Huayi Tencent Entertainment : SUPPLEMENTAL ANNOUNCEMENT ON DISCLOSEABLE TRANSACTION CAPITAL INCREASE TO AND ACQUISITION OF EQUITY INTEREST IN A COMPANY ENGAGED IN NEW RETAIL PLATFORM FOR PRESCRIPTION DRUGS BY WAY OF CASH CONSIDERATION AND ISSUE OF CONSIDERATION SHARES

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

This announcement is for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for the Shares.

華 誼 騰 訊 娛 樂 有 限 公 司

Huayi Tencent Entertainment Company Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 419)

SUPPLEMENTAL ANNOUNCEMENT ON

DISCLOSEABLE TRANSACTION

CAPITAL INCREASE TO AND

ACQUISITION OF EQUITY INTEREST IN A COMPANY ENGAGED IN

NEW RETAIL PLATFORM FOR PRESCRIPTION DRUGS

BY WAY OF

CASH CONSIDERATION AND ISSUE OF CONSIDERATION SHARES

Reference is made to the announcement of Huayi Tencent Entertainment Company Limited (the "Company") dated 7 April 2021 (the "Announcement") in relation to capital increase to and acquisition of equity interest in a company engaged in new retail platform for prescription drugs. Unless otherwise defined, capitalized terms used in this announcement shall have the same meanings as defined in the Announcement.

The Company would like to provide the following further information regarding the Announcement.

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THE CONSIDERATION SHARES

As disclosed in the sub-section titled "Consideration and Terms of Payment" under the section headed "THE CAPITAL INCREASE AND ACQUISITION AGREEMENT" of the Announcement, the number of the Second Consideration Shares to be issued will be determined with reference to the average closing price of the Shares as quoted on the Stock Exchange for the last five consecutive trading days before the date of the satisfaction of the First Performance Target, while the number of the Third Consideration Shares, the Fourth Consideration Shares, the Fifth Consideration Shares and the Sixth Consideration Shares to be issued will be determined with reference to the average closing price of the Shares as quoted on the Stock Exchange for the last five consecutive trading days before the date of the satisfaction of the Second Performance Target. The issue prices per Share for these tranches of the Consideration Shares are to be subsequently determined, and the number of Shares in these respective tranches of Consideration Shares cannot be ascertained yet.

While there is no cap under the Capital Increase and Acquisition Agreement on the maximum number of Consideration Shares to be issued, using the issue price of HK$0.529 per Share (being the average closing price per Share as quoted on the Stock Exchange for the five consecutive trading days immediately prior to the date of the Capital Increase and Acquisition Agreement) for reference, the total number of Consideration Shares to be issued assuming the First Performance Target, the Second Performance Target as well as the Guaranteed Profits for the two years after completion of the Further Acquisition are all fulfilled would be 674,509,970 Shares, representing: (i) approximately 5.00% of the total number of issued Shares as at the date of the Announcement, and (ii) approximately 4.76% of the total number of issued Shares as enlarged by the allotment and issue of all of the Consideration Shares. Taking such hypothetical total number of the Consideration Shares as reference, the Board thus considers and expects that the Second Consideration Shares, the Third Consideration Shares, the Fourth Consideration Shares, the Fifth Consideration Shares and the Sixth Consideration Shares will be able to be allotted and issued by the Company under the General Mandate.

Effect on Shareholding Structure of the Company

For illustration purpose only, set out below is the shareholding structure of the Company (i) immediately upon the allotment and issue of the Second Consideration Shares, (ii) immediately upon the allotment and issue of the Third Consideration Shares, (iii) immediately upon the allotment and issue of the Fourth Consideration Shares, (iv) immediately upon the allotment and issue of the Fifth Consideration Shares, and (v) immediately upon the allotment and issue of the Sixth Consideration Shares:

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								Immediately upon the allotment and issue of
	the Second	the Third	the Fourth	the Fifth	the Sixth
	Consideration Shares	Consideration Shares	Consideration Shares	Consideration Shares	Consideration Shares
	(Note 3)	(Note 4)	(Note 4)	(Note 4)	(Note 4)
	Number of				Number of				Number of				Number of				Number of
	Shares		Approx.	Shares		Approx.	Shares		Approx.	Shares		Approx.	Shares		Approx.
Tencent Holdings
Limited (Note 1)	2,116,251,467	15.52%		2,116,251,467	15.41%		2,116,251,467	15.36%	2,116,251,467	15.14%	2,116,251,467	14.93%
YUEN Hoi Po
(Note 2)	2,397,340,107	17.58%		2,397,340,107	17.46%		2,397,340,107	17.40%	2,397,340,107	17.16%	2,397,340,107	16.92%
Public Shareholders
The Founding
Shareholders	137,150,360	1.01%		233,830,122		1.70%		277,898,106	2.02%	476,204,038	3.41%	674,509,970	4.76%
Other shareholders of
the Company	8,984,515,003	65.89%		8,984,515,003		65.43%		8,984,515,003	65.22%	8,984,515,003	64.29%	8,984,515,003	63.39%
Total
13,635,256,937	100.00%		13,731,936,699		100.00%		13,776,004,683	100.00%	13,974,310,615	100.00%	14,172,616,547	100.00%
Notes:

1. These Shares are held by Mount Qinling Investment Limited. Since Mount Qinling Investment Limited is a wholly-owned subsidiary of Tencent Holdings Limited, Tencent Holdings Limited is deemed to be interested in these Shares.
2. YUEN Hoi Po is an executive Director and is beneficially interested in 459,310,000 Shares. He is also deemed to be interested in 1,938,030,017 Shares held by his wholly-owned corporation, namely Smart Concept Enterprise Limited.
3. The Second Consideration Shares, if issued, will be issued at the price per Share equal to the average closing price of the Shares as quoted on the Stock Exchange for the last five consecutive trading days before the date of the satisfaction of the First Performance Target, which may or may not be HK$0.529.
4. The Third Consideration Shares, the Fourth Consideration Shares, the Fifth Consideration Shares and the Sixth Consideration Shares, if issued, will be issued at the price per Share equal to the average closing price of the Shares as quoted on the Stock Exchange for the last five consecutive trading days before the date of the satisfaction of the Second Performance Target, which may or may not be HK$0.529.

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The illustrative information in the above table is based on the assumptions that (a) there are no other changes in the issued ordinary share capital of the Company or in the holding of Shares from the date of the Announcement to the date of allotment and issue of the respective tranches of the Consideration Shares (other than the issue of such Consideration Shares), (b) the First Performance Target and the Second Performance Target will be satisfied and the Guaranteed Profits will be fulfilled to its fullest extent by the Target Group in each of the two years after the completion of the Further Acquisition, (c) the exchange rate of RMB to HK$ as at the date of the Capital Increase and Acquisition Agreement is used, and (d) the Second Consideration Shares, the Third Consideration Shares, the Fourth Consideration Shares, the Fifth Consideration Shares and the Sixth Consideration Shares are issued at the price of HK$0.529 per Share, being the average closing price per Share as quoted on the Stock Exchange for the five consecutive trading days immediately prior to the date of the Capital Increase and Acquisition Agreement.

In the event the number of Shares in any particular tranche of the Consideration Shares turns out be much larger than expected and cannot be issued by the Company under the General Mandate, under the Capital Increase and Acquisition Agreement the Company may choose to pay cash to the Founding Shareholders in lieu of the issue of all or part of that tranche of the Consideration Shares to settle that part of consideration. Alternatively, the Company may choose to comply with relevant requirements under the Listing Rules (as applicable, including obtaining specific approval by the shareholders of the Company) for the issue of that tranche of the Consideration Shares.

BASIS FOR DETERMINATION OF THE FIRST PERFORMANCE TARGET, THE SECOND PERFORMANCE TARGET AND THE GUARANTEED PROFITS

The business model of the Target Group for the new retail platform for prescription drugs was recently developed around the end of 2020, and has been implemented in a limited scale in Shaanxi and Guangxi areas of the PRC since the first quarter of 2021. The companies comprising the Target Group thus did not record substantial amounts of revenue from the business model for the new retail platform for prescription drugs for 2019 and 2020. Notwithstanding the aforesaid, the First Performance Target, the Second Performance Target and the Guaranteed Profits were determined based on the following factors, taking into account the Group's capital injection and the Target Group's business expansion plan:

1. The overall market size for the business of prescription drugs in the PRC is huge and is expected to grow. According to the "PRC Prescription Drug Market Operational Risk and Developmental Trend Analysis Report, 2020-2026" published by the Intelligence Research Group, the scale of prescription drug outflow from medical institutions (i.e. the right to purchase prescription drugs being transferred to the patients) in 2020 was approximately RMB400 billion to RMB500 billion, and such scale also shows a sign of a gradual expansion with the National Healthcare Security Administration carrying out volume-based purchase.

