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GLOBAL
OFFERING
(Incorporated in the Cayman Islands with limited liability)
Stock Code : 2881
Sole Sponsor
Sole Overall Coordinator, Sole Global Coordinator,
Joint Bookrunner and Joint Lead Manager


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If you are in any doubt about any of the contents of this prospectus, you should obtain independent
professional advice.
Wuhan Y ouji Holdings Ltd.
ʮ̡
(Incorporated in the Cayman Islands with limited liability)
GLOBAL OFFERING
Number of Offer Shares under the
Global Offering
: 18,300,000 Shares (subject to the
Over-allotment Option)
Number of Hong Kong Offer Shares : 1,830,000 Shares (subject to reallocation)
Number of International Offer Shares : 16,470,000 Shares (subject to reallocation
and the Over-allotment Option)
Maximum Offer Price : HK$8.50 per Offer Share, plus brokerage of
1%, SFC transaction levy of 0.0027%,
Stock Exchange trading fee of 0.00565%
and AFRC transaction levy of 0.00015%
(payable in full on application in Hong
Kong dollars and subject to refund)
Nominal value : US$0.0001 per Share
Stock code : 2881
Sole Sponsor, Sole Overall Coordinator, Sole Global Coordinator, Joint Bookrunner and Joint Lead Manager
Joint Bookrunners and Joint Lead Managers
⳪暲@:9)
(in alphabetical order)
Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company
Limited take no responsibility for the contents of this prospectus, 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
prospectus.
A copy of this prospectus, having attached thereto the documents specified in “Appendix V – Documents Delivered to the Registrar of
Companies and Available on Display – Documents Delivered to the Registrar of Companies” in this prospectus, has been registered by the
Registrar of Companies in Hong Kong as required by section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance
(Chapter 32 of the Laws of Hong Kong). Neither the Securities and Futures Commission of Hong Kong nor the Registrar of Companies in
Hong Kong takes any responsibility as to the contents of this prospectus or any other documents referred to above.
The Offer Price is expected to be determined by agreement between the Sole Overall Coordinator (for itself and on behalf of the
Underwriters) and us on or around Friday, June 14, 2024. The Offer Price will be not more than HK$8.50 per Offer Share and is currently
expected to be not less than HK$5.50 per Offer Share. If, for any reason, the Offer Price is not agreed by 12:00 noon on Friday, June 14, 2024,
the Global Offering will not proceed and will lapse.
The Sole Overall Coordinator (for itself and on behalf of the Underwriters) may, with our consent, reduce the number of Offer Shares
being offered under the Global Offering and/or the indicative Offer Price range below that is stated in this prospectus at any time on
or prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. For further details, please refer
to “Structure and Conditions of the Global Offering” and “How to Apply for Hong Kong Offer Shares” in this prospectus.
The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement are subject to termination by the Sole
Sponsor and the Sole Overall Coordinator (for itself and on behalf of the Hong Kong Underwriters) if certain grounds arise prior to 8:00 a.m.
on the Listing Date. For further details, please refer to “Underwriting – Underwriting Arrangements and Expenses – Hong Kong Public
Offering – Grounds for termination” in this prospectus.
The Offer Shares have not been and will not be registered under the U.S. Securities Act or any state securities law in the United States and
may only be offered, sold or delivered outside the United States in an offshore transaction in reliance on Regulation S.
A TTENTION
We have adopted a fully electronic application process for the Hong Kong Public Offering. We will not provide printed copies of this
prospectus to the public in relation to the Hong Kong Public Offering.
This prospectus is available at the website of the Stock Exchange at www.hkexnews.hk and our website at www.chinaorganic.com .I f
you require a printed copy of this prospectus, you may download and print from the website addresses above.
IMPORTANT
June 7, 2024


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Your application through the HK eIPO White Form service or the HKSCC EIPO
channel must be for a minimum of 500 Hong Kong Offer Shares and in one of the numbers set
out in the table. If you are applying through the HK eIPO White Form service, you may refer
to the table below for the amount payable for the number of Shares you have selected. You
must pay the respective maximum amount payable on application in full upon application for
Hong Kong Offer Shares. If you are applying through the HKSCC EIPO channel, you are
required to pre-fund your application based on the amount specified by your broker or
custodian, as determined based on the applicable laws and regulations in Hong Kong.
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2) on
application/
successful
allotment
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2)
on application/
successful
allotment
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2)
on application/
successful
allotment
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2)
on application/
successful
allotment
HK$ HK$ HK$ HK$
500 4,292.86 7,000 60,100.06 50,000 429,286.13 400,000 3,434,289.00
1,000 8,585.72 8,000 68,685.78 60,000 515,143.36 450,000 3,863,575.13
1,500 12,878.58 9,000 77,271.50 70,000 601,000.58 500,000 4,292,861.26
2,000 17,171.45 10,000 85,857.23 80,000 686,857.80 600,000 5,151,433.50
2,500 21,464.30 15,000 128,785.83 90,000 772,715.03 700,000 6,010,005.76
3,000 25,757.17 20,000 171,714.46 100,000 858,572.26 800,000 6,868,578.00
3,500 30,050.02 25,000 214,643.07 150,000 1,287,858.38 915,000
(1) 7,855,936.09
4,000 34,342.89 30,000 257,571.68 200,000 1,717,144.50
4,500 38,635.75 35,000 300,500.29 250,000 2,146,430.63
5,000 42,928.61 40,000 343,428.90 300,000 2,575,716.76
6,000 51,514.34 45,000 386,357.51 350,000 3,005,002.88
(1) Maximum number of Hong Kong Offer Shares you may apply for and this is 50% of the Hong Kong
Offer Shares initially offered.
(2) The amount payable is inclusive of brokerage, SFC transaction levy, the Stock Exchange trading fee and
AFRC transaction levy. If your application is successful, brokerage will be paid to the Exchange
Participants (as defined in the Listing Rules) or to the HK eIPO White Form Service Provider (for
applications made through the application channel of the HK eIPO White Form Service Provider)
while the SFC transaction levy, the Stock Exchange trading fee and the AFRC transaction levy will be
paid to the SFC, the Stock Exchange and the AFRC, respectively.
No application for any other number of the Hong Kong Offer Shares will be considered
and any such application is liable to be rejected.
IMPORTANT
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If there is any change in the following expected timetable of the Global Offering,
we will issue an announcement in Hong Kong to be published on the Stock Exchange’s
website at www.hkexnews.hk and our Company’s website at www.chinaorganic.com.
Time and date (Note 1)
Hong Kong Public Offering commences ............................. 9:00 a.m. on
Friday, June 7, 2024
Latest time for completing electronic applications
under the HK eIPO White Form service through
(1) the IPO App , which can be downloaded by searching
“IPO App ” in App Store or Google Play or downloaded at
www.hkeipo.hk/IPOApp or www.tricorglobal.com/IPOApp
(2) the designated website www.hkeipo.hk (Note 2) .................. 11.30 a.m. on
Thursday, June 13, 2024
Application lists open (Note 3) ..................................... 11:45 a.m. on
Thursday, June 13, 2024
Latest time for (a) completing payment for HK eIPO White Form
applications by effecting internet banking transfer(s) or
PPS payment transfer(s) and (b) giving
electronic application instructions to HKSCC
(Note 4) ............... 12:00 noon on
Thursday, June 13, 2024
If you are instructing your broker or custodian who is a HKSCC Participant to give
electronic application instructions via HKSCC’s FINI System to apply for the Hong Kong
Offer Shares on your behalf, you are advised to contact your broker or custodian for the
latest time for giving such instructions which may be different from the latest time as stated
above.
Application lists close
(Note 3) ..................................... 12:00 noon on
Thursday, June 13, 2024
Expected Price Determination Date (Note 5) .................... Friday, June 14, 2024
Announcement of the Offer Price, the level of indications of
interest in the International Offering, the level of applications in
the Hong Kong Public Offering and the basis of allocation of
the Hong Kong Offer Shares at the website of the
Stock Exchange at www.hkexnews.hk and our website at
www.chinaorganic.com on or before ..................... Monday, June 17, 2024
Results of allocations in the Hong Kong Public Offering
(with successful applicants’ identification document numbers,
where appropriate) to be available through a variety of channels
as described in the section headed “How to Apply for
Hong Kong Offer Shares – B. Publication of Results”
in this prospectus .................................... Monday, June 17, 2024
EXPECTED TIMETABLE
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Time and date (Note 1)
• Results of allocations in the Hong Kong Public Offering
will be available at the “IPO Results” function in the
IPO App or at www.tricor .com.hk/ipo/result or
www.hkeipo.hk/IPOResult with
a “search by ID” function from ..................... Monday, June 17, 2024
Share certificates in respect of wholly or partially
successful applications to be despatched or
deposited into CCASS on or before
(Note 7)(Note 9) .............. Monday, June 17, 2024
e-Auto Refund payment instructions/refund cheques
in respect of wholly or partially successful applications
if the final Offer Price is less than the price payable
on application (if applicable) or wholly or partially
unsuccessful applications to be
despatched on or before
(Note 8)(Note 9) ......................T uesday, June 18, 2024
Dealings in the Shares on the Stock Exchange to
commence at 9:00 a.m. on ..............................T uesday, June 18, 2024
Notes:
1. All dates and times refer to Hong Kong local dates and time, except as otherwise stated.
2. You will not be permitted to submit your application under the HK eIPO White Form service through the
IPO App or the designated website at www.hkeipo.hk after 11:30 a.m. on the last day for submitting
applications. If you have already submitted your application and obtained a payment reference number from
the IPO App or the designated website at or before 11:30 a.m., you will be permitted to continue the
application process (by completing payment of application monies) until 12:00 noon on the last day for
submitting applications, when the application lists close.
3. If there is/are a tropical cyclone warning signal number 8 or above, a “black” rainstorm warning and/or
Extreme Conditions in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Thursday, June
13, 2024, the application lists will not open or close on that day. Please refer to “How to Apply for the Hong
Kong Offer Shares – E. Severe Weather Arrangements” in this prospectus.
4. Applicants who apply for the Hong Kong Offer Shares by giving electronic application instructions to
HKSCC via HKSCC’s FINI system or instructing your broker or custodian to apply on your behalf via
HKSCC’s FINI system should refer to “How to Apply for the Hong Kong Offer Shares – A. Application for
Hong Kong Offer Shares – 2. Application Channels” in this prospectus.
5. The Price Determination Date is expected to be on or around Friday, June 14, 2024. If, for any reason, the
Offer Price is not agreed between the Sole Overall Coordinator (for itself and on behalf of the Underwriters)
and our Company by 12:00 noon on Friday, June 14, 2024, the Global Offering will not proceed and will lapse.
6. None of the websites set out in this section or any of the information contained on the websites forms part of
this prospectus.
7. Share certificates will only become valid at 8:00 a.m. on the Listing Date provided that the Global Offering
has become unconditional and the right of termination described in “Underwriting – Underwriting
Arrangements and Expenses – Hong Kong Public Offering – Grounds for Termination” has not been
exercised. Investors who trade Shares on the basis of publicly available allocation details or prior to the
receipt of Share certificates or the Share certificates becoming valid do so entirely at their own risk.
EXPECTED TIMETABLE
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8. e-Auto Refund payment instructions/refund cheques will be issued in respect of wholly or partially
unsuccessful applications pursuant to the Hong Kong Public Offering and also in respect of wholly or partially
successful applications in the event that the final Offer Price is less than the price payable per Offer Share on
application.
9. Applicants who have applied through the HK eIPO White Form service and paid their applications monies
through single bank accounts may have refund monies (if any) despatched to the bank account in the form of
e-Auto Refund payment instructions. Applicants who have applied through the HK eIPO White Form service
and paid their application monies through multiple bank accounts may have refund monies (if any) despatched
to the address as specified in their application instructions in the form of refund cheques in favour of the
applicant (or, in the case of joint applications, the first-named applicant) by ordinary post at their own risk.
For further information, please refer to “How to Apply for the Hong Kong Offer Shares –
D. Despatch/collection of Share certificates and refund of application monies” in this prospectus.
The above expected timetable is a summary only. For details of the structure of the
Global Offering, including its conditions, and the procedures for applications for Hong Kong
Offer Shares, please refer to “Structure and Conditions of the Global Offering” and “How to
Apply for Hong Kong Offer Shares” in this prospectus, respectively.
If the Global Offering does not become unconditional or is terminated in accordance with
its terms, the Global Offering will not proceed. In such case, we will make an announcement
as soon as practicable thereafter.
EXPECTED TIMETABLE
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IMPORTANT NOTICE TO INVESTORS
This prospectus is issued by our Company solely in connection with the Hong Kong
Public Offering and the Hong Kong Offer Shares and does not constitute an offer to sell
or a solicitation of an offer to buy any security other than the Hong Kong Offer Shares
offered by this prospectus pursuant to the Hong Kong Public Offering. This prospectus
may not be used for the purpose of, and does not constitute, an offer or invitation in any
other jurisdiction or in any other circumstances. No action has been taken to permit a
public offering of the Offer Shares in any jurisdiction other than Hong Kong and no
action has been taken to permit the distribution of this prospectus in any jurisdiction
other than Hong Kong. The distribution of this prospectus and the offering of the Offer
Shares in other jurisdictions are subject to restrictions and may not be made except as
permitted under the applicable securities laws of such jurisdictions pursuant to
registration with or authorization by the relevant securities regulatory authorities or an
exemption therefrom.
Y ou should rely only on the information contained in this prospectus to make your
investment decision. The Hong Kong Public Offering is made solely on the basis of the
information contained and the representations made in this prospectus. We have not
authorized anyone to provide you with information that is different from what is
contained in this prospectus. Any information or representation not made in this
prospectus must not be relied on by you as having been authorized by us, the Sole
Sponsor, the Sole Overall Coordinator, the Sole Global Coordinator, the Joint
Bookrunners, the Joint Lead Managers, any of the Underwriters, any of our or their
respective directors, officers, employees, agents, or representatives or any other person
or party involved in the Global Offering.
Page
Expected Timetable ................................................ i i
Contents ......................................................... v
Summary ........................................................ 1
Definitions ....................................................... 2 3
Glossary of Technical Terms .......................................... 3 2
Forward-looking Statements ......................................... 3 4
Risk Factors ...................................................... 3 6
Waivers from Strict Compliance with the Listing Rules .................... 6 1
Information about this Prospectus and the Global Offering ................ 6 4
Directors and Parties Involved in the Global Offering ..................... 6 8
Corporate Information .............................................. 7 5
Industry Overview ................................................. 7 8
CONTENTS
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Page
Regulatory Overview ............................................... 9 4
History, Reorganization and Corporate Structure ........................ 1 1 5
Business ......................................................... 1 3 5
Directors and Senior Management .................................... 2 3 0
Relationship with Our Controlling Shareholders ......................... 2 4 4
Continuing Connected Transactions ................................... 2 4 7
Share Capital ..................................................... 2 5 4
Substantial Shareholders ............................................ 2 5 6
Financial Information .............................................. 2 5 7
Future Plans and Use of Proceeds ..................................... 3 2 3
Underwriting ..................................................... 3 2 6
Structure and Conditions of the Global Offering ......................... 3 3 7
How to Apply for Hong Kong Offer Shares .............................. 3 4 9
Appendix I – Accountants’ Report .............................. I - 1
Appendix II – Unaudited Pro Forma Financial Information ........... II-1
Appendix III – Summary of Our Constitution and Cayman Islands
Companies Law ................................. III-1
Appendix IV – Statutory and General Information ................... I V - 1
Appendix V – Documents Delivered to the Registrar of Companies and
A vailable on Display ............................. V - 1
CONTENTS
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This summary aims to give you an overview of the information contained in this
prospectus. As this is a summary, it does not contain all the information that may be
important to you, and is qualified in its entirety by, and should be read in conjunction
with, the full text of this prospectus. Y ou should read the whole prospectus before you
decide to invest in the Offer Shares.
There are risks associated with any investment. Some of the particular risks
associated with investing in the Offer Shares are set out in “Risk F actors. ” Y ou should
read that section carefully before you decide to invest in the Offer Shares.
OVERVIEW
We are a renowned toluene derivative products provider in the PRC and the global
market, primarily focusing on the manufacture of toluene oxidation and chlorination products,
benzoic acid ammonification products and other fine chemical products through organic
synthesis process. Our toluene derivative products are primarily used for food preservatives,
household chemicals, animal feed acidifier and synthetic intermediates for agrochemical and
pharmaceutical uses. Leveraging our PRC-based product development and manufacturing
capabilities, we market and sell our products in over 70 countries. Under the leadership of our
experienced management team, we will continue to leverage our product development and
manufacturing capabilities and global sales network to increase our market shares and
strengthen our industry position in China and globally.
Our leading position in toluene oxidation and toluene chlorination products is
substantiated by our industry ranking and market share in the PRC and the global market.
According to the Frost & Sullivan Report, our Group ranked as the largest manufacturer for
both benzoic acid and sodium benzoate and the second largest benzyl alcohol manufacturer in
the PRC in terms of the sales revenue in 2023, representing 62.0%, 37.9% and 33.9% of the
PRC total market revenue in 2023, respectively. In the global market, we ranked second place
among manufacturers for benzoic acid and sodium benzoate and third place among
manufacturers for benzyl alcohol in 2023, accounting for 37.0%, 22.4% and 20.6% of the
global total market revenue in 2023, respectively.
As of the Latest Practicable Date, we had a self-produced product portfolio primarily
consisting of five toluene oxidation products, two toluene chlorination products, two benzoic
acid ammonification products and more than 20 types of other fine chemical products for
broad market uses. In 2021, 2022 and 2023, we recorded sales volume of approximately
362,302 tons, 375,848 tons and 346,147 tons of products, respectively. Our products are
widely recognized around the world. We are the contracted supplier of many renowned global
companies, including a number of Fortune 500 companies and regional industry participants.
We have established long-term business relationships with these companies, which enable our
customers to procure products at competitive prices while providing us with a solid customer
base. Sales to our Fortune 500 customers contributed approximately 7.6%, 8.5% and 10.5% of
our total revenue for the years ended December 31, 2021, 2022 and 2023. While our existing
products enjoy broad market appeal and use, we strive to maintain our competitive advantages
by allocating additional resources to product development to ensure a growing portfolio of
products to our customers.
SUMMARY
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For the years ended December 31, 2021, 2022 and 2023, we generated revenue of
RMB2,789.5 million, RMB3,133.8 million and RMB2,677.1 million, respectively, and
generated RMB309.1 million, RMB340.5 million and RMB72.9 million, respectively, in net
profits for the corresponding periods. The following table sets forth the revenue and
percentage of total revenue by business segments during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
RMB’000
% of total
revenue RMB’000
% of total
revenue RMB’000
% of total
revenue
Revenue from self-produced products 2,213,551 79.4 2,721,500 86.8 2,221,064 83.0
Toluene oxidation products 1,311,522 47.0 1,555,182 49.6 1,356,387 50.7
– benzoic acid 752,321 27.0 910,379 29.0 784,461 29.3
– sodium benzoate 451,129 16.2 543,084 17.3 437,519 16.3
– others 108,072 3.8 101,719 3.3 134,407 5.1
Toluene chlorination products 487,513 17.5 831,305 26.5 587,599 21.9
– benzyl chloride 124,810 4.5 189,440 6.0 124,841 4.7
– benzyl alcohol 362,703 13.0 641,865 20.5 462,758 17.2
Benzoic acid ammonification products 237,010 8.5 130,392 4.2 116,250 4.3
– benzonitrile 48,319 1.7 27,180 0.9 39,538 1.5
– benzoguanamine 188,691 6.8 103,212 3.3 76,712 2.8
Other fine chemical products 177,506 6.4 204,621 6.5 160,828 6.1
Revenue from products trading 575,926 20.6 412,336 13.2 456,039 17.0
Toluene product trading 541,042 19.4 360,815 11.6 320,085 12.0
Other products trading 34,884 1.2 51,521 1.6 135,954 5.0
Total 2,789,477 100.0 3,133,836 100.0 2,677,103 100.0
Sales of self-produced products. Our revenue was primarily generated from sales of our
self-produced products, which include revenues from toluene oxidation product sales, toluene
chlorination product sales, benzoic acid ammonification product sales and other fine chemical
product sales. Revenue contribution from sales of self-produced products accounted for
79.4%, 86.8% and 83.0% of our total revenue for the years ended December 31, 2021, 2022
and 2023, respectively. Our total revenue decreased by 14.6% from RMB3,133.8 million in
2022 to RMB2,677.1 million in 2023 due the general decline in market demands for our
products coupled with the increase in market supply of toluene oxidation products, resulting
in the drop in both sales volume and average selling price of our products. For detailed
analysis on the fluctuations of the revenue and gross profit margin of our business operation in
2023, please refer to “— Our Business Operating Data” and “Financial Information —
Discussion of Results of Operations” in this prospectus.
SUMMARY
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Products trading . We engage in products trading to supplement our primary production
operations and sales. We categorize our products trading by toluene product trading and other
products trading. Revenue contribution from products trading accounted for 20.6%, 13.2%
and 17.0% of our total revenue for the years ended December 31, 2021, 2022 and 2023,
respectively. Our revenue generated from products trading decreased by 28.4% from
RMB575.9 million in 2021 to RMB412.3 million in 2022 as a result of the decrease in trading
volume of petroleum toluene from approximately 112,272 tons to 54,823 tons in the
corresponding years. This decrease in sales volume and overall revenue was due to our
increased internal demand for petroleum toluene for our production needs and market
fluctuations in 2022. The trading volume of petroleum toluene further decreased to 49,295
tons in 2023 primarily due to the reduction in our procurement in light of the unfavorable
market sentiment in the chemical industry which in turn reduces the volume of petroleum
toluene available for trading.
Following the implementation of our future plans and completion of the Global Offering,
our Directors believe that we will continue to maintain our market ranking in toluene
oxidation and toluene chlorination products and successfully expand our business operations
in the toluene derivative products industry in the PRC and the global market. We believe that
we are well-positioned to explore opportunities in the larger organic synthetic chemical
market with our competitive strengths, existing capabilities and strategic planning.
OUR COMPETITIVE STRENGTHS
We believe the following competitive strengths have allowed us to establish our market
position and contributed to our success: (i) we are a market leading and top-ranked
manufacturer for the production of toluene oxidation and toluene chlorination products for a
variety of use in domestic and industrial applications; (ii) our brand and reputation are
propelled by our rich and diverse portfolio of products strategically designed for our four
primary industries, namely (a) food preservatives, (b) household chemicals, (c) animal feed
acidifier and (d) synthetic intermediates for agrochemical and pharmaceutical use; (iii) our
cost-efficient manufacturing process and refined manufacturing equipment are driven by our
advanced research and development capabilities; (iv) our leading market position is elevated
by our extensive distribution network for our products; (v) our continuing and sustainable
commercial success are based on our strong and cohesive customer base; and (vi) our
experienced management team with proven track records provides exemplary leadership to
guide our growth.
OUR BUSINESS STRA TEGIES
We aim to achieve sustainable growth in our production capacity and enhance our market
position by implementing the following strategies: (i) continue to expand our production
capacity to sustain our long-term economy of scale and profitability; (ii) timely respond to
changes in market circumstances by adjusting sales and pricing strategies; (iii) further
increase our domestic and international market shares by forming in-depth cooperations with
established market participants; (iv) further enhance our research and development
capabilities to develop high value products; and (v) expand our sales and marketing network
in the global market.
SUMMARY
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OUR BUSINESS OPERA TING DA TA
The following table sets forth the average sales price (“ ASP”), sales volume and gross
profit margin of our products for the periods indicated:
Y ear ended December 31,
2021 2022 2023
ASP
Sales
volume
Gross profit
margin ASP
Sales
volume
Gross profit
margin ASP
Sales
volume
Gross profit
margin
RMB
per ton tons
RMB
per ton tons
RMB
per ton tons
Sale of self-produced products 8,909 248,462 28.7% 8,536 318,818 24.3% 7,957 279,147 14.1%
Toluene oxidation products 8,145 161,028 29.6% 9,150 169,962 20.0% 8,267 164,071 (1) 10.0%
– benzoic acid 7,288 103,224 32.0% 8,053 113,050 17.2% 7,367 106,487 7.6%
– sodium benzoate 9,600 46,994 29.2% 11,002 49,361 23.5% 9,670 45,245 14.0%
– others 9,997 10,810 14.7% 13,470 7,551 25.9% 10,893 12,339 10.6%
Toluene chlorination products 9,519 51,217 18.7% 13,411 61,988 27.5% 11,235 52,299 19.5%
– benzyl chloride 6,784 18,398 21.7% 9,508 19,924 31.9% 7,870 15,863 23.6%
– benzyl alcohol 11,052 32,819 17.6% 15,260 42,064 26.3% 12,701 36,436 18.4%
Benzoic acid ammonification products 29,920 7,921 54.6% 28,232 4,619 52.5% 17,415 6,675 32.2%
– benzonitrile 15,371 3,143 42.4% 18,540 1,467 43.2% 14,995 2,637 29.3%
– benzoguanamine 39,493 4,778 57.8% 32,738 3,152 54.9% 18,995 4,038 33.7%
Other fine chemical products 6,273 28,296 15.1% 2,488 82,249 26.0% 2,867 56,102 16.5%
Sale of products trading 5,059 113,840 0.6% 7,230 57,030 9.2% 6,807 67,000 3.5%
Toluene product trading 4,819 112,272 (0.5)% 6,581 54,823 6.9% 6,493 49,295 3.8%
Other products trading 22,253 1,568 18.1% 23,344 2,207 25.2% 7,679 17,705 2.8%
Total 362,302 375,848 346,147
Note:
(1) Including sales volume of products processed by Hebei Kangshi under the entrusted processing service
arrangement.
The ASPs of our self-produced products decreased from RMB8,909 per ton in 2021 to
RMB8,536 per ton in 2022, and further decreased to RMB7,957 per ton in 2023. The ASPs of
our self-produced products are primarily affected by the price fluctuation of raw materials,
and petroleum toluene, in particular, as our major raw material used. In addition, we also
adjust our pricing strategy based on market demands and supplies. In light of the weak
chemical market sentiment and the weak downstream demand in 2023, we lowered our ASPs
for our self-produced products to ensure our market competitiveness and maintain our market
position and the utilization rate of our production facilities at an optimal level. If the market
experiences excessive demands, we would raise our ASPs, and vice versa.
We recorded significant increase in the sales volume of our self-produced products from
approximately 248,462 tons in 2021 to 318,818 tons in 2022. In particular, sales volume of
benzoic acid increased from approximately 103,224 tons in 2021 to 113,050 tons in 2022. The
increase in sales volume of benzoic acid were primarily due to a ban on the use of antibiotics
in animal feed additive implemented by the PRC government in July 2020, where benzoic acid
SUMMARY
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is a viable replacement for antibiotics, and our Company is one of the few manufacturers
capable of producing the qualified feed-level benzoic acid in the PRC market. We experienced
a decrease in sales volume in 2023 to 279,147 tons primarily due to the unfavorable economic
environment in the PRC and globally. Our customers, mainly in food additives, feed additives,
pesticide intermediate market, and pharmaceutical intermediate market, were adversely
impacted. Many of them have been lowering their production and inventory levels in light of
the economic uncertainty, which consequentially reduces their demand for our products and
therefore the sales volume of our products.
Our gross profit margin for sales of self-produced products decreased from 28.7% in
2021 to 24.3% in 2022, and further decreased to 14.1% in 2023. The gross profit margin of our
products may fluctuate in tune with market supply and demand. In particular, the decrease in
gross profit margin in 2022 and 2023 is mainly attributed to the decrease in margin of our
toluene oxidation products, from 29.6% in 2021 to 20.0% in 2022 due to the increase in raw
material costs of petroleum toluene from approximately RMB4,973 per ton in 2021 to
RMB6,710 per ton in 2022 was not fully transferred to our customers, and further to 10.0% in
2023 due to the decrease in downstream demands amid economic uncertainty and the increase
in market supply which intensified market competition. The gross profit margin of our toluene
chlorination products also decreased from 27.5% in 2022 to 19.5% in 2023 amid economic
uncertainty which reduces downstream demand.
The significant decrease in gross profit margin in 2023 was mainly attributed to the
decrease in average selling price. On the demand side, there was a contraction in downstream
customer demand amid the unfavourable economic environment and weak consumer
sentiment. On the supply side, several industry participants increased their production
capacity in toluene oxidation products in 2023 which caused the increase in market supply.
These circumstances exerted significant pressure on our pricing. Such market circumstances
was completely opposite to the market position in the first half of 2022 where the demand was
higher than the supply and put the chemical manufacturers in a good market position.
Therefore, to react to the above mentioned difficult market condition in 2023, we adjusted our
business strategy and lowered the selling prices of our products in order to effectively
compete with our competitors for the smaller number of available sales orders in the market so
as to maintain our market position and the utilization rate of our production facilities at an
optimal level. For detailed analysis, please refer to “Business — Business Developments in
2023” and “Financial Information — Discussion of Results of Operations” in this prospectus.
Our foremost business strategy in 2023 was to maintain our market share and the utilization
rate of our production facilities at an optimal level in light of the market circumstances, as
compared to 2022 which the primary focus was on maintaining an optimal gross profit margin.
We also engaged in products trading during the Track Record Period, which
complements our self-produced products sales and enhances customers cohesiveness for our
business operation by providing customers with various trading products. Trading volume
during the Track Record Period decreased from approximately 113,840 tons in 2021 to 57,030
tons in 2022, and increased to 67,000 tons in 2023. We recorded minimal gross profit margin
of 0.6% for our products trading in 2021, primarily due to the relative stable petroleum
toluene price in the corresponding year. We recorded higher gross profits from products
trading in 2022 and 2023 because we resold our surplus petroleum toluene at a higher price
compared to our purchase price. When our raw material inventory meets or exceeds the
requirements for our production, we may engage in toluene product trading business to sell
our surplus inventory by obtaining information and tracking market opportunities on the
Independent Commodity Intelligence Services to improve our cash-flow position.
SUMMARY
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We conduct products trading primarily to maintain a stable and sufficient supply of raw
materials for our manufacturing, and it also helps us to enhance and develop our relationship
with clients and to better manage our inventories in raw materials. Therefore, despite
fluctuating profit margins, we anticipate greater business advantages in the long run and will
continue to engage in products trading. During the Track Record Period and up to the Latest
Practicable Date, products trading of our Group were all conducted through direct sales.
For the detailed analysis on the fluctuations of the sales volume and gross profit margin
of our main products under our business segments of self-produced products sales and
products trading during the Track Record Period, please refer to “Financial Information —
Description of Key Statement of Profit or Loss Items” in this prospectus.
OUR CONTROLLING SHAREHOLDERS
As of the date of this prospectus, Mr. Gao, through his wholly-owned investment holding
vehicle Vastocean Capital Limited, holds 66.86% of the issued shares capital of our Company.
Immediately upon completion of the Global Offering (assuming the Over-allotment Option is
not exercised), Mr. Gao will, indirectly and beneficially, be entitled to exercise 53.75% of the
voting power at general meetings of our Company. Accordingly, upon Listing, Mr. Gao and
Vastocean Capital Limited will constitute a group of controlling shareholders of our Company
under the Listing Rules. For details, please refer to “Relationship with our Controlling
Shareholders” in this prospectus.
SALES AND CUSTOMERS
We have a dedicated sales team responsible for the overall management of our sales and
marketing activities. Our sales team is responsible for business development, product delivery
liaison and post-sales services under our direct sales model. In addition, our sales team is also
responsible for maintaining regular contact with our distributors as well as coordinating with
manufacturers and trading companies for our products trading business. Our sales team
leaders report to the directors of their respective sales division, who then report to our
president.
Our products are sold by means of direct sales channel and distribution sales channel.
The extensive coverage of our well-rounded distribution network in the PRC and global
market enables us to reach a broader customer base. The table below sets out the breakdown of
our sales by channels during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
total
revenue
Gross
profit
margin
Direct sales channel
– Direct sales 1,224,453 43.9 30.0% 1,624,669 51.8 26.0% 1,226,480 45.8 14.9%
– Products trading 575,926 20.6 0.6% 412,336 13.2 9.2% 456,039 17.0 3.5%
Distribution sales channel
– Distribution sales 989,098 35.5 26.9% 1,096,831 35.0 21.8% 994,584 37.2 13.2%
Total 2,789,477 100.0 22.9% 3,133,836 100.0 22.3% 2,677,103 100.0 12.3%
SUMMARY
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The gross profit margin of our direct sales and distribution sales decreased to 26.0% and
21.8%, respectively, in 2022, which was primarily due to the market-oriented pricing policy
we adopted in 2022 for our toluene oxidation products. In the same year, the gross profit
margin of products trading increased significantly to 9.2%, which was mainly because we had
been able to capture the favourable market price trend in the first half of 2022 in selling the
surplus products at a higher price.
The overall decrease in gross profit margin in 2023 as compared with that of 2022 was
primarily due to the decrease in margin of our toluene oxidation products and toluene
chlorination products from 20.0% and 27.5% in 2022 to 10.0% and 19.5% in 2023. The
decreases in 2023 were due to the decrease in downstream demands as many downstream
industry customers tend to lower their inventory level or slow down their inventory
replenishment amid economic uncertainty and the increase in market supply of toluene
oxidation products which intensified market competition, which exerted significant pressure
on our pricing. We also strategically lowered our sales prices so as to maintain the utilization
of our production plant and to enhance our market position. For details, please refer to
“Business — Business Developments in 2023” and “Business — Our Strategies” in this
prospectus.
As of December 31, 2023, we sold our products in the PRC and more than 70 other
countries in the global market. The table below sets forth an analysis of our revenue by
customer location for the periods indicated:
Y ear ended December 31,
2021 2022 2023
RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
total
revenue
Gross
profit
margin
Mainland China 2,171,112 77.8 21.4% 2,452,017 78.2 20.7% 2,060,003 76.9 10.8%
Asia (except Mainland
China) 262,513 9.4 28.1% 308,110 9.8 28.7% 287,508 10.7 19.8%
The Americas 212,821 7.6 32.3% 159,116 5.1 33.2% 135,882 5.1 18.1%
Europe 119,477 4.3 22.2% 185,654 5.9 23.6% 175,848 6.6 13.0%
Other countries/regions 23,554 0.9 23.7% 28,939 1.0 23.2% 17,862 0.7 10.1%
Total 2,789,477 100.0 22.9% 3,133,836 100.0 22.3% 2,677,103 100.0 12.3%
During the Track Record Period, our gross profit margin in mainland China slightly
decreased from 21.4% in 2021 to 20.7% in 2022 primarily due to our adoption of a pricing
strategy to sell our toluene oxidation products at a relatively lower price in light of the market
competition and to gain market share in 2022. Our gross profit margin in mainland China
further decreased to 10.8% in 2023, which was primarily due to the decrease in margin of our
toluene oxidation products and toluene chlorination products from 20.0% and 27.5% in 2022
to 10.0% and 19.5% in 2023 due to the decrease in downstream demands as many downstream
industry customers tend to lower their inventory level or slow down their inventory
replenishment amid economic uncertainty and we adopted a pricing strategy to sell our
products at a relatively lower price to maintain our market share in light of the unfavourable
industry environment and to cope with the intensified market competition resulted from the
increase in market supply of toluene oxidation products. For details of our strategy in
SUMMARY
–7–


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response to the changes in market circumstances, please refer to “Business — Our Strategies
— Timely respond to changes in market circumstances by adjusting sales and pricing
strategies” in this prospectus.
Our gross profit margin in the overseas markets remained relatively stable from 2021 to
2022. Our gross profit margin in the overseas markets experienced an overall decrease in 2023
due to the downward trend in the overseas market demands for the same reasons as for
domestic sales as well as higher inventory purchased by the overseas customers in 2022 in
light of the then transportation restriction amid COVID-19 related measures in the PRC. In
addition, we adopted a pricing strategy to sell our products at a relatively lower price to
maintain our market share in light of the unfavourable industry environment and to cope with
the intensified market competition resulted from the increase in market supply of toluene
oxidation products.
PROCUREMENT AND SUPPLIERS
The principal raw materials for our production are chemicals, including petroleum
toluene, sodium hydroxide, chlorine and sodium carbonate, which we purchase from our
suppliers. We also source various other types of materials and equipment from our suppliers,
such as additives, solvents, pumps, distillation towers, reaction kettles, storage tanks and
packaging materials. Our customers usually do not designate suppliers for raw materials and
equipment.
We have established a comprehensive procurement management system as well as the
associated procurement policies. The warehouse management department draws up the
procurement plan for raw materials and packaging materials according to the production plan
issued by the production department according to the actual stock levels; the functional
departments of each workshop draw up the procurement plan for regular materials according
to the actual needs. The supply department is responsible for generating purchase orders
based on the procurement plan and placing them with the suppliers effectively. For equipment
and other materials, we conduct procurement after receiving procurement requests from
relevant departments.
Except for certain bulk materials, such as petroleum toluene, we have multiple sources
for our raw materials to reduce possible interruptions to our business operations and
over-reliance on any individual supplier. We closely monitor the supply and demand
conditions of raw materials and make corresponding adjustments in our procurement plan if
there is any anticipated shortage of supply or price changes. During the Track Record Period,
we did not experience any difficulty in sourcing suppliers for raw materials or any material
production disruption due to shortage of raw materials.
Purchases with our suppliers are generally made by individual purchase orders with
reference to our production plans and demand for our products. For certain bulk material
suppliers, we sign annual framework agreements with these suppliers to specify the quantity
and tentative price of raw materials to be supplied throughout the year. We include in our
purchase orders for raw materials the product specifications, quantity and quality, payment
terms, delivery schedules and liability for breach of contract. Our purchase orders for
equipment also include additional terms such as warranty and intellectual property rights. We
did not entered into long-term sales and purchase agreements with our suppliers during the
Track Record Period, as our Directors believe that it is an industry practice for maintaining
SUMMARY
–8–


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flexibility both in terms of the purchase quantity and price. During the Track Record Period
and up to the Latest Practicable Date, we did not adopt any hedging policies for the
fluctuations in the prices of raw materials and products.
PRODUCTION PLANTS AND EXPANSION PLAN
During the Track Record Period, we had two production plants in operation through our
wholly-owned subsidiaries, namely our Wuhan Production Plant and Qianjiang Xinyihong
Production Plant, with an aggregate site area of 326,618.9 sq.m. and an aggregate gross floor
area of 78,256.0 sq.m., located in Wuhan and Qianjiang, Hubei Province. Each of our
production plants is designed for the production of designated products with built-in
flexibility.
Current Production Capacity and Utilization Rate
The following table sets forth the designed production capacity, actual production
volume and utilization rate of our manufacturing facilities at our Wuhan Production Plant and
Qianjiang Xinyihong Production Plant during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
Wuhan Production Plant
Designed Production Capacity (1) (tons) 302,500 302,500 302,500
Actual Production V olume (2) (tons) 309,683 371,579 314,679
Utilization Rate (3) 102.4% 122.8% 104.0%
Qianjiang Xinyihong Production Plant
Designed Production Capacity (1) (tons) 144,040 144,040 144,040
Actual Production V olume (2) (tons) 132,190 132,050 124,414
Utilization Rate (3) 91.8% 91.7% 86.4%
Notes:
(1) The designed production capacity figures are calculated based on a number of assumptions, including
the operation hours. The figures for the years ended December 31, 2021, 2022 and 2023 are based on the
assumption that each production plant operates approximately 8,000 hours per year (i.e., 330 days per
year). The designed production capacity is calculated with reference to (i) the annual production
capacity of our Group’s production equipment as designated by the equipment manufacturers and (ii)
the registration documents our Group filed with the PRC authorities for our production facilities.
(2) Actual production is the actual number of products manufactured by our Group for the indicated period,
including self-produced products and those used as raw material for other self-produced products. As
certain portion of self-produced products was used as raw materials for the manufacturing of our
Group’s other self-produced products, our Group’s production volume may exceed the sales volume of
our self-produced products during the Track Record Period.
SUMMARY
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(3) Our actual production volume may exceed the designed production capacity, which leads to utilization
rates exceeding 100% due to (i) certain self-produced products manufactured by our Group can be sold
as a final product or can be further refined for the production of refined products of the same category,
and (ii) technical improvements we adopted in our manufacturing process which enable our actual
production volume to exceed certain designed production capacity. According to our PRC Legal
Advisors, only production volume of the end products is relevant for the assessment of our compliance
with the production volume limit approved in the relevant registration documents that filed with the
PRC authorities, but not the production volume used in the calculation of the utilisation rate. Therefore,
provided that the production volume of the end products during the Track Record Period is within the
production volume limit approved in the relevant registration documents that filed with the PRC
authorities, our manufacturing operation complies with the relevant laws and regulations in the PRC.
According to Frost & Sullivan, based on public information disclosed by listed companies, it is a
common situation for manufacturing companies to operate with a utilization rate exceeding 100%.
In addition, our joint venture, Hebei Kangshi also operates the Hebei Kangshi Production
Plant. It has a designed production capacity of 79,000 tons per year and commenced
production in January 2023. We entered into an entrusted processing service agreement with
Hebei Kangshi in September 2023. For details, please refer to “Business — Business
Cooperation with Major Market Participants — Cooperation with SINOPEC — Hebei
Kangshi Production Plant” in this prospectus.
Production Expansion Plan
The following table sets forth certain information regarding our planned production
facilities, including those that are currently under development:
Production facility Phase
Actual
construction
date
Expected capital expenditure (1) Expected payback
years since
production (2)use of proceeds internal resources
(RMB’million)
Hubei Xinxuanhong
Production Plant
Phase I July 2023 11.9 188.1 3
Phase II N/A (3) 27.8 522.2 6.9
Total 39.7 710.3
Notes:
(1) expected to be financed by a combination of IPO proceeds and internal resources, and is expected to be
incurred throughout the construction period up to 2029. As of December 31, 2023, we had incurred
capital expenditures of RMB55.1 million for the construction of Hubei Xinxuanhong Production Plant.
(2) derived from the feasibility study report for the respective production plant, which was primarily
calculated by the estimated total investment amount divided by the expected annual profit.
(3) The Phase II construction is expected to commence in the second half of 2025.
SUMMARY
–1 0–


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Designed annual production capacity for major products before and after production
expansion plan
During the Track Record Period, we operated two production plants: our Wuhan
Production Plant and Qianjiang Xinyihong Production Plant and our joint venture operated the
Hebei Kangshi Production Plant. We also plan to expand our production capacity through the
establishment of Hubei Xinxuanhong Production Plant. The following table sets forth the
designed annual production capacity of the production facilities operated by our subsidiaries
for our major products before and after our production expansion plan:
As of December 31, 2023
After Completion of
Production Expansion Plan
Wuhan
Production
Plant (2)
Qianjiang
Xinyihong
Production
Plant (2)
Wuhan
Production
Plant (2)
Qianjiang
Xinyihong
Production
Plant (2)
Hubei
Xinxuanhong
Production
Plant (3)
(tons) (tons)
Toluene oxidation products
– benzoic acid 200,000 – 200,000 – –
– sodium benzoate 65,000 – 65,000 – –
– others 12,000 – 12,000 – –
Toluene chlorination products
– benzyl chloride – 74,000 – 74,000 100,000
– benzyl alcohol – 60,000 – 60,000 50,000
Benzoic acid
ammonification products
– benzonitrile 10,000 – 10,000 – –
– benzoguanamine 5,000 – 5,000 – –
Other fine chemical products 10,500 10,040 10,500 10,040 150,000
Designed Annual
Production Capacity
(1) 302,500 144,040 302,500 144,040 300,000
In addition, as at the Latest Practicable Date, our joint venture operated the Hebei
Kangshi Production Plant, which has a designed annual production capacity which mainly
include approximately 60,000 tons of industrial-grade benzoic acid, 15,000 tons of sodium
benzoate, 2,000 tons of benzaldehyde and 2,000 tons of benzyl benzoate. The Hebei Kangshi
Production Plant commenced production in January 2023. We entered into an entrusted
processing service agreement with Hebei Kangshi in September 2023. For details, please refer
to “Business — Business Cooperation with Major Market Participants — Cooperation with
SINOPEC — Hebei Kangshi Production Plant” in this prospectus.
SUMMARY
–1 1–


--- page 20 ---
Notes:
(1) The designed annual production capacity figures are calculated based on a number of assumptions,
including the assumption that each production plant operates approximately 8,000 hours per year.
(2) The Wuhan Production Plant and the Qianjiang Xinyihong Production Plant are not part of our
“Production Expansion Plan”.
(3) The designed production mainly includes toluene chlorination products and other fine chemical
products. The Hubei Xinxuanhong Production Plant will be developed in phases up to 2029. The Phase
I production is expected to begin in the second half of 2024 with a designed production capacity of
40,000 tons, and the Phase II production is expected to commence in the second half of 2026 with the
remaining production capacity being developed and put into use in stages up to 2029.
For details, please refer to “Business — Production Expansion Plan” in this prospectus.
SUMMARY OF HISTORICAL FINANCIAL INFORMA TION
Selected Information on Our Consolidated Statements of Profit or Loss
The table below presents a summary of our consolidated statement of profit or loss and
other comprehensive income for the periods indicated:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Revenue 2,789,477 3,133,836 2,677,103
Cost of sales (2,150,355) (2,434,558) (2,347,338)
Gross profit 639,122 699,278 329,765
Selling and distribution expenses (19,820) (24,009) (20,717)
Administrative expenses (100,457) (116,498) (95,416)
Research and development expenses (110,831) (133,001) (99,959)
Profit before tax 393,536 427,690 94,738
Profit for the year 309,137 340,470 72,902
Our total revenue increased by 12.3% from RMB2,789.5 million in 2021 to RMB3,133.8
million in 2022, primarily due to the increase in average sales price and sales volume of our
toluene oxidation and chlorination products, and partially offset by the decrease in average
sales price and sales volume of our benzoic acid ammonification products and the decrease in
sales volume of toluene trading products. In particular, the sales volume of our toluene
chlorination products increased by 21.0% from 51,217 tons in 2021 to 61,988 tons in 2022 as
a result of the market supply shortages. The total sales volume of our products increased from
approximately 362,302 tons to 375,848 tons in 2021 and 2022, respectively.
Our total revenue decreased by 14.6% from RMB3,133.8 million in 2022 to RMB2,677.1
million in 2023, primarily due to the decrease in downstream demand amid the unfavorable
economic environment in the PRC and globally. We lowered the selling prices of our products
in order to effectively compete with our competitors for the smaller number of available sales
orders so as to maintain our market position and the utilization rate of our production facilities
SUMMARY
–1 2–


--- page 21 ---
at an optimal level and to keep our market share. Our revenue was therefore adversely affected
during the period. The total sales volume of our products decreased from approximately
375,848 tons in 2022 to 346,147 tons in 2023 and the average selling price of our
self-produced products also dropped from RMB8,536 per ton to RMB7,957 per ton in the
corresponding periods resulting in a decrease in revenue in 2023.
During the Track Record Period, we incurred cost of sales of RMB2,150.4 million,
RMB2,434.6 million and RMB2,347.3 million in 2021, 2022 and 2023, respectively. Our cost
of sales increased by 13.2% from RMB2,150.4 million in 2021 to RMB2,434.6 million in
2022 primarily due to the increase in total sales volume from approximately 362,302 tons to
375,848 tons in the corresponding years. Our cost of sales decreased by 3.6% from
RMB2,434.6 million in 2022 to RMB2,347.3 million in 2023, as a result of the decrease in
total sales volume of our self-produced products from approximately 318,818 tons to 279,147
tons and toluene product trading from approximately 54,823 tons to 49,295 tons for the
corresponding periods. In addition, the average unit price of petroleum toluene, our primary
raw materials, increased from approximately RMB4,973 per ton in 2021 to RMB6,710 per ton
in 2022, and slightly decreased to RMB6,654 per ton in 2023. As confirmed by Frost &
Sullivan, the average unit price of the primary raw material of toluene and toluene-derived
chemical products may be affected and fluctuate correspondingly with the macro-environment
of global politics and economy. Generally, an increase/decrease in average unit price of
petroleum may result in an increase/decrease in average unit price of petroleum toluene, the
primary raw material of our products, and further leads to an increase/decrease in the sales
price of our self-produced products.
During the Track Record Period, we generated net profits of RMB309.1 million,
RMB340.5 million and RMB72.9 million in 2021, 2022 and 2023, respectively, which
demonstrate our business’s profitability. Our net profit increased by 10.1% from RMB309.1
million in 2021 to RMB340.5 million in 2022, primarily due to the increase in gross profit by
9.4% from RMB639.1 million to RMB699.3 million in the corresponding years that mainly
resulting from the increase in gross profit of our toluene chlorination products, primarily due
to the decrease in overall market supply caused by a PRC manufacturer’s termination of
toluene chlorination production. As a market leader, our ability to supply these products
increased our market bargaining power and enabled our growth in net profit in 2022 and
offset, the decrease in gross profit of toluene oxidation products and benzoic acid
ammonification products resulting from the increase in average unit cost. Our net profit
decreased by 78.6% from RMB340.5 million to RMB72.9 million in 2023, primarily due to
the decreased gross profit in 2023 by RMB369.5 million which resulted from the decrease in
downstream market demands and the intensified market competition and our strategic move to
sell our products at a lower price in order to maintain our market position and the utilization
rate of our production facilities as explained above and partially offset by the decrease in
income tax of RMB65.4 million. Please refer to “Business — Our Strategies — Timely
respond to changes in market circumstances by adjusting sales and pricing strategies” and
“Business — Market Developments in 2023” in this prospectus for details of the changes in
market circumstances and our responses.
SUMMARY
–1 3–


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Selected Information on Our Consolidated Statements of Financial Position
The table below sets forth the major items of our consolidated statements of financial
position as of the dates indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Total non-current assets 1,182,574 1,292,451 1,283,308
Total current assets 1,753,796 864,887 832,574
Total current liabilities 1,228,303 1,218,688 1,422,654
Total non-current liabilities 187,749 212,543 163,611
Net current assets/(liabilities) 525,493 (353,801) (590,080)
Net assets 1,520,318 726,107 529,617
We recorded net current assets of RMB525.5 million as at December 31, 2021 and
recorded net current liabilities of RMB353.8 million and RMB590.1 million as at December
31, 2022 and 2023, respectively. Our net current liabilities as at December 31, 2022 was
primarily due to the dividend of RMB1,013.0 million and RMB89.8 million declared in
February and December 2022, respectively, to our shareholders. Our net current liabilities as
at December 31, 2023 further increased to RMB590.1 million primarily due to dividend of
RMB270.0 million declared in 2023 to our shareholders. For details of the dividend
distribution of our Group, please refer to “Financial Information — Dividend” in this
prospectus.
We had net assets of RMB1,520.3 million, RMB726.1 million and RMB529.6 million as
of December 31, 2021, 2022 and 2023, respectively. The decrease in our net assets in 2022
was mainly due to (i) total dividends of RMB1,102.8 million (including dividends of
RMB1,013.0 million and RMB89.8 million declared in February 2022 and December 2022,
respectively); and (ii) repurchase of shares amounted to RMB33.0 million in 2022, and
partially offset by the net profit recorded in 2022 of RMB340.5 million. Our net assets
decreased to RMB529.6 million as of December 31, 2023 mainly attributable to the dividends
of RMB270.0 million declared and partially offset by the net profit of RMB72.9 million in
2023. For details, please refer to the Consolidated Statements of Change in Equity and related
notes of “Appendix I — Accountant’s Report” in this prospectus.
SUMMARY
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--- page 23 ---
Selected Information on Consolidated Statements of Cash Flows
The table below sets forth a summary of our cash flows for the periods indicated:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Net cash flows from operating
activities 124,233 148,362 160,529
Net cash flows from/(used in)
investing activities (236,724) 53,904 (79,831)
Net cash flows from/(used in)
financing activities 139,713 (188,969) (98,905)
Net increase/(decrease) in cash and
cash equivalents 27,222 13,297 (18,207)
Cash and cash equivalents at
beginning of year 42,354 69,461 83,451
Effect of foreign exchange rate
changes (115) 693 189
Cash and cash equivalents at end of
year 69,461 83,451 65,433
During the Track Record Period, our cash flows from operating activities were generated
primarily from our self-produced products sales and products trading. For the year ended
December 31, 2021, 2022 and 2023, we recorded continuous positive cash flows from our
operating activities.
For the year ended December 31, 2023, our net cash flows from operating activities of
RMB160.5 million reflect our profit before tax of RMB94.7 million, as positively adjusted
primarily by (i) a decrease in inventories of RMB33.4 million, and (ii) depreciation of
property, plant and equipment of RMB111.2 million, and was partially offset by negative
adjustment of increase in trade and bills receivables of RMB91.0 million.
For the year ended December 31, 2022, our net cash flows from operating activities of
RMB148.4 million reflect our profit before tax of RMB427.7 million, as negatively adjusted
primarily by (i) an increase in trade and bills receivables of RMB205.1 million; and (ii)
income tax paid of RMB195.4 million, and partially offset by positive adjustment of
depreciation of property, plant and equipment of RMB99.1 million.
For the year ended December 31, 2021, our net cash flows from operating activities of
RMB124.2 million reflect our profit before tax of RMB393.5 million, as negatively adjusted
primarily by (i) an increase in inventories of RMB189.5 million, and (ii) an increase in trade
and bills receivables of RMB264.3 million, partially offset by positive adjustment of
depreciation of plant and equipment of RMB93.7 million.
SUMMARY
–1 5–


