Wai Kee : 10/26/2018, CONTINUING CONNECTED TRANSACTIONS (Download)

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WAI KEE HOLDINGS LIMITED

(Incorporated in Bermuda with limited liability)

(Stock Code: 610)

CONTINUING CONNECTED TRANSACTIONS

2019 BUSINESS SERVICES AGREEMENT

On 4 December 2015, the Company and NWD entered into the 2016 Business Services Agreement in relation to the provision of Services by the members of the Group to the members of NWD Group. In anticipation of the expiry of the current term of the 2016 Business Services Agreement on 31 December 2018 and to ensure compliance with Chapter 14A of the Listing Rules, the Directors proposed to renew the 2016 Business Services Agreement in order to facilitate the conduct of transactions of similar nature to those under the 2016 Business Services Agreement. On 26 October 2018, the Company entered into the 2019 Business Services Agreement with NWD for the provision of Services to the members of NWD Group for an initial term of 3 years effective from 1 January 2019.

LISTING RULES IMPLICATIONS

As at the date of this announcement, NWD, through its subsidiary, held 198,068,000 Shares (representing approximately 24.97% of the Company's issued share capital). NWD is therefore a substantial Shareholder and a connected person of the Company under the Listing Rules. As such, the transactions contemplated under the 2019 Business Services Agreement constitute continuing connected transactions of the Company under the Listing Rules.

As the applicable percentage ratios (as defined in the Listing Rules) in respect of annual caps for the transactions under the 2019 Business Services Agreement exceed 5%, the 2019 Business Services Agreement is subject to the reporting, annual review, announcement and Independent Shareholders' approval requirements under Chapter 14A of the Listing Rules.

A circular containing, among other things, (i) further details of the 2019 Business Services Agreement; (ii) the letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders; (iii) the recommendation from the Independent Board Committee; and (iv) the notice convening the SGM will be despatched to the Shareholders. As additional time is required to prepare and finalise certain information for inclusion in the circular, the circular is expected to be despatched to the Shareholders on or before 30 November 2018. NWD and its associates will abstain from voting on the resolution to approve the 2019 Business Services Agreement at the SGM.

BACKGROUND INFORMATION AND REASONS FOR AND BENEFITS OF THE RENEWAL OF THE 2016 BUSINESS SERVICES AGREEMENT

Members of the Group (including Build King Group) may tender for potential construction projects of NWD Group from time to time. On 4 December 2015, the Company and NWD entered into the 2016 Business Services Agreement in relation to the provision of Services by the members of the Group to the members of NWD Group. During the term of the 2016 Business Services Agreement, the members of the Group entered into transactions with the members of NWD Group in respect of the Services contemplated under the 2016 Business Services Agreement. The Group and NWD Group wish to continue with the transactions in relation to the Services which may arise from time to time.

In anticipation of the expiry of the current term of the 2016 Business Services Agreement on 31 December 2018 and to ensure compliance with Chapter 14A of the Listing Rules, the Directors proposed to renew the 2016 Business Services Agreement in order to facilitate the conduct of transactions of similar nature to those under the 2016 Business Services Agreement. The Company will seek prior Independent Shareholders' approval of all the existing and foreseeable continuing connected transactions entered or to be entered into between the members of the Group and the members of NWD Group, thereby aiming to reduce the administrative burden on the Company to comply with the reporting and independent shareholders' approval requirements under the Listing Rules in relation to the execution or renewal of agreements in respect of the Services.

The 2019 Business Services Agreement sets out the framework which governs the provision of Services by the members of the Group to the members of NWD Group from time to time. The terms of the 2019 Business Services Agreement were arrived at after arm's length negotiations between the parties. Members of the Group will enter into separate agreement(s) with the members of the NWD Group upon successful bidding or tender for each contract for provision of Services.

THE 2019 BUSINESS SERVICES AGREEMENT

The principal terms of the 2019 Business Services Agreement are set out below:

Date

: 26 October 2018

Parties	:	(1)	the Company
(2)	NWD
Subject matter	:

The 2019 Business Services Agreement requires that all agreements in relation to the provision of Services by the members of the Group to the members of NWD Group are:

• (a) in writing and set out the terms and conditions on which the transactions contemplated thereunder shall be undertaken;

• (b) determined in the usual and ordinary course of business of the Group and NWD Group on normal commercial terms (as defined in the Listing Rules); and

• (c) in compliance with all applicable provisions of the Listing Rules, the 2019 Business Services Agreement and the respective agreement(s) for provision of Services.

It applies to all agreements for Services subsisting on or entered into after the commencement of the term of the 2019 Business Services Agreement.

Payment terms

• : The payment terms are not provided under the 2019 Business Services Agreement and will be determined on a case-by-case basis and set out in the relevant agreements as contemplated under the 2019 Business Services Agreement.

  Term

• : An initial term of three years starting from 1 January 2019 (subject to the approval of the 2019 Business Services Agreement granted by resolution of the Independent Shareholders at the SGM), unless terminated earlier in accordance with the terms and conditions thereunder.

Subject to re-compliance with the requirements of the applicable Listing Rules and other applicable laws and regulations at the relevant time or, alternatively, any waivers obtained from the strict compliance with such requirements, upon expiry of the initial term or subsequent renewal term, the 2019 Business Services Agreement is automatically renewed for a successive period of three (3) years thereafter (or such other period permitted under the Listing Rules) unless a party under the 2019 Business Services Agreement gives a 30 days' prior written notice to the other party to terminate the 2019 Business Services Agreement.

Notwithstanding the above, the 2019 Business Services Agreement may be terminated at any time by the written agreement of the Company and NWD.

