tight domestic coal supply, high level of coal prices, increased difficulties for obtaining financing and the rising financing costs resulting from the recent tightened credit policy nationwide and the high gearing ratio of Datang Fuel Company. The Board also took important concerns on the growth prospects of Datang Fuel Company and the strategic value of the investment of Group Fuel Company in Datang Fuel Company (i.e., Group Fuel Company agreed to transfer its 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company upon completion of the increase in capital contribution) into its consideration in determining the capital contribution to be made by Group Fuel Company. Apart from the above main factors and considering the benefits for entering into the Capital Contribution Agreement as set out in the section headed "REASONS FOR AND BENEFITS OF ENTERING INTO THE CAPITAL CONTRIBUTION AGREEMENT", the Board has also taken into account the above-mentioned valuation of the total equity of Datang Fuel Company made on 31 August 2011, the audited undistributed profits of approximately RMB461 million attributable to the original shareholder of Datang Fuel Company as at 31 August 2011 under the audited accounts of Datang Fuel Company as audited by the Auditor and the fact that the Company still maintains effective control on Datang Fuel Company upon completion of the Capital Contribution Agreement. (3) Upon completion of the aforesaid increase in capital contribution, the shareholders and the shareholding structure of Datang Fuel Company will be adjusted as follows: the Company will hold 51% (original 100%) and Group Fuel Company will hold 49%. The Company will continue to be the controlling shareholder of Datang Fuel Company and Datang Group Fuel Company will continue to be a controlled subsidiary of the Company. (4) Upon completion of the aforesaid increase in capital contribution, Group Fuel Company agreed to transfer its 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company. The Company will make further announcement in respect of such transfer in accordance with the requirements of the Listing Rules as and when appropriate. (5) During the period between the valuation date, i.e., 31 August 2011, and the completion date of the capital contribution, any losses or gains of Datang Fuel Company will be entitled and borne by the original shareholder of Datang Fuel Company. EFFECTIVE DATE OF THE CAPITAL CONTRIBUTION AGREEMENT The Capital Contribution Agreement will become effective upon receiving the approval from the board of directors or the approval from the shareholders at the general meeting of each of the parties pursuant to their respective articles of associations and rules of procedures. INFORMATION ON PROJECT ASSETS UNDER THE CAPITAL CONTRIBUTION AGREEMENT Datang Fuel Company was incorporated in December 2006, with a registered capital of RMB515 million. Datang Fuel Company carries out business operations independently; enters into coal order contracts with mining parties on behalf of the Group; is responsible for the negotiation and signing of contracts for railway and sea transportation; provides fuel purchase and sale services to the Group; and is responsible for the sale and distribution of self-produced coal for the Company, for the purchase and distribution of coal from the market (including the overseas market) and for the fuel market-related logistical operations. Before the increase in capital contribution, the Company originally held 100% equity interests in Datang Fuel Company. As at the valuation date on 31 August 2011 under the consolidated balance sheet of Datang Fuel Company, the total assets of Datang Fuel Company amounted to approximately RMB7,578 million, the total liabilities amounted to approximately RMB6,564 million and the net assets amounted to approximately RMB1,014 million (the above-said figures have been audited). For the year ended 31 December 2010, net profits before and after taxation and extraordinary items of Datang Fuel Company amounted to approximately RMB223 million and RMB155 million, respectively (the above-said figures have been audited). For the year ended 31 December 2009, net profits before and after taxation and extraordinary items of Datang Fuel Company amounted to approximately RMB9.35 million and RMB8.12 million, respectively (the above-said figures have been audited). REASONS FOR AND BENEFITS OF ENTERING INTO THE CAPITAL CONTRIBUTION AGREEMENT Due to tight domestic coal supply and coal prices staying at high levels for a long term in recent years, there is a higher demand for cash flows and capital turnover at Datang Fuel Company. Especially recently, the operating pressure upon Datang Fuel Company has been mounting further because of increased difficulties for obtaining financing and rising financing costs as a result of the recently tightened credit policy nationwide. Through involving Group Fuel Company as a shareholder of Datang Fuel Company by way of capital contribution and share enlargement, new funds will be injected into Datang Fuel Company and the financial strains of the Company and Datang Fuel Company will be effectively alleviated. Moreover, through the effect of financing leverage, the asset-liability ratio of Datang Fuel Company will be further lowered and its financing capability will be strengthened. The equity investment by Group Fuel Company in Datang Fuel Company will help Datang Fuel Company to allocate its upstream coal resources rationally to benefit the industries where CDC's subsidiaries operate, thereby helping Datang Fuel Company to expand its market share and increase its profitability. Pursuant to the Capital Contribution Agreement, Group Fuel Company agreed to transfer its 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company at an appropriate time upon completion of the relevant approval procedures. With a designed transport capacity of 26.7 million tonnes/year, Huzhun Railway is a local railway backed by the energy base in Erdos, Inner Mongolia and is mainly used for coal transport. After obtaining equity interest in Huzhun Railway, Datang Fuel Company will then be able to participate as a shareholder in the coordination of the transport capacity of Huzhun Railway. It will be able to extend the industry chain to the coal transportation sector, expand its coal procurement to the main coal producing areas in Erdos, and ensure that the coal procured in the upstream can be transited smoothly to the downstream, thereby effectively controlling procurement and transportation costs and securing timely supply of coal to the subsidiaries of the Company. In conclusion, the equity investment by Group Fuel Company in Datang Fuel Company will strengthen Datang Fuel Company as a major market player; is conducive to further stabilising the upstream segment of the Group's coal-fire power business; secure coal supply to the Group's coal-fire power enterprises; effectively stabilise price fluctuations in the fuel procurement market; and further strengthen the Company's and Datang Fuel Company's market competitiveness and profitability, thereby ensuring better returns for the Shareholders. Upon completion of the capital contribution and share enlargement, even though the shareholding of the Company in Datang Fuel Company will be adjusted from 100% to 51%, the Company will still remain its controlling position in Datang Fuel Company and the scope of consolidation of financial reports of the Company will not be affected. The Capital Contribution Agreement is entered into on normal business terms. The Directors are of the view that the relevant