THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt about this circular or as to the action to be taken, you should consult your stockbroker, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in China Literature Limited, you should at once hand this circular 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. 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. This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the securities. CHINA LITERATURE LIMITED 閱文集團 (Incorporated in the Cayman Islands with limited liability) (Stock Code: 772) (1) MAJOR AND CONNECTED TRANSACTION (2) CONSIDERATION ISSUE UNDER SPECIFIC MANDATE (3) CONTINUING CONNECTED TRANSACTIONS AND NOTICE OF EXTRAORDINARY GENERAL MEETING Exclusive Financial Adviser to the Company Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders SOMERLEY CAPITAL LIMITED A notice convening the Extraordinary General Meeting of China Literature Limited to be held at Salon 1-4, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Friday, October 19, 2018 at 9:30 a.m. is set out on pages EGM-1 of this circular. A form of proxy for use at the Extraordinary General Meeting is also enclosed. Such form of proxy is also published on the websites of The Stock Exchange of Hong Kong Limited (www.hkexnews.hk) and the Company (http://ir.yuewen.com). Whether or not you are able to attend the Extraordinary General Meeting, you are requested to complete the form of proxy in accordance with the instructions printed thereon and return it to the Hong Kong share registrar of the Company, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong as soon as possible but in any event not less than 48 hours before the time appointed for the holding of 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 Extraordinary General Meeting (or any adjournment thereof) if they so wish. September 28, 2018 CONTENTS Page DEFINITIONS ........................................................ 1 LETTER FROM THE BOARD ........................................... 9 LETTER FROM THE INDEPENDENT BOARD COMMITTEE.................. 83 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER ................. 85 APPENDIX I FINANCIAL INFORMATION OF THE GROUP .................. I-1 APPENDIX II FINANCIAL INFORMATION OF THE TARGET SPV GROUP...... II-1 APPENDIX III FINANCIAL INFORMATION OF THE OPERATING ENTITY GROUP ............................................................ III-1 APPENDIX IV MANAGEMENT DISCUSSION AND ANALYSIS ON THE OPERATING ENTITY GROUP ......................................... IV-1 APPENDIX V UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP ................................................. V-1 APPENDIX VI VALUATION REPORT ON THE OPERATING ENTITY GROUP . VI-1 APPENDIX VII GENERAL INFORMATION ................................ VII-1 NOTICE OF EXTRAODINARY GENERAL MEETING ........................ EGM-1 —i— DEFINITIONS In this circular, unless the context otherwise requires, the following expressions shall have the following meanings: “Acquisition” the acquisition of 100% of the issued share capital in the Target pursuant to the Share Purchase Agreement “associate(s)” has the meaning ascribed to it under the Listing Rules “Board” the board of directors of the Company “Business Day(s)” the days on which commercial banks are open for business in Hong Kong, the Cayman Islands and PRC (excluding Saturdays, Sundays, public holidays and any weekday on which Typhoon Signal No. 8 or higher is hoisted or a black rain storm warning is given in Hong Kong at any time during 9:00 a.m. to 5:00 p.m.) “CCT” continuing connected transaction as defined in the Listing Rules “Company” China Literature Limited (閱文集團), an exempted company incorporated in the Cayman Islands with limited liability on April 22, 2013, whose shares are listed on the main board of the Stock Exchange with stock code 772 “Completion” the completion of the Acquisition “Completion Date” the date on which the Acquisition is completed, which shall be the fifth (5th) Business Day following the date on which the last of the conditions precedent (other than the conditions which by their terms are to be satisfied at Completion) is satisfied or waived in accordance with the Share Purchase Agreement (or such other date as may be agreed by the parties in writing) “Companies Law” the Companies Law Chapter 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands as amended, supplemented or otherwise modified from time to time “connected person(s)” has the meaning ascribed to it under the Listing Rules “Consideration” the total consideration (including cash and Consideration Shares) payable by the Company to the Vendors “Consideration Shares” an aggregate of 153,936,541 new Shares to be issued by the Company to the Vendors to satisfy part of the Consideration for the Acquisition —1— DEFINITIONS “Contractual Arrangements” the series of contractual arrangements entered into by, among others, Shanghai Yueting, Shanghai Yuechao, Shanghai Hongwen and its registered shareholders, and Shanghai Yuewen and its registered shareholders, details of which are described in the section headed “Contractual Agreements” in the listing document of the Company dated October 26, 2017 “Control Agreements” tentatively including the Exclusive Business Cooperation Agreement, Exclusive Option Agreements, Equity Pledge Agreements, Powers of Attorney, Confirmations from the Relevant Individual Shareholders and Spouse undertaking, or any other equivalent agreements made from time to time, which enable the Target to exclusively control and consolidate in its financial statements the results of the Operating Entity Group “Controlled Account” in respect of each Management Vendor, a separately designated account with a bank in the name of the escrow agent into which payment will be made by Company as set out in the section headed “Controlled Account” “controlling shareholder” has the meaning ascribed to it under the Listing Rules “Deed of Non-Competition” the deed of non-competition provided by the Founder, Ms. Qu and each key employee on August 13, 2018 in favour of the Company “Distribution Framework the framework agreement entered into between Shanghai Agreement” Yueting (for itself and on behalf of other members of the Group) and Tencent Computer (for itself and on behalf of other members of the Retained Tencent Group) on August 13, 2018, in relation to, among other things, cooperation on distribution of television series, web series and films on the platforms of the Retained Tencent Group “Director(s)” the director(s) of the Company “Draft Foreign Investment Law” the Draft Foreign Investment Law (中華人民共和國外國投資 法(草案徵求意見稿)) published by the MOFCOM in January 2015 “Earn Out Consideration” the relevant consideration payable by the Company to a Management Vendor under the Earn Out Mechanism “Enlarged Group” the Group and the Target Group (which, for the avoidance of doubt, includes but not limited to the Operating Entity Group upon the Control Agreement taking effect) —2— DEFINITIONS “Executive SPV” X-Poem Limited, a company incorporated with limited liability in the British Virgin Islands, whose registered office is at Craigmuir Chambers, Road Town, Tortola, VG 1110, British Virgin Islands “Extraordinary General Meeting” the extraordinary general meeting of the Company to be held or “EGM” at Salon 1-4, Level 3, JW Marriott Hotel Hong Kong, Pacific Place, 88 Queensway, Hong Kong on Friday, October 19, 2018 at 9:30 a.m., or any adjournment thereof and notice of which is set out on pages EGM-1 of this circular “Founder” Mr. Huayi Cao, a citizen and resident of the PRC “Founder SPV” C-hero Limited, a company incorporated with limited liability in the British Virgin Islands, whose registered office is at Craigmuir Chambers, Road Town, Tortola, VG 1110, British Virgin Islands “Group” the Company and its subsidiaries and consolidated affiliated entities from time to time “Holders” the parties to the Deed of Lock-up Undertaking, including Founder, Founder SPV, Ms. Qu, Qu SPV, Executive SPV, each of the shareholders of Executive SPV and its respective ultimate individual shareholder “Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China “HK$” Hong Kong dollars, the lawful currency of Hong Kong “Independent Board Committee” the independent committee of the Board, comprising Ms. Yu Chor Woon Carol, Ms. Leung Sau Ting Miranda and Mr. Liu Junmin, being all the independent non-executive Directors, established for the purpose of, among other things, advising the Independent Shareholders in respect of the Share Purchase Agreement (including the Control Agreement) and the Distribution Framework Agreement, and