sany heavy equipment international holdings …down.sanygroup.com/files/20170517143028695.pdf ·...

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consultyour licensed securities dealer, bank manager, solicitor, professional accountant or other professionaladviser.

If you have sold or transferred all your shares in Sany Heavy Equipment International Holdings CompanyLimited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser ortransferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer waseffected for transmission to the purchaser or transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take noresponsibility for the contents of this circular, make no representation as to its accuracy or completenessand expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon thewhole or any part of the contents of this circular.

SANY HEAVY EQUIPMENT INTERNATIONALHOLDINGS COMPANY LIMITED三一重裝國際控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 631)

CONTINUING CONNECTED TRANSACTIONSSUPPLEMENTAL MASTER PURCHASE AGREEMENT (2017-2019)

ANDSUPPLEMENTAL PRODUCTS SALES AGREEMENT (2017-2019),

AS AMENDED BY SUPPLEMENTALPRODUCTS SALES AGREEMENT (2017-2019) (REVISED)

ANDNOTICE OF EXTRAORDINARY GENERAL MEETING

Independent Financial Advisor to the Independent Board Committeeand the Independent Shareholders

Vinco Capital Limited(A wholly-owned subsidiary of Vinco Financial Group Limited)

A letter from the Board is set out on pages 6 to 24 of the circular. A letter from the Independent BoardCommittee containing its advice and recommendation to the Independent Shareholders is set out on pages25 to 26 of this circular. A letter from Vinco Capital, the Independent Financial Adviser to the IndependentBoard Committee and the Independent Shareholders, is set out on pages 27 to 48 of this circular.

A notice convening the EGM to be convened and held at Conference Room 103, Research and DevelopmentBuilding, Sany Heavy Equipment Co., Ltd., No. 25, 16 Kaifa Road, Shenyang Economic of TechnologicalDevelopment Zone, Shenyang, Liaoning Province, PRC on Friday, 19 May 2017 at 10:00 a.m. is set out onpages 54 to 55 of this circular. Whether or not you are able to attend the EGM, you are requested tocomplete the accompanying form of proxy for use at the EGM in accordance with the instructions printedthereon and return the same to the Company’s Hong Kong share registrar, Computershare Hong KongInvestor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong assoon as possible, and, in any event, not less than 48 hours before the time appointed for the holding of theEGM or any adjournment thereof. Completion and return of the form of proxy will not preclude you fromattending and voting in person at the EGM or any adjourned meeting thereof should you so wish.

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

4 May 2017

Page

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Letter from Vinco Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Appendix – General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Notice of the EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

CONTENTS

– i –

In this circular, the following expressions shall have the following meanings unless thecontext otherwise requires:

“associate(s)” has the same meaning ascribed to it under the ListingRules;

“Board” the board of Directors;

“Business Day” any day on which the Stock Exchange is open for thebusiness of dealing in securities;

“BVI” British Virgin Islands;

“Company” Sany Heavy Equipment International HoldingsCompany Limited （三一重裝國際控股有限公司）, acompany incorporated with limited liability on 23 July2009 under the laws of the Cayman Islands and theShares of which are listed on the Stock Exchange(stock code: 631);

“Companies Ordinance” the Companies Ordinance (Chapter 622 of the Laws ofHong Kong);

“connected person” has the same meaning ascribed to it under the ListingRules;

“Continuing ConnectedTransactions”

the transactions under the Supplemental MasterPurchase Agreement (2017-2019) and the SupplementalProducts Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement(2017-2019) (Revised);

“controlling shareholder” has the same meaning ascribed to it under the ListingRules;

“Director(s)” the director(s) of the Company;

DEFINITIONS

– 1 –

“EGM” an extraordinary general meeting of the Company to beconvened at Conference Room 103, Research andDevelopment Building, Sany Heavy Equipment Co.,Ltd., No. 25, 16 Kaifa Road, Shenyang Economic ofTechnological Development Zone, Shenyang, LiaoningProvince, PRC on Friday, 19 May 2017 at 10:00 a.m.for the purpose of considering and, if thought fit,approving, among other things, the SupplementalMaster Purchase Agreement (2017-2019) and theSupplemental Products Sales Agreement (2017-2019),as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised);

“Group” the Company and its subsidiaries;

“HK$” Hong Kong dollar, the lawful currency of Hong Kong;

“Hong Kong” the Hong Kong Special Administrative Region of thePRC;

“Hunan Sany Port Equipment” Hunan Sany Equipment Co., Ltd.*（湖南三一港口設備有限公司）, a company established under the laws of thePRC and a subsidiary of the Company;

“Independent Board Committee” an independent board committee of the Boardcomprising all the independent non-executive Directors,who have no material interest in the SupplementalMaster Purchase Agreement (2017-2019) and theSupplemental Products Sales Agreement (2017-2019),as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised), namely, Mr. Ng YukKeung, Mr. Poon Chiu Kwok and Mr. Hu Jiquan;

“Independent Shareholders” the Shareholders who are not interested in or involvedin the Supplemental Master Purchase Agreement (2017-2019) and the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental ProductsSales Agreement (2017-2019) (Revised);

“Independent Third Party(ies)” means an individual(s) or a company(ies) who or whichis/are independent of and not connected with (withinthe meaning of the Listing Rules) any Directors, chiefexecutive or substantial shareholders (within themeaning of the Listing Rules) of the Company, itssubsidiaries or any of their respective associates;

DEFINITIONS

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“Latest Practicable Date” 26 April 2017, being the latest practicable date prior tothe printing of this circular for the purpose ofascertaining certain information contained herein;

“Listing Rules” the Rules Governing the Listing of Securities on theStock Exchange;

“Master Purchase Agreement” means the master purchase agreement dated 31December 2014 entered into between the Company andSany Group in relation to (1) the purchase by theGroup of certain parts and components from SG Group;and (2) the purchase by the Group of certainsecond-hand manufacturing equipment, including butnot limited to machine tools, for the manufacturing ofthe Group, from SG Group;

“PRC” the People’s Republic of China;

“RMB” Renminbi, the lawful currency of the PRC;

“Sales Agreement” means the sales agreement entered into between theCompany and the Sany Group on 19 June 2015 inrespect of the sales of completed products by theCompany to Sany Group;

“Sany BVI” Sany Heavy Equipment Investments Company Limited（三一重裝投資有限公司）, a company incorporated on 23

June 2009 with limited liability under the laws of BVI;

“Sany Group” 三一集團有限公司 (Sany Group Limited*), a companywith limited liability established on 18 October 2000under the laws of the PRC;

“Sany HK” Sany Hongkong Group Limited（三一香港集團有限公司）,a company incorporated in Hong Kong on 14 October2005 with limited liability under the CompaniesOrdinance;

“SFO” the Securities and Futures Ordinance (Chapter 571 ofthe Laws of Hong Kong);

“SG Group” Sany Group and its subsidiaries;

“Share(s)” ordinary share(s) of HK$0.10 each in the share capitalof our Company;

“Shareholder(s)” the holder(s) of the Share(s) of the Company with anominal value of HK$0.10 each;

DEFINITIONS

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“Stock Exchange” The Stock Exchange of Hong Kong Limited;

“subsidiary(ies)” has the meaning ascribed to it in the CompaniesOrdinance (Chapter 622 of the Laws of Hong Kong);

“Supplemental Master PurchaseAgreement”

the supplemental agreement entered into between theCompany and Sany Group on 19 June 2015 in respectof the revised annual cap under the Master PurchaseAgreement;

“Supplemental Master PurchaseAgreement (2016)”

means the supplemental agreement entered intobetween the Company and Sany Group on 7 January2016 in relation to (1) the purchase by the Group ofcertain parts and components from SG Group and (2)the purchase by the Group of certain second-handmanufacturing equipment, including but not limited tomachines tools, for the manufacturing of the Group,from SG Group;

“Supplemental Master PurchaseAgreement (2017-2019)”

means the supplemental agreement entered intobetween the Company and Sany Group on 16 March2017 in relation to (1) the purchase by the Group ofcertain parts and components from SG Group and (2)the purchase by the Group of certain second-handmanufacturing equipment, for the manufacturing of theGroup, from SG Group;

“Supplemental Master SalesAgreement (2016)”

means the supplemental agreement entered intobetween the Company and Sany Group on 16 March2017, pursuant to which the Company (or itssubsidiaries) agreed to sell certain raw materials andsecond-hand manufacturing equipment to Sany Group(or its subsidiaries);

“Supplemental Products SalesAgreement (2016)”

means the sales agreement entered into between theCompany and Sany Group on 7 January 2016 in respectof the sales of finished products by the Company toSany Group;

“Supplemental Products SalesAgreement (2017-2019)”

means the sales agreement entered into between theCompany and Sany Group on 16 March 2017 in respectof the sales of finished products by the Company toSany Group;

DEFINITIONS

– 4 –

“Supplemental Products SalesAgreement (2017-2019)(Revised)”

means the sales agreement entered into between theCompany and Sany Group on 20 March 2017, pursuantto which the Supplemental Products Sales Agreement(2017-2019) was amended, details of which aredisclosed in announcement of the Company dated 20March 2017;

“Vinco Capital” or “IndependentFinancial Adviser”

Vinco Capital Limited, a wholly-owned subsidiary ofVinco Financial Group Limited (Stock Code: 8340), alicensed corporation to carry out Type 1 (dealing insecurities) and Type 6 (advising on corporate finance)regulated activities under the SFO and the independentfinancial adviser appointed to advise the IndependentBoard Committee and the Independent Shareholders inrelation to the Supplemental Master PurchaseAgreement (2017-2019) and the Supplemental ProductsSales Agreement (2017-2019) as amended by theSupplemental Products Sales Agreement (2017-2019)(Revised); and

“%” per cent.

* for identification only

DEFINITIONS

– 5 –



(Stock Code: 631)

Executive Directors:Mr. Qi Jian (Chairman)Mr. Wu Likun

Non-executive Directors:Mr. Tang XiuguoMr. Xiang WenboMr. Mao Zhongwu

Independent Non-executive Directors:Mr. Ng Yuk KeungMr. Poon Chiu KwokMr. Hu Jianquan

Registered Office:Cricket SquareHutchins DriveP.O. Box 2681Grand Cayman KY1-1111Cayman Islands

Place of Business in Hong Kong:Room 1001, Landmark NorthNo. 39 of Lung Sum AVSheung ShuiN.T. Hong Kong

4 May 2017

To the Shareholders

Dear Sir/Madam,




INTRODUCTION

Reference is made to the announcement of the Company dated 16 March 2017 and 20March 2017 (the “Announcements”). As set out in the Announcements, on 16 March 2017,the Company entered into (i) the Supplemental Master Purchase Agreement (2017-2019)with Sany Group to renew the transactions under the Supplemental Mater PurchaseAgreement (2016) with a fixed term for three years ending 31 December 2019; and (ii) theSupplemental Products Sales Agreement (2017-2019) with Sany Group to renew the

LETTER FROM THE BOARD

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transactions under the Supplemental Products Sales Agreement (2016) with a fixed term forthree years ending 31 December 2019, which was amended pursuant to the SupplementalProducts Sales Agreement (2017-2019) (Revised).

The purpose of this circular is to provide you with (i) further information regarding theContinuing Connected Transactions, (ii) the recommendation from the Independent BoardCommittee to the Independent Shareholders, (iii) the advice from Vinco Capital to theIndependent Board Committee and the Independent Shareholders, and (iv) the noticeconvening the EGM.

CONTINUING CONNECTED TRANSACTIONS

(A) SUPPLEMENTAL MASTER PURCHASE AGREEMENT (2017-2019)

As disclosed in the announcement of the Company dated 7 January 2016, the Companyand Sany Group entered into the Supplemental Master Purchase Agreement (2016) to renewthe transactions under the Master Purchase Agreement with a fixed term commencing from 7January 2016 to 31 December 2016 (both days inclusive) and an annual cap amount of RMB143,948,000. On 16 March 2017, the Company and Sany Group entered into theSupplemental Master Purchase Agreement (2017-2019) to renew the transactions under theSupplemental Master Purchase Agreement (2016) with a fixed term of three years ending 31December 2019.

Supplemental Master Purchase Agreement (2017-2019)

The particulars of the Supplemental Master Purchase Agreement (2017-2019) areas follows:

Parties: (1) the Company, and

(2) Sany Group

Transaction: The Company agreed to purchase or procure itssubsidiaries to purchase from Sany Group or itssubsidiaries (1) certain parts and components produced bySany Group or its subsidiaries and (2) certain second-handmanufacturing equipment for the manufacturing ofproducts of the Group.

Term: The Supplemental Master Purchase Agreement(2017-2019) has a fixed term of three years ending 31December 2019.


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Price: Parts and Components

For those tailor-made parts and components for the Groupmanufactured by Sany Group, the basis of determiningprices of the parts and components produced by SanyGroup and its subsidiaries will be determined on arm’slength negotiation and with reference to themanufacturing costs involved in the relevant parts andcomponents plus a gross margin ranging from 10% to20%, with reference to the usual gross margin of theGroup’s procurement of other similar parts andcomponents from Independent Third Parties, which shouldbe in any event no less favorable to the Group than isavailable to Independent Third Parties. Due toconfidentiality concern of certain technical information,the Group only procures tailor-made parts and componentsfrom Sany Group rather than other third-party suppliers.However, the Group is able to operate independently fromSany Group. The Group’s procurement of tailor-madeparts and components from Sany Group only accountedfor approximately 3% of the Group’s total procurementfor each of the three years ended 31 December 2016 andit is expected that such procurement will remain to thesame extent for three years ending 31 December 2019.Even under the remote possibility that Sany Group ceasesto supply tailor-made parts and complements to theGroup, the Group can still engage other third-partysuppliers to manufacture tailor-made parts andcomponents imposing confidentiality obligations on them.However, under such arrangement, the Group will need todisclose the confidential technical information to thirdparties, which is not in the best interest of the Company.