terms of the Capital Contribution Agreement and the consideration are fair and reasonable and are in the interest of the Company and the Shareholders as a whole. The Company anticipates that no gain or loss will be accrued to the Company as a result of the capital contribution contemplated under the Capital Contribution Agreement. INFORMATION ON CDC CDC is a State-owned enterprise. Its main scope of business includes the development, investment, construction, operation and management of power energy, organisation of power (thermal) production and sales; as well as power technology development and consultation. INFORMATION ON GROUP FUEL COMPANY Group Fuel Company was incorporated in December 2003 and is a wholly-owned subsidiary of CDC. Its main scope of business includes the wholesaling of coal; the investment and management in energy resources and their transportation; the development, training and consulting services of new technology in power energy; and the sale and technical consulting services of exploration-manufacturing-chemical processing equipment for fuel resources. INFORMATION ON THE COMPANY The Company is principally engaged in the development and operation of power plants, the sale of electricity and thermal power, the repair and maintenance of power equipment and power related technical services, with its main service areas being in the PRC. INFORMATION ON DUOLUN COAL CHEMICAL COMPANY Duolun Coal Chemical Company was duly incorporated on 19 August 2009 with a registered capital of RMB4,050.00 million. Duolun Coal Chemical Company is principally responsible for the construction and operation of the coal-based olefin project with an annual output of 460,000 tonnes. The equity structure of Duolun Coal Chemical Company is as follows: Energy and Chemical Company, the Company's wholly-owned subsidiary, holds 60% equity interests, and CDC, the controlling Shareholder of the Company, holds 40% equity interests. As at 31 December 2010, Duolun Coal Chemical Company's total assets amounted to approximately RMB20,722.62 million; total liabilities amounted to approximately RMB16,687.76 million; and the asset-to-liability ratio was approximately 80.53% (the aforesaid figures were audited). As at 30 June 2011, Duolun Coal Chemical Company's total assets amounted to approximately RMB21,552.31 million; total liabilities amounted to approximately RMB17,506.20 million; and the asset-to-liability ratio was approximately 81.23% (the aforesaid figures have not been audited). LISTING RULES IMPLICATIONS As at the Latest Practicable Date, CDC is the controlling Shareholder of the Company, which together with its subsidiaries, hold approximately 34.71% of the issued share capital of the Company. Duolun Coal Chemical Company is owned as to 60% and 40% by Energy and Chemical Company, a wholly-owned subsidiary of the Company, and CDC, respectively. Group Fuel Company is a wholly-owned subsidiary of CDC. Duolun Coal Chemical Company and Group Fuel Company are therefore connected persons of the Company and the entering into of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement constitutes connected transactions of the Company under Chapter 14A of the Listing Rules. Since one or more of the applicable percentage ratios (as defined under Rule 14.07 of the Listing Rules) in respect of (i) the Entrusted Loan under the Framework Entrusted Loan Agreement aggregated with the entrusted loans provided by the Group to Duolun Coal Chemical Company in the preceding 12 months; and (ii) the Capital Contribution Agreement is more than 5%, the Framework Entrusted Loan Agreement and the Capital Contribution Agreement are subject to the requirements of reporting, announcement and approval by the Independent Shareholders of the Company under Chapter 14A of the Listing Rules. The Company will disclose the relevant details of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement in the next annual report and accounts of the Company in accordance with the relevant requirements as set out in Rule 14A.45 of the Listing Rules. Since one or more of the applicable percentage ratios (as defined under Rule 14.07 of the Listing Rules) in respect of the Capital Contribution Agreement is more than 5% but less than 25%, the entering into the Capital Contribution Agreement constitutes a discloseable transaction of the Company and is subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules. None of the Directors have any material interest in the Framework Entrusted Loan Agreement and the Capital Contribution Agreement. Those connected Directors, including Liu Shunda, Hu Shengmu and Fang Qinghai, who are the principal management staff of CDC, have abstained from voting at the Board meeting for approval of the relevant transaction in accordance with the requirements of the listing rules of the Shanghai Stock Exchange. EGM The Company will convene the EGM to, among other things, consider and approve the Framework Entrusted Loan Agreement and the Capital Contribution Agreement. The notice convening the EGM and the relevant notice of attendance were despatched to the Shareholders on 13 October 2011. Any Shareholder with a material interest in the transactions and its associates shall abstain from voting at the EGM. Therefore, CDC and its associates, which hold approximately 34.71% of the issued share capital of the Company as the Latest Practicable Date, shall abstain from voting at the EGM in approving the Framework Entrusted Loan Agreement and the Capital Contribution Agreement. RECOMMENDATION Your attention is drawn to the letter from the Independent Board Committee as set out on pages 15 to 16 of this circular which contains its recommendation to the Independent Shareholders on the terms of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement. Your attention is also drawn to the letter of advice received from Mizuho Securities, the independent financial adviser to the Independent Board Committee and the Independent Shareholders as set out on pages 17 to 26 of this circular which contains, among others, its advice to the Independent Board Committee and the Independent Shareholders in relation to the terms of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement, the casting of votes for or against the resolution approving the Framework Entrusted Loan Agreement and the Capital Contribution Agreement by poll at the EGM as well as the principal factors and reasons considered by it in concluding its advice. The Directors consider that the terms of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement are fair and reasonable and in the interest of the Shareholders and the Company as a whole and they recommend the Shareholders to vote in favour of the resolutions at the EGM. Yours faithfully, By Order of the Board of Datang International Power Generation Co., Ltd. Zhou Gang Secretary to the Board
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LETTER FROM THE INDEPENDENT BOARD COMMITTEE
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DATANG INTERNATIONAL POWER GENERATION CO., LTD. (a sino-foreign joint stock limited company incorporated in the People's Republic of China) (Stock Code: 00991) office address No.9 Guangningbo Street Xicheng District Beijing, 100033 The PRC 1 November 2011
To the Independent Shareholders
Dear Sir or Madam, DISCLOSEABLE TRANSACTION AND CONNECTED TRANSACTIONS
We refer to the circular issued by the Company to the shareholders dated 1 November 2011 (the "Circular") of which this letter forms part. Terms defined in the Circular shall have the same meanings in this letter unless the context otherwise requires.