--- page 24 ---
For the detailed analysis on the cash flows of our Group, please refer to “Financial
Information — Liquidity and Capital Resources” in this prospectus.
KEY FINANCIAL RA TIOS
The following table sets forth certain of our key financial ratios as of the dates and for the
periods indicated:
Y ear ended December 31,
2021 2022 2023
Gross profit margin (1) 22.9% 22.3% 12.3%
Net profit margin (2) 11.1% 10.9% 2.7%
Return on Equity (3) 20.3% 46.9% 13.8%
Return on Assets (4) 10.5% 15.8% 3.4%
As at December 31,
2021 2022 2023
Current Ratio (5) 1.4 0.7 0.6
Gearing Ratio (6) 41.3% 87.2% 158.5%
Notes:
(1) Gross profit margin equals gross profit divided by revenue for the periods.
(2) Net profit margin equals profit for the periods divided by revenue for the periods.
(3) Return on equity equals profit for the periods divided by total equity as at end of the periods.
(4) Return on assets equals profit for the periods divided by total assets as at end of the periods.
(5) Current ratio equals current assets divided by current liabilities as of the end of the periods.
(6) Gearing ratio equals net debt divided by total equity as at end of the periods.
Our return on equity increased from 20.3% for the year ended December 31, 2021 to
46.9% for the year ended December 31, 2022, primarily attributed to our increase in net
profits generated and the dividend distributions in 2022. Our return on equity decreased to
13.8% for the year ended December 31, 2023, primarily attributed to our significant decrease
in net profits in 2023. For details of our key financial ratios, please refer to “Financial
Information — Key Financial Ratios” in this prospectus.
SUMMARY
–1 6–


--- page 25 ---
OFFERING STA TISTICS
All statistics in the following table are based on the assumptions that (i) the Global
Offering has been completed and 18,300,000 new Shares are issued pursuant to the Global
Offering; (ii) 93,300,000 Shares are in issue immediately following the completion of the
Global Offering; and (iii) the Over-allotment Option is not exercised.
Based on the low end
of the indicative
Offer Price Range of
HK$5.5 per Share
Based on the
mid-point of the
indicative Offer Price
Range of HK$7.0 per
Share
Based on the high
end of the indicative
Offer Price Range of
HK$8.5 per Share
Market capitalization of our Shares (1) HK$513.2 million HK$653.1 million HK$793.1 million
Unaudited pro forma adjusted consolidated net
tangible asset per Share (2) HK$6.86 HK$7.16 HK$7.45
Notes:
(1) The calculation of market capitalization is based on 93,300,000 Shares expected to be in issue, with
18,300,000 Shares to be issued pursuant to the Global Offering, immediately upon completion of the
Global Offering.
(2) The unaudited pro forma adjusted consolidated net tangible assets value per Share is calculated after
making certain adjustments referred to in “Appendix II — Unaudited Pro Forma Financial Information”
in this prospectus.
USE OF PROCEEDS
Assuming an Offer Price of HK$7.0 per Offer Share, being the mid-point of the Offer
Price range stated in this prospectus, we will receive net proceeds of approximately HK$53.3
million from the Global Offering after deducting the underwriting commissions and other
estimated expenses in connection with the Global Offering, assuming the Over-allotment
Option is not exercised. We intend to use the net proceeds from the Global Offering for the
following purposes:
• approximately 82.0% of the net proceeds from the Global Offering (or
approximately HK$43.7 million), will be used to increase our production capacity
by constructing new production facilities at Hubei Xinxuanhong Production Plant;
• approximately 3.0% of the net proceeds from the Global Offering (or approximately
HK$1.6 million), will be used for our research and development activities;
• approximately 5.0% of the net proceeds from the Global Offering (or approximately
HK$2.7 million), will be used for sales and marketing activities to enhance our
brand recognition in the PRC and overseas; and
• approximately 10.0% of the net proceeds from the Global Offering (or
approximately HK$5.3 million), will be used for our working capital and general
corporate purposes, including procurement of raw materials and management of
inventory level.
For details, please refer to “Future Plans and Use of Proceeds — Use of Proceeds” in this
prospectus.
SUMMARY
–1 7–


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LISTING EXPENSES
The total listing expenses of our Company are estimated to be approximately HK$74.8
million (or approximately RMB67.9 million) assuming the Over-allotment Option is not
exercised and based on an Offer Price of HK$7.0 (being the mid-point of our Offer Price range
of HK$5.5 to HK$8.5 per Offer Share), representing 58.4% of the gross proceeds from the
Global Offering. These listing expenses are mainly comprised of underwriting-related
expenses of approximately HK$14.9 million (or approximately RMB13.5 million), and
non-underwriting related expenses of approximately HK$59.9 million (or approximately
RMB54.4 million), which are comprised of (i) accountant and legal adviser fees and expenses
of approximately HK$37.4 million (or approximately RMB34.0 million) and (ii) printing and
other fees and expenses of approximately HK$22.5 million (or approximately RMB20.4
million). The listing expenses above are the latest practicable estimate for reference only, and
the actual amount may differ from this estimate.
The listing expenses incurred up to December 31, 2023 by our Company in relation to the
Listing and the Global Offering were RMB41.9 million, of which (i) RMB7.8 million,
RMB14.4 million and RMB10.1 million were charged to our consolidated statement of profit
or loss for the year ended December 31, 2021 and 2022 and 2023, respectively, and (ii)
RMB9.6 million will be deducted from equity upon Listing. We estimate that additional
listing expenses of approximately RMB26.1 million (including underwriting commissions
and other expenses, assuming the Over-allotment Option is not exercised and based on the
mid-point of our Offer Price range of HK$5.5 to HK$8.5 per Offer Share) will be incurred by
our Company, approximately RMB9.5 million of which is expected to be charged to our
consolidated statements of profit or loss, and approximately RMB16.6 million of which is
expected to be deducted from equity upon Listing.
LEGAL PROCEEDINGS AND NON-COMPLIANCE MA TTERS
From time to time, we may be subject to legal proceedings, investigations and claims
incidental to the conduct of our business. During the Track Record Period and up to the Latest
Practicable Date, we were not involved in any material litigation, arbitration or claims
(including personal injuries, employee compensation or product liability claims) and we are
not aware of any material litigation, arbitration or claims pending or threatened against us that
would have a material adverse effect on our business, financial condition or results of
operations. Our Directors are not involved in any actual or threatened claims or litigations.
However, we may from time to time become a party to various legal, arbitration or
administrative proceedings arising in the ordinary course of business.
During the Track Record Period, we had not committed and did not commit any material
non-compliance with the laws or regulations which, in the opinion of our management, is
likely to have a material adverse effect on our business, financial condition or results of
operations. We understand from our PRC Legal Advisors that, other than (i) our failure to (a)
complete certain inspections or filings; and (b) obtain certain building ownership certificates
as disclosed in the subsection headed “Business — Properties — Self-Owned Properties —
Buildings”, (ii) our failure to attend to (a) the “Three Simultaneities (ࣛprocedures for
the prevention and control of occupational disease hazards for certain sectors of the
construction project; and (b) the energy conservation review for certain projects as disclosed
in the subsection headed “Business — Environmental, Social and Governance —
Occupational Health and Work Safety” and (iii) the non-compliance of our Group relating to
SUMMARY
–1 8–


--- page 27 ---
advances arrangement as disclosed in the subsection headed “Business — Non-compliance
Relating to Advances Arrangement” in this prospectus, we had complied with all relevant laws
and regulations in all material respects during the Track Record Period and the subsequent
period up to the Latest Practicable Date.
RISK FACTORS
Our business operations and the Global Offering involve certain risks and uncertainties.
For further information, please refer to “Risk Factors” in this prospectus. Some of the major
risk factors include: (i) any shortage in supply of raw materials or material fluctuation in their
purchase prices may adversely affect our profit margins and results of operation; (ii) any
change in demand may adversely affect our revenue and profitability as we generate a
substantial portion of our revenue through the sales of our self-produced products; (iii) we
experienced fluctuation in our financial performance during the Track Record Period and our
historical performance may not be indicative of our future performance; (iv) we rely on our
distributors for the sale of our products to their respective end customers. Termination of or
failure to renew our distribution relationship with our distributors may significantly decrease
the sale of our products; (v) we may be subject to liability in connection with accidents that
occur during the production process at our production facilities due to, amongst others, failure
to comply with safety measures and procedures; and (vi) we rely on certain key personnel and
may not be able to retain their services.
DIVIDEND
During the Track Record Period, we declared and distributed dividends of RMB1,013.0
million, RMB89.8 million and RMB270.0 million in February 2022, December 2022 and
December 2023, respectively, to our shareholders (the “ Dividends ”). Among the Dividends of
RMB1,372.8 million in aggregate, (i) dividends of RMB886.0 million in aggregate was used
to offset our Group’s receivables due from Linuo Group and Linuo Investment; (ii) dividends
of RMB353.7 million in aggregate was paid in cash to shareholders other than the Wuhan
Youji Employee Trust as of the Latest Practicable Date; and (iii) dividends of RMB133.1
million were distributed to the Wuhan Youji Employee Trust, including (a) dividends of
RMB21.4 million attributable to 632 contactable shareholders which were fully settled as of
the Latest Practicable Date and (b) the remaining dividends attributable to 4,713 shareholders
that could not be contacted as of the Latest Practicable Date. We are undertaking continuous
effort to contact these shareholders through news publication of the dividend payment,
contacting these shareholders through their last known contact information, actively
monitoring and responding to the municipal hotline and Wuhan Youji Employee Trust
consultation hotline and encouraging word-of-the-mouth dissemination of this dividend
payment by employees. For details of the dividend distribution of our Group, please refer to
“Financial Information — Dividend” in this prospectus.
Currently, we do not have a formal dividend policy or a fixed dividend distribution ratio.
Subject to the Cayman Islands law and the Articles and Memorandum, the proposal of
payment and the amount of our dividends in the future will be made at the discretion of our
Board and will depend on our general business condition and strategies, cash flows, financial
results and capital requirements, the interests of our Shareholders, taxation conditions,
statutory and regulatory restrictions and other factors that our Board deems relevant. Any
declaration and payment of dividends will be subject to our constitutional documents and the
Companies Act. Under Cayman Islands law, dividends may be paid out of profit or, if the
Articles allow for it, out of share premium account of the Company provided relevant laws are
complied with. We will review our dividend policy from time to time.
SUMMARY
–1 9–


--- page 28 ---
NEW MEASURES ON OVERSEAS LISTING FILINGS
The China Securities Regulatory Commission (“ CSRC ”) promulgated Trial
Administrative Measures of the Overseas Securities Offering and Listing by Domestic
Companies ( ) (the “ Overseas Listing Trial
Measures ”) and five relevant guidelines on February 17, 2023, which became effective on
March 31, 2023. The Overseas Listing Trial Measures regulate both direct and indirect
overseas offering and listing by PRC domestic companies’ by adopting a filing-based
regulatory regime. For more details, please refer to “Regulatory Overview — Regulatory
developments on overseas listing — New measures on overseas listing filings” in this
prospectus.
Our PRC Legal Advisors are of the view that we are required to comply with the filing
requirements under the Overseas Listing Trial Measures. We have completed the filing
procedure with the CSRC with respect to the listing of our Shares on the Stock Exchange and
for the Global Offering on January 2, 2024.
MARKET DEVELOPMENTS IN 2023
The chemical industry, in particular toluene oxidation and chlorination products
industry, experienced a challenging year in 2023 as impacted by the uncertainty surrounding
the economic environment globally as well as in the PRC and the geopolitical tension, which
in turn has a widespread negative impact on the customers’ spending in various downstream
industries. Although our downstream customers mainly related to daily necessities such as
food and beverages and pharmaceutical which have relatively stable demands, they delay their
purchases and reduce their inventory level in light of the uncertain economic environment,
which in turn adversely affects their demand on chemical products. In addition, as petroleum
price remained at relatively low level throughout 2023, which resulted in the decrease in raw
material price of the Group’s products, the Group lowered the average selling price of its
products in response to the then market circumstances. According to the General
Administration of Customs of the PRC, export value of basic organic chemicals industry in the
PRC has dropped from approximately RMB515.1 billion in 2022 to RMB403.6 billion in
2023, decreasing at a rate of 21.5%. According to the National Bureau of Statistics, the
Purchasing Manager’s Index (PMI) was consistently below 50 throughout majority of 2023
while the Producer Price Index (PPI) in the PRC dropped from 9.1% in January 2022 to a
negative level since October 2022 and throughout 2023, which represent a contraction in the
upstream industries. At the same time, Consumer Price Index (CPI) in the PRC also dropped
to a level close to zero in 2023 indicating an overall weak consumer sentiment in 2023.
According to the World Bank, global economy shown a decelerating trend with the global
GDP growth fell from 3.0% in 2022 to 2.6% in 2023.
In light of the unfavorable economic environment and the reduced consumer demand, as
a prudence measure to maintain greater liquidity and flexibility at the time of uncertainties,
many downstream industry customers tend to lower their inventory level or slow down their
inventory replenishment, resulting in sluggish demand for fine chemicals. This was
completely opposite to the market circumstances in 2022 when the chemical industry was at a
boom and the downstream industrial customers were stocking up as they foresee there could
be an increase in selling prices, including the price of toluene oxidation and chlorination
products. These circumstances also coincided with the expansion in capacity of some of the
market players in toluene oxidation products which were put into operation since late 2022
SUMMARY
–2 0–


--- page 29 ---
which further increases the market supply of toluene oxidation products. According to Frost &
Sullivan, there is no newly constructed production capacity of toluene oxidation products by
five major domestic manufacturers that is put into operation in 2024. The increase in market
supply of toluene oxidation products further intensified the market competition amid time of
weak demands, which has an immediate adverse impact on the market participants as it takes
time to digest the increased production capacity. All of which further exerted significant
downward pressure on product pricing. This circumstance was a reversal of the marketing
condition in 2022 when demand was much higher than the supply, which positioned chemical
manufacturers in an ideal market position.
To cope with the challenging market environment, chemical manufacturers, including
our Group, have been lowering product selling prices so as to effectively compete in the
market, and to maintain the utilization rates of their production facilities. Together with the
decrease in sales volume with the contraction in downstream demand, most chemical industry
players recorded a drop in revenue in 2023. According to Frost & Sullivan, all of the top five
players in the PRC benzoic acid market, sodium benzoate market and the top three players in
the PRC benzyl alcohol market recorded a drop in revenue in 2023 as compared to 2022
ranging from 13.8% to 48.3%. As the manufacturing and operating costs are relatively fixed,
the reduction in selling prices has a significant impact to the profit margins. According to the
statistics published by the National Bureau of Statistics, entities in the PRC chemical
materials and manufacturing industry had recorded a drop in revenue in 2023 by 3.5%,
whereas net profit of the industry dropped more significantly by 34.1% in 2023 as compared
to 2022. Many listed chemical companies also exhibited a similar trend in their revenue and
profitability with a drop in net profit by over 70%, a number of which even turned from net
profit in 2022 to a loss in 2023. According to Frost & Sullivan, the significant decrease in
profitability for chemical companies in 2023 was an industry norm. The drop in revenue and
net profit of benzoic acid, sodium benzoate and benzyl alcohol industry in 2023 in the PRC
were more significant compared to the chemical materials and manufacturing industry in the
PRC mainly because the average sales price of benzoic acid, sodium benzoate, and benzyl
alcohol in the PRC experienced a higher decreasing trend in 2023 compared to that of the
chemical materials and manufacturing industry in the PRC.
As a top-ranked toluene oxidation and toluene chlorination products provider in the PRC
and the global market, we were unavoidably adversely affected by the downturn in the
chemical industry. In light of the unfavourable market sentiment, we adopted a strategy to sell
our products at a lower prices so as to maintain our market position and the utilization rate of
our production facilities at an optimal level while at the same time, maintain or even increase
our market shares. With our competitive advantages as a leading player in the market, we view
it as an opportunity to further strengthen our market position as we are able to effectively
compete in the market in such circumstances. According to Frost and Sullivan, we remained as
the largest manufacturer for both benzoic acid and sodium benzoate in the PRC in terms of the
sales revenue in 2023 with our market share increased from 59.1% and 37.3% in 2022 to
62.0% and 37.9% in 2023. As a result of the above, our revenue, gross profit and gross profit
margin dropped significantly in 2023. For details, please refer to “Business — Market
Development in 2023” in this prospectus. Despite these circumstances, we continue to devote
significant efforts to improve our performance. Together with the gradual recovery of the
chemical industry globally and also in the PRC, our performance gradually improved since the
third quarter of 2023 with quarter-to-quarter increase in revenue (based on the unaudited
management accounts) by 8.7% and 6.6% in the third quarter and fourth quarter of 2023,
respectively.
SUMMARY
–2 1–


--- page 30 ---
RECENT DEVELOPMENTS AND NO MA TERIAL ADVERSE CHANGE
Subsequent to the Track Record Period and up to the Latest Practicable Date, with our
continuous efforts in improving our performance and the gradual recovery of the chemical
industry globally and also in the PRC, our performance gradually improved. In particular,
based on the unaudited management accounts of the Company as of March 31, 2024, our
revenue and sales volume for the three months ended March 31, 2024 increased by 15.0% and
6.7%, respectively, as compared to the same period in 2023. The utilization rates of our Wuhan
Production Plant and Qianjiang Xinyihong Production Plant also increased in the first quarter
of 2024 as compared to that in 2023, indicating an improvement in our performance.
Our Directors confirm that, as of the date of this prospectus, there had been no material
adverse change in our financial or trading position, indebtedness, mortgage, contingent
liabilities, guarantees or prospects since December 31, 2023, the end of the period reported on
the Accountants’ Report included in Appendix I to this prospectus.
SUMMARY
–2 2–


--- page 31 ---
In this prospectus, unless the context otherwise requires, the following terms shall
have the meanings set forth below. Certain other terms are explained in “Glossary. ”
“AFRC” the Accounting and Financial Reporting Council of Hong Kong
“Articles” or “Articles
of Association”
the amended and restated articles of association of our Company
conditionally adopted on May 21, 2024 and with effect upon
Listing Date, a summary of which is set out in “Appendix III —
Summary of our Constitution and Cayman Islands Companies
Law” in this prospectus
“Audit Committee” the audit committee of the Board
“Board” or “Board of
Directors”
the board of Directors
“business day” any day (other than a Saturday, Sunday or public holiday in Hong
Kong) on which banks in Hong Kong are generally open for
normal banking business
“BVI” the British Virgin Islands
“CAGR” compound annual growth rate
“Capital Market
Intermediaries”
the capital market intermediaries participating in the Global
Offering as listed in the section headed “Directors and Parties
Involved in the Global Offering” in this prospectus and has the
meaning ascribed thereto under the Listing Rules
“CCASS” the Central Clearing and Settlement System established and
operated by HKSCC
“China” or “PRC” the People’s Republic of China excluding, for the purpose of this
prospectus, excluding Hong Kong, the Macau Special
Administrative Region and Taiwan
“Companies Act” the Companies Act (as revised) of the Cayman Islands as amended
from time to time
“Companies Ordinance” the Companies Ordinance (Chapter 622 of the Laws of Hong
Kong)
“Companies
(Winding Up and
Miscellaneous
Provisions)
Ordinance”
the Companies (Winding Up and Miscellaneous Provisions)
Ordinance (Chapter 32 of the Laws of Hong Kong)
DEFINITIONS
–2 3–


--- page 32 ---
“Company,”
“our Company,” “we,”
“our” or “us”
Wuhan Youji Holdings Ltd. (ʮ̡ ) (formerly
known as Centelligence Holdings Ltd.), an exempted company
incorporated under the laws of the Cayman Islands with limited
liability on September 23, 2016
“Controlling
Shareholder(s)”
has the meaning given to it under the Listing Rules and unless the
context otherwise requires, refers to the person(s) named in the
“Relationship with our Controlling Shareholders”
“Director(s)” the director(s) of our Company
“Extreme Conditions” the occurrence of “extreme conditions” as announced by any
government authority of Hong Kong due to serious disruption of
public transport services, extensive flooding, major landslides,
large-scale power outage or any other adverse conditions before
Typhoon Signal No. 8 or above is replaced with Typhoon Signal
No. 3 or below
“F&S” or “Frost &
Sullivan”
Frost & Sullivan (Beijing) Inc., our industry consultant and an
independent third party
“F&S Report” or “Frost
& Sullivan Report”
an independent market research report prepared by F&S, which
was commissioned by our Company for the purpose of this
prospectus
“FINI” “Fast Interface for New Issuance”, an online platform operated by
HKSCC that is mandatory for admission to trading and, where
applicable, the collection and processing of specified information
on subscription in and settlement for all new listings
“Fortune 500
companies”
the 500 largest companies recognized and published by the
Fortune magazine
“Global Offering” the Hong Kong Public Offering and the International Offering
“Group,” “our Group,”
“we,” “our” or “us”
our Company and its subsidiaries, or where the context so
requires, in respect of the period before our Company became the
holding company of its present subsidiaries, the business operated
by such subsidiaries or their predecessors (as the case may be)
“Hebei Kangshi” Hebei Kangshi New Materials Co., Ltd. (ʮ
̡), a limited liability company established under the laws of the
PRC on January 14, 2019 and a material joint venture of our
Group
“HK eIPO White
Form ”
the application for the Hong Kong Offer Shares to be issued in the
applicant’s own name, submitted through the IPO App or the
designated website at www.hkeipo.hk
DEFINITIONS
–2 4–


--- page 33 ---
“HK eIPO White Form
Service Provider”
the HK eIPO White Form service provider designated by our
Company, as specified in the IPO App and on the designated
website at www.hkeipo.hk
“HKFRS” Hong Kong Financial Reporting Standards, issued by the Hong
Kong Institute of Certified Public Accountants
“HKSCC” Hong Kong Securities Clearing Company Limited, a
wholly-owned subsidiary of Hong Kong Exchanges and Clearing
Limited
“HKSCC EIPO” the application for the Hong Kong Offer Shares to be issued in the
name of HKSCC Nominees and deposited directly into CCASS to
be credited to your designated HKSCC Participant’s stock
account through causing HKSCC Nominees to apply on your
behalf, including by instructing your broker or custodian who is a
HKSCC Participant to give electronic application instructions
via HKSCC’s FINI System to apply for the Hong Kong Offer
Shares on your behalf
“HKSCC Nominees” HKSCC Nominees Limited, a wholly-owned subsidiary of
HKSCC
“HKSCC Operational
Procedures”
the operational procedures of HKSCC, containing the practices,
procedures and administrative or other requirements relating to
HKSCC’s services and the operation and functions of the
Systems, as from time to time in force
“HKSCC Participant” a participant admitted to participate in CCASS as a direct clearing
participant, a general clearing participant or a custodian
participant
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Hong Kong dollars” or
“HK$”
Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong Offer
Shares”
the 1,830,000 Shares being initially offered for subscription in
the Hong Kong Public Offering, subject to reallocation
“Hong Kong Public
Offering”
the offer of the Hong Kong Offer Shares at the Offer Price for
subscription by the public in Hong Kong
“Hong Kong Share
Registrar”
Tricor Investor Services Limited
“Hong Kong
Underwriters”
the underwriters of the Hong Kong Public Offering listed in
“Underwriting – Hong Kong Underwriters” in this prospectus
DEFINITIONS
–2 5–


--- page 34 ---
“Hong Kong
Underwriting
Agreement”
the underwriting agreement dated June 5, 2024 relating to the
Hong Kong Public Offering and entered into by, among others,
our Company, the Sole Sponsor, the Sole Overall Coordinator and
the Hong Kong Underwriters, as further described in
“Underwriting — Underwriting Arrangements and Expenses —
Hong Kong Public Offering — Hong Kong Underwriting
Agreement” in this prospectus
“Hubei Kangxin” Hubei Kangxin Chemical Trading Co., Ltd. (׸
ப΂ʮ̡ ), a limited liability company established under the
laws of the PRC on December 12, 2018 and our wholly-owned
subsidiary
“Hubei Tuopu” Hubei Tuopu Organic and Phosphoric Chemicals Import and
Export Co., Ltd. (ʮ̡ ), a limited
liability company established under the laws of the PRC on May
20, 2002 and a related party of our Group
“Hubei Xinlianhong” Hubei Xinlianhong New Materials Technology Co., Ltd. ( ಳ̏อ
ʮ̡ ), a limited liability company
established under the laws of the PRC on November 28, 2022 and
our wholly-owned subsidiary
“Hubei Xinxuanhong” Hubei Xinxuanhong New Materials Co., Ltd. (ࣘ
ʮ̡ ), a limited liability company established under the laws
of the PRC on January 5, 2021 and our wholly-owned subsidiary
“independent third
party(ies)”
person(s) or company(ies) and their respective ultimate beneficial
owner(s), who/which, to the best of our Directors’ knowledge,
information and belief, having made all reasonable enquiries,
is/are not a connected person of our Company
“International Offer
Shares”
the 16,470,000 Shares being initially offered in the International
Offering together with, where relevant, any additional Shares
which may be issued by our Company pursuant to the exercise of
the Over-allotment Option, subject to reallocation
“International Offering” the offer of the International Offer Shares at the Offer Price
outside the United States in offshore transactions in accordance
with Regulation S, as further described in “Structure and
Conditions of the Global Offering” in this prospectus
“International
Underwriters”
the underwriters of the International Offering
DEFINITIONS
–2 6–


--- page 35 ---
“International
Underwriting
Agreement”
the international underwriting agreement relating to the
International Offering, which is expected to be entered into by,
among others, the Company, the Sole Sponsor, the Sole Overall
Coordinator and the International Underwriters as further
described in “Underwriting — Underwriting Arrangements and
Expenses — International Offering” in this prospectus
“IPO App ” the mobile application for HK eIPO White Form service which
can be downloaded by searching “ IPO App ” in App Store or
Google Play or downloaded at www.hkeipo.hk/IPOApp or
www.tricorglobal.com/IPOApp
“Joint Bookrunners” the joint bookrunners as named in “Directors and Parties Involved
in the Global Offering” in this prospectus
“Joint Lead Managers” the joint lead managers as named in “Directors and Parties
Involved in the Global Offering” in this prospectus
“Latest Practicable
Date”
May 29, 2024, being the latest practicable date for the purpose of
ascertaining certain information contained in this prospectus
prior to its publication
“Linuo Group” Linuo Group Holdings Co., Ltd. (ʮ̡ ), a
limited liability company established under the laws of the PRC
on September 28, 1994
“Linuo Investment” Wuhan Linuo Investment Holdings Group Co., Ltd. (ဏɢፕҳ
ʮ̡ ), a limited liability company established
under the laws of the PRC on November 29, 2001
“Listing” the listing of the Shares on the Main Board
“Listing Committee” the Listing Committee of the Stock Exchange
“Listing Date” the date, expected to be on or about Tuesday, June 18, 2024 on
which the Shares are to be listed on the Stock Exchange and from
which dealings in the Shares are to be permitted to commence on
the Stock Exchange
“Listing Rules” the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited
“Main Board” the stock market (excluding the option market) operated by the
Stock Exchange which is independent from and operates in
parallel with GEM of the Stock Exchange
DEFINITIONS
–2 7–


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“Memorandum” or
“Memorandum of
Association”
the amended and restated memorandum of association of our
Company conditionally adopted on May 21, 2024 and with effect
upon Listing Date, a summary of which is set out in “Appendix III
— Summary of our Constitution and Cayman Islands Companies
Law” in this prospectus
“Mr. Chen” Mr. Chen Ping ( ௓̻), an executive Director and one of the joint
company secretaries of our Company
“Mr. Gao” Mr. Gao Lei ( ৷ཤ), a non-executive Director who, together with
Vastocean Capital Limited, will constitute our Controlling
Shareholders upon Listing
“Mr. Shen” Mr. Shen Yingming (׼ߵa non-executive Director
“Mr. Zou” Mr. Zou Xiaohong (ࠀan executive Director and the
chairman of the Board
“Nomination
Committee”
the nomination committee of the Board
“Offer Price” the final offer price per Offer Share (exclusive of brokerage of
1.0%, SFC transaction levy of 0.0027%, Stock Exchange trading
fee of 0.00565% and AFRC transaction levy of 0.00015%)
“Offer Shares” the Hong Kong Offer Shares and the International Offer Shares
together with, where relevant, any additional Shares which may
be issued by our Company pursuant to the exercise of the
Over-allotment Option
“OTCBB” Over -the-Counter Bulletin Board, an inter-dealer quotation
system operated by the Financial Industry Regulatory Authority,
which regulates member brokerage firms in the United States
“Over-allotment
Option”
the option expected to be granted by our Company to the
International Underwriters, exercisable by the Sole Overall
Coordinator (for itself and on behalf of the International
Underwriters), pursuant to which our Company may be required
to allot and issue up to an aggregate of 15% additional Shares to
cover over-allocations in the International Offering
“PRC Legal Advisors” Jingtian & Gongcheng
“Price Determination
Agreement”
the agreement expected to be entered into between our Company
and the Sole Overall Coordinator (for itself and on behalf of the
Underwriters) on or about the Price Determination Date to
determine the Offer Price
DEFINITIONS
–2 8–


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“Price Determination
Date”
the date, expected to be on or about Friday, June 14, 2024, on
which the Offer Price will be determined
“Qianjiang Xinyihong” Qianjiang Xinyihong Organic Chemical Co., Ltd. ( ᆑϪอᄂ҃Ϟ
ʮ̡ ), a limited liability company established under
the laws of the PRC on December 5, 2006 and our wholly-owned
subsidiary
“Regulation S” Regulation S under the U.S. Securities Act
“Remuneration
Committee”
the remuneration committee of the Board
“Renminbi” or “RMB” Renminbi, the lawful currency of the PRC
“Reorganization” the corporate reorganization undergone by our Group in
preparation of the Listing as described in “History,
Reorganization and Corporate Structure – Reorganization”
“SAFE” the State Administration of Foreign Exchange of the PRC ( ʕശɛ
͏΍ձ਷̮ි၍ଣ҅ )
“SAMR” the State Administration for Market Regulation (̹ఙ္ຖ၍
ଣᐼ҅), formerly known as the State Administration for Industry
and Commerce (၍ଣᐼ҅ )
“SFC” the Securities and Futures Commission of Hong Kong
“SFO” the Securities and Futures Ordinance (Chapter 571 of the Laws of
Hong Kong)
“Share(s)” ordinary share(s) in the capital of our Company of a par value of
US$0.0001 each
“Shareholder(s)” holder(s) of our Share(s)
“Sole Global
Coordinator”
the sole global coordinator as named in “Directors and Parties
Involved in the Global Offering” in this prospectus
“Sole Overall
Coordinator”
the sole overall coordinator as named in “Directors and Parties
Involved in the Global Offering” in this prospectus
“Sole Sponsor” the sole sponsor as named in “Directors and Parties Involved in
the Global Offering” in this prospectus
“Stabilizing Manager” BOCOM International Securities Limited
DEFINITIONS
–2 9–


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“Stock Borrowing
Agreement”
the stock borrowing agreement to be entered into between
Vastocean Capital Limited and the Stabilizing Manager (or its
affiliates or any person acting for it) pursuant to which the
Stabilizing Manager (or its affiliates or any person acting for it)
may borrow up to 2,745,000 Shares from Vastocean Capital
Limited to facilitate the settlement of over-allocations in the
International Offering
“Stock Exchange” The Stock Exchange of Hong Kong Limited, a wholly owned
subsidiary of Hong Kong Exchange and Clearing Limited
“Takeovers Code” the Code on Takeovers and Mergers issued by the SFC
“Track Record Period” the years ended December 31, 2021, 2022 and 2023
“Underwriters” the Hong Kong Underwriters and the International Underwriters
“Underwriting
Agreements”
the Hong Kong Underwriting Agreement and the International
Underwriting Agreement
“United States” or
“U.S.”
the United States of America, its territories, its possessions and
all areas subject to its jurisdiction
“U.S. dollars” or “US$” United States dollars, the lawful currency of the United States
“U.S. Securities Act” the U nited States Securities Act of 1933, and the rules and
regulations promulgated thereunder
“Wuhan Linuo” Wuhan Linuo Investment Co., Ltd. (ʮ̡ ), a
limited liability company established under the laws of the PRC
on July 9, 2003 and a wholly-owned subsidiary of Linuo
Investment until its deregistration on October 16, 2019
“Wuhan Youji” W uhan Youji Industries Co., Ltd. (ʮ̡ )
(formerly known as Wuhan Youji Synthetic Chemical Plant (ဏ
ϞዚΥϓʷʈᅀ ), Wuhan City Wuhan Youji Synthetic Chemical
Plant (ဏϞዚΥϓʷʈᅀ ), and Wuhan Youji Industries
Joint Stock Co., Ltd. (ʮ̡ )), a limited
liability company established under the laws of the PRC on
January 12, 1990 and our wholly-owned subsidiary
“Youji HK” W uhan Youji (Hong Kong) Co., Limited, a private company
limited by shares incorporated under the laws of Hong Kong on
June 10, 2016 and our wholly-owned subsidiary
“%” percent
DEFINITIONS
–3 0–


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In this prospectus, the terms “associate(s), ” “close associate(s), ” “connected
person(s), ” “connected transaction(s), ” “core connected person(s), ” “controlling
shareholder(s), ” “subsidiary(ies)” and “substantial shareholder(s)” shall have the meanings
given to such terms in the Listing Rules, unless the context otherwise requires.
F or ease of reference, the names of Chinese laws and regulations, governmental
authorities, institutions, natural persons or other entities (including certain of our
subsidiaries) have been included in this prospectus in both the Chinese and English
languages. In the event of inconsistency, the Chinese versions shall prevail. English
translations of company names and other terms from the Chinese language are provided for
identification purposes only.
DEFINITIONS
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This glossary contains certain definitions and technical terms used in this
prospectus in connection with our business. As such, some terms and definitions may
not correspond to standard industry definitions or usage of such terms.
“ammonification” the process in which organic or inorganic acids associated with
ammonia are converted into ammonium
“BRC” the certification for an internationally recognized standard food
safety management systems
“CAS number” a unique numerical identifier issued by the American Chemical
Society for chemical elements, compounds, polymers, biological
sequences, mixtures and alloys
“catalyst” a substance that speeds up a chemical reaction, but is not
consumed by the reaction
“chlorination” the process in which chlorine (and no other elements) are
introduced into a molecule
“CIF” the acronym for cost, insurance, and freight, which requires the
buyer to assume full responsibility for the goods as soon as they
reach the destination port
“FAMI-QS” the certification for an internationally recognized standard for
quality and feed safety management system for the sector of
specialty feed ingredients and their mixtures
“FOB” the acronym for free on board, which requires the seller to assume
responsibility until the goods are loaded onto the shipping vessel
“FSSC 22000” the certification for an internationally recognized standard for
food safety management system issued by Intertek Certification
Limited
“GMP” a system for ensuring that products are consistently produced and
controlled according to quality standards, which is designed to
minimize the risks involved in any pharmaceutical production
that cannot be eliminated through testing the final product. It is
also the practice required in order to conform to the guidelines
recommended by agencies that control the authorization and
licensing of the manufacture and sales of pharmaceutical products
“HALAL” the certification that guarantees that products and services aimed
at the Muslim population meet the requirements of Islamic law
GLOSSARY OF TECHNICAL TERMS
–3 2–


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“ISO” the International Organization for Standardization, a
non-governmental organization based in Geneva, Switzerland, for
assessing the quality systems of business organizations
“ISO 22000” the certification for an internationally recognized standard for
food safety management systems
“ISO 9001” the certification for an internationally recognized standard for
quality management systems
“KOSHER” a certification of conformity of food to the regulations of kashrut
which is a set of Jewish religious dietary laws and include a
comprehensive legislation concerning permitted and forbidden
foods
“oxidation” the process or result of the chemical combination of a substance
with oxygen
“sq.m.” square meter(s)
“toluene” C
7H8, a clear, colorless liquid which becomes a vapor when
exposed to air at room temperature
GLOSSARY OF TECHNICAL TERMS
–3 3–


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This prospectus contains certain forward-looking statements and information relating to
our Company and its subsidiaries that are based on the beliefs of our management as well as
assumptions made by and information currently available to our management. When used in
this prospectus, the words “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”,
“going forward”, “intend”, “may”, “ought to”, “plan”, “project”, “seek”, “should”, “target”,
“will”, “would” and the negative of these words and other similar expressions, as they relate to
us or our management, are intended to identify forward-looking statements. Such statements
reflect the current views of our management with respect to future events, operations,
liquidity and capital resources, some of which may not materialize or may change. These
statements are subject to certain risks, uncertainties and assumptions, including the other risk
factors as described in this prospectus. You are strongly cautioned that reliance on any
forward-looking statements involves known and unknown risks and uncertainties. The risks
and uncertainties facing our company which could affect the accuracy of forward-looking
statements include, but are not limited to, the following:
• our business prospects;
• future developments, trends and conditions in the industry and markets in which we
operate or into which we intend to expand;
• our business and operating strategies and plans to achieve these strategies;
• general economic, political and business conditions in the markets in which we
operate;
• changes to the regulatory environment, operating conditions and general outlook in
the industry and geographical markets in which we operate;
• the effects of the global financial markets and economic crisis;
• our financial condition and performance;
• our ability to reduce costs;
• our dividend policy;
• the amount and nature of, and potential for, future development of our business;
• capital market developments;
• the actions and developments of our competitors; and
• change or volatility in interest rates, foreign exchange rates, equity prices, volumes,
operations, margins, risk management and overall market trends.
Subject to the requirements of applicable laws, rules and regulations, we do not have any
and undertake no obligation to update or otherwise revise the forward-looking statements in
this prospectus, whether as a result of new information, future events or otherwise. As a result
of these and other risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this prospectus might not occur in the way we expect or at all.
Accordingly, you should not place undue reliance on any forward-looking information.
FORW ARD-LOOKING STA TEMENTS
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In this prospectus, statements of or references to our intentions or those of our Directors
are made as of the date of this prospectus. Any such information may change in light of future
developments.
All forward-looking statements in this prospectus are qualified by reference to the
cautionary statements in this section.
FORW ARD-LOOKING STA TEMENTS
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Potential investors should consider carefully all the information set out in this
prospectus and, in particular, should consider and evaluate the following risks and
uncertainties associated with an investment in our Company before making any
investment decision in the Shares being offered in this Global Offering. If any of the
circumstances or events described below actually arises or occurs, our business, and
financial condition, operating results and prospects may suffer. In any such case, the
market price of our Shares may decline, and you may lose all or part of your investment.
This prospectus also contains forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those anticipated in the
forward-looking statements as a result of many factors, including the risks described
below and elsewhere in this prospectus.
RISKS RELA TING TO OUR BUSINESS
Any shortage in supply of raw materials or material fluctuation in their purchase prices
may adversely affect our profit margins and results of operation.
We source raw materials, in particular, toluene from a limited number of suppliers. For
the years ended December 31, 2021, 2022 and 2023, our five largest raw material suppliers,
who were Independent Third Parties, together accounted for approximately 76.6%, 78.0% and
79.7% of our total purchases respectively, and our largest raw material supplier accounted for
approximately 41.0%, 32.9% and 27.9% of our total purchases respectively. For the years
ended December 31, 2021, 2022 and 2023, the cost of consumed raw materials accounted for
approximately 54.7%, 64.5% and 59.0% of our cost of sales respectively. During the Track
Record Period, we were able to maintain stable business relationship with the largest raw
material suppliers and major market participants in our industry to secure the raw material
supply. It is our intention to continue purchasing from these suppliers for the coming years.
However, we cannot guarantee that we will be able to renew the purchase agreements with
these suppliers, or able to find alternative suppliers in time to replace these suppliers if we are
not able to renew such agreements. Major toluene manufacturers may suspend production to
carry out regular maintenance. There is no assurance that we will always be able to secure an
adequate supply of raw materials at commercially viable prices to meet our future production
requirements. Moreover, the price of our raw materials, especially that of toluene, is affected
by its upper stream product crude oil, and any changes in the international crude oil prices,
may increase our costs of sales and reduce our gross profit and gross margin. We cannot
guarantee that we will not suffer adverse effects from any price increases of raw materials in
the future. If we encounter a shortage of raw materials or if we are unable to pass on the price
increases of raw materials to our customers in a timely manner, our business and results of
operations could be adversely affected.
We generate a substantial portion of our revenue through the sales of our self-produced
products, any change in demand may adversely affect our revenue and profitability.
We currently generate a substantial part of our revenue from the sales of our
self-produced products, which include toluene oxidation products, toluene chlorination
products, benzoic acid ammonification products and other fine chemical products, which in
aggregate accounted for approximately 79.4%, 86.8% and 83.0% of the total revenue for the
years ended December 31, 2021, 2022 and 2023, respectively. The demand for and the price of
our self-produced products are subject to fluctuations due to a variety of factors including the
demand of our downstream industry customers in the PRC and global markets, prices of our
RISK FACTORS
–3 6–


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raw materials used for production, and overall economic conditions. We may not be able to
foresee these adverse factors and adjust our business strategy to combat these variables in a
timely manner, and our actions may not sufficiently mitigate the adverse financial
performance as of result of these macroeconomic factors. The chemical industry exhibited
cyclical fluctuations from time to time coinciding with fluctuations in macroeconomic
environment and unforeseen events. In 2023, the chemical industry was adversely impacted by
the uncertainty surrounding the economic environment globally as well as in the PRC. In light
of the unfavorable economic environment and the reduced consumer demand, many
downstream industry customers lowered their inventory level or slow down their inventory
replenishment as a prudent measure to maintain greater liquidity and flexibility at the time of
uncertainties, resulting in sluggish demand for fine chemicals. For details, please refer to
“Business — Market Development in 2023” in this prospectus.
In light of the significant industry downturn experienced in 2023, our financial
performance was adversely impacted. It is uncertain that we can successfully broaden our
revenue sources or, if we can, generate additional revenue at a level comparable to that from
the sales of our self-produced products. In the event that there is any material adverse change
in the market demand for and/or price of our self-produced products, our revenue and
profitability may be materially and adversely affected.
We recorded minimal gross profit margin in 2021 through our products trading, and we
cannot assure you that we will not incur gross loss or minimal gross profit margin in
products trading in the future.
We engage in products trading to supplement our primary production operations to
ensure the procurement of raw materials for production and as a strategy to effectively manage
our inventory. We may occasionally incur marginal losses if there is a downward trend in
market prices. Revenue contribution from products trading accounted for 20.6%, 13.2% and
17.0% of our total revenue for the years ended December 31, 2021, 2022 and 2023,
respectively. We recorded minimal gross profit margin of 0.6% in 2021 for our products
trading operations. Toluene products trading constitutes a substantial portion of our products
trading business, and we incurred gross losses of RMB2.7 million for our toluene products
trading in 2021. We engage in products trading despite fluctuating profits as we anticipate
greater business advantage by maintaining products trading operations and stable access to
raw material supply in the long run, and aim to be at the forefront of this developing trend. As
the market prices of our products are expected to be fluctuating, we cannot assure you that we
will not incur gross loss or minimal gross profit margin in products trading in the future.
We experienced fluctuation in our financial performance during the Track Record
Period and our historical performance may not be indicative of our future performance.
We experienced fluctuation in our financial performance during the Track Record Period.
Our revenue increased from RMB2,789.5 million in 2021 to RMB3,133.8 million in 2022, but
then decreased to RMB2,677.1 million in 2023. During the same period, our net profit
increased from RMB309.1 million in 2021 to RMB340.5 million in 2022, but then decreased
to RMB72.9 million in 2023.
RISK FACTORS
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Our ability to generate revenue and achieve profitability will depend on the performance
of our existing product offerings and the success of the implementation of our strategic
initiatives. Our revenue and profit margin could also be affected by a number of factors, many
of which are beyond our control, including regulatory evolvement, changes in economic,
performance of and demand from downstream industries, epidemics, pandemics and
competition, and our results of operations may be adversely affected by any of such factors.
As a result, our historical performance may not be indicative of our future performance.
We had net current liabilities as at December 31, 2022 and 2023, and we cannot assure
you that we will not continue to record net current liabilities.
As at December 31, 2022 and 2023, we recorded net current liabilities of RMB353.8
million and RMB590.1 million, respectively, which is primarily resulted from the dividend of
RMB1,102.8 million and RMB270.0 million declared by our Company in 2022 and 2023,
respectively. Although we recorded net current assets of RMB525.5 million as at December
31, 2021, we may incur net current liabilities in the future. Having net current liabilities could
constrain our operational flexibility and could adversely affect our ability to expand our
business. If we do not generate sufficient cash inflow from our operations to meet our present
and future financial needs, we may need to continue to use and rely on external financial
resources. If adequate external financial resources are not available in a timely manner on
commercially acceptable terms or at all, we may encounter liquidity issue. Our business and
financial condition and operating results could be adversely affected.
We face intense competition in our businesses. If we fail to compete successfully against
our current or future competitors, our business, financial condition and results of
operations may be materially and adversely affected.
Some of our competitors may be able to devote greater resources to the development,
promotion, and sale of their products. In addition, market players with greater available
resources and the ability to initiate or withstand substantial price competition could acquire
our current or potential competitors. Our competitors may also establish cooperative
relationships among themselves or with other market players that may further enhance their
product offerings or resources. If our competitors’ products become more accepted than our
products, or if our competitors are able to respond more quickly and effectively to new or
changing opportunities, technologies, or customer requirements, then our revenues and future
business prospects could be adversely affected.
We may be required to modify our pricing practices in order to attract new customers or
retain existing customers due to increased competition and/or excess market supply. For
example, as impacted by the uncertainty surrounding the economic environment globally as
well as in the PRC and the geopolitical tension, which in turn has a widespread negative
impact on the customers’ spending in various downstream industries, there was weak
downstream demand in 2023, together with the increase in market supply of toluene oxidation
products, we strategically lowered the ASPs for our self-produced products to ensure our
market competitiveness and to maintain our market position and the utilization rate of our
production facilities at an optimal level. Pricing pressures in connection with the increased
competition and/or excess market supply could result in reduced sales, reduced margins,
losses, or a failure to maintain or improve our competitive market position, any of which could
adversely affect our business.
RISK FACTORS
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In response to the challenges posed by the increased competition and excess market
supply, we have adopted and will continue to adopt various measures to improve our financial
performances, including but not limited to (i) reduce manufacturing costs, (ii) actively explore
domestic and overseas markets, (iii) actively maintain and further develop customer
relationships, (iv) expedite the launch of new products, (v) maintain and enhance our
relationship with raw material suppliers to purchase raw materials at a more favorable price.
For details, please refer to “Business — Market Development in 2023” in this prospectus.
However, we might not be able to successfully implement these business strategies
successfully, or our strategies might not yield the desired results.
We rely on our distributors for the sale of our products to their respective end customers.
Termination of or failure to renew our distribution relationship with our distributors,
may significantly decrease the sale of our products.
We rely on our distributors to distribute and market our products. During the Track
Record Period, revenue generated from the sales to the distributors amounted to
approximately RMB989.1 million, RMB1,096.8 million and RMB994.6 million, respectively,
representing 35.5%, 35.0% and 37.2% of our revenue, respectively, for the years ended
December 31, 2021, 2022 and 2023. The performance of the distributors, their sales network
and their ability to expand their businesses may affect the future growth of our business, sales
volume and profitability. If most of our distribution agreements are suspended, terminated or
otherwise expired without renewal, our profitability could be materially and adversely
affected. We cannot assure you that we will be able to maintain our agreements with the
distributors on favorable terms or at all. The distributors may not be able to maintain their
competitiveness, or sell and market our products successfully, or we may not be able to
monitor the distributors directly to ensure efficient sales of our products to their customers.
Furthermore, if the sales volume of our products cannot be maintained at a satisfactory level,
the distributors may not place orders on our new products with us or may reduce the quantity
of our existing products or may ask for discount on the purchase price. In addition, we may not
have sufficient control over the distributors, and we cannot assure you that the distributors
will not breach their distribution agreements or will comply with their obligations thereunder,
including those with respect to our retail policies. The loss of the distributors, or reduced
orders from them or if the distribution agreements cannot be renewed or if the distributors
breach any of the terms thereunder, could materially and adversely affect our business and
financial condition and operating results. We focused on identifying, recruiting and retaining
quality distributors as part of our growth strategies. If we are unable to maintain or grow our
sales and distribution network, we could experience a decline in sales and market share.
We may be subject to liability in connection with accidents that occur during the
production process at our production facilities due to, amongst others, failure to comply
with safety measures and procedures.
In the course of operations and production, we require our employees to comply with and
implement all the safety measures and procedures as stipulated in our internal policies.
Nevertheless, there is no assurance that our safety measures or other related rules and
regulations by our employees are strictly followed. As our production process at our
production facilities inevitably involves the operation of tools, equipment and machinery,
accidents resulting in employee injuries or even deaths may occur. There is no assurance that
these accidents, whether due to malfunctions of such tools, equipment or machinery or other
reasons, will not occur in the future. Any violation of safety measures and procedures may
RISK FACTORS
–3 9–