PRICING POLICY OF THE GROUP

The Group will need to go through the tender process before being appointed to provide the Services to the relevant members of NWD Group in respect of NWD Group's construction projects in Hong Kong.

Generally speaking, consultancy or project management activities are charged as a percentage of the project cost, and main/sub-contractor activities would, depending on the requirements of the employer, be at a fixed sum with or without a variable element.

General pricing policy

In pricing each tender, regardless of the nature of services required and of whether the transaction is to be entered into with connected persons of the Group or independent third parties, the Group will:

• (a) estimate the potential costs of the construction or building works ("project costs") to which the services relate, which is the aggregate of the direct costs, including labour cost, plant and machinery cost, construction materials cost and sub-contractor fees, estimated by reference to the considerations such as the nature of the project (including the location and size of project, and whether it is main contractor or sub-contractor Services that is being required), complexity, method and program to be used for the construction works, possible technical issues that may need to be addressed, timing for delivery of the services and late delivery penalty structure, the pricing structure which would typically be specified in each tender invitation document (including lump sum or variable pricing/price adjustment structures), performance bond requirements, etc. (the "Specification Considerations"), availability of the resources to the Group, including the staff/labour, specialist contractors, machinery resources and project

  cashflow (the "Resources Considerations"); and

• (b) estimate a potential margin within the range of what the Group would in its experience in the industry charge for similar projects of similar specifications for independent third party employers.

Where the Group is to provide main contractor or sub-contractor services, the tender price will represent the whole of the potential project costs. The tender price may be a fixed sum or variable charging formula or a combination of both, depending on the terms of the tender invitation. The tendering team will prepare a cost estimate of the tender according to the requirements of the tender documents. The tendering team may conduct tender progress meetings throughout the estimating process as and when required. After having the potential project costs and the proposed tender price estimated, management meeting will be held to provide senior management with the cost estimation and other related documents. The senior management of the Group will review the potential project costs estimate, any potential margin and the proposed tender price, and determine whether or not the tender price (including the pricing structure) should be modified having regard to various factors including the specification of the project, the potential risks associated with the project (for example, projects requiring the Group to bear suppliers and sub-contractor costs are generally regarded as higher risks than those which do not), general business environment and the perceived competitiveness of the tender price. In determining the profit margin of potential projects, the Company will consider factors including, but not limited to, the existing workload and the capacity of the Group, future price trend of various components of the project costs, competitiveness of the tender price, reliability and reputation of the potential clients and strategic importance of the tender to the future growth of the Group. Generally, the Group's gross profit margin in its tenders for contracting services would at least be within the industry range of 3% to 7% (based on published information on industry projects).

Where the services required involve only consultancy or project management services for specified construction or building works, the tender price is broadly speaking determined as a percentage, typically between 3% and 4% (subject to negotiation) of the potential project costs depending on the complexity of the projects.

For tenders for Services to be rendered to NWD Group

For tenders for Services to be rendered to NWD Group contemplated under the 2019 Business Services Agreement, the senior management of the Group will also review the potential project costs estimate and the tender price to ensure that they are (i) arrived at through procedures consistent with that of tenders for contracts with other independent third parties; and (ii) on terms no less favourable to the Group than those that would have been offered at the time by the Group to other independent third parties on comparable circumstances.

Definitive contracts for Services will be entered into between the relevant members of the Group and NWD Group in respect of tenders awarded to the Group based on a form of contract provided by NWD Group, and incorporating terms of the successful tenders.

HISTORICAL FIGURES

The following table sets out the respective aggregate value of the Services provided by the members of the Group under the 2016 Business Services Agreement for the two years ended 31 December 2017 and the eight months ended 31 August 2018, their respective annual caps for the three years ending 31 December 2018, and the corresponding utilisation rates (calculated as the value of tenders awarded to the Group by NWD Group and recognised by the Group for the relevant financial year divided by the estimated annual cap for that year) of the existing annual caps:

For the eight months ended

31 August 2018

(for actual amount only)/ for the financial year endingFinancial year ended 31 DecemberActual amount (HK$ million)

2016 217.92

2017

31 December 2018 (for annual cap only)

257.62 149.78

Historical annual caps (HK$ million)

510

260 260

Utilisation rates (notes)

42.73%

99.08% 86.41%

Notes:

1.

The utilisation rate for transactions for the eight months ended 31 August 2018 was calculated based on two-thirds of the annual cap set for the financial year ending 31 December 2018.

2.

The low utilization rate in 2016 was primarily due to the delay in commencement of certain works in 2016 and the loss of tenders initially contemplated by the Group for the purpose of determining the annual cap for 2016.

RENEWED ANNUAL CAPS

The Company proposes to seek approval from the Independent Shareholders for the renewed annual caps under the 2019 Business Services Agreement for each financial year as follows:

Financial year ending 31 December

2019	2020	2021
Annual cap	300	450	450
(HK$ million)

The renewed annual caps are determined by the Company having taken into account the following:

• (i) estimated value of one on-going demolition and construction work contract which commenced in December 2016 and is expected to complete in the first half of 2019;

• (ii) estimated value of foundation works for one project of NWD for which the Group has submitted tender, assuming that such tender will be awarded to the Group (the outcome of which is uncertain) for Listing Rules compliance purposes. It is expected that such works will span from the last quarter of 2018 to the first half of 2021;

• (iii) possible contract revenue estimated by the Group having regard to the type of works that could be required for NWD's possible projects that the Group is aware through media reports and the relevant Specification Considerations and the Resources Considerations;

• (iv) prevailing market conditions, such as labour and construction material costs and perceived trends, construction industry condition and trends, which may impact the estimation of the Group on pricing;