Under the Listing Rules, the Framework Entrusted Loan Agreement and the Capital Contribution Agreement constitute connected transactions for the Company, and are subject to the approval of the Independent Shareholders at the EGM. The Capital Contribution Agreement also constitutes a discloseable transaction of the Company under Chapter 14 of the Listing Rules.
We have been appointed as the Independent Board Committee to consider the terms of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement and to advise the Independent Shareholders in connection with the Framework Entrusted Loan Agreement and the Capital Contribution Agreement as to whether, in our opinion, their terms are fair and reasonable and whether the Framework Entrusted Loan Agreement and the Capital Contribution Agreement are in the interests of the Company and the shareholders as a whole. Mizuho Securities has been appointed as the independent financial adviser to advise us in this respect.
We wish to draw your attention to the letter from the Board and the letter from Mizuho Securities as set out in the Circular. Having considered the principal factors and reasons considered by, and the advice of, Mizuho Securities as set out in its letter of advice, we consider that the Framework Entrusted Loan Agreement and the Capital Contribution Agreement are on normal commercial terms, and that the Framework Entrusted Loan Agreement and the Capital Contribution Agreement are in the best interests of the Company and the Shareholders as a whole.
We also consider that the terms of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement are fair and reasonable. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to approve the Framework Entrusted Loan Agreement and the Capital Contribution Agreement at the EGM.
Yours faithfully, For and on behalf of the Independent Board Committee Li Yanmeng, Zhao Zunlian, Li Hengyuan, Zhao Jie, Jiang Guohua Independent non-executive Directors Datang International Power Generation Co., Ltd.
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LETTER FROM MIZUHO SECURITIES
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The following is the text of the letter of advice from Mizuho Securities Asia Limited, the independent financial adviser to the Independent Board Committee and Independent Shareholders, in respect of the Framework Entrusted Loan Agreement and Capital Contribution Agreement, which has been prepared for the purpose of inclusion in this circular. Mizuho Securities Asia Limited 12th Floor, Chater House, 8 Connaught Road Central, Hong Kong Tel: 2685-2000 Fax: 2685-2410 1 November 2011To the Independent Board Committeeand the Independent Shareholders Datang International Power Generation Co., Ltd. Dear Sirs, DISCLOSEABLE TRANSACTIONN AND CONNECTED TRANSACTIONSINTRODUCTION
We refer to our engagement as the independent financial adviser to the Independent Board Committee and Independent Shareholders in respect of the Framework Entrusted Loan Agreement and Capital Contribution Agreement. Further details of the Framework Entrusted Loan Agreement and Capital Contribution Agreement are set out in the letter from the Board (the "Letter from the Board") in the circular of the Company to its Shareholders dated 1 November 2011 (the "Circular"), of which this letter forms part. Capitalised terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise requires.
On 12 October 2011, Datang Fuel Company, a wholly-owned subsidiary of the Company, entered into the Capital Contribution Agreement with the Company and Group Fuel Company, a wholly-owned subsidiary of CDC. Pursuant to the agreement, Group Fuel Company agreed to make capital contribution in the sum of approximately RMB557 million to Datang Fuel Company. The Company will not participate in this capital contribution. Upon completion of the increase in capital contribution and share enlargement, the shareholders and the shareholding structure of Datang Fuel Company will be adjusted as follows: the Company will hold 51% and Group Fuel Company will hold 49% equity interest in Datang Fuel Company.
On 24 October 2011, the Company and Energy and Chemical Company entered into the Framework Entrusted Loan Agreement with CCB Diao Yu Tai Branch and Duolun Coal Chemical Company in relation to the provision of the Entrusted Loan by the Company or Energy and Chemical Company to Duolun Coal Chemical Company through the Framework Entrusted Loan Arrangement, in which CCB Diao Yu Tai Branch acts as the lending agent.
