Goodbaby International Hldg : (009) Letter from the Board (Eng)

Goodbaby International Holdings Limited 好 孩 子 國 際 控 股 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 1086)

Executive Directors:

Mr. SONG Zhenghuan (Chairman)

Mr. Martin POS Mr. LIU Tongyou

Mr. Michael Nan QU Mr. WANG Haiye

Mr. Jan REZAB

non-executive Director:

Mr. HO Kwok Yin, Eric

Independent Non-executive Directors:

Mr. Iain Ferguson BRUCE Mr. SHI Xiaoguang

Ms. CHIANG Yun

Mr. JIN Peng

Registered office:

Cricket Square Hutchins Drive

P.O. Box 2681 Grand Cayman KY1-1111

Cayman Islands

Head office

28 East Lufeng Road, Lujia Town, Kunshan City

Jiangsu Province, 215331 PRC

Principal place of business:

Room 2001, 20th Floor

Two Chinachem Exchange Square 338 King's Road

North Point Hong Kong

4 September 2017

To the Shareholders

Dear Sir or Madam,

1. MAJOR AND CONNECTED TRANSACTION
2. ISSUE OF CONSIDERATION SHARES UNDER SPECIFIC MANDATE
3. APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

Reference is made to the Announcement.

The purpose of this circular is to provide you with, among other things, (i) further details of the Acquisition and the Whitewash Waiver; (ii) a letter of advice from the Independent Board Committee to the Independent Shareholders in relation to the Acquisition and the Whitewash Waiver; (iii) a letter of advice from the Independent Financial Adviser in relation to the Acquisition and the Whitewash Waiver; and (iv) a notice of the EGM.

THE ACQUISITION

On 24 July 2017 (after trading hours), the Purchaser and the Vendor entered into the Agreement.

The principal terms of the Agreement are set out below.

Subject Matter

The Purchaser conditionally agreed to acquire, and the Vendor conditionally agreed to sell, the Sale Share.

The Sale Share, represents the entire issued share capital of the Target at Completion.

The Target Group has the following core businesses: (i) the product development, brand management and distribution of leading Self-owned Brands in maternity and baby-care products and apparel products; and (ii) one of the largest retail networks for MBC Products in China, a leading omni-channel sales platform provides customers with its Self-owned Brands in maternity and baby-care products, apparel products and the Group's durable juvenile products.

Consideration

The consideration for the Sale Share is US$360,000,000 (equivalent to approximately HK$2,812,176,000), subject to the adjustment set out below. It will be satisfied as to US$120,485,816 (equivalent to approximately HK$941,187,000) by the payment of the Cash Consideration and as to the balance by the allotment and issue of the Consideration Shares at the Issue Price credited as fully paid.

Adjustment

The consideration is subject to an upward or downward adjustment. The upward adjustment is subject to a cap of US$36,000,000 (after taking into account the net impact of the adjustments in (i) and (ii) below) whereas the downward adjustment is not subject to any cap. The details of adjustments are:

1. Debt-free and cash-free adjustment:

2. where the amount of the external debt and external debt equivalent (including (i) bank borrowing; (ii) tax payable; and (iii) deferred tax), of the Target Group as at Completion is higher than the amount of (i) the cash and cash equivalent; and (ii)

   amount due from related parties of the Target Group (which is to be fully settled as at Completion) as at Completion, the consideration shall be reduced by an amount equal to the difference, which is to be settled by the Vendor in cash within 30 business days (as defined in the Agreement) after the date of finalising the Completion Statement; or

3. where the amount of the cash and cash equivalent and amount due from related parties of the Target Group as at Completion is higher than the amount of the external debt and external debt equivalent of the Target Group as at Completion, the consideration shall be increased by an amount equal to the difference, which is to be settled by the Purchaser, in cash within 30 business days (as defined in the Agreement) after the date of finalizing the Completion Statement, and

4. Working capital adjustment:

5. where the Actual Working Capital is lower than the Reference Working Capital, the consideration shall be reduced by an amount equal to the difference, which is to be settled by the Vendor in cash within 30 business days (as defined in the Agreement) after the date of finalizing the Completion Statement; or

6. where the Actual Working Capital is higher than the Reference Working Capital, the consideration shall be increased by an amount equal to the difference, which is to be settled by the Purchaser in cash within 30 business days (as defined in the Agreement) after the date of finalizing the Completion Statement.

