THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION
Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.
If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a stockbroker or other registered dealer in securities, a bank manager, solicitor, professional accountant or other professional adviser.
If you have sold or transferred all your shares in Xinhua News Media Holdings Limited, you should at once hand this circular, together with the enclosed form of proxy, to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale was effected for transmission to the purchaser or transferee.
XINHUA NEWS MEDIA HOLDINGS LIMITED 新華通訊頻媒控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 309)
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND NOTICE OF EXTRAORDINARY GENERAL MEETING
Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders
South China Capital Limited
A letter from the Board is set out on pages 5 to 43 of this circular, and a letter from the Independent Financial Adviser containing its advice and recommendation to the Independent Board Committee and the Independent Shareholders is set out on pages 45 to 65 of this circular and a letter from the Independent Board Committee is set out on page 44 of this circular.
A notice convening an extraordinary general meeting of Xinhua News Media Holdings Limited to be held at 23/F., 381 Queen’s Road East, Wan Chai, Hong Kong at 12:00 p.m. on 27 March 2015 is set out on pages 103 to 104 of this circular. A form of proxy for use at the extraordinary general meeting is enclosed with this circular. Such form of proxy is also published on the websites of The Stock Exchange of Hong Kong Limited (www.hkexnews.hk) and the Company (www.XHNmedia.com).
Whether or not you are able to attend the extraordinary general meeting, please complete and sign the accompanying form of proxy in accordance with the instructions printed thereon and return it to the Branch Share Registrar of the Company in Hong Kong, Tricor Tengis Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for holding the extraordinary general meeting or any adjournment thereof. Completion and return of the form of proxy will not preclude shareholders from attending and voting in person at the meeting if they so wish.
24 February 2015 CONTENTS
Page
Definitions ...... 1
Letter from the Board
1. Introduction ...... 5
2. Background ...... 6
3. The Remedial Agreement ...... 8
4. Reasons for the Settlement and the entering into the Remedial Agreement ...... 11
5. Principal business activities of the Company ...... 14
6. Principal business activities of Asia-Pacific Regional Bureau ...... 15
7. Listing Rules Implications ...... 15
8. Business plan and capital expenditure plan for the remaining free right period ...... 16
9. TheEGM ...... 22
10. The Television Screen Broadcast Business ...... 22
11. Overview of the Outdoor Advertising Industry ...... 25
12. Overview of the legal and regulatory requirements ...... 25
13. Risk factors ...... 37
14. Financial and trading prospect of the Television Screen Broadcast Business ...... 42
15. Recommendation ...... 43
16. Additional information ...... 43
Letter from the Independent Board Committee ...... 44
Letter from the Independent Financial Adviser ...... 45
Appendix I – Financial Information of the Group ...... 66
Appendix II – Management Discussion and Analysis of the Group .... 68
Appendix III – General Information ...... 94
Notice of Extraordinary General Meeting ...... 103
–i– DEFINITIONS
In this circular except Appendix II “Management Discussion And Analysis of the Group”, unless the context otherwise requires, the following expressions shall have the following meanings:
“Ally” Ally Thrive Investments Limited, a company incorporated in the British Virgin Islands with limited liability and a wholly-owned subsidiary of the Company
“APRB”/“Asia-Pacific Regional Xinhua News Agency Asia-Pacific Regional Bureau Bureau” Limited, a company incorporated under the laws of Hong Kong with limited liability and established by Xinhua News Agency Asia-Pacific Regional Bureau, the Asia-Pacific regional branch office of Xinhua News Agency; and a substantial shareholder and connected person of the Company
“Audited Operating Revenue” the revenue derived from the Television Screen Broadcast Business and comprises of the sale of airtime for the display of advertisements and advertisement production income as shown in the Company’s audited accounts
“Board” the board of Directors
“Company” Xinhua News Media Holdings Limited, a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the main board of the Stock Exchange
“connected person(s)” has the meaning ascribed to it under the Listing Rules and the word “connected” shall be construed accordingly
“Cooperation” the cooperation between Asia-Pacific Regional Bureau and the Company under the Cooperation Agreement to develop the Television Screen Broadcast Business of the Company
“Cooperation Agreement” the Cooperation Agreement referred to in the Company’s Circular dated 11 March 2011 and approved by the Shareholders at an extraordinary general meetings of the Shareholders on 8 April 2011
–1– DEFINITIONS
“Development Region” (a) Hong Kong; (b) Macau; (c) Taiwan; (d) Asia-Pacific countries excluding China (other than the regions set out in (e)) and/or regions, including Japan, South Korea, North Korea, East Asia, South East Asia, Australia, New Zealand and the nearby island countries, etc.; (e) Guangzhou, Shenzhen, Shanghai and Beijing; and (f) other regions (including China) as may be jointly confirmed by the Parties from time to time
“Director(s)” the director(s) of the Company
“EGM”/“Extraordinary General extraordinary general meeting of the Company to be Meeting” held at 23/F., 381 Queen’s Road East, Wan Chai, Hong Kong at 12:00 p.m. on 27 March 2015, including any adjournment thereof, for the purpose of approving, inter alia, the Remedial Agreement and the Settlement
“Free Right” the right granted by Asia-Pacific Regional Bureau to the Company for a term of 10 years (which is extendable subject to future negotiation between the Parties) commencing from 24 May 2011 to broadcast media information in accordance with the terms of the Cooperation Agreement, and “Free Right period” shall mean the period within which the Free Right is granted to the Company
“Group” the Company and its subsidiaries
“Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China
“Independent Board an independent board committee comprising of all Committee” the independent non-executive Directors formed to provide recommendation to the Independent Shareholders in relation to the Remedial Agreement and the Settlement
“Independent Financial South China Capital Limited, a corporation licensed by Adviser” the SFC to conduct type 6 (advising on corporate finance) regulated activities under the SFO, appointed by the Company to make recommendations to the Independent Board Committee and the Independent Shareholders in relation to the Remedial Agreement and the Settlement
“Independent Shareholders” all Shareholders other than Asia-Pacific Regional Bureau and its associates
–2– DEFINITIONS
“Independent Shareholders approval by the Independent Shareholders at the Approval” EGM of the Settlement and the Remedial Agreement
“Latest Practicable Date” 16 February 2015 being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange (Main Board)
“Macau” the Macau Special Administrative Region of the People’s Republic of China
“Media Information” information collected or obtained by Asia-Pacific Regional Bureau in the course of development of the Television Screen Broadcast Business and other information mutually agreed by the Parties, including the name of Asia-Pacific Regional Bureau as well as other information and advertisement content over which Asia-Pacific Regional Bureau acquires or owns copyright from time to time
“Media Subsidiary” Xinhua News Media Limited, a company incorporated in the British Virgin Islands with limited liability, established pursuant to the Cooperation Agreement for conducting the Television Screen Broadcast Business and a wholly-owned subsidiary of the Company
“PAC Consulting” Pan Asia Century Consulting Limited, a company incorporated in the British Virgin Islands with limited liability
“Parties” Asia-Pacific Regional Bureau and the Company, each a “Party”
“PRC” or “China” the People’s Republic of China, which, for the purpose of this circular only, does not include Hong Kong, Macau, and Taiwan
“Remedial Agreement” the remedial agreement dated 15 July 2014 entered into between Asia-Pacific Regional Bureau and the Company relating to the Settlement and other miscellaneous amendments to the Cooperation Agreement (有關發展電視屏幕廣告和資訊播放業務合 作協議的補償協議) as varied by the Supplemental Agreement
–3– DEFINITIONS
“Settlement” the full and final compensation for the non-fulfillment of the Revenue Undertaking contemplated under the Remedial Agreement
“SFC” Securities and Futures Commission in Hong Kong
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
“Share(s)” ordinary share(s) with a nominal value of HK$0.01 each in the share capital of the Company
“Shareholders” the holders of the Share(s)
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“substantial shareholder(s)” has the meaning ascribed to it under the Listing Rules
“Supplemental Agreement” the supplemental agreement to the Remedial Agreement entered into on 31 December 2014 pursuant to which the Parties agreed to extend the long stop date for the satisfaction of the conditions precedents of the Remedial Agreement from 31 December 2014 to 15 April 2015 (or such other date as the parties may agree)
“Takeovers Codes” the Codes on Takeovers and Mergers and Share Repurchases issued by the SFC
“Television Screen Broadcast the business of publicly broadcasting information and Business” advertisements on television screens (whether indoors or outdoors)
“HK$” Hong Kong dollar, the lawful currency of Hong Kong
“US$” United States dollar, the lawful currency of the United States of America
“%” per cent.
–4– LETTER FROM THE BOARD
XINHUA NEWS MEDIA HOLDINGS LIMITED 新華通訊頻媒控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 309)
Executive Directors: Registered Office: Mr. Ju Mengjun (Co-chairman) P.O. Box 309 Dr. Lo Kou Hong (Co-chairman) Ugland House Mr. Yu Guang Grand Cayman Mr. David Wei Ji KY1-1104 Mr. Chang Yong Cayman Islands Mr. Yan Liang Principal Place of Independent Non-executive Directors: Business in Hong Kong: Mr. Wang Qi 2nd Floor Mr. Tsang Chi Hon 5 Sharp Street West Mr. Ho Hin Yip Wan Chai Hong Kong
24 February 2015
To the Shareholders
Dear Sir/Madam,
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION AND NOTICE OF EXTRAORDINARY GENERAL MEETING
1. INTRODUCTION
Reference is made to the announcement of the Company dated 15 July 2014, 4 August 2014, 25 August 2014, 16 September 2014, 9 October 2014, 30 October 2014, 21 November 2014, 12 December 2014, 31 December 2014 and 7 January 2015 in relation to, among others, the Settlement and the Remedial Agreement.
The purpose of this circular is to provide you with, among other things, further information regarding the Settlement and the Remedial Agreement, general information of the Group and the notice of the EGM.
–5– LETTER FROM THE BOARD
2. BACKGROUND
Reference is made to the Circular of the Company dated 11 March 2011, the announcements of the Company dated 15 July 2014, 11 March 2011, 24 May 2011, 3 August 2011, 31 December 2013, 30 January 2014 and 3 March 2014 regarding the Cooperation Agreement.
Under the Cooperation Agreement, Asia-Pacific Regional Bureau had undertaken that the Audited Operating Revenue for the year ended 31 December 2011 and the year ended 31 December 2012 would be no less than HK$30,000,000 and HK$100,000,000 respectively (the “Revenue Undertaking”). If any part of the Revenue Undertaking cannot be fulfilled, Asia-Pacific Regional Bureau has to pay appropriate compensation to the Company as liquidated damages. Apart from the Revenue Undertaking, Asia-Pacific Regional Bureau has not given any undertaking in respect of (a) the Audited Operating Revenue for the remainder of the Cooperation, nor (b) the profitability of the Television Screen Broadcast Business.
The Audited Operating Revenue for the year ended 31 December 2011 and 31 December 2012 were HK$64,000 and HK$1,003,000 respectively and the details are illustrated in the following table:-
Client Number Client Revenue Duration Scope of service (HK$)
1 M001 Midland Holdings 25,000.0 6 Weeks Kowloon Through Train (between Hong Kong and Guangzhou East) Limited • each advertisement duration: 32 seconds • number of advertisement spots: 420 • number of playing times: 10 times per drive and 60 times per day 2 M002 mReferral Corporation 25,000.0 6 Weeks Kowloon Through Train (between Hong Kong and Guangzhou East) (HK) Limited • each advertisement duration: 20 seconds • number of advertisement spots: 420 • number of playing times: 10 times per drive and 60 times per day 3 M003 Wellness Enterprise 5,000.0 6 Weeks Kowloon Through Train (between Hong Kong and Guangzhou East) Limited • each advertisement duration: 32 seconds • number of advertisement spots: 420 • number of playing times: 6 times per day 4 M004 China Everbright 2,000.0 6 Weeks Kowloon Through Train (between Hong Kong and Guangzhou East) Limited • each advertisement duration: 32 seconds • number of advertisement spots: 420 • number of playing times: 6 times per day 5 M005 Guoyuan Securities 2,800.0 6 Weeks Kowloon Through Train (between Hong Kong and Guangzhou East) (Hong Kong) Co., Ltd • each advertisement duration: 32 seconds • number of advertisement spots: 420 • number of playing times: 6 times per day
–6– LETTER FROM THE BOARD
Client Number Client Revenue Duration Scope of service (HK$)
6 M006 Guosen Securities (HK) 4,750.0 6 Weeks Kowloon Through Train (between Hong Kong and Guangzhou East) Brokerage Co., • each advertisement duration: 32 seconds Limited • number of advertisement spots: 420 • number of playing times: 6 times per day 7 M008 JM Network Limited 27,000.0 6 Weeks Kowloon Through Train Hunghom Departure hall/KTT inTrain TV advertising 8 M009 Dafenggang Economic 869,166.7 1 Year Kowloon Through Train Hunghom Departure hall/KTT inTrain TV Zone Administration advertising of Dafeng (Jiangsu) 9 M010 China Collectors Club 67,200.0 6 Weeks Kowloon Through Train Hunghom Departure hall/KTT inTrain TV Publishing House advertising (Translation) 10 M007 GuangZhou New Media 40,000.0 6 Weeks Kowloon Through Train Hunghom Departure hall/KTT inTrain TV Advertising Plannaing advertising Limited (Translation) 11 M011 Follow Him Limtied (Note) – 1 Month Kowloon Through Train Hunghom Departure hall/KTT inTrain TV advertising 12 M012 People HK Limited (Note) – 2 Weeks Kowloon Through Train Hunghom Departure hall/KTT inTrain TV advertising
Total 1,067,916.7
Note: the Company did not derive any revenue from Follow Him Limited and People HK Limited at that time as the advertisements were placed as promotions.
Since the Revenue Undertaking was not fulfilled, Asia-Pacific Regional Bureau has to pay appropriate compensation to the Company. However, the Cooperation Agreement has not provided for any specific figure or formula for assessing the appropriate compensation payable to the Company, the Company had therefore entered into negotiations with Asia-Pacific Regional Bureau on remedial actions. The Company is pleased to announce that the Company has entered into the Remedial Agreement with Asia-Pacific Regional Bureau on 15 July 2014 whereby as full and final compensation for the non-fulfillment of the Revenue Undertaking, Asia-Pacific Regional Bureau has undertaken to the Company that the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016 would be no less than HK$170,000,000 (the “Further Undertaking”). Asia-Pacific Regional Bureau has further agreed that if the Further Undertaking is not fulfilled, Asia-Pacific Regional Bureau shall pay to the Company as liquidated damages a sum equivalent to 12% of the shortfall of the Further Undertaking (the “Liquidated Damages”).
–7– LETTER FROM THE BOARD
Particulars of the Remedial Agreement are described in the following sections:
3. THE REMEDIAL AGREEMENT
Date
15 July 2014 (after trading hours of the Stock Exchange).
Parties
(1) Asia-Pacific Regional Bureau.
(2) The Company.
As at the Latest Practicable Date, Asia-Pacific Regional Bureau is a substantial shareholder, and therefore a connected person of the Company.
The Settlement
As full and final compensation for the non-fulfillment of the Revenue Undertaking, Asia-Pacific Regional Bureau has given the Further Undertaking. Asia-Pacific Regional Bureau has further agreed that if the Further Undertaking is not fulfilled, Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages.
Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages in full within 1 month of written request by the Company.
Amendments to the Cooperation Agreement
The following are the major amendments to the material terms of the Cooperation Agreement:
(1) The Revenue Undertaking (and the promise to pay appropriate compensation in the event of non-fulfillment of the Revenue Undertaking) by Asia-Pacific Regional Bureau under the Cooperation Agreement shall be replaced by the Further Undertaking. In the event of non-fulfillment of the Further Undertaking, Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages. Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages in full within 1 month of written request by the Company. The Company shall make the claim for compensation, if any, within 24 months from 31 March 2016.
(2) Save as amended by the Remedial Agreement, all other terms of the Cooperation Agreement remain valid and binding, and the Cooperation Agreement shall be read together with the Remedial Agreement as a whole.
–8– LETTER FROM THE BOARD
Under the Cooperation Agreement, the Company shall make available a sum of no less than HK$200,000,000 for continuous development of the Television Screen Broadcast Business if the Audited Operating Revenue for the year ended 31 December 2012 is no less than HK$100,000,000. Since the Audited Operating Revenue for the year ended 31 December 2012 was less than HK$100,000,000, the Company will not be required to make available the sum of no less than HK$200,000,000 under the Cooperation Agreement.
Consideration
The consideration given by the Company is the forbearance of its right against Asia-Pacific Regional Bureau for appropriate compensation as a result of the non-fulfillment of the Revenue Undertaking, in return for Asia-Pacific Regional Bureau’s giving of the Further Undertaking.
The Company is not required to pay any cash or other kinds of consideration to any party under the Settlement and the Remedial Agreement.
The Consideration was determined between the Company and Asia-Pacific Regional Bureau after arm’s length negotiations taking into account the appropriate compensation payable to the Company for the non-fulfillment of the Revenue Undertaking. The Board considered the appropriate compensation would be the lost profits that the Company could have achieved had Asia-Pacific Regional Bureau fulfilled the Revenue Undertaking. As the Television Screen Broadcast Business had recorded losses for the financial year ended 31 March 2012 and 31 March 2013, the Board made references to the performance of a number of companies listed on the Stock Exchange engaged in businesses similar to the Television Screen Broadcast Business, namely, outdoor advertising businesses in Hong Kong and/or the PRC. The Board considered that these companies may be regarded as comparables as the businesses are similar in nature and represent an exhaustive list of entities that the Board was able to identify and satisfied the selection criteria. The Board noted that out of these comparable companies, 4 of which have achieved a net profit margin ranging from 1.44% to 12.20% for their respective latest financial year, whilst the others have recorded losses for their respective latest financial year. Accordingly, the Directors have adopted a notional net profit margin of 12% for the purpose of ascertaining the lost profits that the Company could have achieved had Asia-Pacific Regional Bureau fulfilled the Revenue Undertaking. The notional net profit margin of 12% was determined and agreed by the Company and Asia-Pacific Regional Bureau during arm’s length negotiations on remedial actions and was a concession made by Asia-Pacific Region Bureau. The Directors considered that the adoption of a net profit margin of 12% is fair and reasonable having regard to the fact that almost half of the comparable companies have recorded losses for their respective latest financial year. Had Asia-Pacific Regional Bureau fulfilled the Revenue Undertaking and applied a net profit margin of 12%, the Company’s lost profit could have been HK$15,600,000.
–9– LETTER FROM THE BOARD
As the Revenue Undertaking was now replaced by the Further Undertaking on the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016, the Board considered that compounded interest at the rate of 8% per annum should be added to the lost profit of HK$15,600,000 from 1 January 2013 to 31 March 2016 or a total of 3.25 years. The Company has been advised by its legal advisers that the current rate of interest on judgment debts (which is also published at the Hong Kong Judiciary’s website), that is, the interest rate that the Hong Kong Courts would normally award on judgment debts is 8% per annum (simple interest). As the Cooperation Agreement does not provide for the accrual of interests on the compensation for the non-fulfillment of the Revenue Undertaking, the Directors therefore considered that the adoption of an interest rate of 8% compounded annually is fair and reasonable.
Accordingly, the appropriate compensation as at 31 March 2016 would be HK$20,044,537 calculated by adding interest to the notional lost profit of HK$15,600,000 at the rate of 8% compounded annually for 3.25 years as follows:
HK$15,600,000 x 1.08 x 1.08 x 1.08 x 1.02 = HK$20,044,537
In order to achieve a net profit of HK$20,044,537 and by adopting a net profit margin of 12%, the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016 should be no less than HK$167,037,808.
The Liquidated Damages payable by Asia-Pacific Regional Bureau will be calculated by reference to the shortfall of the Further Undertaking. The maximum Liquidated Damages payable by Asia-Pacific Regional Bureau, assuming there is no Audited Operating Revenue for the two financial years ending 31 March 2016, will be 12% of HK$170,000,000 or HK$20,400,000.
Conditions precedent
The Remedial Agreement is conditional upon the satisfaction of all of the following conditions:
1. the Board of Asia-Pacific Regional Bureau approving the Remedial Agreement;
2. the Board of the Company approving the Remedial Agreement in accordance with the Listing Rules; and
3. the Independent Shareholders’ Approval.
The Remedial Agreement shall take effect on the next day following the satisfaction of the all of the above conditions precedent.
It was agreed upon by the Parties that if any of the above conditions precedent is not satisfied on or before 31 December 2014 and extended to 15 April 2015 by the Supplemental Agreement, the Remedial Agreement will be terminated; and the
–10– LETTER FROM THE BOARD
Parties shall use its respective best endeavours to agree on the remedies for the non-fulfillment of Revenue Undertaking. As at the Latest Practicable Date, the first and second condition have been satisfied.
4. REASONS FOR THE SETTLEMENT AND THE ENTERING INTO THE REMEDIAL AGREEMENT
As a result of the non-fulfillment of the Revenue Undertaking, the Company has a potential claim against Asia-Pacific Regional Bureau for appropriate compensation under the Cooperation Agreement. However, the Cooperation Agreement has not provided for any specific figure or formula for ascertaining the appropriate compensation. The Directors have considered a number of options including cash compensation, extension of the Free Right period, and the Further Undertaking.
Immediate cash compensation
The Company had discussed with Asia-Pacific Regional Bureau for immediate cash compensation. However, as the Cooperation Agreement did not provide for any specific figure or formula for assessing the appropriate compensation payable to the Company, the Company and Asia-Pacific Regional Bureau had to agree on the amount of the appropriate compensation. Despite various negotiations, the Company and Asia-Pacific Regional Bureau were unable to agree on the amount of the appropriate compensation.
The Company could, under the Cooperation Agreement, commence arbitration process against Asia-Pacific Regional Bureau for cash compensation. The Directors have considered arbitration process but have noted that considerable time and financial resources would be needed in the arbitration process while the outcome, including the amount of compensation, would be uncertain. In particular, since the Television Screen Broadcast Business had recorded losses for the year ended 31 March 2012 and 31 March 2013, it would be difficult for the Company to substantiate its lost profits as a result of the non-fulfillment of the Revenue Undertaking would have been 12% of the Revenue Undertaking. If the Company were to proceed with the arbitration process, the eventual compensation which may be awarded to the Company would be uncertain and could be significantly lower than the Liquidated Damages.
In addition, since Asia-Pacific Regional Bureau has not given any undertaking in respect of the Audited Operating Revenue for the remainder of the Cooperation, compensation for the non-fulfillment of the Revenue Undertaking in the form of cash is one-off and will not in any way enhance the development of the Television Screen Broadcast Business. Moreover, since the Cooperation is continuing, the commencement of arbitration process against Asia-Pacific Regional Bureau might seriously damage the business relationship between the Parties and cripple future cooperation. The Directors therefore considered that the commencement of arbitration against Asia-Pacific Regional Bureau for cash compensation may have adverse effects on the development of the Television Screen Broadcast Business and not in the best interests of the Company and the Shareholders as a whole.
–11– LETTER FROM THE BOARD
Extension of the Free Right period
The Directors have considered the option for extension of the Free Right period and discussed with Asia-Pacific Regional Bureau for an extension of the Free Right period as compensation for the non-fulfillment of the Revenue Undertaking, even though the benefits of an extension of the Free Right period which would accrue to the Company is not certain as the Free Right does not necessarily produce revenue to the Company and therefore may not sufficiently remedy the Revenue Undertaking. However, Asia-Pacific Regional Bureau considered that: (1) it has only given the Revenue Undertaking but has not given any undertaking in respect of the Audited Operating Revenue for the remainder of the Cooperation; and (2) the Free Right is not the loss suffered by the Company as a result of the non-fulfillment of the Revenue Undertaking, Asia-Pacific Regional Bureau did not agree that the non-fulfillment of the Revenue Undertaking should be remedied by an extension of the Free Right period.
Notwithstanding Asia-Pacific Regional Bureau’s refusal to extend the Free Right period as compensation for the non-fulfillment of the Revenue Undertaking, the Directors are of the opinion that the Further Undertaking, the non-fulfillment of which would entitle the Company to claim Liquidated Damages, which is calculated at a fair and reasonable profit margin, has already provided for full compensation.
Further Undertaking
Under the Settlement and the Remedial Agreement, Asia-Pacific Regional Bureau has undertaken that the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016 would be no less than HK$170,000,000, that is, the Further Undertaking, failing which Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages. The Further Undertaking may be regarded as time extension for, or delay by, Asia-Pacific Regional Bureau to fulfill the Revenue Undertaking as replaced by the Further Undertaking. The increase in the Audited Operating Revenue from HK$130,000,000 under the Revenue Undertaking to HK$170,000,000 under the Further Undertaking was determined by applying a fair and reasonable rate of interest of 8% compounded annually to compensate for the delay in fulfilling the Further Undertaking. The Directors therefore consider that the Further Undertaking will fully compensate the Company for the non-fulfillment of Revenue Undertaking.
In the event of non-fulfillment of the Further Undertaking, the Settlement and the Remedial Agreement provide a clear formula for calculating the Liquidated Damages payable by Asia-Pacific Regional Bureau to the Company as compensation. As the Liquidated Damages is calculated at a fair and reasonable rate of net profit margin of 12% of the shortfall in the Further Undertaking, the Directors consider that the Liquidated Damages payable to the Company in the event of non-fulfillment of the Further Undertaking is fair and reasonable.
Furthermore, the Further Undertaking may serve as motivation for Asia-Pacific Regional Bureau to assist in the development of the Television Screen Broadcast Business, which will be in the interests of the Company and the Shareholders as a whole.
–12– LETTER FROM THE BOARD
On 4 June 2014, with the assistance from Asia-Pacific Regional Bureau, the Media Subsidiary entered into an advertising agreement with Xiangxing (Fujian) Bag & Luggage Group Company Limited (“Xiangxing”) and agreed to provide advertisement broadcasting services to Xiangxing for a term of one year with the option to renew for an additional one year by mutual agreement at a consideration of HK$30,000,000 per annum. Further details of the advertising agreement with Xiangxing are disclosed in the section headed “8. Business Plan and Capital Expenditure Plan for the Remaining Free Right Period”.
