Kingdee International Software : Announcements and Notices - Connected Transaction in Relatio ...

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KINGDEE INTERNATIONAL SOFTWARE GROUP COMPANY LIMITED ږሁ਷ყழ΁ණྠϞࠢʮ̡

(incorporated in the Cayman Islands with limited liability)

(Stock code: 268)

CONNECTED TRANSACTION IN RELATION TO ACQUISITION OF EQUITY INTEREST IN CLOUDHUB

On 6 March 2019, Diechuang Holdings as seller and Hongjin Investment (a controlled structured entity in the Group's consolidated financial statements) as purchaser entered into the Equity Transfer Agreement, whereby Diechuang Holdings conditionally agreed to sell, and Hongjin Investment conditionally agreed to purchase, the Equity Interest (representing approximately 51.73% of the registered capital in CloudHub) at a consideration of RMB50,456,000.

As Mr. Xu, an executive Director, the Chairman of the Board and the controlling shareholder of the Company, is beneficially interested in 99% of Diechuang Holdings' equity interest, Diechuang Holdings is an associate of Mr. Xu and therefore a connected person of the Company pursuant to the Listing Rules. Accordingly, the Proposed Acquisition constitutes a connected transaction of the Company under the Listing Rules.

As each of the applicable percentage ratios in respect of the Proposed Acquisition calculated in accordance with the Listing Rules is less than 5%, the Proposed Acquisition is subject to the reporting and announcement requirements and are exempt from the independent shareholders' approval requirement under Chapter 14A of Listing Rules.

INTRODUCTION

On 6 March 2019, Diechuang Holdings as seller and Hongjin Investment as purchaser entered into the Equity Transfer Agreement, whereby Diechuang Holdings conditionally agreed to sell, and Hongjin Investment conditionally agreed to purchase, the Equity Interest (namely, approximately 51.73% of the registered capital in CloudHub) at a consideration of RMB50,456,000. As at the date of this announcement, the equity interests of CloudHub are owned by Diechuang Holdings, Hongjin Investment (a controlled structured entity in the Group's consolidated financial statements) and other independent third parties as to approximately 51.73%, 9.13% and 39.14%, respectively.

Reference is made to the announcement of the Company dated 28 July 2016 in relation to, among other things, the termination of the Previous Contractual Arrangements which Kingdee China (a wholly-owned subsidiary of the Company) had in place in relation to CloudHub at a total consideration of RMB43,330,450. Following the completion of such termination, CloudHub ceased to be consolidated into the financial statements of the Group as a 100% subsidiary of Kingdee China, and Kingdee China's remaining 15% interest in CloudHub became accounted for as an interest in associate in the financial statements of the Group. As at the date of this announcement, Hongjin Investment owns approximately 9.13% of the equity interest in CloudHub.

THE EQUITY TRANSFER AGREEMENT

The major terms of the Equity Transfer Agreement are set out as follows:

Date	6 March 2019
Parties	(a) Diechuang Holdings (as seller); and
(b) Hongjin Investment (as purchaser).
Subject matter

Pursuant to the Equity Transfer Agreement, Diechuang Holdings conditionally agreed to sell, and Hongjin Investment conditionally agreed to purchase, the Equity Interest.

Upon completion of the Proposed Acquisition, Hongjin Investment will be interested in approximately 60.86% in CloudHub, and CloudHub will become a controlled structured entity of the Company, such that the financial information of CloudHub will be consolidated into the accounts of the Group.

Consideration

The total consideration for the equity transfer contemplated under the Equity Transfer Agreement is RMB50,456,000.

The amount of the above consideration was determined after arm's length negotiations among the parties to the Equity Transfer Agreement taking into account factors including but not limited to the Valuation of CloudHub in the sum of RMB97,537,000 as appraised by an independent professional valuer, and the reasons for the Proposed Acquisition as mentioned in the section headed "Reasons for and Benefits of the Proposed Acquisition" in this announcement.

Subject to the fulfilment of conditions set out below, the consideration is payable by Hongjin Investment to Diechuang Holdings in the following instalments:

Time of payment % of payment

Within 15 business days following the entry into the Equity Transfer Agreement 50%

Within 15 business days following the completion of necessary filings in relation 50% to the Proposed Acquisition with the relevant administration for industry and commerce

The payment of the consideration will be funded by internal resources of the Group.

Conditions precedent

Payment by Hongjin Investment of the consideration for the equity transfer to Diechuang Holdings is subject to the satisfaction (or written waiver by Hongjin Investment) of the following conditions:

• (a) all internal authorisations (including without limitation approval by the board of directors and shareholders) required on the part of Diechuang Holdings for the equity transfer contemplated under the Equity Transfer Agreement having been obtained and not having been revoked;

• (b) all representations and warranties given by Diechuang Holdings under the Equity Transfer Agreement remaining true, complete and accurate in all material respects as at the date of payment; and

• (c) all documentation related to the Proposed Acquisition and corresponding amendment of articles of association and change in directors having been executed.