For those common parts and components which can beeasily accessible in the market, the Group will follow thepricing as determined during the Group’s commercialprocurement tender process.

Further details of the pricing policy of the SupplementalMaster Purchase Agreement (2017-2019) of the Group aredisclosed below.


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Second-hand Manufacturing Equipment

The basis of determining prices of the second-handmanufacturing equipment will be determined on arm’slength negotiation and with reference to the belowformula, which is a default formula set by the Group’sSAP financial software following the Group’s accountingpolicy for depreciation and valuation on equipment andalso applicable to the valuation of all equipments of theGroup, no matter whether they are procured fromIndependent Third Parties or Sany Group, and should bein any event no less favorable to the Group than isavailable to Independent Third Parties.

Price = Original Purchase Price – Original Purchase Price(1-3%) x (number of years since the machine tool waspurchased by Sany Group/10 years)

“3%” represents the minimum residual value of equipmentand “10 years” represents the maximum durable years ofequipment and both of them are set according to theGroup’s accounting policy.

The Company shall purchase second-hand machine toolswhich have been acquired by SG Group for no more thanthree years.

Payment: In respect of each purchase of parts and components orsecond-hand manufacturing equipment by the Group fromSany Group or its subsidiaries, Sany Group or itssubsidiaries and the Company or its subsidiaries will enterinto separate purchase agreements to specify the exacttypes and number of products to be purchased, therelevant delivery arrangements and the selling prices ofsuch products.

Payment will be settled by way of telegraphic transfer atcredit terms to be agreed by the parties in accordancewith the Group’s normal term of supplies fromIndependent Third Parties.


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Historical figures: Below set forth the historical caps and actual transactionamounts for the transactions contemplated for the threefinancial years ended 31 December 2016:

Financial yearsended Historical caps

Historicaltransaction

amounts

31 December2014

RMB927,011,000 RMB246,610,000

31 December2015

RMB339,814,121 RMB226,320,000

31 December2016

RMB143,948,000 RMB142,310,000

Below sets forth the breakdown of the historicaltransaction amount attributable to parts and componentsand second-hand manufacturing equipment for the threefinancial years ended 31 December 2016.

Financial years ended

Historytransaction

amountsattributable to

parts andcomponents

Historytransaction

amountsattributable to

second-handmanufacturing

equipment

Total historicaltransaction

amounts

31 December 2014 RMB246,610,000 nil RMB246,610,00031 December 2015 RMB200,680,000 RMB25,640,000 RMB226,320,00031 December 2016 RMB140,060,000 RMB2,250,000 RMB142,310,000

Proposed annualcap:

It is proposed that the annual cap amounts for thetransactions contemplated under the Supplemental MasterPurchase Agreement (2017-2019) for the three yearsending 31 December 2019 will be set at RMB215.954million, RMB303.504 million and RMB401.578 million,respectively.


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Below sets forth the breakdown of the proposed annualcap of parts and components and second-handmanufacturing equipment under the Supplemental MasterPurchase Agreement (2017-2019).

Financial yearsended

Capsattributable to

parts andcomponents

Capsattributable to

second hand-manufacturing

equipment

31 December2017

RMB205,157,000 RMB10,797,000

31 December2018

RMB288,329,000 RMB15,175,000

31 December2019

RMB381,499,000 RMB20,079,000


– 11 –

Basis of theproposed annualcap:

The annual caps of the Supplemental Master PurchaseAgreement (2017-2019) are calculated and determinedafter taking into account (i) the historical transactionamount, and (ii) the estimated procurement plan of theGroup for the three years ending 31 December 2019 inline with the sales forecast. Solely for determination ofthe annual caps which shall not constitute any assuranceor guarantee as to the future performance of our Group,the projected procurement of the Group would reachapproximately RMB2,181,358,000, RMB3,263,483,000and RMB4,512,117,000 for the three years ending 31December 2019 and the Group’s procurement from SanyGroup would remain approximately from 8% to 10% ofthe total procurement. The sales forecast is estimated bythe Group after taking into consideration of (i) the actualsales for the year ended 31 December 2016; (ii) thesigned sales contracts with other third parties customersand Sany Group; (iii) the intended orders placed andexpected to be placed by the Company’s existingcustomers; (iv) the number of customers’ enquiries at theGroup’s feasibility study stage before offering theGroup’s quotations; and (v) the Directors’ estimation onthe future sales volume based on their discussion andquotations with existing customers. The Directors aretherefore of the view that the business of the Group issustainable in the foreseeable future with the assumptionsthat (i) the amounts of existing recurring orders fromexisting customers and Sany Group would remain stable;and (ii) the Group would be able to secure the intendedpurchase orders from existing customers and Sany Groupthroughout the period for the three years ending 31December 2019 as stipulated in the forecast.

In addition, the Directors are of the view that they areable to (i) strengthen their market presence; (ii)continuously diversify its customer base of the Group inorder to sustainable development of its business; and (iii)secure recurring business and attract new customers.

Reason For and Benefits of the Supplemental Master Purchase Agreement(2017-2019)

The Directors consider that it is crucial for the Group to maintain the stability insupply and quality of the parts and components for its existing and future productionneeds. SG Group is familiar with the Group’s specifications, standards andrequirements and the Group is confident on the quality of the parts and componentssupplied by SG Group. In view of the Group’s past purchasing experience with certainmembers of SG Group, the Directors are of the view that SG Group can effectively


– 12 –

fulfill the Group’s high requirement in supply stability as well as product quality. Inaddition, SG Group has provided the Group with more favourable terms such asflexible and timely delivery schedule of the parts and components purchased by theGroup.

The Directors (including the independent non-executive Directors, whose viewsare set out on pages 25 to 26 of this circular) are of the view that the SupplementalMaster Purchase Agreement (2017-2019) has been entered into in the ordinary andusual course of business on normal commercial terms and the terms thereof are fair andreasonable and in the interest of the Company and the Shareholders as a whole.

As no Director has a material interest in the Supplemental Master PurchaseAgreement (2017-2019), none of the Directors has abstained from voting on therelevant board resolution approving the Supplemental Master Purchase Agreement(2017-2019).

Listing Rules Implications

As at the Latest Practicable Date, Mr. Liang Wengen is a controlling shareholderof the Company by virtue of his indirect 56.42% interests in Sany Hong Kong, whichin turn holds 2,134,580,188 ordinary shares and 479,781,034 Convertible PreferenceShares, which, in aggregate, represents 85.97% of the issued share capital of theCompany.

Sany Group, being held by Mr. Liang Wengen as to 56.42%, is therefore anassociate of Mr. Liang Wengen under Rule 14A.12(1)(c) and hence a connected personof the Company under the Listing Rules.

Accordingly, the transactions under the Supplemental Master Purchase Agreement(2017-2019) constitute continuing connected transactions of the Company under theListing Rules.

As one or more of the applicable percentage ratios (other than the profits ratio) ascalculated in accordance with Chapter 14 of the Listing Rules for the proposed capamount in respect of the Supplemental Master Purchase Agreement (2017-2019) areexpected to exceed 5%, the Supplemental Master Purchase Agreement (2017-2019)would be subject to the reporting, announcement and Independent Shareholders’approval requirements under Chapter 14A of the Listing Rules.


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(B) SUPPLEMENTAL PRODUCTS SALES AGREEMENT (2017-2019), ASAMENDED BY SUPPLEMENTAL PRODUCTS SALES AGREEMENT (2017-2019)(REVISED)

Background

As disclosed in the announcement of the Company dated 7 January 2016, theCompany and Sany Group entered into the Supplemental Products Sales Agreement(2016) to renew the transactions under the Sales Agreement with a fixed termcommencing from 7 January 2016 to 31 December 2016 (both days inclusive) and anannual cap of RMB1,180.395 million. On 16 March 2017, the Company and SanyGroup entered into the Supplemental Products Sales Agreement (2017-2019) to renewthe transactions under the Supplemental Products Sales Agreement (2016) with a fixedterm of three years ending 31 December 2019. On 20 March 2017, the Company andSany Group entered into the Supplemental Products Sales Agreement (2017-2019)(Revised), pursuant to which the annual caps under the Supplemental Products SalesAgreement (2017-2019) were amended.

Supplemental Products Sales Agreement (2017-2019), as amended by theSupplemental Products Sales Agreement (2017-2019) (Revised)

Particulars of the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised) are setforth as follows.

Parties: (1) the Company, and

(2) Sany Group

Subject Matter: Pursuant to the Supplemental Products Sales Agreement(2017-2019), the Company agreed to sell or procure itssubsidiaries to sell its finished products to Sany Group orits subsidiaries for sales to the end customers.

Sales Contracts: In respect of each sale of products by the Company (or itssubsidiaries) to Sany Group (or its subsidiaries), theCompany (or its subsidiaries) and Sany Group (or itssubsidiaries) shall enter into separate agreements tospecify the exact types and number of products beingsold, the relevant delivery arrangements and, whereapplicable, the selling prices of such products.


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Pricing: Since the Supplemental Products Sales Agreement(2017-2019) serves the purpose for the Company to takeadvantage of Sany Group’s sales network to sell itsfinished products to end-customers, and in other words,the Group just sells the finished products toend-customers through Sany Group’s sales network, underan arrangement which Sany Group does not actuallyreceive any mark-up against the prices under theSupplemental Products Sales Agreement (2017-2019), theprices of the finished products under the SupplementalProducts Sales Agreement (2017-2019) are determinedaccording to the costs involved (raw material costs, labourcosts and manufacturing expenses) plus the margin,ranging from 37% to 41% for domestic sales and from25% to 29% for overseas sales (considering the overseassales involve higher transportation costs). Such margin isthe same as that the Group charges on Independent ThirdParty customers when the Group sells the finishedproducts to them directly. In any event, the prices atwhich the Company (or its subsidiaries) sells itsproduct(s) to Sany Group (or its subsidiaries) shall not beless than the price at which the Company (or itssubsidiaries) sells the same product(s) to otherdistributors.

Further details of the pricing policy of the SupplementalProducts Sales Agreement (2017-2019) of the Group aredisclosed below.

Payment terms: The price of any products to be sold under theSupplemental Products Sales Agreement (2017-2019) shallbe paid by telegraphic transfer within three months afterdelivery and the relevant products having passed theinspection by Sany Group.

Historical figures: Since Hunan Sany Port Equipment was acquired by theGroup on 31 December 2014, as set out in theannouncement of the Company dated 7 November 2014,the connected transactions between Sany Group and theGroup in terms of sales of finished products from theGroup to Sany Group only commenced since then. Thus,there were no historical connected transactions amountsthereunder for the three years ended 31 December 2014.


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Below set forth the historical caps and actual transactionamounts for the transactions contemplated for the twofinancial years ended 31 December 2016:

Financial yearsended Historical caps

Historicaltransaction

amounts

31 December2015

RMB1,475,831,828 RMB1,128,600,000

31 December2016

RMB1,180,395,000 RMB740,157,000

Proposed annualcap:

According to the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental ProductsSales Agreement (2017-2019) (Revised), both partiesagreed that the aggregate amount of sales of productsfrom the Group to Sany Group under the SupplementalProducts Sales Agreement (2017-2019) (Revised), asaggregate with those under the Supplemental Master SalesAgreement (2017-2019) shall not exceed 50% of theGroup’s then total revenue in each of the financial yearduring the term of the Supplemental Products SalesAgreement (2017-2019) (Revised) (“Revenue Limit”),and the proposed annual caps under the SupplementalProducts Sales Agreement (2017-2019) for the three yearsending 31 December 2019 shall be RMB993 million,RMB995 million, and RMB996 million.

To elaborate, the annual caps under the SupplementalProducts Sales Agreement (2017-2019) cover two businesssegments of the Group: port machinery and miningmachinery business. The Group would cease tomanufacture natural gas machinery from 2017.


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Port machinery

The annual caps of the sales arrangement between the Groupand Sany Group in terms of port machinery for the threefinancial years ending 31 December 2019 will beapproximately RMB929.512 million, RMB931.075 millionand RMB931.256 million determined based on (i) thehistorical transaction amount in terms of port machinery ofapproximately RMB683.184 million for the year ended 31December 2016; and (ii) the Group’s anticipatedmanufacturing capacity of the port machinery and sales planto end-customers from 2017 to 2019. It is expected that salesto end customers in the port machinery business would reachapproximately RMB1,450 million, RMB2,140 million andRMB2,560 million for each of the three years ending 31December 2019. The Group’s existing manufacturingcapacity of port machinery was approximately RMB1,100million for the year ended 31 December 2016. The Companyplans to invest around RMB200 million to the portmachinery business and the Group’s anticipatedmanufacturing capacity of port machinery for the three yearsending 31 December 2019 would reach approximatelyRMB1,500 million, RMB2,100 million and RMB3,300million respectively. Moreover, according to the Group’sannual results for the year ended 31 December 2016published on 22 March 2017, the actual sales in the portmachinery business for the year ended 31 December 2016were RMB1,114 million. The Board believes that theanticipated manufacturing capacity on port machinery is fairand reasonable given that (i) the Group’s actual sales of portmachinery business already exceeded the Group’s existingmanufacturing capacity for the year ended 31 December2016 (the production cycle of port machinery generally lastsfor from one year to one year and half so that the Group’ssales might be accrued and exceed its manufacturingcapacity); (ii) the Group’s projected sales to end-customersin the port machinery business for the three years ending 31December 2019 are in line with the Group’s anticipatedmanufacturing capacity on port machinery; (iii) the potentialpositive outlook on the port machinery industry as the PRCgovernment’s preferential policy intends to implementreform and innovation in all areas of shipping developmentas discussed above; and (iv) with the experience of theDirectors and management team, they are of the view thatthey are able to (a) strengthen their market presence; (b)continuously diversify its customer base of the Group inorder to sustainable development of its business; and (c)secure recurring business and attract new customers.