The Directors have assessed that the provision of services under the advertising agreement with Xiangxing would take up approximately 5% of the Group’s overall advertising capacity (that is, advertising time slots offered by the Group). The Directors consider that the Group’s remaining advertising capacity is able to support the Further Undertaking.
Since the Revenue Undertaking was not fulfilled, the Directors considered that the remedies for the non-fulfillment of the Revenue Undertaking should take effect as early as possible. Thus, the Further Undertaking should commence immediately following the Settlement and the Remedial Agreement and would cover the two financial years ending 31 March 2015 and 31 March 2016.
Moreover, since Asia-Pacific Regional Bureau has only given the Revenue Undertaking but has not given any undertaking in respect of the profitability of the Television Screen Broadcast Business, it would also not be appropriate for the Further Undertaking to be based on profit margin, even though the Liquidated Damages is calculated by reference to profit margin.
Settlement fair and reasonable and in the Company’s and Shareholders’ interest
As a result of the non-fulfillment of the Revenue Undertaking, the Company and Asia-Pacific Regional Bureau have entered into negotiations for the remedial actions. The Directors have considered a number of options including cash compensation, extension of the Free Right period, and the Further Undertaking set out above. In considering the various options, the Directors should assess whether the solution provides appropriate compensation for the non-fulfillment of the Revenue Undertaking and whether the solution is in the interest of the Company and the Shareholders as a whole. Accordingly, when considering the Further Undertaking as compensation for the non-fulfillment of the Revenue Undertaking, the Directors should assess whether the increased amount of the Further Undertaking is sufficient to compensate the delay in fulfilling the Further Undertaking and whether adequate compensation will be afforded to the Company in the event of non-fulfillment of the Further Undertaking, rather than the likelihood of the Further Undertaking being fulfilled. Furthermore, the giving of opinion by the Directors on the likelihood of the Further Undertaking being fulfilled may cause unnecessary speculations and prejudice objective assessment of the Shareholders.
–13– LETTER FROM THE BOARD
If the Further Undertaking can be fulfilled, no compensation will be payable by Asia-Pacific Regional Bureau. As such, Asia-Pacific Regional Bureau’s obligation to pay the Liquidated Damages is not dependent on the profitability of the Television Screen Broadcast Business. The Directors consider that since the Revenue Undertaking was not a guarantee for profits, and the increased amount of the Further Undertaking is sufficient to compensate the delay in fulfilling the Revenue Undertaking, the Further Undertaking (together with the undertaking to pay Liquidated Damages in the event of non-fulfillment) is fair and reasonable and is in the best interests of the Company and the Shareholders as a whole.
The Settlement and the Remedial Agreement were arrived at after arm’s length negotiations between the Parties. In light of the above and in particular: (1) the uncertainty of the outcome of the arbitration process particularly the amount of compensation, (2) the Settlement and the Remedial Agreement make provisions for ascertaining compensation thereby removing uncertainty, (3) the Liquidated Damages is calculated at a fair and reasonable rate of net profit margin, and (4) the Settlement would save time and financial resources of the Company, and the Group’s resources and efforts can be concentrated on future operation and development of the Television Screen Broadcast Business, the Directors consider that the terms of the Settlement and the Remedial Agreement are fair and reasonable and are in the best interests of the Company and the Shareholders as a whole.
Non-fulfillment of the Further Undertaking
If the Further Undertaking is not fulfilled, the Company will make a claim against Asia-Pacific Regional Bureau for the Liquidated Damages after the Audited Operating Revenue for the two financial years ending 31 March 2016 shall have been finalized in accordance with the terms of the Remedial Agreement.
During the negotiations on remedial actions, Asia-Pacific Regional Bureau is fully aware of its financial obligations in the event of non-fulfillment of the Further Undertaking; and by entering into the Remedial Agreement, Asia-Pacific Regional Bureau must have considered its ability to pay the Liquidated Damages in the event of non-fulfillment of the Further Undertaking. Furthermore, by reason of Asia-Pacific Regional Bureau’s relationship with Xinhua News Agency, which is the state press agency of the PRC, the Directors see no reasons of Asia-Pacific Regional Bureau being unable, or refusing to honour its obligations, to pay the Liquidated Damages in the event of non-fulfillment of the Further Undertaking.
5. PRINCIPAL BUSINESS ACTIVITIES OF THE COMPANY
The principal business activities of the Group are provision of cleaning and related services, provision of medical waste treatment services, and the provision of publicly broadcasting information and advertisement on television screen services.
–14– LETTER FROM THE BOARD
6. PRINCIPAL BUSINESS ACTIVITIES OF ASIA-PACIFIC REGIONAL BUREAU
Asia-Pacific Regional Bureau is an organization established by Xinhua News Agency Asia-Pacific Regional Bureau in Hong Kong and its principal business activities include news reporting, editing, press release and other related business.
7. LISTING RULES IMPLICATIONS
As the Cooperation Agreement was a very substantial acquisition and the Remedial Agreement has the effect of amending some of the material terms of the Cooperation Agreement and shall form part of the Cooperation Agreement, the Cooperation Agreement as amended by the Remedial Agreement constitutes a very substantial acquisition subject to the relevant very substantial acquisition requirements under Chapter 14 of the Listing Rules.
Asia-Pacific Regional Bureau is a substantial shareholder who is holding 214,681,040 Shares, representing approximately 15.70% of the Company’s issued share capital and therefore a connected person of the Company. As the value of the consideration is more than HK$10,000,000, the Remedial Agreement constitutes a non-exempted connected transaction and a very substantial acquisition and is subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules and subject to the relevant very substantial acquisition requirements under Chapter 14 of the Listing Rules.
The Company will seek the Independent Shareholders’ Approval of the Settlement and the Remedial Agreement at the EGM whereby Asia-Pacific Regional Bureau and its close associates shall abstain from voting.
An Independent Board Committee has been formed to provide recommendation to the Independent Shareholders in relation to the Remedial Agreement and the Settlement. The Independent Financial Adviser has been appointed to advise the Independent Board Committee and the Independent Shareholders in this regard.
Shareholders and investors should note that the sole purpose of the Settlement and the Remedial Agreement is to compensate the Company for the non-fulfillment of the Revenue Undertaking by Asia-Pacific Regional Bureau under the Cooperation Agreement. The Directors have not expressed any opinion as to whether the Further Undertaking will be fulfilled; and that the Further Undertaking shall not be taken as an indication that the aggregate Audit Operating Revenue for the two financial years ending 31 March 2016 would be no less than HK$170,000,000. Shareholders and investors are therefore urged to exercise caution when dealing in the Shares.
Shareholders and investors should note that the Settlement and the Remedial Agreement is subject to various conditions as stated in the sub-section headed “3. The Remedial Agreement – Conditions precedent”. The Settlement and the Remedial Agreement may or may not proceed. Shareholders and investors are therefore urged to exercise caution when dealing in the Shares.
–15– 8. BUSINESS PLAN AND CAPITAL EXPENDITURE PLAN FOR THE REMAINING FREE RIGHT PERIOD
For the purpose of facilitating Shareholders’ assessment of the Company’s prospects, the Company’s current arrangement of the Television Screen Broadcasting Business, business plan and capital expenditure plan for the remaining Free Right period are provided below:
(a) Current arrangement of the Television Screen Broadcasting Business
Arrangement between venue providers and the Company
The Company entered into arrangements with different venue providers and/or provider of display screens and the BOARD THE FROM LETTER details are illustrated below as at the Latest Practicable Date:
Renew Revenue Maintenance Screen Volume Type Partner Duration Option Sharing Exclusivity Terms Ownership Obligation Size Location
Volume of indoor TV screens KTT InTrain 28 Video Wall MTR 3 Years 3 Years No Yes HK$600,000/Yr Rent the Company 26" Inside KTT Train KTT–16– Hunghom Station 12 Flat Panel MTR 3 Years 3 Years No Yes HK$600,000/Yr Rent the Company 50" Inside Hung Hom Station HKIA Airport 10 Flat Panel HKIA Continuous n/a No Yes – Rent the Company 42" Inside Terminal 1 Gates Total indoor screens 50
Volume of outdoor LED screens Hong Kong LED – COSCO 1 Video Wall Grand Millenium 2 Years 2 Years 4% of Gross Yes HK$18,000/Month Rent the Company 240" Grand Millenium Plaza Profit Plaza Hong Kong LED – Causeway 1 Video Wall HK SAR Continuous n/a No No – Rent the Company 200" 520 Lockhart Road, Bay Causeway Bay Hong Kong LED – Wan Chai 1 Video Wall Independent Continuous n/a No Yes – Rent the Company 100" 157 Hennessy Road, Wan Chai Total outdoor screens 3
Total screens 53 Arrangements between advertising customers and the Company
In May 2014, the Company sponsored the Annual Music Youth Festival held at Central Government Offices, Admiralty, Hong Kong where Symbol Media Limited advertised throughout the Company’s network of outlet screens for a period of three week. It was a one-time contract which generated revenue of approximately HK$2,400,000.
On 4 June 2014, the Company entered into an advertising agreement with Xiangxing, one of Chinese largest manufacturers of luggage, pursuant to which the Company agreed to provide advertisement broadcasting services to Xiangxing and Xiangxing agreed to broadcast advertisements through the Company’s network of mobile, indoor and outdoor television screens for a term of one year with the option to renew for an additional one year, upon agreements from both ETRFO H BOARD THE FROM LETTER parties, at a consideration of HK$30,000,000 per annum. Xiangxing is responsible to provide the video content subject to approval by the Company and relevant authority and has a right to change its video content on a monthly basis with a requirement of one week prior notice. The Company is responsible for any maintenances issues to the outlet screens and is required to make up any additional advertising time at the end of the contract should there be any advertising periods suspended due to any maintenance issues of the outlet screens. Further, Media Information was incorporated in the
–17– advertising contract with Xiangxing. Details of the advertising contract with Xiangxing are illustrated below:
Project Description Volume Time Slot Frequency Frequency Frequency Frequency Frequency Contract Sum Payment Terms (Unit) (Per Hour) (Per Day) (Per Month) (Per Year) (Year)
KTT inTrain LED Screen 28 26" Inch InTrain LED Screen 28 30 seconds 10 12 30 12 1 KTT HungHom Train Station HungHom Station Passenger Lobby 12 12 30 seconds 10 12 30 12 1 50" LED Screen Hong Kong International HKIA Terminal 1 Passenger Gate 10 10 maximum 20 minutes 1 20 30 12 Airport 42" LED Screen Grand Millenium Plaza Grand Millenium Plaza 1 Outdoor 240" 1 30 seconds 10 15 30 12 1 Outdoor LED Screen LED Screen Hong Kong Victoria Park HK Victoria Park Front Entrance 1 200" 1 30 seconds 10 15 30 12 1 Outdoor LED Screen LED Screen Causeway Bay Lockhart Road Causeway Bay Lockhart Road 1 100" 1 30 seconds 10 15 30 12 1 LED Screen LED Screen
Total: HK$30,000,000/ HK$7,500,000/ Year 3 Months LETTER FROM THE BOARD
Xiangxing and Media Subsidiary shall carry out preparation work for the publishing of advertisements to commence on the effective date. Xiangxing has definite commitment on the publishing schedule and Xiangxing is required to pay the instalments even if it fails to provide the advertisement contents to the Media Subsidiary. The consideration of HK$30,000,000 under the advertising agreement is payable by Xiangxing to the Media Subsidiary by 4 equal quarterly instalments. Currently, Xiangxing is at the preparation phrase working on the advertising designs and contents and relevant matters. The preparation phrase is close to completion and the Media Subsidiary and Xiangxing agreed that the first instalment is payable at the commencement of the advertising period.
Sales and marketing arrangement between Xinhua News Agency and the Company
The Company recognizes the value of Xinhua News Agency and its expansive network. Xinhua News Agency Asia-Pacific Regional Bureau and Asia-Pacific Regional Bureau are in full cooperation with the Company to identify and refer potential customers. In this respect, the Media Subsidiary entered into an advertisement agreement with Xiangxing on 4 June 2014 which was identified and referred by Asia-Pacific Regional Bureau. Xinhua News Agency Asia-Pacific Regional Bureau oversees 33 Xinhua News Agency branches in the Asia Pacific region including locations such as South Korea, Japan, Singapore, Malaysia and Indonesia. Xinhua News Agency Asia-Pacific Regional Bureau has alerted the local branches to help identify international companies looking to advertise in the Hong Kong and PRC in order to tap and penetrate into the Chinese market. Additionally, Xinhua News Agency Asia-Pacific Regional Bureau has circulated the Company’s overview and platform during its internal meetings with each of Xinhua News Agency PRC branches in order to increase the awareness of the Company and to help identify and refer possible PRC enterprises looking to advertise and develop in the Hong Kong market. Furthermore, Xinhua News Agency Asia-Pacific Regional Bureau can help tab into various local and regional PRC government entities looking to advertise in Hong Kong. In support of the Company’s new strategy, Xinhua News Agency Asia-Pacific Regional Bureau has also been able to initiate meetings with potential large Chinese customers and from these connections through Xinhua News Agency Asia-Pacific Regional Bureau, the Company is able to expand its presence and increase its awareness throughout the entire Asia Pacific region including the PRC and hence bring business opportunities to the Company. By leveraging Xinhua News Agency Asia-Pacific Regional Bureau, the Company is also able to minimize initial startup costs and bypass setting up regional offices. Currently, the Company has five sales and marketing employees, four business development employees, four senior management and eight support function employees. The Company plans to hire additional employees in conjunction with the growth of the business. The Company is also keen to rely on Xinhua’s various local branches to do many of its sales and marketing efforts in regions outside of Hong Kong.
–18– LETTER FROM THE BOARD
(b) Business plan
Both Asia-Pacific Regional Bureau and the Group are dedicated and focused on recapturing the shortfall during the development stage of the Television Screen Broadcast Business in previous years. After the Television Screen Broadcast Business achieves a positive return on its operations in Hong Kong and in PRC, the Group plans to expand its operations in other regions such as Macau, South Korea and Japan. As Asia-Pacific Regional Bureau has regional offices in Macau, South Korea and Japan, the Company believes that this will enable Asia-Pacific Regional Bureau to provide more direct assistance in the development of the Television Screen Broadcast Business in Macau, South Korea and Japan. As explained above, the Company plans to expand its operation in other regions after the Television Screen Broadcast Business achieves a positive return on its operations in Hong Kong and in PRC. Therefore, it is expected that the business operation in Macau, South Korea and Japan will not commence until late 2015.
One major change in strategy is the Company’s targeted advertising clients. Instead of hiring an expansive sales team to target medium size companies with equal sized advertising budget, the Company plans to fully leverage Xinhua’s expansive PRC network to target large Chinese enterprises with large advertising budgets. The management believes this change in strategy will not only reduce costs but also increase revenues and the Company’s gross/net margins.
The Company is currently looking to increase the total number of LED screen outlets in both Hong Kong and PRC in order to increase its attractiveness to potential advertising customers. In addition to the 53 LED outlets currently on hand, the Company plans to add an additional 10 LED screens in the PRC and an additional 5 LED screens in Hong Kong in the upcoming two years. In PRC, the Company is targeting first tier Chinese cities such as Beijing, Shanghai, Guangzhou and Shenzhen. In Hong Kong, the Company is targeting centralized commercial areas such as Wan Chai, Causeway Bay, Tsim Sha Tsui, Sheung Wan and Mong Kok. The targeted LED screens are mostly large outdoor LED displays located in heavily commercial areas such as malls, commercial buildings, and train stations. These potential targets all align with the Company’s strategy of maximizing exposure to the targeted demographic to meet the Company’s potential advertising client’s needs. The Company is currently in negotiation with several corporations in an attempt to acquire the additional LED outlets. One potential partner currently in negotiation is with a PRC railway company where the Company is to acquire the rights to the entire rail line of train stations stretching from Zhuhai to GuangZhou. Another potential client is a media company based in PRC where the Company is to acquire the rights or own outright of LED screens located in Finance Street and Olympic Park in Beijing. In Hong Kong, the Company is currently in negotiations with two respective companies regarding large LED screens located in Tsim Sha Tsui, Sheung Wan, Wan Chai and Mong Kok.
–19– LETTER FROM THE BOARD
The Company wants to keep all options open in order to determine the best possible option in terms of minimizing cost and maximizing the number of outlets. Negotiations have been kept open to all possible methods including but not limited to fixed rental, revenue sharing arrangement, profit sharing arrangement, and outright merger and acquisition. Projected allocation of capital expenditure will be used towards these pipeline deals. Currently, the Company is under negotiation on several deals in its pipeline. The Company expects to utilize approximately HK$25million as capital expenditure in 2015 toward the investment on acquisition of these pipeline deals which are all large indoor/outdoor LED screen related projects. Of the HK$25 million, the Company expects to allocate approximately 75%, 12.5% and 12.5% purchasing, leasing and installations of television screens respectively. The company wants to expand its LED screen network in order to increase its attractiveness to potential new advertising clients. Revenue generated from the sales of advertisements such as Xiangxing will be partly reallocated towards capital expenditure in 2015. The Company is confident that it will reach its target utilizing one or multiple financing options listed above.
Incorporation of Media Information in the Company’s business strategy
Pursuant to the Cooperation Agreement, the Company acquired the Free Right, which allows the Company to use the Media Information for a period of 10 years commencing from 24 May 2011. The Company had made use of the Media Information to attract existing and potential customers as the Company recognizes that a combination of news and advertisements will increase viewership and attract more attention to target demographic of viewers. In this regard, a multitude of programs, including but not limited to, sports, current events, lifestyle, worldwide and local news are provided by Asia-Pacific Regional Bureau at no costs to increase viewership. All programs are video feeds in English, Mandarin or Cantonese with Chinese subtitles updated with new content provided on a weekly basis. The term of providing exclusive Media Information has been and is intended to be included in all advertising contracts, including the one entered with Xiangxing. In this way, the Company had made use of the Media Information to attract existing and potential customers.
–20– (c) Capital expenditure plan
The initial capital of HK$100,000,000 contributed by the Company for the Television Screen Broadcast Business under the Cooperation Agreement has been used as follows:
Salary and Director Misc. Advertising Renovation Banking Office Wages Professional Director Fee Allowance Expense Expense Expenses Rent Expense Expense Expense T&E Expense Fees Expense Grand Total
Sum of ETRFO H BOARD THE FROM LETTER Amount HK$2,570,000 HK$638,261 HK$11,909,487 HK$9,141,299 HK$105,890 HK$7,397,202 HK$4,869,981 HK$8,162,223 HK$1,306,847 HK$12,379,101 HK$58,480,290
The Company proposes that the expected capital expenditure will be financed by internal resources of the Media Subsidiary. –21– It is planned that the unutilized initial capital of approximately HK$42,000,000 will be used as follows:
HK$ (approximate)
Purchase of television screens and installation costs 17,000,000 Leasing of space for installation of television screens 4,000,000 Set up costs of other offices 0 General working capital 21,000,000
Total 42,000,000 LETTER FROM THE BOARD
9. THE EGM
Mr. Ju Mengjun and Mr. Chang Yong are the Company’s Directors and by virtue of their being directors of Asia- Pacific Regional Bureau, are considered as having an interest in the transaction contemplated under the Settlement and the Remedial Agreement, therefore they were abstained from voting at the meeting of the Board convened for the purpose of approving the Settlement and the Remedial Agreement.
Asia-Pacific Regional Bureau holds 214,681,040 Shares, representing approximately 15.70% of the issued share capital of the Company as at the Latest Practicable Date, and therefore is a substantial shareholder and a connected person of the Company pursuant to R14.07 of the Listing Rules. As a result, Asia-Pacific Regional Bureau will be required to abstain from voting at the EGM. The proposed resolutions will be passed by way of ordinary resolutions and voting will be conducted by way of poll in accordance with the requirements of the Listing Rules. Other than Asia-Pacific Regional Bureau, no other Shareholders have any material interest in the Settlement and the Remedial Agreement.
10. THE TELEVISION SCREEN BROADCAST BUSINESS
Asia-Pacific Regional Bureau
Asia-Pacific Regional Bureau is a company established with limited liability under the laws of Hong Kong by Xinhua News Agency Asia-Pacific Regional Bureau, the Asia-Pacific regional branch of Xinhua News Agency established in January 1984. Asia-Pacific Regional Bureau is principally engaged in news reporting, editing, press release and other related business.
Xinhua News Agency, headquartered in Beijing, PRC, is the state-owned news agency of the PRC and the major news and information collection and distribution centre in the PRC founded in 1931. Xinhua News Agency has branches located in over 30 provinces, autonomous regions and centrally administered municipalities in the PRC as well as Hong Kong and Macau and bureaus in more than 100 countries and regions. In addition, Xinhua News Agency has five regional offices that can release news directly, including, Xinhua News Agency Asia-Pacific Regional Bureau in Hong Kong, the Latin American Regional Office in Mexico City, the African Regional Office in Nairobi, the Middle-East Regional Office in Cairo and the European Regional Office in Brussels. Xinhua News Agency has a multi-channel, multi-function and multi-level news release system and broadcasts news to PRC domestic newspapers, radio and television stations through dedicated lines and release news to the world in a number of languages, including Chinese, English, French, Spanish, Russian, Arabic and Portuguese. Xinhua News Agency also publishes a number of publications in the PRC including “Reference News” and “Fortnightly Chat”, which are one of the largest daily newspapers and magazines in the PRC in terms of circulation, respectively. Xinhua News Agency has also established its audio-video news centre which provides programmes on current events and special topics to television stations and its subscribers, and has set up a news, information and subscribers network both domestically and overseas and
–22– LETTER FROM THE BOARD signed news exchange and cooperation agreements with news agencies and other journalistic organizations of about 100 countries and regions.
Overview of the Television Screen Broadcast Business
The Media Subsidiary will be the key operating subsidiary of the Group to carry out Television Screen Broadcast Business. The Television Screen Broadcast Business will involve the broadcast of the Media Information on television screens that are installed outdoors (such as external walls of buildings and plazas) and indoors (such as shopping malls and office building lobby) and the production of advertisements. The timeslots during which the Media Information will be broadcasted and the particular type of Media Information to be broadcasted in a particular timeslot would be determined by the Media Subsidiary taking into account factors such as local legal and regulatory requirements, physical environment where the television screens are situated, the feedback of the targeted audience, market demands, market competition, requests or suggestions of the advertisers (i.e. customers and potential customers of the Media Subsidiary). Revenue derived from the Television Screen Broadcast Business will comprise the sale of air time for the display of the customers’ advertisements and advertisement production income.
It is intended that whilst Asia-Pacific Regional Bureau will contribute its management experience and the Free Right, the Group will assist the development of the Television Screen Broadcast Business by contributing its expertise and network in the equity market to facilitate future fund raising activities for the development of the Television Screen Broadcast Business. Furthermore, given that Hong Kong has been the operating base of Xinhua News Agency Asia-Pacific Regional Bureau since its establishment, the Company and Asia-Pacific Regional Bureau have considered it commercially prudent to have the Television Screen Broadcast Business commenced in Hong Kong first and will, depending on the then economic conditions, business and financial performances of the Media Subsidiary, progressively expand the geographic coverage of the Television Screen Broadcast Business to South Korea.
It is expected that the vast network of business connections with companies operating in Hong Kong, Macau and China of Asia-Pacific Regional Bureau will assist the Media Subsidiary in promoting the Television Screen Broadcast Business and attracting potential customers.
Overview of market competition
Advertising is a highly competitive industry and is crowded by many local and international advertising agencies and production companies and advertising customers may choose to advertise through a number of media. As such, the Directors consider that the Television Screen Broadcast Business will face direct and indirect competitions from other advertising media players in areas ranging from traditional radio, newspaper, magazines, television, posters and billboards to light emitting diode (“LED”)/liquid crystal display (“LCD”) display screens installed in transit and subways and to internet based media. The Directors have considered that direct competitors to the Group’s Television Screen Broadcast Business would include (i) operators of commercial properties (such as shopping malls and hotel operators) who install their own television screens and promote their advertising
–23– LETTER FROM THE BOARD services to potential customers; (ii) public transport operators which have installed television screens to display advertisements; and (iii) outdoor broadcasting companies which operate and invest in advertising display network using LED video displays in Hong Kong. In addition, the Directors have also considered that the Television Screen Broadcast Business will be subject to a number of competitive factors such as (i) the locations of the television screens installed by the Media Subsidiary; (ii) the attractiveness of the Media Information to be displayed; (iii) the pricing policy; (iv) the brandname of the advertising customers and their relationship with the Media Subsidiary; and (v) other advertising media developed that may become more attractive to the potential advertising customers.
The competitive strengths of the Media Subsidiary
The management of the Company considers that the Media Subsidiary has a number of competitive strengths in developing the Television Screen Broadcast Business, including:
(i) The Free Right
Unlike many other players in the media industry which are required to incur substantial cost to produce their own programmes or acquire the right to broadcast programmes produced by the relevant content suppliers to attract potential advertising customers, the Media Information provided by Asia-Pacific Regional Bureau to the Company will be on a free of charge basis under the Cooperation Agreement. As such, the Media Subsidiary will have significant cost advantages over other media players. In addition, leveraged on the resourceful media and news content that can be accessed by the Media Subsidiary under the Free Right, it is considered that the Media Subsidiary will be able to differentiate from other media players and allow it to gain a solid foothold in the media industry.
(ii) Extensive business network of Asia-Pacific Regional Bureau
Under the Cooperation Agreement, Asia-Pacific Regional Bureau will assist the Company in developing the Television Screen Broadcast Business and the Media Subsidiary will therefore be able to leverage on the extensive business network of Asia-Pacific Regional Bureau and gain access to a vast potential clientele (particularly the PRC enterprises).
–24– LETTER FROM THE BOARD
11. OVERVIEW OF THE OUTDOOR ADVERTISING INDUSTRY
Outdoor advertising refers to the various types of advertising means that reach the potential consumers when they are outside home and mainly focus on marketing to consumers when they are “on-the-go” in public areas, in transit, waiting and/or in specific commercial locations (e.g. the display of advertisements on television screens installed in shopping malls/plazas or on the exterior wall of buildings are some common types of outdoor advertising).
The conditions of advertising market is dependent on a number of factors, including the general economic conditions, industry and market trends and the overall business environment (i.e. enterprises are more willing to incur advertising expenses to promote their products during economic booms than recessions).