The Reference Working Capital is RMB -12,768,000 (negative twelve million seven hundred and sixty eight thousand), being the inventory, trade and notes receivables, prepayments, deposits and other receivables, trade payables, other payables and accruals and amount due to related parties of the Target Group as at 30 April 2017. The Target Group is able to maintain negative working capital due to the longer credit term granted to the Target Group by its suppliers as compared to the credit period that the Target Group grants to its customers, while inventory turnover has been relatively stable. A credit period of 80 to 120 days is granted by suppliers to the Target Group. In contrast, the Target Group generally does not grant credit period to distributors and grants a credit period ranging from 30 days to 50 days to other customers. Moreover, other payables and accruals, which comprise trade related items occurred in the normal course of business including advances from customers, commission payable to third party online platforms, accrued online marketing and promotion costs, and commission and bonus for sales force, has been increasing over the three years and six months period ended 30 June 2017 as the Target Group expands its business and develops its online and wholesale channels in addition to the offline retail channel, thus contributing to the negative working capital balance.

Security

The Consideration Shares will be allotted and issued at Completion and settled as follows:

1. the Consideration Shares, being 536,100,000 new Shares, will be held by the shareholders of the Vendor upon completion of the Repurchase and the Distribution; and

2. 80,578,109 of the Consideration Shares (the "Charged Consideration Shares"), being 10% of the Consideration, will be charged to the Purchaser or its wholly-owned subsidiary by the shareholders of the Vendor (upon completion of the Repurchase and the Distribution) as security to cover any claims the Purchaser may have against the Vendor which is not otherwise settled pursuant to the terms of the Agreement, including any amount payable under the adjustment as set out above. If there were no outstanding claims against the Vendor, the Charged Consideration Shares shall be returned to the shareholders of the Vendor (upon completion of the Repurchase and the Distribution) on the 540th calendar day following the Completion Date.

The Company will not be holding its own Shares. The chargors (that is, PUD, CAEL, SGIL, ROSL and SIML) remain the beneficial owners of the Charged Consideration Shares, and have the right to exercise all voting rights attaching to such Shares, unless and until there is enforcement of security. The ownership in such Shares will not pass to the Company upon enforcement.

Basis of the consideration

The consideration has been determined after arm's length negotiation between the parties with reference to the prevailing market condition, the historical operating and financial performance, the growth prospect of the Target Group, and benchmarking price-earnings ratios of comparable companies, comprising 1) leading global MBC Products brands or retailers which offer non-durable juvenile products such as toys, baby care products and baby and children's apparel, or durable juvenile products such as car seats and strollers; and 2) Hong Kong listed specialty retailers operating in China. The comparable companies are selected on the basis that they engage in similar business as the Target Group, which is the product development, distribution or retail of MBC Products, or the operation of a large retail network in China. The comparable companies are listed on the Stock Exchange or other major global stock exchanges. Only those companies with public financial information for the twelve months ended June 30, 2017 are taken into consideration for comparison purpose.

We note that the implied price-earnings ratio of the Sales Share taking into account the consideration of US$360,000,000 divided by the RMB175.4 million audited net income after tax of Target Group for the twelve months ended 30 June 2017 is approximately 13.9 times and is lower than the range of price-earnings ratio (based on share prices as of 1 September 2017 and respective net income after tax for the twelve months ended 30 June 2017) of the comparable companies which is between 16.4 times to 26.6 times and average being 20.7 times.

The cash consideration payable by the purchaser will be funded from bank loans and internal resources.

The proposed issue of the Consideration Shares and the payment of the Cash Consideration was arrived at after due and careful consideration by the Board. While the issue of the Consideration Shares will result in a dilution in the shareholdings in percentage terms of the existing public shareholders, having taken into account various factors as set forth below, the dilution effects on the shareholding of the existing Public Shareholders are considered acceptable.