--- page 48 ---
lead to higher probability of occurrences, and/or increased seriousness, of personal injuries,
property damages and/or fatal accidents at our production facilities, which may materially and
adversely affect business operations as well as financial position to the extent not covered by
insurance policies.
During the Track Record Period and up to the Latest Practicable Date, no material
personal injuries, material property damages and/or fatal accidents occurred at our production
facilities. However, there is no assurance that there will not be any violations of rules, laws or
regulations or breach of safety measures and procedures imposed by us on the part of our
employees or other contractors in the future. In such event, we may be liable for personal
injury or death and monetary losses suffered by our employees, fines or penalties or other
legal liability arisen from violation of applicable PRC laws and regulations. We may also be
subject to business interruptions caused by equipment shutdowns for government
investigation or implementation or imposition of safety measures as a result of the accident.
Further, any enhanced safety measure imposed by the PRC government from time to time in
the future could have a material adverse effect on the manner in which we conduct our
operations, thereby adversely impacting our operations.
Labor shortages or increases in labor costs could harm our business, reduce our
profitability and slow our growth.
Experienced professional staff and other labor are important for the operation of our
businesses, and therefore, our success depends in part on our ability to attract, retain and
motivate a sufficient number of our research and development personnel and staff for our
production work. Qualified individuals in the relevant industries are in short supply and
competition for workers is intense. In addition, competition for qualified individuals or
workers could also require us to pay higher wages, which could result in higher labor costs.
Labor cost in the PRC has been on a rising trend over the years, and it may rise further in
the future. We may not be able to fully transfer the increased cost of labor to our customers or
offset the increase in labor cost against corresponding increases in the prices of our products.
In the event that we are unable to cope with the increasing labor cost, our business, financial
performance and results of operations may be adversely affected.
Our agreements with our customers and/or distributors do not contain specific labor cost
adjustment mechanism, and we may fail to anticipate or may be unable to transfer the full
impact of the increase in labor cost to our customers on a timely basis. In such cases, our
business and results of operations may be adversely affected.
We rely on certain key personnel and may not be able to retain their services.
Our success to date has been, and will continue to be dependent on the continued services
of our management and key personnel. In particular, we rely on the expertise and experience
of our chairman of the Board and executive Director, Mr. Zou Xiaohong, and our chief
executive officer, Mr. Zhou Xu, who have over 40 years and 35 years of experience,
respectively, in the chemicals industry and toluene derivative products industry. For details,
please refer to “Directors and Senior Management — Directors — Executive Directors” and
“Directors and Senior Management — Senior Management” in this prospectus, respectively.
We expect that that our management team will continue to play a pivotal role in the future
growth and success of our business. However, there is no guarantee that we will be able to
RISK FACTORS
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attract and retain our current personnel or that they will not leave our employment in the
future. If one or more of the members of our senior management or other key personnel are
unable or unwilling to continue in their present positions, we may not be able to find suitable
replacements in a timely manner, or at all. In addition, individuals with sufficient training may
not be available to hire, and we will need to expend significant time and expense training the
employees we hire. Furthermore, our ability to train and integrate new employees into our
operations may not meet the growing demands of our business, which may materially and
adversely affect our ability to grow our business and our results of operations.
If we are not able to implement our production expansion plan or effectively manage our
expansion, our business and financial condition and operating results could be adversely
affected.
As part of our development strategies, we intend to further expand our existing
production capacities by development of the Hubei Xinxuanhong Production Plant. For
details, please refer to “Business — Production Expansion Plan” in this prospectus. Our
expansion plans may involve the following risks: (i) our actual production volume may vary
depending on the demand and purchase orders for our products which in turn may be affected
by market trends, customers’ preferences or other factors which are beyond our control; (ii)
the demand for our products and revenue to be generated may not increase in line with our
increase in production capacity; and (iii) we expect to incur increased fixed costs, such as
amortization of right-of-use assets and depreciation costs, in connection with capital
investments relating to the expansion of our manufacturing facilities, and will be charged to
our Group’s consolidated statements of profit or loss each year. Other variable costs incurred
in relation to the expansion will be accounted for based on the actual production volume, level
of distribution and business activities engaged in by our Group, and relocation of staff from
other production plants; we cannot guarantee our expansion plans will be successfully
implemented without delay or at all; and we may not be able to obtain the necessary licenses
from the relevant regulatory authorities for our expansion plans. We cannot assure you that
our expansion plans will be implemented without failure or delay, nor can we provide any
assurance to you that the demand for our products will increase in line with our increasing
production capacity in the future. Any delays in the construction schedule, deviation from our
planned specifications, failure to control the costs within budget as a result of the above
factors may affect the time that our production capacities could be enhanced and our results of
operations and financial position may also be adversely affected. If we cannot recoup the
increased costs for the expansion in our production capacity, our business and financial
condition and operating results could be adversely affected.
In addition, we cannot assure you that we will always be able to obtain the financing
required to fund such capital expenditures for the implementation of our production expansion
plan within the prescribed timeframe, or at all. If our business growth is slower than we have
expected, it may lead to over-expansion of our production capacity and may result in lower
production utilization rate, which could have an adverse impact on our gross profit margin.
RISK FACTORS
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We face challenges in achieving the goals of our business strategies, and we may not be
successful in implementing our strategies and business initiatives.
We have experienced considerable growth in our business in recent years. We seek to
pursue strategies that we believe would further strengthen our market position, such as
increasing our in-house production capacities in Hubei Xinxuanhong Production Plant and
further expanding our marketing network in North America, Southeast Asia and India. We also
plan to increase our domestic and international market shares by forming strategic
partnerships with established market participants, and further enhance our research and
development ability.
The implementation of these business strategies may be subject to capital investment and
human resources constraints. Our ability to implement such strategies will depend on a variety
of factors, some of which are beyond our control, such as the general market conditions, the
economic and political environment of the PRC and the world. While we believe our business
strategies will help us to achieve our strategic goals, we might not be able to successfully
carry out such strategies or our strategies might not yield the desired results.
Failure to fulfil our obligations related to our contract liabilities could materially and
adversely affect our results of operation, liquidity and financial position.
Our contract liabilities represent short-term advances we received for products we have
not delivered to the purchasers. As at December 31, 2021, 2022 and 2023, we had contract
liabilities of approximately RMB64.3 million, RMB42.9 million and RMB50.6 million,
respectively. There is no assurance that we will be able to fulfil our obligations for these
contract liabilities as the completions of existing and future orders from our customers are
subject to various factors, including availability of raw materials and our ability to procure
them from the suppliers, and logistics services, and normal operations of our business. If we
are not able to fulfill our contract liability obligations, the amount of contract liabilities will
not be recognized as revenue, and we may have to return the advanced payments made by our
customers or provide alternative compensation for the deferred revenue due to the customers.
As a result, our results of operations, liquidity and financial position may be materially and
adversely affected.
Any failure by our customers to make payments for trade and bills receivables to us, or
any disputes over, or significant delays in receiving, such payments could materially and
adversely affect our cash flows and profitability.
As at December 31, 2021, 2022 and 2023, our gross amount of trade and bills receivables
were approximately RMB234.9 million, RMB327.8 million and RMB296.9 million,
respectively. For further information on our trade and bills receivables, please refer to
“Financial Information — Discussion of Selected Items from the Consolidated Statements of
Financial Position — Net Current Assets/Liabilities — Trade and Bills Receivables” in this
prospectus. Our trade and bills receivables turnover days were 24 days, 33 days and 42 days
for the years ended December 31, 2021, 2022 and 2023, respectively. The trade and bills
receivables turnover days are based on the average of the beginning and the ending balance of
trade and bills receivables of the respective period divided by the revenue for that
corresponding period multiplied by 365 days.
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Our Group’s profitability and cash flows are dependent to a large extent on the
creditworthiness of our customers and their ability to settle the outstanding amount owed to
our Group in accordance with the credit periods we have granted to them. Any failure by our
customers to make payments to us, or any dispute over or significant delays in receiving such
payments from our customers, could require us to write off or make provision against our
trade and bills receivables, either of which could adversely affect our cash flows and
profitability.
We may be exposed to impairment loss risks associated with our prepayments, deposits
and other receivables.
During the Track Record Period, our prepayments, deposits and other receivables
primarily consisted of deposits and other receivables, prepayments, deductible input V AT, and
loans to directors. Our prepayments, deposits and other receivables amounted to RMB1,094.9
million, RMB69.3 million and RMB145.4 million as of December 31, 2021, 2022 and 2023,
respectively. Among which, RMB1,008.2 million, RMB13.3 million and RMB59.4 million
were receivables due from related parties. As at the same dates, our prepayment, which
primarily related to prepayment to suppliers for our raw material, were RMB62.1 million,
RMB27.7 million and RMB29.3 million, respectively.
In the event that our related parties fail to make payments for the loans extended to them,
or our suppliers fail to provide the raw materials that they agreed to provide to us after we have
made prepayments to them or fail to return the respective prepayments to us in full or at all, we
may have to make provision for impairment on our payments to them. As such, if we need to
make provision for impairment losses for our prepayments, deposits and other receivables, our
business, financial condition and results of operations may also be materially and adversely
affected.
Our results of operations may be affected by the share of results of our joint venture and
associates and we may be subject to related liquidity risk if no dividend is declared to us.
During the Track Record Period, we derived certain portion of our profits from our
investments in our associates, which amounted to RMB8.5 million, RMB11.8 million and
RMB4.5 million for the year ended December 31, 2021, 2022 and 2023, respectively. For the
same years, we incurred losses of RMB6.0 million, RMB8.0 million and RMB11.8 million
from our investments in our joint venture. The carrying amount of our investment in joint
venture and associates were RMB56.7 million, RMB56.8 million and RMB35.9 million as at
December 31, 2021, 2022 and 2023, respectively. Our results of operations could be affected
by the fluctuation in the share of results of our joint ventures and associates. In addition, our
investment in joint ventures and associate are subject to liquidity risk. Our investments in
joint ventures and associate are not as liquid as other investment products as there is no return
in our investment until dividends are received even if our joint venture and associates reported
profits under equity accounting.
Furthermore, our ability to promptly sell one or more of our interests in the joint venture
and associates in response to the changing economic, financial and investment conditions is
limited. We cannot predict whether we will be able to sell any of our interests in the joint
venture or associates for the price or on the terms set by us. We also cannot predict the length
of time needed to find a purchaser and to complete the relevant transaction. Therefore, the
illiquid nature of our investment in joint venture and associates may significantly limit our
RISK FACTORS
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ability to respond to adverse changes in the performance of our joint venture and associates. In
addition, if there is no or negative share of profit or no dividends from our joint venture or
associates, our financial condition or result of operations could be materially affected.
Moreover, as we expect to continue to invest in our existing and future joint ventures and
associates for the expansion of our business, our liquidity may be further restricted if we are
not able to receive dividends from our existing or future joint ventures and associates, which
could materially and adversely affect our ability to conduct or expand our business.
Our success relies on the image of our “XINKANG ( อੰ೐ )” brand. Any damage to or
deterioration in the image of such brand could materially and adversely affect our
business and results of operations.
We believe brand image is a critical factor for our customers and distributors, their
downstream resellers and end users in deciding whether to purchase our products. We market
all of our products under our “XINKANG ( อੰ೐)” brand. As such, if our brand becomes less
attractive to our customers or less popular due to our failure to continue to maintain and
promote the image of such brand, ineffective marketing strategies or any negative publicity or
dispute relating to such brand, including product defects and counterfeit products, market
perception and consumer acceptance of such brand may be eroded, in which case our business,
financial condition and results of operations may be materially and adversely affected.
We and entities with which we collaborate to export our products may not be able to meet
regulatory requirements imposed by the governments of the PRC or our export
destinations.
We export certain amount of our products from China to our overseas customers. Certain
countries to which we export our products may impose technical, hygienic, environmental or
other requirements on the import, distribution and sales of our products, which may be
different from or more stringent than the standards imposed by the PRC government
authorities. In addition to requirements imposed by the PRC government authorities, other
countries may also require us and entities with which we collaborate to export our products to
obtain various approvals, certificates, registrations or other documentation to conduct our
export sales.
We rely on our PRC freight forwarder and our overseas customers to complete all such
relevant procedures, and they are responsible for complying with various aspects of the
relevant PRC and foreign laws and regulations. As such, we cannot assure you that all of our
PRC freight forwarder, our overseas customers or any other entities which we rely on are in
compliance with all various aspects of PRC or foreign laws and regulations relevant to our
export sales, or that they can meet the relevant standards or obtain the approvals, certificates,
registrations or other documentation necessary to our export sales. If we or other entities with
which we collaborate with to export our products fail to satisfy the relevant standards adopted
by the PRC or the destination countries or obtain the requisite approvals, certificates,
registrations or other documentation now or in the future, our ability to export to these
markets could be materially and adversely affected. We may also face regulatory actions or
claims for significant damages, and there may be a material adverse effect on our business,
results of operations and financial condition.
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A material disruption to the operation of our production facilities could materially and
adversely affect our business and financial condition and operating results.
We cannot assure you that there will be no disruptions to the operations of our production
facilities in the future. If operations at any of our production facilities are materially disrupted
as a result of fires, equipment failure, natural disasters, work stoppages, power outages,
explosions, adverse weather conditions, political turmoil, trade disputes, transport logistics,
labor disputes, workforce restructuring or other factors, our business and financial condition
and operating results could be adversely affected. The occurrence of any of these events could
also require us to make significant unanticipated capital expenditures.
Interruptions in production could increase our costs and delay our delivery of products,
which may further subject us to penalties or other liabilities under the relevant sales
arrangements with our customers. Production suspensions caused by such disruptions could
cause a reduction in sales or delay in sales recognition. Lost sales or increased costs arising
from such disruption of operations may not be recoverable under our existing insurance
policies and prolonged business disruption could result in a loss of customers. If any one or
more of the above risks were to materialize, our business and financial condition and
operating results could be adversely affected.
We may be subject to liability in connection with the use and storage of hazardous
materials.
We use and store flammable and/or explosive raw materials, other hazardous materials or
chemical compounds, which may cause industrial accidents if we do not handle these
materials properly. We cannot assure you that any accident causing explosion, disruption of
operation, injuries or death resulting from our negligence or mishandling of these hazardous
materials will not happen at our production facilities. In such event, we may be liable for the
loss of life and property, personal injuries, medical expenses suffered by the victims in the
accident and we may have to pay fines and penalties for violation of applicable PRC laws and
regulations. Furthermore, our manufacturing facilities may be required to halt operation
pending investigations from the competent authorities, which would adversely affect our
business operation, reputation and financial performance.
We generate and dispose environmental wastes which may subject us to liabilities.
Our operations are subject to PRC environmental protection laws and regulations which
govern the emission, discharge, release and disposal of environmental wastes and other
pollutants. Under the applicable laws and regulations, enterprises that produce environmental
wastes are required to adopt effective measures to control, properly manage and dispose of
environmental wastes, including waste gas, wastewater, solid wastes and noise. Manufacturers
discharging environmental wastes and other pollutants are required to pay fines for discharges
above permitted levels under the applicable PRC environmental protection laws and
regulations. Failure to comply with the applicable PRC environmental laws or regulations may
result in local environmental protection authorities imposing fines or suspending operations,
and may lead to the loss of environmental and production licenses. The PRC government and
PRC regional regulatory authorities have the discretion to suspend or close any facility failing
to comply with such environmental protection laws and regulations. In the event that the PRC
government imposes more stringent environmental protection laws and regulations, our
production costs may substantially increase, or we may also be forced to suspend production
RISK FACTORS
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or may need to incur material capital expenditures or other costs in order to remain in
compliance and which we may be unable to pass on these additional costs to our customers.
We may not be able to maintain effective quality control and may be subject to product
liability claims which could have a material adverse impact on our reputation, business
and financial condition, and operating results.
The performance and quality of our products are critical to the success of our business.
Our product quality depends significantly on the effectiveness of our quality control system,
which, in turn, relies on a number of factors, including our ability to ensure that our staff is in
full compliance with our quality control policies as well as the composition of our quality
control team. Any significant failure or deterioration of our quality control system could
seriously damage our product quality and have a material adverse effect on our reputation in
the market among current or prospective customers, which could in turn lead to fewer orders
in the future, and harm our financial condition and operating results.
We may not be able to effectively manage our inventory.
The balance of our inventory amounted to RMB305.6 million, RMB320.5 million and
RMB285.3 million, respectively, and accounted for 17.4%, 37.1% and 34.3% of our current
assets as of December 31, 2021, 2022 and 2023. For the years ended December 31, 2021, 2022
and 2023, our inventory turnover days were 36 days, 47 days and 47 days, respectively. This
level of inventory, particularly of finished goods, may result in obsolescence if we
over-estimate the demand level or if there is a sudden change in customer preference. The
demand for our products is dependent on our customers’ needs, the development of the sales
channels (including the distributorship network) and the economic condition of the market
which is beyond our control.
If we are not able to manage our inventory efficiently, we could be subject to the risk of
inventory obsolescence, decline in the realizable value, and significant write-down of the
value of our inventory. Any of these events could adversely affect our business and financial
condition and operating results.
Litigation or legal proceedings could expose us to liability, divert our management’s
attention and negatively impact our reputation.
During the Track Record Period and up to the Latest Practicable Date, we were not
involved in any material litigation, claim or any other proceedings against us. However, we
may be involved in litigation or legal proceedings during the ordinary course of business
operations related to product or other types of liability, labor disputes or contract disputes that
could have a material and adverse effect on our financial conditions. These actions could also
expose us to adverse publicity, which might adversely affect our brands, reputation and
customer preference for our products. If we become involved in any litigation or other legal
proceedings in the future, the outcome of which could be uncertain and could result in
settlements or outcomes that adversely affect our financial conditions. In addition, any
litigation or legal proceedings could incur substantial legal expenses as well as significant
time and attention of our management, diverting their attention from our business and
operations.
RISK FACTORS
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We may not be able to protect our intellectual property rights, and the infringement of
our intellectual property rights by third parties could affect our ability to compete.
Throughout our business development history, we have developed and maintained a
number of patents and trademarks for our products. As at the Latest Practicable Date, we held
three registered trademarks in the PRC. We also had 80 registered patents and 10 pending
patent applications in the PRC. Seeking patent protection can be lengthy and expensive, and
we cannot assure you that our patent applications will result in patents being issued or that our
existing patents or patents issued in the future will be sufficient to provide us with meaningful
or required protection or commercial advantage. Our patents and patent applications may be
challenged, invalidated or circumvented. Our current or potential competitors, many of whom
have substantial resources and have made substantial investments in competing technologies,
may have, and may develop, products that compete directly with our products despite our
possession of relevant intellectual property rights.
In addition, policing unauthorized use of proprietary technology is difficult and
expensive, and we may need to commence litigation to enforce or defend patents issued to us
or to determine the enforceability, scope and validity of our proprietary rights or those of
others. In the event of any such litigation or an adverse determination in any such litigation,
could result in substantial costs and diversion of resources and management attention, which
could harm our business, reputation and competitive position.
Our existing insurance coverage may not be sufficient to cover the risks related to our
operations and we may incur significant losses resulting from product liability claims or
business interruptions.
Insurance policies taken out by us, including those against fire, natural disasters,
operational interruptions and third-party liability, are subject to exclusions and limitations of
liability both in amount and with respect to the insured events. We and/or our employees (as
the case may be) may be exposed to claims in respect of matters that are not covered by any
insurance policies we maintain. In addition, although we maintain insurance coverage we
believe to be adequate based on the industry we operate in, covering our properties,
manufacturing facilities, plant and machinery, equipment and inventories, which is also in line
with market practice according to Frost & Sullivan, there may be circumstances (such as
earthquakes, war, floods, transportation disruption, power shortages and disruption of or
damage to our production facilities, equipment or products) in which we would not be covered
adequately, or at all. Any material loss not covered by our insurance or reimbursed by our
insurance providers could materially and adversely affect our business, financial conditions
and results of operations.
We may be affected by global and regional trade policies.
As of December 31, 2023, we have exported our products to more than 70 countries
across the world with a particular focus on the North American, Southeast Asian and European
markets. For the years ended December 31, 2021, 2022 and 2023, we generated approximately
22.2%, 21.8% and 23.1% of our revenue from our sales to international market, respectively.
Government policies favoring domestic companies in certain foreign markets or trade barriers
including export or import requirements, higher hygiene standards in relation to food
products, tariffs, taxes and other restrictions and charges may adversely affect our ability to
export our products to customers in other countries at favorable or reasonable terms or at all.
RISK FACTORS
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Moreover, any change in the inflation, interest rates, foreign exchange rate, government
policies, trade policies, exchange control regulations, food industry laws and regulations,
social stability, political, legal, economic and diplomatic environment of the countries in
which we or our customers operate, or the perception that these changes could occur, could
adversely affect the financial and economic conditions in the countries in which we or our
customers operate, as well as our business operation, financial condition and results of our
operations.
The government grants received by our Group during the Track Record Period was
non-recurring in nature.
During the Track Record Period, benefited from government grants and subsidies, we
recorded government grants of RMB7.1 million, RMB17.0 million and RMB11.8 million for
the year ended December 31, 2021, 2022 and 2023, respectively. These government grants
include (i) government grants related to income, representing subsidies received from the
local governments for the purpose of compensation of expenses incurred by our Group; and
(ii) government grants related to assets, representing subsidies received for the purchase of
assets. Our government grants are non-recurring in nature with no unfulfilled conditions or
contingencies attached to them, and the amount of the grants were subject to the discretion of
the relevant government authority. Since our receipt of the government grants and subsidies is
subject to periodic time lags and changing government practice, our other income in a
particular period may be higher or lower relative to other periods depending on the potential
changes in these government grants and subsidies in addition to any business or operational
factors that we may otherwise experience. There is no assurance that our Group will continue
to receive similar government grants in the future, or at all. If there is any change, suspension
or termination of government subsidies, our business, financial condition and results of
operations could be materially and adversely affected.
We may not be able to obtain adequate financing to fund our capital requirements.
We have in the past funded our capital expenditures primarily by shareholder equity
injections, cash generated from our operations and through credit facilities. We cannot assure
you that cash generated from our operations will be sufficient to fund our future development
and expansion plans. For us to grow and remain competitive, we may require new capital in
the future. There can be no assurance that such additional financing will be available to us on
reasonable terms or at all. Our ability to obtain additional capital in the future is subject to a
variety of uncertainties beyond our control, including market conditions, credit availability
and interest rates. If we are unable to raise sufficient capital in the future on commercially
acceptable terms, we may have to abandon, delay, or postpone certain of our planned capital
expenditures. Our inability to finance our planned capital expenditures could adversely affect
our business, financial condition, results of operations. In addition, the terms and amount of
capital raised through issuing equity securities may significantly dilute the interests of
shareholders.
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We are exposed to foreign exchange risks.
Our Group was subject to transactional currency exposures which arose from sales in
currencies other than our functional currencies. During the Track Record Period, our sales in
the PRC were settled in Renminbi while our international sales were mainly settled in U.S.
dollars. For the years ended December 31, 2021, 2022 and 2023, approximately 22.0%, 23.0%
and 23.0% of our sales were denominated in currencies other than the functional currencies of
our operating subsidiaries making the sale, respectively.
Any future significant fluctuations in exchange rates will result in increases or decreases
in our reported costs and earnings, and, accordingly, our business, financial condition, results
of operations and prospects. If there is any material fluctuation in the exchange rates of one
currency that we use to settle our payables against the other currency we received from our
customers, and if we are unable to pass on the exchange risk to our customers, our results of
operations and financial condition may be adversely affected. During the Track Record
Period, we do not have a foreign currency hedging policy but we monitor foreign exchange
exposure and will consider hedging significant foreign currency exposure should the need
arise.
Our share award scheme may cause shareholding dilution to our existing Shareholders
and have a material and adverse effect on our financial performance.
On January 18, 2021, Linuo Investment and Cougar Holdings approved a share award
scheme of Wuhan Youji, pursuant to which Linuo Investment (a substantial shareholder of
Cougar Holdings) agreed to grant share awards representing an aggregate of 600 shares in
Cougar Holdings to 104 eligible employees of our Group, including senior and middle
management of Wuhan Youji at the time. We adopted share award scheme to provide
incentives and rewards to eligible participants who contribute to the success of our operations.
For the year ended December 31, 2021, 2022 and 2023, we recognized share-based
compensation expenses of RMB0.4 million, RMB0.4 million and RMB0.4 million,
respectively. To further incentivize our employees, we may grant additional incentive shares
in the future. Issuance of additional shares with respect to such share award scheme may dilute
the shareholding percentage of our existing Shareholders. Expenses incurred with respect to
such share award scheme may also increase our operating expenses and therefore have a
material and adverse effect on our financial performance.
Any potential claims or disputes by the Unresponsive Shareholders could materially and
adversely affect our business and results of operations.
As detailed in “History, Reorganization and Corporate Structure — Reorganization —
Step 2: Arrangements for Employee Trust Shareholders” in this prospectus, our Company,
through Wuhan Youji, has actively sought to reach out to the beneficial shareholders,
including survivors and heirs, with a view to resolve the historical issues with the Employee
Trust. As of May 31, 2022, approximately 8.92% and 0.78% of the issued share capital of
Cougar Holdings, were held by the Unresponsive Shareholders and the Retaining
Shareholders, respectively, which were all transferred to Custodian Capital Ltd. subsequently.
Since the Retaining Shareholders have signed custodial agreements and the Retaining
Shareholders have agreed with such arrangements, our PRC Legal Advisors advise that such
arrangements are not against their wills and will not infringe their rights and interests. In
addition, considering (1) for the potential demands or claims of transferring or directly
RISK FACTORS
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holding such shares in the Company held by the Unresponsive Shareholders, our Controlling
Shareholders and Custodian Capital Ltd. have provided written undertaking that they will
accommodate and resolve any such demands or claims, and will not dispose such entrusted
shares without authorization and will assume potential liabilities for the Unresponsive
Shareholders (if any); and (2) such arrangements have been approved by the Local Financial
Regulatory Bureau of Wuhan (ፄʈЪ҅ ) and relevant procedures have been
went through pursuant to the instructions of the Wuhan Federation of Trade Union (ဏ̹ᐼ
ʈึ), our PRC Legal Advisors are of the view that under current circumstances, reasonable
measures have been taken as far as possible to protect the interests of Unresponsive
Shareholders so as to reduce the risk of potential disagreement raised by them. However, the
Unresponsive Shareholders, if they appear in the future upon presenting proof of their
beneficial title in the shares held by the Employee Trust, may not agree to such arrangement.
As such, any potential claims or disputes by the Unresponsive Shareholders could have a
material and adverse effect on our business, financial condition and results of operations.
RISKS RELA TING TO THE INDUSTRY
We may not compete effectively and may lose our leading market position.
We operate in a competitive market and face competition in each of our business
segments. Some of our competitors may have greater production capacity and manpower and
other resources, stronger financial strengths, more established customer base, more
diversified product offerings, more established brands and market recognition. We expect
competition in our industry to intensify in the future. Intense competition will subject us to
pricing pressure which may squeeze profit margins with respect to some of our products and
reduce our revenue. If we fail to compete effectively or maintain our competitiveness in the
market, our business and financial condition and operating results could be adversely affected.
Our business operations are subject to various registration, license, permit and
certificate requirements. The loss of, expiry, withdrawal, revocation, downgrading or
failure to obtain or renew any of such registrations, licenses, permits and certificates
could materially and adversely affect our operations and financial results.
Pursuant to relevant PRC laws and regulations, we are required to hold various licenses
and permits in order to conduct our business. We are also required to comply with applicable
regulations and standards in relation to our production and the quality of our products. Our
PRC Legal Advisors advise us and our Directors confirm that, during the Track Record Period
and up to the Latest Practicable Date, we had complied with all applicable material laws and
regulations in the PRC, had obtained all the necessary registrations, licenses, permits and
certificates for our business operations in the PRC and as confirmed by our Directors, we had
not experienced any difficulty in the renewal of such registrations, licenses, permits and
certificates in relation to our production and operations. For a summary of such registrations,
licenses, permits or certificates, please refer to “Regulatory Overview” in this prospectus.
The registrations, licenses, permits and certificates that we currently hold may only be
valid for a limited period of time and may be subject to periodic reviews and renewal by the
relevant authorities. Any failure to comply with these laws and regulations, or the loss of or
failure to renew our licenses and permits or any change in the government policies, could lead
to temporary or permanent suspension of some of our business operations or the imposition of
penalties on us, which could adversely affect our results of operations and financial condition.
RISK FACTORS
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RISKS RELA TING TO DOING BUSINESS IN THE PRC
The national and regional economies in China and our business may be adversely
affected by factors beyond our control such as natural disasters, acts of war or terrorism
and epidemics, including COVID-19.
During the Track Record Period, we derived a substantial portion of our revenue from
sales in the PRC. For the years ended December 31, 2021, 2022 and 2023, the revenue
generated from our sales in the PRC accounted for approximately 77.8%, 78.2% and 76.9% of
our total sales for the same periods, respectively. Our business is subject to general economic
and social conditions in China. Certain factors beyond our control may adversely affect the
economy, infrastructure and livelihood of people in the region where we conduct our business
operations. Some regions in China may be susceptible to the threat of natural disasters such as
earthquakes or epidemics such as Ebola and Monkeypox. Serious natural disasters and acts of
war or terrorism may result in, among others, power shortages or failures, loss of life, injuries,
destruction of assets and disruption of our business operations. Severe communicable disease
outbreaks may cause a widespread health crisis that materially and adversely affects economic
systems and financial markets. Any of these factors and others beyond our control could have
an adverse effect on the overall business sentiment and environment, create uncertainties in
the region where we conduct our business operations, cause our business to suffer in ways that
we cannot predict and materially and adversely impact our business, financial condition and
results of operations.
The outbreak of pneumonia-like illness named COVID-19 has been spreading globally.
COVID-19 is highly infectious and has resulted in deaths in the PRC and other countries. On
January 30, 2020, the World Health Organization declared the outbreak of COVID-19 as a
public health emergency of international concern and subsequently characterized COVID-19
as a pandemic on March 11, 2020. The government authorities of the PRC and other countries
may take various necessary measures from time to time to control the COVID-19 outbreak.
A prolonged outbreak and/or variant of COVID-19 could have a material adverse impact
on our business operations, including potential suspension of our production and impact on
delivery of our products to our customers and raw materials from our suppliers. Our business
operations could be disrupted if any of our staff had or is suspected to have COVID-19 as we
may be required to quarantine some or all of our staff and/or disinfect our production
facilities. The duration and scale of such epidemic cannot be predicted or controlled by our
Group and hence it may have significant and adverse impact on our business operations and
operating results.
Changes in existing laws and regulations or additional or more stringent laws and
regulations on environmental protection in the PRC may cause us to incur additional
capital expenditure.
PRC environmental protection laws and regulations require manufacturers that may
cause environmental wastes to adopt effective measures to control and dispose of industrial
wastes. In addition, we are required to obtain clearances and authorizations from government
authorities for the treatment and disposal of such discharge. As our manufacturing processes
generate noise, waste water, waste gas and other industrial wastes, we are required to comply
with national and local environmental regulations. If we fail to comply with environmental
regulations, in particular, in relation to the use of or discharge of hazardous substances (if
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any), we may be required to pay potentially significant monetary damages and fines, suspend
production or cease operations, which would have a material adverse effect on our business
and operating results. There can also be no assurance that the PRC government will not
change the existing laws or regulations, or impose additional or more stringent laws or
regulations, or interpret or implement the existing laws and regulations more strictly in order
to seek better environmental protection. Compliance with any of these additional or more
stringent laws or regulations or more stringent implementations may cause us to incur
additional capital expenditure, which we may be unable to pass on to our customers by
increasing the prices for our products.
Our business operations may be affected by regulatory changes.
The establishment and many aspects of the business operations of our PRC subsidiaries
are regulated by various local, provincial and national regulations. The PRC legal framework,
qualification requirements and enforcement trends in the fine industrial chemical products
industry may change, and we may not be able to respond to such changes in a timely manner.
Such changes may also cause the compliance cost to increase, which may materially and
adversely affect our business, financial condition and results of operations.
Changes to PRC laws, regulations and government policies in relation to environmental
protection and occupational health and safety could adversely impact our business,
financial condition and results of operations.
We are and will continue to be subject to PRC laws, rules and regulations concerning
environmental protection as well as occupational health and safety requirements, including in
relation to the operation of our facilities and the discharge of gaseous waste, liquid waste and
solid waste, the disposal of hazardous substances during our manufacturing processes and
noise pollution. Any breach of the PRC environmental protection and health and safety
regulations could subject us to a substantial fine, damage our reputation, cause delays in
production or result in some or all of our production facilities being temporarily suspended or
permanently shut down. There is no assurance that the national or local authorities will not
enact additional laws or regulations or amend or enforce new regulations in a more rigorous
manner. In case the PRC government amends such laws, rules and regulations to impose a
more stringent standard, we may need to incur additional costs and expenses (including
additional capital expenditure) in order to comply with the amended standard, which could
result in increased operating costs and thus adversely affecting our financial condition and
results of operations.
We may rely on dividends and other distributions on equity paid by our operating
subsidiaries to fund cash and financing requirements. Limitations on the ability of our
operating subsidiaries in the PRC to pay dividends to us could have a material adverse
effect on our ability to conduct our business.
We are a holding company incorporated in the Cayman Islands and conduct substantially
all of our operations through our PRC subsidiaries. We will rely on dividends paid by our PRC
subsidiaries for our future cash needs that cannot be provided by equity issuance or
borrowings outside of the PRC, including the funds necessary to pay dividends and other cash
distributions to our shareholders, to service any debt we may incur and to pay our operating
expenses. Under the PRC laws, payment of dividends is only permitted out of accumulated
profits according to PRC accounting standards and regulations, and subsidiaries in the PRC
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are also required to set aside part of their after-tax profits to fund certain reserve funds that are
not distributable as cash dividends. As a result, our PRC subsidiaries will be restricted in their
ability to transfer the net profits to us in the form of dividends. Other factors such as cash flow
conditions, restrictions on distributions contained in the PRC subsidiaries’ articles of
associations, restrictions contained in any debt instruments, withholding tax and other
arrangements will also affect the ability of our subsidiaries in the PRC to make distributions to
our Company. If our PRC subsidiaries cannot pay dividends due to government policy and
regulations or contractual restrictions, or because they cannot generate the requisite cash flow,
we may not be able to pay dividends, service our debt or pay our expenses, which may have a
material adverse effect on our business, prospects, financial condition and results of
operations.
We may be considered a “PRC resident enterprise” under the CIT Law, which could
result in our global income being subject to a 25% PRC enterprise income tax.
Our Company is incorporated in the Cayman Islands. We conduct our business primarily
through our operating subsidiaries in the PRC. Under the CIT Law, enterprises established
under the laws of foreign countries or regions and whose “de facto management bodies” are
located within the PRC are considered “PRC resident enterprises” and thus will generally be
subject to an CIT at the rate of 25% on their global income. On December 6, 2007, the State
Council adopted the CIT Regulations, which became effective on January 1, 2008 and was
amended on April 23, 2019, which defines the term “de facto management bodies” as “bodies
that substantially carry out comprehensive management and control on the business operation,
employees, accounts and assets of enterprises.” Currently, substantially all of our
management is based in the PRC, and may continue to be based in the PRC in the future. On
April 22, 2009, a circular issued by the State Administration of Taxation in respect of the
standards used to classify certain Chinese-invested enterprises controlled by Chinese
enterprises or Chinese group enterprises and established outside of China as “resident
enterprises” clarified that dividends and other income paid by such “resident enterprises” will
be considered to be Chinese source income, subject to withholding tax in the PRC, currently at
the rate of 10%, when recognized by non-Chinese enterprise shareholders. The circular also
subjects such “resident enterprises” to various reporting requirements with PRC tax
authorities. Under the implementation regulations to the enterprise income tax, a “de facto
management body” is defined as a body that has material and overall management and control
over the production and business operations, personnel and human resources, finances and
properties of an enterprise. In addition, the circular sets forth the criteria for determining
whether “de facto management bodies” are located in the PRC for overseas incorporated,
domestically controlled enterprises. However, as the circular only applies to enterprises
established outside of the PRC which are controlled by Chinese enterprises or groups of
Chinese enterprises, it remains unclear how the tax authorities will interpret the location of
“de facto management bodies” of overseas incorporated enterprises. As such, despite the fact
that substantially all of our management members are currently located in China, it remains
unclear whether the PRC tax authorities would require our overseas registered entities to be
treated as PRC resident enterprises.
If we were considered a PRC resident enterprise, we would be subject to the CIT at the
rate of 25% on our global income, and any dividends or gains on the sale of our Shares
received by our non-resident enterprise shareholders may be subject to a withholding tax at a
rate of up to 10%. In addition, although the CIT Law provides that dividend payments between
qualified PRC resident enterprises are exempted from CIT, it remains unclear as to the
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qualification requirements for this exemption and whether dividend payments made by our
PRC operating subsidiaries to us would meet such qualification requirements if we were
considered a PRC resident enterprise for the purpose. If our global income were to be taxed
under the CIT Law, our financial position and operating results would be materially and
adversely affected.
Failure by our Shareholders or beneficial owners who are PRC residents to make any
required applications and filings pursuant to regulations relating to offshore investment
activities by PRC residents may prevent us from distributing profits and could expose us
and our PRC resident Shareholders to liabilities under PRC law.
Circular 37, which was promulgated by SAFE and became effective on July 4, 2014,
requires a PRC individual resident (the “ PRC Resident ”) to file a “Registration Form of
Overseas Investments Contributed by Domestic Individual Residents” and register with the
local SAFE branch before he or she contributes assets or equity interests in an overseas special
purpose vehicle (the “ Overseas SPV ”), that is directly established or controlled by the PRC
Resident for the purpose of conducting investment or financing. Following the initial
registration, the PRC Resident is also required to register with the local SAFE branch for any
major change in respect of the Overseas SPV , including, among other things, any major
change of the PRC Resident shareholder, name of the Overseas SPV , term of operation, or any
increase or reduction of the overseas SPV’s registered capital, share transfer or swap, and
merger or division. According to the Notice on Further Simplifying and Improving Policies
for the Foreign Exchange Administration of Direct Investment (ආɓӉ
 ) released in February 2015 by SAFE, as
amended in December 2019, or SAFE Circular 13, local banks will examine and handle
foreign exchange registration for overseas direct investment, including the initial foreign
exchange registration and amendment registration, under Circular 37 from June 2015.
The failure to comply with registration procedures set forth in SAFE Circular 37 may
result in restriction being imposed on the foreign exchange activities of our PRC subsidiaries,
including the payment of dividends and other distributions to us and the capital inflow from us
and may also subject the relevant PRC Residents and our PRC subsidiaries to penalties under
PRC foreign exchange administration regulations. Further, failure to comply with various
SAFE registration requirements described above would result in liability for foreign exchange
evasion under PRC laws. It remains unclear how this regulation, and any further regulation
concerning offshore or cross-border transaction, will be interpreted, amended and
implemented by the relevant government authorities, we cannot predict how these regulations
will affect our business operation or future strategies.
Fluctuations in exchange rates may affect the value of your investment and limit our
ability to utilize our cash.
The conversion and remittance of foreign currencies are subject to the foreign exchange
regulations in the PRC. We receive part of our payments from our customers in Renminbi and
may need to convert and remit Renminbi into foreign currencies for the payment of dividends,
if any, to our Shareholders. Under the current foreign exchange regulations in the PRC,
following the completion of the Global Offering, foreign exchange transactions under the
current account conducted by us, including the payment of dividends, do not require prior
approval from the SAFE, although we are still required to present the relevant documentary
evidence and conduct the transactions at designated foreign exchange banks in the PRC that
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have the licenses to carry out foreign exchange business. We will be able to pay dividends in
foreign currencies without prior approval from SAFE or its local branches by complying with
such procedural requirements. However, in case foreign currencies become scarce in the PRC,
we may not be able to pay dividends in foreign currencies to our Shareholders. Foreign
exchange transactions under our capital account will continue to be, to certain extent, subject
to foreign exchange controls and require the approval of the SAFE or its local branches. These
limitations could affect our ability to obtain foreign exchange through equity financing, or to
obtain foreign exchange for capital expenditures.
Our sales in the PRC are settled in Renminbi while our international sales are mainly
settled in U.S. dollars. Any significant fluctuations in the exchange rates between these
currencies could adversely affect our business and financial condition and operating results.
These exchange rates may also be affected by, among other things, the policies of the PRC
Government and changes in the political and economic conditions both internationally and in
the PRC. Since 1994, the conversion of Renminbi into foreign currencies, including U.S.
dollar, has been based on rates set by the People’s Bank of China, which are based on
interbank foreign exchange market rates on the previous day and current exchange rates on the
world financial markets. On July 21, 2005, the PRC government introduced a managed
floating exchange rate system to allow the value of Renminbi to fluctuate within a regulated
band based on market supply and demand and by reference to a basket of currencies. The
exchange rate between Renminbi and the U.S. dollar may indirectly affect the exchange rates
between Renminbi and Euro. The value of Renminbi against Hong Kong dollar has been
changing on a daily basis. The PRC government has since then made, and may make, further
adjustments to the exchange rate system in the future.
If Renminbi appreciates or depreciates against other currencies significantly, and as we
need to convert and remit the proceeds from the Global Offering and future financing into
Renminbi for our operations, appreciation or depreciation of the Renminbi against the
relevant foreign currencies would decrease or increase Renminbi amount we would receive
from the conversion. On the other hand, because the dividends on our Shares, if any, will be
paid in Hong Kong dollars, any devaluation of Renminbi against Hong Kong dollar could
reduce the amount of any cash dividends on our Shares in Hong Kong dollars.
Certain of our lease agreements have not been registered with the relevant government
authorities and may be subject to fines.
We have leased several properties in the PRC. As of the Latest Practicable Date, certain
of our lease agreements had not been registered with the relevant government authorities.
Under the relevant PRC laws and regulations, the lease agreements need to be registered and
filed with the relevant government. According to our PRC Legal Advisors, while the lack of
registration will not affect the validity and enforceability of the lease agreements, a fine
ranging from RMB1,000 to RMB10,000 may be imposed on the parties for each
non-registered lease. We may incur additional expenses if any fine were imposed upon us. The
registration of some lease agreements requires additional steps to be taken by the respective
landlords which are beyond our control. We cannot assure you that the landlords will be
cooperative and the registration of these lease agreements and other lease agreements that we
may enter into in the future can be completed.
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PRC regulation of direct investment and loans by offshore holding companies to PRC
entities may delay or limit us from using the net proceeds from the Global Offering to
make additional capital contributions or loans to our major PRC subsidiaries.
In utilizing the proceeds of the Global Offering in the manner described in the section
headed “Future Plans and Use of Proceeds” in this prospectus or any other debt or equity
offering, as an offshore holding company of our PRC operating subsidiaries, we may make
loans or additional capital contributions to our PRC subsidiaries. Any loans to our PRC
subsidiaries are subject to the PRC regulations and approvals. For example, loans made by our
Company to our PRC subsidiaries to finance their activities cannot exceed the statutory limits
and must be registered with SAFE or its local counterpart.
In addition, any capital contributions made to our PRC subsidiaries must be filed with the
MOFCOM or its local counterpart. We cannot assure you that we will be able to obtain such
government registrations or approvals on a timely basis, if at all, with respect to future loans
or capital contributions made by us to our PRC subsidiaries. If we fail to receive such
registrations or approvals, our ability to use the net proceeds of the Global Offering could be
negatively affected, which could adversely affect our liquidity and our ability to fund and
expand our business.
We face tax risks with respect to the indirect transfers of equity interests in the PRC
resident enterprises in connection with the Reorganization.
On February 3, 2015, SAT promulgated the Bulletin on Several Issues concerning the
Enterprise Income Tax on Indirect Asset Transfer by Non-Resident Enterprises
(Bulletin [2015] No. 7, “ Bulletin 7 ”) (ʍਪᕚ
ʮѓ). Bulletin 7 is the latest regulatory instrument on indirect transfer and replace certain
provisions of two previous sets of guidance issued in 2009 and 2011: the Notice on
Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-Resident
Enterprises ([2009] Circular 698, “ Circular 698 ”) (ה
) and the Bulletin on Several Issues Concerning the Administration of
Income Tax on Non-resident Enterprises (Bulletin [2011] No. 24, “ Bulletin 24 ”) (֢ڢ׵
ʮѓ ). Tax matters occurred but have not been settled before
3 February 2015, the date of implementation of Bulletin 7, shall be governed by Bulletin 7.
Pursuant to Bulletin 7, an indirect transfer of equities and other assets of a Chinese
resident enterprises (“ Chinese taxable assets ”) conducted by non-resident enterprises
through arrangements that do not have reasonable commercial purposes, which results in
avoidance of EIT, shall be deemed as direct transfer of Chinese taxable assets and thus subject
to tax in the PRC.
In connection with the Reorganization, our Group conducted transactions that may be
deemed to be indirect transfers of equity interests in the PRC subsidiaries. If the relevant PRC
tax authorities hold that these transactions do not have reasonable commercial purpose and
were conducted for the purpose of avoiding PRC tax, our Group may incur PRC tax liability
for such transaction. However, it remains unclear how the PRC tax authorities will implement
and enforce Bulletin 7 and whether it will subject our Group to any PRC tax liabilities.
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Y ou may experience difficulty in effecting service of legal process, enforcing foreign
judgments or bringing original actions in the PRC based on foreign laws against us and
our Directors and senior management.
Substantially all of our assets are located in the PRC. In addition, almost all of our
Directors and executive officers reside in the PRC and their personal assets may also be in the
PRC. Therefore, investors may encounter difficulties in effecting service of process from
outside the PRC upon us or most of our Directors and executive officers. A judgment of a
court from a foreign jurisdiction may be reciprocally recognized or enforced if the jurisdiction
has a corresponding treaty with the PRC or if the judgments of the PRC courts have been
recognized before in that jurisdiction, subject to the satisfaction of other requisite
requirements. However, recognition and enforcement in the PRC of judgments of certain
overseas courts in relation to any matter not subject to a binding jurisdiction provision may be
difficult or impossible.
RISKS RELA TING TO THE GLOBAL OFFERING
There has been no prior public market for the Shares and the liquidity and market price
of our Shares may be volatile.
Prior to completion of the Global Offering, there has been no public market for our
Shares. There can be no guarantee that an active trading market for our Shares will develop or
be sustained after completion of the Global Offering. The Offer Price is the result of
negotiations between our Company and the Sole Overall Coordinator (for itself and on behalf
of the Underwriters), which may not be indicative of the price at which our Shares will be
traded following completion of the Global Offering. The market price of our Shares may drop
below the Offer Price at any time after completion of the Global Offering.
Purchasers of our Shares in the Global Offering will experience immediate dilution and
may experience further dilution if we issue additional Shares in the future.
If the final Offer Price is higher than the net tangible asset value per Share of the
outstanding Shares issued to our existing Shareholders immediately prior to the Global
Offering, purchasers of our Shares in the Global Offering will experience an immediate
dilution in terms of the pro forma consolidated net tangible asset value. In addition, we may
consider offering and issuing additional Shares or equity-related securities in the future to
raise additional funds, finance acquisitions or for other purposes. Purchasers of our Shares
may experience further dilution in terms of the net tangible asset value per Share if we issue
additional Shares in the future at a price that is lower than the net tangible asset value per
Share.
The price and the trading volume of our Shares may be volatile which could result in
substantial losses for investors purchasing our Shares under the Global Offering.
The price and trading volume of our Shares may be volatile. The market price of our
Shares may fluctuate significantly and rapidly as a result of the following factors, among
others, some of which are beyond our control:
• actual or anticipated variations of our operating results;
• loss of key raw material suppliers;
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• changes in securities analysts’ estimates or market perception of our financial
performance;
• announcement by us of significant acquisitions, depositions, strategic alliances or
joint ventures;
• addition or departure of key senior management or other key personnel;
• fluctuations in stock market price and volume;
• regulatory or legal developments, including involvement in litigation; and
• general economic, political and stock market conditions in Hong Kong, the PRC and
elsewhere in the world.
In addition, stock markets and the shares of other companies listed on the Stock
Exchange with significant operations and assets in the PRC have experienced increasing price
and volume fluctuations in recent years, some of which have been unrelated or
disproportionate to the operating performance of such companies. Such market fluctuations
may materially and adversely affect the market price of our Shares.
Future sale or major divestment of Shares by our Controlling Shareholders or our
investors could materially and adversely affect the prevailing market price of our Shares.
The future sale of a significant number of our Shares in the public market after the Global
Offering, or the possibility of such sales, by our Controlling Shareholders or investors could
materially and adversely affect the market price of our Shares and could materially impair our
future ability to raise capital through offerings of our Shares. Although our Controlling
Shareholders have agreed to a lock-up on their Shares, any major disposal of our Shares by
any of such Controlling Shareholders upon expiry of the relevant lock-up periods (or the
perception that these disposals may occur) may cause the prevailing market price of our
Shares to fall which could negatively impact our ability to raise equity capital in the future.
Our interests may conflict with those of our Controlling Shareholders, who may take
actions that are not in, or may conflict with, our or our public shareholders’ best
interests.
The interests of our Controlling Shareholders may differ from the interests of our other
Shareholders. If the interests of our Controlling Shareholders conflict with the interests of our
other Shareholders, or if our Controlling Shareholders cause our business to pursue strategic
objectives that conflict with the interests of our other Shareholders, the non-controlling
shareholders could be disadvantaged by the actions that our Controlling Shareholders choose
to cause us to pursue.
Our Controlling Shareholders could have significant influence in determining the
outcome of any corporate transaction or other matter submitted to the Shareholders for
approval, including but not limited to mergers, privatizations, consolidations and the sale of
all, or substantially all, of our assets, election of directors, and other significant corporate
actions. Our Controlling Shareholders have no obligation to consider the interests of our
Company or the interests of our other shareholders. Consequently, our Controlling
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Shareholders’ interests may not necessarily be in line with the best interests of our Company
or the interests of our other Shareholders, which may have a material and adverse effect on our
Company’s business operations and the price at which our Shares are traded on the Stock
Exchange.
Future offerings or sales could adversely affect the prevailing market price of our
Shares.
Future offerings or sales of our Shares by us or our Controlling Shareholders, or other
Shareholders in the public market, or the perception that such offerings or sales could occur,
may cause the market price of our Shares to decline. Following the expiration of their
respective lock-up periods, the market price of our Shares may decline as a result of future
sales of substantial amounts of our Shares or other securities relating to our Shares or the
perception that such sales or issuances may occur. This could also have a material and adverse
effect on our ability to raise capital in the future at a time and at a price deemed appropriate.
In addition, if we issue additional Shares or share options or other securities in the future, you
may experience further dilution.
Certain industry statistics contained in this prospectus may not be accurate and should
not be unduly relied upon.
Certain facts and statistics in this prospectus related to the PRC, its economy and the
industries in which we operate within the PRC are derived from official government
publications generally believed to be reliable. We believe that the sources of these facts and
statistics are appropriate sources for such information and have taken reasonable care in
extracting and reproducing such information. We have no reason to believe that such
information is false or misleading in any material respect or that any fact has been omitted that
would render such information false or misleading in any material respect. These facts and
statistics have not been independently verified by us, the Sole Sponsor, the Sole Overall
Coordinator, the Sole Global Coordinator, the Joint Bookrunners, the Joint Lead Managers,
the Underwriters, any of our or their respective directors, officers or representatives or any
other person involved in the Global Offering and therefore we make no representation as to the
accuracy of such facts and statistics, which may not be consistent with other information
compiled within or outside the PRC and may not be complete or up-to-date. Due to possibly
flawed or ineffective collection methods or discrepancies between published information and
market practice and other problems, the statistics herein may be inaccurate or may not be
comparable from period to period or to statistics produced for other economies and should not
be unduly relied upon. Further, we cannot assure you that they are stated with the same degree
of accuracy as may exist elsewhere. In all cases, investors should give consideration as to how
much weight or importance they should place on all such facts and statistics.
This prospectus contains forward looking statements relating to our plans, objectives,
expectations and intentions, which may not represent our overall performance for
periods of time to which such statements relate.
Included in this prospectus are various forward-looking statements that are based on
various assumptions. The future results could differ materially from those expressed or
implied by such forward-looking statements. For details of these statements and the
associated risks, please refer to “Forward-looking Statements” in this prospectus.
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Y ou should read the entire prospectus carefully and we strongly caution you not to place
any reliance on any information contained in press articles or other media regarding us
and the Global Offering.
We strongly caution you not to rely on any information contained in the press articles or
other media regarding us and the Global Offering. Prior to the publication of this prospectus,
there has been press and media coverage regarding us and the Global Offering, including
certain financial information, industry comparisons, and/or other information about the
Global Offering and us. There may continue to be additional press and media coverage on us
and this Global Offering. We do not accept any responsibility for any such press or media
coverage or the accuracy or completeness of any such information. We make no representation
as to the appropriateness, accuracy, completeness or reliability of any such information or
publication. To the extent that any such information appearing in publications other than this
prospectus is inconsistent with, or conflicts with, the information contained in this
prospectus, we disclaim it, and accordingly you should not rely on any such information. In
making your decision as to whether to purchase our Shares, you should rely only on the
information included in this prospectus.
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In preparation for the Global Offering, we have sought the following waivers from strict
compliance with the relevant provisions of the Listing Rules.
MANAGEMENT PRESENCE IN HONG KONG
Pursuant to Rule 8.12 of the Listing Rules, we must have a sufficient management
presence in Hong Kong. This normally means that at least two of our executive directors must
be ordinarily resident in Hong Kong.
Since our principal business and operations are substantially located, managed and
conducted in the PRC through its PRC subsidiaries, our Directors consider that appointment
of additional executive Directors who will be ordinarily resident in Hong Kong would not be
beneficial to or appropriate for the Group. As none of our executive Directors are ordinarily
based in Hong Kong, we do not, and do not contemplate in the foreseeable future that we will,
have a sufficient management presence in Hong Kong for the purpose of satisfying the
requirements under Rule 8.12 of the Listing Rules.
Accordingly, we have applied to the Stock Exchange for, and the Stock Exchange has
agreed to grant, a waiver from strict compliance with the requirements under Rule 8.12 of the
Listing Rules. We will put in place the following measures in order to ensure that regular
communication is maintained between the Stock Exchange and our Company:
(a) we have appointed two authorized representatives pursuant to Rule 3.05 of the
Listing Rules, who will act as our principal channel of communication with the
Stock Exchange. The two authorized representatives are Mr. Chen Ping ( ௓̻), an
executive Director and Ms. Lai Ho Yan (ࢸone of our company secretaries.
Mr. Chen confirms that he possesses valid travel documents and can readily travel to
Hong Kong and Ms. Lai is ordinarily resident in Hong Kong. Each of the authorized
representatives will be available to meet with the Stock Exchange in Hong Kong
within a reasonable period of time upon the request of the Stock Exchange and will
be readily contactable by telephone and email. Each of the authorized
representatives is authorized to communicate on behalf of our Company with the
Stock Exchange;
(b) the authorized representatives have means to contact our Directors (including our
independent non-executive Directors) promptly at all times as and when the Stock
Exchange wishes to contact our Directors for any matter;
(c) all of our Directors have confirmed that they possess or can apply for and renew
valid travel documents to visit Hong Kong and would be able to meet with the Stock
Exchange upon reasonable notice and within a reasonable period. Each of our
Directors will be readily contactable by telephone and email, and is authorized to
communicate on behalf of our Company with the Stock Exchange;
(d) each of our Directors has provided his/her respective contact details, including
office phone numbers, mobile phone numbers, email addresses and addresses, to the
Stock Exchange and the authorized representatives. In the event that any Director
expects to travel or otherwise be out of office, he/she will provide the contact details
and his/her place of accommodation to the authorized representatives;
W AIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES
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(e) our Company has appointed BOCOM International (Asia) Limited as compliance
adviser pursuant to Rule 3A.19 of the Listing Rules who will have access at all times
to the authorized representatives, our Directors and other senior management of our
Company, and will act as an additional channel of communication with the Stock
Exchange for the period commencing on the date of the listing of the Shares on the
Main Board and ending on the date when our Company distributes its annual report
for the first full financial year in accordance with Rule 13.46 of the Listing Rules;
and
(f) meetings between the Stock Exchange and our Directors can be arranged through
the authorized representatives or the compliance adviser of our Company or directly
with our Directors within a reasonable time frame. Our Company will inform the
Stock Exchange promptly in respect of any change in the authorized representatives
and/or its compliance adviser.
APPOINTMENT OF JOINT COMPANY SECRETARIES
Pursuant to Rule 8.17 of the Listing Rules, we must appoint a company secretary who
satisfies Rule 3.28 of the Listing Rules. According to Rule 3.28 of the Listing Rules, our
company secretary must be an individual who, by virtue of his or her academic or professional
qualifications or relevant experience, is, in the opinion of the Stock Exchange, capable of
discharging the functions of company secretary.
The Stock Exchange considers the following academic or professional qualifications to
be acceptable:
(a) a member of The Hong Kong Chartered Governance Institute;
(b) a solicitor or barrister (as defined in the Legal Practitioners Ordinance (Chapter 159
of the Laws of Hong Kong)); and
(c) a certified public accountant (as defined in the Professional Accountants Ordinance
(Chapter 50 of the Laws of Hong Kong)).
In assessing “relevant experience,” the Stock Exchange will consider the individual’s:
(a) length of employment with the issuer and other issuers and the roles he or she
played;
(b) familiarity with the Listing Rules and other relevant laws and regulations including
the SFO, the Companies Ordinance, the Companies (Winding Up and Miscellaneous
Provisions) Ordinance, and the Takeovers Code;
(c) relevant training taken and/or to be taken in addition to be the minimum requirement
under Rule 3.29 of the Listing Rules; and
(d) professional qualifications in other jurisdictions.
W AIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES
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We have appointed Mr. Chen Ping ( ௓̻) as one of our joint company secretaries. Mr.
Chen joined our Group in October 2010 as the board secretary and has served as a director of
Wuhan Youji since August 2016, and is primarily responsible for the Board affairs, corporate
governance and capital operations of our Group. Although our Company believes, having
regard to Mr. Chen’s past experience in handling corporate matters, that he has a thorough
understanding of our Company and the Board, Mr. Chen does not possess the requisite
qualifications required by Rule 3.28 of the Listing Rules. Therefore, our Company has
appointed Ms. Lai Ho Yan (ࢸwho is a Hong Kong resident and possesses such
qualifications, to be a joint company secretary to assist Mr. Chen in the compliance matters
for the Listing as well as other Hong Kong regulatory requirements for a period of three years
commencing from the Listing Date. For the biographies of our joint company secretaries,
please refer to “Directors and Senior Management – Joint Company Secretaries” in this
prospectus. Over such three-year period, we will implement measures to assist Mr. Chen to
satisfy the requisite qualifications as prescribed in Rule 3.28 of the Listing Rules.
Accordingly, we have applied to the Stock Exchange for, and the Stock Exchange has
agreed to grant, a waiver from strict compliance with the requirements under Rules 8.17 and
3.28 of the Listing Rules in relation to Mr. Chen’s appointment as joint company secretary
pursuant to Chapter 3.10 of the Guide for New Listing Applicants on the following conditions:
(a) Mr. Chen must be assisted by Ms. Lai, who possesses the qualification and
experience as required under Rule 3.28 of the Listing Rules and is appointed as a
joint company secretary throughout the validity period of the waiver; and
(b) the waiver is valid for a period of three years from the Listing Date and will be
revoked immediately if and when Ms. Lai ceases to provide such assistance or if
there are material breaches of the Listing Rules by our Company.
It is anticipated that Mr. Chen will gain experience with the assistance of Ms. Lai. Before
the end of the initial three-year period, we will evaluate the then experience of Mr. Chen in
order to determine whether the requirements as stipulated in Rules 3.28 and 8.17 of the Listing
Rules can be satisfied at the time and on-going assistance would be needed. We would then
endeavor to demonstrate to the satisfaction of the Stock Exchange that Mr. Chen, having had
the benefit of Ms. Lai’s assistance for three years, would then have acquired the “relevant
experience” within the meaning of Rule 3.28 of the Listing Rules so that a further waiver
would not be necessary.
CONTINUING CONNECTED TRANSACTIONS
We have entered into, and expect to continue, certain transactions which will constitute
our continuing connected transactions under the Listing Rules upon Listing. Accordingly, we
have applied to the Stock Exchange for, and the Stock Exchange has agreed to grant, a waiver
from strict compliance with Chapter 14A of the Listing Rules. For details, please refer to
“Continuing Connected Transactions” in this prospectus.
W AIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES
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DIRECTORS’ RESPONSIBILITY STA TEMENT
This prospectus, for which our Directors (including any proposed Director who is named
as such in this prospectus) collectively and individually accept full responsibility, includes
particulars given in compliance with the Companies (Winding Up and Miscellaneous
Provisions) Ordinance, the Securities and Futures (Stock Market Listing) Rules (Chapter
571V of the Laws of Hong Kong) and the Listing Rules for the purpose of giving information
with regard to us. Our Directors, having made all reasonable enquiries, confirm that to the best
of their knowledge and belief the information contained in this prospectus is accurate and
complete in all material respects and not misleading or deceptive, and there are no other
matters the omission of which would make any statement herein or this prospectus
misleading.
CSRC FILING
The CSRC issued a notification on January 2, 2024 confirming our completion of the
filing procedures for the Listing and the Global Offering. In issuing such notification, the
CSRC accepts no responsibility for our financial soundness or the accuracy of any of the
statements made or opinions expressed in this prospectus.
THE HONG KONG PUBLIC OFFERING AND THIS PROSPECTUS
This prospectus is published solely in connection with the Hong Kong Public Offering,
which forms part of the Global Offering. For applicants under the Hong Kong Public Offering,
this prospectus sets out the terms and conditions of the Hong Kong Public Offering.
The Hong Kong Offer Shares are offered solely on the basis of the information contained
and representations made in this prospectus and on the terms and subject to the conditions set
out herein. No person is authorized to give any information in connection with the Global
Offering or to make any representation not contained in this prospectus, and any information
or representation not contained herein must not be relied upon as having been authorized by
our Company, the Sole Sponsor, the Sole Overall Coordinator, the Sole Global Coordinator,
the Joint Bookrunners, the Joint Lead Managers, and any of the Underwriters, any of their
respective directors, agents, employees or advisors or any other party involved in the Global
Offering.
The Listing is sponsored by the Sole Sponsor and the Global Offering is managed by the
Sole Overall Coordinator. The Hong Kong Public Offering is fully underwritten by the Hong
Kong Underwriters under the terms and conditions of the Hong Kong Underwriting
Agreement and is subject to our Company and the Sole Overall Coordinator (for itself and on
behalf of the Underwriters) agreeing on the Offer Price. The International Offering is
expected to be fully underwritten by the International Underwriters subject to the terms and
conditions of the International Underwriting Agreement, which is expected to be entered into
on or around the Price Determination Date.
If, for any reason, the Offer Price is not agreed between the Sole Overall Coordinator (for
itself and on behalf of the Underwriters) and the Company, the Global Offering will not
proceed and will lapse. For full information about the Underwriters and the underwriting
arrangements, please refer to “Underwriting” in this prospectus.
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
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Neither the delivery of this prospectus nor any offering, sale or delivery made in
connection with the Shares should, under any circumstances, constitute a representation that
there has been no change or development reasonably likely to involve a change in our affairs
since the date of this prospectus or imply that the information contained in this prospectus is
correct as of any date subsequent to the date of this prospectus.
Details of the structure of the Global Offering, including its conditions, are set out in
“Structure and Conditions of the Global Offering” in this prospectus; and the procedures for
applying for the Hong Kong Offer Shares are set out in “How to Apply for Hong Kong Offer
Shares” in this prospectus.
OVER-ALLOTMENT OPTION AND STABILIZA TION
Details of the arrangements relating to the Over-allotment Option and stabilization are
set out in “Structure and Conditions of the Global Offering” in this prospectus.
RESTRICTIONS ON OFFERS AND SALES OF SHARES
Each person acquiring the Hong Kong Offer Shares under the Hong Kong Public Offering
will be required to, or be deemed by his acquisition of Offer Shares to, confirm that he is
aware of the restrictions on offers of the Offer Shares described in this prospectus.
No action has been taken to permit a public offering of the Offer Shares or the general
distribution of this prospectus in any jurisdiction other than in Hong Kong. Accordingly, this
prospectus may not be used for the purposes of, and does not constitute, an offer or invitation
in any jurisdiction or in any circumstances in which such an offer or invitation is not
authorized or to any person to whom it is unlawful to make such an offer or invitation. The
distribution of this prospectus and the offering of the Offer Shares in other jurisdictions are
subject to restrictions and may not be made except as permitted under the applicable securities
laws of such jurisdictions and pursuant to registration with or authorization by the relevant
securities regulatory authorities or an exemption therefrom.
APPLICA TION FOR LISTING ON THE STOCK EXCHANGE
We have applied to the Listing Committee for the listing of, and permission to deal in, the
Shares in issue and to be issued pursuant to the Global Offering (including any additional
Shares which may be issued pursuant to the exercise of the Over-allotment Option). Dealings
in the Shares on the Stock Exchange are expected to commence on Tuesday, June 18, 2024. No
part of our equity or debt securities is listed on or dealt in on any other stock exchange and no
such listing or permission to list is being or proposed to be sought in the near future.
Under section 44B(1) of the Companies (Winding Up and Miscellaneous Provisions)
Ordinance, any allotment made in respect of any application will be invalid if the listing of,
and permission to deal in, the Shares on the Stock Exchange is refused before the expiration of
three weeks from the date of the closing of the application lists, or such longer period (not
exceeding six weeks) as may, within the said three weeks, be notified to our Company by or on
behalf of the Stock Exchange.
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
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SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
If the Stock Exchange grants the listing of, and permission to deal in, the Shares and we
comply with the stock admission requirements of HKSCC, the Shares will be accepted as
eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect
from the Listing Date or any other date as determined by HKSCC. Settlement of transactions
between participants of the Stock Exchange is required to take place in CCASS on the second
settlement day after any trading day.
All activities under CCASS are subject to the General Rules of HKSCC and HKSCC
Operational Procedures in effect from time to time.
Investors should seek the advice of their stockbroker or other professional advisors for
details of the settlement arrangement as such arrangements may affect their rights and
interests. All necessary arrangements have been made to enable the Shares to be admitted into
CCASS.
PROFESSIONAL TAX ADVICE RECOMMENDED
You should consult your professional advisors if you are in any doubt as to the taxation
implications of subscribing for, purchasing, holding or disposing of, or dealing in, the Shares
or exercising any rights attaching to the Shares. We emphasize that none of our Company, the
Sole Sponsor, the Sole Overall Coordinator, the Sole Global Coordinator, the Joint
Bookrunners, the Joint Lead Managers, the Underwriters, any of our or their respective
directors, officers or representatives or any other Global Offering accepts responsibility for
any tax effects or liabilities resulting from your subscription, purchase, holding or disposing
of, or dealing in, the Shares or your exercise of any rights attaching to the Shares.
REGISTER OF MEMBERS AND STAMP DUTY
Our principal register of members will be maintained by our principal share registrar,
International Corporation Services Ltd., in the Cayman Islands. Our Hong Kong register of
members will be maintained by the Hong Kong Share Registrar, Tricor Investor Services
Limited, in Hong Kong.
All Offer Shares issued pursuant to applications made in the Hong Kong Public Offering
and the International Offering will be registered on the Hong Kong register of members of our
Company in Hong Kong. Dealings in the Shares registered in our Hong Kong register of
members will be subject to Hong Kong stamp duty. For further details of Hong Kong stamp
duty, please seek professional tax advice.
EXCHANGE RA TE CONVERSION
Unless otherwise specified, amounts denominated in Renminbi or U.S. dollars have been
translated, for the purpose of illustration only, into Hong Kong dollars in this prospectus at the
following exchange rates: RMB0.9084:HK$1.00 and US$1.00:HK$7.8245.
No representation is made that any amounts in Renminbi or U.S. dollars were or could
have been or could be converted into Hong Kong dollars at such rates or any other exchange
rates on such date or any other date.
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
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ROUNDING
Certain amounts and percentage figures included in this prospectus have been subject to
rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an
arithmetic aggregation of the figures preceding them.
LANGUAGE
If there is any inconsistency between this prospectus and its Chinese translation, this
prospectus shall prevail, provided that if there is any inconsistency between the Chinese
names of the entities or enterprises established in the PRC mentioned in this prospectus and
their English translations, the Chinese names shall prevail. The English translations of the
Chinese names of such PRC entities or enterprises are provided for identification purposes
only.
INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
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DIRECTORS
Name Residential address Nationality
Executive Directors
Mr. Zou Xiaohong Room 1, 1/F
No. 101, Jianqiao New Village
Hanyang District, Wuhan
Hubei
China
Chinese
Mr. Chen Ping 5-101 Building 65
63 Huanhu Road
Dongxihu District, Wuhan
Hubei
China
Chinese
Non-executive Directors
Mr. Gao Lei Room 101, No. 2
Lane 1889, Hongqiao Road
Changning
Shanghai
China
Chinese
Mr. Shen Yingming No. 5 Villa, Linuo Technology Park (North)
No. 30766, Jingshi East Road
Licheng District, Jinan
Shandong
China
Chinese
Ms. Li Deye Room 102, Unit 4, Building 5
Linuo Group, No. 30099
Jingshi East Road
Licheng District, Jinan
Shandong
China
Chinese
Independent non-executive Directors
Dr. Liu Zhongdong No. 7, Unit 4, Building 5
No. 101 Zhongyuan East Road
Erqi District, Zhengzhou
Henan
China
Chinese
Dr. Yuan Kang Room 5A, Unit 1, Building 621
Chengtou Hancheng, Chukang Road
Hongshan District, Wuhan
Hubei
China
Chinese
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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Name Residential address Nationality
Mr. Liu Kai Yu Kenneth Flat C, 16/F
Braemar Hill Mansions
39 Braemar Hill Road
North Point
Hong Kong
British
Further information about our Directors and other senior management members are set
out in “Directors and Senior Management.”
PARTIES INVOLVED IN THE GLOBAL OFFERING
Sole Sponsor BOCOM International (Asia) Limited
(a licensed corporation registered for
Type 1 (dealing in securities) and Type 6
(advising on corporate finance) of the
regulated activities under the SFO)
9/F, Man Yee Building
68 Des V oeux Road Central
Central, Hong Kong
Sole Overall Coordinator and
Sole Global Coordinator
BOCOM International Securities Limited
15/F, Man Yee Building
68 Des V oeux Road Central
Central, Hong Kong
Joint Bookrunners and
Capital Market
Intermediaries
BOCOM International Securities Limited
15/F Man Yee Building
68 Des V oeux Road Central
Central
Hong Kong
ABCI Capital Limited
11/F, Agricultural Bank of China Tower
50 Connaught Road Central
Hong Kong
CCB International Capital Limited
12/F CCB Tower
3 Connaught Road Central
Central
Hong Kong
CEB International Capital Corporation Limited
34-35/F, Everbright Centre
108 Gloucester Road
Wan Chai
Hong Kong
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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China Everbright Securities (HK) Limited
33/F, Everbright Centre
108 Gloucester Road
Wan Chai
Hong Kong
China Industrial Securities International Capital
Limited
32/F, Infinitus Plaza
199 Des V oeux Road Central
Sheung Wan
Hong Kong
CMBC Securities Company Limited
45/F, One Exchange Square
8 Connaught Place
Central
Hong Kong
Essence International Securities (Hong Kong)
Limited
39/F, One Exchange Square
Central
Hong Kong
Fortune Origin Securities Limited
404-405, 4/F, Nan Fung Tower
88 Connaught Road Central
Central
Hong Kong
Futu Securities International (Hong Kong) Limited
34/F, United Centre
95 Queensway
Admiralty
Hong Kong
ICBC International Securities Limited
37/F, ICBC Tower
3 Garden Road
Hong Kong
Phillip Securities (Hong Kong) Limited
11/F United Centre
95 Queensway
Hong Kong
Quam Securities Limited
5/F and 24/F (Rooms 2401 and 2412)
Wing On Centre
111 Connaught Road Central
Hong Kong
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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SPDB International Capital Limited
33/F, SPD Bank Tower, One Hennessy
1 Hennessy Road
Hong Kong
Yue Xiu Securities Company Limited
Rooms Nos. 4917-4937, 49/F
Sun Hung Kai Centre
30 Harbour Road, Wanchai
Hong Kong
Zhongtai International Securities Limited
19/F, Li Po Chun Chambers
189 Des V oeux Road Central
Hong Kong
Joint Lead Managers and
Capital Market
Intermediaries
BOCOM International Securities Limited
15/F Man Yee Building
68 Des V oeux Road Central
Central
Hong Kong
ABCI Securities Company Limited
10/F, Agricultural Bank of China Tower
50 Connaught Road Central
Hong Kong
CCB International Capital Limited
12/F CCB Tower
3 Connaught Road Central
Central
Hong Kong
China Sunrise Securities (International) Ltd
Unit 4502, 45/F, The Center
99 Queen’s Road Central
Hong Kong
CEB International Capital Corporation Limited
34-35/F, Everbright Centre
108 Gloucester Road
Wan Chai
Hong Kong
China Everbright Securities (HK) Limited
33/F, Everbright Centre
108 Gloucester Road
Wan Chai
Hong Kong
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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China Industrial Securities International Capital
Limited
32/F, Infinitus Plaza
199 Des V oeux Road Central
Sheung Wan
Hong Kong
CMBC Securities Company Limited
45/F, One Exchange Square
8 Connaught Place
Central
Hong Kong
CNI Securities Group Limited
Unit A 36/F United Asia Finance Centre
333 Lockhart Road
Wanchai
Hong Kong
Essence International Securities (Hong Kong)
Limited
39/F, One Exchange Square
Central
Hong Kong
Fortune Origin Securities Limited
404-405, 4/F, Nan Fung Tower
88 Connaught Road Central
Central
Hong Kong
Futu Securities International (Hong Kong) Limited
34/F, United Centre
95 Queensway
Admiralty
Hong Kong
ICBC International Securities Limited
37/F, ICBC Tower
3 Garden Road
Hong Kong
Maxa Capital Limited
Unit 2602, 26/F, Golden Centre
188 Des V oeux Road Central
Sheung Wan
Hong Kong
Phillip Securities (Hong Kong) Limited
11/F United Centre
95 Queensway
Hong Kong
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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--- page 81 ---
Quam Securities Limited
5/F and 24/F (Rooms 2401 and 2412)
Wing On Centre
111 Connaught Road Central
Hong Kong
Sinomax Securities Limited
28/F, Shun Feng International Centre
182 Queen’s Road East
Hong Kong
SPDB International Capital Limited
33/F, SPD Bank Tower, One Hennessy
1 Hennessy Road
Hong Kong
Yue Xiu Securities Company Limited
Rooms Nos. 4917-4937, 49/F
Sun Hung Kai Centre
30 Harbour Road, Wanchai
Hong Kong
Zhongtai International Securities Limited
19/F, Li Po Chun Chambers
189 Des V oeux Road Central
Hong Kong
Legal Advisors to our Company As to Hong Kong law:
Paul Hastings
22/F, Bank of China Tower
1 Garden Road
Central
Hong Kong
As to Hong Kong law:
DeHeng Law Offices (Hong Kong) LLP
28/F, Henley Building
5 Queen’s Road Central
Hong Kong
As to PRC law:
Jingtian & Gongcheng
34/F, Tower 3, China Central Place
77 Jianguo Road
Beijing 100025
China
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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As to Cayman Islands law:
Travers Thorp Alberga
3605 Tower Two
Lippo Centre
89 Queensway
Hong Kong
Legal Advisors to the Sole
Sponsor and the
Underwriters
As to Hong Kong law:
King & Wood Mallesons
13/F, Gloucester Tower
The Landmark
15 Queen’s Road Central
Hong Kong
As to PRC law:
Tian Yuan Law Firm
Unit 509, Tower A, International Enterprise Mansion
No. 35 Jinrong Da Jie
Xicheng District, Beijing
China
Auditor and Reporting
Accountants
Ernst & Y oung
Certified Public Accountants
Registered Public Interest Entity Auditor
27/F, One Taikoo Place
979 King’s Road
Quarry Bay, Hong Kong
Industry Consultant Frost & Sullivan (Beijing) Inc.
Unit 2401-02, Level 24
China World Office 2
1 Jianguomenwai Avenue
Chaoyang District, Beijing 100004
China
Receiving Banks Industrial and Commercial Bank of China
(Asia) Limited
33/F., ICBC Tower
3 Garden Road
Central
Hong Kong
Bank of Communications Co., Ltd.
Hong Kong Branch
Unit B B/F & G/F, Unit C G/F, 1-3/F,
16/F Room 01 & 18/F, Wheelock House
20 Pedder Street
Central
Hong Kong
DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
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Registered Office International Corporation Services Ltd.
PO Box 472, 2nd Floor, Harbour Place
103 South Church Street, George Town
Grand Cayman KY1-1106
Cayman Islands
Head Office and Principal
Place of Business in the PRC
No. 1, Chemical Second Road
Wuhan Chemical Industrial Park
Qingshan District, Wuhan
Hubei
China
Principal Place of Business in
Hong Kong
5/F, Manulife Place
348 Kwun Tong Road
Kowloon
Hong Kong
Company’s Website www.chinaorganic.com
(The information on the website does not form part of
this prospectus)
Joint Company Secretaries Mr . Chen Ping
5-101 Building 65
63 Huanhu Road
Dongxihu District, Wuhan
Hubei
China
Ms. Lai Ho Yan (ACG, HKACG)
5/F, Manulife Place
348 Kwun Tong Road
Kowloon
Hong Kong
Authorized Representatives Mr . Chen Ping
5-101 Building 65
63 Huanhu Road
Dongxihu District, Wuhan
Hubei
China
Ms. Lai Ho Yan (ACG, HKACG)
5/F, Manulife Place
348 Kwun Tong Road
Kowloon
Hong Kong
CORPORA TE INFORMA TION
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Audit Committee Mr. Liu Kai Yu Kenneth (Chairperson)
Dr. Liu Zhongdong
Dr. Yuan Kang
Mr. Gao Lei
Mr. Shen Yingming
Remuneration Committee Mr. Liu Kai Yu Kenneth (Chairperson)
Dr. Liu Zhongdong
Dr. Yuan Kang
Mr. Zou Xiaohong
Mr. Gao Lei
Nomination Committee Mr. Zou Xiaohong (Chairperson)
Dr. Liu Zhongdong
Dr. Yuan Kang
Mr. Liu Kai Yu Kenneth
Mr. Gao Lei
Principal Share Registrar International Corporation Services Ltd.
PO Box 472, 2nd Floor, Harbour Place
103 South Church Street, George Town
Grand Cayman KY1-1106
Cayman Islands
Hong Kong Share Registrar Tricor Investor Services Limited
17/F, Far East Finance Centre
16 Harcourt Road
Hong Kong
Compliance Adviser BOCOM International (Asia) Limited
9/F, Man Yee Building
68 Des V oeux Road Central
Central, Hong Kong
Principal Banks Bank of Communications Wuhan Hongshan Branch
268 Xiongchu Dadao
Hongshan District, Wuhan
Hubei
China
Agricultural Bank of China, Dadongmen Branch
442 Wuluo Road
Wuchang District, Wuhan
Hubei
China
CORPORA TE INFORMA TION
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--- page 85 ---
Hankou Bank, Qiaokou Branch
160 Qiaokou Road
Qiaokou District, Wuhan
Hubei
China
Rural Commercial Bank Beihu Branch
No. 94 Qinghua Road
Qingshan District, Wuhan
Hubei
China
CORPORA TE INFORMA TION
–7 7–