12. OVERVIEW OF THE LEGAL AND REGULATORY REQUIREMENTS
It is the intention of the Company to place the initial focus of the Television Screen Broadcast Business in Hong Kong. Prior to expanding the Television Screen Broadcast Business to other countries, the management of the Company will take into account a number of factors including, local legal and regulatory requirements and market demands and competitions.
Television Screen Broadcast Business is not a restricted business (i.e. only open to particular class of business operators irrespective of whether other business operators can obtain the relevant approvals, permits and consent etc. required for the actual operation of the business) in Hong Kong. However, the running of such business is subject to certain legislative and regulatory requirements.
Set out below is a brief discussion on the legislative and regulatory requirements in Hong Kong that may be applicable or relevant to the conduct of Television Screen Broadcast Business:
No Licence Required under Broadcasting Ordinance (Chapter 562 of the Laws of Hong Kong) and Telecommunications Ordinance (Cap 106 of the Laws of Hong Kong)
Considering that the advertisements and information involved in the Television Screen Broadcast Business are not intended or available for receipt by audience of domestic premises and rooms in hotels for lodging and the programmes and advertisements to be shown on the television screens installed by the Group will be made solely for performance or display in public places, the licensing requirements under the Broadcasting Ordinance and/or the Telecommunications Ordinance are not applicable to the Television Screen Broadcast Business and no licence under the said ordinance needs to be obtained. Given this, the Television Screen Broadcast Business intended to be run by the Company is not and need not be subject to the regulatory requirements under the Broadcasting Ordinance and the codes of practice and guidelines issued thereunder.
–25– LETTER FROM THE BOARD
No Legislation Specifically Requiring the Carrying on of Advertising Business to be Licensed
There is no legislation or regulation in Hong Kong specifically requiring participants in the advertising industry to obtain licence for carrying on advertising business. Therefore the Media Subsidiary will not be required to obtain such licence for showing on television screens advertisements.
No Specific Legislative and Regulatory Requirement Regarding the Legal Form and Place of Establishment of the Media Subsidiary
There is no specific legal and regulatory requirement in relation to the legal form or place of incorporation or establishment of the party in Hong Kong conducting the Television Screen Broadcast Business in manner as planned by the Company. So it is permissible for the Media Subsidiary to be in the form of a company with limited liability as commonly used by many business operations and whether such company is a Hong Kong company or not does not matter so long as the company obtains Hong Kong business registration certificate.
Operational Control
Buildings Ordinance (Chapter 123 of the Laws of Hong Kong)
The Television Screen Broadcast Business to be conducted by the Company through the Media Subsidiary involves installation of television screens on the external wall of buildings. Prior approval of building plans and consent to commence the installation works are required under the Buildings Ordinance from the Building Authority for the installation of television displays on external walls of buildings. In this connection, the relevant design and constructions standards under the Buildings Ordinance have to be met for the Group’s installation of television screens on external walls of buildings.
Road Traffic Ordinance (Chapter 374 of the Laws of Hong Kong)
The mode in which the Television Screen Broadcast Business is intended to be conducted in Hong Kong, which involves showing of, inter alia, advertisements on television screens to be installed outdoors, including for example on exterior walls of buildings, would require the obtaining of written permission from the Transport Department pursuant to the Road Traffic Ordinance and/or its related regulations.
–26– LETTER FROM THE BOARD
Public Health and Municipal Services Ordinance (Chapter 132 of the Laws of Hong Kong)
The Public Health and Municipal Services Ordinance requires the Food and Environmental Hygiene Department to serve a notice on the owner of any structure erected solely for the purpose of exhibiting advertisements to remove the structure or do such work as may be specified in the notice to render the same safe if in the opinion of the Food and Environmental Hygiene Department such structure is dangerous or is likely to become dangerous by reason of its construction, wind, rain, dilapidation, its age or other cause. Failure to comply with any of the requirements of the said notice is an offence.
Advertisements Regulations (Chapter 132B of the Laws of Hong Kong)
There may possibly be the argument that the television screens to be set up in Hong Kong for the running of the Television Screen Broadcast Business by the Company constitute at the time when they show programmes or advertisements, electric or other similar light sign regulated by the Advertisements Regulations. Pursuant to the Advertisements Regulations, the Fire Services Department has the authority to issue a notice requiring the removal of any electric or other similar light sign if it appears to the Fire Services Department that the same is for any reason, including inefficient maintenance, a source of serious risk of fire. If such a notice is issued, within 7 days of the service of such notice, the person by or for whom such sign was erected and is maintained shall cause the sign to be removed unless within such period of 7 days he satisfies the Fire Services Department, by remedying any defect or otherwise, that the notice can safely be withdrawn.
Summary Offences Ordinance (Chapter 228 of the Laws of Hong Kong)
Under the Summary Offences Ordinance, any person who without lawful authority or excuse sets out or leaves, or causes to be set out or left, any matter or thing which obstructs, inconveniences or endangers, or may obstruct, inconvenience or endanger, any person or vehicle in a public place shall be liable to a fine or to imprisonment.
Noise Control Ordinance (Chapter 400 of the Laws of Hong Kong)
Under the Noise Control Ordinance, an offence would be committed if a person at any time in any public place plays or operates any television apparatus or uses any megaphone or other device or instrument for magnifying sound and the noise of so doing is a source of annoyance (i.e. annoyance that would not be tolerated by a reasonable person) to any person.
–27– LETTER FROM THE BOARD
Country Parks and Special Areas Regulations (Chapter 208A of the Laws of Hong Kong)
Pursuant to the Country Parks and Special Areas Regulation, displaying any advertisement within a country park or special area designated as such under the Country Parks Ordinance (Chapter 208 of the Laws of Hong Kong) requires a permit in writing granted by the Agriculture, Fisheries and Conservation Department.
As at the Latest Practicable Date, the Company has no plan to install the television screens for showing, inter alia, advertisements in the said country parks and special areas and as such there is no need to obtain written permit from the Agriculture, Fisheries and Conservation Department for the Television Screen Broadcast Business the Company intends to conduct.
Content Control
Broadcasting Ordinance (Chapter 562 of the Laws of Hong Kong) and Telecommunications Ordinance (Chapter 106 of the Laws of Hong Kong)
As mentioned above, the regulatory requirements under, inter alia, the Telecommunications Ordinance and the Broadcasting Ordinance and the codes of practice issued thereunder, which apply to licensees under the Broadcasting Ordinance, are not applicable to the running of Television Screen Broadcast Business as planned by the Company. As such, it is not mandatory for the Company or the Media Subsidiary to observe the Generic Code of Practice on Television Programme Standards and the Generic Code of Practice on Television Advertising Standards both issued pursuant to the Broadcasting Ordinance and the content control related statutory provisions in the Broadcasting Ordinance in the conduct of Television Screen Broadcast Business as planned by the Company. However, it is intended that to the extent practicable and relevant, the requirements in the aforesaid codes of practice and the Broadcasting Ordinance be complied with as far as possible.
Film Censorship Ordinance (Chapter 392 of the Laws of Hong Kong)
For each programme and advertisement to be shown on television screens installed at public places for the purpose of Television Screen Broadcast Business to be conducted by the Company after Completion, a certificate of exemption or a certificate of approval in respect thereof issued by the Television and Entertainment Licensing Authority under the Film Censorship Ordinance has to be obtained.
The certificate of approval or the certificate of exemption (as the case may be) or a legible photocopy thereof shall be displayed and kept displayed in a conspicuous position in or about the entrance to the part of the place intended to be occupied by persons viewing the exhibition of the programme or advertisement (as the case may be) during the period of the exhibition of the same.
–28– LETTER FROM THE BOARD
Unless a certificate of exemption is obtained, the programme or the advertisement (as the case may be) has to go through classification procedures of the Television and Entertainment Licensing Authority. There are four categories in the classification system, namely category I (suitable for all ages), category IIA (not suitable for children), category IIB (not suitable for young persons and children) and category III (persons aged 18 or above only). The advertisement relating to the programme classified has to display prominently the appropriate symbol applicable for the classification and where relevant the corresponding prescribed notices in both English and Chinese.
There is no intention to have programmes or advertisements classified as category III shown on the television screens to be set up for the purpose of the Company’s Television Screen Broadcast Business. Moreover, it would be an offence to exhibit a programme or an advertisement classified as belonging to category III to a person under the age of 18 but the television screens are intended to be installed at public places where people aged under 18 will also have access. This is another impetus, in addition to factors like maintaining good image, for avoiding showing category III programmes or advertisements on the television screens to be set up.
Furthermore, it is intended that the television screens to be set up will not show any advertisements relating to any film which is classified as belonging to category III. If such advertisements are to be shown, approval of the advertisements by the Television and Entertainment Licensing Authority must be obtained.
Control of Obscene and Indecent Articles Ordinance (Chapter 390 of the Laws of Hong Kong)
The Control of Obscene and Indecent Articles Ordinance seeks to control articles (i.e. any thing consisting of or containing material to be read or looked at or both read and looked at, any sound recording, and any film, video-tape, disc or other record of a picture or pictures) which consist of or contain material that is obscene or indecent (including material that is violent, depraved or repulsive). For any programme or advertisement intended to be shown on the television screens to be set up for the purpose of the Company’s Television Screen Broadcast Business, if there is in force a certificate of approval or a certificate of exemption issued under the Film Censorship Ordinance in respect of that programme or advertisement, the Control of Obscene and Indecent Articles Ordinance shall not apply to that programme or advertisement.
In case certificate of approval or certificate of exemption under the Film Censorship Ordinance cannot be obtained for any programme or advertisement intended to be shown on television screens for the purpose of the Company’s Television Screen Broadcast Business, showing such programme or advertisement (as the case may be) on television screens will not be further pursued and as such there is no need to go through the procedures in relation to application for classification under the Control of Obscene and Indecent Articles Ordinance.
–29– LETTER FROM THE BOARD
Trade Descriptions Ordinance (Chapter 362 of the Laws of Hong Kong)
Pursuant to the Trade Descriptions Ordinance, it would be an offence to publish an advertisement with a false trade description (as defined under the Trade Description Ordinance). However, it would be a defence for the person charged to prove that he is a person whose business it is to publish or arrange for the publication of advertisements and that he received the advertisement for publication in the ordinary course of business and did not know and had no reason to suspect that its publication would amount to an offence under the Trade Descriptions Ordinance. To guard against the possibility of showing, as commissioned by the advertisers, advertisements containing false trade description, the Media Subsidiary will have in place procedures and policies for examining the content of the advertisements intended to be shown with a view to avoiding as far as possible the showing of advertisements with false or misleading content on television screens. In this connection, efforts will be made to comply with the related provisions in the said Generic Code of Practice on Television Advertising Standards (e.g. the provisions relating to truthful presentation and factual and best selling claims).
Legislation relating to Specific Type of Advertisements
There are Hong Kong ordinances that contain provisions regulating particular types of advertisements. Examples include the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), Banking Ordinance (Chapter 155 of the Laws of Hong Kong), Undesirable Medical Advertisements Ordinance (Chapter 231 of the Laws of Hong Kong), Travel Agent Ordinance (Chapter 218 of the Laws of Hong Kong), Sex Discrimination Ordinance (Chapter 480 of the Laws of Hong Kong), Disability Discrimination Ordinance (Chapter 487 of the Laws of Hong Kong) and Race Discrimination Ordinance (Chapter 602 of the Laws of Hong Kong). Some of these ordinances also contain provisions affording parties carrying on the business of publishing or arranging for the publication of the advertisement defence if certain conditions are satisfied.
Control in relation to advertisement production in Hong Kong
Regarding production of advertisements by the Media Subsidiary, which is intended to constitute a relatively small portion of the Television Screen Broadcasting Business, depending on the location and methodology of shooting, the equipment to be used, etc., certain permits and/or authorization from the relevant authorities may be required to be obtained and there may be relevant statutory provisions and conditions stated in the permits/authorization to be complied with.
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Not Foresee Major Obstacles in Obtaining Required Approval and Written Permission
It is intended that relevant experienced professionals will be engaged in advising the Media Subsidiary, for instance, on the selection of appropriate places for installation of the television screens, how the installation should be carried out in order to meet the requisite design construction and other relevant standards and requirements, the appropriate degree of brightness to be set for the television screens etc. and in drawing up the required plans, proposals and submissions. Besides, the physical and surrounding conditions of the site and safety will be important factors to be taken into account in selecting the places for installation of the television screens. Before formal submission of the applications for approval/permission to the Buildings Department and the Transport Department, the Company, the Media Subsidiary and/or the professionals engaged will consult and communicate with these departments in order to have a better understanding of their requirements to ensure proper compliance with the relevant regulatory requirements in Hong Kong.
Moreover, the content to be shown on the television screens under the Company’s Television Screen Broadcast Business will be news, news related and information programmes and advertisements, not violent or pornographic content.
Overview of the PRC Legal and Regulatory Requirements
It is the intention of the Company to place initial focus of the Television Screen Broadcast Business in Hong Kong, before expanding the Television Screen Broadcast Business to the PRC in addition to Hong Kong in the upcoming two years. The Company has engaged Beijing Zedu Law Firm to provide PRC legal opinion on the applicable PRC laws and regulations relating to the Group’s development of the Television Screen Broadcast Business in the PRC.
The Company has the following two feasible models for the operation of the Television Screen Broadcast Business in the PRC: (1) The Company conducts the Television Screen Broadcast Business directly from sale of airtime for the display of advertisements and advertisement productions; or (2) the Company cooperates closely with other third-party media operators or media service providers or advertising agencies who are holders of Advertising Business License or relevant approval and delegate or authorize such persons or organizations to engage in the advertising business activities in the PRC.
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Set out below is a brief overview of the legislative and regulatory requirements in the PRC that may be applicable or relevant to the conduct of Television Screen Broadcast Business in the PRC, and the PRC legal opinion in relation to the above two feasible models of operation as well as in respect of the granting of Free Right by Asia-Pacific Regional Bureau:
PRC Laws on Governance of the Advertising Industry
Pursuant to the Advertising Law of the People’s Republic of China (中華 人民共和國廣告法) (the “Advertising Law”) adopted in the 10th meeting of the Standing Committee of the 8th National People’s Congress of the People’s Republic of China on 27 October 1994 and which took effect on 1 February 1995, the term “advertisers” (廣告主) refers to any legal persons, economic organisations or individuals that, directly or through certain agencies, design, produce and release advertisements for the purpose of promoting products or providing services. The term “advertisement agencies” (廣告經營者) refers to those legal persons, economic organisations or individuals that are authorised to provide advertisement content design, production and agency services. The term “advertisement releaser” (廣告發佈者) refers to those legal persons or other economic organisations that release advertisements for the advertisers or for those advertisement agencies which are authorised by the advertisers.
Under the Advertising Law, advertisements shall not contain any false content, misrepresent to, or mislead the consumers. The content of an advertisement shall be conducive to the physical and mental health of the people, shall promote the quality of commodities and services, protect the legitimate rights and interests of consumers, be in compliance with social morality and professional ethics, and safeguard the dignity and interests of the State. An advertisement shall not involve any of the following circumstances: (1) using the National Flag, the National Emblem or the National Anthem of the People’s Republic of China; (2) using the names of State organs or their functionaries; (3) using words such as the State-level, the highest-grade or the best; (4) hindering social stability or endangering the safety of the person or property, or harming the public interests; (5) hindering the public order or violating the sound social morals; (6) having information suggesting pornography, superstition, terror, violence or hideousness; (7) carrying information of ethnic, racial, religious or sexual discrimination; (8) hindering the protection of environment or natural resources; or (9) other circumstances prohibited by laws or administrative rules and regulations. An advertisement should provide distinct and clear specifications on the product’s function, place of origin, uses, quality, price, manufacturer, validity period, promises or the content, forms, quality, price or promises of the services offered. An advertisement shall be distinguishable and shall enable consumers to identify it as such and not belittle commodities of other producers and dealers or services of other providers.
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Under the Advertising Law, the content of advertisements for food, wine and cosmetics should comply with the requirements of the health department and the use of medical terms or terms that are confusingly similar with medications is prohibited. The content of advertisements for medications should be based on the instructions approved by the State Council or provincial public health administrative department. It is prohibited to advertise tobacco through media broadcast, films, television, newspaper or periodicals and no advertising is allowed for special drugs such as anaesthetics, psychotropic drugs, toxic drugs or radioactive drugs.
Under the Advertising Law, advertisers shall, in designing, producing, and releasing advertisements on their own or by others on a commission basis, possess or furnish true, lawful and valid supporting documents, among others, to confirm the truthfulness of the content of the advertisements. Advertising agents and advertisement releaser should examine such supporting documents and verify the content of the advertisements according to laws and administrative regulations. In relation to advertisements with untrue content or incomplete supporting documents, advertising agents should not provide design, production or agency services while the advertisement releaser should not release such advertisements. In the event that false propaganda for commodities or services is conducted by making use of advertisements, the advertising supervisory and administrative authorities shall order the advertiser to stop releasing the advertisements and to use the same amount of its advertising expenses for making corrections in public within the corresponding areas, thus eliminating the effects, and shall impose on the advertiser a fine of not less than the amount of its advertising expenses but not more than five times that amount. The advertiser is responsible for civil liabilities arising from releasing false advertisements, deceiving and misleading consumers and causing the infringement of the legitimate rights of consumers. The advertising agents and advertisement releaser who know or are assumed to know the false content of the advertisements but still choose to design, produce and release such advertisements shall be jointly liable for the consequences in accordance with the PRC laws.
Pursuant to the Regulations on Administration of Advertisement (廣告 管理條例) (the “Regulations on Administration of Advertisement”) promulgated by the State Council on 26 October 1987 which took effect on 1 December 1987 and Detailed Implementing Rules for the Regulation on Advertising promulgated by the State Administration of Industry and Commerce on 30 November 2004 which took effect on 1 January 2005 (Order of the State Administration of Industry and Commerce No. 18) (廣告管理條例施 行細則) (the “Detailed Rules for the Implementation of the Regulation on the Administration of Advertising”), advertisement operators shall register in accordance with the following procedures: (1) for enterprises engaging in the operation of advertising business, application for registration shall be made at the competent administration for industry and commerce and obtain the business licence; and (2) for radio stations, television stations, periodicals publishing entities, and other entities that are required to apply for the
–33– LETTER FROM THE BOARD examination and approval in registering the operation of advertising business pursuant to other laws and administrative regulations, application for registration shall be made at the provincial level, autonomous region level and municipal city level at its locality or its authorised competent administration for industry and commerce of county level and above and obtain advertising business licnece (“Advertising Business Licence”). The content of an advertisement must be true sound, clear and easy to understand and must not cheat users and consumers in any way. An advertisement that contains any of the following content may not be released, broadcasted, installed or posted: (1) that violates the laws and regulations of the State; (2) that impairs the national dignity of the State; (3) that involves designs of the national flag, national emblem or national anthem or the music of the national anthem of the People’s Republic of China; (4) that is reactionary, obscene, superstitious or absurd; (5) that is fraudulent; and (6) that depreciates products of the same kind.
Pursuant to the Measures for the Administration of Advertising Business Licences promulgated by State Administration of Industry and Commerce on 30 November 2004 which took effect on 1 January 2005 (Order of the State Administration of Industry and Commerce No. 16) (廣告經營許可証 管理辦法) (the “Measures for the Administration of Advertising Business Licences”), radio stations, television stations, periodicals publishing entities, and other entities that are required to apply for the examination and approval in registering the operation of advertising business pursuant to other laws and administrative regulations shall apply to the administrative authorities governing advertising pursuant to the laws and obtain Advertising Business Licence before engaging in the respective advertising operation activities.
Pursuant to the Notice Governing Issues in relation to the Renewal of Advertising Business Licence promulgated by the State Administration of Industry and Commerce on 10 December 2004 and took effect on the same date (關於換發《廣告經營許可証》有關問題的通知 Gong Shang Guang Zi [2004] No.203), according to the provisions under Clause 2 of the Measures for the Administration of Advertising Business Licences, radio stations, television stations, periodicals or newspapers publishing entities, and other entities that are required to apply for the examination and approval in registering the operation of advertising business pursuant to laws and administrative regulations shall renew their Advertising Business Licences. The Advertising Business Licences of other entities engaging in advertising operation business will not be renewed.
Policies Governing the Investment in the Businesses of Advertising by Foreign Investors
Pursuant to the Provisions on the Administration of Foreign-Funded Advertising Enterprises jointly promulgated by the State Administration of Industry and Commerce and the Ministry of Commerce on 22 September 2008 which took effect on 1 October 2008 (Order of the State Administration of
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Industry and Commerce and Ministry of Commerce No. 35) (外商投資廣告企業 管理規定), (the “Provisions on the Administration of Foreign-funded Advertising Enterprises”), the establishment of advertising enterprises by investors from Hong Kong, Macau and Taiwan in the Mainland should follow the relevant provisions accordingly. For a foreign investor to establish an foreign-funded advertising enterprise, the following procedures should be followed: (1) the foreign investor shall apply to the State Administration of Industry and Commerce or its authorised administration for industry and commerce at the provincial level and obtain the Opinion on the Examination and Approval of Foreign-Invested Advertising Enterprise Project issued by the State Administration of Industry and Commerce or its authorised administration for industry and commerce at the provincial level; (2) the foreign investor shall apply to the Administrative Department for Commerce at the provincial level at the locality in which it intends to establish the enterprise, and obtain the Foreign-Invested Enterprise Approval Certificate issued by the Administrative Department for Commerce at the provincial level after examination and approval; and (3) the foreign investor shall follow the enterprise registration procedures of the State Administration of Industry and Commerce or its authorised administration for industry and commerce competent at the local level for examining and approving the registration. In addition to compliance with the conditions required under relevant laws and regulations, the establishment of advertising enterprises is also required to satisfy the following conditions: (1) the investor should be an enterprise that is principally engaged in advertising business; and (2) the investor should have been set up and operating for more than three years.
The State Administration of Industry and Commerce issued the Several Opinions on Further Improving the services provided for the Development of Foreign Invested Enterprises by Fully Carrying out the Functions of Administration of Industry and Commerce (Gong Shang Wai Qi Zi [2010] No. 94) (關於充分發揮工商行政管理職能作用進一步做好外商投資企業發展工作的若 干意見) (the “Several Opinions on Further Improving the services provided for the Development of Foreign Invested Enterprises by Fully Carrying out the Functions of Administration of Industry and Commerce”) on 7 May 2010, which took effect on the same date, and pursuant to which the provincial administration for industry and commerce is authorised to examine and approve projects on foreign-funded advertising enterprises, perfect approval requirement, set up filing system, and implement for matted examination and approval. The Ministry of Commerce issued the Notice of the Ministry of Commerce on Decentralizing the Examination and Approval Power for Foreign Investment (Shang Zi Fa [2010] No.209) (關於下放外商投資審批權限有 關問題的通知) (the “Notice of the Ministry of Commerce on Decentralizing the Examination and Approval Power for Foreign Investment”) on 10 June 2010, which requires that in addition to those matters to be approved by the Ministry of Commerce which has been set out under relevant laws and regulations, the establishment of foreign-funded enterprises related to the service sector and its changes (including the above of limit amount and the capital increase) should be approved and managed by the local approving
–35– LETTER FROM THE BOARD authority. It also reaffirms and further clarifies the scope of approval applicable to the competent provincial commerce department for foreign-funded enterprises.
Pursuant to the Measures for the Administration of Advertising Business Licences and the Detailed Implementing Rules for the Regulation on Advertising, a foreign invested enterprise which applies to operating advertising business shall be governed by the Provisions on the Administration of Foreign-Funded Advertising Enterprises with reference to the Regulations on Control of Advertisement, the Detailed Implementing Rules for the Regulation on Advertising and other relevant provisions.
The Grant of Free Right by Asia-Pacific Regional Bureau
Xinhua News Agency, headquartered in Beijing, PRC, is the state-owned news agency of the PRC and the major news and information collection and distribution centre in the PRC founded in 1931. Asia-Pacific Regional Bureau is a company established with limited liability under the laws of Hong Kong by Xinhua News Agency Asia-Pacific Regional Bureau, the Asia-Pacific regional branch of Xinhua News Agency established in January 1984. The principal business activities of Asia-Pacific Regional Bureau include news reporting, editing, press release and other related business.
According to the written approval granted by Xinhua News Agency, Beijing Zedu Law Firm confirmed that the Free Right granted by Asia-Pacific Regional Bureau to the Company in respect of Asia-Pacific regions, including the PRC, was duly approved by Xinhua News Agency. Accordingly, the Company is entitled to broadcast media information obtained from Asia-Pacific Regional Bureau. In such circumstances, the Company has been authorized to exercise the Free Right in the PRC.
Legal Opinion on the PRC Legal and Regulatory Requirements
In respect of the Company’s development of the Television Screen Broadcast Business in the PRC, Beijing Zedu Law Firm is of the following legal opinions regarding the two feasible models of the operation of the Television Screen Broadcast Business in the PRC after taking into account the relevant and applicable PRC laws and regulations:
(A) if the Company conducts the Television Screen Broadcast Business directly, the Company shall be required to obtain Advertising Business Licence before engaging in the operation of advertising operation activities in the PRC. In the event that the Company applies for Advertising Business Licence from the administrative authorities governing advertising activities pursuant to the laws, Beijing Zedu Law Firm does not anticipate any major obstacles for the Company to obtain Advertising Business Licence.
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(B) if the Company cooperates closely with other third-party media operators or media service providers or advertising agencies who are holders of Advertising Business License or relevant approval and delegate or authorize such persons or organizations to engage in the advertising business activities in the PRC, then the Company shall not be required to obtain Advertising Business Licence.
In addition, the Free Right granted by Asia-Pacific Regional Bureau to the Company in respect of Asia-Pacific regions, including in the PRC, was duly approved by Xinhua News Agency. Accordingly, the Company has been authorized to exercise the Free Right in the PRC.
13. RISK FACTORS
(i) Risk Relating to the Business
The lack of experience of the existing management of the Company and reliance on key management to be nominated by Asia-Pacific Regional Bureau
The Group’s success in the development of Television Screen Broadcast Business, to a significant extent, will be dependent on its management and other key personnel. Those to be nominated by Asia-Pacific Regional Bureau are expected to possess relevant experiences in the news and media business whereas the existing management and key personnel of the Company lacks experience in such business. If there is any change in the management and other key personnel of the Company or the Media Subsidiary (particularly those nominated by Asia-Pacific Regional Bureau), the operations of the Group may be adversely affected.