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Mining Machinery Business

The annual caps of the sales arrangement between theGroup and Sany Group in terms of mining machinerymachinery will be approximately RMB63.488 million,RMB63.925 million and RMB64.744 million, determinedbased on (i) the historical transaction amount in terms ofmining machinery business of approximately RMB54.181million for the year ended 31 December 2016; and (ii) theGroup’s sales plan of mining machinery from 2017 to2019, representing less than 5% of the total sales ofmining machinery for the relevant year. It is expected thatsales in the mining machinery business would reachapproximately RMB1,280 million, RMB1,790 million andRMB2,560 million for each of the three years ending 31December 2019, which is closely related to the increasingmarket price of coal. The demand of mining machinerywill increase when the coal mining activities arise drivenby increasing demand and price of coal.

Basis of theproposed annualcap:

The proposed annual caps are calculated and determinedafter taking into account (i) the Group’s anticipatedmanufacturing capacity for the years ending 31 December2019, (ii) the Group’s expected plans to take advantage ofSany Group’s strong domestic and overseas sales networkand sales experiences to enhance the Group’s productsales; (iii) the PRC government’s preferential policywhich expects to stimulate the development of theGroup’s port machinery and mining machinery business;and (iv) the Revenue Limit, as disclosed above.

Reasons for and Benefits of the Supplemental Products Sales Agreement(2017-2019), as Amended by the Supplemental Products Sales Agreement(2017-2019) (Revised)

By selling the Group’s products to the Sany Group, which will then be sold toend-customers, the Group can take advantage of Sany Group’s strong domestic andoverseas sales network and sales experiences to enhance the Group’s sales.

The Directors (including the independent non-executive Directors, whose viewsare set out on pages 25 to 26 of this circular) are of the view that the SupplementalProducts Sales Agreement (2017-2019), as amended by the Supplemental ProductsSales Agreement (2017-2019) (Revised) has been entered into in the ordinary and usualcourse of business on normal commercial terms and the terms thereof are fair andreasonable and in the interest of the Company and the Shareholders as a whole.


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As no Director has a material interest in the Supplemental Products SalesAgreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised), none of the Directors has abstained from voting on the relevantboard resolution approving the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised).

The Company is of the view that the transaction amount under the SupplementalProducts Sales Agreement (2017-2019) does not constitute reliance on Sany Group onthe following basis:

(1) the sales of the products actually happen between the Group and thethird-party end-customers and Sany Group is just a sales platform and doesnot contribute to or derive any economic interests therein; and

(2) the majority of the sales under the Supplemental Products Sales Agreement(2017-2019) will be derived from port machinery business. Port machinerybusiness was previously operated by Sany Group and Sany Group had set upreputation recognition for the port machinery. The Group acquired suchbusiness from Sany Group in early 2015. In order not to interrupt the normaloperation of port machinery business, the Group continued to take advantageof the sales platform of Sany Group for the port machinery sales as atransitional arrangement. The Group has established self-owned salesnetwork for the domestic sales of port machinery and will graduallystrengthen its overseas sales network for port machinery. It is expected thatproportion of the sales of port machinery through Sany Group’s salesplatform against the total sales of the port machinery will gradually decreasein the future.

Internal Control in relation to the Revenue Limit

In order to monitor the Revenue Limit to safeguard the interests of theIndependent Shareholders, the Company will adopt the following measures:

(1) The Group’s accounting department will monitor the aggregate amount ofsales under the Supplemental Products Sales Agreement (2017-2019)(Revised) from time to time to ensure that the Revenue Limit and therelevant annual cap for the corresponding financial year is not exceeded. TheGroup’s accounting department will prepare a quarterly report on the statusof the aggregate amount of sales which will be submitted to Board forreview.

(2) In the event the aggregate amount of sales under the Supplemental ProductsSales Agreement (2017-2019) (Revised) reaches 45% of the then totalrevenue of the Group at any time in the relevant financial year, theaccounting department will inform the management, which will then notifythe business department that no sales can be made from the Group to the


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Sany Group and the Group will sell to the Independent Third Partycustomers for the remaining period of that financial year until the Group hasgenerated greater overall revenue.

Listing Rules Implications

As at the Latest Practicable Date, Mr. Liang Wengen is a controlling shareholderof the Company by virtue of his indirect 56.42% interests in Sany Hong Kong, whichin turn holds 2,134,580,188 ordinary shares and 479,781,034 Convertible PreferenceShares, which, in aggregate, represents 85.97% of the issued share capital of theCompany.

Sany Group, being held by Mr. Liang Wengen as to 56.42%, is therefore anassociate of Mr. Liang Wengen under Rule 14A. 12(1)(c) and hence a connected personof the Company under the Listing Rules.

Accordingly, the transactions under the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised) constitute continuing connected transactions of the Company under theListing Rules.

As one or more of the applicable percentage ratios (other than the profits ratio) ascalculated in accordance with Chapter 14 of the Listing Rules for the proposed capamount in respect of the Supplemental Products Sales Agreement (2017-2019), asamended by the Products Sales Agreement (2017-2019) (Revised), are expected toexceed 5%, the Supplemental Products Sales Agreement (2017-2019), as amended bythe Products Sales Agreement (2017-2019) (Revised), would be subject to thereporting, announcement and Independent Shareholders’ approval requirements underChapter 14A of the Listing Rules.

PRICING POLICY

Supplemental Master Purchase Agreement (2017-2019)

The basis of determining the prices of the products to be purchased by the Group underthe Supplemental Master Purchase Agreement (2017-2019) will be in accordance with theprevailing market prices of similar products and based on the following principles:

(i) by reference to the prevailing market prices of the same or substantially similarproducts, taking into account the price, quality and other conditions (such aspayment terms, credit terms and after-sales services) offered by suppliers via theGroup’s commercial procurement tender process. The commercial procurementpolicy of the Group indicates that where comparable products are available,commercial procurements must go through a tender process. To elaborate, thereare generally two stages during the tender process. During the first stage, theGroup circulates the technology specifications to the potential candidates and theninvites three to five tenderers, including Sany Group if it manufactures therelevant products that the Group requires, with due qualification, technology, and


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manufacturing scale to attend the tender to provide the bidding documentsincluding the prices to the Group’s commercial tender committee（商業評標委員會）and the technical tender committee（技術評標委員會）for review. The commercialtender committee mainly consists of five professional bidding engineers and thetechnical tender committee mainly consists of five research and developmentengineers and production engineers who work for the relevant business segmentfor the products. During the second stage, the Company negotiates with each ofthem in detail on the prices based on the review results obtained during the firststage and each of them then provides the second round of quotation based on suchnegotiation. The tenderer offering the most favorable prices wins the tender. TheGroup would choose third party supplier if the price offered by them is morefavorable. However, based on the Group’s experience and historical transactionrecords, during the tender process where Sany Group is involved, Sany Grouptends to offer the most favorable price rather than other Independent Third Partiesbecause Sany Group is most familiar with the Group’s specifications, standards,and requirements; and

(ii) where the prevailing market price above is unattainable, such as for productstailor-made for the Group manufactured by Sany Group due to confidentiality ofcertain technical information, which the Group cannot seek other market pricesfor reference, the basis of determining prices of the parts and componentsproduced by Sany Group and its subsidiaries will be determined on arm’s lengthnegotiation and with reference to the manufacturing costs involved in the relevantpart and component plus a gross margin ranging from 10% to 20%, with referenceto the usual gross margin of the Group’s procurement of other similar productsfrom Independent Third Parties, which should be in any event no less favorable tothe Group than is available to Independent Third Parties, as disclosed in theparagraph headed “Supplemental Master Purchase Agreement (2017-2019) –Price” above. In order to determine the gross margin of the products, includingparts and components, the Company maintains a cost engineer in charge of theGroup’s procurement costs (the Group requires that such cost engineer should atleast have three years of working experience in procurement department in theGroup) to (1) collect the quotes obtained from the commercial tender procurementtender process of the Company and (2) conduct industry researches and pricequotations on a monthly basis to obtain the latest industry standard, market priceand breakdowns of costs of different kinds of products including but not limitedto the similar parts and components in order to get a full picture of the grossmargin changed on relevant products in the market as the Group’s database. Whenthe Company determines the prices of the parts and components to be producedby Sany Group and its subsidiaries, the cost engineer would provide advice on thesuggested gross margin with reference to that of the similar parts and components.Based on the current database of the Group, the gross profit margin charged onthe similar parts and components with similar costs structure ranges from 10% –20%. To ensure that the actual prices for the procurement of the Group under theSupplemental Master Purchase Agreement (2017-2019) are on normal commercialterms and on terms no less favourable to the Group than that available toIndependent Third Party, the internal audit department of the Group will conductregular checks to review and assess, against manufacturing costs involved and


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Sany Group’s sales to other Independent Third Parties in the market, whether theproducts have been procured on normal commercial terms. If they are of the viewthat the prices of the procurement are less favourable to the Group than thatavailable to Independent Third Parties, they will report the issue to the executiveDirectors and the chief executive officer in order to re-consider and re-negotiatethe prices of the procurement.

Products purchased under the Supplemental Master Purchase Agreement (2017-2019)must be on normal commercial terms and on terms comparable to those offered byIndependent Third Parties.

Supplemental Products Sales Agreement (2017-2019)

In determining the sales price under the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised), the sales and marketing department（營銷部）of the Group will take into accountthe cost of the products, the appropriate margin and prices offered to Independent ThirdParties to ensure that the prices and terms are no more favorable to those offered toIndependent Third Parties. Different margins will be applied to different products based onthe level of standardization and the core technologies used. To elaborate, the current grossmargin ranges from 37% to 41% for domestic sales and from 25% to 29% for overseas sales(considering the overseas sales involve higher transportation costs). Such gross margin is thesame as that the Group charges on Independent Third Party customers when the Group sellsthe finished products to them directly. Orders or particular contracts for the products to besupplied by the Group under the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised) need to bereviewed and approved by the senior management of the Group. In addition, the internalaudit department of the Group will conduct regular checks to review whether the prices ofthe sales by Sany Group to end-customers are consistent with those under the SupplementalProducts Sales Agreement (2017-2019), as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised). If not, they will report the issue to the executiveDirectors and chief executive officer in order to consider whether to continue thetransactions under the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised).

General

To ensure that the actual prices for the transactions under the Supplemental MasterPurchase Agreement (2017-2019) and the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised) are on normal commercial terms and on terms no less favorable to the Companythan to Independent Third Parties, the internal audit department of the Group will conductregular checks to review and assess whether the products have been procured or sold inaccordance with the terms of the relevant agreement and on normal commercial terms. Inaddition, the Company has engaged external auditors to conduct annual review of thetransactions under the Supplemental Master Purchase Agreement (2017-2019) and theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised).


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Given that sales to SG Group under the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised) have to strictly adhere to the pricing policy of the Group, and that procurementsmade by the Group under the Supplemental Master Purchase Agreement (2017-2019) arebased on prevailing market prices after comparison with offers from Independent ThirdParties, the Directors (including the independent non-executive Directors) are of the viewthat the procedures adopted by the Group as described above could ensure that theContinuing Connected Transactions will be conducted on normal commercial terms or better,and are fair and reasonable and in the interests of the Shareholders as a whole.

Information about the Company

The Company is an investment holding company and its subsidiaries are principallyengaged in the design, manufacture and sales of roadheaders, combined coal mining units,mining transportation vehicles, port machinery and marine heavy equipment products.

Information about Sany Group

Sany Group is principally engaged in the manufacture and distribution of engineeringmachineries for construction purposes, machinery leasing, manufacture of automobile andeducational businesses.

EXTRAORDINARY GENERAL MEETING

The EGM will be convened and held at Conference Room 103, Research andDevelopment Building, Sany Heavy Equipment Co., Ltd., No. 25, 16 Kaifa Road, ShenyangEconomic of Technological Development Zone, Shenyang, Liaoning Province, PRC onFriday, 19 May 2017 at 10:00 a.m. at which ordinary resolutions will be proposed for theShareholders to consider, and, if thought fit, to approve the Continuing ConnectedTransactions.

Any connected persons or Shareholders with a material interest in the ContinuingConnected Transactions or the transactions as contemplated thereunder or their respectiveassociates shall abstain from voting at the EGM. The relevant interested Shareholder,namely, Sany HK, and its associates will abstain from voting on the resolution approving theContinuing Connected Transactions at the EGM. Other than Sany HK or its associates, as atthe Latest Practicable Date, and to the best knowledge, belief and information of theDirectors having made all reasonable enquiries, no other Shareholder is required under theListing Rules to abstain from voting at the EGM.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not youare able to attend the EGM, you are requested to complete and return the enclosed form ofproxy in accordance with the instructions printed thereon, and deposit it with the Company’sbranch share registrar in Hong Kong, Computershare Hong Kong Investor Services Limited,at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong, as soon aspossible and in any event not less than 48 hours before the time appointed for the EGM orany adjournment thereof. Completion and return of the form of proxy shall not preclude youfrom attending and voting in person at the EGM or any adjournment of it if you so wish.


