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Paul Y. Engineering Group Limited *

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Paul Y. Engineering Group Limited * Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement. This announcement is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities nor is it calculated to invite any such offer or invitation. In particular, this announcement does not constitute and is not an offer to sell or a solicitation of any offer to buy securities in Hong Kong, the United States or elsewhere. Paul Y. Engineering Group Limited * (Incorporated in Bermuda with limited liability) (Incorporated in Bermuda with limited liability) (Stock code: 577) (Stock code: 498) VERY SUBSTANTIAL ACQUISITION DEEMED VERY SUBSTANTIAL INCLUDING A POTENTIAL SHARE DISPOSAL AND POTENTIAL TRANSACTION DISCLOSEABLE TRANSACTION FOR PYE FOR PYI PROPOSED PLACING OF NEW SHARES BY PYE REQUIRING A SPECIFIC MANDATE FROM PYE SHAREHOLDERS, AND CONSTITUTING A DEEMED VERY SUBSTANTIAL DISPOSAL FOR PYI PROPOSED FILM JOINT VENTURE BETWEEN PYE, LEGENDARY AND HUAYI CONSTITUTING A VERY SUBSTANTIAL ACQUISITION FOR PYE AND INCLUDING A POTENTIAL SHARE TRANSACTION FOR PYE PROPOSED CAPITAL REDUCTION BY PYE AND PROPOSED DISTRIBUTION IN SPECIE BY PYE OF A 49% INTEREST IN ITS EXISTING BUSINESSES, WITH THE OFFER OF A CASH ALTERNATIVE PROVIDED BY PYI CONSTITUTING A POTENTIAL DISCLOSEABLE TRANSACTION FOR PYI PROPOSED SPECIAL CASH DIVIDEND BY PYE OF HK$0.25 PER SHARE WITH A SCRIP ALTERNATIVE Financial Adviser to PYE and PYI Anglo Chinese Corporate Finance, Limited Placing agent UBS AG, Hong Kong Branch –1– Summary The PYE Board is pleased to announce that PYE has entered into certain agreements and resolved to pursue certain transactions which, together, would represent a significant refocusing of PYE’s business activities which the PYE Board believes will, in due course, generate strong cash flows and ultimately benefit to all PYE Shareholders. In summary, PYE proposes to pursue a new film joint venture with industry-leading partners, Legend Pictures, LLC and Huayi Group. PYE also plans to reduce its exposure to, and reliance upon, its existing construction, civil engineering and property-related businesses by distributing 49% of the intermediate holding company of those businesses. Placing On 21 August 2011, PYE entered into two conditional agreements to allot a total of 3,100 million Placing Shares, with the prospect of up to an additional 500 million Placing Shares, being allotted on exercise of the Upsize Options (which, if exercised, in full would mean that a total of 3,600 million Placing Shares would be allotted and issued pursuant to the Placing). The first agreement, the Independent Placing Agreement, is between PYE and UBS AG, Hong Kong Branch, who has conditionally agreed to place, on a best efforts basis, 2,740 million Placing Shares at a Placing Price of HK$0.65. In addition, the Placing Agent has been granted an option to call for the issue of up to an additional 440 million Placing Shares at the same Placing Price. The second agreement, the AID Subscription Agreement, is between PYE and the AID Subscribers who have conditionally agreed to subscribe 360 million Placing Shares at the same Placing Price. In addition, the AID Subscribers have been granted an option to call for the issue of up to an additional 60 million Placing Shares for subscription by the AID Subscribers, again at the same Placing Price. The Principal Partner of AID Capital is Mr. Wu King Shiu, Kelvin and the Managing Partner of AID Capital is Mr. Chang Tat Joel. The PYE Board proposes, with the approval of the PYE Shareholders, to appoint Mr. Wu and Mr. Chang to the PYE Board with effect from completion of the Placing. In addition, Mr. Wu is to be appointed Chief Executive Officer of Legendary East (referred to below) and Mr. Chang is to be its Chief Financial Officer. The 3,100 million Placing Shares (assuming no exercise of the Upsize Options) represent approximately 510.75% of the existing issued shares of PYE, amounting to 606,954,322 Shares as at the date of this announcement, and approximately 83.63% of the total issued shares of PYE as enlarged by the Placing. From the net Placing proceeds after the placing commission (assuming no exercise of the Upsize Options and no incentive payment to the Placing Agent is made) of approximately HK$1,966 million, PYE will apply approximately HK$1,719.9 million (equivalent to US$220.5 million) in subscribing for a 50% interest in Legendary East, as described below. The balance will be applied for working capital purposes. –2– The Placing is one aspect of the Specific Mandate which is to be sought from the PYE Shareholders by way of approval in general meeting of PYE. The Placing constitutes a deemed very substantial disposal by PYI, whose percentage share of the issued share capital of PYE will be diluted from approximately 61.92% to approximately 10.14% assuming no exercise of the