Ability to anticipate and quickly respond to evolving consumer tastes and preferences for advertising will significantly determine future success of the Television Screen Broadcast Business
The Group’s business includes provision of advertising services to clients, the success of which largely depends on its ability to anticipate and respond to consumer tastes and preferences for advertising. Such consumer tastes and preferences, however, may change quickly and frequently and the Group may not be able to anticipate the same and promptly respond thereto. If the Group is unable to adjust its advertising services to address evolving consumer tastes and preferences, demand for advertising services from clients may decrease, subsequently resulting in the reduction in utilisation rate or price level and adversely affecting the Group’s ability to retain existing clients and attract new clients. As such, the Group’s business, financial conditions and results of operations may be materially and adversely affected.
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Risks relating to the broadcasting of the Media Information
Although the Media Information has been highly regarded in Asia Pacific and will be provided to the Media Subsidiary for broadcast on a free of charge basis, there can be no guarantee that the Media Information will remain to be popular or keep evolving in line with the taste and preferences with its audiences (hence potential advertising customers). As such, in the event that Asia-Pacific Regional Bureau fails to (i) capture the taste and preferences of the audiences of the Media Information; and (ii) continue its provision of the Media Information to the Media Subsidiary with quality, both of which are beyond the control of the Group, the viewership of the Media Information may deteriorate. Accordingly, the bargaining power of the Group for the advertising placements and demand of advertisers for the same will decrease and consequently the results of operations of the Group will be adversely affected.
No absolute assurance that the Free Right or similar right will not be granted to other media operators
Asia-Pacific Regional Bureau has confirmed to the Company and Xinhua News Agency Asia-Pacific Regional Bureau has agreed that (i) Asia-Pacific Regional Bureau has not granted and will not grant the Free Right or rights similar to the Free Right to other persons, companies or institutions; (ii) no other institution, company or unit can grant right which is the same as or similar to the Free Right to other persons, companies or institutions; (iii) to Asia-Pacific Regional Bureau’s knowledge, Xinhua News Agency and Xinhua News Agency Asia-Pacific Regional Bureau have not granted the Free Right and rights similar to the Free Right to other persons, companies or institutions; and (iv) Asia-Pacific Regional Bureau will grant the Free Rights in respect of the Development Region to the Company. Although written confirmation has not been granted by Xinhua News Agency, Asia-Pacific Regional Bureau has confirmed that the above have been duly noted by Xinhua News Agency.
The results of the Television Screen Broadcast Business are affected by the seasonal fluctuations in advertisement spending
The Group’s advertising revenue is subject to seasonal demand for its customers’ products and services and, accordingly, their advertising budgets. The demand for the customers’ products and services is affected by a number of factors beyond the Group’s control, including economic conditions, industry and market trends, shifts in consumer purchasing patterns and changes in the business environment. As the customer base of advertisers may span a wide spectrum of industries, the Group may not be able to anticipate accurately and timely any future changes in the foregoing factors. If there are any adverse changes in trends in seasonal spending patterns or other factors which result in a decrease in demand for the advertising customers’ products and services and consequently the tightening of the customers’ advertising
–38– LETTER FROM THE BOARD budgets, demand for the advertising services may decrease and the prospects, results of operations and financial condition of the Group may be materially and adversely affected.
Dependent on the networking of Asia-Pacific Regional Bureau for identifying advertising customers
The Television Screen Broadcast Business of the Group is highly dependent on the networking of Asia-Pacific Regional Bureau for identifying advertising customers. There is no assurance that the Group will be able to obtain substantial number of sales orders to ensure the profitability of the Television Screen Broadcast Business.
No assurance that the results of the Television Screen Broadcast Business undertaken by the Group will be as anticipated
There is no assurance that the Television Screen Broadcast Business to be undertaken by the Group will lead to any result or any targeted result can be completed within the anticipated time frame or the cost of such business can be recovered or sufficient demand for advertising can be generated for the Group’s Television Screen Broadcast Business.
No assurance that the Television Screen Broadcast Business will be successfully developed
The Group itself has no previous experience in running such new business for the broadcasting of the Media Information on television screens, therefore, there is no assurance that the operation of Television Screen Broadcast Business to be undertaken by the Group will generate profitability or be able to attract sufficient demand for such business. In the event of the lack of sufficient demand, the Group’s profitability will be adversely affected.
The Group may not be able to obtain appropriate licences, approvals, consents, written permissions and/or authorizations from the relevant government or regulatory authorities in Hong Kong, for the installation of the television screens and production of advertisement due to any changes in the legal requirements relating to the Television Screen Broadcast Business
The Group is required to obtain appropriate approvals, consents and/or written permissions (as the case may be) from the relevant government authorities, such as the Building Authority and the Transport Department in Hong Kong to engage in the installation of the television screens outdoors.
Furthermore, in the event that the compliance standards in relation to the licences, approvals, consents, written permissions and/or authorisations required for the conduct of the Television Screen Broadcast Business have become more stringent or there is any change in the interpretation of any existing laws and regulations relating to the operation of the Television Screen
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Broadcast Business, the profitability and operations of the Television Screen Broadcast Business may be adversely affected.
The Company may not be able to obtain Advertising Business Licence from the relevant administrative authorities in the PRC to engage in the operation of advertising operation activities in the PRC
As advised by Beijing Zedu Law Firm, the Company may be required to obtain Advertising Business Licence in order to engage in the operation of advertising operation activities in the PRC, there is no assurance that the Company will be able to obtain the Advertising Business Licence from the relevant administrative authorities governing advertising activities in the PRC. In the event of failure to obtain the Advertising Business Licence and other necessary permits or approvals, the Company’s Television Screen Broadcast Business in the PRC may be adversely affected.
The widespread outbreak of any severe contagious disease or pandemic, if uncontrolled, could adversely affect results of operations of the Group’s Television Screen Broadcast Business
The widespread outbreak of any severe contagious disease or pandemic, if uncontrolled, could affect people’s health and cause disruption to business activities, including affecting the health of the Group’s employees, suppliers and customers, and leading to disruptions in provision of services of the Group. Any widespread uncontrolled outbreak of severe contagious disease or pandemic could therefore adversely affect the results of operations of the Group.
(ii) Risk relating to the Industry
The results of operations of the Television Screen Broadcast Business may be affected by advertising trends and increasing competition in the media advertising industry
Increasing competition in the advertising and media industry may, among other things, create downward pressure on the pricing of the Television Screen Broadcast Business and could therefore significantly and adversely affect the results of the Group’s operations and financial condition. Some of the Group’s competitors may be more experienced or have greater financial resources than the Group in the media business. New entrants in the market may also reduce the price for their advertising services to compete for business with more established companies. Given the intensifying competition from existing and future competitors, the Group’s market share and/or profit margins may be adversely affected.
If the Group is unable to compete effectively against the competitors by maintaining the Group’s competitive advantages or to timely respond to a changing business environment, or if there are any reductions in or reallocations of the customers’ advertising expenditures or budgets, or any
–40– LETTER FROM THE BOARD shift to advertising in other types of media, the Group may lose customers and its financial condition and results of operations may be adversely affected. In addition, any increase in competition may adversely affect the Group’s market share. Any of these events could have a material adverse effect on the Group’s financial condition, results of operations and future prospects.
Risk relating to violation of laws governing advertising services in Hong Kong
There is legislation regulating in general the truthfulness of advertisements and advertising for specific industries and some of such legislation contain provisions affording parties carrying on the business of publishing or arranging for the publication of advertisements defence if certain conditions are satisfied. Although by running the Television Screen Broadcast Business, the role of the Media Subsidiary will be just providing a media for the placing of advertisements rather than being the advertiser itself, there is still the risk of the Media Subsidiary being in violation of the said legislation if the content of the advertisements or the circumstances of the advertising does meet the corresponding requirements as specified in the legislation and the conditions for relying on the said defence are not all met. In the event of the said violation of legislation, the reputation of the Media Subsidiary and its parent company/ultimate parent company, namely the Company will be adversely affected. Depending on the situation, administrative fines may be imposed by the relevant authorities and its payment does not provide exemption from possible civil or criminal liability. Inability to use the advertisement content concerned is also a possible consequence.
With respect to production of advertisements by the Media Subsidiary for its clients, which is intended to constitute a relatively small portion of the Company’s Television Screen Broadcast Business, in case the Media Subsidiary fails to obtain any necessary permit/authorization for the production or to observe the relevant statutory provisions and/or conditions stated in any such permit or authorization, there is the risk that the Media Subsidiary may be required to discontinue the production in the same manner. Other possible risks of the said non-compliance includes criminal liability on the part of the Media Subsidiary and reputational risk.
Risk relating to change of policies in Hong Kong and in the PRC
There is no assurance that (i) there will be no change in government policy in relation to conduct of business in general or in areas relating to the Television Screen Broadcast Business in Hong Kong and in the PRC; and (ii) such change will not have a negative impact on the Group. In the event of the implementation of any unfavourable government policy to the Television Screen Broadcast Business, which may result in (i) increase in operation cost; and (ii) the obligation to comply with more onerous requirements in relation to the conduct of the Television Screen Broadcast Business in Hong Kong and in the PRC, the results of operation of the Television Screen Broadcast Business of the Group may be adversely affected.
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Risk relating to failure to obtain relevant licences and permits etc. to operate in Hong Kong and in the PRC
In the event of failure to obtain the necessary licences, permits, approvals, consent, authorization etc. required for the running of the Company’s Television Screen Broadcast Business in Hong Kong and in the PRC from any relevant authority, the mode of operation of such business would have to change and resources will have to be deployed in devising revised mode of operation that is viable where such licences, permits, approvals, consent or authorization are not in place.
Risk relating to evolving legal systems in Hong Kong and in the PRC
Like most jurisdictions, the legal system of Hong Kong and in the PRC is evolving and is not static. A natural corollary of this is possible change in policy, laws and regulations, which may give rise to uncertainties in their interpretation, application and enforcement. Depending on what the change is, such change may also affect the business community’s interest in conducting businesses in the Hong Kong and in the PRC, which in turn may affect the demand for advertising and the number of potential advertising customers of the Group.
Risk relating to increase in corporate tax rates in Hong Kong
Under the current Hong Kong tax legislations, no preferential tax treatment is available for companies engaged in the advertising and media industry. Profits derived by the Media Subsidiary will be subject to Hong Kong corporate tax rate of 16.5%. In the event that there is an increase in corporate tax rates in Hong Kong, the results of operation of the Group’s Television Screen Broadcast Business may be adversely affected.
14. FINANCIAL AND TRADING PROSPECT OF THE TELEVISION SCREEN BROADCAST BUSINESS
With the new appointments of the chief executive officer and the chief operation officer and with the rededicated focus of the Group, the prospects of the Television Screen Broadcast Business looks bright. Currently, the Media Subsidiary has a multitude of LED screen outlets in Hong Kong covering the most high profile densely populated areas such as Hong Kong Airport, MTR Hunghom Station, Sheung Wan, Wan Chai and Causeway Bay.
The rededicated group has already converted these outlets into signing a major advertising agreement with Xiangxing, one of China’s largest manufacturers of luggage, at a consideration of HK$30,000,000 per annum, with an option to extend for an additional year. The total potential consideration of the agreement is worth approximately HK$60,000,000. In full cooperation with Asia-Pacific Regional Bureau, the Group will look to target other large Chinese enterprises with similar advertising budgets.
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Furthermore, the Group is currently in negotiations to acquire several high profile LED screen outlets in China in order to expand the supply of its LED screen outlets. The potential projects are all strategically located in first tier Chinese cities such as Beijing, Shanghai, Shenzhen and Guangzhou in order to maximise the exposure of the Group’s target demographic and to increase the attractiveness of the Group’s broadcast network to our potential advertising clients.
The Group will focus and look to expand its broadcast network in both Hong Kong and China for the next two years. Starting in year 2016, the Group, with the expansive network of Asia-Pacific Regional Bureau, plans to expand its broadcast business into other Asia Pacific regions such as Macau, South Korea and Japan. The expansion will not only meet the demands of Chinese enterprises looking to penetrate the international markets, but also satisfy foreign enterprises looking to tap into the Chinese market. In cooperation with Asia-Pacific Regional Bureau, the Group will look to fully unlock and to synergise with the exclusive value of the free right to soon develop the Television Screen Broadcast Business into the main revenue generating source of the Group.
15. RECOMMENDATION
The Directors are of the view that the Settlement and the Remedial Agreement are fair and reasonable and in the interests of the Company and the Shareholders as a whole. The Directors recommend the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the EGM.
Your attention is drawn to the letter from the Independent Board Committee set out on page 44 of this circular, and the letter from Independent Financial Adviser set out on pages 45 to 65 of this circular. The Independent Shareholders are advised to read the aforesaid letters before deciding as to how to vote on the resolutions regarding the Settlement and the Remedial Agreement.
16. ADDITIONAL INFORMATION
Your attention is drawn to the additional information set out in the appendices to this circular.
On behalf of the Board Xinhua News Media Holdings Limited Ju Mengjun Co-chairman
–43– LETTER FROM THE INDEPENDENT BOARD COMMITTEE
XINHUA NEWS MEDIA HOLDINGS LIMITED 新華通訊頻媒控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 309)
24 February 2015
To the Independent Shareholders
Dear Sir/Madam,
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION
We refer to the circular issued by the Company to the Shareholders dated 24 February 2015 (the “Circular”) which this letter forms a part of. Terms defined in the Circular shall have the same meanings as those used in this letter unless the context otherwise requires.
We have been appointed by the Board as the Independent Board Committee to consider the terms and conditions of the Settlement and the Remedial Agreement and the transactions contemplated thereunder and to advise the Independent Shareholders in respect of the same. South China Capital Limited has been appointed as the Independent Financial Adviser.
We wish to draw your attention to the “Letter from the Board” and the “Letter from the Independent Financial Adviser” as set out in the Circular. Having considered the principal factors and reasons considered by, and the advice of, the Independent Financial Adviser as set out in its letter of advice, we consider that the Settlement and the terms and conditions of the Remedial Agreement are on normal commercial terms and in the ordinary and usual course of business of the Group and are fair and reasonable and are in the interests of the Company and its Independent Shareholders as a whole. Accordingly, we recommend that the Independent Shareholders vote in favour of the ordinary resolution approving the Settlement and the Remedial Agreement and the transactions contemplated thereunder at the EGM.
For and on behalf of the Independent Board Committee
Mr. Wang Qi Mr. Tsang Chi Hon Mr. Ho Hin Yip Independent Non-executive Directors
–44– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
The following is the full text of the letter of advice from South China Capital Limited to the Independent Board Committee and the Independent Shareholders for incorporation in this circular.
South China Capital Limited 28/F., Bank of China Tower No. 1 Garden Road, Central Hong Kong
24 February 2015
To the Independent Board Committee and the Independent Shareholders
Dear Sirs,
VERY SUBSTANTIAL ACQUISITION AND CONNECTED TRANSACTION
INTRODUCTION
We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders regarding the Settlement and the Remedial Agreement (the “Transaction”), details of which are set out in the letter from the board (the “Letter from the Board”) of the circular issued by the Company dated 24 February 2015 (the “Circular”), of which this letter forms part. This letter contains our advice to the Independent Board Committee and the Independent Shareholders in respect of the Transaction. Unless otherwise stated, defined terms used herein shall have the same meanings as those defined in the Circular.
The Board announced on 15 July 2014 that Company had entered into the Remedial Agreement with Asia-Pacific Regional Bureau on 15 July 2014 whereby as full and final compensation for the non-fulfillment of the Revenue Undertaking, Asia-Pacific Regional Bureau had undertaken to the Company that the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016 would be no less than HK$170,000,000 (the “Further Undertaking”). Asia-Pacific Regional Bureau had further agreed that if the Further Undertaking is not fulfilled, Asia-Pacific Regional Bureau shall pay to the Company as liquidated damages a sum equivalent to 12% of the shortfall of the Further Undertaking (the “Liquidated Damages”).
As the Cooperation Agreement was a very substantial acquisition and the Remedial Agreement has the effect of amending some of the material terms of the Cooperation Agreement and shall form part of the Cooperation Agreement, the Cooperation Agreement as amended by the Remedial Agreement constitutes a very substantial acquisition subject to the relevant very substantial acquisition requirements under Chapter 14 of the Listing Rules.
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Asia-Pacific Regional Bureau is a substantial shareholder and therefore a connected person of the Company. As the value of the consideration is more than HK$10,000,000, the Remedial Agreement constitutes a non-exempted connected transaction and a very substantial acquisition and is subject to the reporting, announcement and independent shareholders’ approval requirements under Chapter 14A of the Listing Rules and subject to the relevant very substantial acquisition requirements under Chapter 14 of the Listing Rules.
Mr. Ju Mengjun and Mr. Chang Yong are the Company’s Directors and by virtue of their being directors of Asia-Pacific Regional Bureau, are considered as having an interest in the transaction contemplated under the Settlement and the Remedial Agreement, therefore they were abstained from voting at the meeting of the Board convened for the purpose of approving the Settlement and the Remedial Agreement.
Asia-Pacific Regional Bureau holds 214,681,040 Shares, representing approximately 15.70% of the issued share capital of the Company as at the Latest Practicable Date, and therefore is a substantial shareholder and a connected person of the Company pursuant to Rule 14.07 of the Listing Rules. As a result, Asia-Pacific Regional Bureau will be required to abstain from voting at the EGM. The proposed resolutions will be passed by way of ordinary resolutions and voting will be conducted by way of poll in accordance with the requirements of the Listing Rules. Other than Asia-Pacific Regional Bureau, no other Shareholders have any material interest in the Settlement and the Remedial Agreement.
We, South China Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee, which comprises all the Independent non-executive Directors, namely Mr. Wang Qi, Mr. Tsang Chi Hon and Mr. Ho Hin Yip, and Independent Shareholders as to whether the terms of the Transaction are on normal commercial terms, fair and reasonable and the Transaction is in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole.
BASES OF OUR OPINION
In formulating our opinion, we have relied on the statements, information, opinions and representations contained or referred to in the Circular and/or provided to us by the Company, the Directors and the management. We have assumed that all statements, information, opinions and representations contained or referred to in the Circular and/or provided to us were true, accurate and complete at the time they were made and continued to be so as at the date of the Circular.
The Directors jointly and severally accept full responsibility for the accuracy of the information 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 at after 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.
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We have no reason to believe that any statements, information, opinions or representations relied on by us in forming our opinion is untrue, inaccurate or misleading, nor are we aware of any material facts the omission of which would render the statements, information, opinions or representation provided to us untrue, inaccurate or misleading. We have performed all necessary steps as required under Rule 13.80 of the Listing Rules, including the notes thereto, to enable us to reach an informed view and to justify our reliance on the information provided so as to provide a reasonable basis for our opinions and have relied on such information and consider that the information we have received is sufficient for us to reach our advice and recommendation as set out in this letter and to justify our reliance on such information. We have assumed that all the statements, information, opinions and representations for matters relating to the Group contained or referred to in the Circular and/or provided to us by the Company, the Directors and the management have been reasonably made after due and careful enquiry. We have relied on such statements, information, opinions and representations and have not conducted any independent investigation into the business, financial conditions and affairs or the future prospects of the Group.
PRINCIPAL FACTORS AND REASONS CONSIDERED
In arriving at our recommendation and giving our advice to the Independent Board Committee and the Independent Shareholders in respect of the Transaction, we have considered the following principal factors and reasons:
1 Background information of Asia-Pacific Regional Bureau
Asia-Pacific Regional Bureau is an organization established by Xinhua News Agency Asia-Pacific Regional Bureau in Hong Kong and its principal business activities include news reporting, editing, press release and other related business.
Xinhua News Agency, headquartered in Beijing, PRC, is the state-owned news agency of the PRC and the major news and information collection and distribution centre in the PRC founded in 1931.
2 Background information of the Group
The principal business activities of the Group are provision of cleaning and related services, provision of medical waste treatment services, and the provision of publicly broadcasting information and advertisement on television screen services.
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Set out below is a summary of the Group’s financial information for the two years ended 31 March 2013 and 31 March 2014 prepared in accordance with the Hong Kong Financial Reporting Standards extracted from the annual report of the Company for the year ended 31 March 2014 (the “Annual Report 2014”):
For the year ended 31 March 2014 2013 HK$’000 HK$’000
Revenue 227,544 201,167 (Loss)/profit for the year from a discontinued operation (20,324) 652 Loss for the year attributable to: Owners of the Company (70,588) (56,569) Non-controlling interests (2,254) 474 Bank balances and cash 57,001 62,683
Net assets value 173,123 260,968
The Group’s turnover from continuing operations for the year ended 31 March 2014 amounted to approximately HK$227,544,000, represented 13.1% increase as compared to the previous year. The loss of the Group from continuing operations was approximately HK$52,518,000, represented 7.5% decrease as compared to previous year. Cleaning and related services business made a profit of approximately HK$6,453,000, the medical waste treatment business made a profit of approximately HK$2,556,000, the waste treatment business made a loss of approximately HK$4,364,000 and the television screen broadcast business made a loss of approximately HK$20,028,000 of which HK$11,660,000 was from the amortisation of the intangible asset related to the granting of the Free Right by Asia-Pacific Regional Bureau for the television screen broadcast business under the Cooperation Agreement. As the performance of the television screen broadcast business was worse than expected, an impairment loss of approximately HK$32,438,000 was recognised.
As at 31 March 2014, the Group did not have any bank borrowings but the Group had a finance lease payable and loan from a director of approximately HK$57,000 and approximately HK$9,591,000 respectively.
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Set out below is a summary of the Group’s revenue and results by segments as extracted from the Annual Report 2014:
Television screen Cleaning and broadcast Medical waste related services business treatment Waste treatment 2014 2013 2014 2013 2014 2013 2014 2013 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000
Service income from external customers 218,223 193,109 742 1,003 8,508 7,055 71 – Other income and gains 1,717 803 1 33 841 515 529 197
TOTAL 219,940 193,912 743 1,036 9,349 7,570 600 197
Segment results 6,453 4,729 (20,028) (25,113) 2,556 1,844 (4,364) (2,327)
As stated above, we understand from the Company that it was originally planned that during the first two years of its business operation, the Media Subsidiary would have recruited up to 40 to 70 employees comprising general manager, sales managers and staff, production manager and staff, accountants and other administrative and supportive staff, of which approximately 15 to 30 of these employees would be located at the Shenzhen office. However, the Media Subsidiary had encountered difficulties in recruiting suitable employees, and in particular, experienced candidates for the sales and sales support team. The Company believes the lack of an experienced sales and sales support team has, to a certain extent, contributed to the shortfall in the Revenue Undertaking.
We note that the news programs including finance, sports, entertainment, lifestyle and world events provided to the Group on an exclusive basis by Xinhua News Agency, continue to run smoothly on through-trains operated by the MTR Corporation Limited (“MTR”) running from Guangzhou East to Hong Kong and at the MTR Hunghom Departure Hall in Hong Kong. The news programs are broadcasted in various locations in Hong Kong, including departure gates in the Hong Kong International Airport, Grand Millenium Plaza in Sheung Wan, Lockhart Road in Causeway Bay and Hennessy Road in Wan Chai.
As stated in the Letter from the Board, the Company entered into arrangements with different venue providers and/or provider of display screens. We have reviewed four contracts with different venue providers and/or provider of display screens. As advised by the Company, the contracts with different venue providers and/or provider of display screens were determined by reference to such terms established between independent venue providers and/or provider of display screens, given that (i) such determination of terms is based on the industry norm market consensus and is not at the sole discretion of the Group; and (ii) terms will be settled by arms’ length negotiations between the different venue providers and/or provider of display screens and the Group on normal commercial terms. Based on our review, the said terms of contracts are on normal commercial terms.
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Please refer to the paragraph named “(a) Current arrangement of the Television Screen Broadcasting Business” under the section of “business plan and capital expenditure plan for the remaining free right period” for the details of the relevant terms, as stated in the Letter from the Board.
3 Background information of the Cooperation Agreement
Reference is made to the circular issued by the Company dated 11 March 2011 regarding the development of television screen broadcast business. The Company and Asia-Pacific Regional Bureau entered into (i) the principal agreement on 22 November 2010; (ii) the supplemental agreement on 27 November 2010; and (iii) the clarification memorandum on 28 January 2011, which together constitute the Cooperation Agreement.
Under the Cooperation Agreement, Asia-Pacific Regional Bureau had undertaken that the Audited Operating Revenue for the year ended 31 December 2011 and the year ended 31 December 2012 would be no less than HK$30,000,000 and HK$100,000,000 respectively (the “Revenue Undertaking”). If any part of the Revenue Undertaking cannot be fulfilled, Asia-Pacific Regional Bureau has to pay appropriate compensation to the Company as liquidated damages. Apart from the Revenue Undertaking, Asia-Pacific Regional Bureau has not given any undertaking in respect of (a) the Audited Operating Revenue for the remainder of the Cooperation, nor (b) the profitability of the Television Screen Broadcast Business.
The Audited Operating Revenue for the year ended 31 December 2011 and 31 December 2012 were HK$64,000 and HK$1,003,000 respectively. Since the Revenue Undertaking was not fulfilled, Asia-Pacific Regional Bureau has to pay appropriate compensation to the Company. However, the Cooperation Agreement has not provided for any specific figure or formula for assessing the appropriate compensation payable to the Company, the Company had therefore entered into negotiations with Asia-Pacific Regional Bureau on remedial actions.
On 15 July 2014 the Company has entered into the Remedial Agreement with Asia-Pacific Regional Bureau whereby as full and final compensation for the non-fulfillment of the Revenue Undertaking, Asia-Pacific Regional Bureau has undertaken to the Company that the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016 would be no less than HK$170,000,000 (the “Further Undertaking”). Asia-Pacific Regional Bureau has further agreed that if the Further Undertaking is not fulfilled, Asia-Pacific Regional Bureau shall pay to the Company as liquidated damages a sum equivalent to 12% of the shortfall of the Further Undertaking (the “Liquidated Damages”).