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Pursuant to Rule 13.39(4) of the Listing Rules, any vote of the Shareholders at ageneral meeting of the Company must be taken by way of poll. Accordingly, the resolutionsto be considered and, if thought fit, approved at the EGM will be voted on by way of pollby the Independent Shareholders. After conclusion of the EGM, the poll resultsannouncement will be published on the respective websites of the Stock Exchange and theCompany.

RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept fullresponsibility, includes particulars given in compliance with the Listing Rules for thepurpose of giving information with regard to the Company. The Directors, having made allreasonable enquiries, confirm that to the best of their knowledge and belief the informationcontained in this circular is accurate and complete in all material respects and notmisleading or deceptive, and there are no other matters the omission of which would makeany statement herein or this circular misleading.

RECOMMENDATION

The Continuing Connected Transactions

Your attention is drawn to the letter from the Independent Board Committee set out onpages 25 to 26 of this circular and the letter of Vinco Capital to the Independent BoardCommittee and the Independent Shareholders set out on pages 27 to 48 of this circular inconnection with the Continuing Connected Transactions and the transactions contemplatedthereunder and the principal factors and reasons considered by Vinco Capital in arriving atsuch advice.

The Independent Board Committee, having taken into account the advice of VincoCapital Limited, considers that the Continuing Connected Transactions were entered into inthe ordinary and usual course of business on normal commercial terms and the terms thereofare fair and reasonable and in the interest of the Company and the Shareholders as a whole.

Accordingly, the Independent Board Committee recommends the IndependentShareholders to vote in favour of the resolutions to approve the Continuing ConnectedTransactions and the transactions contemplated thereunder at the EGM as set out in thenotice of the EGM.

Your attention is drawn to additional information set out in the appendices to thiscircular.

By Order of the BoardSany Heavy Equipment International Holdings Company Limited

Qi JianChairman


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(Stock Code: 631)

4 May 2017

To the Independent Shareholders




Dear Sir or Madam,

We refer to the circular of the Company dated 4 May 2017 (the “Circular”) to theShareholders, of which this letter forms part. Unless the context otherwise requires, termsdefined in the Circular shall have the same meanings when used in this letter.

We have been appointed as members of the Independent Board Committee to adviseyou as to whether, in our opinion, the terms of the Supplemental Master PurchaseAgreement (2017-2019) and the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised) are fair andreasonable so far as the Independent Shareholders are concerned. Vinco Capital has beenappointed by the Company as the Independent Financial Adviser to advise the IndependentBoard Committee and the Independent Shareholders in respect of the Supplemental MasterPurchase Agreement (2017-2019) and the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised).

Your attention is drawn to the “Letter from the Board” set out on pages 6 to 24 of theCircular which contains, inter alia, information about the terms of the Supplemental MasterPurchase Agreement (2017-2019) and the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised), and the “Letter from Vinco Capital” set out on pages 27 to 48 of the Circularwhich contains its advice in respect of the Supplemental Master Purchase Agreement(2017-2019) and the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised) together with theprincipal factors taken into consideration in arriving at such.

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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Having considered the terms of the Supplemental Master Purchase Agreement(2017-2019) and the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised) and having taken intoaccount the factors and reasons considered by and the advice of Vinco Capital as stated intheir letter dated 4 May 2017, we consider that (i) the transactions under the SupplementalMaster Purchase Agreement (2017-2019) and the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised) are in the ordinary and usual course of the Company’s business; (ii) the enteringinto of the Supplemental Master Purchase Agreement (2017-2019) and the SupplementalProducts Sales Agreement (2017-2019), as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised) is on normal commercial terms; (iii) the terms of theSupplemental Master Purchase Agreement (2017-2019) and the Supplemental Products SalesAgreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised) are fair and reasonable so far as the interests of the IndependentShareholders are concerned; and (iv) the entering into of the Supplemental Master PurchaseAgreement (2017-2019) and the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised) are in theinterests of the Company and the Independent Shareholders as a whole. Accordingly, werecommend the Independent Shareholders to vote in favour of the relevant resolutions to beproposed at the EGM to ratify and approve and the Supplemental Master PurchaseAgreement (2017-2019) and the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised).

Yours faithfully,For and on behalf of the Independent Board Committee

Mr. Ng Yuk KeungIndependent Non-executive

Director

Mr. Poon Chiu KwokIndependent Non-executive

Director

Mr. Hu JiquanIndependent Non-executive

Director

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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The following is the text of a letter of advice from Vinco Capital to the IndependentBoard Committee and the Independent Shareholders in connection with the terms of theSupplemental Master Purchase Agreement (2017-2019) and the Supplemental Products SalesAgreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised), which has been prepared for the purpose of incorporation in thiscircular:

Vinco Capital LimitedUnits 4909-4910, 49/F., The Center

99 Queen’s Road Central, Hong Kong

4 May 2017

To the Independent Board Committee and the Independent Shareholders ofSany Heavy Equipment International Holdings Company Limited

Dear Sirs,




A. INTRODUCTION

We refer to our engagement as the independent financial adviser to advise theIndependent Board Committee and the Independent Shareholders in respect of the terms ofthe Supplemental Master Purchase Agreement (2017-2019) and the Supplemental ProductsSales Agreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised), details of which are set out in the “Letter from the Board” of thecircular issued by the Company dated 4 May 2017 (the “Circular”) to the Shareholders, ofwhich this letter forms part. Capitalised terms used in this letter shall have the samemeanings ascribed to them in the Circular unless the context otherwise requires.

Reference is made to the announcements of the Company dated 16 March 2017 and 20March 2017 (the “Announcements”). As set out in the Announcements, on 16 March 2017,the Company entered into (i) the Supplemental Master Purchase Agreement (2017-2019)with Sany Group to renew the transactions under the Supplemental Mater PurchaseAgreement (2016) with a fixed term for the three years ending 31 December 2019; and (ii)the Supplemental Products Sales Agreement (2017-2019) with Sany Group to renew thetransactions under the Supplemental Products Sales Agreement (2016) with a fixed term forthe three years ending 31 December 2019 which was amended pursuant to the SupplementalProducts Sales Agreement (2017-2019) (Revised).

LETTER FROM VINCO CAPITAL

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As at the Latest Practicable Date, Mr. Liang Wengen is a controlling shareholder of theCompany by virtue of his indirect 56.42% interests in Sany Hong Kong, which in turn holds2,134,580,188 ordinary shares and 479,781,034 Convertible Preference Shares, which, inaggregate, represents 85.97% of the issued share capital of the Company. Sany Group, beingheld by Mr. Liang Wengen as to 56.42%, is therefore an associate of Mr. Liang Wengenunder Rule 14A.12(1)(c) and hence a connected person of the Company under the ListingRules.

As one or more of the applicable percentage ratios (other than the profits ratio) ascalculated in accordance with Chapter 14 of the Listing Rules for the proposed cap amountsin respect of each of (1) the Supplemental Master Purchase Agreement (2017-2019), and (2)the Supplemental Products Sales Agreement (2017-2019) are expected to exceed 5%, each of(1) the Supplemental Master Purchase Agreement (2017-2019) and (2) the SupplementalProducts Sales Agreement (2017-2019), as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised) would be subject to the reporting, announcement andIndependent Shareholders’ approval requirements under Chapter 14A of the Listing Rules.

Any connected persons or Shareholders with a material interest in the ContinuingConnected Transactions or the transactions as contemplated thereunder or their respectiveassociates shall abstain from voting at the EGM. The relevant interested Shareholder,namely, Sany HK, and its associates will abstain from voting on the resolution approving theContinuing Connected Transactions at the EGM. Other than Sany HK or its associates, as atthe Latest Practicable Date, and to the best knowledge, belief and information of theDirectors having made all reasonable enquiries, no other Shareholder is required under theListing Rules to abstain from voting at the EGM.

The independent Board Committee, comprising all the independent non-executiveDirectors, namely Mr. Ng Yuk Keung, Mr. Poon Chiu Kwok and Mr. Hu Jiquan, has beenestablished by the Board to consider and advise the Independent Shareholders in respect ofthe fairness and reasonableness of the terms of the Supplemental Master Purchase Agreement(2017-2019) and the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised). We have been appointedand have been approved by the Independent Board Committee, as the Independent FinancialAdviser to advise the Independent Board Committee and the Independent Shareholders inthis regard.

As the Latest Practicable Date, we are not connected with the Directors, chiefexecutive and substantial shareholders of the Company or any of their respective subsidiariesor their respective associates and, as the Latest Practicable Date, did not have anyshareholding, directly or indirectly, in any of their respective subsidiaries or their respectiveassociates and, as at the Latest Practicable Date, did not have any shareholding, directly orindirectly, in any member of the Group or any right, whether legally enforceable or not, tosubscribe for or to nominate persons to subscribe for securities in any member of the Group.We were not aware of any relationships or interests between us and the Company or anyother parities that could be reasonably be regarded as hindrance to our independence asdefined under Rule 13.84 of the Listing Rule to act as the Independent Financial Adviser tothe Independent Board Committee and the Independent Shareholders in respect of theSupplemental Master Purchase Agreement (2017-2019) and the Supplemental Products Sales


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Agreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised). During the past two years, we have been appointed as theindependent financial adviser to the Company regarding to various continuing connectedtransactions of which the circulars dated (i) 20 July 2015; (ii) 3 February 2016; and (iii) 6May 2016. Apart from normal professional fees payable to us in connection with thisappointment as the Independent Financial Adviser to the Independent Board Committee andthe Independent Shareholders, no arrangement exists whereby we will receive any fee fromthe Company, its subsidiaries, its associates or their respective substantial shareholders orassociates. Also, we are not aware of the existence of or change in any circumstances thatwould affect our independence. Accordingly, we consider that we are eligible to giveindependent advice on the Continuing Connected Transactions.

B. BASIS OF OUR OPINION AND RECOMMENDATION

In forming our opinion and recommendation, we have relied on the information, factsand representations contained or referred to in the Circular and the information, facts andrepresentations provided by, and the opinions expressed by the Directors, management of theCompany and its subsidiaries. We have assumed that all information, facts, opinions andrepresentations made or referred to in the Circular were true, accurate and complete at thetime they were made and continued to be true, accurate and complete as at the date of theCircular and that all expectations and intentions of the Directors, management of theCompany and its subsidiaries, will be met or carried out as the case may be. We have noreason to doubt the truth, accuracy and completeness of the information, facts, opinions andrepresentations provided to us by the Directors, management of the Company and itssubsidiaries. The Directors have confirmed to us that no material facts have been omittedfrom the information supplied and opinions expressed. We have no reason to doubt that anyrelevant material facts have been withheld or omitted from the information provided andreferred to in the Circular or the reasonableness of the opinions and representations providedto us by the Directors, management of the Company and its subsidiaries.

The Directors jointly and severally accept full responsibility for the accuracy of theinformation contained in the Circular and confirm, having made all reasonable enquiries,that to the best of their knowledge, opinions expressed in the Circular have been arrived atafter due and careful consideration and there are no other facts not contained in the Circular,the omission of which would make any statement in the Circular misleading. We have alsosought and received confirmation from the Directors that no material facts have beenomitted from the information supplied and opinions expressed.

We have relied on such information and opinions and have not, however, conductedany independent verification of the information provided, nor have we carried out anyindependent investigation into the business, financial conditions and affairs of the Group orits future prospect.

We consider that we have reviewed all currently available information and documents(particularly, (i) the annual report of the Company for the year ended 31 December 2015(the “2015 Annual Report”); (ii) the interim report of the Company for the six monthsended 30 June 2016 (the “2016 Interim Report”); (iii) the purchases summary prepared bythe Group for the year ended 31 December 2016 and quotations from the independent third


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parties suppliers for similar products; (iv) internal documents in relation to the Group’sprocurement tender process; (v) estimated procurement plan under the Supplemental MasterPurchase Agreement (2017-2019); (vi) sales forecast under the Supplemental Products SalesAgreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised); (vii) sample sales contracts and invoices from the sales summary forthe similar products by the Group sold to the Group and other independent customers and(viii) internal control policies regarding the compliance of Continuing ConnectedTransactions) which are made available to us and enable us to reach an informed view andto justify our reliance on the information provided so as to provide a reasonable basis forour advice. Based on the foregoing, we confirm that we have taken all reasonable steps,which are applicable to the Supplemental Master Purchase Agreement (2017-2019) and theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised), as referred to in Rule 13.80 of the ListingRules (including the notes thereto).

This letter is issued for the information for the Independent Board Committee and theIndependent Shareholders solely in connection with their consideration of the SupplementalMaster Purchase Agreement (2017-2019) and the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised), except for its inclusion in the Circular, is not to be quoted or referred to, inwhole or in part, nor shall this letter be used for any other purposes, without our priorwritten consent.

C. PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committeeand Independent Shareholders in relation to the Supplemental Master Purchase Agreement(2017-2019) and the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised), we have considered theprincipal factors and reasons set out below.

I. Background of the Continuing Connected Transactions

Information of the Company

The Company is an investment holding company and its subsidiaries areprincipally engaged in the design, manufacture and sales of roadheaders, combined coalmining units, mining transportation vehicles, port machinery and marine heavyequipment products.

Information of Sany Group

Sany Group is principally engaged in the manufacture and distribution ofengineering machineries for construction purposes, machinery leasing, manufacture ofautomobile and educational businesses.


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As at the Latest Practicable Date, Mr. Liang Wengen is a controlling shareholderof the Company by virtue of his direct 56.42% interest in Sany HK, which in turnholds 2,134,580,188 ordinary shares and 479,781,034 Convertible Preference Shares,which, in aggregate, representing 85.97% of the issued share capital of the Company.Sany Group, being held by Mr. Liang Wengen as to 56.42%, is therefore an associateof Mr. Liang Wengen under Rule 14A.12(1)(c) and hence a connected person of theCompany under the Listing Rules.