As at the Latest Practicable Date, CDC is the controlling Shareholder of the Company, which together with its subsidiaries, hold approximately 34.71% of the issued share capital of the Company. Duolun Coal Chemical Company is owned as to 60% and 40% by Energy and Chemical Company, a wholly-owned subsidiary of the Company, and CDC, respectively. Duolun Coal Chemical Company and Group Fuel Company are therefore connected persons of the Company, and the Framework Entrusted Loan Agreement and Capital Contribution Agreement constitute connected transactions of the Company under Chapter 14A of the Listing Rules.
In addition, since one or more of the applicable percentage ratios (as defined under Rule 14.07 of the Listing Rules) in respect of the Capital Contribution Agreement is more than 5% but less than 25%, the entering into the Capital Contribution Agreement constitutes a discloseable transaction of the Company and is subject to the reporting and announcement requirements under Chapter 14 of the Listing Rules.
Our scope of work under this engagement is to assess whether the terms of the Framework Entrusted Loan Agreement and Capital Contribution Agreement are fair and reasonable so far as the Shareholders are concerned, and, from that perspective, whether the Framework Entrusted Loan Agreement and Capital Contribution Agreement are in the interests of the Company and the Shareholders as a whole. It is not within our scope of work to opine on any other aspects of the Framework Entrusted Loan Agreement and Capital Contribution Agreement. In addition, it is not within our terms of reference to comment on the commercial merits of the Framework Entrusted Loan Agreement and Capital Contribution Agreement which are the responsibility of the Directors.
BASIS OF OUR OPINION
In arriving at our opinion, we have relied on the information, opinions and facts supplied, and representations made to us, by the Directors, advisers and representatives of the Company (including those contained or referred to in the Circular). We have also assumed that the information and representations contained or referred to in the Circular were true and accurate in all respects at the time they were made and continue to be so at the date of dispatch of the Circular. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and senior management of the Company. We have also relied on certain information available to the public and have assumed such information to be accurate and reliable, and we have not independently verified the accuracy of such information. We have been advised by the Directors and believe that no material facts have been omitted from the Circular.
We consider that we have reviewed sufficient information to reach an informed view, to justify reliance on the accuracy of the information contained in the Circular and to provide a reasonable basis for our opinion. We have not, however, conducted an independent verification of the information nor have we conducted any form of in-depth investigation into the businesses and affairs or other prospects of the Company, Datang Fuel Company and Duolun Coal Chemical Company, and any of their respective subsidiaries or associates.
PRINCIPAL FACTORS AND REASONS CONSIDERED
In forming our opinion, we have considered the following principal factors and reasons:
A. Framework Entrusted Loan Agreement
On 24 October 2011, the Company entered into the Framework Entrusted Loan Agreement with Energy and Chemical Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company in relation to the provision of the Entrusted Loan by the Company or Energy and Chemical Company to Duolun Coal Chemical Company through the Framework Entrusted Loan Arrangement, in which CCB Diao Yu Tai Branch acts as the lending agent.
1. Information relating to Duolun Coal Chemical Company
Duolun Coal Chemical Company was duly incorporated on 19 August 2009 with a registered capital of RMB4,050.00 million. Duolun Coal Chemical Company is principally responsible for the construction and operation of the coal-based olefin project with an annual output of 460,000 tonnes. The equity structure of Duolun Coal Chemical Company is as follows: Energy and Chemical Company, the Company's wholly-owned subsidiary, holds 60% equity interests, and CDC, the controlling Shareholder of the Company, holds 40% equity interests.
As at 31 December 2010, Duolun Coal Chemical Company's total assets amounted to approximately RMB20,722.62 million; total liabilities amounted to approximately RMB16,687.76 million; and the asset-to-liability ratio was approximately 80.53% (the aforesaid figures were audited).
As at 30 June 2011, Duolun Coal Chemical Company's total assets amounted to approximately RMB21,552.31 million; total liabilities amounted to approximately RMB17,506.20 million; and the asset-to-liability ratio was approximately 81.23% (the aforesaid figures have not been audited).
2. Reasons for and benefits of entering into the Framework Entrusted Loan Agreement
As mentioned in the Letter from the Board, in order to ensure the smooth progress of the Duolun Coal Chemical Project, the Company and Energy and Chemical Company intend to provide the Entrusted Loan amounting to RMB2 billion (including the first tranche of the Entrusted Loan amounting to RMB500 million) to Duolun Coal Chemical Company according to the actual situation of the Duolun Coal Chemical Project. The Entrusted Loan is beneficial for the smooth progress of subsequent project construction of the Duolun Coal Chemical Project and is to ensure repayment of due borrowings by Duolun Coal Chemical Company. Having considered the recently tightened credit policy in China, it would be beneficial to Duolun Coal Chemical Company to secure a loan facility of RMB2 billion under the Framework Entrusted Loan Agreement.
In view of such background and the fact that it is in the interest of the Company to provide appropriate financing to Duolun Coal Chemical Company which is its indirect non-wholly owned subsidiary, we consider that the provision of the Entrusted Loan amounting to RMB2 billion under the Framework Entrusted Loan Arrangement is in the ordinary and usual course of business of the Company and is in the interest of the Company and its Shareholders as a whole.
3. Major terms of the Framework Entrusted Loan Agreement
Framework Entrusted Loan Arrangement
Pursuant to the Framework Entrusted Loan Agreement, CCB Diao Yu Tai Branch is designated by the Company or Energy and Chemical Company to act as the lending agent to, inter alia, release the Entrusted Loan by various tranches to Duolun Coal Chemical Company through the Framework Entrusted Loan Arrangement.