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As stated in the Letter from the Board, Asia-Pacific Regional Bureau has confirmed to the Company and Xinhua News Agency Asia-Pacific Regional Bureau has agreed that (i) Asia-Pacific Regional Bureau has not granted and will not grant the Free Right or rights similar to the Free Right to other persons, companies or institutions; (ii) no other institution, company or unit can grant right which is the same as or similar to the Free Right to other persons, companies or institutions; (iii) to Asia-Pacific Regional Bureau’s knowledge, Xinhua News Agency and Xinhua News Agency Asia-Pacific Regional Bureau have not granted the Free Right and rights similar to the Free Right to other persons, companies or institutions; and (iv) Asia-Pacific Regional Bureau will grant the Free Rights in respect of the Development Region to the Company. Although written confirmation has not been granted by Xinhua News Agency, we have discussed with the Company and understand that Asia-Pacific Regional Bureau has confirmed that the above have been duly noted by Xinhua News Agency.
4 Summary of the Cooperation Agreement and the Remedial Agreement
We have reviewed the Cooperation Agreement and the Remedial Agreement and set out below is a summary of the major amendments to the material terms of the Cooperation Agreement:
Cooperation Agreement Remedial Agreement (existing terms) (amended terms)
Date: 22 November 2010, 27 15 July 2014 November 2010 and 28 January 2011
Parties: Asia-Pacific Regional Bureau Asia-Pacific Regional Bureau The Company The Company
Subject matters: Asia-Pacific Regional Bureau Asia-Pacific Regional Bureau and the Company shall has given the Further closely cooperate to Undertaking. If the Further develop the Television Undertaking is not Screen Broadcast Business, fulfilled, Asia-Pacific including but not limited Regional Bureau shall pay to, identifying suitable to the Company the locations for installing the Liquidated Damages television screens that broadcast the media information and advertisements and entering into the relevant leasing agreements in respect of such locations
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Cooperation Agreement Remedial Agreement (existing terms) (amended terms)
Free Right: 10 years commencing from Unchanged 24 May 2011
Consideration: HK$151,285,729 The Company is not required (214,681,040 consideration to pay any cash or other Shares at HK$0.7047 each) kinds of consideration
Undertaking: – Asia-Pacific Audited revenue of the The aggregate Audited Regional Bureau Television Screen Operating Revenue for the Broadcast Business for the two financial years ending two years ended 31 31 March 2016 would be no December 2011 and 2012 less than HK$170,000,000 will be no less than HK$30 million and HK$100 million, respectively
– The Company A sum of no less than Since the Audited Operating HK$200,000,000 for Revenue for the year continuous development of ended 31 December 2012 the Television Screen was less than Broadcast Business if the HK$100,000,000, the Audited Operating Company will not be Revenue for the year required to make available ended 31 December 2012 is the sum of no less than no less than HK$200,000,000 under the HK$100,000,000 Cooperation Agreement
Compensation for No specific figure or formula HK$20,400,000 non-fulfillment of for assessing the undertaking appropriate compensation
In the event of non-fulfillment of the Further Undertaking, Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages. Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages in full within 1 month of written request by the Company. The Company shall make the claim for compensation, if any, within 24 months from 31 March 2016. Based on our discussion with the Company, we understand it is the intention of the Company to make claim immediately (after publishing the Company’s financial figures for the year 2016) against Asia-Pacific Regional Bureau should there is a shortfall to the Further Undertaking. We are of the view that the intention of the Company to make claim immediately is in the interest of the Company and the Shareholders as a whole.
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The Directors informed us that, during the negotiations on remedial actions, Asia-Pacific Regional Bureau reported the negotiations status and financial obligations to Xinhua News Agency. Thus, as stated in the Letter from the Board, Asia-Pacific Regional Bureau is fully aware of its financial obligations in the event of non-fulfillment of the Further Undertaking; and by entering into the Remedial Agreement, Asia-Pacific Regional Bureau must have considered its ability to pay the Liquidated Damages in the event of non-fulfillment of the Further Undertaking. We concur with the Directors’ view that, by reason of Asia-Pacific Regional Bureau’s relationship with Xinhua News Agency, which is the state press agency of the PRC, no reasons of Asia-Pacific Regional Bureau being unable, or refusing to honour its obligations, to pay the Liquidated Damages in the event of non-fulfillment of the Further Undertaking. In addition, as at the Latest Practicable Date, Asia-Pacific Regional Bureau holds 214,681,040 Shares, representing approximately 15.70% of the issued share capital of the Company as at the Latest Practicable Date, and therefore is a substantial shareholder and a connected person of the Company pursuant to Rule 14.07 of the Listing Rules. Given Xinhua News Agency is aware of the possible financial obligations of Asia-Pacific Regional Bureau and the market value of Asia-Pacific Regional Bureau’s shareholding in the Company exceeds the Liquidate Damages, we are of the view that Asia-Pacific Regional Bureau is able to honour its obligations.
Save as amended by the Remedial Agreement, all other terms of the Cooperation Agreement remain valid and binding, and the Cooperation Agreement shall be read together with the Remedial Agreement as a whole.
5 Reasons for the Settlement and the entering into the Remedial Agreement
As a result of the non-fulfillment of the Revenue Undertaking, the Company has a potential claim against Asia-Pacific Regional Bureau for appropriate compensation under the Cooperation Agreement. However, the Cooperation Agreement has not provided for any specific figure or formula for ascertaining the appropriate compensation. We understand the Directors have considered a number of options including cash compensation, extension of the Free Right period, and the Further Undertaking. Details of the reasons are stated in the Letter from the Board. We have reviewed the Cooperation Agreement and set out below is a summary of the reasons for the Remedial Agreement and the Settlement:
(i) Immediate cash compensation
The Cooperation Agreement did not provide any specific figure or formula for assessing the appropriate compensation payable to the Company in the event the Revenue Undertaking can not be fulfilled. We have discussed with the Company and understand despite various negotiations, the Company and Asia-Pacific Regional Bureau were unable to agree on the amount of the appropriate compensation. If the Company were to proceed with the arbitration process, the eventual compensation which may be awarded to the Company would be uncertain and could be significantly lower than the Liquidated Damages. We agree with the Directors’ view that the commencement of arbitration against Asia-Pacific Regional Bureau for cash compensation may have adverse effects on the development of the Television Screen Broadcast Business and not in the best interests of the Company and the Shareholders as a whole.
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We have further discussed with the Company regarding the background and details of the Cooperation Agreement and the essence of the Remedial Agreement. In view of the absence of a specific clause and/or formula to determine the amount of compensation should Asia-Pacific Regional Bureau fail to meet the Revenue Undertaking, we are of the view (after discussions with the Company and its legal advisers) that it would be difficult for the Company to claim from the Asia-Pacific Regional Bureau.
As stated in the Letter from the Board, under the Settlement and the Remedial Agreement, Asia-Pacific Regional Bureau has undertaken that the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016 would be no less than HK$170,000,000, that is, the Further Undertaking, failing which Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages. The Further Undertaking may be regarded as time extension for, or delay by, Asia-Pacific Regional Bureau to fulfill the Revenue Undertaking as replaced by the Further Undertaking. The increase in the Audited Operating Revenue from HK$130,000,000 under the Revenue Undertaking to HK$170,000,000 under the Further Undertaking was determined by applying a fair and reasonable rate of interest of 8% compounded annually to compensate for the delay in fulfilling the Further Undertaking. The Directors therefore consider that the Further Undertaking will fully compensate the Company for the non-fulfillment of Revenue Undertaking.
As the Revenue Undertaking was now replaced by the Further Undertaking on the aggregate Audited Operating Revenue for the two financial years ending 31 March 2016, the Board considered that compounded interest at the rate of 8% per annum should be added to the lost profit of HK$15,600,000 from 1 January 2013 to 31 March 2016 or a total of 3.25 years. The Company has been advised by its legal advisers that the current rate of interest on judgment debts (which is also published at the Hong Kong Judiciary’s website), that is, the interest rate that the Hong Kong Courts would normally award on judgment debts is 8% per annum (simple interest). As the Cooperation Agreement does not provide for the accrual of interests on the compensation for the non-fulfillment of the Revenue Undertaking, the Directors therefore considered that the adoption of an interest rate of 8% compounded annually is fair and reasonable.
We consider the basis of calculating the lost profit and the adding of compound interest rate of 8% per annum from 1 January 2013 to 31 March 2016, which eventually forms the Further Undertaking, is fair and reasonable given (i) the Cooperation Agreement has not provided for any specific figure or formula for assessing the appropriate compensation payable to the Company; (ii) the Further Undertaking was determined between the Company and Asia-Pacific Regional Bureau after arm’s length negotiations; and (iii) the Company has been advised by its legal advisers that the current rate of interest on judgment debts (which is also published at the Hong Kong Judiciary’s website), that is, the interest rate that the Hong Kong Courts would normally award on judgment debts is 8% per annum (simple interest). Further, it was also stated in the Remedial Agreement that Asia-Pacific Regional Bureau shall pay to the Company the Liquidated Damages in
–54– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER full within 1 month of written request by the Company. The Company shall make the claim for compensation, if any, within 24 months from 31 March 2016. Based on our discussion with the Company, we understand it is the intention of the Company to make claim immediately (after publishing the Company’s financial figures for the year 2016) against Asia-Pacific Regional Bureau should there be a shortfall to the Further Undertaking.
In addition, as stated in the Letter from the Board, in the event of non-fulfillment of the Further Undertaking, the Settlement and the Remedial Agreement provide a clear formula for calculating the Liquidated Damages payable by Asia-Pacific Regional Bureau to the Company as compensation. As the Liquidated Damages is calculated at a fair and reasonable rate of net profit margin of 12% of the shortfall in the Further Undertaking, the Directors consider that the Liquidated Damages payable to the Company in the event of non-fulfillment of the Further Undertaking is fair and reasonable.
As stated in the Letter from the Board, the lost profit due to the Revenue Undertaking would be HK$15,600,000. We note the said lost profit was calculated by adopting a profit margin of 12%, which was based upon comparable companies listed on the Stock Exchange and after arm’s length negotiations with the Asia-Pacific Regional Bureau (details of the comparable companies are stated below). As stated in the Letter from the Board, during the negotiation of the Further Undertaking, the Board has also included a compounded annual interest rate of 8% to the lost profit. Should the Asia-Pacific Regional Bureau fail to meet the Further Undertaking, it is required to compensate the Company based on a 12% profit margin.
As stated in the Letter from the Board, if the Further Undertaking can be fulfilled, no compensation will be payable by Asia-Pacific Regional Bureau. As such, Asia-Pacific Regional Bureau’s obligation to pay the Liquidated Damages is not dependent on the profitability of the Television Screen Broadcast Business. We have discussed with the Directors and understand that since the Revenue Undertaking was not a guarantee for profits, and the increased amount of the Further Undertaking is sufficient to compensate the delay in fulfilling the Revenue Undertaking, the Further Undertaking (together with the undertaking to pay Liquidated Damages in the event of non-fulfillment) is fair and reasonable and is in the best interests of the Company and the Shareholders as a whole.
(ii) Extension of the Free Right period
The Directors have considered the option for extension of the Free Right period under the Cooperation Agreement. However, Asia-Pacific Regional Bureau has only given the Revenue Undertaking but has not given any undertaking in respect of the Audited Operating Revenue for the remainder of the Cooperation; and the Free Right is not the loss suffered by the Company as a result of the non-fulfillment of the Revenue Undertaking.
We note from the Cooperation Agreement that the Free Right is the right granted by Asia-Pacific Regional Bureau to the Company to broadcast certain media
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information to public entities or individuals on television screens that are installed outdoors (such as external walls of buildings and plazas) and indoors (such as shopping malls and office building lobby) in (a) Hong Kong; (b) Macau; (c) Taiwan; (d) Asia-Pacific countries (excluding China) and/or regions, including Japan, South Korea, North Korea, East Asia, South East Asia, Australia, New Zealand and the nearby island countries, etc.; and (e) other regions.
Further, we note that there are procedures under the Listing Rules (Rule 14A.63) regarding the non-fulfilment of the guarantee. Details of which are stated below:
“If the actual performance fails to meet the guarantee, the listed issuer must disclose the following in an announcement and in its next annual report:
(1) the shortfall and any adjustment in the consideration for the transaction;
(2) whether the connected person has fulfilled its obligations under the guarantee;
(3) whether the listed issuer’s group has exercised any option to sell the company or business back to the connected person or other rights it held under the terms of the guarantee, and the reasons for its decision; and
(4) the independent non-executive directors’ opinion on:
(a) whether the connected person has fulfilled its obligations; and
(b) whether the decision of the listed issuer’s group to exercise or not to exercise any options or rights set out in rule 14A.63(3) is fair and reasonable and in the interests of the shareholders as a whole”
In the event of non-fulfilment of the Further Undertaking, details would be reviewed by the independent non-executive directors of the Company as mentioned above, we are of the view that there exist appropriate measures to govern the Remedial Agreement and the Settlement and to safeguard the interests of the Shareholders. Given the Further Undertaking would entitle the Company to claim Liquidated Damages, we are of the view that the Remedial Agreement has sufficient clause to protect the Company’s interest in the event that the Further Undertaking cannot be fulfilled.
6 Analysis on the fairness and reasonableness of the Further Undertaking and Liquidated Damages
As stated in the Letter from the Board, the consideration given by the Company is the forbearance of its right against Asia-Pacific Regional Bureau for appropriate compensation as a result of the non-fulfillment of the Revenue Undertaking, in return for Asia-Pacific Regional Bureau’s giving of the Further Undertaking. The Further Undertaking is the remedial actions to Revenue Undertaking, which depends on future revenue level. Hence, we are of the view that the payment of compensation based on future revenue levels is fair and reasonable.
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After made references to the performance of a number of companies listed on the Stock Exchange engaged in businesses similar to the Television Screen Broadcast Business, namely, outdoor advertising businesses in Hong Kong and/or the PRC. The Directors have adopted a notional net profit margin of 12% for the purpose of ascertaining the lost profits that the Company could have achieved had Asia-Pacific Regional Bureau fulfilled the Revenue Undertaking.
In assessing the fairness and reasonableness of the Consideration, we have considered the following:
Selection of peer companies
With a view to assess as to whether the comparable companies selected by the Board are suitable for comparison purposes, we have obtained and reviewed the list of those comparable companies (which engaged in businesses similar to the Television Screen Broadcast Business, namely, advertising and/or related businesses in Hong Kong and/or the PRC). The list contains 7 listed issuers on both the Main Board and GEM of the Stock Exchange which fall within the abovementioned category (based on their respective latest published annual reports), namely Clear Media Ltd. (“Clear Media”), National United Resources Holdings Limited (“National United”), China Chuanglian Education Group Limited (“China Chuanglian”), Focus Media Network Ltd. (“Focus Media”), China 33 Media Group Ltd. (“China 33”), Inno-Tech Holdings Ltd. (“Inno-Tech”) and Dahe Media Co. Ltd (“Dahe Media”) (altogether the “Peer Companies”). In our view, the Peer Companies represent an exhaustive list of entities that the Board was able to identify and satisfy the selection criteria.
Net profit/ Profit Company Stock code Principal activities Year end Turnover (Net loss) margin (HK$’000) (HK$’000)
Clear Media 100.HK Operation of outdoor advertising 31 December 2013 1,647,455 201,008 12.20% business – display of advertisements on bus shelters
National 254.HK Provision of outdoor media 30 June 2013 39,287 (412,975) N/A United advertising and media business related services/ Coking coal trading business (Note 1)
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Net profit/ Profit Company Stock code Principal activities Year end Turnover (Net loss) margin (HK$’000) (HK$’000)
China 2371.HK The provision of advertising and 31 December 2013 *98,350 *7,712 7.84% Chuanglian consultancy services in respect of placing advertisements on the outdoor billboards and LED screens to advertisers and advertising agencies/ Educational consultancy and online training and education
Focus Media 8112.HK Provision of out-of-home 31 December 2013 72,253 4,016 5.56% advertising services
China 33 8087.HK Sale of advertising spaces in 31 December 2013 *157,774 *(26,024) N/A magazines and newspapers; sale of outdoor advertising spaces at towers, trains and railway stations; and sale of advertising air time through audio broadcasting during train transmission
Inno-Tech 8202.HK Provision of advertising 30 June 2014 51,375 (371,458) N/A placement agency services in television channel and outdoor displays and media advertisement
Dahe Media 8243.HK Design, printing and production 31 December 2013 *428,954 *6,163 1.44% of outdoor advertising products, the dissemination of outdoor advertisement by leasing outdoor advertising spaces in the PRC and trading of artwork
Lowest 1.44% Highest 12.20% Average 6.76%
* renminbi in thousand
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Note 1 National United has changed its financial year ended to 31 December 2013. It started the coking coal trading business subsequent to 30 June 2013 and became its largest business segment (with revenue amounted to approximately HK$186 million, representing approximately 96% of its total revenue during the six months ended 31 December 2013)
Source: Stock Exchange’s website and published annual reports of the Peer Companies
The Peer Companies profit margin ranged from approximately 1.44% to approximately 12.20%, with an average of approximately 6.76%. The profit margin used to determine the Further Undertaking and Liquidated Damages is 12%, which is within the range of the Peer Companies and is higher than the average profit margin of the Peer Companies of approximately 6.76%.
We note from the respective latest annual reports that apart from National United, China Chuanglian and Dahe Media, all Peer Companies have derived their revenue solely from advertising related business. The above mentioned 3 companies have other business segments apart from the advertising related segment. National United’s advertising business segment contributed approximately HK$8 million for the six months ended 31 December 2013, represented approximately 4.16% of its total revenue. China Chuanglian’s advertising business segment contributed approximately RMB31 million for the year ended 31 December 2013, represented approximately 31.65% of its total revenue. Dahe Media’s advertising business segment contributed approximately RMB424 million for the year ended 31 December 2013, represented approximately 98.91% of its total revenue. Given National United and China Chuanglian are not principally engaged in the advertising related business, we consider it would be fair and meaningful to exclude their results from the above analysis (“New Peer Companies”).
After excluding National United and China Chuanglian, the lowest and highest profit margin for the New Peer Companies will remain the same at 1.44% and 12.20% respectively. The average profit margin for the New Peer Companies will be 6.40%.
The profit margin used to determine the Further Undertaking and Liquidated Damages is 12%, which is still within the range of the New Peer Companies and is higher than the average profit margin of the Peer Companies of approximately 6.40%.
As stated above and in the Letter from the Board, had Asia-Pacific Regional Bureau fulfilled the Revenue Undertaking and applied a net profit margin of 12%, the Company’s lost profit could have been HK$15,600,000.
The Board considered that compounded interest at the rate of 8% per annum should be added to the lost profit of HK$15,600,000 from 1 January 2013 to 31 March 2016 or a total of 3.25 years. The Company has been advised by its legal advisers that the current rate of interest on judgment debts (which is also published at the Hong Kong Judiciary’s website http://www.judiciary.gov.hk/en/crt_services/interest_rate.htm), that is, the interest rate that the Hong Kong Courts would normally award on judgment debts is 8% per annum (simple interest).
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We have checked the Judiciary’s website and have discussed with the Company and its legal adviser regarding the rationale for adopting such interest onto the calculation of Further Undertaking. We are of the view that the adoption of 8% interest rate is fair and reasonable as (i) the Cooperation Agreement does not provide for the accrual of interests on the compensation for the non-fulfillment of the Revenue Undertaking; and (ii) if the Company were to proceed with the arbitration process, the eventual compensation which may be awarded to the Company would be uncertain and could be significantly lower than the Liquidated Damages.
7 Financial and trading prospect of the Television Screen Broadcast Business
As stated in the Letter from the Board, the Media Subsidiary has a multitude of LED screen outlets in Hong Kong covering the most high profile densely populated areas such as Hong Kong Airport, MTR Hunghom Station, Sheung Wan, Wan Chai and Causeway Bay.
As announced by the Company on 4 June 2014, the Group had entered into an agreement with Xiangxing (Fujian) Bag & Luggage Group Limited (“Xiangxing”), one of China’s largest manufacturers of luggage, regarding the provision of advertisement broadcasting services to Xiangxing through the Company’s network of mobile, indoor and outdoor television screens for a term of one year (at a consideration of HK$30,000,000 per annum) with the option to renew for an additional one year upon agreement from both parties.
As stated in the Letter from the Board, Xiangxing and Media Subsidiary shall carry out preparation work for the publishing of advertisements to commence on the effective date. Xiangxing has definite commitment on the publishing schedule and Xiangxing is required to pay the instalments even if it fails to provide the advertisement contents to the Media Subsidiary. The consideration of HK$30,000,000 under the advertising agreement is payable by Xiangxing to the Media Subsidiary by 4 equal quarterly instalments. Currently, Xiangxing is at the preparation phrase working on the advertising designs and contents and relevant matters. The preparation phrase is close to completion and the Media Subsidiary and Xiangxing agreed that the first instalment is payable at the commencement of the advertising period.
As stated in the Letter from the Board and based on our discussion with the Company, the Company is currently looking to increase the total number of LED screen outlets in both Hong Kong and the PRC in order to increase its attractiveness to potential advertising customers. In addition to the 53 LED outlets, the Company plans to add an additional 10 LED screens in the PRC and 5 additional LED screens in Hong Kong in the upcoming two years. The targeted LED screens are mostly large outdoor LED displays located in commercial areas such as malls, commercial buildings and train stations.
We note that the Company has sponsored the Annual Music Youth Festival and have entered into an advertising agreement with Xiangxing in June 2014 since the appointments of new Chief Executive Officer and Chief Operating Officer (details of which are stated in the Letter from the Board). We have discussed with the Company in relation to the current and proposed plan. We understand it is the intention of the
–60– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
Company to keep all options open in order to determine the best possible option in terms of minimizing cost and maximizing the number of outlets. By leveraging on Xinhua’s expansive network with large Chinese enterprises in the PRC, the Company will be targeting Chinese enterprises as the main source of revenue. In view of the above, we consider the Company has a better chance to improve its Television Screen Broadcasting Business in the coming years.
We have discussed with the Chief Operating Officer regarding the business plan of the Television Screen Broadcast Business and the sales and marketing arrangement between Xinhua News Agency and the Company (details are stated in the Letter from the Board under the paragraphs headed “sales and marketing arrangement between Xinhua News Agency and the Company” and “business plan”). We understand from the Company that APRB has alerted and circulated the Company’s profile to its local branches with a view to identify international companies looking to advertise in Hong Kong and the PRC region. We have discussed with the Company and understand that APRB has alerted the local branches to help identify international companies looking to advertise in the Hong Kong and PRC in order to tap and penetrate into the Chinese market. In support of the Company’s new strategy, Xinhua News Agency Asia-Pacific Regional Bureau has also been able to initiate meetings with potential large Chinese customers and from these connections through Xinhua News Agency Asia-Pacific Regional Bureau, the Company is able to expand its presence and increase its awareness throughout the entire Asia Pacific region including the PRC and hence bring business opportunities to the Company. We understand from the Company that such process is still ongoing as at the Latest Practicable Date.
The Company engaged Beijing Zedu Law Firm to provide PRC legal opinion on the applicable PRC laws and regulations relating to the Group’s development of the Television Screen Broadcast Business in the PRC. We have performed the following in relation to the proposed PRC operation of the Television Screen Broadcasting Business: (i) we have reviewed the opinion given by Beijing Zedu Law Firm. Details of the PRC Legal and Regulatory Requirements are stated in the Letter from the Board; (ii) we have interviewed with Beijing Zedu Law Firm as to its expertise and independence; (iii) we have reviewed the terms of engagement and assessed the scope of work of Beijing Zedu Law Firm; and (iv) we have assessed the reasonableness of representations made by the Company to the transaction to Beijing Zedu Law Firm. We are of the view that the PRC legal opinion is consistent with the other information known to us about the Company, its business and its business plans.
As at the Latest Practicable Date, the Company has five sales and marketing employees, four business development employees, four senior management and eight support function employees. The Company plans to hire additional employees in conjunction with the development of its Television Screen Broadcasting Business.
As stated in the Letter from the Board, the Directors have assessed that the provision of services under the advertising agreement with Xiangxing would take up approximately 5% of the Group’s overall advertising capacity (that is, advertising time slots offered by the Group). We have reviewed the advertising agreement with Xiangxing and discussed with the Directors in relation to the Group’s remaining advertising capacity. The Directors consider that the Group’s remaining advertising capacity is able to support the Further Undertaking.
–61– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
We understand the Group is currently in negotiations to acquire several high profile LED screen outlets in China in order to expand the supply of its LED screen outlets. The potential projects are all strategically located in first tier Chinese cities such as Beijing, Shanghai, Shenzhen and Guangzhou in order to maximise the exposure of the Group’s target demographic and to increase the attractiveness of the Group’s broadcast network to potential advertising clients.
From the above analysis, we consider the Company has a better chance to improve its business performance in the coming years.
As stated in the Letter from the Board, pursuant to the Cooperation Agreement, the Company acquired the Free Right, which allows the Company to use the Media Information for a period of 10 years commencing from 24 May 2011. We have discussed with the Company and understand that the Company had made use of the Media Information to attract existing and potential customers as the Company recognizes that a combination of news and advertisements will increase viewership and attract more attention to target demographic of viewers. The Company confirmed that the term of providing exclusive Media Information has been and is intended to be included in all advertising contracts, including the one entered with Xiangxing. We have reviewed the said contract signed between the Group and with Xiangxing. The terms of providing exclusive Media Information have been stated in that contract.
As stated in the Letter from the Board, the unutilized initial capital of approximately HK$42 million will be used for the following: (i) HK$17 million for the purchase of television screens and installation costs; (ii) HK$4 million for the leasing of space for installation of television screens; and (iii) HK$21 million for general working capital. We consider the Company has sufficient financial resources to implement the business plan. In the event the Company confronts any project that requires additional capital, we have been given to understand from the Company that it will consider raising funds by means of issuing new Shares and/or debt securities. As stated in the Letter from the Board, the Company expects to utilize approximately HK$25million as capital expenditure in 2015 toward the investment on acquisition of these pipeline deals which are all large indoor/outdoor large LED screen related projects. Of the HK$25 million, the Company expects to allocate approximately 75%, 12.5% and 12.5% purchasing, leasing and installations of television screens respectively. We understand the Company wants to expand its LED screen network in order to increase its attractiveness to potential new advertising clients. We have discussed with the Directors that the Company is under negotiation on several deals in its pipeline and the capital expenditure plan is in line with the business plan of the Group. We have discussed the potential pipeline deals investment projection prepared by the Company. We understand from the Company that the projected allocation of capital expenditure will be used towards the pipeline deals as stated in the Letter from the Board.