--- page 86 ---
This and other sections of this prospectus contain information relating to the
industry in which we operate. Certain information and statistics set forth in this section
have been extracted from the Frost & Sullivan Report issued by Frost & Sullivan, an
independent market research agency, which we commissioned, and from various
official government publications and other publicly available publications. Information
and statistics from official government sources have not been independently verified by
us, the Sole Sponsor, the Sole Overall Coordinator, the Sole Global Coordinator, the
Joint Bookrunners, the Joint Lead Managers, any of the Underwriters, any of our or
their respective directors, officers or representatives or any other person involved in the
Global Offering and no representation is given as to their accuracy.
SOURCE AND RELIABILITY OF INFORMA TION
We have commissioned Frost & Sullivan, an independent market research and consulting
company, to conduct an analysis of, and to prepare a report on the global and the PRC toluene
and toluene derivative products industry. The report prepared by Frost & Sullivan is referred
to in the prospectus as the Frost & Sullivan Report. A total fee of RMB1,180,000 was paid to
Frost & Sullivan for the preparation of the report, which we believe reflects market rates for
reports of this type. Frost & Sullivan is a global consulting company founded in 1961 in New
York and has over 40 global offices with more than 2,000 industry consultants, market
research analysts, technology analysts and economists.
The Frost & Sullivan Report was undertaken through both primary and secondary
research obtained from various sources using intelligence collection methodologies. Primary
research involved discussing the status of the industry with certain leading industry
participants across the industry value chain and conducting interviews with relevant parties to
obtain objective and factual data and prospective predictions. Secondary research involved
reviewing information integration of data and publication from publicly available sources,
including official data and announcements from government agencies, and company reports,
independent research reports and data based on Frost & Sullivan’s own data base.
In compiling and preparing the Frost & Sullivan Report, Frost & Sullivan has adopted the
following assumptions (i) the social, economic and political environments in the relevant
markets are likely to remain stable in the forecast period and (ii) industry key drivers are
likely to drive the global and the PRC toluene and toluene derivative products industry in the
forecast period. Frost & Sullivan believes that the basic assumptions used in preparing the
Frost & Sullivan Report, including those used to make future projects, are factual, correct and
not misleading. Frost & Sullivan has independently analyzed the information, but the
accuracy of the conclusions of its review largely relies on the accuracy of the information
collected. Frost & Sullivan research may be affected by the accuracy of these assumptions and
the choice of these primary and secondary sources.
Our Directors, after due and reasonable consideration, are of the view that there has been
no adverse change in the market information since the date of the Frost & Sullivan Report
which may qualify, contradict or have impact on the information therein.
INDUSTRY OVERVIEW
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OVERVIEW OF GLOBAL TOLUENE AND TOLUENE DERIV A TIVE PRODUCTS
INDUSTRY
Overview of Synthetic Organic Chemistry Industry
Organic compounds are a type of chemical compounds where one or more than one
carbon covalently bonded with each other and with other atom like nitrogen, oxygen, halogen
etc., such as, toluene (C
6H5Cl), methane (CH 4), ethane (C 2H6), benzene (C 6H6), Chloroethane
(C 2H5Cl) etc. Downstream applications include food & beverages, pharmaceuticals,
pesticides, agrochemicals, water treatment, crop protection, personal care products &
cosmetics, fertilizers, automotive industry, gasoline additives, polymers, and chemicals. As
an important part of global chemistry market, the global synthetic organic chemistry industry
has demonstrated significant growth driven by research and development, growing
industrialization and downstream demand. Many advanced researches are being carried out
with huge investments in research and development.
Introduction of Toluene and Toluene Derivative Products
Toluene is commonly used as one of the most important chemical raw materials. It is a
colorless, transparent, volatile liquid with special aromatic fragrance at room temperature. It
is mainly used for blending gasoline components and the main production of toluene
derivatives, explosives, dye intermediates and drugs. Toluene derivative products can be
produced through various reaction processes, including oxidation, chlorination of toluene and
ammonification of benzoic acid.
• Toluene oxidation products: Benzoic acid and sodium benzoate are important
toluene oxidation products. Benzoic acid, which is white crystal or powder, is
widely used as preservative and intermediate in food, pesticide, medicine, printing,
and dyeing industries. Sodium benzoate, which is white crystal or colorless powder,
is mainly used in the pharmaceutical industry, printing and dyeing industry, plant
genetic research and other fields.
• Toluene chlorination products: Benzyl chloride and benzyl alcohol are the most
common toluene chlorination products. Benzyl chloride, a colorless transparent
liquid with a pungent odor, is an important organic synthesis intermediate, used in
the manufacture of spices, dyes, drugs, and synthetic resins. Benzyl alcohol, a
colorless liquid, is used to make flavors and pharmaceutical raw materials, and can
be used as a solvent for preservatives, paints, and dyes.
• Benzoic acid ammonification products: Benzonitrile and benzoguanamine are
typical benzoic acid ammonification products. Benzonitrile is a colorless oily liquid
with an almond smell. It is mainly used as a pesticide, dye intermediate, solvent
antioxidant, and solvent for other organic substances. Benzoguanamine is a white
crystalline powder, which is mainly used for making thermosetting resins, modified
resins, amino coatings, plastics, pesticides and dyes.
• Other fine chemical products: Other fine chemical products mainly include benzyl
acetate and p-methyl chlorbenzy. Benzyl acetate is a kind of colorless liquid with
sweet, floral fruity odor, which is mainly used for the production of edible flavors
and fragrances. P-methyl benzyl chloride is a colorless/white/yellow low melting
solid or liquid, which is used as pharmaceutical intermediate.
INDUSTRY OVERVIEW
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Industry Value Chain Analysis
The main market participants of the industry chain for toluene and toluene derivative
products include toluene suppliers (upstream), specialty chemicals manufacturers
(midstream), and intermediate manufacturers (downstream). Leading companies cooperate
with upstream chemical companies to guarantee the continuous supply of raw materials. The
upstream of toluene and toluene derivative products is the raw material suppliers. Chinese
toluene market fluctuates mostly around supply and demand fundamentals and changes at the
macro level. The influencing factors of the PRC’s toluene market are also undergoing major
changes due to public health and safety measures, the state’s control over the bulk commodity
market, and the downward shift of industry profits. The global toluene market has long been
affected by the macroeconomic and financial situation, the cost side effect, and the supply and
demand changes in the industry. The midstream includes specialty chemical manufacturers
that produce toluene derivative products. Different products are produced based on chemical
technology owned by different companies. The downstream are mainly companies that
produce chemical intermediates covering various industries including food & beverage
additive, feed additive, coating intermediates and pesticide intermediates.
The sales channels of toluene and toluene derivative product industry includes (i) direct
sales; (ii) distribution sales; and (iii) products trading. Distributorship model is considered the
norm in the industry as the distribution network (i) extends sales across different provinces
and cities in the PRC domestically and across different countries internationally, and allows
for the penetration of the Group’s products, (ii) partially shifts the credit risk from
manufacturers to distributors and (iii) facilitates the formulation of sales and marketing
strategy based on market trends and intelligence from different geographic and customer
segments.
Upstream
Raw Material Suppliers
Oxidation of
Toluene
Other Toluene Derivatives …
Chlorination
of Toluene Ammonification
•T o l uene
• Paraxylene
• Catal ysts
• Sodi um hydroxide
• Sodi um Carbonate
•L i q uid chlorine
•…
…
Pesticide
intermediates
Food &
beverage
additiveCoating
intermediates Dye
intermediates
Daily chemical
product
intermediates
Feed
additive
Equipment/Machinery Suppliers
Labor Supply
Industries
DownstreamMidstream
Toluene and Toluene-Derived Chemicals
Manufacturers
Source: Frost & Sullivan Report
Global and the PRC Sales V olume and Sales Revenue of Benzoic Acid
The global production capacity of benzoic acid reached approximately 840.0 thousand
tons in 2023. Leading benzoic acid manufacturers have been expanding production capacities
to meet the increasing downstream market demand. It is expected that the global production
capacity will increase to approximately 906.0 thousand tons by 2028. The global sales volume
of benzoic acid increased from approximately 246.7 thousand tons in 2018 to approximately
265.1 thousand tons in 2023, representing a CAGR of 1.4%. The global sales revenue of
benzoic acid increased from approximately RMB1,728.2 million in 2018 to approximately
RMB2,120.7 million in 2023, representing a CAGR of 4.2%. In 2020, the supply chain and
logistics crisis caused by COVID-19 pandemic materially affected chemicals manufacturers.
Many manufacturing facilities were forced to shut down or operate at reduced capacity,
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leading to lower production capacity for most raw materials. During the same period, the sales
volume of the PRC benzoic acid increased from approximately 125.2 thousand tons to
approximately 149.5 thousand tons, representing a CAGR of 3.6%. The sales revenue
increased from approximately RMB974.5 million to approximately RMB1,266.0 million,
representing a CAGR of 5.4%.
Antibiotic-treated animals has been banned from production globally because countries
and international organizations gradually call for less use of antibiotics in healthy animals for
growth promotion and disease prevention. The reduction in antibiotics will largely lead to the
increase in sales of benzoic acid. With increasing needs for downstream products such as
non-phthalate plasticizers, the global sales volume of benzoic acid is estimated to reach 357.3
thousand tons in 2028 from 286.5 thousand tons in 2024, representing a CAGR of 5.7%. The
global sales revenue of benzoic acid is estimated to reach RMB3,153.0 million in 2028 from
RMB2,405.8 million in 2024, representing a CAGR of 7.0%. The PRC sales volume of
benzoic acid is expected to reach 218.7 thousand tons in 2028 with a CAGR of 6.9% from
2024, and the sales revenue is expected to reach RMB2,019.3 million in 2028 from
RMB1,471.7 million in 2024, with a CAGR of 8.2%.
Sales V olume and Sales Revenue of Benzoic Acid (Global), 2018-2028E
0
50
100
150
200
250
300
350
400
2018
3,500
4,000
3,000
2,000
2,500
1,000
1,500
500
0
2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
246.7 256.5 240.9
273.1 295.5
265.1
286.5 308.6 328.1 343.1 357.3
1,728.2 1,761.8 1,543.7
2,224.6
2,551.5
2,120.7 2,405.8 2,643.2 2,852.4 3,012.6 3,153.0
RMB MillionThousand Ton
Global Benzoic Acid Sales Volume
Global Benzoic Acid Sales Revenue 4.2% 7.0%
CAGR 2018-2023 CAGR 2024E-2028E
1.4% 5.7%
Source: Frost & Sullivan Report
Sales V olume and Sales Revenue of Benzoic Acid (The PRC), 2018-2028E
0
20
40
60
80
100
120
140
160
180
200
220
240
3,000
2,000
2,500
1,000
1,500
500
0
125.2 130.7 128.7 145.4 160.6 149.5
167.5
182.7 198.1 210.1 218.7
974.5 997.5 916.4
1,316.0 1,540.8 1,266.0 1,471.7 1,637.3 1,801.9 1,930.2 2,019.3
RMB MillionThousand Ton
PRC Benzoic Acid Sales Volume
PRC Benzoic Acid Sales Revenue 5.4% 8.2%
CAGR 2018-2023 CAGR 2024E-2028E
3.6% 6.9%
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
Source: Frost & Sullivan Report
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Global and the PRC Sales V olume and Sales Revenue of Sodium Benzoate
Global sodium benzoate production capacity is estimated to increase from approximately
363.0 thousand tons in 2023 to 400.7 thousand tons in 2028, benefiting from leading
companies’ insight into downstream demand and outstanding capacity expansion layouts. The
global sales volume of sodium benzoate increased from approximately 174.6 thousand tons in
2018 to approximately 191.7 thousand tons in 2023, representing a CAGR of 1.9%.
Correspondingly, the global sales revenue of sodium benzoate slightly increased from
approximately RMB1,719.0 million in 2018 to approximately RMB1,952.3 million in 2023,
representing a CAGR of 2.6%. During the same period, the sales volume of the PRC sodium
benzoate increased from 78.6 thousand tons to approximately 102.0 thousand tons,
representing a CAGR of 5.4%. The PRC sales revenue increased from RMB859.1 million to
RMB1,154.6 million.
Driven by the increasing demands from downstream markets such as personal care
market, both sales volume and revenue of sodium benzoate are expected to further expand
over the forecast period. The global sales volume of sodium benzoate is estimated to reach
238.0 thousand tons in 2028 from 204.7 thousand tons in 2024, with a CAGR of 3.8% over the
prediction period. The global sales revenue of sodium benzoate is estimated to reach
RMB2,688.8 million in 2028 from RMB2,230.7 million in 2024, with a CAGR of 4.8% over
the prediction period. The PRC sales volume of sodium benzoate is estimated to reach 144.3
thousand tons in 2028 from 113.1 thousand tons in 2024, with a CAGR of 6.3% over the
prediction period. The PRC sales revenue of sodium benzoate is estimated to reach
RMB1,810.9 million in 2028 from RMB1,370.0 million in 2024, with a CAGR of 7.2% over
the prediction period.
Sales V olume and Sales Revenue of Sodium Benzoate (Global), 2018-2028E
0
50
100
150
200
250
3,500
3,000
4,000
2,500
2,000
1,500
1,000
500
0
250
200
150
50
0
100
174.6 179.7 182.4
208.5 215.3
191.7 204.7 214.2 223.0 231.0 238.0
RMB MillionGlobal Sodium Benzoate Sales Volume
Global Sodium Benzoate Sales Revenue 2.6% 4.8%
CAGR 2018-2023 CAGR 2024E-2028E
1.9% 3.8%
1,719.0 1,729.6 1,668.3 1,925.7
2,489.6
1,952.3 2,230.7 2,381.2 2,504.0 2,604.1 2,688.8
Thousand Ton
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
Source: Frost & Sullivan Report
Sales V olume and Sales Revenue of Sodium Benzoate (The PRC), 2018-2028E
0
50
100
150
2,500
2,000
1,000
1,500
500
0
78.6 83.2 87.9
106.3 113.3
102.0
113.1 121.5 129.8 137.2 144.3
859.1 890.0 892.7
1,091.1
1,456.2
1,154.6 1,370.0 1,500.8 1,619.6 1,718.7
1,810.9
RMB MillionThousand Ton
PRC Sodium Benzoate Sales Volume
PRC Sodium Benzoate Sales Revenue 6.1% 7.2%
CAGR 2018-2023 CAGR 2024E-2028E
5.4% 6.3%
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
Source: Frost & Sullivan Report
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Global and the PRC Sales V olume and Sales Revenue of Benzyl Alcohol
In 2023, the global production capacity of benzyl alcohol reached 260.0 thousand tons.
The global sales volume of benzyl alcohol increased from approximately 149.3 thousand tons
in 2018 to approximately 175.5 thousand tons in 2023, representing a CAGR of 3.3%. The
global sales revenue of benzyl alcohol increased from approximately RMB1,844.1 million in
2018 to approximately RMB2,251.3 million in 2023, representing a CAGR of 4.1%. During
the same period, the sales volume of the PRC benzyl alcohol increased from approximately
78.6 thousand tons in 2018 to approximately 98.5 thousand tons in 2023, representing a
CAGR of 4.6%. The PRC sales revenue increased from approximately RMB1,048.3 million in
2018 to approximately RMB1,364.1 million in 2023, representing a CAGR of 5.4%.
Driven by the global economic recovery and the increasing application and use of benzyl
alcohol, especially in pharmaceuticals, consumer electronics, additive materials, and home
improvement industries, the global sales volume of benzyl alcohol is estimated to reach 238.7
thousand tons in 2028 from 192.3 thousand tons in 2024, representing a CAGR of 5.5%. The
global sales revenue of benzyl alcohol is estimated to reach RMB3,494.6 million in 2028 from
RMB2,640.2 million in 2024, representing a CAGR of 7.3%. It is expected that PRC sales
volume of benzyl alcohol will increase from 111.9 thousand tons in 2024 to 143.4 thousand
tons in 2028, with a CAGR of 6.4% over the prediction period. The PRC sales revenue of
benzyl alcohol is estimated to reach RMB2,267.7 million in 2028.
Global Sales V olume and Sales Revenue of Benzyl Alcohol (Global), 2018-2028E
0
50
100
150
200
250
250
200
4,500
3,500
4,000
3,000
2,000
2,500
2,500
1,000
500
0
150
100
0
50
149.3 156.3 170.7
192.3 199.2
175.5 192.3 203.9 215.5 227.1 238.7
RMB MillionGlobal Benzyl Alcohol Sales Volume
Global Benzyl Alcohol Sales Revenue 4.1% 7.3%
CAGR 2018-2023 CAGR 2024E-2028E
3.3% 5.5%
1,844.1 1,880.8 2,218.7 2,474.4
3,007.3
2,251.3 2,640.2 2,882.6 3,107.9 3,308.4 3,494.6
Thousand Ton
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
Source: Frost & Sullivan Report
Sales V olume and Sales Revenue of Benzyl Alcohol (The PRC), 2018-2028E
0
50
100
150
3,000
2,000
2,500
1,000
1,500
500
0
78.6 79.3 88.7
101.3 109.4
98.5
111.9 119.8 127.7 135.6 143.4
1,048.3 1,031.5
1,244.6 1,408.0
1,783.7
1,364.1
1,659.2 1,828.6 1,988.3 2,132.7 2,267.7
RMB MillionThousand Ton
PRC Benzyl Alcohol Sales Volume
PRC Benzyl Alcohol Sales Revenue 5.4% 8.1%
CAGR 2018-2023 CAGR 2024E-2028E
4.6% 6.4%
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
Source: Frost & Sullivan Report
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In 2023, influenced by factors including the slowdown of global economic growth,
reduced demand from downstream inventory replenishment, and market adjustments due to
geopolitical factors, crude oil prices dropped from high price level. Decrease in crude oil
prices reduced the cost support for downstream products, resulting in the decline in prosperity
of markets for benzoic acid, sodium benzoate, and benzyl alcohol, resulting in the decrease in
production volume and capacity utilization rate of upstream manufacturers.
For example, the capacity utilization rate of benzoic acid industry in the PRC reached
74.8% in 2022, and the production volume reached 168.2 thousand tons. However, in 2023,
with the decrease in market demand and the increase in overall production capacity, the
capacity utilization rate of benzoic acid industry in the PRC dropped to 43.7% while the total
production volume dropped by 13.0%. Similarly, the capacity utilization rate of sodium
benzoate industry in the PRC reached 74.2% in 2022, and the production volume reached
118.0 thousand tons. However, in 2023, the capacity utilization rate of sodium benzoate
industry in the PRC dropped to 49.6% while the total production volume dropped by 15.9% in
2023. For the benzyl alcohol industry in the PRC, the capacity utilization rate reached 82.2%
in 2022, and the production volume reached 111.5 thousand tons. However, in 2023, the
capacity utilization rate of benzyl alcohol industry in the PRC dropped to 71.2% while the
total production volume dropped by 11.2% in 2023.
Further, there was structural adjustment in the global and the PRC toluene and toluene
derivative products markets which involves a general shift in sales towards leading Chinese
manufacturers with the withdrawal of small and medium-sized manufacturers from the
industry, and the decrease in the output and production capacity utilization rate of overseas
manufacturers. This phenomenon is more explicit in the overseas market where the production
volume of benzoic acid, sodium benzoate, and benzyl alcohol industry outside of the PRC in
2023 dropped by 19.9%, 17.9%, and 15.4% as compared to 2022, respectively. These figures
represent a much higher decline than observed in the PRC, where the production volume of
benzoic acid, sodium benzoate, and benzyl alcohol industry in the PRC in 2023 decreased by
13.0%, 15.9%, and 11.2% as compared to 2022, respectively. This is mainly due to the rising
production costs caused by the European energy crisis, which has led to a significant decline
in the capacity utilization rates of overseas manufacturers. Consequently, both sales volume
and sales revenue of benzoic acid, sodium benzoate, and benzyl alcohol underwent significant
contraction in 2023.
The toluene and toluene derivative products market is cyclical in nature, the ups and
downs are primarily reflected by the fluctuation in production volume and inventory level of
the upstream manufacturers, and raw material price trend in the industry. In 2024, considering
the business cycle, downstream industries of benzoic acid, sodium benzoate, and benzyl
alcohol are gradually increasing their demand for replenishing stocks. The production volume
of the upstream manufacturers and raw material prices are continuously increasing, and the
inventory level of the upstream manufacturers is decreasing at the same time. These
contributed to the rebound in sales revenue of the upstream manufacturers. In January 2024,
product demand of benzoic acid, sodium benzoate, and benzyl alcohol from downstream
industries in the PRC have shown a rebound trend and reached 19.2, 15.0, and 11.0 thousand
tons, representing an increase of 34.3%, 31.6%, and 12.2% as compared to 14.3, 11.4, and 9.8
thousand tons of product demand in January 2023, respectively. Production volume of the
PRC benzoic acid, sodium benzoate, and benzyl alcohol industry in January 2024 reached
17.4, 14.1, 9.7 thousand tons, representing an increase of 39.2%, 28.2%, and 3.2% as
compared to 12.5, 11.0, and 9.4 thousand tons of production volume in January 2023,
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respectively. The inventory level of benzoic acid, sodium benzoate, and benzyl alcohol
manufacturers in the PRC in January 2024 was 9.2, 6.1 and 6.0 thousand tons, representing a
decrease of 25.2%, 35.1%, and 6.3% as compared to 12.3, 9.4, and 6.4 thousand tons in
January 2023, respectively. Therefore, benzoic acid, sodium benzoate, and benzyl alcohol
industry in the PRC show a significant recovery trend in 2024. Simultaneously, recovery of
the domestic and international economies will drive consumption resurgence. With the further
improvement in profit expectations, the capacity utilization rates of major industry players
will rise gradually. Besides, the structural adjustment is expected to continue and will benefit
the export of chemical products from the PRC. According to the data from General
Administration of Customs of the PRC, export volume of benzoic acid, its salts and esters
products from the PRC reached approximately 14.1 thousand tons in January 2024,
representing a year-on-year increase of 44.0% as compared to approximately 9.8 thousand
tons in January 2023. The global toluene and toluene derivative products market is undergoing
a structural adjustment that is shifting towards leading Chinese manufacturers. The benzoic
acid, sodium benzoate, and benzyl alcohol markets are expected to rebound in both sales
volume and sales revenue in 2024 and years forward.
Key Market Drivers and Trends
• Recovery in market demand from traditional and emerging downstream industries
The toluene and toluene derivative products have been widely used in the downstream
including food and beverage market, industrial market, feed additive market, pesticide
intermediate market, and pharmaceutical intermediate market etc. Due to changes in the
consumer preferences for packaged food items and drinks and increased per capita income,
the demand for preservative is growing. The market size of global food preservative market is
expected to reach USD4.1 billion in 2028, and is expected to increase at a CAGR of 4.0% from
2024 to 2028. The growing food preservative market is driving the growth of the toluene and
toluene derivative products industry. The PRC market size for the feed additives industry by
revenue has increased from RMB94.4 billion in 2018 to RMB122.3 billion in 2023,
representing a CAGR of 5.3%. Although the PRC market size for the feed additives industry
by revenue dropped from RMB126.8 billion in 2022 to RMB122.3 billion in 2023, the
industry is expected to recover in 2024 and reach RMB160.4 billion in 2028 with a CAGR of
6.0% from 2024. Feed acidifier is also an important downstream product of toluene
derivatives. The new high-efficiency, non-polluting, non-residual feed additives are becoming
increasingly popular along with probiotics, enzymes, fragrances, and other new green feed
additives. The market for feed acidifiers with the substitution effect is expected to explode. In
addition to the use in traditional industries, the downstream applications for daily chemical
products which are well-crafted and enjoy personal care effectiveness are also increasing.
Benzoic acid ammonification products mainly comprise benzonitrile and benzoguanamine,
which is used as pharmaceutical intermediate. The PRC market size of pesticide intermediates
and pharmaceutical intermediates have reached RMB39.3 billion and RMB46.7 billion in
2023 and is expected to reach RMB44.9 billion and RMB70.5 billion in 2028, representing
CAGRs of 2.2% and 8.8% from 2024 respectively. Benefiting from the increasing demand
from downstream pesticide intermediate and pharmaceutical intermediate markets, the future
market demand for benzoic acid ammonification products is expected to grow and recover
from the drop in 2023.
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• Favorable and long-term effective regulations and policies
The PRC government has been taking actions to plan and support the development of
toluene and toluene derivative products industry and related downstream industries which
utilize toluene derivative products including food additives, food preservative and feed
additives. According to the Announcement No. 194 of the Ministry of Agriculture and Rural
Affairs of the People’s Republic of the PRC issued on July 9, 2019, starting from July 1, 2020,
feed manufacturers will stop producing commercial feed containing growth-promoting drug
feed additives (except traditional Chinese medicine), which promote the development of
functional feed additives. The past few years have witnessed a more stringent and
comprehensive regulation of the food and beverage preservative industry in the PRC. In 2019,
The Regulation on the Implementation of the Food Safety Law of the People’s Republic of the
PRCૢԷ was released by the State Council, which
proposed to establish food safety risk evaluation mechanism and assess risks in terms of the
biological, chemical and physical impact of food additive and related products. In 2021, in
order to provide a scientific basis for developing cosmetic quality and safety risk control
measures and standards, and conducting cosmetic sampling and testing, the National
Cosmetic Safety Risk Monitoring Plan for the second half of 2021 ( 2021ʷѱ
ྌ) has been issued by the National Medical Products Administration.
Tightening regulations will further promote the development of relevant industries where the
toluene and toluene derivative products are used. In 2022, Notice on Issuing the “14th
Five-Year Plan” for Promoting Agricultural and Rural Modernization (Ι೯ “ɤ̬ʞ”પ
) specifies, by 2025, the utilization rates of pesticides for
major crops will reach over 43.0% from 40.6% in 2020. This measure accelerates the adoption
of low-toxic and low-residue pesticides, promoting the usage of pesticide intermediates with
low environmental pollution and increasing the demand for toluene and toluene-derived
chemicals.
• Improvement of manufacturing technology
It is expected that the toluene and toluene derivative products industry will keep
improving technologies as major producers are devoted to innovations and advancement of
their production method, synthesizing process, and catalyst preparation technology.
Continuous innovation and improvement of production techniques, automation, and
information technology have direct influence on product quality. For example, Wuhan Youji
Industries Co., Ltd. has independently developed an innovative method to produce benzoic
acid, referred to as the liquid-phase oxidation of toluene with air, which significantly
improves the product quality and enhances the production capacity. Apart from production
efficiency, toluene and toluene derivative products industry participants have also adopted
measures and technologies to facilitate energy efficiency and environmental protection to
comply with relevant regulations and policies to achieve sustainable development.
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Entry Barrier
• Technology and Talent Threshold
Maintaining industry competitiveness entail high technology capabilities and high
threshold of product quality. In order to achieve these element, toluene and toluene derivative
products manufacturers need to establish and maintain sufficient technology and expertise,
which constitutes an important technical barrier for new marker participants who lack
industry experience. Manufacturers need to spend significant resources to achieve
breakthroughs in key technologies and mature applications through independent research and
development because the manufacturing process involves complex protocol of manufacturing
products and by-products under strict product performance requirements. The higher
technology threshold and the demand for experienced technicians constitute the technology
and talent barrier to the toluene and toluene derivative products industry.
• Significant Capital Investment
Significant capital investment is necessary for the toluene and toluene derivative
products manufacturers to gain footing in the industry. The toluene and toluene derivative
products manufacturing operations require a large amount of capital for the upfront
procurement of upstream raw material and expensive equipment to produce such chemical
products. Moreover, it is costly to continuously improve the production line and enhance the
production techniques to meet the changing demands of downstream markets. Substantial
capital is critical for the toluene and toluene-derived chemicals manufacturer to the building
and maintaining their leading market position. Therefore, new market participants without
sufficient capital are difficult to enter and effectively compete in toluene and toluene
derivative products industry.
• Customer Resources and Channels
One of the foremost concern for the downstream markets of toluene and toluene
derivative products industry including food and beverage industry, daily chemical products
industry, medical intermediates industry, is product quality and safety. In addition to product
quality, leading toluene and toluene derivative products manufacturers commonly establish
their own standards to test the quality of supplier’s products during raw material procurement
process. Once these manufacturers determine a supplier’s products meet their standard
requirement, the manufacturers usually maintain long term cooperation with these suppliers
and rarely seek to replace them. This industry custom and practice is a great advantage of the
established supplier and a significant entry barrier for new market participants.
• Industry Requirements on Safety
The quality and safety of toluene and toluene derivative are subject to regulatory
oversight. Market participants establish complex quality control processes and internal
organizational structure in line with industry characteristics to meet these regulatory
standards. Leading manufacturers in the toluene and toluene derivative products industry are
required to invest significant human and capital resources, set up quality inspection and
control departments, configure professional inspection personnel, and build a sound quality
control system to accomplish this feat. With the improvement of quality and safety
requirements of downstream products, higher requirements are put forward for upstream
toluene and toluene-derived chemicals, and higher substantive access barriers in compliance
with regulatory requirement which presents as a significant entry barrier.
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• Cost Management and Economics of Scale
The effective cost management and economics of scale will help in generating profit,
which is significant for companies’ sustainable development. Leading toluene and toluene
derivatives providers could leverage their research and development capabilities in product
innovation and formula diversification, which enable these enterprises to deliver value added
products with excellent quality under proper cost control. Moreover, these enterprises are
good at leveraging their long-term industry experience to optimize the production process,
and are committed to improving the utilization of by-products and further achieving cost
effectiveness, which highlights their long-term development advantages with economics of
scale. However, new entrants may lack relevant technical accumulation and industry
experience, and also lack the vision in the utilization of by-products and the optimization of
production processes, thus forming the cost management and economics of scale barrier.
Competitive Landscape of Global and the PRC Toluene and Toluene Derivative Products
Industry
The global sales revenue of benzoic acid in 2023 was approximately RMB2,120.7
million. The global concentration of top five benzoic acid manufacturers increased from
93.9% in 2022 to 95.2% in 2023 in terms of market revenue. In terms of revenue in 2023, our
Group ranked second among benzoic acid manufacturers, accounting for 37.0% of the global
market revenue.
Top Five Player by Revenue in Global Benzoic Acid Market, 2023
809.4 (38.2%)
784.5 (37.0%)
279.9 (13.2%)
93.3 (4.4%)
51.6 (2.4%)
1
5
4
3
2
Tengzhou Tenglong Chemical Co., Ltd.
Hunan Hongrun Chemical Technology Co., Ltd.
Tianji Dongda Chemical Group Company Ltd.
Lanxess AG
CompanyRanking Revenue (RMB Million)
Wuhan Youji Industries Co., Ltd.
Source: Frost & Sullivan Report
The PRC sales revenue of benzoic acid was approximately RMB1,266.0 million in 2023.
The PRC benzoic acid market was highly concentrated among the top five benzoic acid
manufacturers, whose aggregate market share in terms of revenue was 96.5% in 2023. Our
Group ranked first among benzoic acid manufacturers in terms of revenue, accounting for
62.0% of the PRC market revenue.
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Top Five Player by Revenue in the PRC Benzoic Acid Market, 2023
784.5 (62.0%)
279.9 (22.1%)
93.3 (7.4%)
51.6 (4.1%)
14.0 (0.9%)
1
5
4
3
2
Benxi Black Horse Chemical Industry & Commercial Co., Ltd.
Tengzhou Tenglong Chemical Co., Ltd.
Tianji Dongda Chemical Group Company Ltd.
Wuhan Youji Industries Co., Ltd.
CompanyRanking Revenue (RMB Million)
Hunan Hongrun Chemical Technology Co., Ltd.
Source: Frost & Sullivan Report
The global sales revenue of sodium benzoate in 2023 was approximately RMB1,952.3
million. The global concentration of top five sodium benzoate manufacturers increased from
84.4% in 2022 to 85.8% in 2023 in terms of market revenue. In terms of revenue in 2023, our
Group ranked second among sodium benzoate manufacturers, accounting for 22.4% of the
global market revenue.
Top Five Player by Revenue in Global Sodium Benzoate Market, 2023
705.0 (36.1%)
437.5 (22.4%)
325.4 (16.7%)
127.3 (6.5%)
80.2 (4.1%)
1
5
4
3
2
Shandong Ruiheng Biotechnology Co., Ltd
Tengzhou Tenglong Chemical Co., Ltd.
Tianji Dongda Chemical Group Company Ltd.
Lanxess AG
CompanyRanking Revenue (RMB Million)
Wuhan Youji Industries Co., Ltd.
Source: Frost & Sullivan Report
The PRC sales revenue of sodium benzoate was approximately RMB1,154.6 million in
2023. The PRC sodium benzoate market was highly concentrated among the top five sodium
benzoate manufacturers, whose aggregate market share in terms of revenue was 88.1% in
2023. Our Group ranked first among sodium benzoate manufacturers in terms of revenue,
accounting for 37.9% of the PRC market revenue.
Top Five Player by Revenue in the PRC Sodium Benzoate Market, 2023
437.5 (37.9%)
325.4 (28.2%)
127.3 (11.0%)
80.2 (6.9%)
47.2 (4.1%)
1
5
4
3
2
Shandong Tongtaiweirun Chemical Co., Ltd
Shandong Ruiheng Biotechnology Co., Ltd
Tianji Dongda Chemical Group Company Ltd.
Wuhan Youji Industries Co., Ltd.
CompanyRanking Revenue (RMB Million)
Tengzhou Tenglong Chemical Co., Ltd.
Source: Frost & Sullivan Report
INDUSTRY OVERVIEW
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The market size of global benzyl alcohol market reached approximately RMB2,251.3
million in 2023. The global concentration of top five benzyl alcohol manufacturers increased
from 88.3% in 2022 to 91.1% in 2023 in terms of market revenue. In 2023, our Group ranked
third among benzyl alcohol manufacturers in terms of revenue, accounting for 20.6% of the
global market revenue. Our Group is the second largest benzyl alcohol manufacturer in the
PRC in terms of sales revenue.
Top Five Player by Revenue in Global Benzyl Alcohol Market, 2023
579.1 (25.7%)
538.8 (23.9%)
462.8 (20.6%)
346.4 (15.4%)
124.7 (5.5%)
1
5
4
3
2
KLJ Group
Hubei Kelin Bolun New Materials Co., Ltd.
Hubei Greenhome Materials Technology, Inc.
Lanxess AG
CompanyRanking Revenue (RMB Million)
Wuhan Youji Industries Co., Ltd.
Source: Frost & Sullivan Report
The PRC sales revenue of benzyl alcohol was approximately RMB1,364.1 million in
2023. The PRC benzyl alcohol market was highly concentrated among the top three benzyl
alcohol manufacturers, whose aggregate market share in terms of revenue was 98.8% in 2023.
Our Group ranked second among benzyl alcohol manufacturers in terms of revenue,
accounting for 33.9% of the PRC market revenue.
Top Three Player by Revenue in the PRC Benzyl Alcohol Market, 2023
538.8 (39.5%)
462.8 (33.9%)
346.4 (25.4%)
1
3
2
Hubei Kelin Bolun New Materials Co., Ltd.
Wuhan Youji Industries Co., Ltd.
CompanyRanking Revenue (RMB Million)
Hubei Greenhome Materials Technology, Inc.
Note: Other market players in the China benzyl alcohol market have a minimal market share of less than 2%
respectively.
Source: Frost & Sullivan Report
In 2023, major global and the PRC market players in benzoic acid, sodium benzoate and
benzyl alcohol markets faced severe challenges on revenue and profitability arising from the
slower-than-expected economic recovery caused by COVID-19 and downward trend of raw
material prices. Entities in the PRC chemical materials and manufacturing industry has
recorded a significant drop in net profit in 2023 as compared to 2022. For global and the PRC
market players in benzoic acid, sodium benzoate and benzyl alcohol markets, the rate of drop
in net profit from 2022 to 2023 can reach the range from 70% to nearly 100%, or even
recorded a net loss. Therefore, it is industry norm to record a significant decrease in
profitability for chemical companies in 2023. However, the drop of the profitability in the
INDUSTRY OVERVIEW
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PRC chemical materials and manufacturing industry has been narrowing throughout the year
from -54.9% in March 2023 to -52.2% in June 2023 and -46.5% in September 2023, and
further narrowed to -34.1% in December 2023, according to the statistics issued by National
Bureau of Statistics.
Notes:
1. LANXESS Chemical Company Ltd. is a listed Germany company which primarily engages in the
production of advanced intermediate, additives and specialty chemicals.
2. Tianji Dongda Chemical Group Company Ltd. is an unlisted Chinese company which primarily engages
in the production of benzoic acid, sodium benzoate, benzyl benzoate and polyol benzoate.
3. Hunan Hongrun Chemical Technology Co., Ltd. is an unlisted Chinese enterprise engaged in fine
chemical products such as benzoic acid, benzaldehyde, benzoate, etc.
4. Tengzhou Tenglong Chemical Co., Ltd. is an unlisted Chinese enterprise for food-antiseptic products
such as benzoic acid, sodium benzoate, and potassium benzoate.
5. Benxi Black Horse Chemical Industry & Commercial Co., Ltd. is an unlisted Chinese company which
primarily engages in the production of benzoic acid, sodium benzoate and potassium sorbate.
6. Shandong Ruiheng Biotechnology Co., Ltd. is an unlisted Chinese enterprise that produces sodium
benzoate, calcium propionate, benzoic acid, calcium acetate in China.
7. Shandong Tongtaiweirun Chemical Co., Ltd is an unlisted Chinese enterprise specializes in the
production of food grade, pharmaceutical grade, feed grade propionate.
8. Hubei Greenhome Materials Technology, Inc. is an unlisted Chinese company which primarily engages
in the production of benzyl chloride, benzaldehyde and benzyl alcohol.
9. Hubei Kelin Bolun New Materials Co., Ltd. is an unlisted Chinese enterprise that engages in the
research, production and marketing of benzyl alcohol products.
10. KLJ Group is an unlisted Indian company which primarily engages in the production of plasticizers,
benzyl alcohol and polymer compounds.
MAJOR TOLUENE AND TOLUENE DERIV A TIVE PRODUCTS AND RA W
MA TERIAL AND COST ANALYSIS
The average unit price of benzoic acid increased from RMB6.5 thousand per ton in 2018
to RMB7.5 thousand per ton in 2023 at a CAGR of 2.9%, with a higher growth between 2020
and 2021 due to the multiple effects of robust downstream market demand and a shortage of
raw material supply due to the COVID-19. The prices of sodium benzoate and benzyl alcohol
represented relatively steady trend between 2018 to 2021, which reached RMB8.6 thousand
per ton and RMB12.9 thousand per ton in 2021 respectively. The prices of these three products
have seen dramatic growth in 2022, which was mainly because of the outstanding growth of
toluene and brent crude oil. The average unit price of benzoic acid, sodium benzoate, and
benzyl alcohol experienced a drop in 2023 due to the decline of raw material prices, drop in
downstream product demand and decline in capacity utilization rate with increasing
aggregated production capacity in the market. In the future, recovery of the domestic and
international economies will drive consumption resurgence of benzoic acid, sodium benzoate,
and benzyl alcohol, thus increasing the capacity utilization rate with no newly constructed
production capacity that is put into operation in 2024 and balancing the supply and demand.
Further, the recovery of downstream product demand will increase the raw material demand,
resulting in the rising raw material prices in the long term. Therefore, the average unit price is
expected to maintain a steady increasing trend from 2024 based on the recovery of
downstream product demand and rising raw material prices, reaching RMB8.2 thousand per
ton, RMB10.5 thousand per ton, and RMB14.6 thousand per ton respectively in 2028 as
detailed in the graph below.
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A verage Unit Price of Benzoic Acid, Sodium Benzoate and Benzyl Alcohol, 2018-2028E
20
0
7.8 7.9 8.0 8.1 8.2
6.5 6.4 5.9
7.5 7.5 8.0
RMB Thousand/Ton
CAGR 2018-2023 CAGR 2024E-2028E
Benzoic Acid 2.9% 1.2%
Sodium benzoate 0.7% 0.9%
Benzyl Alcohol 0.8% 1.6%
9.4 10.1 10.410.3 10.4 10.5
9.1 8.9 8.5 8.6
10.7
12.8 13.7
14.414.1 14.6 14.6
12.4 12.0 13.0 12.9
15.1
2018 2019 2020 2021 2022 2023 2024E 2025E 2026E 2027E 2028E
Source: Frost & Sullivan Report
Brent crude oil is a major trading product and serves as a benchmark for purchases on
global financial markets. The price of brent crude oil is normally affected by numerous factors
including the balance between supply and demand, geopolitics, the intervention of
organizations like OPEC and economic policies. In 2020, responses to the COVID-19
pandemic led to steep declines in global petroleum demand and volatile crude oil markets and
brent crude oil fell to USD43.2/barrel. The demand of crude oil continues to recover, and the
price of brent crude oil has reached USD70.9/barrel in 2021 and subsequently USD97.9/barrel
in 2022. In 2023, the average unit price of brent crude oil dropped to USD82.0/barrel.
Slowdown of global economic recovery, rising oil output from non-OPEC countries, and
global interest rate hike have led to downward fluctuations in oil price in 2023. Geopolitical
concerns and economic sanctions restrict the global trade and increase the costs of production,
business operations, and financing, resulting in the slowdown of global economic recovery.
Also, due to significant production volume increases in non-OPEC countries such as the
United States, the overall global oil industry supply surplus has been exacerbated, lowering
the oil price. Further, major global economies are implementing monetary policies of raising
interest rates to curb inflation, leading to a deceleration in the growth of demand for oil and
drop in oil price.
5,480.4
3,750.6
2018 2019 2020 2021 2022 2023 2018
71.7
64.2
43.2
70.9
97.9
82.0
2019 2020 2021 2022 2023
RMB Per Ton Toluene Brent Crude Oil3.5%
CAGR 2018-2023