The parties agreed that they shall enter into separate Operational Entrusted Loan Agreements in relation to the provision of various tranches of the Entrusted Loan through the Framework Entrusted Loan Arrangement during the term of the Framework Entrusted Loan Agreement provided that such separate Operational Entrusted Loan Agreements shall always be in line with the principles of the Framework Entrusted Loan Agreement and the terms and conditions of the Entrusted Loan Agreement.
The Entrusted Loan Agreement in relation to the provision of the first tranche of the Entrusted Loan amounting to RMB500 million has been entered into between the Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company on 12 October 2011.
Principal amount of the Entrusted Loan
The principal amount of the Entrusted Loan is RMB2 billion. Since the Entrusted Loan Agreement in relation to the provision of the first tranche of the Entrusted Loan amounting to RMB500 million has been entered into, the remaining balance of the Entrusted Loan amounts to RMB1.5 billion.
Term
The term for the Framework Entrusted Loan Agreement is 36 months commencing from 12 October 2011 to 11 October 2014. The term of each of the entrusted loan to be drawn down shall not be more than three years.
We have discussed with the Company and noted that Duolun Coal Chemical Company may require funding for the subsequent project construction of the Duolun Coal Chemical Project. Having considered the recently tightened credit policy in China, it would be beneficial for Duolun Coal Chemical Company to secure a loan facility of RMB2 billion under the Framework Entrusted Loan Agreement for a relatively longer term. In this connection, we concur with the Director's view that the tenor of 36 months for the Framework Entrusted Loan Agreement is fair and reasonable.
Interest rate
At a floating interest rate, being the benchmark interest rate to be charged for the same level of loans in RMB by the People's Bank of China for the same period as announced by the People's Bank of China on the date when each tranche of borrowing is withdrawn and such interest rate is to be adjusted annually. The adjustment date is 21st December of each year. The adjusted interest rate will be the benchmark interest rate for the same level of loans in RMB for the same period announced by the People's Bank of China on the adjustment date.
Such interest rate is arrived at after arm's length negotiation between the Company and Duolun Coal Chemical Company in consideration of the overall reduction in capital costs to the Group after the accounts of Duolun Coal Chemical Company (being the controlled subsidiary of the Company) are consolidated into the accounts of the Company.
In order to assess the reasonableness of the interest rate of the Entrusted Loan, we have reviewed the interest rates of the long-term loans of the Group as at 31 December 2010 as references. According to the 2010 annual report of the Company ("2010 Annual Report"), the interest rates of the long-term bank loans of the Group as at 31 December 2010 ranged from 2.16% to 8%, and the interest rates of other long-term loans of the Group as at 31 December 2010 ranged from 1.13% to 6.32%. We note that the three-to-five-year benchmark lending rate as at 31 December 2010 as announced by the People's Bank of China was 6.22%, and such lending rate is close to the high end of the interest rates of the long-term bank loans and other long-term loans of the Group as at 31 December 2010. Having considered that the floating interest rate of the Entrusted Loan would be the same as the benchmark interest rate to be charged for the same level of loans in RMB by the People's Bank of China for the same period (i.e. three years under the Framework Entrusted Loan Agreement), and that the accounts of Duolun Coal Chemical Company are consolidated into the accounts of the Company, we are of the view that the interest rate under the Framework Entrusted Loan Agreement is reasonably determined.
Entrusted Loan Agreement
The Entrusted Loan Agreement in relation to the provision of the first tranche of the Entrusted Loan amounting to RMB500 million has been entered into between the Company, CCB Diao Yu Tai Branch and Duolun Coal Chemical Company on 12 October 2011. The term of the Entrusted Loan Agreement is 36 months commencing from 12 October 2011 to 11 October 2014. The interest rate is at a floating interest rate, being the benchmark interest rate to be charged for the same level of loans in RMB by the People's Bank of China for the same period as announced by the People's Bank of China on the date when each trench of borrowing is withdrawn and such interest rate is to be adjusted annually. The adjustment date is 21st December of each year. The adjusted interest rate will be the benchmark interest rate for the same level of loans in RMB for the same period announced by the People's Bank of China on the adjustment date. The principal shall be repaid by Duolun Coal Chemical Company upon maturity of the Entrusted Loan Agreement and the interest shall be settled by Duolun Coal Chemical Company on a quarterly basis. The settlement date falls on the twentieth (20th) day of the last month of each quarter.
The entrusted loan under the Entrusted Loan Agreement will only be provided after the Framework Entrusted Loan Agreement is approved by the Independent Shareholders at the EGM.
4. Opinion
Having considered the principal factors and reasons described above, we are of the opinion that the terms of the Framework Entrusted Loan Agreement and that of the Entrusted Loan Agreement are on normal commercial terms and are fair and reasonable as far as the interests of the Independent Shareholders are concerned, and, from this perspective, the Framework Entrusted Loan Agreement and the Entrusted Loan Agreement are in the interests of the Company and its shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to approve the Framework Entrusted Loan Agreement and the Entrusted Loan Agreement at the EGM.
B. CAPITAL CONTRIBUTION AGREEMENT
On 12 October 2011, Datang Fuel Company, a wholly-owned subsidiary of the Company, entered into the Capital Contribution Agreement with the Company and Group Fuel Company, a wholly-owned subsidiary of CDC. Pursuant to the agreement, Group Fuel Company agreed to make capital contribution in the sum of approximately RMB557 million to Datang Fuel Company. The Company will not participate in this capital contribution. Upon completion of the increase in capital contribution and share enlargement, the shareholders and the shareholding structure of Datang Fuel Company will be adjusted as follows: the Company will hold 51% and Group Fuel Company will hold 49% equity interest in Datang Fuel Company.