–62– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
Set out below is a list of countries by advertising expenditure in year 2014 and year-on-year growth to year 2014 from year 2012:
Rank Country Advertising expenditure Year-on-year growth Year 2014 Year 2013 Year 2012 Year 2014 Year 2013 Year 2012 (US$’ million) (US$’ million) (US$’ million) (%) (%) (%)
1 United States of America 189,514.4 181,212.6 178,538.0 4.6 1.5 2.7 2 Japan 53,238.0 51,712.7 50,962.6 2.9 1.5 3.7 3 China 48,019.2 42,836.0 38,375.6 12.1 11.6 9.3 4 Germany 23,997.8 23,604.6 23,456.5 1.7 0.6 –0.5 5 United Kingdom 22,158.1 21,617.6 21,159.3 2.5 2.2 3.6 6 Brazil 20,835.0 18,338.5 16,566.4 13.6 10.7 6.8 7 Australia 14,219.1 13,234.1 12,866.6 7.4 2.9 0.2 8 Canada 13,587.1 13,004.1 12,616.0 4.5 3.1 6.8 9 France 12,970.6 13,123.6 13,569.3 –1.2 –3.3 –2.9 10 Russia 11,566.9 10,624.5 9,514.3 8.9 11.7 11.4
Source: Magna Global
According to Magna Global, China was the world’s third biggest advertising market in year 2014, after the US and Japan. China’s advertising market has a high potential for growth. The advertising expenditure in China is expected to reach US$48,019.2 million in year 2014, represented a year-on-year growth of 12.1%. The growth potential in the whole advertising market in China represents a positive sign in Television Screen broadcasting Business.
As stated in the Letter from the Board, the Group will focus and look to expand its broadcast network in both Hong Kong and China for the next two years. Leveraging on the expansive network of Asia-Pacific Regional Bureau, the Group plans to expand its broadcast business into other Asia Pacific regions such as Macau, South Korea and Japan. The expansion will not only meet the demands of Chinese enterprises looking to penetrate the international markets, but also satisfy foreign enterprises looking to tap into the Chinese market. Based on the above, we are of the view that the Transaction is in the ordinary and usual course of business of the Group and is fair and reasonable, on normal commercial terms and in the interests of the Company and the Shareholders as a whole.
–63– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
POSSIBLE FINANCIAL EFFECT
Effect on net assets value
As stated above and in the Letter from the Board, since the Audited Operating Revenue for the year ended 31 December 2012 was less than HK$100,000,000, the Company will not be required to make available the sum of no less than HK$200,000,000 under the Cooperation Agreement.
The Remedial Agreement will not have any material impacts on the net assets position of the Group.
Effect on earnings
Apart from the possible operating revenue to be generated from the Further Undertaking, the Remedial Agreement is not expected to have any material impact on the Group’s financial results for the year ending 31 March 2015.
Effect on working capital
The consideration given by the Company is the forbearance of its right against Asia-Pacific Regional Bureau for appropriate compensation as a result of the non-fulfillment of the Revenue Undertaking, in return for Asia-Pacific Regional Bureau’s giving of the Further Undertaking. The Company is not required to pay any cash or other kinds of consideration to any party under the Settlement and the Remedial Agreement.
In light of the above, we consider the Remedial Agreement will not have any material adverse impact on the financial position of the Group.
As stated in the Letter from the Board, the Company had discussed with Asia-Pacific Regional Bureau for immediate cash compensation. However, as the Cooperation Agreement did not provide for any specific figure or formula for assessing the appropriate compensation payable to the Company, the Company and Asia-Pacific Regional Bureau had to agree on the amount of the appropriate compensation. Despite various negotiations, the Company and Asia-Pacific Regional Bureau were unable to agree on the amount of the appropriate compensation.
If the independent shareholders vote down the Remedial Agreement, the Company could, under the Cooperation Agreement, commence arbitration process against Asia-Pacific Regional Bureau for cash compensation. As stated in the Letter from the Board, the Directors have considered arbitration process but have noted that considerable time and financial resources would be needed in the arbitration process while the outcome, including the amount of compensation, would be uncertain. In particular, since the Television Screen Broadcast Business had recorded losses for the year ended 31 March 2012 and 31 March 2013, it would be difficult for the Company to substantiate its lost profits as a result of the non-fulfillment of the Revenue Undertaking would have been 12% of the Revenue Undertaking. If the Company were to proceed with the arbitration process, the eventual compensation which may be awarded to the Company would be uncertain and could be significantly lower than the Liquidated Damages.
–64– LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
As stated in the Letter from the Board, the Directors have adopted a notional net profit margin of 12% for the purpose of ascertaining the lost profits that the Company could have achieved had Asia-Pacific Regional Bureau fulfilled the Revenue Undertaking. The notional net profit margin of 12% was determined and agreed by the Company and Asia-Pacific Regional Bureau during arm’s length negotiations on remedial actions and was a concession made by Asia-Pacific Region Bureau. The Directors considered that the adoption of a net profit margin of 12% is fair and reasonable having regard to the fact that almost half of the comparable companies have recorded losses for their respective latest financial year.
We note the said lost profit was calculated by adopting a profit margin of 12%, which was based upon comparable companies listed on the Stock Exchange and after arm’s length negotiations with the Asia-Pacific Regional Bureau (details of the comparable companies are stated above under the section of “Analysis on the fairness and reasonableness of the Further Undertaking and Liquidated Damages”). As stated in the Letter from the Board, during the negotiation of the Further Undertaking, the Board has also included a compounded annual interest rate of 8% to the lost profit. Should the Asia-Pacific Regional Bureau fail to meet the Further Undertaking, it is required to compensate the Company based on a 12% profit margin. As the Liquidated Damages is calculated at a fair and reasonable rate of net profit margin of 12% of the shortfall in the Further Undertaking, we consider that the Liquidated Damages payable to the Company in the event of non-fulfillment of the Further Undertaking is fair and reasonable given (i) the Cooperation Agreement has not provided for any specific figure or formula for assessing the appropriate compensation payable to the Company; and (ii) the Further Undertaking was determined between the Company and Asia-Pacific Regional Bureau after arm’s length negotiations.
RECOMMENDATION
Having taken into consideration the factors and reasons as stated above, we are of the opinion that (i) the Settlement and the terms and conditions of the Remedial Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Settlement and the Remedial Agreement are in the interests of the Company and the Shareholders. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the resolution(s) to be proposed at the EGM to approve the Settlement and the Remedial Agreement and we recommend the Independent Shareholders to vote in favour of the resolution(s) in this regard.
Yours faithfully, For and on behalf of South China Capital Limited Francis Yeung Managing Director
–65– APPENDIX I FINANCIAL INFORMATION OF THE GROUP
1. FINANCIAL INFORMATION OF THE GROUP
Audited financial information of the Group for each of the three years ended 31 March 2014, 2013 and 2012 are disclosed in the following documents which have been published on the website of the Stock Exchange (http://www.hkexnews.hk) and the Company (www.XHNmedia.com).
(a) The audited consolidated financial statements of the Group for the year ended 31 March 2014 (together with the notes thereto) were set out in the 2014 annual report of the Company which was published on 22 July 2014. Please also see below a quick link to the 2014 annual report:
http://www.hkexnews.hk/listedco/listconews/SEHK/2014/0722/LTN20140722604.pdf
(b) The audited consolidated financial statements of the Group for the year ended 31 March 2013 (together with the notes thereto) were set out in the 2013 annual report of the Company which was published on 30 July 2013. Please also see below a quick link to the 2013 annual report:
http://www.hkexnews.hk/listedco/listconews/SEHK/2013/0730/LTN20130730330.pdf
(c) The audited consolidated financial statements of the Group for the year ended 31 March 2012 (together with the notes thereto) were set out in the 2012 annual report of the Company which was published on 30 July 2012. Please also see below a quick link to the 2012 annual report:
http://www.hkexnews.hk/listedco/listconews/SEHK/2012/0730/LTN20120730666.pdf
2. STATEMENT OF INDEBTEDNESS
Borrowings
As at the close of business on 31 January 2015, being the latest practicable date for the purpose of this statement of indebtedness, the Group had outstanding of borrowings of approximately HK$10,285,000 which are set out below:
HK$’000
Finance lease 1,064 Amount due to a director 9,221
10,285
–66– APPENDIX I FINANCIAL INFORMATION OF THE GROUP
Securities and guarantees
Certain property, plant and equipment of the Group of approximately HK$1,153,000 have been pledged to secure the finance lease of the Group as at 31 January 2015.
Contingent liabilities
The following table sets forth the Group’s indebtedness:
At the indebtedness date, the Group had contingent liabilities as follows:
(a) The Group has executed performance guarantees to the extent of an aggregate amount of HK$11,067,000 in respect of certain services provided to various customers by the Group.
(b) The Group had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$4,320,000 as at 31 January 2015. The contingent liability has arisen because, as at 31 January 2015, a number of current employees have achieved the required number of years of service to the Group in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision of approximately HK$2,407,000 in respect of such payments has been made in the consolidated statement of financial position as at 31 January 2015.
(c) During the ordinary course of its business, the Group may from time to time be involved in litigation concerning personal injuries sustained by its employees or third party claimants. The Group maintains insurance cover and, in the opinion of the Directors, based on current evidence, any such existing claims should be adequately covered by the insurance as at 31 January 2015.
3. WORKING CAPITAL
The Directors are of the opinion that the Group has sufficient working capital for its present requirements, that is for at least the next 12 months from the date of this circular.
–67– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
Set out below is the management discussion and analysis of the Group’s operations for the three years ended 31 March 2014 and the interim report for the six months ended 30 September 2014, and as modified as appropriate. The subsections set out below are extracted from the “Management Discussion And Analysis” sections of the relevant annual reports of the Company to provide further information relating to the financial condition and results of operations of the Group during the periods stated. These extracted materials were prepared prior to the entering into the Settlement and the Remedial Agreement and speak as of the date they were originally published. The Company’s prospects and intentions will have changed since that date, and the reader should therefore not place undue reliance on this information, particularly the information consisting of or relating to forward-looking or future statements.
(A) MANAGEMENT DISCUSSION AND ANALYSIS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2014
OPERATING RESULTS
The Group’s turnover from continuing operations for the six months ended 30 September 2014 amounted to approximately HK$137,084,000 which represented a 29% increase as compared to the same period last year. The loss of the Group (included a discontinued operation) for the six months ended 30 September 2014 was approximately HK$416,000 (2013: HK$19,999,000) represented a 98% improvement when compared to the previous reporting period. Cleaning and related services business made a profit of approximately HK$7,118,000, the medical waste treatment business made a profit of approximately HK$1,209,000, the waste treatment business make a loss of approximately HK$1,148,000 and the television screen broadcast business made a profit of approximately HK$2,745,000.
FINANCIAL REVIEW
As at 30 September 2014, the Group’s cash and cash equivalents and pledged time deposits totalled approximately HK$84,289,000 (31 March 2014: HK$67,507,000) and its current ratio (excluding discontinued operation) was 3.84 (31 March 2014: 3.58). The Group’s net assets were approximately HK$192,016,000 (31 March 2014: HK$173,123,000).
As at 30 September 2014, the Group did not have any bank borrowings but the Group has finance lease payables and loans from a Director of approximately HK$795,000 and HK$9,272,000 respectively (31 March 2014: HK$57,000 and HK$9,591,000) and therefore, its gearing ratio, representing ratio of finance lease payables and loans from a Director to shareholders’ equity was 5.2% (31 March 2014: 5.6%). The Group’s shareholders’ equity amounted to approximately HK$192,016,000 as at 30 September 2014 (31 March 2014: HK$173,123,000).
The Group takes a prudent approach to cash management and risk control. Its revenues, expenses and capital expenditures in relation to cleaning and related services business and television screen broadcast business are transacted in Hong Kong (“HK”) dollars, whereas those of the medical waste treatment business, and
–68– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
waste treatment business are transacted in Renminbi (“RMB”). The Group’s cash and bank balances are primarily denominated in HK dollars, RMB and United States dollars.
Foreign currency risks in relation to exchange rate fluctuations of RMB will be mitigated as future revenue from the medical waste treatment business and waste treatment business, which is in RMB, can offset future liabilities and expenses.
As at 30 September 2014, the Group’s banking facilities were secured by the pledge of certain Group’s time deposits amounting to approximately HK$10,513,000 (31 March 2014: HK$10,506,000).
BUSINESS REVIEW
Television screen broadcast business
The television screen broadcast business has shown significant turn around as the retooled efforts from senior management helped this business segment post a net gain for the first time. Operationally, the specially produced news programs by Xinhua News Agency, to the Group on an exclusive basis, which including but not limited to finance, sports, entertainment and lifestyle continue to run smoothly on through trains operated by the MTR Corporation Limited (“MTR”) running from Guangzhou East to Hong Kong and at the MTR Hunghom Departure Hall. Also, the television programs broadcasting on selected television screens at departure gates in the Hong Kong International Airport (“HK Airport”) running smoothly. The Group has also renewed its existing contracts with the MTR Corporation regarding Hunghom departure Hall and MTR KTT through train, which will ensure the Group to have exclusive rights to these broadcasting platforms for the foreseeable future. Furthermore, the 240 inch outdoor LED screen located at Grand Millenium Plaza, Cosco Tower is also under contract and fully operational.
During the period under review, the Group is pleased to have signed an advertising contract with Xiangxing (Fujian) Bag & Luggage Group Company Limited (“Xiangxing”) for an aggregate sum of HK$30,000,000 per annum with the mutual option to renew for another year at HK$30,000,000. The Group will continue to adopt the strategy of targeting large enterprises with large advertising budgets as its potential client and advertising partner. Additionally, the Group has started negotiations with multiple media agents and advertising corporations regarding potential cooperation and partnerships in order to increase its broadcast platform while also minimising initial capital investment costs. The Group will build on this new momentum to continue to improve and to expand this business segment with the focus to evolve this segment to be the biggest revenue gainer.
According to the Cooperation Agreement, Xinhua News Agency Asia-Pacific Regional Bureau Limited (“APRB”) has undertaken that the audited operating revenue derived from the television screen broadcast business for the year ended 31 December 2011 and the year ended 31 December 2012 will be no less than HK$30,000,000 and HK$100,000,000, respectively (the “Revenue Undertaking”).
–69– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
Since the Revenue Undertaking was not fulfilled, the Group entered into the remedial agreement with APRB on 15 July 2014 as full and final compensation for the non-fulfillment of the Revenue Undertaking. Appropriate disclosures have been made in the announcement of the Company on 15 July 2014. Furthermore, as disclosed in the Company’s announcement on 21 November 2014, the Group is currently in the process of preparing and finalising the circular in accordance with the Main Board Listing Rules and is expected to be dispatched on or before 12 December 2014. Appropriate announcements will be made in the event of further delay of the circular.
Cleaning and related services
Adapting to the present market climate and responding to the growing demand for more innovative and attentive services, the Group has taken stock of our performance to ensure that it is and will continue to be highly efficient, effective and versatile at all times.
During the past six months under review, the Group secured a 32-month contract with a renowned property owner for the provision of general cleaning for both common and tenanted areas, pest control and management, stone finishing maintenance as well as curtain wall cleaning for a 30-storey office building on Connaught Road, Central.
The Group’s business co-operation with a listed property developer sparked significant progress. A contract was signed with this developer to render initial and general cleaning, pest management, decoration waste disposal and related services to a brand new housing estate in New Territories West, comprising an annexed “Green Atrium”, which is one of a first in residential developments, for educating and raising the awareness of environmental protection. Through a stringent screening process, the Group was elected because of, firstly, our extensive job references in residential properties and, secondly, of the Group’s strength in the environmental protection field, particularly in the organic waste separation and treatment process.
In addition to the above new developments, several major contracts were renewed ranging from two to three years. These contracts include a top-notch shopping mall and commercial building in Causeway Bay, a Grade-A commercial building on Pedder Street in Central, two residential estates in Tung Chung and one in Kowloon Bay.
The Group’s high-level cleaning has also shown growth at a steady pace. The Group is one of a few in the industry to provide such high-level cleaning services by direct employees to warrant service quality. The Group maintains cooperation with a consultation group in the provision of cleaning to various overhead areas in hospitals and sanitariums, which calls for higher sanitary requirements and minimal disturbances when the cleaning work was being carried out.
The Group’s stone and tile maintenance and restoration products imported from Italy continued to gain popularity and recognition in Hong Kong, Macau and the mainland as the sale volume steadily increased.
–70– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
Medical waste treatment business
As to the medical waste treatment business, the two medical waste treatment plants of the Group located in Siping City and Suihua City in PRC, have been operating smoothly throughout the period under review.
Waste treatment business
The Group is seeking various options in respective of this investment during the period under review.
PROSPECTS
Television screen broadcast business
The Group has rededicated and refocused its efforts to successfully build and to expand the television screen broadcast business. With Xinhua News Agency Asia Pacific Bureau as the Group’s operating partner, the Group believes that the television screen broadcast business can be a lucrative segment that can generate high gross and net margins coincide with a high turnover. Thus, the Group will endeavor to deploy all necessary resources in improving the brand in order to increase coverage and market share.
The Group is currently in negotiations with several media agents as well as several other media advertising corporations in forming possible partnerships. The Group believes that this strategy can broaden the television screen platform, increase brand awareness, as well as minimise initial capital investment. These potential partners have television screens located in key strategic locations such as Beijing, Shanghai, and Guangzhou in the PRC as well as Japan, Macau and Singapore in the Asia Pacific which perfectly fits with the group’s current expansion strategy.
In Hong Kong, the Group is currently looking to increase the total number of LED screen outlets in order to increase the attractiveness to potential advertising customers. The Group is currently in negotiations with several parties involving television screens in key strategic locations such as Tsim Sha Tsui, Mongkok, Causeway Bay and Wan Chai. Combine these possibilities with the Group’s existing platforms located at HK Airport, Hung Hom Train Station, and Sheung Wan, the Group believes that it will create an even more attractive platform to its new and existing advertising clients.
The Group recognises the potential value of the television screen broadcast business, and thus will refocus its full attention in making this segment of the business a success. Barring unforeseen circumstances, the Directors believe many ongoing discussions and negotiations mentioned above would and will provide positive impacts to the Group in the immediate future.
–71– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
Cleaning and related services
The Statutory Minimum Wage (“SMW”) rate, which now stands at $30.00 per hour, will be revised in May 2015. SMW rate has a far-reaching impact in the cleaning service industry. Most of our major contracts with our customers provide a mechanism for adjusting our service charges to commensurate with the movements of the SMW rate and/or the Consumer Price Index.
The chronic shortage of labour besets employers in Hong Kong as a whole. The situation is more serious in the service industry. There is no sign of ease in the foreseeable future. According to some analysts, this phenomenon can be attributed not only to an aging population but also to the fact that people are choosing rather to further their academic qualifications instead.
To help combat against such pernicious effect, the Group, in order to attract and retain good staff, has put in place a staff retention programme, such as offering more attractive fringe benefits, reviewing its current medical scheme benefits and improving the chances of promotion etc. Through such efforts, the staff turnover rate, on a comparative basis, is relatively low.
With the Group’s reputation and experience in the cleaning and related services industry and backed by a stable and reliable workforce, the Group is confident that it can make progress in developing its business in this area in the coming years.
Medical waste treatment business
The two medical waste treatment plants located in Siping City and Suihua City are now well established and are expected to continue their smooth operations. The Group therefore expects that the medical waste treatment business segment will continue to bring in revenue to the Group in the future.
INTERIM DIVIDEND
The Board does not recommend the payment of any dividend to shareholders for the six months ended 30 September 2014 (2013: Nil).
CONTINGENT LIABILITIES
At the end of the reporting period, the Group had contingent liabilities as follows:
(a) The Group has executed performance guarantees to the extent of an aggregate amount of approximately HK$6,799,000 (31 March 2014: HK$4,914,000) in respect of certain services provided to various customers by the Group.
–72– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
(b) The Group had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$4,609,000 as at 30 September 2014 (31 March 2014: HK$4,227,000). The contingent liability has arisen because, at the end of the reporting period, a number of current employees have achieved the required number of years of service to the Group in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision of HK$2,541,000 (31 March 2014: HK$2,290,000) in respect of such payments has been made in the condensed consolidated statement of financial position as at 30 September 2014.
(c) During the ordinary course of its business, the Group may from time to time be involved in litigation concerning personal injuries sustained by its employees or third party claimants. The Group maintains insurance cover and, in the opinion of the directors, based on current evidence, any such existing claims should be adequately covered by the insurance as at 30 September 2014 and 31 March 2014.
EMPLOYEES AND REMUNERATION POLICIES
The total number of employees of the Group as at 30 September 2014 was 1,605 (31 March 2014: 1,609). Total staff costs, including directors’ emoluments and net pension contributions, for the period under review amounted to HK$97,672,000 (30 September 2013: HK$85,969,000). The Group provides employees with training programmes to equip them with the latest skills.
Remunerations are commensurate with individual job nature, work experience and market conditions, and performance-related bonuses are granted to employees on discretionary basis.
(B) MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 MARCH 2014
OPERATING RESULTS
The turnover of Xinhua News Media Holdings Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) from continuing operations for the year ended 31 March 2014 amounted to approximately HK$227,544,000, (2013: HK$201,167,000) represented a 13.1% increase when compared to the previous year. The loss of the Group from continuing operations was approximately HK$52,518,000 (2013: HK$56,747,000). Cleaning and related services business made a profit of approximately HK$6,453,000, the medical waste treatment business made a profit of approximately HK$2,556,000, the waste treatment business made a loss of approximately HK$4,364,000 and the television screen broadcast business made a loss of approximately HK$20,028,000 of which HK$11,660,000 was from the
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amortisation of the intangible asset related to the granting of the Free Right by Xinhua News Agency Asia-Pacific Regional Bureau Limited (“APRB”) for the television screen broadcast business under the cooperation agreement entered into on 22 November 2010 (the “Cooperation Agreement”). As the performance of the television screen broadcast business was worse than expected, an impairment loss of approximately HK$32,438,000 was recognised.
The management consulting services business was divested by the Group on 28 March 2014, which made a loss of approximately HK$4,921,000 for the period up to 28 March 2014, the date of the disposal.
FINANCIAL REVIEW
As at 31 March 2014, the Group’s cash and cash equivalents and pledged time deposits totalled approximately HK$67,507,000 (2013: HK$72,705,000) and its current ratio (excluded the discontinued operation) was 3.58 (2013: 4.64). The Group’s net assets were approximately HK$173,123,000 (2013: HK$260,968,000).
As at 31 March 2014, the Group did not have any bank borrowings but the Group had a finance lease payable and loan from a director of approximately HK$57,000 and approximately HK$9,591,000 respectively (2013: HK$109,000 and HK$10,650,000 (included in liabilities directly associated with the assets classified as held for sale)) and therefore, its gearing ratio, representing ratio of a finance lease payable and loan from a director to shareholders’ equity was 5.6% (2013: 4.1%). The Group’s shareholders’ equity amounted to approximately HK$173,123,000 as at 31 March 2014 (2013: HK$260,968,000).
The Group takes a prudent approach to cash management and risk control. Its revenues, expenses and capital expenditures in relation to cleaning related business and television screen broadcast business are transacted in Hong Kong (“HK”) dollars, whereas those of the medical waste treatment business and waste treatment business and medical consultation business are transacted in Renminbi (“RMB”). The Group’s cash and bank balances are primarily denominated in HK dollars, RMB and United States dollars.
As at 31 March 2014, the Group’s banking facilities were secured by the pledge of certain of the Group’s time deposits amounting to approximately HK$10,506,000 (2013: HK$10,022,000).
BUSINESS REVIEW
Television screen broadcast business
The Group, in association with APRB, is rededicated and refocused on developing the television screen broadcast business. The news programs including finance, sports, entertainment, lifestyle and world events provided to the Group on an exclusive basis by Xinhua News Agency, continue to run smoothly on through-trains operated by the MTR Corporation Limited (“MTR”) running from
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Guangzhou East to Hong Kong and at the MTR Hunghom Departure Hall in Hong Kong. The news programs broadcasted on various locations in Hong Kong, including departure gates in the Hong Kong International Airport (“HK Airport”), Grand Millenium Plaza in Sheung Wan, Lockhart Road in Causeway Bay and Hennessy Road in Wan Chai also continue to run smoothly.
During the year, the Group has appointed Mr. Yu Guang as Chief Executive Officer (“CEO”) and Mr. David Wei Ji as Chief Operating Officer (“COO”). They are responsible for overseeing the general operations of the television screen broadcast business. So far, the Group has signed a major advertising agreement with Xiangxing (Fujian) Bag & Luggage Group Company Limited (“Xiangxing”), one of China’s largest luggage manufacturers. The value of the contract was approximately HK$30,000,000 per annum, with an option to renew for an additional one year. The total potential consideration would be approximately HK$60,000,000.
Furthermore, the Group has endeavored to approach media agents to discuss cooperation in the sharing of LED screen outlets to increase broadcasting channels, in both Hong Kong and People’s Republic of China (the “PRC”) and also to reduce initial capital investment cost.
According to the Cooperation Agreement, APRB has undertaken that the audited operating revenue derived from the television screen broadcast business for the year ended 31 December 2011 and the year ended 31 December 2012 would be no less than HK$30,000,000 and HK$100,000,000, respectively (the “Revenue Undertaking”). As the Revenue Undertaking was not fulfilled, negotiations on remedial actions were conducted. As at 31 March 2014 the parties have made progress as to the major terms of the settlement. However, the parties have subsequently entered into the settlement and remedial agreement, and the details of which were disclosed in the announcement of the Company dated 15 July 2014.
Cleaning and related services
Our Group is an integrated cleaning services provided in Hong Kong. The Group has been engaged in the cleaning business, pest control and other cleaning related professional service for over 35 years and has accumulated solid knowledge and extensive experience in these fields. The Group has engaged in many substantial cleaning service projects and gained unique strength and experience in making good use of the Group’s resources. With our Group’s strong and devoted management team and stable workforce, the Group was able to maintain growth in the reporting year notwithstanding the fierce competition in the market and various challenges.