Average Unit Prices of Toluene (the PRC), 2018-2023
USD Per Barrel 2.7%
CAGR 2018-2023
Average Unit Prices of Brent Crude Oil, 2018-2023
7,409.8 7,248.9
6,096.0
3,000
2,000
7,000
8,000
6,000
5,000
4,000
5,628.4
0
20
40
80
60
100
Source: Frost & Sullivan Report
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In general, the price of international crude oil is positively correlated with the average
price of toluene as oil is one of indispensable raw materials. The price of toluene decreased
from RMB6,096.0 per ton in 2018 to RMB3,750.6 per ton in 2020. In 2020, due to the slump
in oil consumption, stock accumulation of refined oil products and shrinking demands of oil
blending, the average price of toluene decreased by 31.6%. The market price of toluene was on
a fluctuated but overall upwards trend in 2021. As the oil price continues to increase, the price
of toluene demonstrates similar trend and has reached RMB7,409.8 per ton in 2022. In 2023,
drop in the average prices of brent crude oil led to the decrease in the average sales price of
toluene to RMB7,248.9 per ton. Due to the drop in oil prices, toluene, as the product of the
petroleum refining process, lacked sufficient cost support and demand from downstream
markets, leading to a slight drop in its average price in 2023, resulting in the decrease of the
average sales price of benzoic acid, sodium benzoate and benzyl alcohol in the corresponding
period.
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LA WS AND REGULA TIONS RELA TING TO FOREIGN INVESTMENT
Pursuant to the Company Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷ʮ̡
) (hereinafter referred to as the “ Company Law ”) promulgated by the Standing
Committee of the National People’s Congress (hereinafter referred to as the “ SCNPC ”) on
December 29, 1993 and subsequently amended on December 25, 1999, August 28, 2004,
October 27, 2005, December 28, 2013, October 26, 2018, and December 29, 2023,
respectively, which will become effective on July 1, 2024, all companies established in China
are subject to the provisions of the Company Law, which stipulate provisions on the
establishment, corporate structure and management of companies, and also apply to
foreign-invested companies. To the extent laws on foreign investment have other stipulations,
these stipulations shall prevail.
Pursuant to the Foreign Investment Law of the People’s Republic of China
() (hereinafter referred to as the “ Foreign Investment Law ”)
promulgated by the National People’s Congress on March 15, 2019 and became effective on
January 1, 2020, and the Implementing Regulations of the Foreign Investment Law of the
People’s Republic of China (ૢԷ ) promulgated by the
State Council of the People’s Republic of China on December 26, 2019 and came into force on
January 1, 2020, China will further implement the open-up policy, proactively promote
foreign investment, protect the legitimate rights and interests of foreign investors and regulate
the management of foreign investment. The various policies to support the development of
enterprises shall equally apply to foreign-invested enterprises in accordance with the laws.
Foreign investors’ capital contributions, profits, capital gains, gains from asset disposal,
royalties of intellectual property rights, legally obtained compensation or indemnification,
gains from liquidation can be freely remitted in or out of China in RMB or foreign currency in
accordance with the laws. The State implements a management system comprising pre-access
national treatment along with a negative list with respect to foreign investment, and gives
national treatment to foreign investment beyond the negative list. Foreign investors shall not
invest in any field forbidden by the negative list for foreign investment; for any field restricted
by the negative list, foreign investors shall conform to the investment conditions stipulated
under the negative list such as requirements on equity and senior management; any field that
does not fall within the negative list shall be administered under the principle of equal
treatment to domestic and foreign investment.
Pursuant to the Special Administrative Measures (Negative List) for Foreign Investment
Access (2021 version) (૶ఊ2021)
promulgated by the National Development and Reform Commission (hereinafter referred to as
the “ NDRC ”) and the Ministry of Commerce of the People’s Republic of China (hereinafter
referred to as the “ MOC”) on December 27, 2021 and became effective on January 1, 2022,
and the “Catalog of Industries for Encouraged Foreign Investment (2022 version)” ( ོᎸ̮
ਠҳ༟ପุͦ፽2022) promulgated by the MOC and the NDRC on October 26, 2022
and became effective on January 1, 2023, the Company’s core business, namely the production
and sales of food additives, feed additives, drug additives, coatings, etc., falls within the
permitted category of foreign investment.
Pursuant to the Measures for the Reporting of Foreign Investment Information
() promulgated by the MOC and the SAMR on December 30, 2019
and came into effect on January 1, 2020, where foreign investors carry out investment
activities directly or indirectly within the PRC, foreign investors or foreign-invested
enterprises shall report investment information to competent commerce departments.
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LA WS AND REGULA TIONS RELA TING TO SAFE PRODUCTION
Pursuant to the Work Safety Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷τ
) (hereinafter referred to as the “ Work Safety Law ”) promulgated by the SCNPC
on June 29, 2002 and amended on August 27, 2009, August 31, 2014 and June 10, 2021 and
became effective on September 1, 2021, production and business operation entities in China
shall abide by the Work Safety Law and other laws and regulations concerning work safety,
and redouble their efforts to ensure work safety by setting up and perfecting the responsibility
system for work safety of all employees and rules and regulations on work safety, increasing
the input and guarantee of funds, materials, technologies, and personnel in terms of work
safety, improving the conditions for work safety, strengthening the development of standards
and adoption of information technologies for work safety, building a dual prevention
mechanism of level-to-level safety risk management and control and hidden danger
identification and management, and perfecting the risk prevention and resolution mechanism,
to raise the work safety level and ensure work safety. In addition, the production, business
operation, transportation, storage, and use of any hazardous substances or the disposal of or
abandonment of hazardous substances shall be subject to the examination and approval as well
as the supervision and administration of the relevant administrative departments according to
the provisions of the relevant laws and regulations, national standards, or industrial standards.
Pursuant to the Work Safety Law, the major person-in-charge of a production or operation
entity shall be fully responsible for the work safety efforts of the entity. The production and
operation entities must educate and urge their employees to strictly observe the regulations
and rules for safe production and the rules for safe operations; and must truthfully inform the
employees of the dangerous elements that exist at the site of operations and work positions, of
the prevention measures, and of corresponding emergency measures for dealing with
accidents; provide articles of labor protection that meet the national standards or industrial
standards for their employees, as well as supervise and educate them in the proper use of these
articles pursuant to the prescribed rules.
Pursuant to the Work Safety Law, and the Regulations on Work Safety Licenses
(τΌ͛ପ஢̙ᗇૢԷ) issued by the State Council on January 13, 2004 and amended on
July 18, 2013 and July 29, 2014, the State applies a work safety licensing system to
enterprises engaged in mining, construction and production, hazardous chemicals, fireworks
and firecrackers, and civil explosives. Without work safety licenses, an enterprise shall not
engage in production activities.
Pursuant to the Work Safety Law, and the Measures for the Supervision and
Administration of “Three Simultaneities” for Safety Facilities of Construction Projects
() promulgated by the State Administration of
Work Safety (now has been adjusted to the Ministry of Emergency Management, hereinafter
referred to as the “ Former SA WS”), production and operation entities are responsible for the
construction of the safety facilities of construction projects. The safety facilities of a
construction project must be designed, constructed and put into production and use
simultaneously with the main part of the project. Investment in safety facilities shall be
brought into the budgetary estimate of the whole construction project.
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LA WS AND REGULA TIONS RELA TING TO HAZARDOUS CHEMICALS
Licensing and Filing Requirements Related to Hazardous Chemicals
Pursuant to the Work Safety Law, and the Administrative Regulations on the Safety of
Hazardous Chemicals (τΌ၍ଣૢԷ , hereinafter referred to as the
“Administrative Regulations on the Safety of Hazardous Chemicals ”) promulgated by the
State Council on January 26, 2002, last amended on December 7, 2013 and became effective
on the same date, and the Measures for the Implementation of Work Safety Licenses of
Hazardous Chemical Production Enterprises (፬
) promulgated by the Former SAWS on August 5, 2011, amended and became effective on
May 27, 2015 and March 6, 2017 respectively, the term “hazardous chemicals” refers to the
highly toxic chemicals and other chemicals which are toxic, corrosive, explosive, flammable
or combustion-supporting that can harm people, facilities or the environment. Enterprises that
produce hazardous chemicals shall obtain a safety license before production.
Pursuant to the Administrative Regulations on the Safety of Hazardous Chemicals, and
the Measures for the Administration of the Permits for Trading in Hazardous Chemicals
( ) promulgated by the Former SAWS on July 17, 2012,
amended on May 27, 2015 and became effective on July 1, 2015, the State applies a licensing
system to the business operation of hazardous chemicals (including storage management,
hereinafter the same). Without a business permit, no entity or individual may engage in the
operation of hazardous chemicals. Pursuant to the Catalogue of Hazardous Chemicals (2015
version) (ͦ፽2015) promulgated by the Former SAWS and the Ministry
of Industry and Information Technology of the People’s Republic of China, the Ministry of
Public Security of the People’s Republic of China, the Ministry of Environmental Protection
of the People’s Republic of China (adjusted to the Ministry of Ecology and Environment of the
People’s Republic of China, hereinafter referred to as the “ Former Ministry of
Environment ”), the Ministry of Transport of the People’s Republic of China, the Ministry of
Agriculture of the People’s Republic of China (adjusted to the Ministry of Agriculture and
Rural Affairs of the People’s Republic of China, hereinafter referred to as the “ Former
Ministry of Agriculture ”), the former General Administration of Quality Supervision,
Inspection and Quarantine, National Railway Administration, National Health and Family
Planning Commission (transformed to National Health Commission of the People's Republic
of China) and Civil Aviation Administration of China on February 27, 2015 and became
effective on May 1, 2015, toluene and other products operated by the Company are listed in
the catalogue and thus the Company shall comply with laws and regulations on hazardous
chemicals.
Pursuant to the Regulation on the Administration of Precursor Chemicals (ʷኪ
၍ଣૢԷ) promulgated by the State Council on August 26, 2005, amended and became
effective on July 29, 2014, February 6, 2016 and September 18, 2018, the Measures for the
Licensing for Production and Operation of Non-pharmaceutical Precursor Chemicals (ᖹ
 ) promulgated by the Former SAWS on April 5,
2006 and became effective on April 15, 2006, the precursor chemicals are classified into three
categories. Category I refers to the major materials that may be used to produce drugs.
Categories II and III refer to the chemical auxiliary substances that may be used to produce
drugs. The specific classification and varieties of precursor chemicals are shown in the
attachment of the present Regulation. The State applies a licensing system to the production
and operation of non-pharmaceutical precursor chemicals. The production and operation of
REGULA TORY OVERVIEW
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non-pharmaceutical precursor chemicals of Category I shall be subject to license-based
administration, while the production and operation of precursor chemicals of Category II and
Category III shall be subject to record certificate-based administration. The valid term of a
certificate on record of production and operation of a non-pharmaceutical precursor chemical
of Category II or Category III shall be 3 years. If the producer or operator needs to continue
the production or operation after expiry of the valid term, it shall renew the record certificate
within 3 months prior to the expiry of the valid term of the record certificate.
Regulations Related to Production and Storage of Hazardous Chemicals
Pursuant to the Administrative Regulations on the Safety of Hazardous Chemicals, work
safety departments shall be responsible for checking the safety conditions of building,
renovating and enlarging construction projects for producing and storing hazardous
chemicals. An enterprise producing or storing hazardous chemicals shall hire an institution
with the qualifications required by the State to make a safety evaluation on its work safety
conditions once every three years and make a safety evaluation report after that. The safety
evaluation report shall cover the problems existing in the current work safety conditions and a
schedule for correction, as well as submit the safety evaluation report and the implementation
of the rectification schedule to the work safety department of the local people’s government at
the county level for record.
Pursuant to the Measures for the Administration of Registration of Hazardous Chemicals
() promulgated by the Former SAWS on July 1, 2012 and became
effective on August 1, 2012, enterprises engaged in the production and import of any
chemicals listed in the Catalogue of Hazardous Chemicals must register with the competent
work safety supervision department prior to the inspection and acceptance of completed
projects or the first importation activity. The hazardous chemicals registration certificate shall
be valid for three years and the enterprise may file a certificate renewal application three
months before the expiry of the validity term of the registration certificate.
Pursuant to the Interim Provisions on the Supervision and Management of Major Hazard
Sources of Dangerous Chemicals ( )
promulgated by the Former SAWS on August 5, 2011, amended on May 27, 2015 and became
effective on July 1, 2015, enterprises that undertake production, storage, usage and operation
for hazardous chemicals shall identify, assess and evaluate their major hazard sources,
establish and perfect the safety monitoring and controlling systems, formulate emergency
plan of major hazard sources, make timely registration and records of the major hazard
sources identified and determined item by item, and file with the safety production
supervision and administration departments of the people’s governments at county level
where they locate.
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LA WS AND REGULA TIONS RELA TING TO FOOD, FEED AND PHARMACEUTICAL
INDUSTRY
Production and Operation of Food Additives
Pursuant to the Food Safety Law of the People’s Republic of China (࠮
) (hereinafter referred to as the “ Food Safety Law ”) promulgated by the SCNPC on
February 28, 2009, amended on April 24, 2015, December 29, 2018 and April 29, 2021, the
Regulation on the Implementation of the Food Safety Law of the People’s Republic of China
(ૢԷ ) (hereinafter referred to as the “ Regulation on the
Implementation of the Food Safety Law ”) promulgated by the State Council on July 20,
2009, as amended on February 6, 2016 and March 26, 2019 and became effective on December
1, 2019, and the Management Measures for Food Additive Productions (૴̋ኒ͛ପ၍
) promulgated by the former Ministry of Light Industry on December 31, 1992 and
becoming effective on the same date, the State adopts a licensing system for the production of
food additives. Those engaging in the production of food additives shall have the premises,
production equipment or facilities, specialized technicians, and management rules suitable for
the varieties of food additives produced, and shall obtain a permit for the production of food
additives. The production of food additives must be carried out in conformity with the laws,
regulations, and national food safety standards. A producer of food additives shall inspect the
food additives produced by it in accordance with the food safety standards, and food additives
may be shipped out from the factory or be sold only after passing the inspection. A food
additive producer shall establish a record system for checking ex-factory food additives,
check the inspection certificates and safety compliance of ex-factory products, honestly
record the names, specifications, quantities, dates or lot numbers of production, best before
date, inspection certificate numbers, and dates of sale of food additives and the names,
addresses, and contact methods of purchasers, and keep the relevant vouchers.
Production and Operation of Feed Additives
The Regulation on the Administration of Feeds and Feed Additives (૴̋ኒ
၍ଣૢԷ) promulgated by the State Council on May 29, 1999 and subsequently amended
and became effective on November 29, 2001, December 7, 2013, February 6, 2016 and March
1, 2017 sets out the management and regulatory regulations on the research and development,
production, operation and use of feeds, which means industrially processed or manufactured
products to be fed to animals, including single feeds, additive premix feeds, concentrated
feeds, formula feeds, and concentrate supplements, and feed additives, which means the small
quantities or traces of substances added in the processing, manufacturing and use of feeds,
including nutritional feed additives and general feed additives. Enterprises engaged in the
production of feed or feed additives must obtain a feed or feed additive production license
before production. The PRC government encourages the research and development of new
feeds and new feed additives. Before a new feed or new feed additive is put into production,
the developer or production enterprise shall file an application for examination and approval
with the agriculture administrative department under the State Council.
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The Measures for the Administration of Production Licenses for Feeds and Feed
Additives ( ) promulgated by the Former Ministry of
Agriculture on May 2, 2012, amended and became effective on December 31, 2013, May 30,
2016, November 30, 2017 and January 7, 2022 stipulates the conditions and requirements for
enterprises engaged in the production of feed, feed additives or additive premixed feed to
obtain relevant production licenses. The enterprise must obtain relevant feed additive
production license or additive premixed feed production license before producing feed and
feed additives. After obtaining a production license, the production enterprise of feed
additives or additive premix feeds shall apply to the provincial feed management department
for the issuance of a product approval document number. The provisions for the production of
feed and feed additives include the availability of relevant facilities and equipment, technical
and quality supervision personnel and compliance with relevant safety and health standards.
Manufacturing and Operation of Drugs
Pursuant to the Medicinal Product Administration Law of the People’s Republic of China
( ) (hereinafter referred to as the “ Medicinal Product
Administration Law ”) promulgated by the SCNPC on September 20, 1984, last amended on
August 26, 2019 and became effective on December 1, 2019 and the “Regulations for the
Implementation of the Drug Administration Law of the People’s Republic of China” ( ʕശɛ͏
ૢԷ) promulgated by the State Council on August 4, 2002, amended
and became effective on February 6, 2016 and March 2, 2019, the Medicinal Product
Administration Law applies to the research, development, manufacturing, distribution, use,
supervision, and administration of medicinal products in the territory of the People’s Republic
of China. To be engaged in the manufacture of medicinal products, the enterprise shall be
subject to the approval of the medicinal product regulatory department of the people’s
government of the province, autonomous region, or municipality directly under the Central
Government where it is located, and obtain a manufacturing permit for medicinal products. No
medicinal products may be manufactured without a manufacturing permit for medicinal
products. An enterprise shall manufacture medical products that meet the national medicinal
product standards. Where any medicinal product quality standards approved by the medicinal
product regulatory department of the State Council are higher than the national medicinal
product standards, the approved medicinal product quality standards shall prevail; and in
absence of national medicinal product standards, the approved medicinal product quality
standards shall be complied with.
Pursuant to the Measures for the Supervision and Administration of Drug Production
() promulgated by the State Administration for Market Regulation
on January 22, 2020 and became effective on July 1, 2020, active drug ingredients
manufacturers shall organize production in accordance with the approved production
processes, strictly comply with the management standards for the drug production quality, and
ensure that the production process satisfies the statutory requirements. Manufacturers of
auxiliary materials, and packaging materials and containers in direct contact with drugs are
subject to related inspection. Other entities and individuals carrying out drugs-related
manufacturing activities shall assume corresponding liability in accordance with the laws. A
drug production license is required in order to produce preparations, active drug ingredients,
and traditional Chinese medicine decoction pieces. The drug production license is valid for
five years.
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LA WS AND REGULA TIONS RELA TING TO COMMODITY IMPORT AND EXPORT
Pursuant to the Foreign Trade Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷
) promulgated by the SCNPC on May 12, 1994 and subsequently amended and
became effective on April 6, 2004, November 7, 2016 and December 30, 2022 and the “Notice
by the Department of Enterprise Management and Audit-Based Control of the General
Administration of Customs of Matters Concerning the Recordation of the Consignees and
Consignors of Imported and Exported Goods” (ආ̈ɹ஬
 ) promulgated by the General Administration of Customs
of the People’s Republic of China on January 3, 2023 and became effective on the same date,
a consignee or consignor of imported or exported goods who applies for recordation shall be
qualified as a market entity and is not required to be filed as a foreign trade business operator.
Pursuant to the Customs Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷ऎᗫ
) promulgated by the SCNPC on January 22, 1987 and subsequently amended on July 8,
2000, June 29, 2013, December 28, 2013, November 7, 2016, November 4, 2017 and April 29,
2021, the consignee of imported goods, the consignor of exported goods and the owner of
inward and outward articles shall be the obligatory customs duty payer. Unless otherwise
stipulated, all imported and exported goods must be declared and duties on them shall be paid
by the consignees or the consignors or by the representatives entrusted. The consignee or the
consignor of imported or exported goods and the customs declaration enterprise shall undergo
customs declaration formalities at the Customs in accordance with the laws. Pursuant to the
Provisions of the People’s Republic of China on the Recordation of Customs Declaration
Entities ( ) promulgated by the General
Administration of Customs on November 19, 2021 and became effective on January 1, 2022,
customs declaration entities refer to consignees or consignors of imported or exported goods
or customs declaration enterprises that have filed for record with the Customs in accordance
with the Provisions. Consignors or consignees of imported or exported goods or customs
declaration enterprises that apply for record-filing shall obtain market entity qualifications.
Pursuant to the Regulation of the People’s Republic of China on the Administration of
the Import and Export of Goods (ආ̈ɹ၍ଣૢԷ ) (hereinafter
referred to as the “ Regulation on the Administration of the Import and Export of Goods ”)
promulgated by the State Council on December 10, 2001 and became effective on January 1,
2002, enterprises engaged in the import of goods to the customs territory of the People’s
Republic of China or export of goods from the customs territory of the People’s Republic of
China, shall comply with the Regulation on the Administration of the Import and Export of
Goods. For goods that are prohibited from importation or exportation, they can not be
imported or exported; for goods that are subject to import or export restrictions, a license or
quota management system shall be implemented; for goods that are freely imported or
exported, there is no restriction. The import and export business operator shall present the
automatic import and export licenses, import and export licenses or the quotas certificate
issued by the administrative departments of import quotas to the customs offices for handling
the formalities of customs declaration and examination.
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LA WS AND REGULA TIONS RELA TING TO FOREIGN EXCHANGE
Pursuant to the Regulation of the People’s Republic of China on Foreign Exchange
Administration ( ʕശɛ͏΍ձ਷̮ි၍ଣૢԷ ) (hereinafter referred to as the
“Regulation on Foreign Exchange Administration ”) promulgated by the State Council on
January 29, 1996, last amended on August 5, 2008 and became affective on the same date, the
foreign exchange income and expenditure and foreign exchange business operations of
Chinese institutions and individuals, and the foreign exchange income and expenditure and
foreign exchange business operations conducted within the territory of the People’s Republic
of China by overseas institutions and individuals must comply with the Regulation on Foreign
Exchange Administration. An overseas institution or individual that makes direct investments
in the territory of the People’s Republic of China shall go through the registration formalities
at a foreign exchange administrative organ upon the approval of the competent department. A
domestic institution or individual that makes direct investment or issues or trades negotiable
securities or derivative products overseas shall go through the registration formalities at the
foreign exchange administrative department of the State Council. If a prior approval or filing
of a competent department was required by relevant state provisions, the approval or filing
process must be completed before handling the foreign exchange registration formalities.
Pursuant to the Notice of the State Administration of Foreign Exchange on Issues
concerning Foreign Exchange Administration of the Overseas Investment and Financing and
the Round-tripping Investment Made by Domestic Residents through Special-Purpose
Companies (೻ҳ༟̮ි
) (hereinafter referred to as the “ SAFE Circular 37 ”) promulgated by
the SAFE on July 4, 2014 and became effective on the same day, before contributing capital to
a special-purpose vehicle with its legal assets or interests within or outside China, a domestic
resident (including domestic institution or domestic resident individual) shall apply to the
foreign exchange authority for undergoing the foreign exchange registration procedure for
foreign investment. Failure to comply with the registration procedures contained in SAFE
Circular 37 may restrict the subsequent foreign exchange activities (including repatriation of
dividends and profits) of relevant domestic residents.
Pursuant to the Notice of the State Administration of Foreign Exchange on Reforming the
Mode of Management of Settlement of Foreign Exchange Capital of Foreign-Funded
Enterprises ( ) (hereinafter
referred to as the “ SAFE Circular 19 ”) promulgated by the SAFE on March 30, 2015 and
became effective on June 1, 2015, foreign-invested enterprises may choose to convert any
amount of foreign exchange in their capital account into RMB based on their actual business
needs. The SAFE further issued Notice of the State Administration of Foreign Exchange on
Reforming and Regulating the Policies for the Administration of Foreign Exchange
Settlement under the Capital Account (ձ஝ᇍ༟͉ධͦഐි၍ଣ
) (hereinafter referred to as the “ SAFE Circular 16 ”) on June 9, 2016, which,
among other things, amended certain provisions of SAFE Circular 19. Pursuant to SAFE
Circular 19 and SAFE Circular 16, the settlement of foreign exchange receipts under the
capital account (including the foreign exchange capital, foreign debt financing and funds
repatriated from overseas listing) that are subject to discretionary settlement as already
specified by relevant policies may be handled at banks based on the domestic institutions’
actual requirements for business operation. Domestic institutions may, when conducting the
discretionary settlement of foreign exchange receipts under the capital account, use their
foreign exchange receipts under the system of foreign exchange settlement upon payment.
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Domestic institutions’ foreign exchange receipts under the capital account shall be used
within the business scope under the genuineness and self-use principles. Domestic
institutions’ foreign exchange receipts under the capital account and the RMB funds obtained
from the settlement thereof may be used for the expenditure under current accounts within
their respective business scope and the expenditure under the capital account permitted by
laws and regulations, which may not be for the following purposes: be used for the
expenditures beyond the business scope of the enterprises or prohibited by the laws and
regulations of the state; be used for securities investment or any investment or wealth
management other than banks’ principal guaranteed products, unless otherwise provided for
by any law or regulation; be used to grant loans to non-affiliated enterprises, except those
circumstances expressly permitted in the business scope; be used to build or purchase the real
estate not for self-use (except real estate enterprises).
Pursuant to the Notice of the State Administration of Foreign Exchange on Further
Simplifying and Improving Policies for the Foreign Exchange Administration of Direct
Investment ( ), hereinafter referred
to as the “ SAFE Circular 13 ”) promulgated by the SAFE on February 13, 2015 and came into
effect on June 1, 2015, the administrative examination and approval procedures relating to the
foreign exchange registration approval under domestic direct investment and the foreign
exchange registration approval under overseas direct investment (hereinafter referred to as
“direct investment related foreign exchange registration ”) were abolished and direct
investment-related foreign exchange registration is directly reviewed and handled by banks.
Further, the procedures for certain direct investment-related foreign exchange businesses are
simplified under the SAFE Circular 13: (1) the registration procedure for confirmation of the
capital contribution of foreign investors under domestic direct investment is simplified. The
registration for confirmation of the non-cash capital contribution of foreign investors under
domestic direct investment and the registration for confirmation of the capital contribution
made by foreign investors for acquisition of the equity interests of the Chinese side were
abolished; (2) the foreign exchange filing of overseas reinvestment was abolished; (3) the
annual inspection on foreign exchange of direct investment was abolished and replaced by the
registration of inventory interests.
LA WS AND REGULA TIONS RELA TING TO ENVIRONMENTAL PROTECTION
Laws and Regulations Relating to Construction Project Environmental Protection
Pursuant to the Environmental Protection Law of the People’s Republic of China
() promulgated by the SCNPC on December 26, 1989, last
amended on April 24, 2014 and became effective on January 1, 2015, all entities and
individuals have the obligation to protect the environment. Enterprises, public institutions and
other producers and operators shall prevent and reduce environmental pollution and
ecological damage, and assume the liability for the damage caused in accordance with the
laws. For the construction of environment-affected projects, the environmental impact
assessment shall be conducted. The pollution prevention and control facilities in construction
projects shall be designed, built and put into production and use along with the principal part
of the project at the same time. The pollution prevention and control facilities shall meet the
requirements specified in the approved documents regarding the environmental impact
assessment and shall not be dismantled or left idle without authorization. The consequences of
violations of the Environmental Protection Law include fines and restricted or suspended
production. If a criminal offense is committed, the offender will be subject to criminal
liability.
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Pursuant to the Law of the People’s Republic of China on Environment Impact
Assessment ( ) promulgated by the SCNPC on October 28,
2002 and most recently amended on December 29, 2018, an environmental impact assessment
shall be conducted for projects that have an impact on the environment in China. For
construction projects with potentially serious environmental impacts, an environment impact
report shall be prepared to provide a comprehensive assessment of their environmental
impacts. For construction projects with potentially mild environmental impacts, an
environmental impact statement shall be prepared to provide an analysis or specialized
assessment of their environmental impacts. For construction projects with very small
environmental impacts, no environmental impact assessment is required. However, an
environmental impact registration form shall be submitted.
Pursuant to the Regulation on the Administration of Construction Project Environmental
Protection (ᚐ၍ଣૢԷ) promulgated by the State Council on November
29, 1998, amended on July 16, 2017 and became effective on October 1, 2017, for a
construction project for which an environmental impact report or environmental impact
statement shall be prepared in accordance with the laws, the construction unit shall submit,
before the commencement of the construction works, the environmental impact report or
environmental impact statement to the competent administrative department of environmental
protection with the authority of examination and approval for approval. If the environmental
impact evaluation document of the construction project is not examined by the examination
and approval department in accordance with the laws or is not approved after examination, the
construction unit may not commence the construction works. A construction project for which
an environmental impact report or environmental impact statement is prepared may
commence operation or be put into use only after its supporting environmental protection
facilities pass the inspection and acceptance; and the construction project may not commence
operation or be put into for use if no inspection and acceptance is performed for the supporting
environmental protection facilities or they fail to pass the inspection and acceptance.
Laws and Regulations Relating to Prevention and Control of Pollution
The Law of the People’s Republic of China on the Prevention and Control of
Atmospheric Pollution ( ) promulgated by the SCNPC on
September 5, 1987, became effective on June 1, 1988, amended and became effective on
August 29, 1995, April 29, 2000, August 29, 2015 and October 26, 2018, the Law of the
People’s Republic of China on the Prevention and Control of Water Pollution ( ʕശɛ͏΍ձ
) promulgated by the SCNPC on May 11, 1984, amended on May 15, 1996,
February 28, 2008 and June 27, 2017 and became effective on January 1, 2018, the Law of the
People’s Republic of China on Noise Pollution Prevention and Control ( ʕശɛ͏΍ձ਷ኛ
) promulgated by the SCNPC on December 24, 2021, became effective on June
5, 2022, and the Law of the People’s Republic of China on the Prevention and Control of
Environmental Pollution Caused by Solid Waste (ط
) promulgated by the SCNPC on October 30, 1995, last amended on April 29, 2020 and
became affective on September 1, 2020 set out the requirements for the prevention and control
of atmospheric pollution, water pollution, noise pollution and solid waste respectively. The
enterprises which discharge sewage, solid waste, noise or waste gas shall obtain
corresponding pollutant discharge permit documents in accordance with the aforesaid laws
and regulations.
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Pursuant to the Administrative Measures for Pollutant Discharge Permitting (for Trial
Implementation) (༊Б) promulgated by the Former Ministry of
Environment and became effective on January 10, 2018, amended and became effective on
August 22, 2019, enterprises and other production operators included in the catalog of
classified management of pollutant discharge licenses for stationary pollution sources shall
apply for and obtain a pollutant discharge license within the prescribed time limit. Pollutant
discharging entities not included in the catalog of classified management of pollutant
discharge licenses for stationary pollution sources are temporarily not required for application
for pollutant discharge licenses. Where any entity is required to obtain a pollutant discharge
license but fails to do so, it shall not discharge pollutants.
Pursuant to the Catalog of Classified Management of Pollutant Discharge Permits for
Stationary Pollution Sources (2019 Version) (๕રϮ஢̙ʱᗳ၍ଣΤ፽ 2019 ϋ
) issued by the Ministry of Ecology and Environment of the People’s Republic of China
(hereinafter referred to as the “ MEE”) and became effective on December 20, 2019, the State
implements the primary management, simplified management and registration management of
pollutant discharge permits based on the quantity of pollutants generated and discharged, their
impacts on the environment and other factors. A pollutant discharge unit under registration
management does not need to apply for a pollutant discharge license.
Pursuant to the Regulations on the Administration of Permitting of Pollutant Discharges
(રϮ஢̙၍ଣૢԷ) promulgated by the State Council on January 24, 2021 and became
effective on March 1, 2021, based on the quantity of pollutants generated and discharged, their
impacts on the environment and other factors, categorical administration of pollutant
discharge permit system is implemented to regulate pollutant-discharging entities: (1) key
administration of pollutant discharge permits shall be implemented for pollutant discharging
entities which generate and discharge relatively large quantities of pollutants or have a
relatively serious impact on the environment; (2) administration of pollutant discharge
permits shall be simplified for pollutant-discharging entities which generate and discharge
relatively small quantities of pollutants and have a relatively small impact on the environment.
Pollutant discharging entities shall apply for pollutant discharging permits with the competent
departments of ecology and environment under the local people’s governments at or above the
level of city with subordinate districts at the places where their production and operation
premises are located. If a pollutant discharging entity has two or more production and
operation premises which discharge pollutants, it shall apply for pollutant discharge permits
separately for its production and operation premises.
LA WS AND REGULA TIONS RELA TING TO INTELLECTUAL PROPERTY RIGHTS
Patent
Pursuant to the Patent Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷ਖ਼
) (hereinafter referred to as the “ Patent Law ”) promulgated by the SCNPC on March
12, 1984, last amended on October 17, 2020 and became effective on June 1, 2021, enterprises
may apply for intellectual property rights of inventions, utility models or designs. A
patentable invention or utility model must meet three conditions, i.e. novelty, inventiveness
and practical applicability. The Patent Office of China National Intellectual Property
Administration is responsible for receiving, examining and approving patent applications.
The duration of the patent right for an invention is 20 years, for a utility model is 10 years, and
for a design is 15 years, all of which commencing from the date of application. Except for
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certain specific circumstances provided by the Patent Law, no entity or individual may,
without the permission of the patentee, exploit the patent.
Trademark
Pursuant to the Trademark Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷ਠ
) promulgated by the SCNPC on August 23, 1982, last amended on April 23, 2019 and
became effective on November 1, 2019, “registered trademark” refers to trademarks that have
been approved by and registered with the Trademark Office of China National Intellectual
Property Administration, including commodity marks, service marks, collective marks and
certification marks. The exclusive right to use a registered trademark shall be limited to
trademarks that have been approved for registration and to commodity on which the use of the
trademark has been approved. The period of validity of a registered trademark is ten years,
starting from the date the registration is approved. Any of the following conducts shall
constitute an infringement of the exclusive right to use a registered trademark, including (but
not limited to): without obtaining a license from the trademark registrant, using a trademark
that is similar to a registered trademark on the same commodity or using a trademark that is
identical with or similar to a registered trademark on similar commodity or selling commodity
that infringe the exclusive right to use the registered trademark.
Copyright
Pursuant to the Copyright Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷ഹ
) (hereinafter referred to as the “ Copyright Law ”) promulgated by the SCNPC on
September 7, 1990, last amended on November 11, 2020 and became effective on June 1, 2021
and the Implementing Regulations of the Copyright Law of the People’s Republic of China
(ૢԷ ) promulgated by the State Council on January 30,
2013 and became effective on March 1, 2013, the copyright of computer software is protected
by the Copyright Law. Authors and other copyright owners may register their works with the
registration authority recognized by the copyright administration department under the State
Council.
Pursuant to the Regulations on Protection of Computer Software (ᚐૢ
Է) promulgated by State Council on December 20, 2001, last amended on January 30, 2013
and became effective on March 1, 2013, and the Measures for Registration of Copyright of
Computer Software ( ) promulgated by National Press and
Publication Administration (being re-organized to the National Copyright Administration) on
February 20, 2002 and became effective on the same date, Chinese citizens, legal entities or
other organizations enjoy the copyright in the software which they have developed, whether
published or not. A software copyright owner may register with the software registration
institution recognized by the copyright administration department of the State Council.
Domain Name
Pursuant to the Administrative Measures for Internet Domain Names ( ʝᑌၣਹΤ၍ଣ
) promulgated by the Ministry of Industry and Information Technology of the People’s
Republic of China (hereinafter referred to as the “ MIIT ”) on August 24, 2017 and became
effective on November 1, 2017, any party that provides internet domain name services or
carries out operation, maintenance, supervision and administration thereof and other relevant
activities within the territory of the People’s Republic of China must observe the
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Administrative Measures for Internet Domain Names. Any party that has domain name root
servers, the institution for operating domain name root servers, the domain name registry and
the domain name registrar within the territory of China shall obtain a permit for this purpose
from the MIIT or the communications administration of the local province, autonomous
region or municipality directly under the Central Government. A permit for being licensed as
an institution for operating domain name root servers, a domain name registry or a domain
name registrar shall be valid for five years.
LA WS AND REGULA TIONS RELA TING TO LABOR PROTECTION
Labor Law and Labor Contracts
Pursuant to the Labor Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷௶
) promulgated by the SCNPC on July 5, 1994, amended and became effective on August
27, 2009 and December 29, 2018, employers shall establish and perfect their rules and
regulations in accordance with the laws and ensure that laborers enjoy labor rights and fulfill
labor obligations. The employer shall establish and enhance its system for labor safety and
sanitation, strictly abide by State rules and standards on labor safety and sanitation, provide
laborers with training in labor safety and sanitation, prevent accidents in the process of work,
and reduce occupational hazards. The employer shall provide laborers with labor safety and
sanitation conditions that meet State stipulations, necessary gears for labor protection, and
regular health examination for laborers engaged in work with occupational hazards.
The Labor Contract Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷௶ਗΥΝ
) promulgated by the SCNPC on June 29, 2007, amended on December 28, 2012 and
became effective on July 1, 2013, and the Regulation on the Implementation of the
Employment Contract Law of the People’s Republic of China (ج
ૢԷ) promulgated by the State Council on September 18, 2008 and became effective on
the same day set out specific provisions in relation to the execution, the terms and the
termination of a labor contract and the rights and obligations of the employees and employers,
respectively. An employer establishes an employment relationship with an employee from the
date when the employer puts the employee to work. A written labor contract shall be
concluded in the establishment of an employment relationship. When an employer employs an
employee, it shall faithfully inform him of the work duties, conditions and location,
occupational harm, safe production condition, remuneration, and other information which the
employee requires to be informed.
Social Insurance
Pursuant to the Social Insurance Law of the People’s Republic of China ( ʕശɛ͏΍ձ
) promulgated by the SCNPC on October 28, 2010, as amended and became
effective on December 29, 2018, the Interim Regulation on the Collection and Payment of
Social Insurance Premiums (ᎈ൬ᅄᖮᅲБૢԷ) promulgated on January 22, 1999
and revised on March 24, 2019, and the Regulation on Work-Related Injury Insurance ( ʈෆ
ᎈૢԷ) promulgated on April 27, 2003 and as amended on December 20, 2010, the
Regulations on Unemployment Insurance (ᎈૢԷ) promulgated on January 22, 1999
and became effective on the date of promulgation by the State Council, and the T rial Measures
for Maternity Insurance for Enterprise Employees ( )
promulgated by the former Ministry of Labor on December 14, 1994 and became effective on
January 1, 1995, employers within the territory of the People’s Republic of China shall pay social
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insurance premiums in accordance with the laws. Where an employer fails to handle social
insurance registration, the social insurance administrative department has the power to order it to
make rectification within a prescribed time limit and, if it fails to do so within the prescribed time
limit, impose a fine of 1-3 times the amount of the social insurance premiums payable upon it,
and a fine of not less than RMB500 but not more than RMB3,000 upon the directly responsible
person in charge and other directly responsible persons. Where an employer fails to pay social
insurance premiums on time or in full amount, the collection agency of social insurance
premiums has the power to order it to pay or make up the deficit of premiums within a prescribed
time limit, and impose a daily overdue fine at the rate of 0.05% of the amount in default from the
due date; and if it still fails to pay the premiums within the prescribed time limit, the relevant
administrative department has the power to impose a fine of 1-3 times the amount in default upon
it.
Housing Fund
Pursuant to the Administrative Regulations on the Housing Provident Fund
(၍ଣૢԷ) promulgated by the State Council on April 3, 1999 and became
effective on the same day and amended on March 24, 2002 and March 24, 2019, employers in
the PRC are required to contribute to housing fund. A company shall register at the housing
provident fund management center within 30 days from the date of its establishment, and open
a housing provident fund account at the entrusted bank on behalf of its employees within 20
days from the date of the registration. A company shall pay and deposit housing provident
fund on time and in full, and may not be overdue in the payment and deposit or underpay the
housing provident fund. The payment and deposit rates for housing provident fund for both
the company and employees shall not be less than 5% of the average monthly salary of such
individual employees for the previous year. Where a company fails to undertake payment and
deposit registration of housing provident fund or fails to go through the formalities of opening
housing provident fund account for its employees, the housing provident fund management
center has the power to order it to go through the formalities within a prescribed time limit;
and where such company fails to do so at the expiration of the time limit, a fine of not less than
RMB10,000 and not more than RMB50,000 shall be imposed. Where a company is overdue in
the payment and deposit of, or underpays, the housing provident fund, the housing provident
fund management center has the power to order it to make the payment and deposit within a
prescribed time limit; where the payment and deposit has not been made after the expiration of
the time limit, an application may be made to a people’s court for compulsory fulfilment of
payment obligation.
Occupational Diseases Prevention and Control
Pursuant to the Law of the People’s Republic of China on the Prevention and Control of
Occupational Diseases ( ) promulgated by the SCNPC on
October 27, 2001 and subsequently amended on December 31, 2011, July 2, 2016, November
4, 2017 and December 29, 2018, an employer shall establish and improve its accountability
system for prevention and treatment of occupational diseases, enhance the management of,
and improve the standards thereof, and bear the liability for the occupational disease hazards
produced in the unit. For construction projects, including new construction, expansion and
reconstruction projects, and projects for technical upgrading and introduction (hereinafter
collectively referred to as “ construction projects ”) that may produce occupational disease
hazards, the company responsible for the project shall, during the period of feasibility study,
carry out a preliminary assessment on occupational disease hazards. The preliminary
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assessment report on occupational disease hazards shall include the assessment of the risks of
occupational disease hazard that the construction project may face and of the impacts that
such hazards may have on the workplace and workers’ health, and identify the types of the
hazards and the measures to be taken for the prevention of occupational diseases. The
expenditure for the establishment of the facilities for the prevention and control of
occupational diseases of a construction project shall be included in the budget of the project,
and such facilities shall be designed, constructed, and put into production and use at the same
time with the main construction. Before accepting a construction project upon its completion
in the inspection and acceptance, the construction unit shall have the effect of occupational
disease hazard control assessed in relation to the project. For the construction project, it may
be put into production and use upon completion only after its occupational disease control and
prevention facilities, which shall be subject to inspection by the construction unit in
accordance with the laws, pass the inspection and acceptance.
The Measures for the Supervision and Administration of “Three Simultaneities” of Facilities
for the Prevention and Control of Occupational Diseases of Construction Projects (ணධͦᔖุ
), promulgated by the Former SAWS on March 9, 2017 and
became effective on May 1, 2017, has stipulated detailed provisions which includes conducting an
occupational disease hazard preliminary assessment, evaluating and reviewing the design of the
protective facilities for occupational diseases and the results of occupational disease hazard control,
and carrying out the inspection and acceptance of the protective facilities for occupational diseases
for construction projects that may produce occupational disease hazards. The administrations of
work safety of all the local people’s governments above the county level shall exercise
classified and hierarchical regulation of “Three Simultaneous” of facilities for the prevention
and control of occupational diseases of construction projects in an area of the competence
defined by the people’s governments at the same level within their jurisdiction according to
the laws and the specific measures shall be formulated by the administrations of work safety at
the provincial level and filed with the State Administration of Work Safety. In case of
violation of relevant regulations, the company may face the legal risk of fines, suspension and
closure.
Pursuant to the Administrative Provisions on Occupational Health in the Workplace
( ) promulgated by the National Health Commission on
December 31, 2020 and became effective on February 1, 2021, the employer with serious
occupational hazards shall engage an occupational health technical service institution with
the corresponding qualification to conduct the assessment of factors of occupational hazards
at least once each year, and evaluate the current situation of occupational hazards at least once
every three years.
LA WS AND REGULA TIONS RELA TING TO TAX IN THE PRC
Enterprise Income Tax
Pursuant to the Enterprise Income Tax Law of the People’s Republic of China
( ) formulated by the NPC on March 16, 2007, last amended
by the SCNPC and became effective on December 29, 2018, a non-resident enterprise having
offices or establishments inside China shall pay enterprise income tax (at the enterprise
income tax rate of 25%) on its incomes derived from China and on incomes that it earns
outside China but which has real connection with the said offices or establishments. The
enterprise income tax on high- and new-tech enterprises that are greatly supported by the State
shall be levied at the reduced tax rate of 15%.
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Pursuant to the Regulation on the Implementation of the Enterprise Income Tax Law of
the People’s Republic of China (ૢԷ ) promulgated by
the State Council on December 6, 2007 and amended on April 23, 2019, dividends paid by a
foreign-invested enterprise to overseas investors are subject to PRC withholding tax at a rate
of 10%, unless otherwise provided in the tax treaty signed by the PRC government and other
jurisdictions. However, pursuant to the Arrangement between the Mainland of China and the
Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income (׵
τર ) promulgated by the State Taxation
Administration on August 21, 2006 and became effective on the same date, the withholding
tax in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise shall
