CHINA HUISHAN DAIRY HOLDINGS COMPANY LIMITED Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.
CHINA HUISHAN DAIRY HOLDINGS COMPANY LIMITED
中 國 輝 山 乳 業 控 股 有 限 公 司
(Incorporated in the Cayman Islands with limited liability)
(Stock Code: 06863)
CONTINUING CONNECTED TRANSACTIONS
On 30 November 2015, Liaoning Huishan, a wholly-owned subsidiary of the Company, entered into the Framework Agreement with Liaoning Ainyveal. Pursuant to the Framework Agreement, Liaoning Huishan and/or its subsidiaries (as vendors) will sell Feeds to Liaoning Ainyveal and/or its subsidiaries (as purchasers). The large-scale application of the Company's two-harvest a year plantation model has led to adequate production volume of Feeds. As a result, the Group is able to sell part of Feeds to external parties in order to broaden the source of revenue and to increase cash flow and to avoid increasing storage cost and the loss of freshness and nutrients of Feeds due to long-term storage, while satisfying the daily demand of Feeds from its milkable cows. The sale of Feeds to Liaoning Ainyveal will enable the Group to secure a stable selling price and a stable demand for Feeds and also to lower transportation costs for the Group by centralising deliveries.
Liaoning Ainyveal is indirectly owned as to approximately 66.7% by Mr. Yang Kai, the controlling Shareholder and an executive director of the Company, and his spouse, through
Shenyang Huabao Investment Co., Ltd.* (瀋陽華寶投資有限公司). Pursuant to Chapter 14A
of the Listing Rules, Liaoning Ainyveal is a connected person of the Company and subsidiaries of Liaoning Ainyveal are also connected persons of the Company. Therefore, the Framework Agreement and the transactions contemplated thereunder constitute continuing connected transactions of the Company.
Each of the relevant percentage ratios under the Listing Rules for the Annual Caps under the Framework Agreement is more than 0.1% but less than 5%. As such, the Framework Agreement and its respective Annual Caps are only subject to the reporting, announcement and annual review requirements but exempt from the circular (including independent financial advice) and Shareholders' approval requirements under Chapter 14A of the Listing Rules.
On 30 November 2015, Liaoning Huishan, a wholly-owned subsidiary of the Company, entered into the Framework Agreement with Liaoning Ainyveal. Pursuant to the Framework Agreement, Liaoning Huishan and/or its subsidiaries (as vendors) will sell Feeds to Liaoning Ainyveal and/ or its subsidiaries (as purchasers).
A summary of the principal terms of the Framework Agreement is set out below:
FRAMEWORK AGREEMENT
Date: 30 November 2015
Vendors: Liaoning Huishan and/or its subsidiaries
Purchasers: Liaoning Ainyveal and/or its subsidiaries
Subject: Sale and purchase of Feeds
Term: From 30 November 2015 to 31 March 2018, both dates inclusive. Subject to compliance with the Listing Rules, both parties may, by giving the other party written notice one month before the expiry of this agreement, renew the term of the Framework Agreement for three years.
Payment method: After inspection and acceptance by the purchaser of the Feeds in each transaction, the vendor shall issue invoice to the purchaser as soon as possible (within three working days), and the purchaser shall make payment within 30 days after the receipt of such invoice.
Pricing policy: The selling price of Feeds to be sold to Liaoning Ainyveal or its subsidiaries is determined based on the prevailing market price of the same type of Feeds determined by several independent sources from time to time, whereby appropriate adjustment (if necessary) may be made according to the quality of Feeds based on the principle of aligning pricing with quality. During the term of Framework Agreement, both parties may adjust the selling price of Feeds according to the then market price. Adjusted price will be applied to all transactions conducted after the price adjustment, if any.
With reference to the current market price, the selling price of corn silage is determined at RMB540 per tonne and the selling price of highly hydrated corn on cob is determined at RMB1,815 per tonne.
ANNUAL CAPS
The expected annual aggregate transaction limits for the Group to dispose of the Feeds to the purchaser during the term of Framework Agreement are as follows:
Financial year ending Annual Cap
(Yuan)
31 March 2016
(from the date of the Framework Agreement)
RMB60,000,000
(approximately HK$72,710,000)
31 March 2017 RMB50,000,000
(approximately HK$60,590,000)
31 March 2018 RMB40,000,000
(approximately HK$48,470,000)
Each of the above Annual Caps is determined on normal commercial terms with reference to the expected annual cultivation and yield of Feeds, number of herd, expected consumption of Feeds and current market price of the relevant Feeds.
INFORMATION OF THE PARTIES
The Company is a leading and the most vertically integrated dairy company in China. Its business model covers the entire dairy value chain from growing and processing of alfalfa and supplementary feeds and the processing of concentrated feeds to dairy farming. Its brand history can be traced back to the early 1950s for dairy production and sales under the ''Huishan'' brand.
Liaoning Ainyveal and its subsidiaries are primarily engaged in, among other things, beef slaughtering, processing and selling, processing and sales of livestock skins, wholesale and retail of frozen fresh beef, sale of pre-packed food, processing and sales of frozen fresh beef, as well as feeding of cows and breeding cattle.
REASONS FOR AND BENEFITS OF THE TRANSACTION
The Company owned over 480,000 mu of land for forage grass and Feeds growing, which was so planned two years ago according to the milkable cows breeding rate and the expected consumption of Feeds. Due to the weak demand for raw milk and decelerating growth of domestic dairy market from 2014 onwards and in view of the market conditions, the Company has yet to continue purchasing milkable cows according to its original plan in the 2015 financial year and therefore the number of milkable cows and the demand for Feeds were lower than expected.
The large-scale application of the Company's two-harvest a year plantation model has led to adequate production volume of Feeds. As a result, the Group is able to sell part of the Feeds to external parties in order to broaden the source of revenue and to increase cash flow and to avoid the increasing storage cost and the loss of freshness and nutrients of Feeds due to long- term storage, while satisfying the daily demand of Feeds by its milkable cows. With the increase in number of milkable cows bred by the Group, the yield of cultivated Feeds will gradually match the demand by the dairy cows. In the future, the Group expects that it will gradually reduce the volume of Feeds sold to external parties and the demand of Feeds by its milkable cows will be at priority.
Liaoning Ainyveal has a long-term and steady demand for Feeds as it has strong capabilities in beef cattle slaughtering and processing and has a concentrate and stable demand for beef cattle. The sale of Feeds to Liaoning Ainyveal will enable the Group to secure a stable selling price and a stable demand for Feeds and also to lower transportation costs for the Group by centralising deliveries. In addition, taking into account that Liaoning Ainyveal has relatively large operating scale with strong capital base, the Company believes that Liaoning Ainyveal is a reliable long-term purchaser.
In light of the above, the Directors, including the independent non-executive Directors, are of the view that the Framework Agreement, including the Annual Caps and the expected transactions contemplated thereof, are on normal commercial terms or better terms and in the ordinary and usual course of business of the Group, and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.
LISTING RULES IMPLICATIONS
Liaoning Ainyveal is indirectly owned as to approximately 66.7% by Mr. Yang Kai, the controlling Shareholder and an executive director of the Company, and his spouse, through
Shenyang Huabao Investment Co., Ltd.* (瀋陽華寶投資有限公司). Pursuant to Chapter 14A of
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