Upsize Options, or to approximately 8.93% assuming exercise, in full, of the Upsize Options. The impact of the Placing on PYI is also therefore a matter that is subject to the approval of the PYI Shareholders in general meeting. Film Joint Venture On 21 August 2011, PYE entered into the legally-binding Heads of Agreement with Legendary East, Legendary and Huayi. The Heads of Agreement have been entered into to reflect the terms on which the parties have agreed to pursue the Film Joint Venture; which the parties intend to document in a longer-form Joint Venture Agreement proposed to be settled and entered into as soon as practicable. The principal purpose of the Film Joint Venture will be to develop, finance, acquire, produce, distribute and exploit films, based on Chinese history, mythology or culture, filmed predominantly in the English language and intended for theatrical release on a worldwide basis. PYE’s contribution to the joint venture company, Legendary East, will be a cash injection in the amount of US$220.5 million. For this, PYE will own 50% of Legendary East. Legendary will upon completion own 40.1% interest in Legendary East. Legendary will also transfer certain existing development properties and related intellectual property rights for films based on Chinese history, mythology or culture to Legendary East. Upon completion, Huayi will own 9.9% of Legendary East. In addition, the Huayi Group may transfer certain existing development properties and related intellectual property rights for films based on Chinese history, mythology or culture to Legendary East. JV Management Members may, collectively, be granted an aggregate shareholding interest of up to 11% of Legendary East. Such grants will not dilute the shareholding interests of PYE or Huayi in Legendary East (and would, therefore, be transferred to the JV Management Members by, or would otherwise reduce the ownership interests of, Legendary). Legendary East will be accounted for as an associate of PYE and thus Legendary East’s accounts will not be consolidated into the accounts of PYE. PYE’s subscription for a 50% stake in Legendary East constitutes a very substantial acquisition for PYE in respect of which approval will be sought from the PYE Shareholders at the PYE SGM. Legendary East will seek to produce and distribute one to two Qualifying Films per year for distribution on a worldwide basis. Such films will be filmed predominantly in the English language and based on Chinese history, mythology or culture and will be produced so as to qualify as Chinese co-productions under applicable Chinese governmental regulations, including approval of the screenplay by the applicable regulatory authorities. Legendary East may also co-finance two (and potentially more) other Approved Co-Financed Pictures (as described in this announcement). –3– The Exchange Rights Subject to fulfilment of certain conditions (as described in this announcement), at any time during the Exchange Rights Period (as described in this announcement): – members of Legendary East (other than PYE) will each have the right (the “Investors’ Put Right”) each time, and from time to time, to require PYE to have transferred to it all (to the maximum extent permissible without triggering a mandatory general offer obligation and subject to a cap on the Exchange Rights) or part (in amounts of not less than 10% of their respective holdings on each occasion) of their respective holdings of Legendary East Shares in exchange for New Shares in PYE; and – PYE will have the right (“PYE’s Call Right”) each time, and from time to time, to require the members of Legendary East (other than PYE) to transfer to PYE all (to the maximum extent permissible without triggering a mandatory general offer obligation and subject to a cap on the Exchange Rights) or part (in amounts of not less than 10% of their respective holdings on each occasion) of their respective holdings of Legendary East Shares (and if part only, then on a pro rata basis as between such members of Legendary East), in exchange for New Shares in PYE, in each case at the Exchange Ratio (as described in this announcement). The Exchange Rights may not be exercised until at least 30 months after the JV Closing and are conditional on, amongst other things: – exercise of the Exchange Rights not causing the shares of PYE to be de-listed nor being deemed to constitute a new listing for PYE; – for the initial exchange, the fair market value of the Legendary East shares (other than those held by PYE but after giving effect to the liquidation preference of PYE’s Legendary East Shares as described in this announcement) must be equal to or must exceed US$220.5 million; and – in the case only of PYE’s Call Right, further compliance with the relevant requirements of Chapter 14 and Chapter 14A of the Listing Rules, including the requirement, as necessary, to obtain independent shareholder approval.
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