1. Information on project assets under the Capital Contribution Agreement
Datang Fuel Company was incorporated in December 2006, with a registered capital of RMB515 million. Datang Fuel Company carries out business operations independently; enters into coal order contracts with mining parties on behalf of the Group; is responsible for the negotiation and signing of contracts for railway and sea transportation; provides fuel purchase and sale services to the Group; and is responsible for the sale and distribution of self-produced coal for the Company, for the purchase and distribution of coal from the market (including the overseas market) and for the fuel market-related logistical operations. Before the increase in capital contribution, the Company originally held 100% equity interests in Datang Fuel Company.
As at the valuation date on 31 August 2011 under the consolidated balance sheet of Datang Fuel Company, the total assets of Datang Fuel Company amounted to approximately RMB7,578 million, the total liabilities amounted to approximately RMB6,564 million and the net assets amounted to approximately RMB1,014 million (the above-said figures have been audited). Based on the above, the gearing ratio of Datang Fuel Company (which is calculated by total liabilities divided by net asset value) as at 31 August 2011 is approximately 647.34%.
For the year ended 31 December 2010, net profits before and after taxation and extraordinary items of Datang Fuel Company amounted to approximately RMB223 million and RMB155 million, respectively (the above-said figures have been audited).
For the year ended 31 December 2009, net profits before and after taxation and extraordinary items of Datang Fuel Company amounted to approximately RMB9.35 million and RMB8.12 million, respectively (the above-said figures have been audited).
Information on CDC
CDC is a State-owned enterprise. Its main scope of business includes the development, investment, construction, operation and management of power energy, organisation of power (thermal) production and sales; as well as power technology development and consultation.
Information on Group Fuel Company
Group Fuel Company was incorporated in December 2003 and is a wholly-owned subsidiary of CDC. Its main scope of business includes the wholesaling of coal; the investment and management in energy resources and their transportation; the development, training and consulting services of new technology in power energy; and the sale and technical consulting services of exploration-manufacturing-chemical processing equipment for fuel resources.
2. Reasons for and benefits of entering into the Capital Contribution Agreement
As mentioned in the Letter from the Board, due to tight domestic coal supply and the fact that coal prices stay at high levels for a long term in recent years, there is a higher demand for cash flows and capital turnover at Datang Fuel Company. Especially recently, the operating pressure upon Datang Fuel Company has been mounting further because of increased difficulties for obtaining financing and rising financing costs as a result of the recently tightened credit policy nationwide. Through involving Group Fuel Company as a shareholder of Datang Fuel Company by way of capital contribution and share enlargement, new funds will be injected into Datang Fuel Company and the financial strains of the Company and Datang Fuel Company will be effectively alleviated. Moreover, through the effect of financing leverage, the asset-liability ratio of Datang Fuel Company will be further lowered and its financing capability will be strengthened. The equity investment by Group Fuel Company in Datang Fuel Company will help Datang Fuel Company allocate its upstream coal resources rationally to benefit the industries where CDC's subsidiaries operate, thereby helping Datang Fuel Company to expand its market share and increase its profitability.
Pursuant to the Capital Contribution Agreement, Group Fuel Company agreed to transfer its 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company at an appropriate time upon completion of the relevant approval procedures. With a designed transport capacity of 26.7 million tonnes/year, Huzhun Railway is a local railway backed by the energy base in Erdos, Inner Mongolia and is mainly used for coal transport. After obtaining equity interest in Huzhun Railway, Datang Fuel Company will then be able to participate as a shareholder in the coordination of the transport capacity of Huzhun Railway. It will be able to extend the industry chain to the coal transportation sector, expand its coal procurement to the main coal producing areas in Erdos, and ensure that the coal procured in the upstream can be transited smoothly to the downstream, thereby effectively controlling procurement and transportation costs and securing timely supply of coal to the subsidiaries of the Company. We note that the consideration, if any, for the transfer of 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company has not been determined at this stage, and if the consideration is determined and an agreement is entered into between the parties in respect of this transaction in the future, the Company shall consider the approval procedures under the Listing Rules in respect of such transactions. As a matter of principle, however, we concur with the Directors' view that effective controlling procurement and transportation costs and timely supply of coal to the subsidiaries of the Company are important to the Group so as to ensure efficient and smooth operation of the Group.
We note that the gearing ratio (which is calculated by total liabilities divided by net asset value) of Datang Fuel Company as at 31 August 2011 was approximately 647.34% which is at a relatively high level. We have discussed with the Company and noted that even though the net profits of Datang Fuel Company increased significantly for the year ended 31 December 2010, its working capital requirement has increased due to a number of factors, including (i) tight domestic coal supply and the fact that coal prices stay at high levels for a long term in recent years which may result in higher level of working capital requirement; and (ii) increased difficulties for obtaining financing and rising financing costs as a result of the recently tightened credit policy in China. Having considered the above, we concur with the Directors' view that it would be beneficial for Datang Fuel Company to increase its capital so as to increase its working capital and reduce its gearing ratio.