As stated in the “Letter from the Board”, the Directors consider that it is crucialfor the Group to maintain the stability in supply and quality of the parts andcomponents for its existing and future production needs. SG Group is familiar with theGroup’s specifications, standards and requirements and the Group is confident on thequality of the parts and components supplied by SG Group. In view of the Group’spast purchasing experience with certain members of SG Group, the Directors are of theview that SG Group can effectively fulfil the Group’s high requirement in supplystability as well as product quality. In addition, SG Group has provided the Group withmore favourable terms such as flexible and timely delivery schedule of the parts andcomponents purchased by the Group.

Moreover, as confirmed by the Company, the Group has been sourcing relevantparts and components from the SG Group since 2007 and hence as stated from “theLetter from the Board”, the Directors are of the view that the Supplemental MasterPurchase Agreement (2017-2019) has been entered into in the ordinary and usualcourse of business on normal commercial terms. The Group strives to enhance its portmachine business and keep enhancing the market competitiveness of coal machinery byexploring the marine engineering market. In light of this, the Group enters theSupplemental Master Purchase Agreement (2017-2019).

On the other hand, as stated in the “Letter from the Board”, entering theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised), by selling the Group’s products toSany Group, which will then be sold to end-customers, the Group can take advantageof Sany Group’s strong domestic and overseas sales network and sales experiences toenhance the Group’s sales by selling the Group’s products to Sany Group.

Moreover, according to the 2016 Interim Report, although the Group’s revenuedecreased during the six months ended 30 June 2016, the Group expected that thecontinuing increase of the sales proportion of the marine engineering business, togetherwith the gradual recovery of the coal machinery market and the continuousimplementation of the international strategy of the Company will bring promisingprospects to the business of the Group. Therefore, we consider that by entering into theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised) with Sany Group, the Group is ableto take advantage of Sany Group’s strong domestic and overseas sales network andsales experiences to enhance the Group’s sales to various markets.


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Having considered (i) the Group has been sourcing relevant parts and componentsfrom the SG Group since 2007 and Sany Group is able to fulfil the Group’srequirements in the past transactions; (ii) the purchase of certain parts and componentsproduced by Sany Group or its subsidiaries and certain second-hand manufacturingequipment are used to produce its equipment products which is in ordinary and usualcourse of business of the Group; (iii) the sales of products to Sany Group under theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised) is likely provide a stable source ofrevenue to the Group; and (iv) the sales network and reputation of the Group can beimproved by leveraging Sany Group’s strong domestic and overseas sales network andsales experiences, we consider that entering into the Supplemental Master PurchaseAgreement (2017-2019) and the Supplemental Products Sales Agreement (2017-2019),as amended by the Supplemental Products Sales Agreement (2017-2019) (Revised) arein the ordinary and usual course of business of the Group, fair and reasonable and inthe interests of the Company and the Shareholders as a whole.

II. Supplemental Master Purchase Agreement (2017-2019)

a. Review of historical annual cap

As disclosed in the announcement of the Company dated 7 January 2016, theCompany and Sany Group entered into the Supplemental Master Purchase Agreement(2016) to renew the transactions under the Master Purchase Agreement with a fixedterm commencing from 7 January 2016 to 31 December 2016 (both days inclusive) andan annual cap amount of RMB143,948,000. On 16 March 2017, the Company and SanyGroup entered into the Supplemental Master Purchase Agreement (2017-2019) to renewthe transactions under the Supplemental Master Purchase Agreement (2016) with afixed term of three years ending December 2019. It is proposed that the annual capamounts for the transactions contemplated under the Supplemental Master PurchaseAgreement (2017-2019) for the three years ending 31 December 2019 to be set atRMB215,954,000, RMB303,504,000 and RMB401,578,000 respectively.

b. Principal terms of the Supplemental Master Purchase Agreement (2017-2019)

Pursuant to the principal terms of the Supplemental Master Purchase Agreement(2017-2019). The Company agreed to purchase or procure its subsidiaries to purchasefrom Sany Group or its subsidiaries (1) certain parts and components produced by SanyGroup or its subsidiaries and (2) certain second-hand manufacturing equipment, for themanufacturing of products of the Group.

The basis of determining the prices of the products to be purchased by the Groupunder the Supplemental Master Purchase Agreement (2017-2019) will be in accordancewith the prevailing market prices of similar products and based on the followingprinciples:

(i) by reference to the prevailing market prices of the same or substantiallysimilar products, taking into account the price, quality and other conditions(such as payment terms, credit terms and after-sales services) offered by


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suppliers via the Group’s commercial procurement tender process. Thecommercial procurement policy of the Group dictates that where comparableproducts are available, commercial procurements must go through a tenderprocess. To elaborate, there are generally two stages for the tender process.Under the first stage, the Group circulates the technology specifications tothe potential candidates and then invites 3-5 tenderers, including Sany Groupif they manufacture the relevant products that the Group requires, amongthese candidates, with due qualification, technology, and manufacturing scaleto attend the tender, during which those tenderers provide the biddingdocuments including the prices, to the Group’s commercial tender committee（商務評標委員會） and the technical tender committee（技術評標委員會） for

review. The commercial tender committee mainly consists of fiveprofessional bidding engineers and the technical tender committee mainlyconsists of five research and development engineers and productionengineers who work for the relevant business segment for the products.Under the second stage, the Company negotiates with each of them in detailson the prices and the conditions and each of them then provides the secondround of quotation based on such negotiation. The tenderer offering the mostfavorable price and conditions wins the tender. The Company would choosethird party supplier if the price and other conditions offered by them aremore favorable. However, based on the Group’s experience and historicaltransactions records, during the tender process where Sany Group isinvolved, Sany Group tends to offer the most favorable price and conditionsrather than other Independent Third Parties because Sany Group is familiarwith the Group’s specifications, standards, and requirements; and

(ii) where the prevailing market price in (i) above is unattainable, such as forproducts tailor-made parts and components for the Group manufactured bySany Group, the basis of determining prices of the parts and componentsproduced by Sany Group and its subsidiaries will be determined on arm’slength negotiation and with reference to the manufacturing costs involved inthe relevant parts and components plus a gross margin ranging from 10% to20%, with reference to the usual gross margin of the Group’s procurement ofother similar products from Independent Third Parties, which should be inany event no less favorable to the Group than is available to IndependentThird Parties.

In order to determine the gross margin of the products, including parts andcomponents, the Company maintains a cost engineer in charge of the Group’sprocurement costs (the Group requires that such cost engineer should at least havethree years of working experience in procurement department in the Group) to (1)collect the quotes obtained from the commercial tender procurement tenderprocess of the Company and (2) conduct industry researches and price quotationson a monthly basis to obtain the latest industry standard, market price andbreakdowns of costs of different kinds of products including but not limited to thesimilar parts and components in order to get a full picture of the gross marginchanged on relevant products in the market as the Group’s database. When theCompany determines the prices of the parts and components to be produced by


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Sany Group and its subsidiaries, the cost engineer would provide advice on thesuggested gross margin with reference to that of the similar parts and components.Based on the current database of the Group, the gross profit margin charged onthe similar parts and components with similar costs structure ranges from10%-20%.

As stated from the “Letter from the Board”, for those tailor-made parts andcomponents for the Group manufactured by Sany Group, the basis of determiningprices of the parts and components produced by Sany Group and its subsidiarieswill be determined on arm’s length negotiation and with reference to themanufacturing costs involved in the relevant parts and components plus a grossmargin ranging from 10% to 20%, with reference to the usual gross margin of theGroup’s procurement of other similar parts and components from IndependentThird Parties, which should be in any event no less favorable to the Group than isavailable to Independent Third Parties. Due to confidentiality concern of certaintechnical information, the Group only procures tailor-made parts and componentsfrom Sany Group rather than other third-party suppliers. However, the Group isable to operate independently from Sany Group. The Group’s procurement oftailor-made parts and components from Sany Group only accounted forapproximately 3% of the Group’s total procurement for the year ended 31December 2016 and it is expected that such procurement will remain to the sameextent for the three years ending 31 December 2019. Even under the remotepossibility that Sany Group ceases to supply tailor-made parts and complements tothe Group, the Group can still engage other third party suppliers to manufacturetailor-made parts and components imposing confidentiality obligations on them.

Having considered that (i) the manufacturing costs plus a gross margin rangingfrom 10% to 20% will only be used where the prevailing market price is unattainable;(ii) our discussion with the Directors and based on our review on the internalpurchasing policy, we noted that the Company will follow the policy and apply thegross margin ranging from 10% to 20% is with reference to the usual gross margin ofthe Group’s procurement of other similar parts and components from Independent ThirdParties; and (iii) the Company will follow the purchasing policy on the tailor madeproducts that applies to both connected parties or Independent Third Parties, wetherefore consider that the terms of Supplemental Master Purchase Agreement(2017-2019) is fair and reasonable and in normal commercial terms.

Furthermore, as the tailor made parts and components for the Group manufacturedby Sany Group are (i) due to confidentiality concern of certain technical information, itwould be in the best interest of the Company to purchase those products from SanyGroup in order to protect Company’s best interest from disclosing the confidentialtechnical information to third parties; (ii) accounted for merely 3% for the year ended31 December 2016 and expected to be the same extent for the three years ending 31December 2019; and (iii) the Group can switch to other third party suppliers tomanufacture tailor-made parts and components, we therefore consider that the relianceby the Group on Sany Group for the tailor made parts and components is small as theGroup is capable to operate independently.


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On the other hand, for those common parts and components which can be easilyaccessible in the market, the Group will follow the pricing as determined during theGroup’s commercial procurement tender process. In order to assess the fairness andreasonableness of the commercial procurement tender process, we have reviewed (i) theinternal document provided by the Company in relation to the Group’s commercialprocurement tender process; and (ii) the sample walkthrough documents in relation tothe tender process of a purchasing project. We noted that the document has set upprocedures and flows for the commercial procurement and the procedures and flowsapply to all divisions and subsidiaries of the Group and the walkthrough documentsstrictly follow the commercial procurement tender process as stipulated in the internaldocuments which we consider that the tender process is fairly applied to all suppliers.

In the tender sample walkthrough documents, there are a range of 3-5 tenderersparticipating the tender in the first stage. Further, the second stage of the tenderprocess allows the Group to further assess and negotiates with the tenderers in order toobtain the more favourable price. Having considered that the tender procurementsystem (i) require to involve a minimum of 3 tenderers and subject to the review oftwo committees before going to the second stage for negotiations; (ii) allow the Groupto further assess and negotiates on the terms of the tenders; and (iii) provide a methodfor the Company to select the most favorable terms and prices from the tenderers, wetherefore consider that using the prevailing market price via the Group’s commercialprocurement tender process to determine the pricing of the products under theSupplemental Master Purchase Agreement (2017-2019) is fair and reasonable and onnormal commercial terms.

For second-hand manufacturing equipment, the prices of the second-handmanufacturing equipment will be determined on arm’s length negotiation and withreference to the below formula, which is a default formula set by the Group’s SAPfinancial software following the Group’s accounting policy for depreciation andvaluation on equipment and also applicable to the valuation of all equipment of theGroup, no matter whether they are procured from Independent Third Parties or SanyGroup, and should be in any event no less favorable to the Group than is available toIndependent Third Parties.

Price = Original Purchase Price − Original Purchase Price (1-3%) ×(number of years since the machine tool was purchased by Sany Group/10 years)

“3%” represents the minimum residual value of equipment and “10 years”represents the maximum durable years of equipment and both of them are set accordingto the Group’s accounting policy.

Since the pricing formula (i) will be used for the second-hand manufacturingequipment and the price will be adjusted accordingly to the number of years since themachine tools which have been acquired by SG Group, and in any event should be noless favourable to the Group than is available to Independent Third Parties; and (ii) is adefault formula set by the system adopted by the Group for depreciation which appliesto all equipment of the Group for depreciation treatments, we therefore consider thatthe formula is fair and reasonable.


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In respect of each purchase of parts and components or second-handmanufacturing equipment by the Group from Sany Group or its subsidiaries, SanyGroup or its subsidiaries and the Company or its subsidiaries will enter into separatepurchase agreements to specify the exact types and number of products beingpurchased, the relevant delivery arrangements and the selling prices of such products.Payment will be settled by way of telegraphic transfer at credit terms to be agreed bythe parties in accordance with the Group’s normal term of supplies from IndependentThird Parties.

We have reviewed the purchases summary prepared by the Group for the yearended 31 December 2016. In the summary, we noted that there are quotations from theIndependent Third Parties suppliers for similar products and the terms of suchpurchases from Sany Group are comparable to and no less favourable to the Groupthan those offered by other independent suppliers to the Group. When there are nothird party suppliers comparable available, the basis of determining prices of the partsand components produced by Sany Group and its subsidiaries will be determined onarm’s length negotiation and with reference to the manufacturing costs involved in therelevant parts and components plus a gross margin ranging from 10% to 20%, and withreference to the usual gross margin of the Group’s procurement of other similarproducts from Independent Third Parties, which should be in any event no lessfavorable to the Group than is available to Independent Third Parties.

According to the “Letter from the Board”, when there are no third party supplierscomparable available, the Company will follow the pricing policy and apply the grossprofit margin ranging from 10%-20%.

In this regard, we have obtained and reviewed the gross profit margin calculationsummary for certain parts and components prepared by the Company in which showing(i) over 70 items of parts and components purchased by the Company from Sany Groupfor the year ended 31 December 2016; (ii) the different kinds of machinery model; (iii)product name; and (iv) the calculation method of the Company which is themanufacturing costs involved in the relevant parts and components plus a gross profitmargin. In the gross profit margin summary, we noted that all items showed in thesummary are in the gross profit margin ranging from 10% to 20%. Moreover, asconfirmed by the Company, the manufacturing costs plus a gross margin ranging from10% to 20% is an industry norm to calculate the purchase price.