During the year, the Group secured contracts with a listed property developer to provide cleaning and related professional services to their prominent office building in Island East and was appointed as the cleaning service contractor for a luxury residential estate in Island South.
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The Group was also able to set in motion to provide cleaning and other related professional services to a foreign property developer to render cleaning, pest and rodent treatment and stone finishing maintenance services to its luxury residences, townhouses, and detached houses in the heart of Kowloon and all along Island South.
The Group also entered into three contracts for providing warewash services to one of the biggest flight kitchens in Hong Kong, and providing general cleaning to their headquarters. The contracts were renewed for two years during the reporting year.
The Group was also re-appointed to provide cleaning, pest control and food waste collection services to a renowned shopping centre and an industrial centre in Kowloon Bay for a term of two years.
Sales volume of the stone maintenance and restoration products specially formulated for the Asian markets, continued to grow, symbolising growing recognition of the products in the market.
The government published a blueprint for sustainable use of resources in May 2013. As mentioned therein, among others, mobilising the community in reducing the municipal solid waste and collection and recycling of food waste, thereby alleviating the pressure on the landfills, is one of the environmental protection targets in the coming decade. With our extensive study and researches on treatment technologies conducted in the past years on recycling processes, the Group, during the reporting year, had co-operated and rendered services to several residential estates and schools in these activities. The Group will continue to develop in this area.
Medical waste treatment business
As to the medical waste treatment business, the two medical waste treatment plants of the Group located in Siping City and Suihua City in PRC, have been operating smoothly throughout the reporting year.
Waste treatment business
As announced on 18 March 2014, the Group and the independent state-owned enterprise had reached consensus to terminate the negotiation regarding the Group’s investment of a waste treatment plant in Shuyang County, Jiangsu Province, PRC. The Group is currently looking into other options in respect to this investment.
Management consulting services business
As announced on 28 March 2014, the Group divested its entire interest in Pan Asia Century Holdings Limited (“PAC Holdings”) and its subsidiaries (collectively referred to as the “Pan Asia Group”) for a total consideration of approximately
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HK$29,000,000. The Group considers the management consulting business to be a non-core asset that does not fit with the Group’s current dual business model. The divestiture will allow the Group to reallocate its full resources to dedicate to its existing main business segments.
Pursuant to the agreement dated 29 August 2012 to acquire the shares in PAC Holdings, the consideration was subject to a downward adjustment if the actual net profit of the Pan Asia Group for the 12-month period commencing from the completion date was less than HK$10,000,000. The actual net loss of the Pan Asia Group for the 12-month period ended 23 September 2013 was HK$3,604,000. Accordingly, the consideration should be adjusted and the Group is entitled to a payment of approximately HK$6,938,000 from the vendor, pending final audit. The management will start discussions with the vendor regarding the payment once the final receivable amount is finalised.
PROSPECTS
Television screen broadcast business
With the new appointments of CEO and COO and with the rededicated focus of the Group, the prospects of the television screen broadcast business looks bright. Currently, the subsidiary, Xinhua News Media Limited, has a multitude of LED screen outlets in Hong Kong covering the most high profile densely populated areas such as HK Airport, MTR Hunghom Station, Sheung Wan, Wan Chai and Causeway Bay.
The rededicated group has already converted these outlets into signing a major advertising agreement with Xiangxing, at a consideration of HK$30,000,000 per annum, with an option to extend for an additional year. The total potential consideration of the agreement is worth approximately HK$60,000,000. In full cooperation with APRB, the Group will look to target other large Chinese enterprises with similar advertising budgets.
Furthermore, the Group is currently in negotiations to acquire several high profile LED screen outlets in China in order to expand the supply of its LED screen outlets. The potential projects are all strategically located in first tier Chinese cities such as Beijing, Shanghai, Shenzhen and Guangzhou in order to maximise the exposure of our target demographic and to increase the attractiveness of our broadcast network to our potential advertising clients.
The Group will focus and look to expand its broadcast network in both Hong Kong and China for the next two years. Starting in year 2016, the Group, with the expansive network of APRB, plans to expand its broadcast business into other Asia Pacific regions such as Macau, South Korea and Japan. The expansion will not only meet the demands of Chinese enterprises looking to penetrate the international markets, but also satisfy foreign enterprises looking to tap into the Chinese market.
In cooperation with APRB, the Group will look to fully unlock and to synergise with the exclusive value of the free right to soon develop the television screen broadcast business into the main revenue generating source of the Group.
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Cleaning and related services
Looking forward, the shortage of low-skilled labour, largely attributable to an aging population, is expected to persist and remain a long-term challenge. By implementing a series of effective measures, the Group was able to overcome the challenge in the past few years and is confident that the Group can prevail in the future. Among other measures, the Group will, as a continuous initiative, conducts joint manpower adequacy reviews with our customers on a regular basis and share with them rewards of the productivity gained.
The Group will continue to share our rich knowledge and extensive experience in the organic waste separation and recycling areas with our customers and the Hong Kong community. This indeed is one of our commitments to our social responsibility in making a green living environment for the society and for future generations.
Medical waste treatment business
The two medical waste treatment plants located in Siping City and Suihua City are now well established and are expected to continue their smooth operations. The Group therefore expects the medical waste treatment business segment will continue to bring in revenue for the Group in the future.
CONTINGENT LIABILITIES
At the end of the reporting period, the Group had contingent liabilities as follows:
(a) The Group has executed performance guarantees to the extent of an aggregate amount of approximately HK$4,914,000 (2013: HK$4,838,000) in respect of certain services provided to various customers by the Group.
(b) The Group had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$4,227,000 as at 31 March 2014 (2013: HK$2,830,000). The contingent liability has arisen because, at the end of the reporting period, a number of current employees have achieved the required number of years of service to the Group in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision of approximately HK$2,290,000 (2013: HK$1,510,000) in respect of such payments has been made in the consolidated statement of financial position as at 31 March 2014.
(c) During the ordinary course of its business, the Group may from time to time be involved in litigation concerning personal injuries sustained by its employees or third party claimants. The Group maintains insurance
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cover and, in the opinion of the directors of the Company (the “Directors”), based on current evidence, any such existing claims should be adequately covered by the insurance as at 31 March 2014 and 2013.
EMPLOYEES AND REMUNERATION POLICIES
The total number of employees of the Group as at 31 March 2014 was 1,609 (2013: 1,519). Total staff costs, including directors’ emoluments and net pension contributions, for the period under review amounted to HK$184,059,000 (2013: HK$164,525,000). The Group provides employees with training programmes to equip them with the latest skills.
Remunerations are commensurate with individual job nature, work experience and market conditions, and performance-related bonuses are granted to employees on discretionary basis.
(C) MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 MARCH 2013
OPERATING RESULTS
The turnover of Xinhua News Media Holdings Limited (the “Company”) and its subsidiaries (collectively referred to as the “Group”) from continuing operations for the year ended 31 March 2013 amounted to approximately HK$205,503,000 (2012: HK$193,471,000), represented 6.2% increase as compared to the previous year. The loss of the Group from continuing operations was approximately HK$53,782,000 (2012: HK$34,334,000). Cleaning and related services business made a profit of approximately HK$4,729,000, the medical waste treatment business made a profit of approximately HK$1,844,000, the management consulting services made a profit of approximately HK$828,000 and the television screen broadcast business made a loss of approximately HK$25,113,000 of which approximately HK$15,129,000 was from the amortisation for the intangible asset related to the granting of the free right by Xinhua News Agency Asia-Pacific Regional Bureau Limited (“APRB”) for the television screen broadcast business under the cooperation agreement entered into by APRB and the Company on 22 November 2010 (the “Cooperation Agreement”). As the performance of the television screen broadcast business was worse than expected, an impairment loss of the free right approximately HK$28,327,000 was recognised.
The discontinuation of the operation of the municipal waste treatment plant was located in Shuyang County, Jiangsu Province, People’s Republic of China (the “PRC”). Total loss from the discontinued operation for the year ended 31 March 2013 was approximately HK$2,313,000.
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FINANCIAL REVIEW
As at 31 March 2013, the Group’s cash and cash equivalents and pledged time deposits totalled approximately HK$72,705,000 (2012: HK$79,564,000) and its current ratio (excluded the discontinued operation) was 4.64 (2012: 4.71). The Group’s net assets were approximately HK$260,968,000 (2012: HK$271,137,000).
As at 31 March 2013, the Group did not have any bank borrowings, but the Group had a finance lease payable and loans from a director of approximately HK$109,000 and approximately HK$10,650,000 respectively (2012: HK$157,000 and HK$9,351,000); and therefore, its gearing ratio representing ratio of a finance lease payable and loans from a director to shareholders’ equity was 4.1% (2012: 3.5%). The Group’s shareholders’ equity amounted to approximately HK$260,968,000 as at 31 March 2013 (2012: HK$271,137,000).
The Group takes a prudent approach to cash management and risk control. Its revenues, expenses and capital expenditures in relation to cleaning related business and television screen broadcast business are transacted in Hong Kong (“HK”) dollars, whereas those of the medical waste treatment business, waste treatment business and management consulting services business are transacted in Renminbi (“RMB”). The Group’s cash and bank balances are primarily denominated in HK dollars, RMB and United States dollars.
Foreign currency risks in relation to exchange rate fluctuations of RMB will be mitigated as future revenue from the medical waste treatment business and management consulting services, which are in RMB, can offset future liabilities and expenses.
As at 31 March 2013, the Group’s banking facilities were secured by the pledge of certain of the Group’s time deposits amounting to approximately HK$10,022,000 (2012: HK$4,001,000).
BUSINESS REVIEW
In spite of the fierce competitions in the cleaning and related services field, demand over supply in the labour market and increasing labour costs, the Group was able to maintain steady growth in the past year under review.
In addition to renewing the two warewash and general cleaning contracts with one of the biggest flight kitchens, the Group was able to obtain a third contract from this business partner for providing commissary services (sorting and packing of reading articles, magazines and head phones etc.) in aircrafts.
In the fourth quarter of 2012, the Group entered into a 2-year contract with a prominent property developer to provide initial and day-to-day comprehensive cleaning to their brand new office building next to the West Rail Tsuen Wan Station.
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Various major contracts, including those in connection with several Grade-A office/commercial buildings and complexes in Central, Admiralty and Quarry Bay, were renewed from one year to three years with reasonable adjustments in the contract prices to make provisions for labour cost increases as a result of the ripple effect of the statutory minimum wage rate revision.
The Group has commenced its external wall cleaning services since the early nineties by using “Sparkling”, an effective external wall cleaning agent formulated and uniquely brand named by the Group. Following the satisfactory completion of a project of a multi-storied residential estate in Tin Hau, the Group was able to obtain and complete another external wall cleaning contract of a top-notch residential development up on the Peak. In this project, various unprecedented difficulties, such as high wind blowing in gusts, vast landscaped areas to be taken care of, had to be resolved and overcome. The project was completed to the satisfaction of the property owners well on schedule.
The series of stone maintenance and restoration products, some of which were specially formulated and manufactured by our European business partner for Asian markets, continued to earn recognition. Sales of the products were on the upward trend.
For the medical waste treatment business, the two medical treatment plants of the Group in Siping City and Suihua City in the Mainland continued to be operating smoothly.
As mentioned previously, the Group was engaged in negotiation with an independent state-owned enterprise regarding the Group’s investment in a waste treatment plant in Shuyang County, Jiangsu Province. The negotiation is still continuing.
For the television screen broadcast business, specially produced news programs including finance, sports, entertainment and lifestyle run smoothly on through trains operated by the MTR running from Guangzhou East and Hong Kong and at the MTR Hung Hom Departure Hall. In addition, the Group has officially launched the television programs broadcasting on selected television screens at departure gates in the Hong Kong International Airport (“HK Airport”) since 12 December 2012.
During the year 2012, the Group has also reached several agency agreements with advertising agents in both Mainland China and Hong Kong. It is expected that these arrangements would help to enlarge the client base of the television screen broadcast business and hence, open up an additional source of advertising revenue. In addition, the Group has endeavoured to approach media agents to discuss cooperation in sharing television screen resources to increase broadcasting channels and reducing capital investment costs.
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According to the Cooperation Agreement, APRB has undertaken that the audited operating revenue derived from the television screen broadcast business for the year ended 31 December 2011 and 31 December 2012 would be no less than HK$30,000,000 and HK$100,000,000, respectively and to pay compensation to the Company in the event any part of the undertaking cannot be fulfilled. Negotiations with APRB on remedial actions is on-going. Such negotiation is currently focused on how the compensation shall be calculated on a fair and reasonable basis given that the Cooperation Agreement contains no provision for determining the relevant amount. At this point the Company and APRB are discussing and evaluating the possibility and appropriateness of various options, including, without limitation, engaging a professional valuer for the assessment of the relevant economic damages. Further professional assistance has been sought in this relation including legal advice on the appropriateness of various remedial considerations. Appropriate announcement will be made when an agreement has been reached.
Following the acquisition of the Pan Asia Century Holdings Limited (“PAC Holdings”) and its subsidiaries (collectively referred to as the “Pan Asia Group”) in the second half of 2012, the Group has a new business of investment management and consulting services, management solutions for hospitals and sales of medical equipment. For the year ended 31 March 2013, the Group has recorded a gain of approximately HK$652,000 from this business segment.
PROSPECTS
Cleaning and related services
The road of the cleaning service sector remains bumpy. Labour shortage is expected to persist in the coming year.
Given the Group’s well established and developed employer-and-employee relations with a turnover rate below industry norm and our good track records in reducing accidents and work injuries, we have been able to overcome the hurdles in the past year and are optimistic that the Group would be able to maintain a stable and trust-worthy labour force to fulfill our contractual obligations.
Over the past years, most of the food waste has been mixed with other rubbish for disposal at landfills. Of late, the government has launched a “Food Waste Recycling Scheme in Housing Estates” and is giving funding support to the participating estates. The food waste-turned-compost generated is used for landscaping, greening and planting activities. In response to the scheme, more and more estates are taking part.
The Group has matured experience and technology in this field and has been sharing our knowledge with our housing estate customers, other voluntary associations and schools. We shall continue to take an active role and plan to extend our sharing and services in this regard to our customers in shopping malls, food courts, commercial complexes in the coming years.
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Television screen broadcast business
In 2012, the Group formulated defined developmental direction and objectives for the television screen broadcast business. A framework for sales network has been established and targeted sales partners identified. The Group has also begun working with several advertising agents based in Mainland China and Hong Kong, enjoying a better connection to customers and a better focus on business with Chinese enterprises.
The Group is contemplating to expand the news programs broadcast coverage to PRC train station departure halls as well as on trains. The Group has identified certain train stations and train service providers and has started negotiations. There are plans to continue seeking out more suitable train stations and train service providers.
After the successful launch of the television screen broadcasting at HK Airport, the Group begins to focus on securing sponsorship on television programs production. The Group is confident that this new development will enhance the Group’s profitability and improve our branding image to international customers and consumers.
The Group is in an advanced stage of negotiation with a property owner in Central District for media broadcasting on an outdoor LED video wall. It is anticipated to launch the broadcasting service in the second half of 2013.
In 2013, the Group has considered other opportunities to expand the broadcasting business. In addition to the television screen broadcast business, the Group is diversifying into other media broadcasting medium, such as the internet and advertising billboards, which are expected to broaden the income source of the Group.
The Group is negotiating with certain media companies in Taiwan regarding potential cooperation. The cooperation is expected to begin with the exchange and sharing of resources, followed by exploring the possibility of setting up partnership or other form of enhanced relationship.
The Group is also discussing with companies in the PRC regarding the possible formation of strategic cooperation relationship in the online media advertisement business.
Management consulting services
Shanghai GoalReal Investments Advisory Company Limited (formerly known as Shanghai GoalReal Hospital Investment Management Limited) (“GoalReal”), an indirect subsidiary of the Company is involved in management consulting services in the PRC. GoalReal has been deploying resources and efforts to strengthen its performance. The Group intends to further explore different business opportunities in the PRC medical equipment and hospital management service markets, such as
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exploring the possibility of obtaining the exclusive right to distribute certain medical equipment in the PRC and participating in the management services and operation of PRC hospitals.
WARRANTS
(i) Warrants placed on 18 March 2011
On 18 March 2011, an aggregate of 30,600,000 unlisted warrants had been successfully placed by the Company to not less than six placees who were third parties independent of and not connected to the Company and its connected persons, at the issue price of HK$0.01 per warrant and the subscription price of HK$0.70 per warrant. The subscription period for the warrants was from the date of issue of the warrants to the expiry, which was 18 months from the issue of the warrants. Upon the exercise in full of the subscription rights attached to the warrants, a maximum of 30,600,000 shares of the Company would have been issued and allotted.
During the year, no warrant had been exercised and the remaining 30,600,000 unlisted warrants at the issue price of HK$0.01 each expired. The related warrant reserve of HK$306,000 was transferred to accumulated losses.
(ii) New shares and warrants placed on 3 May 2011
On 3 May 2011, an aggregate of 45,900,000 new shares had been successfully placed by the Company to not less than six placees who were third parties independent of and not connected to the Company and its connected persons, at the placing price of HK$0.70 per share.
On 3 May 2011, an aggregate of 45,900,000 unlisted warrants had been successfully placed by the Company to not less than six placees who were third parties independent of and not connected to the Company and its connected persons, at the issue price of HK$0.01 per warrant and the subscription price of HK$0.70 per warrant. The subscription period for the warrants was from the date of issue of the warrants to the expiry, which was 18 months from the issue of the warrants. Upon the exercise in full of the subscription rights attached to the warrants, a maximum of 45,900,000 shares would have been issued and allotted.
During the year, no warrant had been exercised and the remaining 45,900,000 unlisted warrants at the issue price of HK$0.01 each expired. The related warrant reserve of HK$459,000 was transferred to accumulated losses.
MATERIAL ACQUISITIONS
On 29 August 2012, a wholly-owned subsidiary of the Company, Ally Thrive Investments Limited (“Ally Thrive”) entered into an agreement with Pan Asia Century Consulting Limited (“PAC Consulting”), an independent third party to acquire all the issued shares of and a shareholder’s loan of approximately
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HK$22,140,000 in PAC Holdings. PAC Holdings was incorporated on 23 April 2012 in the British Virgin Islands with limited liability, whose principal business is investment holding. PAC Holdings owns the entire issued share capital of Pan Asia Century Investments Limited (“PAC Investment”) which holds 51% of the entire equity interest in GoalReal.
The total consideration HK$41,000,000 was settled by the issue of 135,387,000 new shares of the Company at HK$0.2142 per share and the balance in cash. The total consideration is subject to adjustment if the actual net profit of the Pan Asia Group for the 12-month period commencing from the completion date falls below HK$10,000,000, in which case PAC Consulting shall pay to the Group an amount calculated as: (HK$10,000,000 – actual net profit) x 51%. The acquisition was completed on 24 September 2012.
GoalReal has expanded its scope of business at the end of 2012 and is now principally engaged in (i) investment management and consulting service, (ii) the provision of management solutions for hospitals, and (iii) sales of medical equipment.
CONTINGENT LIABILITIES
At the end of the reporting period, the Group had contingent liabilities as follows:
(a) The Group has executed performance guarantees to the extent of an aggregate amount of approximately HK$4,838,000 (2012: HK$3,746,000) in respect of certain services provided to various customers by the Group.
(b) The Group had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$2,830,000 as at 31 March 2013 (2012: HK$2,912,000). The contingent liability has arisen because, at the end of the reporting period, a number of current employees have achieved the required number of years of service to the Group in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision of approximately HK$1,510,000 (2012: HK$1,531,000) in respect of such payments has been made in the condensed consolidated statement of financial position as at 31 March 2013.
(c) During the ordinary course of its business, the Group may from time to time be involved in litigation concerning personal injuries sustained by its employees or third party claimants. The Group maintains insurance cover and, in the opinion of the directors of the Company (the “Directors”), based on current evidence, any such existing claims should be adequately covered by the insurance as at 31 March 2013 and 2012.
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EMPLOYEES AND REMUNERATION POLICIES
The total number of employees of the Group as at 31 March 2013 was 1,519 (2012: 1,579). Total staff costs, including directors’ emoluments and net pension contributions, for the year under review amounted to approximately HK$164,525,000 (2012: HK$165,984,000). The Group provides employees with training programmes to equip them with the latest skills.
Remunerations are commensurate with individual job nature, work experience and market conditions, and performance-related bonuses are granted to employees on discretionary basis. The share option scheme (the “Scheme”) adopted by the Company on 24 April 2003 has expired on 23 April 2013. No further share options would be granted under the Scheme, but share options previously granted shall remain in full force and effect in all other respects.
(D) MANAGEMENT DISCUSSION AND ANALYSIS FOR THE YEAR ENDED 31 MARCH 2012
OPERATING RESULTS
The Group’s turnover from continuing operations for the year ended 31 March 2012 amounted to HK$193,471,000 (2011: HK$176,989,000), represented a 9.3% increase as compared to the previous year. The loss of the Group for the year from continuing operations was HK$34,334,000 (2011: HK$31,137,000). Cleaning and related services business made a loss of HK$1,498,000, the medical waste treatment business made a profit of HK$30,000 and the television screen broadcast business made a loss of HK$21,742,000 which included an amortisation of HK$12,607,000 for the intangible asset related to the granting of the Free Right by Xinhua News Agency Asia-Pacific Regional Bureau Limited (“APRB”) for the television screen broadcast business under the cooperation agreement entered into by APRB and the Company on 22 November 2010 (the “Cooperation Agreement”).
The discontinuation of the operation of the municipal waste treatment plant located in Shuyang County, Jiangsu Province, PRC led to an impairment loss of HK$65,918,000 following the termination of the investment agreement with the Shuyang Municipal Government on 9 January 2012 as described in more details in the announcements published on 5 January 2012 and 11 January 2012. Total loss from the discontinued operation was HK$79,535,000.
BUSINESS REVIEW
Cleaning and related services, in particular for middle to high class residential estates, office buildings, retail and composite developments, were regarded as the principal business of the Group in the financial year under review. The Group was successful in obtaining a service contract providing general cleaning, pest management, curtain wall cleaning as well as stone finishing maintenance for a commercial development and a food court building including the linking foot- bridge of the two in Wan Chai; and cleaning contracts for a brand new commercial
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building standing in the heart of Central as well as a flagship store of a US-based international fashion and clothing retailer along Queen’s Road Central. The Group is also negotiating for the contract with their second yet-to-be-opened store located in the heart of Mong Kok.
We were also able to renew several main service contracts in hand ranging from one to three years for seven commercial buildings in Central and Admiralty and two in Kowloon, as well as several residential estates, including one of the biggest estates in Tseung Kwan O with reasonable adjustments of the service charges to cope with the accelerating labour costs.
The series of the stone care and maintenance products from our Italian business partner, some of which were particularly formulated and manufactured to suit the local market, continued to be welcome and recognised by sectors of the industry.
For the medical waste treatment business, the two medical waste treatment plants of the Group in Siping City and Suihua City on the Mainland continued to be operating smoothly.
Following the entering into of the termination agreement dated 9 January 2012 with the Shuyang Municipal Government as disclosed in the announcement on 11 January 2012, the Group has been in and is continuing negotiations with an independent state-owned enterprise regarding the utilisation of the Municipal Waste Treatment Plant facilities in Shuyang. The Group expects that an agreement could be reached at the end of 2012.
We have diversified our business scope by developing the television screen broadcast business. With the completion of the Cooperation Agreement on 24 May 2011, the Group started to operate on a dual business model.
May to September of 2011 had been the initial developing stage of the television screen broadcast business. During this period, the Group had concentrated on setting up an efficient production and marketing team for the television screen broadcast business; preparing and completing technical specifications of the broadcast systems and channels; selecting and installing equipment and obtaining licences and permits required for the broadcast operations.
As announced on 3 August 2011, the Group obtained its first media content and advertisement services contract with the MTR for providing media content and advertisement on through trains operated by the MTR running between Guangzhou East and Hong Kong and at the departure hall of the MTR Hung Hom Station. Programmes were launched on the Ktt through trains in September 2011 but the Group was only able to complete the installation of television screens in the departure hall of the Hung Hom Station and satisfactory on-site testing at the beginning of March 2012.
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The Group has commenced a full marketing campaign for the television screen broadcast business in the first quarter of 2012. Taking leverage from APRB’s extensive business network, the Group has gained access to some of the prominent Chinese enterprises in Hong Kong which may become potential clients. The production team has also spent a lot of efforts in doing continuing research on understanding market trends and adjusting programmes to suit consumer tastes and preferences.
According to the Cooperation Agreement, APRB has undertaken that the audited operating revenue from the television screen broadcast business for the period ended 31 December 2011 would not be less than HK$30,000,000. The Company has started discussions with APRB on remedy and will make an announcement when an agreement has been made.
FINANCIAL REVIEW
As at 31 March 2012, the Group’s cash and cash equivalents and pledged time deposits totalled HK$79,564,000 (2011: HK$101,319,000) and its current ratio (excludes the discontinued operation) was 4.71 (2011: 4.33). The Group’s net assets were HK$271,137,000 (2011:HK$199,647,000).
As at 31 March 2012, the Group did not have any bank borrowings but the Group had a finance lease payable and loans from a director of HK$157,000 and HK$9,351,000 as at 31 March 2012 respectively (2011: HK$200,000 and HK$4,800,000); loans from a director is included in discontinued operation and therefore, its gearing ratio, representing ratio of a finance lease payable and loans from a director to shareholders’ equity was 3.5% (2011: 2.5%). The Group’s shareholders’ equity amounted to HK$271,137,000 as at 31 March 2012 (2011: HK$199,647,000).
The Group takes a prudent approach to cash management and risk control. Its revenues, expenses and capital expenditures in relation to cleaning related business and television screen broadcast business are transacted in Hong Kong dollars (“HK$”), whereas those of the medical waste treatment business and waste treatment business are transacted in Renminbi (“RMB”). The Group’s cash and bank balances are primarily denominated in HK$, RMB and United States dollars.
Foreign currency risks in relation to exchange rate fluctuations of RMB will be mitigated as future revenue from the medical waste treatment business, which is in RMB, can offset future liabilities and expenses.