As at the date of this announcement, conditions (a) and (c) have been satisfied.

VALUATION

Given that the Valuation was based on the income approach, which involves the calculation of discounted cash flows method, the Valuation constitutes a profit forecast under Rule 14.61 of the Listing Rules.

The Valuation contained in the valuation reports issued by Valtech Valuation Advisory Limited has been prepared on the following principal bases and assumptions:

• 1. There are no changes, the aggregate of which when viewed together, may be construed to be a material adverse change in the existing political, legal, commercial and banking regulations, fiscal policies, foreign trade and economic conditions in countries/regions where Kingdee China currently operates in and in new markets that Kingdee China may potentially expand into as proposed by the management of Kingdee China;

• 2. There are no deviations, the aggregate of which when viewed together, may be construed to be a material adverse change in industry demand and/or market conditions;

• 3. There are no changes, the aggregate of which when viewed together, may be construed to be a material adverse change in the fluctuation of interest rates or currency exchange rates in any country which would be deemed to have a negative impact or the ability to hinder the existing and/or potentially future operations of Kingdee China;

• 4. There are no changes, the aggregate of which when viewed together, may be construed to be a material adverse change in the current laws of taxation in those countries in which Kingdee China operates in or Kingdee China may potentially operate in;

• 5. All relevant legal approvals, business certificates, trade and import permits, bank credit approval have been procured, in place and in good standing prior to commencement of operations by Kingdee China under the normal course of business;

• 6. Revenue projections and future business potential generated from CloudHub are expected to largely conform to those as forecasted by the management of Kingdee China;

• 7. Kingdee China will be able to retain existing and competent management, key personnel, and technical staff to support all facets of the ongoing business and future operations;

• 8. Trademarks, patents, technology, copyrights and other valuable technical and management knowhow will not be infringed in countries/regions where Kingdee China is or will be carrying on business.

Key specific valuation assumptions under the income approach are as follows:

• 1. The estimated growth rates of revenue and operating profit margin during the projection period from 2019 to 2023 are set out in the table below:

  2019	2020	2021	2022	2023
  Revenue growth rate	39%	43%	15%	22%	17%
  Operating profit margin (%)	-22%	15%	20%	23%	24%

• 2. The terminal growth rate for revenue beyond 2023, the projection period, is expected to be 2.5% with a stable operating profit margin;

• 3. The discount rate, being the weighted average cost of capital, is expected to be 18.16%.

The Directors confirm that the profit forecast of CloudHub, on which the Valuation is based, has been made after due and careful enquiries. The Valuation is based on the profit forecast of CloudHub using the general assumptions and key specific assumptions under income approach made by the Directors as disclosed above.

PricewaterhouseCoopers, the auditor of the Company, has reviewed the calculations of the discounted future estimated cash flows in relation to the Valuation which does not involve the adoption of accounting policies.

Report from PricewaterhouseCoopers on the calculations of the discounted future estimated cash flows and letter from the Board in relation to the profit forecast of the CloudHub are set out as Appendix I and Appendix II to this announcement respectively.

INFORMATION ON THE GROUP AND HONGJIN INVESTMENT

The Group is principally engaged in the provision of software products and Cloud services for corporates, hospitals, government organizations and other users worldwide.

Hongjin Investment is an investment holding company and is regarded as a controlled structured entity in the Group's consolidated financial statements.

INFORMATION ON DIECHUANG HOLDINGS

Diechuang Holdings is a company established under the laws of the PRC with limited liability principally engaged in investment holdings, and is owned by Mr. Xu (an executive Director, the Chairman of the Board and the controlling shareholder of the Company) as to 99%. Diechuang Holdings an associate of Mr. Xu and is therefore a connected person of the Company.

INFORMATION ON CLOUDHUB

CloudHub is principally engaged in the provision of a new generation of smart collaboration cloud to registered enterprises and organizations.

Set out below is the financial information of CloudHub for the two years ended 31 December 2018 in accordance with the PRC generally accepted accounting principles:

Year ended 31 December

Audited	Unaudited
2017	2018
RMB'000	RMB'000
(approximately)	(approximately)
Loss before taxation	(140,594)	(122,526)
Loss after taxation	(140,594)	(122,526)

The unaudited net asset value of CloudHub as at 31 December 2018 in accordance with the PRC generally accepted accounting principles amounted to approximately RMB-326,391,000.