Billion Industrial : Announcements and Notices - Continuing Connected Transaction

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BILLION INDUSTRIAL HOLDINGS LIMITED

百宏實業控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 2299)

CONTINUING CONNECTED TRANSACTION

INTRODUCTION

SUMMARY

The Board announces that on 15 August 2019, Billion Vietnam, a wholly-owned subsidiary of the Company and Baikai Vietnam entered into (i) the Vietnam Purchase Agreement pursuant to which Baikai Vietnam agreed to provide paper boxes, roles and polyfoam boards to Billion Vietnam; and (ii) the Vietnam Sales Agreement pursuant to which Billion Vietnam agreed to sell DTY and FDY to Baikai Vietnam.

As at the date of this announcement, Baikai Vietnam is a wholly foreign-owned subsidiary of Baikai Wrap Knitting, which in turn is wholly-owned by Mr. Lin Jinjing, the brother-in- law of both Mr. Sze Tin Yau and Mr. Wu Jinbiao, both being executive Directors. Since Mr. Lin controls the exercise of 100% of the voting power at general meetings and is the sole director of Baikai Wrap Knitting, Baikai Wrap Knitting and its wholly-owned subsidiary, Baikai Vietnam, are associates of Mr. Sze Tin Yau and Mr. Wu Jinbiao. Accordingly, Baikai Vietnam is a connected person of the Company and the transactions under the Vietnam Purchase Agreement and the Vietnam Sales Agreement constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

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LISTING RULES IMPLICATIONS

The relevant percentage ratios (as defined in Rule 14.07 of the Listing Rules) for the transactions under the Vietnam Purchase Agreement are higher than 0.1% but less than 5%, and the annual transaction amount is expected to be greater than HK$3,000,000. Accordingly, the Vietnam Purchase Agreement and the transactions contemplated under it are subject to the reporting and announcement requirements and the annual review requirements, but are exempt from the independent shareholders' approval requirements under Chapter 14A of the Listing Rules.

The relevant percentage ratios (as defined in Rule 14.07 of the Listing Rules) for the transactions under the Vietnam Sales Agreement are higher than 0.1% but less than 5%, and the annual transaction amount is expected to be greater than HK$3,000,000. Accordingly, the Vietnam Sales Agreement and the transactions contemplated under it are subject to the reporting and announcement requirements and the annual review requirements, but are exempt from the independent shareholders' approval requirements under Chapter 14A of the Listing Rules.

The Board announces that on 15 August 2019, Billion Vietnam, a wholly-owned subsidiary of the Company and Baikai Vietnam entered into (i) the Vietnam Purchase Agreement pursuant to which Baikai Vietnam agreed to provide paper boxes, roles and polyfoam boards to Billion Vietnam; and (ii) the Vietnam Sales Agreement pursuant to which Billion Vietnam agreed to sell DTY and FDY to Baikai Vietnam.

THE VIETNAM PURCHASE AGREEMENT

On 15 August 2019, Billion Vietnam and Baikai Vietnam entered into the Vietnam Purchase Agreement, principal terms of which are set out below:

Subject Matter	:	Pursuant to the Vietnam Purchase Agreement, Baikai Vietnam
		agreed to provide paper boxes, rolls and polyfoam boards to
		Billion Vietnam, at a price to be agreed between the parties from
		time to time after arm's length negotiation and comparable to
		market prices of similar products that Billion Vietnam pays to
		other independent suppliers.

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Annual Caps:	:	The aggregated annual caps of the transaction amounts under
		the Vietnam Purchase Agreement for each of the two years
		ending 31 December 2019 and 2020 are RMB46,840,000 and
		RMB140,510,000 respectively. The above annual caps are
		determined based on (i) the estimated demand of Billion Vietnam
		multiplied by the actual unit price of the same products purchased
		by the Group in July 2019; (ii) the prevailing market prices
		of similar products; (iii) the fact that the factories of Baikai
		Vietnam and Billion Vietnam are located in close proximity
		which reduces the delivery costs to the maximum extent; and (iv)
		the anticipated steady sales and production capacity of Baikai
		Vietnam for relevant products in 2019 and 2020.
Term	:	With effect from 15 August 2019 to 31 December 2020 (both
		dates inclusive)

THE VIETNAM SALES AGREEMENT

On 15 August 2019, Billion Vietnam and Baikai Vietnam entered into the Vietnam Sales Agreement, principal terms of which are set out below:

Subject Matter	:	Pursuant to the Vietnam Sales Agreement, Billion Vietnam
		agreed to provide DTY and FDY to Baikai Vietnam, at a price
		to be agreed between the parties from time to time after arm's
		length negotiation and comparable to market prices of similar
		products that Billion Fujian sells to other independent customers.
Annual Caps:	:	The annual caps of the transaction amounts under the Vietnam
		Sales Agreement for each of the two years ending 31 December
		2019 and 2020 are RMB2,330,000 and RMB9,330,000
		respectively. The above annual caps are determined based on
		(i) the estimated demand of Baikai Vietnam multiplied by the
		average unit price of the same products sold by the Group for
		the six months ended 30 June 2019; (ii) the prevailing market
		prices of similar products; (iii) the estimated production capacity
		of Billion Vietnam for the years 2019 and 2020; and (iv) the
		anticipated steady demand of Baikai Vietnam for relevant
		products in 2019 and 2020.
Term	:	With effect from 15 August 2019 to 31 December 2020 (both
		dates inclusive)

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PRICING POLICY AND INTERNAL CONTROL

The basis of determining the prices of the products to be supplied to or purchased by the Group under each of the Vietnam Purchase Agreement and the Vietnam Sales Agreement will be in accordance with the prevailing market prices of similar products and based on the following principles:

1. by reference to the prevailing market price of the same or substantially similar products, taking into account the price of the same or substantially similar products with comparable order quantities and quality offered to/by other purchasers or suppliers (as the case may be); and
2. if there are not sufficient comparable transactions in (i) above, on normal commercial terms comparable to those currently offered by the Group to, or received by the Group from, independent third parties in respect of the same or substantially similar products with comparable quantities.

Given that none of the products under the Vietnam Purchase Agreement and the Vietnam Sales Agreement has a fixed unit price or standard price, or has a published reference price, in determining the prevailing market price for the products for a particular contract, the Group will:

1. in respect of procurement of products from Baikai Vietnam, invite quotations from at least two independent suppliers to get a reference on the prevailing market prices for the relevant products to be procured. Such quotations will be reviewed and evaluated from
   both the technical and commercial perspectives by the manager of the Quality Management Department (品質管理部) and compared against the quote from Baikai Vietnam to ensure that the products to be procured from Baikai Vietnam are comparable to the prices and terms for such products being offered by independent third parties. The Group will, based on the initial quotations from Baikai Vietnam and the independent suppliers, invite the independent suppliers to submit a revised offer. The revised offers will again be compared with the offer of Baikai Vietnam and procurements will only be made from Baikai Vietnam if the price and terms offered are competitive and comparable to those offered by independent suppliers. Orders, including the prices contained therein, for the products to be purchased
   by the Group under the Vietnam Purchase Agreement have to be reviewed and approved by the manager of the Procurement Department (採購部) of Billion Vietnam; and

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1. in respect of sale of products to Baikai Vietnam, evaluate and assess the scope of the relevant order and the manager of the Procurement Department (採購部) will prepare a detailed cost calculation by reference to the cost of materials, products and labours, quotes of the Group to other independent third party customers and the level of fees charged by competitors of the Group in the market (if available) to ensure that the prices and terms of the products of the Group are competitive and comparable to those being offered to independent third party customers of the Group. The Group has a standard pricing policy for its sales which is applicable to all customers. In setting or revising the pricing for the products, market prices are obtained through, among other things, recent transaction prices of the Group, enquiry with other industry players and researches on industry websites. The prices for the products to be sold to a connected person will be governed by such pricing policy and will not be less favourable than the price of similar products sold by the Group to independent customers. Orders, including the price contained therein, for the products to be supplied
   by the Group under the Vietnam Sales Agreement have to be reviewed and approved by the manager of the Sales and Marketing Department (營銷部) and the Accounting Officer of the Finance Department (財務部成本會計主任) of Billion Vietnam and under certain
   circumstances, such as a modification of the selling price due to quality-related issues or orders involving new products of Billion Vietnam, by the Costing Committee (成本研究 委員會) of the Group as well.

To ensure that the actual prices for the continuing connected transactions of the Group are on normal commercial terms and on terms no less favourable to the Group than that available from independent third party suppliers or customers, the Group will conduct regular checks to review and assess whether the products have been supplied or purchased in accordance with the terms of the relevant agreement. In addition, the Company has engaged the auditors of the Company to conduct an annual review of the continuing connected transactions of the Group.

Given that sales to Baikai Vietnam have to strictly adhere to the pricing policy of the Group, and that procurements of the Group from Baikai Vietnam are based on prevailing market prices after comparison with offers from independent suppliers, the Directors, including the independent non-executive Directors, are of the view that the procedures adopted by the Group as described above could ensure that the aforementioned continuing connected transactions of the Group will be conducted on normal commercial terms or better, and are fair and reasonable and in the interests of the Shareholders as a whole.

GENERAL INFORMATION ABOUT THE GROUP AND BAIKAI VIETNAM

The Group is one of the largest developers and manufacturers of polyester filament yarns in China, including DTY and FDY, the two main polyester filament yarns, which have a variety of end applications in consumer products, including apparel, footwear and home furnishings.

Baikai Vietnam is principally engaged in the business of manufacturing paper boxes, rolls, lace fabrics, wearing fabrics and ribbons.

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