be 5% of the total dividends if the Hong Kong enterprise directly holds at least 25% of the
PRC enterprise. In addition, pursuant to the Measures for Non-resident Taxpayers’ Enjoyment
of Treaty Benefits ( ) promulgated by the State
Taxation Administration on October 14, 2019 and became effective on January 1, 2020, in
respect of enjoying tax benefits under the tax treaty, non-resident enterprises, who have tax
obligations in China and need to claim treaty benefits shall be handled in the manner of
“self-assessment, claim for and enjoyment of treaty benefits, and maintain relevant documents
for inspection.” If a non-resident taxpayer determines through self-assessment that he or she is
eligible for treaty benefits, he or she may, when filing tax returns, or when a withholding agent
files withholding returns, enjoy tax treaty benefits, and shall collect and maintain relevant
documents for inspection in accordance with these Measures and accept the follow-up
administration of tax authorities.
Value-added Tax (“V A T”)
Pursuant to the Notice of the Ministry of Finance and the State Taxation Administration
on Overall Implementation of the Pilot Program of Replacing Business Tax with Value-Added
Tax ( ) promulgated
by Ministry of Finance and the State Taxation Administration on March 23, 2016, and became
effective on May 1, 2016 and the Measures for Implementing the Pilot Program of Replacing
Business Tax with Value-Added Tax ( ) (hereinafter
referred to as the “ Measures for V A T ”) promulgated by Ministry of Finance and the State
Taxation Administration on December 12, 2013, and became effective on January 1, 2014
(some measures of them are no longer effective), with the approval of the State Council, since
May 1, 2016, the pilot program of replacing business tax with V AT shall be implemented
across the country. All business tax taxpayers in the construction industry, the real estate
industry, the financial industry, and the living service industry shall be included in the scope
of the pilot program, and the payment of business tax shall be replaced by the payment of V AT.
The entities and individuals that sell services, intangible assets or immovable properties
within the territory of the People’s Republic of China are V AT payers, and shall pay V AT
instead of business tax in accordance with the Measures for V AT.
Pursuant to the Decision of State Council on Abolition of the Provisional Regulations of
the People’s Republic of China on Business Tax and Revision of the Provisional Regulations
of the People’s Republic of China on V AT (ᄻ˟ʕശɛ͏΍ձ਷ᐄุ೼ᅲБ
) promulgated on November 19,
2017 and became effective on the same day, business tax is officially replaced by V AT.
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Pursuant to the Interim Regulations of the PRC on V AT (೼ᅲБૢ
Է) promulgated by the State Council on December 13, 1993 and became effective on
January 1, 1994, and subsequently amended on November 5, 2008, February 6, 2016 and
November 19, 2017, respectively, and its Implementation Regulations ( ʕശɛ͏΍ձ਷ᄣ
) promulgated by the Ministry of Finance and came into force on
December 25, 1993 and amended on December 15, 2008 and October 28, 2011, the V AT
payable tax amount shall be calculated based on the output tax amount for the current period
minus the input tax amount for the current period. The V AT rate is 17% or 11% in some limited
cases, depending on the product category.
Pursuant to the Announcement of the Ministry of Finance, the State Taxation
Administration and the General Administration of Customs on Relevant Policies for
Deepening the Value-Added Tax Reform (೼ҷ
ʮѓ) issued by the Ministry of Finance, the State Taxation Administration
and the General Administration of Customs on March 20, 2019 and became effective on April
1, 2019, the tax rate of 16% applicable to the V AT taxable sale or import of goods by a general
V AT taxpayer shall be adjusted to 13%; and the tax rate of 10% applicable thereto shall be
adjusted to 9%.
Environmental Protection Tax
Pursuant to the Environmental Protection Tax Law of the People’s Republic of China
( ) promulgated by the SCNPC on December 25, 2016 and
amended on October 26, 2018, and the Regulation on the Implementation of the
Environmental Protection Tax Law of the People’s Republic of China ( ʕശɛ͏΍ձ਷ᐑྤ
ૢԷ) promulgated by the State Council on December 25, 2017 and became
effective on January 1, 2018, the enterprises that directly discharge taxable pollutants to the
environment are taxpayers of environmental pollution tax. “Taxable pollutants” means air
pollutants, water pollutants, solid wastes and noises and the payable tax shall be determined
by using the following methods: (1) the tax basis for taxable air pollutants shall be determined
on the basis of the pollution equivalents converted from pollutant emissions; (2) the tax basis
for taxable water pollutants shall be determined on the basis of the pollutant equivalents
converted from pollutant discharges; (3) the tax basis for taxable solid wastes shall be
determined on the basis of the discharges of solid wastes; (4) the tax basis for taxable noises
shall be determined on the basis of the decibels in excess of the standards as prescribed by the
State.
Real Estate Tax
Pursuant to the Interim Regulations of the People’s Republic of China on Real Estate Tax
(ପ೼ᅲБૢԷ ) promulgated by the State Council on September 15,
1986 and revised on January 8, 2011, real estate tax will be levied in cities, county towns,
designated townships and industrial and mining areas, which is payable by the title owner of
the property. The real estate tax will be calculated on the residual value of the property at a
rate of 1.2%, or on the rental income from the property at a rate of 12%.
Pursuant to the Decision of the Standing Committee of the National People’s Congress
on Authorizing the State Council to Launch a Pilot Reform of Property Tax in Certain Regions
(ٙ
) (hereinafter referred to as the “ Decision on the Pilot Reform of Property Tax ”)
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promulgated by the SCNPC on October 23, 2021 and became effective on the same date, the
State Council is authorized to pilot property tax reforms in certain regions. Property tax shall
be levied on all types of residential and non-residential property in pilot areas, excluding
lawfully-owned rural homesteads and houses built on them. Taxpayers of the property tax are
the holders of land-use rights and house owners. Non-residential property shall be governed
by Interim Regulations of the People’s Republic of China on Real Estate Tax and Interim
Regulations of the People’s Republic of China on Urban and Town Land Use Tax. The period
for the Decision on Pilot Reform of Property Tax will be five years from the date on which the
State Council promulgates pilot measures.
Urban and Town Land Use Tax
Pursuant to the Interim Regulations of the People’s Republic of China on Urban and
Town Land Use Tax (ᕄɺήԴ͜೼ᅲБૢԷ ) promulgated by the State
Council on September 27, 1988 and last amended on March 2, 2019, entities using land within
the geographical scope of cities, counties, designated towns, industrial and mining areas shall
pay land use tax. Land use tax shall be calculated on the basis of the areas of land actually
occupied by the taxpayers and shall be levied based on the specified amount of tax, for
example, the annual amount of land use tax per square meter is RMB1.5 to 30 in large cities.
Urban Maintenance and Construction Tax
Pursuant to the Interim Regulation of the People’s Republic of China on Urban
Maintenance and Construction Tax (ண೼ᅲБૢԷ )
promulgated by the State Council on February 8, 1985, amended on January 8, 2011 and
lapsed on September 1, 2021, and the Law of the People’s Republic of China on Urban
Maintenance and Construction Tax ( ) issued by the
SCNPC on August 11, 2020 and became effective on September 1, 2021, all entities and
individuals who are taxpayers of consumption tax, value-added tax and business tax shall pay
city maintenance and construction tax in accordance with these regulations. The calculation of
city maintenance and construction tax shall be based on the amount of consumption tax,
value-added tax and business tax actually paid by such taxpayers, and such tax shall be paid
together with the payment of consumption tax, value-added tax or business tax. For taxpayers
located in urban areas, the rate is 7%; for taxpayers located in counties or townships, the rate
is 5%; for taxpayers located in areas other than urban area, counties and townships, the rate is
1%.
Educational Surcharges
Pursuant to the Interim Provisions on the Collection of Educational Surcharges
() promulgated by the State Council on April 28, 1986 and last
amended on January 8, 2011, entities and individuals obliged to pay consumption tax,
value-added tax and business tax shall pay educational surcharges, except for entities paying
surcharges for rural education under the Notice of the State Council on Raising Funds for
Running Schools in Rural Areas (Guofa No. 174 [1984]) (፬ኪ຾
਷೯[1984] 174 ໮˖). Educational surcharges shall be collected on the basis of
the amount of value-added tax, business tax or consumption tax actually paid by such entities
and individuals, collected at the rate of 3%, and paid simultaneously with value-added tax,
business tax or consumption tax. The administration of the collection of educational
surcharges shall be governed by relevant provisions on consumption tax, value-added tax and
business tax.
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Laws and Regulations Relating to Bills
On August 28, 2004, the SCNPC published the “Negotiable Instruments Law of the
People’s Republic of China (2004 Amendment)” (2004͍)
(hereinafter referred to as the “ Negotiable Instruments Law ”), which became effective on
the same day.
According to the Negotiable Instruments Law, the issue, acquisition and endorsement of
the bills shall be made under the principle of good faith and supported by actual transaction or
pre-existing debt relationship. The following conducts may be subject to criminal liability or
administrative penalties: (i) the act of forging or altering a negotiable instrument; (ii) the act
of deliberately using forged or altered negotiable instruments; (iii) the act of issuing blank
checks or deliberately issue checks on which the signature or seal does not tally with the
signature or seal in the true name pre-submitted for counter-checking; (iv) the act of issuing a
draft or a promissory note without a reliable source of funds in order to obtain money by
deception; (v) the act by the drawer of a draft or a promissory note to make false recordings at
the time of draft in order to obtain property or money by deception; (vi) the act of using
negotiable instruments of others or deliberately use negotiable instruments overdue or voided
in order to obtain property and money by deception; and (vii) a payer has committed one of the
aforesaid acts in vicious collaboration with the drawer or the holder.
According to the provisions of the Negotiable Instruments Law, after the payer has paid
the draft amount in full, the liabilities of all instrument debtors shall be relieved.
Pursuant to the Implementation Measures for the Administration of Negotiable
Instruments (2011 Revision) (2011) amended by the State
Council on January 8, 2011 and effective on the same day, the PBOC is the competent
authority governing and administering negotiable instruments.
During the Track Record Period, the Company endorsed bills to its related party without
actual transaction or debt relationship. As advised by the PRC Legal Advisors, the
endorsement was not in compliance with the Negotiable Instruments Law as it was not
supported by actual transaction or debt relationships. However, the endorsement without
actual transaction or debt relationship does not constitute any of the above-mentioned
conducts which may be subject to administrative penalties or criminal liabilities in accordance
with the Negotiable Instruments Law.
Laws and Regulations Relating to Private Lending
Pursuant to the General Rules for Loans () promulgated by the PBOC on
June 28, 1996, for lending and borrowing, including those in covert form, are conducted
between enterprises without authorization, the PBOC has the power to impose a fine of not
less than the amount but not more than five times the amount of illegal income on the lender
and enforce a loan on such activities.
Pursuant to the Provisions of the Supreme People’s Court on Several Issues concerning
the Application of Law in the Trial of Private Lending Cases (2020 Second Amendment)
(2020͍)
(hereinafter referred to as the “ Judicial Interpretation of Private Lending of the SPC ”)
issued by the Supreme People’s Court on December 29, 2020, for a private lending contract
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between legal persons as needed for production and operation, except for those in violation of
mandatory provisions of laws and regulations, if either party claims that the private lending
contract is valid, the People’s Court shall generally support the claim.
During the Track Record Period, the Company’s endorsement of the bills to its related
parties without actual transaction or pre-existing debt relationship may be deemed as a private
lending to the related parties. As advised by the PRC Legal Advisors, the private lending
violates the provisions of the General Rules for Loans. However, as the latest Judicial
Interpretation of Private Lending of the SPC has confirmed the validity of the private loan
under certain circumstances and the Company has not received any illegal income from the
private lending, the risk of the Company being subject to administrative penalty under the
General Rules for Loans is remote.
REGULA TORY DEVELOPMENTS ON OVERSEAS LISTING
New Measures on Overseas Listing Filings
The China Securities Regulatory Commission (the “ CSRC ”) promulgated Trial
Administrative Measures of the Overseas Securities Offering and Listing by Domestic
Companies ( ) (the “ Overseas Listing Trial
Measures ”) and five relevant guidelines on February 17, 2023, which became effective on
March 31, 2023. The Overseas Listing Trial Measures regulate both direct and indirect
overseas offering and listing by PRC domestic companies by adopting a filing-based
regulatory regime.
According to the Overseas Listing Trial Measures, PRC domestic companies that seek to
offer and list securities in overseas markets, either in direct or indirect means, are required to
complete the filing procedure with the CSRC and report relevant information. The Overseas
Listing Trial Measures provide that no overseas offering and listing shall be made under any
of the following circumstances: (i) such securities offering and listing is explicitly prohibited
by provisions in laws, administrative regulations and relevant state rules; (ii) the intended
securities offering and listing may endanger national security as reviewed and determined by
competent authorities under the State Council in accordance with the laws; (iii) the PRC
domestic company intending to make the securities offering and listing, or its controlling
shareholder and the actual controller, have committed relevant crimes such as corruption,
bribery, embezzlement, misappropriation of property or undermining the order of the socialist
market economy during the latest three years; (iv) the PRC domestic company intending to
make the securities offering and listing is currently under investigations for suspicion of
criminal offenses or major violations of laws and regulations, and no conclusion has yet been
made thereof; or (v) there are material ownership disputes over equity held by the domestic
company’s controlling shareholder or by other shareholders that are controlled by the
controlling shareholder and/or actual controller.
The Overseas Listing Trial Measures also provide that if the issuer both meets the
following criteria, the overseas securities offering and listing conducted by such issuer will be
deemed as indirect overseas offering subject to the filing procedure set forth under the
Overseas Listing Trial Measures: (i) the PRC domestic companies account for more than 50%
of the issuer’s operating income, total profits, total assets or net assets (for the most recent
fiscal year); and (ii) the issuer’s business activities are substantially conducted in mainland
China, or its principal place of business are located in mainland China, or the senior managers
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in charge of its business operations and management are mostly Chinese citizens or domiciled
in Mainland China. Where an issuer submits an application for an initial public offering to
competent overseas regulators, such issuer must file with the CSRC within three business days
after such application is submitted. The Overseas Listing Trial Measures also require
subsequent reports to be filed with the CSRC on material events, such as change of control or
voluntary or forced delisting of the issuer who has completed overseas offerings and listings.
Our PRC Legal Advisors are of the view that we are required to comply with the filing
requirements under the Overseas Listing Trial Measures. We have completed the filing
procedure with the CSRC with respect to the listing of our Shares on the Stock Exchange and
for the Global Offering on January 2, 2024.
On December 27, 2021, the NDRC and the MOC published the latest Special
Administrative Measures (Negative List) for the Access of Foreign Investment (2021) (the
“2021 Negative List ”). Article 6 of the Interpretation Note of the 2021 Negative List
(“Article 6 ”) provides that “where a domestic enterprise engaged in the business in the
prohibited areas of the 2021 Negative List seeks to issue and list its shares overseas, it shall
complete the examination process and obtain approval of the relevant competent authorities of
the State, and that a foreign investor shall not participate in the operation and management of
the enterprise, and its shareholding percentage shall be subject to the relevant provisions on
the administration of domestic securities investment by foreign investors.” Our PRC Legal
Advisors are of the view that as the business of the Group does not fall into the prohibited
category of the 2021 Negative List, Article 6 would not apply to the Group’s listing and the
Group is not required to obtain governmental approval for the Listing.
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OVERVIEW
We are a renowned toluene derivative products provider in the PRC and the global
market, primarily focusing on the manufacture of toluene oxidation, and chlorination products
and benzoic acid ammonification products. Our toluene derivative products enjoy broad
market appeal for food preservatives, household chemicals, animal feed acidifier and
synthetic intermediates for agrochemical as well as pharmaceutical uses.
Our history traces back to 1946, when Yisheng Yanhao Hankou Fenhao (͛᜾໮ဏɹʱ
໮)( “ Yisheng Yanhao ”) the predecessor of Wuhan Youji, our first operating subsidiary, was
founded. As the corporate and shareholding structure continued to evolve over the years, Mr.
Gao Yuankun ( ৷ʩտ), the father of our non-executive Director, Mr. Gao, became an indirect
shareholder of Wuhan Youji in 2004, and handed over the management of Wuhan Youji to Mr.
Gao gradually after Mr. Gao joined our Group in April 2010 and became a Director in
September 2016. For details of the industry experience of Mr. Gao, please refer to “Directors
and Senior Management – Directors – Non-executive Directors” in this prospectus.
BUSINESS MILESTONES
The following is a summary of our key business development milestones since our
inception.
Y ear Event
1946 • Yisheng Yanhao, the predecessor of our principal operating
subsidiary, was established in Wuhan
1980 • We were awarded the national quality award silver medal (ሯඎ
ᆤვሯᆤ௝ ) by the National Economic Commission (ࡰ
ึ) of the PRC
2006 • We established Qianjiang Xinyihong, a subsidiary wholly owned by
Wuhan Youji
2011 • We were named an innovative enterprise in Hubei (Ά
ุ) by the Hubei Provincial Department of Science and Technology
(ኪҦஔᝂ )
2014-2015 • We participated in the drafting of national food safety standards for
benzoic acid and sodium benzoate
2015-2016 • We were named a “Top 10 Enterprises in China’s Light Industry Food
Additives and Ingredients Industry” (ࣘ
Бุɤ੶Άุ ) by the China Food Additives and Ingredients
Association (՘ึ ) and the China National
Light Industry Federation ( ʕ਷ჀʈุᑌΥึ )
2016 • We relocated our Wuhan production base to our current site in Wuhan
Chemical Industrial Park
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Y ear Event
• We participated in the revision of national chemical industry
standard of benzyl chloride for industrial use
2017-2019 • We were named a “Top 50 Enterprises in China’s Light Industry Food
Industry” (Бุʞɤ੶Άุ ) by the China National
Light Industry Federation ( ʕ਷ჀʈุᑌΥึ )
2017 • We were awarded the Green Energy Efficiency Award ( ၠЍືঐᆤ )
by China Chemical Energy Conservation Technology Association
(ʕ਷ʷʈືঐҦஔ՘ึ ) and Benzoic Acid Energy Conservation
and Green Manufacturing Professional Committee (͠აືঐၠЍ
ึ )
2018 • We were included in the third batch of Green Manufacturing List
(ୋɧҭၠЍႡிΤఊ ) released by the General Office of the
Ministry of Industry and Information Technology (ʷ௅
፬ʮᝂ) and were awarded as a Green Factory ( ၠЍʈᅀ )
2020 • We were ranked 65th on the 2020 China Top 100 Fine Chemical
Corporates List (2020 ʕ਷ၚ୚ʷʈϵ੶࿮ఊ ) released by China
Fine Chemical Raw Material & Intermediate Industry ( Ό਷ၚ୚ʷ
ʿʕග᜗Бุ՘Ъଡ଼ ), China National Intelligence and
Information Association (՘ึ ) and China
National Chemical Information Center (ʕː )
2021 • We were ranked 65th on the 2021 China Top 100 Fine Chemical
Corporates List (2021 ʕ਷ၚ୚ʷʈϵ੶࿮ఊ ) released by China
Fine Chemical Raw Material & Intermediate Industry ( Ό਷ၚ୚ʷ
ʿʕග᜗Бุ՘Ъଡ଼ ), China National Intelligence and
Information Association (՘ึ ) and China
National Chemical Information Center (ʕː )
2022 • We were ranked 63rd on the 2022 Hubei Top 100 Private
Manufacturing Enterprises List ( ಳ̏͏ᐄΆุႡிุ 100 ੶)
released by the Hubei Provincial Industry and Commerce
Confederation (ʈਠุᑌΥึ )
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OUR MAJOR SUBSIDIARIES
The table below sets forth information about our operating subsidiaries which made a
material contribution to our results of operations during the Track Record Period.
Name of
subsidiary
Date and place of
establishment Principal business activities
Ownership
as of the Latest
Practicable Date
Major shareholding
changes during the
Track Record Period
Wuhan Youji January 12, 1990,
PRC
Manufacture of toluene
derivative products
100% None
Qianjiang
Xinyihong
December 5, 2006,
PRC
Manufacture of toluene
derivative products
100% None
Hubei Kangxin December 12, 2018,
PRC
Trading of toluene and its
derivative products
100% None
EVOLUTION OF OUR GROUP
Predecessor of Wuhan Y ouji
In 1946, Yisheng Yanhao, the predecessor of Wuhan Youji, was established by Shanghai
Dasheng Trading Company (ʮ̡ ) to engage in the sale business. In 1956, Youji
Plant became a public-private partnership and was renamed to Xinkang Chemical Plant ( อੰ
ʷʈᅀ). In 1966, it was restructured into a state-owned enterprise by merging with Wuhan
Changfeng Chemical Plant (ᔮʷʈᅀ ), and renamed back to Wuhan Youji Synthetic
Chemical Plant (ဏϞዚΥϓʷʈᅀ ).
Incorporation and Early Corporate Development
On May 30, 1981, Wuhan Youji was established in the PRC as an enterprise owned by the
whole people (ϞՓʮ̡ ) under its former name of Wuhan Youji Synthetic Chemical
Plant (ဏϞዚΥϓʷʈᅀ ), with an initial registered capital of RMB11,413,213. On
January 12, 1990, Wuhan Youji was re-registered under the name of Wuhan City Wuhan Youji
Synthetic Chemical Plant (ဏϞዚΥϓʷʈᅀ ) with a registered capital of
RMB14,380,000.
On June 18, 1994, Wuhan Youji was converted into a joint stock company and renamed to
Wuhan Youji Industries Joint Stock Co., Ltd. (ʮ̡ ). Upon
completion of the conversion, Wuhan Youji had a share capital of RMB32,970,000, in which
RMB30,370,000, or 92.12%, were subscribed by Wuhan Chemical State-owned Assets
Management Co., Ltd. (ப΂ʮ̡ )( “ Wuhan Chemical
SAM”). The following table sets forth the shareholding structure of Wuhan Youji upon
completion of the conversion.
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Shareholder
Registered
capital
subscribed
Percentage
interest
(RMB)
Wuhan Chemical SAM 30,370,000 92.12%
Wuhan Chemical Import and Export Corporation
(ဏ̹ʷʈආ̈ɹʮ̡ ) 2,000,000 6.06%
Hubei Chemical Import and Export Corporation
(ʷʈආ̈ɹʮ̡ ) 500,000 1.52%
Shanghai Wanguo Securities Co., Ltd., Wuhan
Branch
(ဏᐄุ௅ ) 100,000 0.30%
Total 32,970,000 100.00%
Pursuant to the approval of the Wuhan Federation of Trade Union (ဏ̹ᐼʈึ )o n
April 23, 1994 and Wuhan Economic System Reform Commission (ࡰ
ึ) on April 5, 1996, the Wuhan Youji Employee Trust (ږthe
“Employee Trust ”) was established by Wuhan Youji to hold shares in Wuhan Youji for the
benefit of certain Wuhan Youji’s employees. Following a capital increase, the Employee Trust,
which acted as an investor in Wuhan Youji to exercise the rights and powers as a shareholder of
Wuhan Youji and was represented by the Wuhan Youji labor union, subscribed for
RMB10,000,000 in the share capital of Wuhan Youji. Pursuant to the articles of association of
Wuhan Youji, the Employee Trust enjoyed the same shareholder rights as other shareholders
of Wuhan Youji. The following table sets forth the shareholding structure of Wuhan Youji upon
completion of the capital increase and subscription by the Employee Trust.
Shareholder
Registered capital
subscribed
Percentage
interest
(RMB)
Wuhan Chemical SAM 30,370,000 65.27%
The Employee Trust 10,000,000 21.49%
Wuhan Ruida Technology Co., Ltd.
(ʮ̡ ) 2,400,000 5.16%
Wuhan Chemical Import and Export Corporation
(ဏ̹ʷʈආ̈ɹʮ̡ ) 2,000,000 4.30%
Employees of Wuhan Youji (ٰ1,160,000 2.49%
Hubei Chemical Import and Export Corporation
(ʷʈආ̈ɹʮ̡ ) 500,000 1.07%
Shanghai Wanguo Securities Co., Ltd., Wuhan
Branch (ဏ
ᐄุ௅) 100,000 0.22%
Total 46,530,000 100.00%
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On September 20, 1996, Wuhan Youji listed 10,466,000 newly-issued shares,
representing 18.74% of its enlarged share capital at the time, for trading on an
over-the-counter market in Wuhan, namely Wuhan Securities Automated Quotations System
(ဏᗇՎІਗజᄆӻ୕ ) (the “ OTC Equity Interest ”). Following the closure of the Wuhan
Securities Automated Quotations System by directives of the PRC central government, trading
of such shares ceased on December 9, 1998.
On November 28, 2003, with the approval of the relevant government authorities, Wuhan
Chemical SAM (which had then been renamed to Wuhan Gehua Group Co., Ltd. (ဏ໤ʷණ
ʮ̡ )) transferred all its 30,370,000 shares in Wuhan Youji (representing 54.39% of
Wuhan Youji’s issued share) to members of the senior management of Wuhan Youji at the time,
including Zhou Hongdun ( մᒿᄧ), the president and chairman of the board of Wuhan Youji
appointed on December 23, 2003. Further, since September 2004, Wuhan Linuo, a PRC
industrial conglomerate founded by Mr. Gao Yuankun, the father of Mr. Gao, and Mr. Shen,
started to increase their shareholding in Wuhan Youji through arm’s-length acquisitions of
shares from the then shareholders.
Reverse Merger with Cougar Holdings and Previous Quotation on the OTCBB
In order to seek a listing in the U.S., on June 9, 2005, Wuhan Youji entered into an
acquisition agreement with, among others, Cougar Holdings Inc. (“ Cougar Holdings ”), a
then Nevada-incorporated mineral company whose shares were traded on the OTCBB (ticker
symbol: CGRH). In anticipation of the reverse merger, Cougar Holdings transferred all its
mineral claims to its wholly-owned subsidiary, and subsequently divested itself of ownership
in the said subsidiary to its then shareholders. Henceforth, Cougar Holdings no longer owned
any mineral claims or had any properties to explore. Pursuant to the acquisition agreement,
Cougar Holdings acquired the entire equity interest in Wuhan Youji.
On December 16, 2005, Wuhan Youji was converted into a limited liability company, and
renamed to its current name, Wuhan Youji Industries Co., Ltd. (ʮ̡ ).
During the conversion, all OTC Equity Interest was registered under the Employee Trust such
that the Employee Trust would hold equity interest in Wuhan Youji on behalf of the owners of
the OTC Equity Interest (the “ OTC Shareholders ,” together with the employee shareholders
of Employee Trust, the “ Employee Trust Shareholders ”).
After the approval of the Department of Foreign Trade and Economic Relations of Hubei
Province, the reverse merger was completed on February 13, 2006. After its completion,
Wuhan Youji became a wholly-owned subsidiary of Cougar Holdings and the shares in Cougar
Holdings continued to be quoted on the OTCBB. The following table sets forth the
shareholding structure of Cougar Holdings upon completion of the reverse merger:
HISTORY, REORGANIZA TION AND CORPORA TE STRUCTURE
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Shareholder Number of shares Percentage interest
The Employee Trust 5,867,546 29.34%
Wuhan Linuo 5,840,023 29.20%
Hudson Capital Corporation
(1) 1,045,333 5.23%
Zhou Hongdun 716,743 3.58%
Wuhan Xuanwei Trading Co., Ltd.
(ʮ̡ ) 688,074 3.44%
Hubei Tuopu
(2) 143,349 0.72%
Zaoyang Jinma Chemical Co., Ltd.
(ʮ̡ )
(“Zaoyang Jinma ”) 28,670 0.14%
Other shareholders (3) 5,670,262 28.35%
Total 20,000,000 100.00%
Notes:
(1) Hudson Capital Corporation was one of the original shareholders of Cougar Holdings.
(2) Hubei Tuopu was held as to 30% by Wu Manzhong (׀“() Mr . Wu”), a current Shareholder and an
independent third party, at the time.
(3) Other shareholders represented 184 public shareholders of Cougar Holdings (including employees of
Wuhan Youji), all independent third parties, whose shareholdings ranged from 0.005% to 2.15%.
In December 2007, the total number of shareholders of Cougar Holdings fell to fewer
than 300 persons. Pursuant to the applicable listing rules, on December 20, 2007, Cougar
Holdings filed Form 15-12G with the U.S. Securities and Exchange Commission to terminate
or suspend its duty to file reports pursuant to Rule 12g-4(a)(1)(i) and then became a “Dark or
Defunct” company listed on the Pink open market (the “ Pink Sheets Market ”), an
over-the-counter trading platform in the United States. Since then, the shares in Cougar
Holdings ceased to be quoted on the OTCBB. To the best knowledge of our Directors having
made all reasonable enquiries, since the completion of the reverse merger with Cougar
Holdings up to the delisting of Cougar Holdings’ shares from the OTCBB and the Pink Sheets
Market:
(i) Cougar Holdings and all the then operating entities and subsidiaries under its
control (including but not limited to Wuhan Youji) had operated in compliance in all
material respects with all applicable rules of the OTCBB and the Pink Sheets
Market, and had not been subject to any disciplinary action imposed by any relevant
law enforcement authority; and
(ii) there are no matter in relation to its prior quotation on the OTCBB and the Pink
Sheets Market and the delisting therefrom that should be brought to the attention of
the Stock Exchange and investors.
Based on the independent due diligence work undertaken by the Sole Sponsor and having
reviewed the underlying materials relating to the reverse merger with Cougar Holdings and
previous quotation on the OTCBB, the Sole Sponsor concurs with the view of our Directors as
mentioned above.
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Between 2009 and 2015, Wuhan Linuo, Mr. Gao and Mr. Shen further increased their
shareholding in Cougar Holdings through a series of transactions of shares in Cougar
Holdings. In particular, between 2009 and 2010, Mr. Gao acquired an aggregate of 17.04%
shares in Cougar Holdings from the Employee Trust and Wuhan Youji’s then employees
including Zhou Hongdun for an aggregate consideration of RMB42,913,593.34, which was
determined after arm’s length negotiations with reference to the operating results and
prospects of business of Wuhan Youji at the time.
The 2016 Restructuring
With a view to providing minority shareholders of Cougar Holdings an exit option to
realize their investment in Cougar Holdings following the termination of quotation on the
OTCBB, in 2016, we underwent a series of restructuring (the “ 2016 Restructuring ”) whereby
our Company became the holding company of our operating subsidiaries in place of Cougar
Holdings.
In February 2016, certain shareholders of Cougar Holdings entered into certain
agreements whereby they contributed their shares to CHI MergerCo (“ MergerCo ”), a Nevada
corporation. Immediately after the contributions, MergerCo held at least 90% of the
outstanding stock of Cougar Holdings. On March 28, 2016, MergerCo’s board of directors
approved a plan of merger that provided for a “short form” merger of MergerCo with and into
Cougar Holdings, with Cougar Holdings as the surviving corporation. Pursuant to the merger,
each share of the common stock of Cougar Holdings not owned by MergerCo would be
canceled and converted into the right to receive cash in an amount equal to US$3.32 per share
as determined by an appraisal report dated April 6, 2016.
The merger was consummated on March 31, 2016 and Cougar Holdings was delisted
from the Pink Sheets Market on May 6, 2016. In June 2016, Mr. Gao further increased its
interest in Cougar Holdings by arm’s length acquisition of 9.29% and 9.15% of the shares in
Cougar Holdings from Zhang Wanli and Wuhan Centelligence Investment Center,
respectively, for a consideration of US$3,882,927.4 and US$3,623,481.18. Each of such
transfers was settled by Mr. Gao undertaking the repayment obligations under the pre-existing
loans granted by Wuhan Linuo to the transferors, who otherwise have no past or present
relationship with our Company, our subsidiaries, Shareholders, Directors or senior
management, or any of their respective associate. Upon the completion of the acquisitions, the
shareholding structure of Cougar Holdings was as follows:
Shareholder Number of shares Percentage interest
Wuhan Linuo 8,244,108 41.22%
Mr. Gao 7,095,708 35.48%
The Employee Trust 3,559,266 17.80%
Mr. Shen 928,899 4.64%
Hubei Tuopu 143,349 0.72%
Zaoyang Jinma 28,670 0.14%
Total 20,000,000 100.00%
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On May 26, 2016, Wuhan International Holding I Limited (“ Wuhan Holding I ”) and
Wuhan International Holding II Limited (“ Wuhan Holding II ”) were incorporated in the BVI
by Cougar Holdings. On June 27, 2016, Cougar Holdings transferred 99% and 1% of its equity
interest in Wuhan Youji to Wuhan Holding I and Wuhan Holding II, respectively, whereby
Wuhan Holding I and Wuhan Holding II became the direct holding companies of Wuhan Youji.
On June 29, 2016, Cougar Holdings changed its place of registration from Nevada, U.S.
to Delaware, U.S. and was renamed to Cougar Holdings LLC. Later on June 30, 2016, Cougar
Holdings further changed its place of registration from Delaware, U.S. to the BVI and was
renamed to Cougar Holdings Limited. On the same day, Cougar Holdings conducted a share
consolidation whereby its issued share capital became US$10,000 divided into 10,000 shares
with a par value of US$1 per share.
On September 23, 2016, our Company was incorporated as an exempted company with
limited liability in the Cayman Islands. Upon incorporation, the one subscriber share was
transferred to Cougar International Growth Holding II Ltd., which in turn was wholly owned
by Cougar Holdings. On September 27, 2016, Centelligence Holdings Ltd. was incorporated
as a company limited by shares in the BVI by our Company (“ Centelligence BVI ”). On
November 1, 2016, the then shareholders of Wuhan Holding I and Wuhan Holding II
transferred their shares in the two companies to Centelligence BVI, whereby Wuhan Youji
became an indirect wholly-owned subsidiary of our Company. On November 7, 2016,
Centelligence BVI transferred the entire share capital of Wuhan Holding I and Wuhan Holding
II to Centelligence International Holdings Limited, which in turn was directly wholly owned
by Centelligence BVI.
Subsequent Share Transfers and Share Entrustment Arrangements
In order for Mr. Gao Yuankun to hand over the ownership and management of our
business to Mr. Gao, his son, on September 22, 2016, Mr. Gao Yuankun caused Wuhan Linuo
to transfer 5.39% of the shares in Cougar Holdings to Mr. Gao, making him the largest direct
shareholder of Cougar Holdings with 40.87% of its issued shares. In addition, the remaining
35.83% shares in Cougar Holdings held by Wuhan Linuo would become held on entrustment
as to 80% and 20% on behalf of Mr. Gao and Mr. Shen, respectively, representing the
respective indirect shareholding of Mr. Gao Yuankun and Mr. Shen in Wuhan Linuo. The
reason for Wuhan Linuo not transferring such 35.83% shares to Mr. Gao and Mr. Shen was that
it was required at the time to maintain such assets on its balance sheet to satisfy certain bank
loan requirements.
After the Reorganization, Mr. Gao and Mr. Shen held Shares in our Company through
their respective investment holding vehicles. Therefore, the share entrustment arrangements
between Wuhan Linuo, Mr. Gao Yuankun and Mr. Shen is no longer relevant to the
shareholding structure of our Company.
HISTORY, REORGANIZA TION AND CORPORA TE STRUCTURE
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On September 11, 2017, Mr. Shen acquired 0.14% of the shares in Cougar Holdings from
Zaoyang Jinma for a consideration of RMB848,000, which was determined after arm’s length
negotiation between the parties. At the time of the acquisition, Zaoyang Jinma was owned as
to 60.07% by Zhang Lijin ( ੵлආ), an independent third party. Since the completion of the
above share transfers and up to the Reorganization, the shareholding structure of Cougar
Holdings was as follows:
Shareholder Number of shares Percentage interest
Mr. Gao 4,087 40.87%
Wuhan Linuo 3,583 35.83%
The Employee Trust 1,780 17.80%
Mr. Shen 478 4.78%
Hubei Tuopu 72 0.72%
Total 10,000 100.00%
On February 11, 2019, Mr. Gao acquired 1.40% of the shares in Cougar Holdings from
the Employee Trust, which were beneficially owned by the Wuhan Youji labor union, for a
consideration of RMB14,030,209.55, which was determined with reference to Wuhan Youji’s
net asset value as of December 31, 2018. Such shares remained registered under the Employee
Trust until the Reorganization.
Under the direction of Mr. Gao and Mr. Shen, on January 18, 2021, Linuo Investment
agreed to set aside 6.00% of the 35.83% shares in Cougar Holdings entrusted to it for awards
pursuant to the share incentive scheme detailed in “— Employee Shareholding Platforms.”
Thereafter, Linuo Investment continued to hold the remaining 29.83% shares in Cougar
Holdings on entrustment for Mr. Gao and Mr. Shen. See “— Evolution of our Group —
Subsequent Share Transfers and Share Entrustment Arrangements” for details of the share
entrustment arrangement.
ACQUISITIONS, DISPOSALS AND MERGERS
Major Acquisitions, Disposals and Mergers
Throughout the Track Record Period, we did not conduct any major acquisitions, mergers
or disposals.
Post-Track Record Period Acquisitions
We have not acquired, agreed to acquire or proposed to acquire any business or
subsidiary after the Track Record Period.
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EMPLOYEE SHAREHOLDING PLA TFORMS
On January 18, 2021, Cougar Holdings approved and adopted a share incentive scheme,
pursuant to which Linuo Investment agreed to award 600 shares in Cougar Holdings to 104
then employees of our Group. The share awards were subject to an award price of
RMB48,511.31 per share, which was the net asset value per share of our Company as of
December 31, 2020 deducting distributable dividends of RMB795 million, and was fully
settled by the grantees in cash on November 29, 2021. Due to the fact that the SAFE
registration of the employees had not been completed by the time, the shares deliverable under
the share incentive scheme remained to be held by Linuo Investment.
During the Reorganization, the 600 shares in Cougar Holdings granted by Linuo
Investment, representing all shares deliverable under the share incentive scheme, were
replaced with 4,500,000 Shares in our Company held by three employee shareholding
platforms, namely NovaVision Holdings I Ltd., NovaVision Holdings II Ltd. and NovaVision
Holdings III Ltd. (the “ Employee Shareholding Platform(s) ”) since April 1, 2022. See “—
Reorganization.” Each recipient of share awards is entitled to the shareholders’ rights
associated with the number of Shares held by the relevant Employee Shareholding Platform(s)
that corresponds to their proportional shareholding therein. The Employee Shareholding
Platforms remain the legal owners of, and control the voting rights attached to, all Shares held
by them. The following table sets forth the shareholding structure of each Employee
Shareholding Platform:
Percentage interest
Name of grantee
NovaVision
Holdings I Ltd.
NovaVision
Holdings II
Ltd.
NovaVision
Holdings III
Ltd. Position in our Group
Zou Xiaohong (ࠀ13.21% – 4.05% Executive Director and chairman of the
Board
Zhou Xu ( մϛ) 13.21% – 4.05% Chief executive officer of our Company
Chu Shiqiong ( Ⴃ˰ᖘ) 4.72% – 2.53% Former employee of Wuhan Youji
Wu Jun ( юᒺ) 4.72% – 2.53% Vice president of Wuhan Youji and
general manager of Hubei Kangxin
Xiao Rencheng ( ӽɛ೻) 4.72% – 2.53% Former employee of Youji HK
Xiao Hai ( ӽऎ) 4.72% – 2.53% Deputy director of production of Wuhan
factory of Wuhan Youji
Xiong Kun ( ဤտ) 4.72% – 2.53% Deputy general manager of Qianjiang
Xinyihong
Xiang Shiyan (ف4.72% – 2.53% General manager of Hubei Xinxuanhong
Mr. Shen 2.86% 12.14% 0.41% Non-executive Director
Zhang Zhongshan (ʆ) – 6.60% 3.17% Former employee of Wuhan Youji
Ma Yi ( ৵ɓ) – 6.60% 3.17% Supervisor of Wuhan Youji
Shen Haifeng (ࢤ6.60% 3.17% Chief financial officer of our Company
Guo Tao ( ெᏹ) – 6.60% 3.17% General manager of Wuhan factory of
Wuhan Youji
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Percentage interest
Name of grantee
NovaVision
Holdings I Ltd.
NovaVision
Holdings II
Ltd.
NovaVision
Holdings III
Ltd. Position in our Group
Dang Hui ( ᙣሾ) – 6.60% 3.17% General manager of Qianjiang Xinyihong
and executive director of Hubei
Xinxuanhong and Hubei Xinlianhong
Chen Ping ( ௓̻) – 6.60% 3.17% Executive Director and joint company
secretary of our Company
Huang Zhengwang ( ර͍ૐ) – 6.60% 3.17% Executive vice president of Wuhan Youji
Li Zitong (ࣶ6.60% 3.17% Former employee of Wuhan Youji
Luo Yansheng (͛) – 2.83% 5.07% Former employee of Wuhan Youji
Fan Jinfeng ( ᇍආቜ) – 2.83% 5.07% Deputy director of Wuhan factory of
Wuhan Youji
Sun Bo (ت࢑1.89% 6.33% Vice president of Wuhan Youji
Wang Jing ( ˮ౺) – 0.94% 0.63% Financial director of Qianjiang
Xinyihong and Hubei Xinxuanhong
Xu Yonghong (ߎ0.94% 0.63% Director of benzyl alcohol workshop of
Qianjiang Xinyihong
Zhang Xu ( ੵϛ) – – 8.87% Vice president of Wuhan Youji and
executive director of Hubei Kangxin
30 others
(1):
42.44%
34 others (1):
25.64%
17 others (1):
24.32%
Note:
(1) Others represent our current and former employees who are our independent third parties and have no
interest in more than one Employee Shareholding Platform. There is no unidentified grantee under the
share incentive scheme.
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REORGANIZA TION
In preparation of the Listing, we have undergone the Reorganization. The following chart
illustrates the corporate structure of our Group immediately prior to the Reorganization:
40.87% 35.83% 17.80% 4.78% 0.72%
Wuhan Youji
Cougar International Growth Holding II Ltd.
(BVI)
Cougar Holdings
Mr. Gao Mr. ShenLinuoI nvestment(2) The
Employee Trust(3) Hubei Tuopu
Mr. Gao Yuankun(1) Mr. Shen
Qianjiang Xinyihong
Hubei Kangxin
Hubei Xinxuanhong
100%
100%
100%
100%
100%
100%
100%
80% 20%
Offshore
Onshore
Company
Wuhan Holding I Wuhan Holding II
Centelligence International Holdings Limited
(Hong Kong)
Centelligence Holdings Ltd.
(BVI)
100% 100%
100%
100%
100%
99% 1%
Youji HK
LinuoG r oup Holdings Co. Ltd.
(ʮ̡)
(PRC)
Notes:
(1) Mr. Gao Yuankun is the father of Mr. Gao, our non-executive Director.
(2) Following the consolidation of Wuhan Linuo into Linuo Investment on October 16, 2019, Linuo
Investment, Wuhan Linuo’s holding company, became the registered shareholder of Cougar Holdings
holding (a) 6.00% of the shares in Cougar Holdings to grantees of the then share incentive scheme as
detailed in “— Employee Shareholding Platforms,” and (b) the remaining shares on entrustment for Mr.
Gao and Mr. Shen. For details of the share entrustment arrangements, please refer to “— Evolution of
our Group — Subsequent Share Transfers and Share Entrustment Arrangements” in this prospectus.
(3) The Employee Trust held 1.40% of shares in Cougar Holdings on behalf of Mr. Gao. For details, please
refer to “— Evolution of our Group — Subsequent Share Transfers and Share Entrustment
Arrangements” in this section.
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Step 1: Establishment of the Offshore Holding Companies
On March 24, 2021, each of Vastocean Capital Limited, Custodian Capital Ltd., SYM
Holdings Limited and Fullfaith Capital Limited was incorporated in the BVI as the
wholly-owned holding vehicles of Mr. Gao, Mr. Gao as holder of the custodian of the
Retaining Shareholders and Unresponsive Shareholders (as defined below), Mr. Shen and Mr.
Wu respectively.
On October 14, 2021, NovaVision Holdings I Ltd. and NovaVision Holdings II Ltd. were
incorporated in the BVI. On January 7, 2022, NovaVision Holdings III Ltd. was incorporated
in the BVI. For the shareholding structure of these Employee Shareholding Platforms, please
refer to “— Employee Shareholding Platforms” in this prospectus.
Mr. Gao, Mr. Shen, Mr. Wu and the above employees have completed the registration
required by SAFE under Circular 37. As advised by our PRC Legal Advisors, the onshore
procedure concerning Step 1 is completed.
Step 2: Arrangements for Employee Trust Shareholders
As detailed in “— Evolution of our Group — Incorporation and Early Corporate
Development,” the Employee Trust is a vestige of Wuhan Youji’s past, holding the interests of
the beneficial shareholders for more than two decades as Wuhan Youji underwent the
privatization, reverse merger and offshore restructuring. The vast majority of them are not
employee shareholders over whom the Employee Trust has authority but OTC Shareholders
whose rights are registered by Wuhan Equity Custody and Trading Center (׸
ʕː), a regional equity market operating agency located in Hubei Province which serves as a
service platform for equity custody registration, equity regulated transactions, and equity
investment and financing comprehensive financial services for various small, medium and
micro enterprises in Hubei Province. Therefore, with the assistance of the Wuhan Equity
Custody and Trading Center, our Company through Wuhan Youji has actively sought to reach
out to the beneficial owners, including survivors and heirs, with a view to resolve the
historical issues with the Employee Trust.
From March 16, 2017 to December 31, 2017 and from November 20, 2021 to February
20, 2022, our Company made an offer to the then Employee Trust Shareholders with the
choice to (a) sell their shareholding in Cougar Holdings at a price determined by an
independent assessor or (b) retain their shares. Due to the passage of time, the Employee Trust
no longer had valid contacts and identification information for each Employee Trust
Shareholder. Therefore, the said share purchase offer was advertised in newspapers of Wuhan
municipality and Hubei Province, China, in several rounds of notices from May to September
2017, and was posted on the website of the Wuhan Equity Custody and Trading Center.
The offer was accepted or otherwise responded to by a portion of the Employee Trust
Shareholders, as follows:
Selling shareholders
For the Employee Trust Shareholders who agreed to sell their shares, such shares were
acquired by Wuhan Tianyuan Deqi Trading Co. Ltd. (ʮ̡ )
(“Tianyuan Deqi ”), a company controlled by Gao Jishan ( ৷Λʆ), an independent third
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party. The transfer of shares in relation to the first round of buyout offer in 2017, representing
approximately 6.2% of the shares in Cougar Holdings held by the Employee Trust in 2017 and
2018, was conducted at the consideration of RMB36,776,276, which was determined based on
the net asset value of Wuhan Youji as of September 30, 2016 as appraised by an independent
valuer, while the transfer in relation to the second round of buyout offer from 2021 through
2022, representing approximately 0.5% of the shares in Cougar Holdings, was conducted at
the consideration of RMB4,172,016, which was determined based on the net asset value of
Wuhan Youji as of October 31, 2021, after deducting distributable dividends. The buy-out
transactions for the OTC Shareholders were registered by the Wuhan Equity Custody and
Trading Center.
On February 28, 2022, Tianyuan Deqi transferred approximately 6.0% and
approximately 0.7% of the shares in Cougar Holdings to Mr. Shen and Mr. Gao for the
consideration of RMB31,423,966.62 and RMB3,842,461.58, respectively. Such consideration
was determined with reference to Wuhan Youji’s net asset value as of December 31, 2021,
after deducting the dividends declared at the time.
Retaining shareholders
As of May 31, 2022, 202 beneficiaries of the Employee Trust, accounting for
approximately 0.78% of the shares in Cougar Holdings, had affirmatively indicated their
preference to forego the buyout offer and retain their shares (the “ Retaining Shareholders ”).
To preserve their rights during the Reorganization, on May 30, 2022, the Retaining
Shareholders entered into a custodial agreement with Custodian Capital Ltd. whereby their
shareholding interests in Cougar Holdings were transferred to Custodian Capital Ltd. Under
this arrangement, the Retaining Shareholders are entitled to:
(a) all the rights and interests corresponding to the shares thereof, including the right to
receive the dividends and the earnings from any share transfer; and
(b) request the transfer of their shares in Custodian Capital Ltd. to their own account or
the account they designated upon 20 business days’ written notice, provided that
they have made the requisite registration with the PRC authorities to be able to hold
overseas investment.
Except with the instruction of the Retaining Shareholders, Custodian Capital Ltd. will
not exercise the voting rights attached to Shares it holds. As advised by our PRC Legal
Advisors, since the Retaining Shareholders have signed custodial agreements and the
Retaining Shareholders have agreed to such arrangements, such arrangements are not against
the wills of the Retaining Shareholders and will not infringe their rights and interests. Further,
as advised by our PRC Legal Advisors, the custodian agreements entered between the
Retaining Shareholders and Custodian Capital Ltd. are not in violation of Articles 153 and 154
of the Civil Code of the PRC (Պ), and are legal, valid, binding and
enforceable under PRC laws. The Retaining Shareholders were informed by our Company via
telephone calls that the right to request the sale of their shares prior to the Listing would lapse
in February 2022. Their rights to request the transfer of their shares to their own account or to
sell after the Listing will not lapse. Mr. Gao and Custodian Capital Ltd. undertook that
Custodian Capital Ltd. would not transfer, pledge, gift or otherwise dispose of the Shares held
by Custodian Capital Ltd. without proper authorization.
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Unresponsive shareholders
As of May 31, 2022, 179 beneficiaries of the Employee Trust and 4,964 OTC
Shareholders, collectively accounting for approximately 8.92% of the shares in Cougar
Holdings, could not be reached or confirmed as having responded to the offer (the
“Unresponsive Shareholders ”). Such shares were transferred to Custodian Capital Ltd., with
Mr. Gao and Custodian Capital Ltd. entering into an undertaking on May 30, 2022 that the
Unresponsive Shareholders would have the ability to participate in the Listing through
Custodian Capital Ltd. In addition, upon presenting proof of their beneficial title in the shares
registered with the Employee Trust, the Unresponsive Shareholders will be entitled to:
(a) request the sale of their shares in Custodian Capital Ltd. and Custodian Capital Ltd.
shall, subject to the applicable laws and regulations, transfer the corresponding
shares to the designated account and make the payment to the Unresponsive
Shareholders, provided that any such sale prior to the Listing must be completed no
later than 28 clear days before the submission of the Listing application, and if any
listing application is submitted by our Company to the Stock Exchange, such sale
shall only be conducted after Listing;
(b) request the purchase of their shares in Custodian Capital Ltd. by Mr. Gao at fair
market value, provided that any such sale prior to the Listing must be completed no
later than 28 clear days before the submission of the Listing application, and if any
listing application is submitted by our Company to the Stock Exchange, such sale
shall only be conducted after Listing. The aforesaid fair market value shall be
determined as follows:
(i) after the Listing, the fair market value is based on the closing price of our
Company on the previous trading day and the actual trading price, deducting
the corresponding transaction tax;
(ii) prior to the Listing, the fair market value is based on the book net asset value of
Wuhan Youji at the end of the last month immediately prior to the acquisition;
(c) request Custodian Capital Ltd. to transfer their shares in Custodian Capital Ltd. to
their own account, provided that they have made the requisite registration with the
PRC authorities to be able to hold overseas investment; and
(d) request Custodian Capital Ltd. to continue holding the Shares on behalf of the
Unresponsive Shareholders and enter into a new entrustment agreement between the
Unresponsive Shareholders and Custodian Capital Ltd.
With a view to preserving the rights of the Unresponsive Shareholders for as long as
Wuhan Youji remains an operating subsidiary of our Company, there is no time limit as to
when the rights of the Unresponsive Shareholders under the above arrangement will lapse.
Any dividends to be declared and paid out by our Company will be held by Custodian Capital
Ltd. on behalf of the Unresponsive Shareholders and distributed to each such Unresponsive
Shareholder who can prove his or her ownership of the shares. In addition, as Custodian
Capital Ltd. is only the custodian of the shares owned by the Unresponsive Shareholders, it
will not exercise the voting rights attached to the Shares it holds. Mr. Gao is chosen as the
controlling person of Custodian Capital Ltd. because he, as our Controlling Shareholder and
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the largest Shareholder, is expected to be a long-term Shareholder. Any successor owner of
Custodian Capital Ltd. must also agree to honor the rights of the Unresponsive Shareholders
under the above arrangement. Mr. Gao also undertook to indemnify the Unresponsive
Shareholders for any losses arising from claims made by any of the Unresponsive
Shareholders with respect to the proposed arrangement. Custodian Capital Ltd. undertook to
preserve the rights of the Unresponsive Shareholders until such Unresponsive Shareholders
requested the transfer of their shares from Custodian Capital Ltd. to their own accounts after
the presentation of proof of ownership of their shares.
The Local Financial Regulatory Bureau of Wuhan (ፄʈЪ҅ ) has
approved the above arrangement of the OTC Shareholders. The Wuhan Federation of Trade
Union has instructed that the Wuhan Youji labor union should handle the arrangement of the
employee shareholders, and the Wuhan Youji labor union held a staff representative meeting to
confirm such arrangements according to the instructions by the Wuhan Federation of Trade
Union. As advised by our PRC Legal Advisors, (i) the Local Financial Regulatory Bureau of
Wuhan and the Wuhan Federation of Trade Union are the appropriate authorities of the
Employee Trust Shareholders, and they have the authority to approve or give instructions of
the arrangement of the Employee Trust Shareholders, and (ii) under the current circumstances,
including the fact that the Company failed to notify the Unresponsive Shareholders of the
above arrangements due to lack of contact information, Mr. Gao, Custodian Capital Ltd. and
the Company have adopted reasonable measurements as far as possible to protect the interests
of the Unresponsive Shareholders to lower the risk of potential objection brought by them.
Step 3: Repurchase and Issuance of Ordinary Shares in our Company