Furthermore, we note that the Directors consider that the equity investment by Group Fuel Company in Datang Fuel Company will strengthen Datang Fuel Company as a major market player; is conducive to further stabilising the upstream segment of the Group's coal-fire power business; secure coal supply to the Group's coal-fire power enterprises; effectively stabilise price fluctuations in the fuel procurement market; and further strengthen the Company's and Datang Fuel Company's market competitiveness and profitability, thereby ensuring better returns for the Shareholders. Having considered the tight domestic coal supply and the fact that coal prices stay at high levels for a long term in recent years, we concur with the Directors' view that bringing in Group Fuel Company as a shareholder of Datang Fuel Company might help Datang Fuel Company to source sufficient coal supply and arrange transportation in a timely and efficient manner through Group Fuel Company's business division of wholesaling of coal of Group Fuel Company and the business division of management in energy resources and related transportation; thereby helping Datang Fuel Company to increase its competitiveness and profitability through further strengthening its operation in coal procurement and related transportation, as well as controlling the procurement and transportation costs.
Having considered (i) that there is working capital need for Datang Fuel Company, (ii) the relatively high gearing ratio of Datang Fuel Company, (iii) the fact that Datang Fuel Company could capitalise on the financial resources of CDC and Group Fuel Company, as well as Group Fuel Company's business in wholesaling of coal, investment and management in energy resources and related transportation, and (iv) that the Company will still remain as the controlling shareholder of Datang Fuel Company and Datang Fuel Company will remain as a subsidiary of the Company, we concur with the Directors' review that the Capital Contribution Agreement is entered into on normal business terms, and is in the interest of the Company and the Shareholders as a whole.
3. Major terms of the Capital Contribution Agreement
(1) Pursuant to the Valuation Report on Datang Fuel Company issued by Zhong Tong Hua Assets Appraisal Co., an independent valuer of the Company, as at the valuation date on 31 August 2011, the total equity of Datang Fuel Company was valued at approximately RMB1,041 million by adopting the cost method. (2) Group Fuel Company agreed to make capital contribution in the sum of approximately RMB557 million to Datang Fuel Company and agreed to make its capital contribution by way of cash within 20 working days from the date of entering into the Capital Contribution Agreement. The Company will not participate in this capital contribution. In the event that the Capital Contribution Agreement is not approved by the Independent Shareholders at the EGM, the contribution amount already made by Group Fuel Company will be refunded by Datang Fuel Company. (3) Upon completion of the aforesaid increase in capital contribution, the shareholders and the shareholding structure of Datang Fuel Company will be adjusted as follows: the Company will hold 51% (original 100%) and Group Fuel Company will hold 49%. The Company will continue to be the controlling shareholder of Datang Fuel Company and Datang Fuel Company will continue to be a controlled subsidiary of the Company. (4) Upon completion of the aforesaid increase in capital contribution, Group Fuel Company agreed to transfer its 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company. As mentioned in the Letter from the Board, the Company will make further announcement in respect of such transfer in accordance with the requirements of the Listing Rules as and when appropriate. (5) During the period between the valuation date, i.e., 31 August 2011, and the completion date of the capital contribution, any losses or gains of Datang Fuel Company will be entitled and borne by the original shareholder of Datang Fuel Company.
We have discussed with the management of the Company regarding the basis for the determination of the amount of capital contribution by Group Fuel Company in return for an equity interest of 49% in Datang Fuel Company. We note that the capital contribution to be made by Group Fuel Company is arrived at after arms length negotiation between the parties with prime consideration on the market circumstances and the capital needs of Datang Fuel Company for its operation and development under the market conditions with tight domestic coal supply, high level of coal prices, increased difficulties for obtaining financing and the rising financing costs resulting from the recent tightened credit policy in the PRC and the relatively high gearing ratio of Datang Fuel Company. The Directors also took important concerns on the growth prospects of Datang Fuel Company and the strategic value of the investment of Group Fuel Company in Datang Fuel Company (i.e., Group Fuel Company agreed to transfer its 5% equity interests in Inner Mongolia Huzhun Railway Company Limited to Datang Fuel Company upon completion of the increase in capital contribution) into its consideration in determining the capital contribution to be made by Group Fuel Company. We further understand from the Company that the capital contribution is determined with due consideration on the capital value of Datang Fuel Company as contained in the Valuation Report, the audited undistributed profits of approximately RMB461 million attributable to the original shareholder of Datang Fuel Company as at 31 August 2011 under the audited accounts of Datang Fuel Company as audited by the Auditor, the net asset value of Datang Fuel Company as contained in its consolidated balance sheet as at 31 August 2011 as audited by the Auditor, and the fact that the Company still maintains effective control on Datang Fuel Company upon completion of the Capital Contribution Agreement.
We have reviewed the Valuation Report and noted that the valuation of Datang Fuel Company was valued at approximately RMB1,041 million as at 31 August 2011 by adopting the cost method. We have reviewed the basis and assumptions adopted in the Valuation Report and also the qualifications and experience of the valuer which undertook the valuation. We noted that the major difference between the capital value of Datang Fuel Company as contained in the Valuation Report and the net asset value of Datang Fuel Company (not on a consolidated basis) as audited by the Auditor, both as at 31 August 2011 is the increase in the value of long-term investments held by Datang Fuel Company for an amount of over RMB200 million based on the Valuation Report. We have discussed with the management of the Company about the nature of the long-term investments held by Datang Fuel Company. We have not noted any irregular or unusual items and consider that the valuation has been undertaken professionally.