Having considered when there are no third party suppliers comparable available,(i) the Company will follow the pricing policy and apply the gross profit marginranging from 10%-20%; and (ii) the manufacturing costs plus a gross margin rangingfrom 10% to 20% is an industry norm to calculate the purchase price. We therefore areof the view that using the manufacturing costs plus a gross margin ranging from 10%to 20% to determine the pricing of the products when there are no third party supplierscomparable available under the Supplemental Master Purchase Agreement (2017-2019)is fair and reasonable and on normal commercial terms.


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Based on the above, having considered (i) prevailing market price of the same orsubstantially similar products offered by Independent Third Parties via the Group’scommercial procurement tender process; and (ii) in the absence of a prevailing marketprice then reference is made to arm’s length negotiation or, in the absence of theforegoing, gross margin comparable to those offered by Independent Third Parties. Inall cases, product purchased under the Supplemental Master Purchase Agreement(2017-2019) must be on normal commercial terms and on terms comparable to thoseoffered by the Independent Third Parties. We therefore consider the pricing mechanismunder the Supplemental Master Purchase Agreement (2017-2019) is fair and reasonable.

c. The proposed annual caps

Set out below are (i) the historical amounts of the actual transactions for the threeyears ended 31 December 2016; (ii) the breakdown of the historical transactionamounts attributable to parts and components and second-hand manufacturingequipment for the three financial years ended 31 December 2016; (iii) the proposedannual caps for the three years ending 31 December 2019 under the SupplementalMaster Purchase Agreement (2017-2019); and (iv) the breakdown of the proposedannual caps of parts and components and second-hand manufacturing equipment underthe Supplemental Master Purchase Agreement (2017-2019):

For the yearended

31 December2014

For the yearended

31 December2015

For the yearended

31 December2016

RMB’000 RMB’000 RMB’000

Historical annual caps 927,011 339,814 143,948Actual transaction amounts 246,610 226,320 142,310Utilization rate 26.6% 66.6% 98.9%

For the yearended 31

December2014


December2015


December2016

RMB’000 RMB’000 RMB’000

History transaction amountsattributable to parts andcomponents 246,610 200,680 140,060

History transaction amountsattributable to second-handmanufacturing equipment nil 25,640 2,250

Total 246,610 226,320 142,310


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For the yearending

31 December2017

For the yearending

31 December2018

For the yearending

31 December2019

RMB’000 RMB’000 RMB’000

Proposed annual caps 215,954 303,504 401,578

For the yearending 31December

2017


2018


2019RMB’000 RMB’000 RMB’000

Proposed annual capsattributable to parts andcomponents 205,157 288,329 381,499

Proposed annual capsattributable to second-handmanufacturing equipment 10,797 15,175 20,079

Total 215,954 303,504 401,578

With reference to the “Letter from the Board”, the proposed annual caps under theSupplemental Master Purchase Agreement (2017-2019) for the three years ending 31December 2019 are determined based with reference to (i) the historical transactionamount, and (ii) the estimated procurement plan of the Group for the three yearsending 31 December 2019 in line with the sales forecast.

In order to assess whether the proposed annual caps under the SupplementalMaster Purchase Agreement (2017-2019) are fair and reasonable, we have discussedwith the management of the Company in relation to the basis and assumptions on theproposed annual caps under the Supplemental Master Purchases Agreement (2017-2019)and we have considered the following aspects when assessing the fairness andreasonable of the basis of the proposed annual caps.

As depicted from the table above, we noted that the relevant utilization rate of theprevious annual cap for the year ended 31 December 2016 is approximately 98.9%,which had been nearly fully utilized. We also noted that the proposed annual caps forthe three years ending 31 December 2019 represent an increase of approximately50.0%, 40.5% and 32.3% respectively, as compared to the historical annual cap for theyear ended 31 December 2016.

As stated from the “Letter from the Board”, solely for determination of theproposed annual caps which shall not constitute any assurance or guarantee as to thefuture performance of our Group, the projected procurement plan of the Group would


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reach approximately RMB2,181,358,000, RMB3,263,483,000 and RMB4,512,117,000for the three years ending 31 December 2019 and the Group’s procurement from SanyGroup would remain approximately 8% to 10% of the total procurement annually.

For our due diligence purpose, we have obtained and reviewed (i) a detailedestimated procurement plan breakdown for the three years ending 31 December 2019prepared by the Company in which showing the different kinds of machinery model,product name, number of various machineries that were estimated to be purchased fromSany Group; and (ii) the historical transaction amount for the year ended 31 December2016. The management of the Group also provided a sales forecast on business of theGroup which represented sales increase of approximately 48%, 44% and 30%respectively for the three years ending 31 December 2019.

Upon our enquiry with the management team of the Company, we have obtainedand review the sales forecast for the three years ending 31 December 2019. We notedthat the sales forecast is estimated by the Group after taking into consideration of (i)the actual sales for the year ended 31 December 2016; (ii) the signed sales contractswith other third parties customers and Sany Group; (iii) the intended orders placed andexpected to be placed by the Company’s existing customers; (iv) the number ofcustomers’ enquiries at the Group’s feasibility study stage before offering the Group’squotations; and (v) the Directors’ estimation on the future sales volume based on theirdiscussion and quotations with existing customers. The Directors are therefore of theview that the business of the Group is sustainable in the foreseeable future with theassumptions that (i) the amounts of existing recurring orders from existing customersand Sany Group would remain stable; and (ii) the Group would be able to secure theintended purchase orders from existing customers and Sany Group thoughtout theperiod for the three years ending 31 December 2019 as stipulated in the forecast.

Furthermore, with the experience of the Directors and management team, they areof the view that they are able to (i) strengthen their market presence; (ii) continuouslydiversify its customer base of the Group in order to sustainable development of itsbusiness; and (iii) secure recurring business and attract new customers. We alsounderstand that the Company is expecting more projects to be constructed in itsoversea market, including but not limited to various (i) bridge projects; (ii) automaticmining projects; and (iii) excavation projects.

Based on such scenario, we consider that the proposed annual caps under theSupplemental Master Purchase Agreement (2017-2019) are justifiable to fully cater theGroup’s estimated business growth and would allow the Group the flexibility topurchase the parts and components from Sany Group in order to maintain businessactivities to its customer for the three years ending 31 December 2019 with referenceto (i) the discussion to the management team of the Group; and (ii) review the basisand assumption in the sales forecast. Considering (i) the increasing rate of the proposedannual caps are in line with the Group’s estimated sale growth plan for the three yearsending 31 December 2019; and (ii) more port and mining machinery projects will beconstructed overseas in the future, we are of the view that the basis of increasing theproposed annual caps for the three years ended 31 December 2019 are justifiable tocater for the Group’s estimated business growth.


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Moreover, as stated in the “Letter from the Board”, the Company is principallyengaged in the design, manufacture and sales of roadheaders, combined coal miningunits, mining transportation vehicles, and port machinery products. We have conductedour own research related to the business prospect of coal mining equipment and portmachinery in order to access the fairness and reasonableness of the proposed annualcaps under the Supplemental Master Purchase Agreement (2017-2019).

For the coal mining equipment segment, according to the report “MiningEquipment – A Global Market Overview” published by Research And Markets, amarket research house, dated 16 January 2017, worldwide market for mining equipmentis estimated at US$100 billion in 2016 and forecasted to be US$107.3 billion in 2017and is likely to grow at a CAGR of 7.9% between 2017 and 2022, and is projected tocross US$150 billion mark by 2022. The report also stated that the market for miningmachinery and equipment is being propelled globally by the prospect of an increase inthe production of metals such as iron ore and copper, which is being steered by newexpansions and projects. Demand for mining equipment has a direct correlation withthe level of mining activity in any region, and with an increase in mining activities ona worldwide basis, the positive effect on equipment used in mining over the comingyears would be quite evident. We therefore are of the view that the mining equipmentbusiness of the Group would have an optimistic prospect in the future.

On the other hand, for the port machinery segments, according to the report“Global Marine Port and Service Industry 2015-2020: Trends, Forecast and OpportunityAnalysis” published by Research and Markets dated 2 October 2015, the global marineport and service industry is forecasted to grow at a CAGR of 4.7% from 2015 to 2020.The major drivers of growth for this industry are high growth of the marine freighttransportation industry and surging demand of containerized and bulk cargo. Increasingglobal exports, rising customer (shipping companies) demand, and expansion of newregional trade hubs are the additional factors contributing to accelerated growth.

Based on the above researches on coal mining and port machinery industry,together considering with the experience of the Directors and management team, theyare of the view that they are able to (i) strengthen their market presence; (ii)continuously diversify its customer base of the Group in order to sustainabledevelopment of its business; and (iii) secure recurring business and attract newcustomers, we are of the view that the coal mining and port machinery industry areexpected to grow steadily in the future. We believed that the PRC’s port and miningmachinery industry will continue to grow positively in the coming years. Thus, there isa high potential for future growth of the port machinery and mining machinerybusiness of the Group. Accordingly, it is fair and reasonable for the Group to have anoptimistic estimation on its port machinery and mining machinery business to increaseits proposed annual caps under Supplemental Master Purchas Agreement (2017-2019).

In addition, we noted that from the 2015 Annual Report, the Group aims tocontinue to expand its international business of port and mining machinery by activelyexploring the international markets including USA, Germany, Brazil, Russia, SouthAfrica and Australia. The Group’s port machinery products have gained a solidreputation worldwide and good cooperation relationship has been developed with key


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domestic and foreign customers. In order to deal with the sales expansion of the Groupfor its international development, we are of the view that it is also justifiable for theGroup to make more purchases from Sany Group to satisfy its production needs.

Based on above, having considered (i) the historical annual cap for the year ended31 December 2016 was fully utilized; (ii) the development trend and future prospectsof port and mining machinery industry in the PRC are optimistic with reference to theindustry researches as mentioned above; (iii) the Group’s sales forecast growth is inline with the increase of the annual caps for the three years ended 31 December 2019;and (iv) the Group’s increasing purchase need as it expands its international business,we are of the view that the proposed annual caps under the Supplemental MasterPurchase Agreement (2017-2019) are fair and reasonable.

III. Supplemental Products Sales Agreement (2017-2019), as amended by theSupplemental Products Sales Agreement (2017-2019) (Revised)

a. Review of historical annual cap

As disclosed in the announcement of the Company dated 7 January 2016, theCompany and Sany Group entered into the Supplemental Products Sales Agreement(2016) to renew the transactions under the Sales Agreement with a fixed termcommencing from 7 January 2016 to 31 December 2016 (both days inclusive) and anannual cap of RMB1,180.395 million. On 16 March 2017, the Company and SanyGroup entered into the Supplemental Products Sales Agreement (2017-2019) to renewthe transactions under the Supplemental Products Sales Agreement (2016) with a fixedterm of the three years ending 31 December 2019. On 20 March 2017, the Companyand Sany Group entered into the Supplemental Products Sales Agreement (2017-2019)(Revised), pursuant to which the annual caps under the Supplemental Products SalesAgreement (2017-2019) were amended.

According to the Supplemental Products Sales Agreement (2017-2019), asamended by the Supplemental Products Sales Agreement (2017-2019) (Revised), bothparties agreed the Revenue Limit and the proposed annual caps under the SupplementalProducts Sales Agreement (2017-2019) for the three years ending 31 December 2019shall be RMB993 million, RMB995 million, and RMB996 million.

b. Principal terms of the Supplemental Products Sales Agreement , as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised)

Pursuant to the Supplemental Products Sales Agreement (2017-2019) on 16 March2017, the Company agreed to sell or procure its subsidiaries to sell its finishedproducts to Sany Group or its subsidiaries for sales to the end customers.

In determining the sales price under the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised), the sales and marketing department（營銷部）of the Group will take intoaccount the cost of the products, the appropriate margin and prices offered toIndependent Third Parties to ensure that the prices and terms are no more favorable to


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those offered to Independent Third Parties. Different margins will be applied todifferent products based on the level of standardization and the core technologies used.To elaborate, the current gross margin ranges from 37% to 41% for domestic sales andfrom 25% to 29% for overseas sales (considering the overseas sales involve highertransportation costs). Such gross margin is the same as that the Group charges onIndependent Third Party customers when the Group sells the finished products to themdirectly. According to the internal control policies prepared by the Company, orders orparticular contracts for the products to be supplied by the Group under theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised) need to be reviewed and approved bythe senior management of the Group.

Since the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised) serves the purposefor the Company to take advantage of Sany Group’s domestic and overseas salesnetwork to sell its finished products to Sany Group then to end-customers. The profitmargins charged to Sany Group under the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement (2017-2019)(Revised) are the same as that the Group charges on Independent Third Party customerswhen the Group sells the finished products to them directly. Regarding the marginsadopted by the Group, after our discussion with the management of the Company, wenoted that those profit margins had made reference to the historical profit marginscharged by the Group to Independent Third Parties customers for domestic sales andoverseas sales. Given that the profit margins are (i) the same as the Group charges onthe Independent Third Party customers directly; and (ii) made reference to the profitmargins of historical transactions of the Group for domestic sales and overseas sales,we therefore consider that the profit margins adopted by the Group for domestic salesand oversea sales are fair and reasonable and on normal commercial terms.