On March 7, 2022, our Company carried out a 1-to-10,000 share subdivision whereby our
authorized share capital became US$50,000 divided into 500,000,000 Shares of US$0.0001
each (the “ Share Subdivision ”).
On the same day, our Company entered into a subscription, repurchase and transfer
agreement whereby we repurchased the entire 500,000,000 Shares from Cougar International
Growth Holding II Ltd. (“ Cougar International ”) (the “ Shares Repurchase ”) for a
consideration of US$5,200,000. In addition, on the same day, we allotted and issued Shares to
the investment holding vehicles of Mr. Gao, Mr. Shen and Mr. Wu with reference to their
respective equity interest in Cougar Holdings (the “ Share Issuance ”) at par. As a result,
Vastocean Capital Limited, Custodian Capital Ltd., SYM Holdings Limited, and Fullfaith
Capital Limited held 54,650,842 Shares, 7,271,448 Shares, 12,537,710 Shares and 540,000
Shares, respectively, with 4,500,000 out of the 54,650,842 Shares held by Vastocean Capital
Limited as nominee of the Employee Shareholding Platforms pending the underlying
employees completing the requisite registration with the PRC authorities to be able to hold
overseas investment. After completing the registrations on March 30, 2022, Vastocean Capital
Limited transferred 4,500,000 shares to NovaVision Holdings I Ltd., NovaVision Holdings II
Ltd. and NovaVision Holdings III Ltd. on April 1, 2022.
Step 4: Transfer of Shares to the Employee Shareholding Platforms
On April 1, 2022, the 1,639,483, 1,640,040 and 1,220,477 Shares held by Vastocean
Capital Limited as nominee of the grantees of share awards were transferred to NovaVision
Holdings I Ltd., NovaVision Holdings II Ltd. and NovaVision Holdings III Ltd..
For the corporate structure of our Group immediately after the Reorganization, please
refer to “— Corporate Structure — Corporate Structure Before the Global Offering” in this
prospectus.
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As advised by our legal advisors as to Cayman Islands law, we have legally and properly
completed, settled, and obtained the requisite legal approvals and completed requisite
governmental registrations with the relevant governmental authorities in the Cayman Islands
with respect to the Reorganization.
SHAREHOLDING SUMMARY OF OUR COMPANY
The following table sets out the shareholding structure of our Company as of the date of
this prospectus and immediately upon completion of the Global Offering (assuming the
Over-allotment Option is not exercised):
Shareholder Share
Percentage
interest in our
Company as of
the date of this
prospectus
Percentage
interest in our
Company upon
completion of the
Global Offering
Vastocean Capital Limited 50,150,842 66.86% 53.75%
Custodian Capital Ltd. 7,271,448 9.69% 7.79%
SYM Holdings Limited 12,537,710 16.72% 13.44%
Fullfaith Capital Limited 540,000 0.72% 0.58%
NovaVision Holdings I Ltd. 1,639,483 2.19% 1.76%
NovaVision Holdings II Ltd. 1,640,040 2.19% 1.76%
NovaVision Holdings III Ltd. 1,220,477 1.63% 1.31%
Total 75,000,000 100.00% 80.39%
Upon Listing, the following Shareholders will be core connected persons of our
Company and hence Shares held by them will not be counted towards the public float for the
purpose of Rule 8.24 of the Listing Rules:
1. Vastocean Capital Limited, which is wholly owned by Mr. Gao, our non-executive
Director;
2. Custodian Capital Ltd., which is wholly owned by Mr. Gao as custodian of the
Retaining Shareholders and Unresponsive Shareholders; and
3. SYM Holdings Limited, which is wholly owned by Mr. Shen, our non-executive
Director.
Accordingly, upon completion of the Global Offering (assuming the Over-allotment
Option is not exercised), 25.02% of our issued Shares will be held by the public and counted
towards the public float for the purpose of Rule 8.24 of the Listing Rules.
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CORPORA TE STRUCTURE
Corporate Structure Before the Global Offering
The following chart sets forth the shareholding structure of our Group before the Global
Offering.
Vastocean
Capital Limited
(BVI)
66.86% 9.69% 16.72% 2.19%2.19%0.72%
100%
100% 100%
Qianjiang Xinyihong
Hubei Kangxin
Hubei Xinxuanhong
100%
100%100%
Offshore
Onshore
Fullfaith
Capital Limited
(BVI)
Custodian
Capital Ltd.
(BVI)(2)
SYM Holdings
Limited
(BVI)
NovaVision
Holdings I Ltd.
(BVI)
NovaVision
Holdings II Ltd.
(BVI)
Mr. WuMr. Gao Mr. Shen
100% 100%
39 employees(1)
100%
48 employees(1)
Company
Wuhan Holding I Wuhan Holding II
Centelligence International Holdings Limited
(Hong Kong)
Centelligence Holdings Ltd.
(BVI)
99% 1%
100% 100%
100%
100%
1.63%
NovaVision
Holdings III Ltd.
(BVI)
100%
40 employees(1)
100%
Wuhan Youji
100%
Youji HK
Hubei Xinlianhong
100%
Notes:
(1) For details of the employees holding interests in the Employee Shareholding Platforms, please refer to
“— Employee Shareholding Platforms” in this prospectus.
(2) Custodian Capital Ltd. holds these Shares on behalf of the Retaining Shareholders and the
Unresponsive Shareholders, and will not exercise the voting rights attached to Shares it holds. For
details, please refer to “— Reorganization — Step 2: Arrangements for Employee Trust Shareholders”
in this prospectus.
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Corporate Structure Immediately Following the Global Offering
The following chart sets forth the shareholding structure of our Group immediately after
completion of the Global Offering (assuming the Over-allotment Option is not exercised).
Vastocean
Capital Limited
(BVI)
53.75% 7.79% 13.44% 1.76% 1.76% 0.58%
100% 100% 100%
Custodian
Capital Ltd.
(BVI)(2)
Mr. WuMr. Gao Mr. Shen
100% 100%
39 employees(1)
100%
48 employees(1)
19.61%
Company
Wuhan Holding I Wuhan Holding II
Centelligence International Holdings Limited
(Hong Kong)
Centelligence Holdings Ltd.
(BVI)
99% 1%
100% 100%
100%
100%
1.31%
100%
40 employees(1)
100%
Offshore
Onshore
Wuhan Youji
100%
Youji HK
Qianjiang Xinyihong
Hubei Kangxin
Hubei Xinxuanhong
100%
100%
Hubei Xinlianhong
100%100%
SYM Holdings
Limited
(BVI)
Fullfaith Capital
Limited
(BVI)
NovaVision
Holdings I Ltd.
(BVI)
NovaVision
Holdings II Ltd.
(BVI)
NovaVision
Holdings III Ltd.
(BVI)
Other public
Shareholders
Notes:
(1)–(2) Please refer to “— Corporate Structure — Corporate Structure Before the Global Offering” in this
prospectus.
PRC REGULA TORY REQUIREMENTS
M&A Rules
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors ( ) (the “ M&A Rules ”) jointly issued by the
Ministry of Commerce, the State-owned Assets Supervision and Administration Commission
of the State Council, the STA, the CSRC, the State Administration for Industry and Commerce
(currently known as the SAMR) and the SAFE on August 8, 2006, effective as of September 8,
2006 and amended on June 22, 2009 with immediate effect, (i) if any PRC domestic company,
enterprise or natural person merges its affiliated domestic company in the name of an offshore
company legally established or controlled by the aforesaid domestic company, enterprise or
natural person, it shall be subject to the approval of the Ministry of Commerce of the People’s
Republic of China (the “ MOC”); (ii) require that a special purpose vehicle, formed for
overseas listing purposes and controlled directly or indirectly by PRC companies or
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individuals through acquisitions of shares of or equity interests in PRC domestic companies,
shall obtain the approval of the CSRC prior to the listing and trading of such special purpose
vehicle’s securities on an overseas stock exchange.
Our PRC Legal Advisors are of the opinion that considering that Wuhan Youji was
registered as a foreign-invested enterprise before the enforcement of the M&A Rules and
neither our Company nor our PRC subsidiaries performed any mergers or acquisitions which
may be subject to M&A Rules, Wuhan Youji was not required by Article 11 of the M&A Rules
to report to the MOC for approval in relation to the Reorganization and the Listing. Hence, the
Listing of our Company are not subject to the approval procedure of CSRS under the M&A
Rules.
SAFE Registration in the PRC
Pursuant to the Circular on Relevant Issues Relating to Domestic Resident’s Investment
and Financing and Roundtrip Investment through Special Purpose Vehicles (͏ஷ
ٝ“() SAFE Circular 37 ”),
promulgated by the SAFE and which became effective on July 14, 2014, (i) a PRC resident
must register with the local SAFE branch in connection with their contribution of offshore or
domestic assets or equity interests in an overseas special purpose vehicle (an “ Overseas
SPV”) that is directly established or indirectly controlled by the PRC resident for the purpose
of conducting overseas investment or financing, and (ii) following the initial registration, the
PRC resident is also required to register with the local SAFE branch for any major change in
respect of the Overseas SPV , including, among other things, a change of the Overseas SPV’s
PRC resident shareholder(s), the name of the Overseas SPV , terms of operation, or any
increase or reduction of the Overseas SPV’s capital, share transfer or swap, and merger or
division. Pursuant to SAFE Circular 37, failure to comply with these registration procedures
may result in penalties. In addition, the PRC subsidiaries of that Overseas SPV may be
prohibited from distributing their profits or dividends to their offshore parent company or
from carrying out other subsequent cross-border foreign exchange activities, and the Overseas
SPV and its offshore subsidiary may be restricted in their ability to contribute additional
capital to their PRC subsidiaries.
Pursuant to the Circular of the SAFE on Further Simplifying and Improving the Policies
of Foreign Exchange Administration Applicable to Direct Investment (׵
ٝpromulgated by the SAFE and which
became effective on June 1, 2015, the power to accept SAFE registration was delegated from
local SAFE branches to local banks where the domestic entity is registered.
As advised by our PRC Legal Advisors, Mr. Gao, Mr. Shen, Mr. Wu and the employees
who were granted equity interest in our Company through the Employee Shareholding
Platforms, who indirectly hold Shares and are known to us as being PRC residents, have
completed the required registration under SAFE Circular 37.
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OVERVIEW
We are a renowned toluene derivative products provider in the PRC and the global
market, primarily focusing on the manufacture of toluene oxidation and chlorination products,
benzoic acid ammonification products and other fine chemical products through organic
synthesis process. Our toluene derivative products are primarily used for food preservatives,
household chemicals, animal feed acidifier and synthetic intermediates for agrochemical and
pharmaceutical uses.
Our leading position in toluene oxidation and toluene chlorination products is
substantiated by our industry ranking and market share both in the PRC and the global market.
According to the Frost & Sullivan Report, we are the largest manufacturer for both benzoic
acid and sodium benzoate and the second largest benzyl alcohol manufacturer in the PRC in
terms of the sales revenue in 2023, representing 62.0%, 37.9% and 33.9% of the PRC total
market revenue for these products in 2023, respectively. In the global market, we ranked
second among manufacturers for benzoic acid and sodium benzoate and third place among
manufacturers for benzyl alcohol in 2023, accounting for 37.0%, 22.4% and 20.6% of the
global total market revenue, respectively.
Our operating history traces back to 1946 as one of the longest standing toluene
derivative products manufacturers in China. Leveraging our PRC-based product development
and manufacturing capabilities, we market and sell our products in over 70 countries. As a
leader and pioneer in the industry, we are committed to the continued development and
expansion of our product portfolio. As of the Latest Practicable Date, we had a self-produced
product portfolio primarily consisting of five types of toluene oxidation products, two types of
toluene chlorination products, two types of benzoic acid ammonification products and more
than 20 types of other fine chemical products for broad market uses. We also engage products
trading during the Track Record Period, which complement our self-produced products sales
and enhanced customers cohesiveness. Our products are widely recognized around the world.
We are the contract supplier of many renowned global companies, including a number of
Fortune 500 companies, and regional industry participants. We have established long-term
business relationships with these companies, which enable our customers to procure products
at competitive prices while providing us with a solid customer base. Sales to our Fortune 500
customers contributed approximately 7.6%, 8.5% and 10.5% of our total revenue in 2021,
2022 and 2023.
Our manufacturing capabilities enable us to execute our strategies for product
development and implement production plans to maintain our leading position. During the
Track Record Period, we operated two production facilities located in Wuhan (the “ Wuhan
Production Plant ”) and Qianjiang (the “ Qianjiang Xinyihong Production Plant ”), Hubei
Province with a total site area of approximately 326,618.9 sq.m. Our production facilities are
operated through our wholly-owned subsidiaries and equipped with advanced technologies
and machineries. 79.4%, 86.8% and 83.0% of our total revenue for the years ended December
31, 2021, 2022 and 2023, respectively, were generated from our sales of self-produced
products. The designed annual production capacity of our Wuhan Production Plant and
Qianjiang Xinyihong Production Plant in 2023 were approximately 302,500 tons and 144,040
tons, respectively.
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According to the Frost & Sullivan Report, the global sales volumes of benzoic acid,
sodium benzoate and benzyl alcohol are expected to reach approximately 357,300 tons,
238,000 tons and 238,700 tons in 2028, respectively. In anticipation of industry trends and our
business growth in the larger organic synthetic chemical products industry, and to better serve
our customers in the PRC and abroad, we have undertaken efforts to expand our current
production capacity. Our Wuhan Production Plant completed its expansion and started trial
production in the expanded facilities in January 2022, which is mainly designed for the
production of melt-crystallized benzoic acid, a downstream product of benzoic acid obtained
through melt-crystallization process. In 2021, we established a wholly-owned subsidiary
Hubei Xinxuanhong, for the establishment, construction and eventual operation of a
manufacturing facility (the “ Hubei Xinxuanhong Production Plant ”) designed to produce
toluene chlorination derivative products and other fine chemical products. The construction of
Hubei Xinxuanhong Production Plant commenced in July 2023 and its Phase I and Phase II
production are expected to begin in the second half of 2024 and the second half of 2026,
respectively.
In addition to strengthening our in-house capabilities, we also aim to supplement our
business developments by forming in-depth cooperation with prominent industry leaders in
China and overseas. On December 18, 2018, we entered into a cooperation agreement to
establish a joint venture, Hebei Kangshi with China Petroleum & Chemical Corporation ( ʕ਷
ʮ̡ ,“ SINOPEC ”), one of the largest publicly listed, integrated energy
and chemical companies in China, in Shijiazhuang, Hebei Province. We obtained the Working
Permit on Construction Works (ʈ஢̙ᗇ ) for this production plant (the “ Hebei
Kangshi Production Plant ”) on September 29, 2020. Production of the Hebei Kangshi
Production Plant commenced in January 2023. The Hebei Kangshi Production Plant is
designed to focus on the production of toluene oxidation derivative products with a designed
annual production capacity of approximately 60,000 tons of industrial-grade benzoic acid and
15,000 tons of sodium benzoate.
In addition to expanding our domestic production capacity, we also plan to establish our
production capability overseas. On March 25, 2019, we entered into a memorandum of
understanding with a publicly listed company in Thailand (the “ Company Y ”) to construct a
production plant facility in Thailand (the “ Thailand Production Plant ”). As of the Latest
Practicable Date, the plan remained in the preliminary stage, and no definitive agreement has
been entered into between Company Y and us. The Thailand Production Plant is designed to
focus on the production of industrial-grade benzoic acid, melt-crystallized benzoic acid and
sodium benzoate, with a designed annual capacity of approximately 60,000 tons, 30,000 tons
and 15,000 tons, respectively. The development of the Thailand Production Plant, being our
first overseas production plant, is part of our global market strategy to achieve economy of
scale and expand our presence in the international markets with high growth potential.
While our existing products enjoy broad market appeal and use, we strive to maintain our
competitive advantages by allocating additional resources to product development to ensure a
growing portfolio of products to our customers. Our manufacturing capability is undergird by
our industry leading research and development team driven to develop more advanced and
cost-efficient products. As of the Latest Practicable Date, we had an in-house research and
development team of 139 employees, including 24 research and development experts.
Research and development experts are assigned into three focus areas: technical research,
technical center, and multi-facet cooperative research institutes, which provide technical
support and new product suggestions. Beyond our internal research and development team, we
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also collaborate with top scientific research experts of the industry through our multi-facet
cooperative research institutes to supplement our technical know-how, improve product
quality and advance our processing technology. We believe these collaborations allow us to
keep abreast of the latest market development and trends in the end markets in which our
customers operates. As of the Latest Practicable Date, we had obtained 34 patents for
inventions and 46 patents for utility models as well as 10 pending patent applications.
We have gained a strong reputation and recognition in the industry as a result of our
quality products and long-term commitment to the toluene derivative market. In recognition of
our achievements and industry expertise, we received government subsidies and were awarded
six provincial and 12 municipal certificates of scientific and technological achievements
during the Track Record Period. In addition, we were invited by the National Health and
Family Planning Commission of the PRC (ึ ) as a drafter for two
national standards, the GB1886.183 for Food Additive Benzoic Acid and GB1886.184 for
Food Additive Sodium Benzoate effected on January 1, 2017, and one industrial standard, the
HG/T 2027-2017 for Industrial Benzyl Chloride effected on April 1, 2018. We ranked among
the Top 10 National Light Industrial Enterprises since June 2015. Our proprietary trademark
“XINKANG ( อੰ೐ )” has been consistently recognized as a Hubei Provincial Famous
Trademark and a Wuhan Famous Trademark, and has become a Well-Known Trademark in
China since March 2016. Our sodium benzoate products have entered the Europe and North
America markets. We are also the contract supplier of several world’s top-tier food and
beverage companies and daily consumer goods companies, and have established in-depth
business relationships with some of the top chemical companies.
Our products are sold by direct sales, distribution sales and products trading. The
extensive coverage of our well-rounded distribution network in the PRC and global market
enables us to reach a broader customer base. As of the Latest Practicable Date, we had an
in-house sales team comprising 29 employees and had adopted various measures to conduct
sales, including direct sales to the end users such as manufacturers, and sales to domestic and
overseas distributors who resell our products to their customers. We also conduct products
trading to purchase petroleum toluene and other products and resell them to our customers.
For the years ended December 31, 2021, 2022 and 2023, revenue generated from direct sales
of our products were RMB1,224.5 million, RMB1,624.7 million and RMB1,226.5 million,
respectively, representing approximately 43.9%, 51.8% and 45.8% of our total revenue for the
same periods, respectively; revenue generated from distributorship sales of our products were
RMB989.1 million, RMB1,096.8 million and RMB994.6 million, representing approximately
35.5%, 35.0% and 37.2% of our total revenue for the same periods. For the same periods,
revenue generated from products trading were RMB575.9 million, RMB412.3 million and
RMB456.0 million, respectively, representing approximately 20.6%, 13.2% and 17.0% of our
total revenue for the same periods. As part of our post-sales services, our sales team is
responsible for the collection and monitoring of product feedbacks, sales transaction, sales
prices, marketing activities and distributorship conducts.
Leveraging our industry position and solid customer base, we are able to secure a steady
and reliable supply of raw materials. We have maintained persistent cooperation with our
suppliers for an average term of five years during the Track Record Period. Our cooperation
with our five largest suppliers during the Track Record Period started as early as 1999 for an
average terms of more than five years, and we have long-term procurement agreement in place
with our top suppliers. Since 2012, we have been listed as the “AAA” customers of SINOPEC
Chemical Commercial Holding Company Limited Huazhong Branch (ࠢ
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ʮ̡ശʕʱʮ̡ , the “ SINOPEC Huazhong ”), a branch of a wholly-owned subsidiary of
SINOPEC, which represents our long-standing cooperative relationship with the largest raw
material supplier in our industry, which affords us the ability to execute large-scale
procurement. We seek multi-dimensional and all-round cooperation with our suppliers, and
believe that such cooperation promotes the sound operation of our business and maximizes
our business efficiency.
We are led by our chairman of the Board, Mr. Zou Xiaohong. Mr. Zou joined our Group
in 1981 and has over 40 years of experience in the toluene derivative products industry. Mr.
Zou is supported by our team of experts in business operation, research and development,
manufacturing and marketing in our industry. We believe that our management team is capable
of meeting the challenges of the competitive industry in which we operate, and lead our future
development and growth. Under the leadership of our experienced management team, we will
continue to leverage our product development and innovation, manufacturing capabilities and
global sales network to increase our market shares and strengthen our industry leading
position in China and globally. Following the implementation of our future plans and
completion of the Global Offering, our Directors believe that we will continue to maintain our
market position and successfully expand our business operation in the toluene derivative
products industry both in the PRC and the global market. We believe that we are
well-positioned to explore opportunities in the larger organic synthetic chemical market with
our competitive strengths, existing capabilities and strategic planning.
OUR COMPETITIVE STRENGTHS
We believe the following competitive strengths have allowed us to establish our market
position and contributed to our success.
We are a market leading and top-ranked manufacturer for the production of toluene
oxidation and toluene chlorination products for a variety of use in domestic and
industrial applications
We are a leading provider of toluene oxidation and toluene chlorination products in the
PRC and the global market, and have operated in the toluene derivative products industry
since our inception. The sales volume of our top three products, benzoic acid, sodium
benzoate and benzyl alcohol reached approximately 106,487 tons, 45,245 tons and 36,436
tons in 2023, respectively. According to the Frost & Sullivan Report, we are the largest
manufacturer for both benzoic acid and sodium benzoate and the second largest benzyl
alcohol manufacturer in the PRC in terms of sales revenue in 2023, representing 62.0%, 37.9%
and 33.9% of the PRC total market revenue, respectively. In the global market, we ranked
second among manufacturers for benzoic acid and sodium benzoate and third place among
manufacturers for benzyl alcohol in 2023, accounting for 37.0%, 22.4% and 20.6% of the
global total market revenue, respectively.
Our company is a state-recognized, large-sized class-two chemical enterprise that
integrates scientific research, industrial production and trade of organic fine chemical
products. Our product portfolio primarily comprises toluene oxidation products, toluene
chlorination products and benzoic acid ammonification products. Toluene derivative products
are commonly used in food preservatives, household chemicals, animal feed acidifier, and
synthetic intermediates for agrochemical and pharmaceutical uses. The broad application of
our diversified product portfolio to these four industries is able to sustain our results of
operations and long-term development.
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We have focused mainly on the toluene derivative products industry for over 70 years and
are one of the most long-standing toluene derivative products manufacturers in China. To
satisfy the needs of our customers and to take advantage of additional market opportunities,
we manufactured a variety of products primarily comprised of toluene oxidation and
chlorination products and benzoic acid ammonification products. These efforts and actions
aim to expand our business in the superordinate category of organic synthetic chemical
industry by leveraging our existing success in the toluene derivative products industry. With
our top-ranked market position and advanced technologies, we provide diversified and quality
products and services to our global customers across more than 70 countries.
In recognition of our achievements in the industry, we were invited by the National Health
and Family Planning Commission of the PRC (ึ ) as one of the
drafting participants of the state standard of food additives of benzoic acid and sodium benzoate,
which went into effect on January 1, 2017. Our Company ranked among the Top 10 National
Light Industrial Enterprises since June 2015. Our proprietary trademark “XINKANG ( อੰ೐)”
has been consistently recognized as a Hubei Provincial Famous Trademark and a Wuhan
Famous Trademark, and has become a Well-Known Trademark in China since March 2016. As
a result of our achievements and devoted focus to occupy meaningful market shares in our
industry, we envisage ourselves to continue our business growth and maintain our leading
position in the industry.
Our brand and reputation are propelled by our rich and diverse portfolio of products
strategically designed for our four primary industries
We maintain a diverse product portfolio devoted to the four major industry segments of
food preservatives, household chemicals, animal feed acidifier, and synthetic intermediates
for agrochemical and pharmaceutical use. Our products portfolio includes toluene oxidation
products, toluene chlorination products, benzoic acid ammonification products and other fine
chemical products. Our product portfolio primarily contains five types of toluene oxidation
products, two types of toluene chlorination products, two types of benzoic acid
ammonification products and more than 20 types of other fine chemical products. We also
engage in products trading during the Track Record Period, which complements our
self-produced products sales and enhances customers cohesiveness for our business operation
by providing customers with various trading products manufactured by other suppliers. Our
broad composition of products satisfies the demand of various industries, including our four
primary targeted industries.
Our diversified product portfolio enables us to better withstand market and industry
fluctuations and risks, and allows us to maintain a robust financial condition with stable
revenue generation and persistent cash flow. For the years ended December 31, 2021, 2022
and 2023, we recorded revenue of RMB2,789.5 million, RMB3,133.8 million and
RMB2,677.1 million, respectively. As a result, we recorded net profit of RMB309.1 million,
RMB340.5 million and RMB72.9 million for the same periods, and period-end cash and cash
equivalents of RMB69.5 million, RMB83.5 million and RMB65.4 million as of December 31,
2021, 2022 and 2023.
Moreover, we believe that our diversified product portfolio creates a stable relationship
among the upstream and downstream supply chain for our business operation. We maintain
long-term business relationship with many of the world’s top enterprises in industries such as
the food and beverage, consumer goods and household chemical industries. The diversity of
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our client base signifies that we are not overly depended on a single purchaser or industry,
which maximizes our ability to withstand industry-specific fluctuations.
Leveraging our diversified product portfolio, we are able to maintain our market
presence in various market segments, many of which are closely related to the basic needs for
daily life such as food preservatives and household chemicals.
Our cost-efficient manufacturing process and refined manufacturing equipment are
driven by our advanced research and development capabilities
We strive to increase our market share by improving our products and product formulas,
and developing new products and product formulas to align with and lead industry trends and
satisfy the demand of our customers. Our product research and development team is
responsible for optimizing the production process, developing new products with high added
value, expanding the application and efficient use of by-products.
We established a competitive internal research and development team of 139 employees
as of the Latest Practicable Date, which included a research and development expert team of
24 members. Our key research and development team members have extensive experience in
the toluene derivative products industry and have developed a long-term relationship with us
for over ten years on average. For the years ended December 31, 2021, 2022 and 2023, our
research and development costs amounted to RMB110.8 million, RMB133.0 million and
RMB100.0 million, respectively, which primarily include staff costs and article of
consumption.
We independently developed several advanced technologies to refine our production
process and obtained series of invention patents during the Track Record Period, including
patents for our loop oxidation reactor and new types of toluene oxidation catalyst. As of the
Latest Practicable Date, we had three trademarks and 80 patents in the PRC, including 34
patents for invention. We also had 10 pending patent application in the PRC. During the Track
Record Period, we had initiated 16 research and development projects. Leveraging our
proprietary patents and technology know-how, we are able to recycle the production
by-products from the upstream process and improve the reaction yields, which significantly
reduce the manufacturing wastes and residuals and further enhance the cost-efficiency and
variety of our products. The extended manufacturing line may enable us to produce products
with relatively higher gross profit margin. For example, we commenced production of benzyl
acetate during the Track Record Period, which is the downstream product of benzonitrile and
achieved a higher gross profit margin.
Our product research and development team works closely with our manufacturing team
to optimize our manufacturing processes in order to enhance product quality, improve
processing technologies and maximize production efficiency. Our product research and
development team also works closely with our quality control team and sales teams to improve
our existing products portfolio, develop new products and refine the production process based
on the feedbacks from our customers and our market research.
In addition to our efforts on research and development to refine our manufacturing
process and products portfolio, we are also committed to reduce environmental pollution and
carbon dioxide emissions through process optimization. We launched a new project for waste
water treatment in 2020 and enhanced the processing capacity of our facilities, which copes
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with our production capacity expansion in 2021. We also adopted a series of environmental
protection measures to recycle exhaust gas and solid wastes, including the adoption of low
nitrogen renovation for our heat conduction furnace and the sludge desiccation system. We
conserve energy through our consistent efforts on advancing our production process. For
example, in 2022, the energy consumption costs per RMB10,000 value of our products
manufactured by our Wuhan Production Plant and Qianjiang Xinyihong Production Plant
reduced by 10.6% and 59.3%, respectively as compared with those in 2021. In 2017, we were
awarded the National Labor Medal ( Ό਷ʞɓ௶ਗᆤ௝ ) for significantly reducing our carbon
dioxide emissions.
By virtue of the cost-efficient manufacturing process and refined manufacturing
equipment benefited from our strong product research and development capability, we are
able to maintain superior product quality and control production costs of our products
effectively. Furthermore, we continue to develop chemical by-products and chemical
derivatives with high added value, and optimize the product structure to increase our gross
margins.
Our leading market position is elevated by our extensive distribution network for our
products
We have established a comprehensive distribution network in both the PRC and the
international market. For the years ended December 31, 2021, 2022 and 2023, 43.9%, 51.8%
and 45.8% of our products measured in terms of revenue were sold through direct sales,
respectively, which were directly sold by us to end users such as chemical companies, food
producing and processing companies, pharmaceutical companies and animal feed producing
companies that use our products as raw materials; 35.5%, 35.0% and 37.2% of our products
were sold through distributorships for the corresponding periods, which were sold to
distributors that we believe will resell these products to their customers and their
sub-distributors; 20.6%, 13.2% and 17.0% of our products were sold through products trading
for the corresponding periods, which were petroleum toluene and other products we purchased
from suppliers and resold to our customers.
We sell our products under our proprietary trademark “XINKANG ( อੰ೐)” and have
established our brand value and recognition through the improvement of our product quality,
the enrichment of our product portfolio and the broadening of our sales scope. During the
Track Record Period, most of our revenues were generated from the PRC market. For the years
ended December 31, 2021, 2022 and 2023, we generated revenue of RMB2,171.1 million,
RMB2,452.0 million and RMB2,060.0 million, representing 77.8%, 78.2% and 76.9% of our
total revenue, respectively, from our customers in the mainland China. As of December 31,
2023, our distribution network comprised 435 distributors across mainland China.
We commenced our direct overseas business in 1996. During the Track Record Period,
Asia (excluding mainland China) is the largest overseas market of our Group. For the years
ended December 31, 2021, 2022 and 2023, we exported approximately 5,364 tons, 5,543 tons
and 5,779 tons of benzoic acid products to other Asian countries and regions, respectively.
Generally, the local companies we cooperated with are well recognized in the local market and
have already developed its customer base and local business relationships. Through
cooperations with these companies, we are able to reach the local customers and maintain
customer relationship in a cost-efficient manner.
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Our overseas distribution network enables us to enhance our brand visibility and expand
brand influence, which in turn afford us the ability to maintain our leading position in the
international market. During the Track Record Period, we established business relationships
with distributors across more than 70 countries. As of December 31, 2023, we had established
an overseas distribution network comprising 251 distributors.
Our continuing and sustainable commercial success are based on our strong and cohesive
customer base
We maintain a strong and cohesive customer base from a wide range of industries. In
particular, we target customers with strong financial conditions and corporate reputations,
positive corporate images and favorable competitive advantages in their respective markets.
Based on our market experience, quality customers in general have good credit records and
usually place sizable orders. We believe that by establishing business relationships with
quality customers, we are able to mitigate credit risks and obtain stable order flows as well as
enhance the goodwill of our Company, which would in turn create further opportunities with
other reputable customers.
In addition to our long-term sales relationship with our customers, we also established
strategic cooperation with our business partners to form comprehensive collaborative
relationships. We entered into a long-term strategic cooperation framework agreement with a
world leading nutritional products company incorporated in Switzerland (the “ Customer B ”),
for the purchase and distribution of feed-grade benzoic acid in 2010, and have been continuing
this cooperation thereafter. The strategic cooperation framework agreement, as supplemented
in November 2018 through a supplemental agreement, was amended and reinstated in its
entirety in August 2023.
The principal terms of the currently effective strategic cooperation framework agreement
we entered into with Customer B are summarized as follows:
Contractual period: October 1, 2022 to September 30, 2027.
Exclusivity: Customer B will purchase feed-grade benzoic acid exclusively
from us for its use in mainland China, and we will exclusively
sell feed-grade benzoic acid to Customer B under its product
code and product name in mainland China and in the global
market, except for a reserved customer of us.
Exclusive
distribution right:
Customer B will serve as the exclusive distributor for the
feed-grade benzoic acid we supply to them, both within and
outside of mainland China.
To retain its right as exclusive distributor, Customer B has to
purchase a certain amount of feed-grade benzoic acid from us
annually, and in the event Customer B fails to meet the annual
target by the end of each contract year, we may terminate the
exclusive distribution right granted to Customer B in the
subsequent contract year, unless Customer B takes certain
remedial measures in a timely manner.
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Purchase price: The purchase price will primarily be determined based on the
market price, with certain other factors taking into account
such as foreign exchange rate and freight costs.
Termination: Each party has the right to terminate the agreement effective
immediately upon written notice under certain circumstances
such as the other party’s material breach of contract,
insolvency or bankruptcy, material violation of environmental
laws and regulations, or the failure to register the products in
the PRC by us.
We are a key supplier of feed-grade benzoic acid for Customer B, and revenue generated
from our business with Customer B (together with its group companies) amounted to
RMB142.9 million, RMB197.4 million and RMB214.8 million for the years ended December
31, 2021, 2022 and 2023. Our comprehensive collaboration with Customer B was the result of
a long-term, mutually beneficial relationship established in the course our business
interactions. Our collaboration with Customer B not only accelerates our development and
manufacturing capacity expansion but also ensures a steady demand for our products in the
long-run. Our strategic partners will continue to play an important role in our future business.
During the Track Record Period, we have conducted business with more than 2,700
corporate customers, covering more than 70 countries. We established and solidified our
business relationship with a variety of prestigious companies, including a number of Fortune
500 Companies. For the years ended December 31, 2021, 2022 and 2023, revenues generated
from our five largest customers amounted to RMB731.5 million, RMB583.2 million and
RMB581.2 million, representing 26.3%, 18.6% and 21.8%, respectively, of our total revenue
for the same periods. All of our five largest customers during the Track Record Period have
maintained sound business relationship with our Group, and as at the Latest Practicable Date,
and a significant portion of our customers had maintained business relationship with our
Group for more than three years.
Our strong and cohesive customer base also enables us to maintain a healthy cash flow
position. For the years ended December 31, 2021, 2022 and 2023, the average trade and bills
receivables turnover days of our Group were 24 days, 33 days and 42 days, respectively.
Our experienced management team with proven track records provides exemplary
leadership to guide our growth
We believe the vision and experience of our senior management and their dedication to
our Group contributed to our successes as well as our continued growth and profitability.
Our executive Directors and members of our senior management and key operating
personnel possess extensive operating and industry experience in our industry. Many of them
have been working in the related industry for over 25 years. Our senior management and
operating team have in-depth industry knowledge, which enables us to respond promptly to
the latest market trends and changing needs and requirements of our customers. For details,
please refer to “Directors and Senior Management” in this prospectus. Our senior
management team strives to exert consistent effort to cultivate a corporate culture that
emphasizes on quality and safety, and position ourselves as a provider of quality products. In
addition, our senior management team has developed a long-term relationship with us for over
ten years on average. During the Track Record Period, our annual key management team
turnover rate remained below 5%.
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Our dedicated management team spearheads our business operations and drives our
future growth plans. Their experience and industrial knowledge enable us to develop new
products and product formulas to further identify and realize new business opportunities. Our
management team plays an important role in establishing a corporate culture which focuses on
consistent delivery of high quality products and continuous innovations. We believe that our
experienced management team has been the key to our success in the past and will continue to
contribute to our growth in the future.
OUR STRA TEGIES
We aim to achieve sustainable growth in our production capacity and enhance our market
position by implementing the following strategies.
Continue to expand our production capacity to sustain our long-term economy of scale
and profitability
We plan to capture a greater market share in the toluene derivative products market both
in the PRC and globally. According to the Frost & Sullivan Report, the global sales volume of
benzoic acid, sodium benzoate and benzyl alcohol increased from approximately 246,700
tons, 174,600 tons and 149,300 tons in 2018 to 265,100 tons, 191,700 tons and 175,500 tons in
2023, representing a CAGR of 1.4%, 1.9% and 3.3%, respectively. In addition, the sales
volume in the global market of benzoic acid, sodium benzoate and benzyl alcohol is expected
to continue its growth trend in the near future and reach approximately 357,300 tons, 238,000
tons and 238,700 tons in 2028, representing a CAGR of 5.7%, 3.8% and 5.5% respectively. We
plan to increase our production capacity to meet the increasing demand for our products and to
sustain our long-term economy of scale and profitability.
During the Track Record Period, we operated two production facilities, the Wuhan
Production Plant and the Qianjiang Xinyihong Production Plant. For the years ended
December 31, 2021, 2022 and 2023, the designed annual production capacity for our Wuhan
Production Plant and Qianjiang Xinyihong Production Plant were approximately 302,500 tons
and 144,040 tons each year, respectively. Utilization rates for these two production plants
were 102.4%, 122.8% and 104.0%, and 91.8%, 91.7% and 86.4% for the corresponding
periods, respectively.
In January 2021, we established a wholly-owned subsidiary, Hubei Xinxuanhong, to
expand our production capacity of toluene chlorination products with a total designed annual
production capacity of approximately 300,000 tons, featuring benzyl chloride and new
products such as benzoyl chloride (the “ Hubei Xinxuanhong Production Plant ”). We
commenced the construction in July 2023 and expect to initiate its Phase I and Phase II
production of the Hubei Xinxuanhong Production Plant in the second half of 2024 and the
second half of 2026, respectively.
As of December 31, 2023, we had incurred capital expenditures of RMB55.1 million for
the expansion plan of Hubei Xinxuanhong Production Plant. We plan to fund the expansion of
Hubei Xinxuanhong Production Plant with proceeds from the Global Offering and our internal
resources. For details about our production expansion plan and use of proceeds from the
Global Offering, please refer to “— Production Expansion Plan” and “Future Plans and Use of
Proceeds — Use of Proceeds” in this prospectus.
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Timely respond to changes in market circumstances by adjusting sales and pricing
strategies
Chemical industry is affected by various factors such as overall economic environment,
prices of petroleum, inflation, and changes in downstream demand. Timely response to
changes in market circumstances is crucial in effectively compete in the market and to
maintain our leading position.
For example, in light of the unfavourable market sentiment in 2023, we reacted swiftly
and adopted a strategy to sell our products at a lower prices so as to maintain our market
position and the utilization rate of our production facilities at an optimal level while at the
same time, maintain or even increase our market shares. With our competitive advantages as a
leading player in the market, we view it as an opportunity to further strengthen our market
position as we are able to effectively compete in the market in such circumstances.
According to Frost and Sullivan, our Group remained as the largest manufacturer for both
benzoic acid and sodium benzoate in the PRC in terms of the sales revenue in 2023 with our
market share increased from 59.1% and 37.3% in 2022 to 62.0% and 37.9% in 2023. We will
continue to respond swiftly to changes in market circumstances so as to maintain and
potentially strengthen our leading market position.
Further increase our domestic and international market shares by forming in-depth
cooperations with established market participants
We intend to further increase our market shares domestically and in the international
markets by developing strategic cooperations with prominent industry participants and
upstream petroleum enterprises. We entered into a memorandum of understanding with a
publicly-listed petroleum company in Thailand (the “ Company Y ”) on March 25, 2019, which
was extended in October 2022 and March 2024 and will remain effective until March 2027, to
establish a joint venture for the purpose of building and operating a manufacturing plant based
in Rayong, Thailand (the “ Thailand Production Plant ”). As of the Latest Practicable Date,
the plan remained in the preliminary stage, and no definitive agreement has been entered into
between Company Y and us. The decision to proceed with the construction of the Thailand
Production Plant will be contingent upon the timing of the future improvement of the chemical
industry environment and consensus is reached with Company Y , and we will take into account
the industry environment at the relevant time in considering the timing of the construction of
the Thailand Production Plant. The Thailand Production Plant is designed primarily for the
manufacturing of industrial-grade benzoic acid, melt-crystallized benzoic acid and sodium
benzoate. We intend to leverage our industry experience and Company Y’s strong regional
presence to further expand our business activities in South and Southeast Asia. This joint
venture opportunity signifies our worldwide footprint with remarkable production capabilities
overseas. We will utilize this benchmark project to explore and evaluate the commercial
benefits of developing production capabilities overseas, and may expand this strategy to other
key markets and regions in the future.
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Domestically, we focus on developing in-depth business relationships with upstream
enterprises to continue to expand our production capabilities and ensure a steady supply of
raw materials. We entered into a cooperation agreement on December 18, 2018 with
SINOPEC, one of the largest publicly listed integrated energy and chemical companies in
China, to establish a joint venture, Hebei Kangshi, in Shijiazhuang, Hebei Province. We hold
51% of interests in Hebei Kangshi. The manufacturing facility of Hebei Kangshi (the “ Hebei
Kangshi Production Plant ”) is primarily designed for the manufacturing of benzoic acid and
its derivatives. The construction of the Hebei Kangshi Production Plant was completed, and
production commenced in January 2023.
In addition, we entered into an annual cooperation agreement on December 19, 2022 with
SINOPEC Jianghan Salt Chemical Hubei Co., Ltd. (ʮ̡ , the
“Jianghan Salt Chemical ”), a wholly-owned subsidiary of SINOPEC. Since 2020, we have
periodically entered into cooperation agreements with Jianghan Salt Chemical for fixed terms
ranging from one to two years, with the material terms remaining unchanged, and we intend to
continue our cooperation with them. Pursuant to the agreement, Jianghan Salt Chemical is
obligated to supply us with liquid caustic soda, which is one of our primary raw material for
the production of sodium benzoate. Jianghan Salt Chemical provides us with a discount on the
purchase price compared to what it charges other customers. The principal terms of the
cooperation agreement we entered into with Jianghan Salt Chemical are summarized as
follows:
Contractual period: January 1, 2023 to December 31, 2023.
Purchase price: The purchase price set by Jianghan Salt Chemical is subject to
monthly fluctuations, taking into account of various factors
such as the prices of raw materials.
Purchase amount: We submit the demand plan for the upcoming month to
Jianghan Salt Chemical by the 25th of each month. The supply
quantity for the subsequent month will be determined through
negotiations between Jianghan Salt Chemical and us.
Termination: Termination upon mutual consent in writing. Additionally,
each party has the right to terminate the agreement if the other
party, due to its fault, renders the agreement unable to be
fulfilled.
Leveraging our technology advantages and access to upstream petroleum enterprises, we
intend to explore more cooperation opportunities with qualified companies.
Further enhance our research and development capabilities to develop high value
products
Our research and development team is responsible for increasing our production
efficiency and effectiveness, and improving the quality of our existing products and services.
Our products enjoy broad commercial appeal due to their quality and competitive prices. Both
of these competitive advantages are the result of our industry know-how and strong research
and development team. We are committed to develop new technologies and to provide a
broader and more diversified range of products to persistently adapt to the ever-changing
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market demands of customers across various industries. We believe our research and
development capabilities afford us the ability to increase our revenue streams, and help us
expand our market shares in both the PRC and global market.
For the years ended December 31, 2021, 2022 and 2023, our expenditures on research
and development amounted to approximately RMB110.8 million, RMB133.0 million and
RMB100.0 million, respectively. As of the Latest Practicable Date, our own research and
development team had registered two trademarks under our “XINKANG ( อੰ೐)” brand, 80
patents, including 34 patents for invention. In addition, we also had 10 pending patent
applications in the PRC. We are committed to allocate resources to continue to enhance our
research and development capabilities to ensure we are at the forefront of the industry in terms
of producing products with broad consumer use at a cost-efficient manner.
Expand our sales and marketing network in the global market
We are also committed to expand the distribution of our products to new markets with
high market potential by expanding our sales and marketing network. We currently maintain
significant business activities and sales in Asia, Europe and the Americas, and plan to increase
our sales in in North America, Southeast Asia and India. According to the Frost & Sullivan
Report, the total consumption volume of benzoic acid in North America had increased from
approximately 59,700 tons in 2018 to 63,100 tons in 2023, and this growth trend is expected to
continue at a CAGR of 4.9% from 2024 to 2028. Given the enormous market potential and
growth, we plan to devote resources to further enhance our presence in the North America.
According to the Frost & Sullivan Report, the total consumption volume of benzoic acid
in India had increased from 30,800 tons in 2018 to 35,700 tons in 2023, and it is estimated that
it will continue to grow in the near future at a CAGR of 7.3% from 2024 to 2028. For the years
ended December 31, 2021, 2022 and 2023, sales volume of our products to India, mainly
include sodium benzoate, benzoic acid and benzaldehyde, were approximately 2,779 tons,
1,985 tons and 3,138 tons, respectively, with revenues amounted to RMB27.9 million,
RMB23.3 million and RMB32.3 million, respectively. In addition to India, other countries in
South Asia and Southeast Asia are emerging as markets with high growth potential. Therefore,
we plan to leverage our current capabilities and strengthen our presence in South and
Southeast Asia, and India in particular, by expanding our sales and marketing network.
IMPACT OF THE COVID-19 PANDEMIC DURING THE TRACK RECORD PERIOD
The COVID-19 outbreak was first reported in December 2019 and quickly developed into
a global pandemic. This pandemic had significant and sustaining effects on the global
economy and business environment.
Despite the general impact on the global market and the macro-economy, our production
was not suspended due to the COVID-19 pandemic as our Company was recognized as a
Supply Guarantee Key Enterprise (ღΆุ ) by the Department of Economy and
Information Technology of Hubei Province (ʷᝂ ). Our products are
widely used as preservatives and intermediates in daily domestic products such as food,
pesticide and medicine, and we were permitted to maintain our production operations. As a
Supply Guarantee Key Enterprise, we did not experience manufacturing interruptions under
the implementation of the strict prevention and control policy of Hubei Province during the
height of the COVID-19 pandemic.
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During the Track Record Period, our business operations were exposed to certain
transportation interruptions due to the COVID-19 pandemic and other reasons from time to
time. However, we responded rapidly and proactively sought alternatives to carry out our daily
business, and elevated our reliability when our competitors were not able to ensure continuity
of production and certainty of delivery. We managed to source our raw material and sold our
products through various transportation methods. For example, we actively utilized railway
transportation when maritime transportation was inaccessible in the market and resorted to
inland waterway transportation on the Yangtze River and truck transportation to ensure our