–88– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
As at 31 March 2012, the Group’s banking facilities were secured by the following:
(i) the pledge of certain of the Group’s time deposits amounting to HK$4,001,000 (2011: HK$14,029,000); and
(ii) a corporate guarantee to the extent of Nil (2011: HK$18,000,000) provided by the Company.
CONVERTIBLE NOTES
On 16 December 2008, the Company issued zero-coupon convertible notes with a nominal value of HK$65,000,000 to ITAD Biotechnology Limited, with a maturity date of 1 January 2012, as part of the total consideration for the acquisition of 70% equity interest in Peixin Group Ltd..
The convertible notes had already been adjusted downward in 2010 by HK$65,000,000 due to the shortfall of targeted net profits. Accordingly, the equity component of the convertible notes of HK$65,000,000 was transferred to the merger reserve. During the year ended 31 March 2011, no adjustment of convertible notes has been made due to the audited net loss of Shuyang ITAD for the year ended 31 December 2010.
On 1 January 2012, the convertible notes matured and the outstanding principal of the convertible notes that has not been converted into shares was redeemed in its entirety by the Company at a redemption price of HK$1.
WARRANTS
(i) Warrants placed on 8 September 2010
On 8 September 2010, an aggregate of 151,000,000 unlisted warrants have been successfully placed by the Company to not less than six placees who are third parties independent of and not connected to the Company and its connected persons, at the issue price of HK$0.015 per warrant and the subscription price of HK$0.51 per warrant. The subscription period for the warrants is from the date of issue of the warrants to the expiry, which is 18 months from the issue of the warrants. Upon the exercise in full of the subscription rights attached to the warrants, a maximum of 151,000,000 shares of the Company will be issued and allotted.
In the year ended 31 March 2011, 109,000,000 shares of HK$0.01 each were issued for cash at a subscription price of HK$0.51 per share pursuant to the exercise of the Company’s warrants for a total cash consideration, before related expenses, of HK$55,590,000.
During the year, no further warrant had been exercised and the remaining of 42,000,000 unlisted warrants at the issue price of HK$0.015 each expired. The related warrant reserve of HK$630,000 was transferred to accumulated losses.
–89– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
(ii) Warrants placed on 18 March 2011
On 18 March 2011, an aggregate of 30,600,000 unlisted warrants have been successfully placed by the Company to not less than six placees who are third parties independent of and not connected to the Company and its connected persons, at the issue price of HK$0.01 per warrant and the subscription price of HK$0.70 per warrant. The subscription period for the warrants is from the date of issue of the warrants to the expiry, which is 18 months from the issue of the warrants. Upon the exercise in full of the subscription rights attached to the warrants, a maximum of 30,600,000 shares of the Company will be issued and allotted.
As at 31 March 2012, no warrant holders have exercised the subscription rights attached to the warrants.
(iii) Placing of New Shares and Warrants
On 3 May 2011, an aggregate of 45,900,000 new shares have been successfully placed by the Company to not less than six placees who are third parties independent of and not connected to the Company and its connected persons, at the placing price of HK$0.70 per share.
On 3 May 2011, an aggregate of 45,900,000 unlisted warrants have been successfully placed by the Company to not less than six placees who are third parties independent of and not connected to the Company and its connected persons, at the issue price of HK$0.01 per warrant and the subscription price of HK$0.70 per warrant. The subscription period for the warrants is from the date of issue of the warrants to the expiry, which is 18 months from the issue of the warrants.
Upon the exercise in full of the subscription rights attached to the warrants, a maximum of 45,900,000 shares of the Company will be issued and allotted.
The aggregate net proceeds from the placing of the 45,900,000 new shares and the 45,900,000 unlisted warrants at an issue price of HK$0.01 per warrant were HK$30,451,000.
As at 31 March 2012, no warrant holders have exercised the subscription rights attached to the warrants.
–90– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
CONTINGENT LIABILITIES
At the end of the reporting period, the Group had contingent liabilities as follows:
(a) The Group has executed performance guarantees to the extent of an aggregate amount of HK$1,157,000 (2011: HK$1,157,000) in respect of certain services provided to various customers by the Group.
(b) The Group had a contingent liability in respect of possible future long service payments to employees under the Employment Ordinance, with a maximum possible amount of approximately HK$2,912,000 as at 31 March 2012 (2011: HK$1,016,000). The contingent liability has arisen because, at the end of the reporting period, a number of current employees have achieved the required number of years of service to the Group in order to be eligible for long service payments under the Employment Ordinance if their employment is terminated under certain circumstances. A provision of HK$1,531,000 (2011: HK$592,000) in respect of such payments has been made in the consolidated statement of financial position as at 31 March 2012.
(c) During the ordinary course of its business, the Group may from time to time be involved in litigation concerning personal injuries sustained by its employees or third party claimants. The Group maintains insurance cover and, in the opinion of the directors of the Company (the “Directors”), based on current evidence, any such existing claims should be adequately covered by the insurance as at 31 March 2011 and 2012.
EMPLOYEES AND REMUNERATION POLICIES
The total number of employees of the Group as at 31 March 2012 was 1,579 (2011: 1,622). Total staff costs, including Directors’ emoluments and net pension contributions, for the year under review amounted to HK$165,984,000 (2011: HK$151,090,000). The Group provides employees with training programmes to equip them with the latest skills.
Remunerations are commensurate with individual job nature, work experience and market conditions, and performance- related bonuses are granted to employees on discretionary basis. In addition, all employees of the Group, including Directors, are eligible to participate in the Company’s share option scheme.
–91– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
PROSPECTS
The Cooperation Agreement signed between the Company and APRB for the development of television screen broadcast business was concluded on 24 May 2011. The name of the Company has since been changed to Xinhua News Media Holdings Limited. Hence, the Company operates on a dual business model. APRB enjoys competitive advantage over other media/advertising industry players, in terms of cost and quality of media content, and an extensive business network particularly with Chinese conglomerates and state-owned enterprises in China. The Group believes that such competitive advantage, together with the growing popularity of ’out-of-home’ advertising as an advertising medium for marketing, will ensure that the new television screen broadcast business will be positive for earnings, and lead to diversification of the Group’s business scope and revenue base.
In 2012, the Group has formulated defined developmental direction and objectives for its television screen broadcast business. Following a half-year penetration pricing, the Group has established the framework for its sales network and identified targeted sales partners. It is expected that in the second half of 2012, the Group would improve its sales strategies by raising the pricing for securing income and focus on broadcasting in large shopping malls.
The Group is currently negotiating with the owners of several large shopping malls for commencing broadcast in those shopping malls for direct contact with consumers, which would enhance the advertising power. The contents of programs will be localised to include more local programs, which shows significant improvement in contents diversification and local procedures.
The Group has entered into a broadcast agreement with the Airport Authority Hong Kong in March 2012 for the broadcast of the programmes produced by the Group at the airport, starting in 2012. The commencement of broadcast will significantly increase the Group’s influence and recognition over the market and media, promoting other advertising-related business, so as to promote stable income growth.
The Group is now negotiating with some social enterprises for cooperation in the provision of matching forum for advertising media, which would be used by social enterprises for marketing and development. While operating its business, the Group would also be able to contribute to the community and support a worthy cause as a responsible member of the Hong Kong society.
The statutory minimum wage rate is to be revised once bi-yearly and the next revision will take place in May 2013. Among others, whether the meal break and rest day should be paid remain a hot debate by many different sectors of the community. The Group foresees that we would still have a strained labour market in the coming year, but with our close and established connection and co-operation with the labour and charity associations, we are confident that we would be able to maintain a stable labour force to fulfill our contractual obligations of the appointments and to enable the Group to expand its market share through strong competitiveness. The
–92– APPENDIX II MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP
success of the sale of the stone care and maintenance products is an encouragement and the Group plans to work harder with our Italian partner to constantly up-grade their products and to introduce new ones from time to time to tally with the requirements of the market.
In order to formulate the strategic and development direction of the Group, the Board approved the formation of the Strategy and Development Committee in March 2012. The duties of the Strategy and Development Committee include, among other things, (i) to research, gather information and keep abreast of market trends and identify investment opportunities, and (ii) to evaluate and make recommendations on proposed investment acquisitions.
In this regard and leveraging on the network and resources of APRB, the Strategy and Development Committee has been continuously evaluating possible investment opportunities with a view to broadening the Group’s revenue source, enhancing the performance of the Group, creating value for shareholders and increasing shareholders’ return. The Group will consider the possible acquisition of new business in a prudent manner when appropriate and promising opportunity arises based on criteria such as (i) having profit generating track records and future growth prospects, (ii) being in an industry supported by the PRC government, (iii) having a size of operation that is suitable for the Group from an acquisition point of view, and (iv) having the potential to create synergy with the existing business of the Group.
The Directors have recently identified and is reviewing a potential acquisition target and some preliminary discussions have taken place but no terms and conditions have been agreed and such acquisition may or may not materialise. The Group has not entered into any agreement, arrangement, understanding or undertaking, whether formal or informal and whether expressed or implied, about any acquisition of new business by the Group. If there is any progress with respect to such potential acquisition or any other possible acquisition in the future that necessitates an announcement to be made by the Group pursuant to the Listing Rules, the Group will make such announcement as and when appropriate.
–93– APPENDIX III GENERAL INFORMATION
1. RESPONSIBILITY STATEMENT
This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm to the best of their knowledge and belief that the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.
2. SHARE CAPITAL
The authorised and issued share capital of the Company as at the Latest Practicable Date were as follows:
As at the Latest Practicable Date
HK$
Authorised: 2,000,000,000 Shares of a nominal value of HK$0.01 each 20,000,000
Issued and fully paid: 1,367,486,040 Shares of a nominal value of HK$0.01 each 13,674,860
3. DISCLOSURE OF INTERESTS
(a) Directors’ interest in the Company
As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executive of the Company in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required to be (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions, if any, which they were taken or deemed to have under such provisions of the SFO); or (ii) as recorded in the register required to be kept by the Company pursuant to Section 352 of the SFO; or (iii) as
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otherwise notified to the Company and the Stock Exchange pursuant to the Code of Practice for Securities Transactions by Directors and Designated Employees adopted by the Company (“Securities Code”) were disclosed as follows:
A.(1) Interests in shares of the Company
Number of Percentage* of Long/short ordinary shares of the Company’s Name of Director position Capacity the Company issued share capital
Mr. Yu Guang Long Interest held by controlled 133,387,000 9.75% corporation (Note (1))
Dr. Lo Kou Hong Long Founder of a discretionary 40,000,000 2.93% trust (Note (2))
Long Interest of spouse 1,700,000 0.12% (Note (3))
Long Beneficial owner 6,000,000 0.44%
Long Interest of spouse 6,000,000 0.44% (Note (4))
Notes:
(1) These shares were beneficially owned by Pan Asia Century Consulting Limited (“PAC Consulting”) the entire issued share capital of which was wholly owned by Huian International Investment Limited (“Huian”). The entire issued share capital of Huian was beneficially owned by Mr. Yu Guang. Accordingly, Mr. Yu Guang was deemed to be interested in such shares through these controlled corporations pursuant to Part XV of the SFO. Although Ms. Zhang Li does not personally and beneficially own any interest in the Company, she was deemed to be interested by virtue of her being the wife of Mr. Yu Guang.
(2) These shares were owned by The Lo’s Family (PTC) Limited in its capacity as the trustee of The Lo’s Family Unit Trust, a unit trust of which all the units in issue were owned by Equity Trustee Limited as the trustee of The Lo’s Family Trust, a discretionary trust of which the objects included Dr. Lo Kou Hong’s family members.
Accordingly, Dr. Lo Kou Hong, as the founder of The Lo’s Family Trust, was deemed to be interested in the shares of the Company owned by The Lo’s Family (PTC) Limited in its capacity as the trustee of The Lo’s Family Unit Trust under Part XV of the SFO.
(3) Dr. Lo Kou Hong was deemed to be interested in the 1,700,000 shares of the Company through interest of his spouse, Ms. Ko Lok Ping, Maria Genoveffa, who personally and beneficially owns such 1,700,000 shares of the Company.
–95– APPENDIX III GENERAL INFORMATION
(4) Dr. Lo Kou Hong was deemed to be interested in the 6,000,000 shares options of the Company through his spouse, Ms. Ko Lok Ping, Maria Genoveffa, who personally and beneficially owns such relevant shares options.
* The percentage represents the number of ordinary shares of the Company interested divided by the number of the Company’s issued shares as at 30 September 2014.
A.(2) Interests in underlying shares of the Company – physically settled unlisted equity derivatives
Number of Percentage* of underlying shares the Company’s of the Company underlying in respect of shares over Name of Long/short the share options the Company’s Director position Capacity granted issued share capital
Dr.LoKou Long Beneficial owner 6,000,000 0.44% Hong
Long Interest of spouse 6,000,000 (Note) 0.44%
Details of the above share options as required to be disclosed by The Rules Governing the Listing of Securities on the Stock Exchange (the “Main Board Listing Rule”) have been disclosed in the section headed “Share Option Scheme”.
Note: Dr. Lo Kou Hong was deemed to be interested in the 6,000,000 share options of the Company through interest of his spouse, Ms. Ko Lok Ping, Maria Genoveffa, who personally and beneficially owns such relevant share options.
* The percentage represents the number of underlying shares of the Company divided by the number of the Company’s issued shares as at 30 September 2014.
–96– APPENDIX III GENERAL INFORMATION
B.(1) Associated corporation – Peixin Group Limited (“Peixin”), a subsidiary of the Company
Number of Percentage* of Name of Long/short ordinary shares in Peixin’s issued Director position Capacity Peixin share capital
Dr. Lo Kou Hong Long Interest held by a controlled 42 shares (Note) 30% corporation
Note: The 42 shares in Peixin were beneficially held through a controlled corporation of Dr. Lo Kou Hong and Ms. Ko Lok Ping, Maria Genoveffa in equal shares. As such, Dr. Lo Kou Hong and Ms. Ko Lok Ping, Maria Genoveffa were deemed to be interested in such shares pursuant to Part XV of the SFO. The remaining 70% of Peixin’s issued share capital were owned by the Company.
* The percentage represents the number of underlying shares divided by the number of Peixin’s issued shares as at 30 September 2014.
B.(2) Associated corporation – Shuyang ITAD Environmental Technology Limited (“Shuyang ITAD”), a subsidiary of the Company
Total amount of Percentage of Name of Long/short registered capital Shuyang ITAD’s Director position Capacity in Shuyang ITAD registered capital
Dr. Lo Kou Hong Long Interest held by a controlled RMB123,640,000 30%(Note) corporation
Note: The entire registered capital in Shuyang ITAD was beneficially owned by Peixin and 42 shares in Peixin were beneficially owned by a controlled corporation of Dr. Lo Kou Hong and Ms. Ko Lok Ping, Maria Genoveffa in equal shares. Such 42 shares in Peixin represent 30% of the entire issued share capital of Peixin. As such, Dr. Lo Kou Hong and Ms. Ko Lok Ping, Maria Genoveffa were deemed to be interested in such registered capital pursuant to Part XV of the SFO.
Save as disclosed above, as at the Latest Practicable Date, none of the Directors or the chief executive of the Company and their respective close associates was interested or was deemed to be interested in the long and short positions in the shares, underlying shares and/or debentures of the Company or any of its associated corporations, which were required to be notified to the Company and the Stock Exchange under the SFO, recorded in the Register of Directors and Chief Executive or notified under the Securities Code or otherwise known by the Directors.
–97– APPENDIX III GENERAL INFORMATION
Share Option Scheme
The Company operated a share option scheme (the “Scheme”) for the purpose of providing incentives and rewards to eligible participants who contributed to the success of the Group’s operations.
The following table discloses movements in the Company’s share options outstanding as at the Latest Practicable Date:
Date of As at grant of Name or category the Latest share Exercise period Exercise price of of participant Practicable Date options (Note 1) of share options share options (Note 2) HK$ per share
Director Dr. Lo Kou Hong 6,000,000 12-5-05 22-4-05 to 21-4-15 0.275
Other employees In aggregate (Note 3) 13,000,000 12-5-05 22-4-05 to 21-4-15 0.275
19,000,000
Notes to the table of share options outstanding during the year:
(1) The vesting period of the share options is from the date of grant until the commencement of the exercise period.
(2) The exercise price of the share options is subject to adjustment in the case of rights or bonus issues, or other similar changes in the Company’s share capital.
(3) Ms. Ko Lok Ping, Maria Genoveffa resigned as an executive director of the Company on 27 September 2011. However, the 6,000,000 shares options granted by the Company to Ms. Ko Lok Ping, Maria Genoveffa for subscribing 6,000,000 shares of the Company remain exercisable.
Mr. Leung Tai Tsan, Charles and Mr. Cheung Pui Keung, James resigned as executive directors of the Company on 27 October 2011. However, the 3,000,000 share options granted by the Company to Mr. Leung Tai Tsan, Charles and the 4,000,000 share options granted by the Company to Mr. Cheung Pui Keung, James for subscribing 3,000,000 shares and 4,000,000 shares of the Company respectively remain exercisable.
The Scheme expired on 23 April 2013. No further shares options could be granted under the Scheme, but the share options outstanding shall remain in full force and effect in all other respects.
–98– APPENDIX III GENERAL INFORMATION
(b) Substantial Shareholders’ interests in the shares and underlying shares of the Company
As at the Latest Practicable Date, the following persons (other than the Directors) had interests of 5% or more in the issued shares and underlying shares of the Company as recorded in the register required to be kept under Section 336 of the SFO:
Interests in shares of the Company
Percentage* of the Company’s Name of substantial Long/short Number of issued share shareholder position Capacity ordinary shares capital
Xinhua News Agency Long Beneficial owner 214,681,040 15.70% Asia-Pacific Regional Bureau Limited (“APRB”)
Xinhua News Agency Long Interest held by controlled 214,681,040 15.70% Asia-Pacific Regional corporation (Note (1)) Bureau
PAC Consulting Long Beneficial owner 133,387,000 9.75%
Huian Long Interest held by controlled 133,387,000 9.75% corporation (Note (2))
Notes:
(1) These shares were beneficially owned by APRB, the entire issued share capital of which was beneficially owned by Xinhua News Agency Asia-Pacific Regional Bureau. Accordingly, Xinhua News Agency Asia-Pacific Regional Bureau was deemed to be interested in such shares pursuant to Part XV of the SFO.
Mr. Ju Mengjun, being Director, is also a director of Asia-Pacific Regional Bureau as well as the president of Xinhua News Agency Asia-Pacific Regional Bureau. Mr. Chang Yong, being Director, is also a director of Asia-Pacific Regional Bureau as well as the vice-president of Xinhua News Agency Asia-Pacific Regional Bureau.
(2) These shares were beneficially owned by PAC Consulting which was wholly owned by Huian. Accordingly, Huian was deemed to be interested in such shares pursuant to Part XV of the SFO. The entire issued share capital of Huian was beneficially owned by Mr. Yu Guang. Accordingly, Mr. Yu Guang was deemed to be interested in such shares pursuant to Part XV of the SFO, which is also disclosed as the interest of Mr. Yu Guang in the above section headed “Directors’ Interests in the Shares and Underlying Shares of the Company and its Associated Corporations”.
Mr. Yu Guang, being Director, is also a director of PAC Consulting and Huian.
* The percentage represents the number of ordinary shares interested divided by the number of the Company’s issued shares as at 30 September 2014.
–99– APPENDIX III GENERAL INFORMATION
(c) Directors’ interests in assets and contracts of the Group
As at the Latest Practicable Date, there was no contract or arrangement subsisting in which any Director was materially interested and which was significant in relation to the business of the Group.
As at the Latest Practicable Date, none of the Directors had any direct or indirect interest in any assets which have been, since 31 March 2014 (being the date to which the latest published audited financial statements of the Group were made up), acquired or disposed of by or leased to or proposed to be acquired or disposed of by or proposed to be leased to, any member of the Group.
(d) No material adverse change
As at the Latest Practicable Date, the Directors were not aware of any material adverse change in the financial or trading position of the Group since 31 March 2014 (being the date to which the latest published audited accounts of the Group have been made up).
(e) Directors’ service contracts
As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Group which will not expire or be determinable by the relevant member of the Group within one year without payment of compensation (other than statutory compensation).
(f) Competing interests
As at the Latest Practicable Date, so far as the Directors are aware of, none of the Directors nor their respective close associates had any interest in any business which competes or is likely to compete, or is in conflict or is likely to be in conflict, either directly or indirectly, with the business of Group.
4. SUBSTANTIAL SHAREHOLDERS
Other than the interests in respect of the Directors and chief executive of the Company as disclosed in paragraph 3(a) and (b), as at the Latest Practicable Date, so far as is known to the Directors or the chief executive of the Company, there is no other person who held interests or short positions in the Shares and underlying Shares which would need to be disclosed to the Company under the provisions interested in of Divisions 2 and 3 of Part XV of the SFO or who were, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or had an option in respect of such capital.
– 100 – APPENDIX III GENERAL INFORMATION
5. MATERIAL CONTRACTS
The particulars of all material contracts (not being contracts entered into in the ordinary course of business) entered into by any member of the Group within the two years immediately preceding the issue of this circular are set out as follows:
1. On 29 August 2012, Ally and PAC Consulting entered into an acquisition agreement pursuant to which Ally agreed to acquire and PAC Consulting agreed to sell and assign the entire issued share capital of Pan Asia Century Holdings Limited (a company incorporated in the BVI with limited liability) and its subsidiaries, and shareholder’s loan for an aggregate consideration of HK$41,000,000, subject to adjustment.
2. On 28 March 2014, Ally and Mr. Lin Feng entered into a disposal agreement pursuant to which Ally agreed to sell and Mr. Lin Feng agreed to purchase the Pan Asia Century Holdings Limited and its subsidiaries at an aggregate consideration of HK$29,000,000.
As at the Latest Practicable Date and save as disclosed above, the Directors were not aware of any material contract (not being contracts entered into in the ordinary course of business) having been entered into by any member of the Group within the two years immediately preceding the issue of this circular.
6. LITIGATION
As at the Latest Practicable Date, none of the members of the Group was engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened against the members of the Group.
7. CONSENT AND QUALIFICATION OF EXPERT
(a) The following are the qualification of the expert who has given an opinion or advice which is contained in this circular:
Name Qualification
South China Capital An Independent Financial Adviser, a corporation Limited licensed to carry out Type 6 (advising on corporate finance) regulated activities under the SFO
(b) As at the Latest Practicable Date, the above expert did not have any shareholding directly or indirectly in any member of the Group or any right, whether legally enforceable or not, to subscribe for or to nominate persons to subscribe for securities in any member of the Group and it had no interest, either directly or indirectly, in any assets which have been, since the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.
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(c) The above expert has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its reports and reference to its name in the form and context in which it appear.
8. GENERAL
(a) The company secretary of the Company is Mr. Goh Choo Hwee. He is a Hong Kong practicing solicitor. He is a partner of Ma Tang & Co. Solicitors, a corporate and commercial law firm in Hong Kong.
(b) The registered office of the Company is located at P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
(c) The principal place of business of the Company is 2nd Floor, 5 Sharp Street West, Wan Chai, Hong Kong.
(d) The Hong Kong Branch Share Registrar and transfer office of the Company is Tricor Tengis Limited, located at 22th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.
9. DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents are available for inspection during normal business hours (i.e. from 9:30 a.m. to 5:00 p.m. on Monday to Friday except public holidays) on any Business Day at the principal place of business in Hong Kong of the Company at 2nd Floor, 5 Sharp Street West, Wan Chai, Hong Kong from the date of this circular up to and including the date of the EGM:
(a) the memorandum of association of the Company;
(b) the acquisition agreement and the disposal agreement as disclosed in the section headed “Material Contracts”;
(c) the Remedial Agreement;
(d) the Supplemental Agreement;
(e) the annual reports of the Company for the three years ended 31 March 2014 and the interim report of the Company for the six months ended 30 September 2014;
(f) the letter from the Independent Board Committee to the Independent Shareholders, the text of which is set out on page 44 of this circular;
(g) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 45 to 65 of this circular; and
(h) this circular.
– 102 – NOTICE OF EXTRAORDINARY GENERAL MEETING
XINHUA NEWS MEDIA HOLDINGS LIMITED 新華通訊頻媒控股有限公司 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 309)
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of Xinhua News Media Holdings Limited (the “Company”) will be held at 23/F., 381 Queen’s Road East, Wan Chai, Hong Kong at 12:00 p.m. on 27 March 2015 for the purposes:
ORDINARY RESOLUTIONS
To consider and, if thought fit, pass the following resolutions as ordinary resolutions of the Company:
“THAT:
(a) The Settlement, the Remedial Agreement dated 15 July 2014 and the Supplemental Agreement dated 31 December 2014 entered into between the Company and Asia- Pacific Regional Bureau and the transactions contemplated thereunder (the details of which are set out in the Company’s circular dated 24 February 2015 be and are hereby approved, confirmed and ratified; and
(b) Any one director of the Company be and is hereby authorized to, on behalf of the Company, do all such acts and sign, seal, execute, deliver all such documents and take all such actions as he or she may consider necessary or desirable for the purpose of or in connection with or to give effect to the Settlement, the Remedial Agreement dated 15 July 2014 and the Supplemental Agreement dated 31 December 2014 and the transactions contemplated thereunder.”
On behalf of the Board Xinhua News Media Holdings Limited Ju Mengjun Co-chairman
Hong Kong, 24 February 2015
– 103 – NOTICE OF EXTRAORDINARY GENERAL MEETING
Notes:
1. The Register of Members will be closed from 25 March 2015 to 27 March 2015, both days inclusive and during which period no share transfer will be effected for the purpose of ascertaining shareholders’ entitlement to attend and vote at the EGM. In order to be eligible to attend and vote at the EGM, all transfer documents accompanied by the relevant share certificates must be lodged for registration with the Company’s Share Registrar, Tricor Tengis Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, not later than 4:30 p.m. on 24 March 2015.
2. Any member entitled to attend and vote at the above meeting is entitled to appoint a proxy to attend and, on a poll, vote instead of him. A proxy need not be a member of the Company.
3. Completion and return of the accompanying form of proxy will not preclude members of the Company from attending and voting in person at the meeting or any adjournment thereof should they so wish, and in such event, the form of proxy shall be deemed to be revoked.
4. A form of proxy for use at the EGM is enclosed herewith.
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