In order to assess the fairness and reasonableness of the terms of theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised), we have reviewed the sales quotationsamples provided by the Company in relation to the sales of its finished products toSany Group and to Independent Third Parties customers. In addition, we have selectedand obtained (i) at least three samples of sales contracts entered into between theGroup and other independent third parties and Sany Group from the sales summary;and (ii) at least three samples sales invoices issued by other Independent Third Partiesand Sany Group to the Group with information on unit prices of the products sold tosuch Independent Third Parties and Sany Group.

Having considered that the sample sales contracts and invoices (i) covered all twomain categories of products; and (ii) showed different type of products in sample salescontracts and invoices, we considered that the samples we have obtained to besufficient and representative for comparison purposes. We noted from the sample salescontracts and invoices that (i) the initial prices of the products payable by the SanyGroup to the Group are no more favourable to the Group than those offered to otherIndependent Third Parties as stated in the samples obtained; and (ii) the payment termsas stated under the Supplemental Products Sales Agreement (2017-2019), as amended


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by the Supplemental Products Sales Agreement (2017-2019) (Revised) are similar tothose offered by the Group to Independent Third Parties as stated under the samplesobtained.

In addition, we noted that the internal control department of the Group willregularly review and assess whether the terms of the sales of its finished products toSany Group are in line with the Supplemental Products Sales Agreement (2017-2019),as amended by the Supplemental Products Sales Agreement (2017-2019) (Revised) andon normal commercial terms. Moreover, the Company will engaged external auditors toconduct annual review of the transactions under the Supplemental Products SalesAgreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised).

Based on the aforesaid, we are of the view that the terms of the SupplementalProducts Sales Agreement (2017-2019), as amended by the Supplemental ProductsSales Agreement (2017-2019) (Revised) are fair and reasonable and on normalcommercial terms.

c. The proposed annual caps

After Hunan Sany Port Equipment was acquired by the Group on 31 December2014, as set out in the announcement dated 7 November 2014, the connectedtransactions between Sany Group and the Group in terms of sales of finished productsfrom the Group to Sany Group only commenced since then. Thus, there were nohistorical connected transactions amounts thereunder for the three years ended 31December 2014.

Set out below are (i) the historical annual caps and actual transaction amounts forthe transactions contemplated for the two financial years ended 31 December 2016; and(ii) the proposed annual caps for the three years ending 31 December 2019 under theSupplemental Products Sales Agreement (2017-2019), as amended by the SupplementalProducts Sales Agreement (2017-2019) (Revised):

For the yearended

31 December2015

For the yearended

31 December2016

RMB’000 RMB’000

Historical annual caps 1,475,832 1,180,395Actual transaction amounts 1,128,600 740,157Utilization rate 76.5% 62.7%


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For the yearending

31 December2017

For the yearending

31 December2018

For the yearending

31 December2019

RMB’000 RMB’000 RMB’000

Proposed annual caps 993,000 995,000 996,000

As depicted from the table above, we note that the relevant utilization rate of theprevious annual cap is approximately 62.7% for the year ended 31 December 2016.After discussing with the management of the Company, the difference between theestimated transaction amount for the year ended 31 December 2016 and the actualtransaction amount was primarily due to the adjustment according to the actualoperations of the Company and market changes. As confirmed by the Directors, suchfactors were unexpected when determining the existing cap for the year ended 31December 2016.

As stated from the “Letter from the Board”, the proposed annual caps arecalculated and determined after taking into account (i) the Group’s anticipatedmanufacturing capacity for the years ending 31 December 2019, (ii) the Group’sexpected plans to take advantage of Sany Group’s strong domestic and overseas salesnetwork and sales experiences to enhance the Group’s product sales, (iii) the PRCgovernment’s preferential policy which expects to stimulate the development of theGroup’s port machinery and mining machinery business, and (iv) the Revenue Limit asagreed in the Supplemental Products Sales Agreement (2017-2019) (Revised).

To access the Group’s manufacturing capacity, accordingly to the 2016 InterimReport, the Group has production and manufacturing bases in Shenyang, Changsha andZhuhai respectively. The Group has 8 plants in the coal machinery industrial parklocated in the Economic and Technological Development Zone of Shenyang（瀋陽經濟技術開發區）with a total area of approximately 629,000 sq.m. The industrial park forsmall port equipment is located in the Changsha Industrial Zone with an area ofapproximately 100,000 sq.m., with several plants and commissioning fields. Theindustrial park for large port machinery is located in Gaolan Port Economic Area ofZhuhai（珠海市高欄港經濟區）and commenced operation on 6 May 2015. The Group isenhancing its manufacturing capacity through increased automation for the year ending31 December 2017 and the Group estimated that the its manufacturing capacity will beenhanced steadily for the three years ending 31 December 2019.

In addition, we are of the view that the accelerated implementation of the nationalstrategies including “Made in China 2025” (「中國製造2025」), “The Belt and Road”(「一帶一路」), “Going Global” (「走出去戰略」) will create a massive businessopportunities in the port and mining machinery industries in the future. According tothe report “The Belt and Road Initiative” published by Hong Kong Trade DevelopmentCouncil dated 26 January 2016, The Belt and Road will cover over 63% of the world’spopulation, over 35% of the world’s merchandise trade and around 30% of the worldGDP in 2050. Also The Belt and Road will take advantage of international transportroutes as well as core cities and key ports to further strengthen collaboration and build


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six international economic cooperation corridors. We are of the view that the “The Beltand Road” initiative and other policies are new drivers for the expansion of theGroup’s overseas markets and would create a massive business opportunities in portand mining machinery industry in the future.

As advised by the Company, among the port and mining industry, there is ademand for more sophisticated, better quality products, which will lead to a morecompetitive market. The shift from traditional port and mining products to moreinnovative products mean that business will need to improve their productioninnovative ability. In order to stay competitive, the Group has strengthened its R&Dand product innovation, created higher quality products and expanded its customerbases. According to the 2016 Interim Report, in the first half of 2016, the Group hascompleted eight new product planning and development in its port machinery segmentand breakthroughs were achieved in three core techniques including mobile applicationfor the products, weighing and printing system for containers and testing, weighing andprinting system for uneven loading. Given the outstanding achievements of the Groupin its R&D activities, the Group would likely launch more advanced products whichwould requires stronger sales network for promotion. Therefore, we are of the viewthat it is fair and reasonable for the Group to take advantage of Sany Group’s strongdomestic and oversea sales network and sales experiences to enhance the Group’sproduct sales.

We have also reviewed the sales forecast under the Supplemental Products SalesAgreement (2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised) provided by the Company in relation to the sales of its finishedproducts to Sany Group. The proposed annual caps under the Supplemental ProductsSales Agreement (2017-2019), as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised) covers two business segments of the Group: portmachinery business and coal mining machinery business. The Group would cease tomanufacture natural gas machinery in 2017. As advised by the Company, the reason fortermination of manufacture natural gas machinery from 2017 is mainly due to theGroup has no intention to sell its natural gas machinery to Sany Group for the threeyears ending 31 December 2019.

For port machinery sales, the proposed annual caps are approximately RMB929.5million, RMB931.1 million and RMB931.3 million, determined based on (i) thehistorical transaction amount of approximately RMB683.2 million for the year ended31 December 2016; and (ii) the Group’s anticipated manufacturing capacity of the portmachinery and sales plan to end-customers from 2017 to 2019. As confirmed by theDirectors, the Company plans to invest around RMB200 million to the port machinerybusiness and port machinery manufacturing capacity is expected to reach aroundRMB3,300 million for the next three years. It is expected that sales to end-customersin the port machinery business would reach approximately RMB1,450 million,RMB2,140 million and RMB2,560 million for each of the three years ending 31December 2019.


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We noted that a vast majority portion (i.e. approximately 93.6%, 93.6% and93.5% for the three years ending 31 December 2019) of the proposed annual caps arethe sales of port machinery products to Sany Group. As stated above, according to the2016 Interim Report, the port machine segment became the most significant businesssegment of the Group which accounted for approximately over 50% of the Group’stotal revenue for the six months ended 30 June 2016. Moreover, the Company hasdeveloped a new production facility of industrial park for large port machinery locatedin Gaolan Port Economic Area of Zhuhai（珠海市高欄港經濟區）and it has commencedoperation on 6 May 2015, in which the manufacturing capacity is expected to increaseto approximately RMB5 billion per annum.

In regarding of the Group’s anticipated manufacturing capacity for the three yearsending 31 December 2019, we have obtained and reviewed a manufacturing capacityanalysis for the three years ending 31 December 2019 prepared by the Company(“2017-2019 Manufacturing Capacity Analysis”) in which showing (i) a detailedanalysis of the Group’s existing manufacturing capacity of port machinery; (ii) adetailed manufacturing capacity analysis of different kinds of port machinery model;and (iii) a detailed investment schedule of port machinery for the three years ending 31December 2019.

We also noted that the 2017-2019 Manufacturing Capacity Analysis is estimatedbased on (i) the Group’s three years projected sales of port machinery for the threeyears ending 31 December 2019; (ii) the Group’s existing manufacturing capacity ofport machinery; (iii) cost control measures made by the Group’s engineeringdepartment; and (iv) the Group’s estimated manufacturing plant area of port machineryfor the three years ending 31 December 2019.

According to the 2017-2019 Manufacturing Capacity Analysis and as advised bythe Company, we noted that the Group’s existing manufacturing capacity of portmachinery was RMB1,100 million for the year ended 31 December 2016 and theGroup’s anticipated manufacturing capacity of port machinery for the three yearsending 31 December 2019, would reach approximately RMB1,500 million, RMB2,100million and RMB3,300 million respectively. Moreover, according to the Group’s annualresult for the year ended 31 December 2016 published on 22 March 2017, the actualsales in the port machinery business for the year ended 31 December 2016 wereRMB1,114 million. Furthermore, we have enquired and confirmed with the Directors,the production cycle of port machinery generally range from one year to one year andhalf which indicated that Group’s sales will be accrued and exceed its manufacturingcapacity in the following year. In regard of this, we have reviewed and obtained twosales contracts provided by the Company (“Production Cycle Contract”) and we notedthat the heavy port machinery’s production cycle indicated in the Production CycleContract are all longer than a year. We therefore are of the view that the anticipatedmanufacturing capacity on port machinery is fair and reasonable given that (i) theGroup’s actual sales of port machinery business already exceeded the Group’s existingmanufacturing capacity for the year ended 31 December 2016; (ii) the Group’sprojected sales to end-customers in the port machinery business for the three yearsending 31 December 2019 are in line with the Group’s anticipated manufacturingcapacity on port machinery; (iii) the Group’s sales amount might exceed its


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manufacturing capacity due to the production cycle of port machinery generally rangefrom one year to one year and half; (iv) the potential positive outlook on the portmachinery industry as the PRC government’s preferential policy intends to implementreform and innovation in all areas of shipping development as discussed above; and (v)with the experience of the Directors and management team, they are of the view thatthey are able to (i) strengthen their market presence; (ii) continuously diversify itscustomer base of the Group in order to sustainable development of its business; and(iii) secure recurring business and attract new customers.

We have also reviewed the sales plan provided by management of the Companyand obtained a sales quotations summary (“the Sales Quotation”) provided by theCompany in relation to the sales of its finished products to Sany Group and toIndependent Third Parties customers and noted that the sales quotations and terms areno less favourable than those offered to Independent Third Parties according to theSales Quotation. Moreover, we have obtained two signed contracts in 2017 provided bythe Company to its Independent Third Parties customers and noted that the terms andprices are comparable than those offered to Sany Group. Therefore we considered thatthe proposed annual caps of port machinery to Sany Group are fair and reasonable.

For mining machinery business, the proposed annual caps are approximatelyRMB63.5 million, RMB63.9 million and RMB64.7 million, determined based on a (i)the historical transaction amount in terms of mining machinery business ofapproximately RMB54.2 million for the year ended 31 December 2016; and (ii) theGroup’s anticipated manufacturing capacity, and the projected growth in sales revenueof the mining machinery from 2017 to 2019. It is expected that sales in the miningmachinery business would reach approximately RMB1,280 million, RMB1,790 millionand RMB2,560 million for each of the three years ending 31 December 2019.

In addition, we noted from the sales plan includes the sales of coal minetransportation vehicles and drilling machinery, and we have reviewed the sales planprovided by the management of the Company and noted that the sales quotations andterms offered by the Group are no less favourable than those offered to IndependentThird Parties according to the Sales Quotation.

Moreover, we also noted that in 2017, the proposed annual caps of miningmachinery segment increased approximately 155.4% from RMB24.9 million for theyear ended 31 December 2016 to RMB63.5 million for the year ending 31 December2017, as advised by the management of the Company, the sales volume of miningmachinery are closely related to the market price of coal. The demand of miningmachinery will increase when the coal mining activities raised driven by increasingdemand and price of coal. As discussed with the management of the Group, theestimated increase in market price for coal is determined with reference to certain coalprice index, including but not limited to Bohai-rim Steam-Coal Price Index (“BSPI”)（環渤海動力煤價格指數） and international price (i.e. Global Coal Newcastle Index)

trends.


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According to “Notice on the Commissioning Operation of the Bohai Bay ThermalCoal Price Index” （《關於開展環渤海動力煤價格指數試運行工作的通知》）, BSPI isauthorized and guided by the National Development and Reform Commission of thePRC. It is periodically published by Qinhuangdao Seaborne Coal Market Co., Ltd.（秦皇島海運煤炭交易市場有限公司）and is an index system which reflects the Free on Boardprice（離岸平倉市場價格水平）and price volatility of Bohai Bay thermal coal.

In this regard, we have reviewed the BSPI published by Qinhuangdao CoalWebsite（秦皇島煤炭網）(http://www.cqcoal.com) on 29 March 2017 and noted that theBSPI has an average year-on-year increase of approximately 57.8%.