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1. The new retail platform has been implemented in a limited scale in a few provinces since the first quarter of 2021. The main purpose of such limited scale implementation is to smoothen and finetune the operational process. As of the date of the Capital Increase and Acquisition Agreement, the Target Group had signed agreements or reached mutual understanding with various pharmacies and drugs manufacturers for distribution of their prescription drugs products through the new retail platform with estimated annual revenue to be generated of over RMB100 million.
2. With the new funds of the First Cash Investment from the Group to be injected upon completion of the Capital Increase, the Target Group plans to rapidly expand the exposure of the platform to other parts of the PRC by signing up more doctors and pharmacies and targets to establish a nation-wide distribution platform for prescription drugs by the end of the first year after the Completion Date. According to the Target Group's business expansion plan, the revenue to be generated in the 4th quarter of the first year following the Completion Date will account for more than 60% of the First Performance Target.
3. The higher quantum of the Second Performance Target as compared to the First Performance Target is mainly due to the full-scale operation with established nation-wide distribution platform that is expected to be in place in the whole of the second year following the Completion Date. With the significant increase in the scale of business and revenue level, the operation is expected to become profitable. The target net profits under the Second Performance Target and under the Guaranteed Profits, respectively, as compared against the target revenue under the Second Performance Target, represent a net profit margin ranging from approximately 6.7% to 8.3%.

The Group will become owner of 51% equity interest in the Target Company following payment of RMB40,000,000 after completion of the Acquisition from BDT and the Capital Increase, and a further consideration of RMB61,000,000 will be payable by the Group after the First Performance Target is achieved. Thereafter, following achievement of the Second Performance Target, completion of the Further Acquisition and fulfillment of the Guaranteed Profits to the fullest extent, the Group would pay further aggregate consideration of RMB299,000,000 for the Acquisitions, by which time the Group will have become owner of 100% equity interest in the Target Company.

The above arrangement for payment of parts of the consideration for the Capital Increase and the Further Acquisition subject to fulfilment of the First Performance Target, the Second Performance Target and the Guaranteed Profits was agreed upon among the parties to the Capital Increase and Acquisition Agreement on arm's length basis. The Company considers such portions of the consideration for the Capital Increase and the Further Acquisition to be fair and reasonable taking into account the following:

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1. a price-to-sales ratio of approximately 1.32 when comparing the aggregate consideration of RMB40,000,000 plus RMB61,000,000 (which is payable after the achievement of the First Performance Target) to the target revenue of the Target Group of no less than RMB150,000,000 under the First Performance Target (taking into account that by that stage the Group owns 51% equity interests in the Target Group);
2. a price-to-sales ratio of approximately 0.67 when comparing the aggregate consideration of RMB40,000,000 plus RMB360,000,000 (being the sum of the portions of consideration payable subject to the achievement of the First Performance Target, the Second Performance Target and the Guaranteed Profits to its fullest extent) to the target revenue of the Target Group of no less than RMB600,000,000 under the Second Performance Target;
3. a price-to-earnings ratio of 10 times when comparing the total consideration of RMB400,000,000 for the Acquisitions and the Capital Increase to the target net profits of the Target Group of no less than RMB40,000,000 under the Second Performance Target; and
4. a price-to-earnings ratio of 8 times when comparing the total consideration of RMB400,000,000 for the Acquisitions and the Capital Increase to the Guarantee Profits of no less than RMB50,000,000.

As a benchmark comparison, according to the latest information as extracted from Bloomberg, the current average price-to-sales ratio and price-to-earnings ratio of Hong Kong Hang Seng Index constituents are about 2 times and 15 times respectively, and the pricing multiples for the Acquisitions and the Capital Increase as stated above are more favourable than such benchmark multiples.

In view of the above basis of consideration and pricing multiples and the fact that under the Capital Increase and Acquisition Agreement the payment obligations of the Investor of certain portions of the consideration (in total comprising 90% of the maximum aggregate consideration) will only arise when the First Performance Target, the Second Performance Target and the Guaranteed Profits are achieved, the Board considers that such parts of consideration for the Capital Increase and the Further Acquisition which are subject to the achievement of the First Performance Target, the Second Performance Target and the Guaranteed Profits to be fair and reasonable and in the interest of the Company and its shareholders as a whole.

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BENEFITS OF THE ACQUISITIONS AND THE CAPITAL INCREASE

The Group's healthcare and wellness services focus on the operations of "Bayhood No. 9 Club", a healthcare and wellness centre which the Group operates on a lease basis to provide quality healthcare and wellness services to high and medium end enterprises and individual clients. On the one hand, the business of the Target Group will serve as a diversification of the Group's business within the healthcare industry. On the other hand, through the Target Group's new retail platform for prescription drugs, the services of "Bayhood No. 9 Club" can be introduced to the users of the platform which may facilitate an expansion of the membership base of "Bayhood No. 9 Club", and at the same time the usage of the new retail platform for prescription drugs may be enhanced by exposure to the clients of "Bayhood No. 9 Club".

By Order of the Board

Huayi Tencent Entertainment Company Limited

Raymond Hau

Company Secretary

Hong Kong, 21 April 2021

As at the date of this announcement, the Board comprises:

Executive directors: Mr. CHENG Wu (Vice Chairman), Mr. YUEN Hoi Po (Chief Executive Officer)

Independent non-executive directors: Dr. WONG Yau Kar David, GBS, JP, Mr. YUEN Kin, Mr. CHU Yuguo

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