Based on the shareholding of Group Fuel Company in Datang Fuel Company of 49% and the amount of capital to be contributed by Group Fuel Company of RMB557 million, the implied valuation ("Implied Valuation") of Datang Fuel Company is RMB1,136.73 million, which is approximately 9.20% higher than the equity value of Datang Fuel Company as at 31 August 2011 pursuant to the Valuation Report, which amounts to approximately RMB1,041 million. Furthermore, the Implied Valuation is approximately 12.10% higher than the consolidated net asset value of Datang Fuel Company as at 31 August 2011 as audited by the Auditor, which amounts to RMB1,014 million. We understand from the Company that the profit growth of Datang Fuel Company for year ended 31 December 2010 as compared to that of the previous year is not a key factor for the parties to determine the amount of capital contribution as the profit track record of Datang Fuel Company is still relatively short. Having considered the above factors, we are of the view that the terms of the capital contribution are fair and reasonable.
4. Opinion
Having considered the principal factors and reasons described above, we are of the opinion that the terms of the Capital Contribution Agreement are on normal commercial terms and are fair and reasonable as far as the interests of the Independent Shareholders are concerned, and, from this perspective, the Capital Contribution Agreement is in the interests of the Company and its shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution to approve the Capital Contribution Agreement at the EGM.
Yours faithfully, For and on behalf of MIZUHO SECURITIES ASIA LIMITED Kelvin S. K. Lau Managing Director Equity Capital Markets & Corporate Finance
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APPENDIX GENERAL INFORMATION
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1. RESPONSIBILITY STATEMENT
This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.
2. DISCLOSURE OF INTERESTS OF DIRECTORS, SUPERVISORS AND CHIEF EXECUTIVE OF THE COMPANY (i) As at the Latest Practicable Date, save and except Mr. Fang Qinghai, being a Director, who held 24,000 A shares of the Company, none of the Directors, supervisors and chief executive of the Company have any interests and short positions in the shares, underlying shares and/ or debentures (as the case may be) of the Company or any of its associated corporations (within the meaning of the SFO) which was required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which any such Director, chief executive or supervisor is taken or deemed to have under such provisions of the SFO) or which was required to be entered into the register required to be kept by the Company under section 352 of the SFO or which was otherwise required to be notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers in the Listing Rules. (ii) As at the Latest Practicable Date, none of the Directors, proposed Directors, supervisors or proposed supervisors of the Company has any direct or indirect interest in any assets which have since 31 December 2010 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group. 3. SERVICE AGREEMENTS
As at the Latest Practicable Date, none of the Directors, proposed directors, supervisors or proposed supervisors of the Company had any existing or proposed service contract with any member of the Group (excluding contracts expiring or determinable by the Company within one year without payment of compensation (other than statutory compensation).
4. INTEREST IN CONTRACT
As at the Latest Practicable Date, none of the Directors or supervisors of the Company was materially interested in any contract or arrangement entered into by any member of the Group, and which was significant in relation to the business of the Group.
5. MATERIAL CHANGES
The Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2010, being the date to which the latest published audited financial statements of the Group were made up.
6. COMPETING INTEREST
As at the Latest Practicable Date, none of the directors of the Company and its Subsidiaries, or their respective Associates has interests in the businesses which compete or are likely to compete, either directly or indirectly, with the businesses of the Company and its Subsidiaries.
7. EXPERT (a) The following sets out the qualifications of the expert which has given its opinion or advice as contained in this circular: Name Qualifications Mizuho Securities A licensed corporation to engage in types 1 (dealing in securities), 2 (dealing in futures contracts) 4 (advising on securities), 5 (advising on futures contracts), 6 (advising on corporate finance) and 9 (asset management) regulated activities under the SFO (b) Mizuho Securities did not have any shareholding, direct or indirect, in any members of the Group or any rights (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any members of the Group as at the Latest Practicable Date. (c) Mizuho Securities does not have any interest, direct or indirect, in any assets which have been acquired or disposed of by or leased to any members of the Group, or which are proposed to be acquired or disposed of by or leased to any members of the Group since 31 December 2010, the date to which the latest published audited financial statements of the Company were made up. (d) Mizuho Securities has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and references to its name in the form and context in which they are included.
8. LITIGATION
No member of the Company and its Subsidiaries is at present engaged in any litigation or arbitration of material importance to the Company and its subsidiaries and no litigation or claim of material importance to the Company and its subsidiaries is known to the Directors or the Company to be pending or threatened by or against any member of the Company and its subsidiaries.
9. MISCELLANEOUS
(a) The registered office of the Company is No. 482, Guanganmennei Avenue, Xuanwu District, Beijing, the PRC and the office address of the Company is No. 9 Guangningbo Street, Xicheng District, Beijing, the PRC. (b) The place of business of the Company in Hong Kong is at c/o Stephen Mok & Co., 21/F, Gloucester Tower, The Landmark, 15 Queen's Road Central, Hong Kong. (c) The Hong Kong share registrar and transfer office of the Company is Computershare Hong Kong Investor Services Limited at 46/F, Hopewell Centre, 183 Queen's Road East, Wanchai, Hong Kong. (d) The secretary to the Board of the Company is Mr. Zhou Gang. Mr. Zhou graduated from East China Institute of Water Conservancy (currently known as Hehai University), and is a senior engineer.
10. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the Framework Entrusted Loan Agreement and the Capital Contribution Agreement, the consent letter and the letter of advice from Mizuho Securities are available for inspection at the principal place of business in Hong Kong of the Company at 21/F, Gloucester Tower, The Landmark, 15 Queen's Road Central, Hong Kong during normal business hours from the date of this circular up to and including 16 November 2011.
PINX