Taking into consideration that (i) the Group’s anticipated manufacturing capacityfor the three years ending 31 December 2019 will be increasing to support the growthof its sales network; (ii) the Group is able to take advantage of Sany Group’s strongdomestic and overseas sales network and experiences; (iii) the PRC government’spreferential policies including “Made in China 2025” (「中國製造2025」), “The Belt andRoad” (「一帶一路」), “Going Global” (「走出去戰略」) are expected to stimulate thedevelopment of the Group’s port machinery and mining machinery business; (iv) theupward rising trend of the coal market price that would ultimately increase the demandof the Group’s mining machinery products; (v) the Group’s sales forecast is in linewith the proposed annual caps; and (vi) the Revenue Limit as agreed in theSupplemental Products Sales Agreement (2017-2019) (Revised), we are of the view theproposed annual caps under the Supplemental Products Sales Agreement (2017-2019),as amended by the Supplemental Products Sales Agreement (2017-2019) (Revised) arefair and reasonable.

D. RECOMMENDATION

Having taken the above principal factors and reasons, we are of the view that theentering of the Supplemental Master Purchase Agreement (2017-2019) and the SupplementalProducts Sales Agreement (2017-2019), as amended by the Supplemental Products SalesAgreement (2017-2019) (Revised) are on normal commercial terms, in the ordinary courseof business of the Group and are in the interests of the Company and the Shareholders as awhole. We also consider that the terms of the Supplemental Master Purchase Agreement(2017-2019) and the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised) and the proposed annualcaps are fair and reasonable. Therefore, we advise the Independent Board Committee torecommend the Independent Shareholders to vote in favour of the ordinary resolutions to beproposed at the EGM approving terms of the Supplemental Master Purchase Agreement(2017-2019) and the Supplemental Products Sales Agreement (2017-2019), as amended bythe Supplemental Products Sales Agreement (2017-2019) (Revised).

Yours faithfully,For and on behalf of

Vinco Capital LimitedAlister Chung

Managing Director

Note: Mr. Alister Chung is a licensed person registered with the Securities and Future Commission of HongKong and a responsible officer of Vinco Capital Limited to carry out type 1 (dealing in securities) andtype 6 (advising on corporate finance) regulated activities under the SFO and has participated in theprovision of independent financial advisory services for various transactions involving companies listed inHong Kong for over 10 years.


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1. DISCLOSURE OF INTERESTS

(a) Interests and short positions of the Directors and the chief executives in theshare capital and associated corporations of the Company

As at the Latest Practicable Date, the interests or short positions of the Directorsand the chief executives in the Shares, underlying Shares or debentures of theCompany or any of its associated corporation (within the meaning of Part XV of theSFO) which will have to be notified to the Company and the Stock Exchange pursuantto Divisions 7 and 8 of Part XV of the SFO (including interests and short positionswhich he is taken or deemed to have under such provisions of the SFO) or which willbe required, pursuant to section 352 of the SFO, to be recorded in the register referredto therein or which will be required to be notified to the Company and the StockExchange pursuant to the Model Code for Securities Transactions by Directors ofListed Companies contained in the Listing Rules, will be as follows:

Long positions in shares of Sany BVI (being the ultimate holding company ofthe Company)

Name of Director Nature of interestNumber ofshares held

Percentage ofissued share

capital

Mr. Tang Xiuguo(1) Beneficial owner 875 8.75%

Mr. Mao Zhongwu(1) Beneficial owner 800 8.00%

Mr. Xiang Wenbo(1) Beneficial owner 800 8.00%

Note:

1. Each of Mr. Tang Xiuguo, Mr. Mao Zhongwu and Mr. Xiang Wenbo holds 8.75%, 8.00% and8.00% of the issued share capital of Sany BVI, respectively, which in turn holds the entireissued share capital of Sany HK.

Save as disclosed above, as at the Latest Practicable Date, none of the Directorsand chief executive of the Company or any of their spouses or children under the ageof 18 were interested, or were deemed to be interested in the long and short positionsin the shares, underlying shares and debentures of the Company or any of its holdingcompany, subsidiaries or other associated corporation (within the meaning of Part XVof the SFO) which were required, pursuant to Section 352 of the SFO, to be entered inthe register referred to therein; or were required pursuant to the Model Code to benotified to the Company and the Stock Exchange. At no time had the Company or anyof its holding company or subsidiaries been participated in any arrangements to enablethe directors or chief executive (including their spouses or children under the age ofeighteen) of the Company to acquire any interests and short positions of shares orunderlying shares or debentures of the Company or any of its associated corporation(within the meaning of Part XV of the SFO).

APPENDIX GENERAL INFORMATION

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(b) Interests and short positions of substantial Shareholders and other parties inthe Shares and underlying Shares of the Company

As at the Latest Practicable Date, other than the interests and short positions ofcertain directors and chief executives as disclosed under the paragraph above, theinterests and short positions of persons in the shares and underlying shares of theCompany which would fall to be disclosed to the Company under the provisions ofDivisions 2 and 3 of Part XV of the SFO or, who is, directly or indirectly, interested in5% or more of the nominal value of any class of share capital carrying rights to vote inall circumstances at general meetings of any other members of the Group, orsubstantial shareholders as recorded in the register of substantial shareholder requiredto be kept by the Company under section 336 of the SFO were as follows:

Name of Shareholder Capacity

Number ofshares/

underlyingshares held

Approximatepercentage of

issued sharecapital

Sany HK(1) Beneficial owner 2,614,361,222 85.97%

Sany BVI(2) Interest in acontrolledcorporation

2,614,361,222 85.97%

Mr. Liang Wengen(3) Interest in acontrolledcorporation

2,614,361,222 85.97%

Notes:

1. The 2,614,361,222 shares and underlying shares consist of 2,134,580,188 ordinary shares and479,781,034 underlying shares which may be issued pursuant to the conversion of the479,781,034 convertible preference shares issued to Sany HK.

2. Sany BVI owns 100% of the issued share capital of Sany HK. Sany BVI is therefore deemedto be interested in all the shares and underlying shares of the Company held by Sany HKunder the SFO.

3. Mr. Liang Wengen is interested in 56.42% of Sany BVI. Mr. Liang Wengen is thereforedeemed to be interested in all the shares and underlying shares of the Company held by SanyHK under the SFO.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors orchief executives of the Company had an interest or short position in the shares or underlyingshares of the Company which would fall to be disclosed to the Company under theprovisions of Divisions 2 and 3 of Part XV of the SFO or, who is, directly or indirectly,interested in 5% or more of the nominal value of any class of share capital carrying rights tovote in all circumstances at general meetings of any other members of the Group, or anyother substantial shareholders whose interests or short positions were recorded in the registerrequired to be kept by the Company under section 336 of the SFO.


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2. SERVICE AGREEMENTS

As at the Latest Practicable Date, none of the Directors had entered or was proposingto enter into a service agreement with any member of the Group which is not determinableby the Group within one year without payment of compensation, other than statutorycompensation.

3. QUALIFICATION AND CONSENT OF EXPERT

The following is the qualifications of the experts or professional advisers who havegiven opinion or advice contained in this circular:

Name Qualifications

Vinco Capital a licensed corporation to carry out Type 1 (dealing insecurities) and Type 6 (advising on corporate finance)regulated activities under the SFO.

Vinco Capital has given and has not withdrawn its written consent to the issue of thiscircular with the inclusion of its letter and references to its name in the form and context inwhich it appears.

The letter and recommendation given by Vinco Capital is given as of the date of thiscircular for incorporation herein.

As at the Latest Practicable Date, Vinco Capital does not have any shareholding in orany right (whether legally enforceable or not) to subscribe for or to nominate persons tosubscribe for securities in the Company.

As at the Latest Practicable Date, Vinco Capital did not have any interest, direct orindirect, in any assets since 31 December 2016, being the date to which the latest publishedaudited accounts of the Company were made up, have been acquired or disposed of by orleased to the Company, or are proposed to be acquired or disposed or by or leased to theCompany.

4. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any material adversechange in the financial or trading position of the Group since 31 December 2016, being thedate to which the latest published audited financial statements of the Company were madeup.

5. COMPETING INTEREST

As at the Latest Practicable Date, none of the Directors and their associates wasinterested in any business apart from the business of the Group, which competes or is likelyto compete, either directly or indirectly, with that of the Group.


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6. INTEREST OF DIRECTORS

As at the Latest Practicable Date, none of the Directors had any direct or indirectinterest in any assets which have been acquired or disposed of by, or leased to, or which areproposed to be acquired or disposed of by, or leased to, the Company or any of itssubsidiaries since 31 December 2016, being the date to which the latest published auditedaccounts of the Company were made up.

As at the Latest Practicable Date, there is no other contract or arrangement subsistingat the Latest Practicable Date in which any of the Directors is materially interested andwhich is significant in relation to the business of the Group.

7. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the Company’sprincipal place of business in Hong Kong at Room 1001, Landmark North, No. 39 of LungSum AV, Sheung Shui, New Territories, Hong Kong during normal business hours from 4May 2017 up to and including the date of the EGM:

(a) the Supplemental Master Purchase Agreement (2017-2019);

(b) the Supplemental Products Sales Agreement (2017-2019);

(c) the Supplemental Products Sales Agreements (2017-2019) (Revised);

(d) the letter of advice from Vinco Capital Limited, the text of which is set out onpages 27 to 48 of this circular; and

(e) the written consent from Vinco Capital Limited referred in paragraph 3 of thisappendix.


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8. MISCELLANEOUS

(a) The Company’s share registrar and transfer office in Hong Kong is atComputershare Hong Kong Investor Services Limited at Shops 1712-1716, 17thFloor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.

(b) The joint company secretaries of the Company are Ms. Yu Leung Fai, a memberof Hong Kong Institutes of Certified Public Accountants and Mr. Zhu Xiangjun,who obtained the waiver from strict compliance with the requirements under Rule3.28 of the Listing Rules form the Stock Exchange on 9 September 2016, whichwas renewed on 14 February 2017.

(c) In the event of inconsistency, the English language text of this circular shallprevail over the Chinese language text.


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(Stock Code: 631)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting (the “EGM”) ofSany Heavy Equipment International Holdings Company Limited (the “Company”) will beheld at Conference Room 103, Research and Development Building, Sany Heavy EquipmentCo., Ltd., No. 25, 16 Kaifa Road, Shenyang Economic of Technological Development Zone,Shenyang, Liaoning Province, PRC on Friday, 19 May 2017 at 10:00 a.m. for the followingpurposes:

ORDINARY RESOLUTIONS

1. “THAT:

(a) the Supplemental Master Purchase Agreement (2017-2019) (as defined in thecircular of the Company dated 4 May 2017) dated 16 March 2017 enteredinto between the Company and Sany Group be and is hereby approved,confirmed and ratified; and

(b) the caps for the fixed term of the three years ending 31 December 2019 forthe transactions under the Supplemental Master Purchase Agreement(2017-2019) be and are hereby approved, confirmed and ratified.”

2. “THAT:

(a) the Supplemental Products Sales Agreement (2017-2019) (as defined in thecircular of the Company dated 4 May 2017) dated 16 March 2017, asamended by the Supplemental Products Sales Agreement (2017-2019)(Revised) (as defined in the circular of the Company dated 4 May 2017)dated 20 March 2017 entered into between the Company and Sany Group beand is hereby approved, confirmed and ratified; and

NOTICE OF THE EGM

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(b) the caps for the fixed term of the three years ending 31 December 2019 forthe transactions under the Supplemental Products Sales Agreement(2017-2019), as amended by the Supplemental Products Sales Agreement(2017-2019) (Revised) be and are hereby approved, confirmed and ratified.”

By Order of the BoardMr. Qi Jian

Chairman

Hong Kong, 4 May 2017

Notes:

(1) A member entitled to attend and vote at the above meeting may appoint one or, if he holds two or moreshares, more proxies to attend and vote instead of him. A proxy need not be a member of the Company. Ona poll, votes may be given either personally or by proxy.

(2) Where there are joint holders of any Share, any one of such joint holder may vote, either in person or byproxy, in respect of such Share as if he were solely entitled thereto, but if more than one of such jointholders be present at the Meeting, the vote of the senior who tenders a vote, whether in person or by proxy,shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shallbe determined by the order in which the names stand in the register of members of the Company in respectof the joint holding.

(3) In order to be valid, a form of proxy together with the power of attorney (if any) or other authority (if any)under which it is signed or a certified copy thereof shall be deposited at the Company’s Hong Kong branchshare registrar, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for the holdingof the meeting or any adjournment thereof. The proxy form will be published on the website of the StockExchange.

(4) The register of members of the Company will be closed from Wednesday, 17 May 2017 to Friday, 19 May2017 (both days inclusive) during which period no transfer of shares will be registered. In order to qualifyfor the entitlement to attend and vote at the EGM, all transfers accompanied by the relevant sharecertificates must be lodged with the Company’s Hong Kong branch share registrar, Computershare HongKong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East,Wanchai, Hong Kong for registration not later than 4:30 p.m. on Tuesday, 16 May 2017.

(5) The completion of a form of proxy will not preclude you from attending and voting at the EGM in personshould you so wish. If you attend and vote at the EGM, the authority of your proxy will be revoked.

As at the date of this notice, the executive Directors are Mr. Qi Jian and Mr. Wu Likun,the non-executive Directors are Mr. Tang Xiuguo, Mr. Xiang Wenbo and Mr. Mao Zhongwu,and the independent non-executive Directors are Mr. Ng Yuk Keung, Mr. Poon Chiu Kwokand Mr. Hu Jiquan.

NOTICE OF THE EGM

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