access to transportation. Our international sales and export shippings were not materially
affected by the COVID-19 pandemic due to the consistent operations of the PRC ports and the
availability of oceanic shipping in China to other regions. Moreover, due to the circumstance
of the pandemic at each particular country and region, many international manufacturers
experienced significant interruption due to its business stoppage and global logistics
congestion caused by the COVID-19 pandemic. In contrast, our strong and continuing
production capacity provided a stable supply and attracted more customers. Therefore, the
COVID-19 pandemic had relatively limited impact to the Group in 2021 and 2022.
Furthermore, there was a severe COVID-19 outbreaks in late 2022 when most of the
travel restrictions and quarantine requirements were lifted in December 2022. There were
significant surges of COVID-19 cases in many cities in China subsequently. The rapid spread
of COVID-19 in a relatively short period of time has resulted in distortion in the Group’s
trading activities with our customers. Certain of our production facilities were temporarily
operated with limited capacity in early 2023 amid the COVID-19 pandemic. Despite the
gradual reduction in COVID-19 cases subsequently, the recovery of economy was much
slower than expected given the significant economic uncertainties globally and in the PRC.
The widespread infections also interrupted the business operations of our downstream
customers for extended periods. While our customers in the food additives and pharmaceutical
intermediate industry are less sensitive to market factors and other customers in the pesticide
intermediate industries benefited from favourable government policies, the adverse impact of
COVID-19 on the global economy and consumer sentiment caused prolonged interruptions to
the operations of the downstream customers, leading to their reduced demand in chemicals. In
addition, as these industries’ demands for toluene derivative products decreased, the increased
availability in market supply of toluene oxidation products further intensified the market
competition. These circumstances exert significant pressure on our pricing and therefore
leading to significant decline in our profitability in 2023.
MARKET DEVELOPMENTS IN 2023
The chemical industry, in particular toluene oxidation and chlorination products
industry, experienced a challenging year in 2023 as impacted by the uncertainty surrounding
the economic environment globally as well as in the PRC and the geopolitical tension, which
in turn has a widespread negative impact on the customers’ spending in various downstream
industries. Although our downstream customers mainly related to daily necessities such as
food and beverages and pharmaceutical which have relatively stable demands, they could
delay their purchases and reduce their inventory level in light of the uncertain economic
environment, which in turn adversely affects their demand on chemical products. In addition,
as petroleum price remained at relatively low level throughout 2023, which resulted in the
decrease in raw material price of the Group’s products, the Group lowered the average selling
price of its products in response to the then market circumstances. According to the General
Administration of Customs of the PRC, export value of basic organic chemicals industry in the
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PRC has dropped from approximately RMB515.1 billion in 2022 to RMB403.6 billion in
2023, decreasing at a rate of 21.5%. According to the National Bureau of Statistics, the
Purchasing Manager’s Index (PMI) was consistently below 50 throughout majority of 2023
while the Producer Price Index (PPI) in the PRC dropped from 9.1% in January 2022 to a
negative level since October 2022 and throughout 2023, which represent a contraction in the
upstream industries. At the same time, Consumer Price Index (CPI) in the PRC also dropped
to a level close to zero in 2023 indicating an overall weak consumer sentiment in 2023.
According to the World Bank, global economy shown a decelerating trend with the global
GDP growth fell from 3.0% in 2022 to 2.6% in 2023.
In light of the unfavorable economic environment and the reduced consumer demand, as
a prudence measure to maintain greater liquidity and flexibility at the time of uncertainties,
many downstream industry customers tend to lower their inventory level or slow down their
inventory replenishment, resulting in sluggish demand for fine chemicals. This was
completely opposite to the market circumstances in 2022 when the chemical industry was at a
boom and the downstream industrial customers were stocking up as they foresee there could
be an increase in selling prices of chemicals, including the price of toluene oxidation and
chlorination products. These circumstances also coincided with the expansion in capacity of
some of the market players in toluene oxidation products which were put into operation since
late 2022 which further increases the market supply of toluene oxidation products. The
increase in market supply of toluene oxidation products further intensified the market
competition amid time of weak demands, which has an immediate adverse impact on the
market participants as it takes time to digest the increased production capacity. All of which
further exerted significant downward pressure on product pricing. This circumstance was a
reversal of the marketing condition in 2022 when demand was much higher than the supply,
which positioned chemical manufacturers in an ideal market position.
To cope with the challenging market environment, chemical manufacturers, including
our Group, have been lowering product selling prices so as to effectively compete in the
market, and to maintain the utilization rates of their production facilities. Together with the
decrease in sales volume with the contraction in downstream demand, most chemical industry
players recorded a drop in revenue in 2023. According to Frost & Sullivan, all of the top five
players in the PRC benzoic acid market, sodium benzoate market and the top three players in
the PRC benzyl alcohol market recorded a drop in revenue in 2023 as compared to 2022
ranging from 13.8% to 48.3%. As the manufacturing and operating costs are relatively fixed,
the reduction in selling prices has a significant impact to the profit margins. According to the
statistics published by the National Bureau of Statistics, entities in the PRC chemical
materials and manufacturing industry had recorded a drop in revenue in 2023 by 3.5%,
whereas net profit of the industry dropped more significantly by 34.1% in 2023 as compared
to 2022. Many listed chemical companies also exhibited a similar trend in their revenue and
profitability with a drop in net profit by over 70%, a number of which even turned from net
profit in 2022 to a net loss in 2023. According to Frost & Sullivan, the significant decrease in
profitability for chemical companies in 2023 was an industry norm.
As a renowned toluene derivative products provider in the PRC and the global market, we
are unavoidably adversely affected by the downturn in the chemical industry. As a result of the
foregoing, we also lowered the selling prices of our products in order to effectively compete
with our competitors for the smaller number of available sales orders so as to maintain our
market position and the utilization rate of our production facilities at an optimal level and to
keep our market share. For example, the average selling price of our toluene oxidation
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products and toluene chlorination products dropped by 9.7% and 16.2% in 2023 as compared
to 2022. At the same time, a relatively lower production plant utilization rate compared to our
past performance and the maintenance of our production plant in February 2023 in turn
increased the per unit costs of our products.
Our revenue, gross profit and gross profit margin were therefore adversely affected
during the period. For the year ended December 31, 2023, our sales volume amounted to
approximately 346,147 tons, as compared to 375,848 tons for the year ended December 31,
2022, together with the decrease in selling prices, resulting in a decrease in revenue of 14.6%
as compared to the same period in 2022. Our gross profit also decreased by 52.8% as
compared to the same period in 2022 and we recorded a lower gross profit margin of 12.3% in
2023. Such decline is largely in-line with the trend observed in the chemical industry
including the listed chemical companies. Despite of this circumstance, we have maintained
our leading position in the toluene oxidation and toluene chlorination products industry and
we remained as the largest manufacturers for benzoic acid and sodium benzoate in the PRC.
Our market share in the PRC benzoic acid market and sodium benzoate market increased from
59.1% and 37.3% in 2022 to 62.0% and 37.9% in 2023, respectively.
The market environment has gradually stabilized and improved by the end of 2023 as the
above impacts have gradually regressed. According to National Bureau of Statistics, entities
in the PRC chemical materials and manufacturing industry recorded a drop in net profit in
2023 as compared to 2022, but the drop had been narrowing throughout the year from -54.9%
in March 2023 to -52.2% in June 2023 and -46.5% in September 2023, and further narrowed to
-34.1% in December 2023, which indicates that the declining trend had stabilized and
gradually improved throughout 2023. Our performance also gradually improved with
quarter-to-quarter increase in revenue based on unaudited management accounts by 8.7% and
6.6% in the third quarter and fourth quarter of 2023, respectively.
Our management has been closely monitoring the industry development and changes in
market circumstance. The chemical industry exhibited cyclical fluctuations from time to time
coinciding with fluctuations in macroeconomic environment and unforeseen events. Having
said that, since our inception and during the Track Record Period, we have successfully
addressed and mitigated the impacts of the cyclical fluctuations to the extent possible and
maintained our leading market position through our business strategy, responsiveness to
market changes and diversified quality product portfolio. We have adopted and will continue
to adopt various measures to improve our financial performances, including but not limited to
(i) refine the production process and strengthen energy management to achieve the purpose of
saving energy, reducing consumption, reducing costs and increasing efficiency, and therefore
reducing manufacturing costs. For example, we are conducting manufacturing refinement for
our benzyl chloride products by upgrading and improving the benzyl chloride reaction and
distillation technology to enhance the quality of benzyl chloride and reduce energy
consumption. We expect the manufacturing refinement to be completed in 2025 and a
projected reduction in energy consumption by up to 10% for such production; (ii) actively
explore domestic and overseas markets, develop new customers, increase sales, and further
expand market share to maintain bargaining power and profitability. For example, we
participated in three domestic trade shows and 10 international trade shows in 2023 as
compared to one domestic trade show in 2022; we also commenced sales with over 200 new
customers in 2023; (iii) actively maintain and further develop customer relationships to
promptly respond to the market need. For example, our sales personnel conducted
approximately 30 visits to our clients each month on average in 2023, as compared to a total of
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approximately 10 visits to our client in 2022; (iv) expedite the launch of new products. For
example, we have implemented facilities to produce columnar sodium benzoate, which is
expected to commence production in the second half of 2024, with an annual production
capacity of approximately 4,000 tons; and (v) maintain and enhance our relationship with raw
material suppliers to purchase raw materials at a more favorable price, which may enable us to
reduce costs for raw materials and maintain an inventory management system that responds
promptly to market fluctuations of raw materials.
EXPECTED MARKET TREND IN 2024
According to Frost & Sullivan, benzoic acid, sodium benzoate, and benzyl alcohol
industry in the PRC show a significant recovery trend in 2024. Simultaneously, the recovery
of the domestic and international economies which will drive consumption resurgence,
downstream industries of benzoic acid, sodium benzoate, and benzyl alcohol are gradually
increasing their demand for replenishing stocks. Together with the gradual reflection of the
positive impacts from the favorable government policies, the benzoic acid, sodium benzoate,
and benzyl alcohol markets are expected to rebound in both sales volume and sales revenue in
2024 with sales revenue in the PRC expected to increase by 16.2%, 18.7% and 21.6%,
respectively, in 2024.
According to Frost & Sullivan, there is no newly constructed production capacity of
toluene oxidation products by five major domestic manufacturers that is put into operation in
2024. Further, according to Frost & Sullivan, there was structural adjustment in the global and
the PRC toluene and toluene derivative products markets which involves a general shift in
sales towards leading Chinese manufacturers with the withdrawal of small and medium-sized
manufacturers from the industry, along with a decrease in the output and production capacity
utilization rate of overseas manufacturers observed in 2023, and such trend is expected to
continue in 2024. These help stabilize the market supply and benefits us as a leading
top-ranked toluene oxidation and toluene chlorination products provider in the PRC and the
global market, allowing us to capture additional market share.
RECENT DEVELOPMENTS
With our continuous efforts to improve our performance and the gradual recovery of the
chemical industry globally and also in the PRC, our performance gradually improved. In
particular, based on the unaudited management accounts of the Company as of March 31,
2024, our revenue and sales volume for the three months ended March 31, 2024 increased by
15.0% and 6.7%, respectively, as compared to the same period in 2023. The utilization rates of
our Wuhan Production Plant and Qianjiang Xinyihong Production Plant also increased in the
first quarter of 2024 as compared to that in 2023, indicating an improvement in our
performance.
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OUR PRODUCTS
Our self-produced toluene derivative products are categorized into the following
segments: (i) toluene oxidation products, (ii) toluene chlorination products; (iii) benzoic acid
ammonification products, and (iv) other fine chemical products such as benzyl acetate and
p-methyl chlorobenzyl. These products are broadly used in food preservatives and oxidation,
household chemicals, feed acidifiers and agricultural and pharmaceutical intermediates. As of
December 31, 2023, we offered five types of toluene oxidation products, two types of toluene
chlorination products, two types of toluene ammonification products and more than 20 types
of other fine chemical products of different specifications to our customers. We also engage in
products trading during the Track Record Period, which complement our self-produced
products sales and enhanced customers cohesiveness for our business operations by providing
customers with various trading products manufactured by other suppliers.
Our Business Model
For the years ended December 31, 2021, 2022 and 2023, we derived our revenue from
sales of our self-produced products, representing approximately 79.4%, 86.8% and 83.0% of
our total revenue for the respective periods. We also generated limited revenue from products
trading during the Track Record Period.
The following table sets forth the sales volume, revenue and percentage of total revenue
by business segments during the Track Record Period:
Y ears ended December 31,
2021 2022 2023
RMB’000
% of total
revenue
Sales
volume RMB’000
% of total
revenue
Sales
volume RMB’000
% of total
revenue
Sales
volume
(tons) (tons) (tons)
Revenue from self-produced products 2,213,551 79.4 248,462 2,721,500 86.8 318,818 2,221,064 83.0 279,147
Toluene oxidation products 1,311,522 47.0 161,028 1,555,182 49.6 169,962 1,356,387 50.7 164,071 (1)
– benzoic acid 752,321 27.0 103,224 910,379 29.0 113,050 784,461 29.3 106,487
– sodium benzoate 451,129 16.2 46,994 543,084 17.3 49,361 437,519 16.3 45,245
– others 108,072 3.8 10,810 101,719 3.3 7,551 134,407 5.1 12,339
Toluene chlorination products 487,513 17.5 51,217 831,305 26.5 61,988 587,599 21.9 52,299
– benzyl chloride 124,810 4.5 18,398 189,440 6.0 19,924 124,841 4.7 15,863
– benzyl alcohol 362,703 13.0 32,819 641,865 20.5 42,064 462,758 17.2 36,436
Benzoic acid ammonification products 237,010 8.5 7,921 130,392 4.2 4,619 116,250 4.3 6,675
– benzonitrile 48,319 1.7 3,143 27,180 0.9 1,467 39,538 1.5 2,637
– benzoguanamine 188,691 6.8 4,778 103,212 3.3 3,152 76,712 2.8 4,038
Other fine chemical products 177,506 6.4 28,296 204,621 6.5 82,249 160,828 6.1 56,102
Revenue from products trading 575,926 20.6 113,840 412,336 13.2 57,030 456,039 17.0 67,000
Toluene product trading 541,042 19.4 112,272 360,815 11.6 54,823 320,085 12.0 49,295
Other products trading 34,884 1.2 1,568 51,521 1.6 2,207 135,954 5.0 17,705
Total 2,789,477 100.0 362,302 3,133,836 100.0 375,848 2,677,103 100.0 346,147
Note:
(1) Including sales volume of products processed by Hebei Kangshi under the entrusted processing service
arrangement.
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The following is a description of our main products:
Toluene oxidation products and derivatives
Our toluene oxidation products mainly include benzoic acid, sodium benzoate and other
products such as benzaldehyde and benzyl benzoate.
Benzoic acid
Benzoic acid is a toluene oxidation product mainly used as preservatives and
intermediates in food, pesticide, medicine, printing, and dye products. Benzoic acid is
produced commercially from toluene by air oxidation, separation and purification. We
manufacture benzoic acid at our Wuhan Production Plant. As of the Latest Practicable Date,
our aggregate designed annual production capacity of benzoic acid by our current operating
manufacturing facilities was approximately 200,000 tons.
Description of benzoic acid
Raw materials : toluene, compressed air
Formula : C
7H6O2
CAS number : 65-85-0
Scope of applications : • as a feed additive to replace antibiotics
• as a food preservative
• as intermediate in food and medicine
Sodium benzoate
Sodium benzoate is the sodium salt of benzoic acid mainly used as a food preservative
and pickling agent. Sodium benzoate is produced by reacting sodium hydroxide with benzoic
acid. We manufacture sodium benzoate at our Wuhan Production Plant. As of the Latest
Practicable Date, our aggregate designed annual production capacity of sodium benzoate by
our current operating manufacturing facilities was approximately 65,000 tons.
Description of sodium benzoate
Raw materials : benzoic acid, sodium hydroxide
Formula : C
7H5NaO2
CAS number : 532-32-1
Scope of applications : • as a food preservative
• as a pickling agent
Toluene chlorination products and derivatives
Our toluene chlorination products mainly include benzyl chloride and benzyl alcohol.
Benzyl chloride
Benzyl chloride is an organic compound mainly used in the manufacture of agricultural
and pharmaceutical intermediates. We manufacture benzyl chloride at our Qianjiang
Xinyihong Production Plant. As of the Latest Practicable Date, our aggregate designed annual
production capacity of benzyl chloride by our current operating manufacturing facilities was
approximately 74,000 tons.
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Description of benzyl chloride
Raw materials : toluene and chlorine
Formula : C 7H7Cl
CAS number : 100-44-7
Scope of applications : • use as a chemical intermediate
• used in the synthesis of amphetamine-class
drugs
• used in preparation of Grignard reagent
Benzyl alcohol
Benzyl alcohol is a colorless liquid with a mild pleasant aromatic odor. It is a useful
solvent due to its polarity, low toxicity, and low vapor pressure. We manufacture benzyl
alcohol at our Qianjiang Xinyihong Production Plant. As of the Latest Practicable Date, our
aggregate designed annual production capacity of benzyl alcohol by our current operating
manufacturing facilities was approximately 60,000 tons.
Description of benzyl alcohol
Raw materials : sodium carbonate, water and benzyl chloride
Formula : C
7H8O
CAS number : 100-51-6
Scope of applications : • used as a general solvent
• used in the soap, perfume, and flavor industries
• used as a local anesthetic, especially with
epinephrine
Benzoic acid ammonification products and derivatives
Our benzoic acid ammonification products mainly include benzonitrile and
benzoguanamine.
Benzonitrile
Benzonitrile is a colorless oily liquid with an almond smell. It is mainly used as an
intermediate of high-grade coatings such as benzoguanamine. We manufacture benzonitrile at
our Wuhan Production Plant. As of the Latest Practicable Date, our aggregate designed annual
production capacity of benzonitrile by our current operating manufacturing facilities was
approximately 10,000 tons.
Description of benzonitrile
Raw materials : benzoic acid, ammonia
Formula : C
7H5N
CAS number : 100-47-0
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Scope of applications : • as an intermediate of high-grade coatings such
as benzoguanamine
• as the intermediate of synthetic pesticide and
aliphatic amine
• as the solvent of nitrile-based rubber, resin,
polymer and coating
Benzoguanamine
Benzoguanamine is a white crystalline powder. It is mainly used for making
thermosetting resins, modified resins, amino coatings, plastics, pesticides and dyes. We
manufacture benzoguanamine at our Wuhan Production Plant. As of the Latest Practicable
Date, our aggregate designed annual production capacity of benzoguanamine by our current
operating manufacturing facilities was approximately 5,000 tons.
Description of benzoguanamine
Raw materials : benzonitrile, dicyandiamide
Formula : C
9H9N5
CAS number : 91-76-9
Scope of applications : • for thermosetting resin, amino resin and
modified resin
• as the intermediate of plastics, pesticides and
dyes
Other fine chemical products
Our other fine chemical products mainly include benzyl acetate and p-methyl benzyl
chloride.
Benzyl acetate
Benzyl acetate is an important fragrance and solvent. It can be used in the synthesis of
alkyd resins and as an excellent solvent for nitrocellulose. We manufacture benzyl acetate at
our Qianjiang Production Plant.
Description of benzyl acetate
Materials : dibenzyl ether, acetic anhydride
Formula : C
9H10O2
CAS number : 140-11-4
Scope of applications : • as soap materials and other industrial flavors
and fruity edible flavors
• as solvents for shellac, cellulose acetate, dyes,
greases, printing inks, etc.
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P-methyl benzyl chloride
P-methyl benzyl chloride is mainly used as a synthetic raw material for fine chemical
products. We manufacture p-methyl benzyl chloride at our Qianjiang Production Plant. As of
the Latest Practicable Date, our aggregate designed annual production capacity of p-methyl
benzyl chloride by our current operating manufacturing facilities was approximately 1,200
tons.
Description of p-methyl benzyl chloride
Materials : p-xylene, chlorine
Formula : C
8H9Cl
CAS number : 104-82-5
Scope of applications : • as an intermediate of organic synthesis, used in
the manufacture of p-methyl benzyl alcohol,
etc.
We also manufacture other fine chemical products at our production plants, such as
p-xylene dimethyl ether, which comprised a small portion of our products portfolio in terms of
our total revenues generated during the Track Record Period.
SALES AND CUSTOMERS
We have a dedicated sales department responsible for the overall management of our
sales and marketing activities. As of the Latest Practicable Date, our sales department had 29
employees. Our sales department is further divided into two divisions of domestic sales and
international sales with 15 and 14 employees, respectively. Each division is comprised of
three sales teams which focused on different products and geographic coverage. We employ
direct sales, distribution sales and products trading in various markets to broaden the reach of
our products. Our sales team is responsible for business development, product delivery liaison
and post-sales services under our direct sales model. In addition, our sales team is also
responsible for maintaining regular contact with our distributors as well as coordinating with
manufacturers and trading companies for our products trading business. Our sales team
leaders report to the director of their respective sales division, who then report to our
president.
Our sales team is also responsible for our marketing activities and promoting new
products to new customers. We focus our marketing efforts on promoting our products and
brand, and have adopted different marketing strategies for direct and distribution sales. For
direct sales and products trading, our internal sales personnel promote our products to
customers directly through business development meetings, product information brochures
and other marketing events. For distribution sales, our distributors are responsible for
promoting our products to end customers. During this process, our sales and marketing
personnel communicate with our customers and distributors to implement our marketing
strategies and conduct promotional activities.
During the Track Record Period, we participated in trade shows and exhibitions in the
PRC and overseas to promote our products to potential customers and to gather the latest
market trends and consumer preferences. We also reach our target customers through periodic
communication and direct customer visits. Advertising through both online and offline media
are carried out to enhance our brand awareness and recognition.
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Our brand
We registered our own brand “XINKANG ( อੰ೐)” with the Trademark Office of the
State Administration of Industry and Commerce of the PRC in June 1990. On December 31,
2015, XINKANG ( อੰ೐) was recognized as “Well-Known Trademark” by the Trademark
Review Committee of the State Administration for Industry and Commerce. As of December
31, 2023, all our products sold in the PRC and in the international markets use our XINKANG
(อੰ೐) brand. We believe the use of our own brand has strengthened customer loyalty, which
facilitates our business expansion.
Our sales model
The table below sets out the breakdown of our sales by revenue channels during the Track
Record Period:
Y ear ended December 31,
2021 2022 2023
RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
revenue
Gross
profit
margin
Direct sales channel
– Direct sales 1,224,453 43.9 30.0% 1,624,669 51.8 26.0% 1,226,480 45.8 14.9%
– Products trading 575,926 20.6 0.6% 412,336 13.2 9.2% 456,039 17.0 3.5%
Distribution sales channel
– Distribution sales 989,098 35.5 26.9% 1,096,831 35.0 21.8% 994,584 37.2 13.2%
Total 2,789,477 100.0 22.9% 3,133,836 100.0 22.3% 2,677,103 100.0 12.3%
Direct sales
We sell our products directly to end users such as chemical companies, food
manufacturing and processing companies, pharmaceutical companies and animal feed
producing companies in the PRC and the global markets. For the years ended December 31,
2021, 2022 and 2023, we generated revenue of RMB1,224.5 million, RMB1,624.7 million and
RMB1,226.5 million, respectively, from direct sales in the PRC and overseas, representing
approximately 43.9%, 51.8% and 45.8% of our total revenue for the respective periods.
Distribution sales
We also distribute and sell our self-produced products through distributors, who we
expect to distribute or resell our products to their sub-distributors and end users. As of
December 31, 2023, we had established an extensive distribution network comprising 435
distributors across China to conduct our distribution sales. We endeavor to leverage our
established network of distributors to supplement our direct sales and further penetrate into
local markets and expand the breadth and depth of our market presence. In addition, we had
established an overseas distribution network comprising 251 distributors as of December 31,
2023. We believe that our existing distribution practice is consistent with customary industry
practice in the PRC and global market, and serves to ensure the efficient coverage of our sales
network while controlling our distribution cost. During the Track Record Period, our gross
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profit margin for distribution sales was lower than that for direct sales because the distributors
typically purchase large quantities of our products and are able to make payment upon
delivery. With these factors under consideration, we are inclined to offer relatively lower
prices to our distributors compared to prices under direct sales.
The gross profit margin of our direct sales, decreased from 26.0% in 2022 to 14.9% in
2023, showing a higher magnitude of decrease as compared to the gross profit margin of our
distribution sales which decreased from 21.8% in 2022 to 13.2% in 2023. The higher
magnitude of decrease for direct sales as compared to distribution sales could be attributable
to the change in product mix. The product mix under distribution sales remained relatively
stable in 2023 while there was a decrease in proportion of direct sales of benzyl alcohol in
2023, which had a higher profit margin.
For the years ended December 31, 2021, 2022 and 2023, our revenue from sales to
distributors were RMB989.1 million, RMB1,096.8 million and RMB994.6 million,
respectively, representing approximately 35.5%, 35.0% and 37.2% of our total revenue for the
respective periods.
Management of our distributors
Our distributors are typically regional distributors primarily involved in the distribution
of chemical products with well-established local customer base. During the Track Record
Period, we entered into written distribution agreements with our distributors. We also adopted
a standardized distribution agreement for our distributors during the Track Record Period to
effectively manage our distributors in a consistent and systematic manner.
We exercise effective control of our distributors through a variety of management
methods and guidelines. First, a substantial portion of our distributors, including domestic
and international distributors, are required to make prepayment before or upon delivery of our
products. In addition, we implement selection criteria of our distributors and exercise
necessary management over them. These selection criteria include that the (i) distributors
must be lawfully established legal entities with valid business licenses issued by the relevant
government authorities; (ii) distributors should have more than two years of experience in
sales of related products and maintain certain level of business activities and accomplishments
in the local industry; (iii) distributors should have strong financial strength, sufficient
financial capacity and sound business credibility; and (iv) distributors should have
professional sales personnel, strong customer maintenance capabilities and customer
development capabilities. We select our distributors in each region based on the distributor’s
business qualifications, experience, compliance, clientele and distribution capabilities. The
distribution capabilities we consider include breadth and quality of sales network, reputation,
credibility and financial conditions, and capabilities in personnel, warehousing, logistics and
transportation.
In addition, as the control and risk are transferred upon delivery of our products to the
distributors, revenue from sales of products will be recognized when control is transferred. We
have no obligation to help the distributors to dispose their unsold products when terminating
their distribution agreements. During the Track Record Period and up to the Latest Practicable
Date, we did not buy back any products that had been sold to our distributors, and there was no
substantial exchange or return of our products due to product defects or otherwise that would
have a material adverse impact on our business operations and financial conditions.
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We also implement an internal pricing policy to oversee and manage our distributorship.
In particular, in order to prevent channel stuffing and cross-region sales by our distributors,
we implemented the following measures to oversee and manage our distributors:
• we monitor the sales volumes to our distributors on a quarterly basis and maintain
regular communications with the distributors on their sales and inventory level;
• if there are specific indications and circumstances leading us to believe that our
distributors have excessive inventory, we may refuse to sell additional products to
them. We assess the inventory levels of our distributors based on the sales volume
analysis performed internally;
• distributors are required to sign the periodically-renewed distribution agreement,
which prohibits cross-region sales. If cross-region sales is identified by us, we may
impose penalties on the non-compliant distributors including warnings, suspension
of supplies, cancellation of price discounts, and cancellation of their distributor
qualifications, based on the severity of such violations;
• we monitor and identify cross-region sales through various measures, including
report by other distributors, and regular inspection and verification by our
marketing team;
• we selectively maintain a limited number of distributors in each region in order to
minimise any risk of market cannibalisation between our distributors;
• we promote our own-branded products through a wide variety of channels to
promote the sales of distributor products. We also encourage them to participate in
promotions and advertising activities that have been pre-approved by us; and
• we have a dedicated sales team providing guidance to distributors on the product
pricing and how to promote and expedite the sales of products based on our years of
experiences in the toluene derivative products industry in the PRC. Generally, we do
not mandate selling prices of our distributors, and they may set the prices based on
their own business judgment.
Based on confirmations from the Company and Directors, the products sold by the
Company do not include highly toxic chemicals and dangerous chemicals used to make
explosives. As advised by our PRC Legal Advisors, according to the Administrative
Regulations on the Safety of Hazardous Chemicals, the hazardous chemicals sellers are
obliged to check the buyers’ relevant permits or licenses only when they sell highly toxic
chemicals and dangerous chemicals used to make explosives. We do not sell highly toxic
chemicals and dangerous chemicals used to make explosives, therefore, we are not required to
check the buyers’ permits or licenses for highly toxic chemicals and dangerous chemicals. To
the best knowledge of our Directors, we are not required to conduct inspection on whether our
distributors satisfy the requirements, if any, for relevant permits or licenses to sell our
products in their respective locations.
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Key terms of distribution agreements
We generally enter into distribution agreements with our distributors on an annual basis.
We use a standardized distribution agreement with limited customization for all our
distributors, which helps us efficiently manage our distributors and ensure an orderly market
for our products. During the Track Record Period, the key terms of our standardized
distribution agreement included:
(i) the distribution agreements are generally for a period of one year and do not have
automatic renewal clauses;
(ii) the products are checked and accepted in accordance with national standards, and
written objections on the quality of the products must be made by the distributors
within three days of delivery, after which the Company is deemed to have delivered
products to the satisfaction of the distributors;
(iii) the unit price of the goods, the place of delivery, the method of delivery and the cost
of transportation are agreed in separate purchase order;
(iv) a substantial portion of the distributors are required to pay the full purchase price
for the goods prior to each order, and all distributors are required to settle all
payments of goods for that year by the end of each calendar year; and
(v) if a distributor is late in making payment for the goods, the distributor is liable for
late payment penalty at the rate of 0.03% per day until the all payments are made,
and if the payment is more than 15 days late, the Company is entitled to terminate
the contract early and pursue claims against the distributor for breach of contract.
We primarily rely on distribution agreements, policies and measures we have in place to
oversee and manage our distributors. Generally, the distribution agreements entered between
our distributors and us are non-exclusive. Our Directors are of the view that there was no sales
cannibalization issue among our distributors and also with us because our distributors
distribute our products through their own connections within their own business and market
network to end users. Therefore, we believe that our distributors have their own customers that
do not materially overlap with customers of our Group. The price of goods we sell to
distributors is determined by taking into consideration of a variety of factors, including prices
of raw materials and market trends, and we do not exercise control over the price of the
subsequent sale by our distributors to their own customers.
Changes of our distributors
During the Track Record Period, none of our distributors explicitly sought to terminate
their distributorship with us. However, there were certain distributors who may suspend
business engagement with us over certain periods from time to time depending on their
business needs and requirements. According to Frost & Sullivan, it is an industry norm for
chemical manufacturers to distribute their products through a large number of distributors and
the number of distributors could fluctuate depending on changes in market circumstances. The
following table sets forth changes in the number of our distributors in the PRC market during
the corresponding periods:
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Y ear ended December 31,
2021 2022 2023
Number of distributors at
the beginning of year 428 429 456
Increase of distributors (1) 143 181 143
Decrease of distributors (2) 142 154 164
Number of distributors at
the end of year 429 456 435
Notes:
(1) Increase of distributors refer to those distributors who had no transaction with us in the previous year
but transacted with us in the present year.
(2) Decrease of distributors refer to those distributors who had transaction(s) with us in the previous year
but did not transact with us in the present year.
The following table sets forth changes in the number of our distributors in the overseas
market during the corresponding periods:
Y ear ended December 31,
2021 2022 2023
Number of distributors at
the beginning of year 138 166 232
Increase of distributors (1) 61 94 114
Decrease of distributors (2) 33 28 95
Number of distributors at
the end of year 166 232 251
Notes:
(1) Increase of distributors refer to those distributors who had no transaction with us in the previous year
but transacted with us in the present year.
(2) Decrease of distributors refer to those distributors who had transaction(s) with us in the previous year
but did not transact with us in the present year.
During the Track Record Period, the aggregate revenue attributed to our new addition
distributors in the PRC were RMB59.9 million, RMB123.0 million and RMB104.1 million for
2021, 2022 and 2023, respectively, representing 6.1%, 11.2% and 10.5% of our aggregate
revenue generated from distribution sales for the same periods. The aggregate revenue
generated from the previous year attributed to the distributors who did not transact with us in
the PRC in each of 2021, 2022 and 2023 were RMB35.2 million, RMB38.8 million and
RMB79.0 million, respectively. In addition, for the same periods, the average revenue
attributed to our new addition distributors in the overseas market were RMB812,247.4,
RMB483,868.0 and RMB396,243.7, respectively, and the average revenue generated from the
previous year attributed to the distributors who did not transact with us in the overseas market
in the present year were RMB216,119.2, RMB285,132.0 and RMB514,787.0, respectively, for
the corresponding years.
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During the Track Record Period, there were 595, 688 and 686 distributors conducting
business with us in 2021, 2022 and 2023, respectively. Changes in the number of distributors
were mainly due to the addition of new distributors as we expanded our distribution network,
and distributors’ suspension of business engagement with us, which was primarily based on
their own business needs. According to Frost & Sullivan, it is an industry norm for chemical
manufacturers to distribute their products through a large number of distributors and the
number of distributors could fluctuate depending on the changes in market circumstances. In
particular, distributors may temporarily suspend their purchase from us in light of the
unfavorable industry environment, which leads to the higher number of distributor decreases
in 2023. During the Track Record Period and up to the Latest Practicable Date, there were no
material disputes, disagreements or litigations between our Group and the distributors who
suspended business with us in the corresponding periods. The extensive distribution network
solidified our market leading position, elevated our products penetration and enhanced our
brand image.
Relationship with our distributors
We have a seller-buyer relationship with our distributors. The ownership of the products,
as well as all risks and rewards associated therewith are transferred to them upon delivery and
acceptance. In general, our sales to our distributors are generally made on a
payment-before-delivery basis. We may, at our sole discretion, grant credit terms not
exceeding 90 days after delivery of our products to a limited number of distributors based on
the distributors’ credibility and their purchase volume in the previous year. We formulate a
monthly production plan based on historical sales performance and number of confirmed
purchase orders. Once the products are delivered to the distributors in accordance with the
purchase orders, they cannot be returned except for defective products. During the Track
Record Period, there was no material sales return by the distributors. Therefore, there is no
obsolete stock at our end.
We also monitor the performance of our distributors in accordance with our internal
policies. For example, our sales personnel keep regular and close liaison with our distributors
to be aware of their sales, marketing activities, storage conditions, logistics facilities and
inventory levels. Our sales staff would also prepare quarterly sales volume analysis to monitor
sales volume to our distributors. Distributors are prohibited from selling any expired products
or selling our products not within their designated geographic regions without our prior
consent. We also encourage our distributors to report to us whether other distributors are
selling our products at their designated geographic regions. Through this reporting system and
our monitoring work, we ensure that our sales to distributors reflect genuine market demand,
and that our distributors are complying with the terms and conditions of our distribution
agreements. If we discover any non-compliance issues, we would inform the relevant
distributor and consider terminating its distribution agreement. Our distributors are also liable
for breaches of their distribution agreements, and we can claim compensation from them for
breaches. We can terminate the distribution agreements if there are material breaches by the
distributor. During the Track Record Period and up to the Latest Practicable Date, there was
no termination of distribution agreement due to breach of material provisions of the
agreement by any of our distributors. As at the Latest Practicable Date, 96.0% of our trade
receivables from our distributors as at December 31, 2023 were subsequently settled.
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During the Track Record Period, except for Hubei Tuopu, a minority shareholder of
Cougar Holdings and a related party of our Group with a sales revenue of RMB24.3 million,
RMB4.7 million and RMB7.6 million for the years ended December 31, 2021, 2022 and 2023,
respectively, all of our distributors were Independent Third Parties, and none were controlled
by our current employees.
Our five largest distributors
For the years ended December 31, 2021, 2022 and 2023, sales of our self-produced
products to our five largest distributors in each year accounted for RMB210.1 million,
RMB161.3 million and RMB166.7 million, representing 21.2%, 14.8% and 16.8% of our total
revenue generated from sales of self-produced products to our distributors or 7.5%, 5.1% and
6.2% of our total revenue for the same periods, respectively. The table below sets forth certain
information on our five largest distributors in each year during the Track Record Period:
For the year ended December 31, 2021
Five largest distributors Sales amount (1) Background
Business
relationship
since Credit term
RMB’000
% of total
distribution
sales
Wego Chemical 93,860.2 9.5% chemicals, minerals and raw materials
supplier based in the U.S.
1999 90 days
Distributor A 46,767.2 4.7% petroleum products, chemical products
and other products sales and trading
company based in the PRC
2018 Payment upon
delivery
Hubei Tuopu 24,325.3 2.5% products import and export trading
company based in the PRC
2002 30 days
Xinrong Chemical 24,187.2 2.4% toluene and other products trading
company based in the PRC
2011 Delivery after
payment
Helm De Maxico 20,937.0 2.1% pharmaceutical, industrial chemical
and other products manufacturing
and distribution company based in
Mexico
2010 Payment upon
receipt of
shipping
documents
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For the year ended December 31, 2022
Five largest distributors Sales amount (1) Background
Business
relationship
since Credit term
RMB’000
% of total
distribution
sales
Wego Chemical 51,011.7 4.7% chemicals, minerals and raw materials
supplier based in the U.S.
1999 90 days
Suzhou Yinshenghe Chemical
Co., Ltd.* ( ᘽψΙସͫʷʈ
ʮ̡ , the “ Suzhou
Yinshenghe ”)
33,837.7 3.1% petroleum products, chemical products
and other products sales and trading
company based in the PRC
2020 Delivery after
payment
Wuhan Xinlantian Chemical
Co., Ltd.* (ဏ̹㒥ᔝ˂
ʮ̡ )
28,619.7 2.6% toluene and other products trading
company based in the PRC
1998 Delivery after
payment
Jiangsu Changzhou Yifeng
Trading Co., Ltd.* ( Ϫᘽ
ப΂ʮ̡ )
24,087.7 2.2% chemical and other products trading
company based in the PRC
2021 Payment upon
delivery
Distributor A 23,785.1 2.2% petroleum products, chemical products
and other products sales and trading
company based in the PRC
2018 Payment upon
delivery
For the year ended December 31, 2023
Five largest distributors Sales amount (1) Background
Business
relationship
since Credit term
RMB’000
% of total
distribution
sales
Wego Chemical 49,709.0 5.0% chemicals, minerals and raw materials
supplier based in the U.S.
1999 90 days
Nanjing Aisijin Chemical Co.,
Ltd.* (ʷʈ
ʮ̡ , the
“Nanjing Aisijin ”)
46,831.8 4.7% petroleum products, chemical products
and other products sales and trading
company based in the PRC
2022 Delivery after
payment
Distributor A 28,670.4 2.9% petroleum products, chemical products
and other products sales and trading
company based in the PRC
2018 Payment upon
delivery
Zhejiang CHEMICALS Import
and Export Corporation* ( ए
ʮ̡ )
21,547.2 2.2% petroleum products, chemical products
and other products sales and trading
company based in the PRC
1999 Payment upon
delivery
Suzhou Yinshenghe 19,953.1 2.0% petroleum products, chemical products
and other products sales and trading
company based in the PRC
2020 Delivery after
payment
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Note:
(1) The sales amount only includes revenue from distribution sales and does not include revenue from direct sales
or products trading.
Products trading
In addition to direct sales of our self-produced products, our direct sales channel also
includes purchasing products from our suppliers and reselling them to our customers in the
PRC and global markets. All products trading were conducted through direct sales channel
during the Track Record Period. For the years ended December 31, 2021, 2022 and 2023, our
revenue from products trading were RMB575.9 million, RMB412.3 million and RMB456.0
million, respectively, representing 20.6%, 13.2% and 17.0% of our total revenue for these
respective periods.
Our products trading business mainly consists of toluene product trading, which is a
primary raw material for our toluene derivative products manufacturing. We engage in
products trading to facilitate the procurement of raw materials for our primary production
operations, ensure our access to a steady source of raw material and as an integral part of the
inventory management system adopted by our Group to minimize cost of sales. Petroleum
toluene is produced from petroleum, and there are limited number of major suppliers of
petroleum toluene in the PRC market. These major suppliers may prioritize selling their
products to their customers with established long-term business relationship and with large
and persistent demands. Other purchasers with no such prior business relationship with these
major suppliers may and commonly solicit information regarding the availability of petroleum
toluene and other raw materials on the Independent Commodity Intelligence Services, which
operates as an independent information exchange platform for companies generally engaged
in the chemical, fertilizer and energy industry, to source raw materials for their productions.
As one of the “AAA” rated customers of SINOPEC Huazhong, a branch of a wholly-owned
subsidiary of SINOPEC and a major petroleum toluene supplier and industry participant in
China, we are able to place large-scale procurement orders with SINOPEC and other reputable
industry suppliers. When our raw material inventory meets or exceeds the requirements for
our production, we may engage in toluene product trading to sell our surplus inventory by
obtaining information and tracking market opportunities on the Independent Commodity
Intelligence Services to improve our cash-flow position. We also engage in other products
trading business when we observe demands and potential profitability for products we
purchased to complement our self-produced products sales and enhance customers
cohesiveness for our business operation by providing customers with various trading
products. We do not purchase excess inventory under our product trading as we continue to
focus on the production and sales of our self-produced products.
Pursuant to the Frost & Sullivan Report, it is an industry practice in the PRC and the
global market that toluene derivative companies choose to source their raw materials through
products trading. In this manner, toluene and toluene derivatives providers are able to respond
to market fluctuations by leveraging benefits such as sufficient customer resources, the ability
to command high premiums due to economies of scale, and the flexibility to adjust inventories
with in-depth market insight.
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Geographical markets
As of December 31, 2023, we sold our products in the PRC and more than 70 countries in
the global market, including the Americas, Southeast Asia and Europe. The table below sets
forth an analysis of our revenue and gross profit margin by region for the periods indicated:
Y ear ended December 31,
2021 2022 2023
RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
revenue
Gross
profit
margin RMB’000
%o f
revenue
Gross
profit
margin
Mainland China 2,171,112 77.8 21.4% 2,452,017 78.2 20.7% 2,060,003 76.9 10.8%
Asia (except
Mainland China) (1) 262,513 9.4 28.1% 308,110 9.8 28.7% 287,508 10.7 19.8%
The Americas (2) 212,821 7.6 32.3% 159,116 5.1 33.2% 135,882 5.1 18.1%
Europe (3) 119,477 4.3 22.2% 185,654 5.9 23.6% 175,848 6.6 13.0%
Other countries/
regions (4) 23,554 0.9 23.7% 28,939 1.0 23.2% 17,862 0.7 10.1%
Total 2,789,477 100.0 22.9% 3,133,836 100.0 22.3% 2,677,103 100.0 12.3%
Notes:
(1) mainly includes Japan, India, Thailand and other countries and regions in Asia
(2) mainly includes U.S., Canada and other countries and regions in North and South America
(3) mainly includes the United Kingdom, Sweden and other countries and regions in Europe
(4) mainly includes Australia, New Zealand and other countries and regions
Sales to customers in the PRC
Our domestic sales to major industrial customers are conducted directly through our
internal sales department. In addition, our domestic sales team is also responsible for the
management of our sales to smaller customers through regional distributors. As of the Latest
Practicable Date, we had a team of 15 sales professionals responsible for our sales in the
domestic market.
For the years ended December 31, 2021, 2022 and 2023, revenue generated from our
domestic sales in the mainland China amounted to RMB2,171.1 million, RMB2,452.0 million
and RMB2,060.0 million, respectively, accounting for 77.8%, 78.2% and 76.9% of our total
revenue, respectively.
During the Track Record Period, our gross profit margin in mainland China slightly
decreased from 21.4% in 2021 to 20.7% in 2022 primarily due to our adoption of a pricing
strategy to sell our toluene oxidation products at a relatively lower price in light of the market
competition and the volatile downstream market demand in order to gain market share in
2022. Our gross profit margin in mainland China further decreased to 10.8% in 2023, which
was primarily due to the decrease in margin of our toluene oxidation products and toluene
chlorination products from 20.0% and 27.5% in 2022 to 10.0% and 19.5% in 2023 due to the
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decrease in downstream demands as many downstream industry customers tend to lower their
inventory level or slow down their inventory replenishment amid economic uncertainty and we
adopted a pricing strategy to sell our products at a relatively lower price to maintain our
market share in light of the unfavourable industry environment and to cope with the
intensified market competition resulted from the increase in market supply of toluene
oxidation products.
Sales to customers in international markets
We commenced sales directly in the international markets in 1996. As of the Latest
Practicable Date, we marketed and sold our products across the world with a particular focus
on the North American, Southeast Asian and European markets. As of the same date, we had a
team of 14 sales professionals dedicated to managing our sales in the international markets.
According to the Frost & Sullivan Report, our Group was the second largest
manufacturer for benzoic acid and sodium benzoate and the third largest manufacturer for
benzyl alcohol in the global market in terms of the sales revenue in 2023, accounting for
37.0%, 22.4% and 20.6% of the global total market revenue, respectively. For the years ended
December 31, 2021, 2022 and 2023, revenue generated from our sales in the international
markets amounted to RMB618.4 million, RMB681.8 million and RMB617.1 million,
accounting for 22.2%, 21.8% and 23.1% of our total revenue, respectively. Our sales to the
international markets are mainly conducted through direct sales supplemented by distribution
sales and products trading in the global markets.
Our gross profit margin in the overseas markets remained relatively stable from 2021 to
2022. Our gross profit margin in the overseas markets experienced an overall decrease in 2023
due to the downward trend in the overseas market demands for the same reasons as for
domestic sales as well as the higher inventory purchased by overseas customers in 2022 in
light of the then transportation restriction amid COVID-19 related measures in the PRC. In
addition, we adopted a pricing strategy to sell our products at a relatively lower price to
maintain our market share in light of the unfavourable industry environment and to cope with
the intensified market competition resulted from the increase in market supply of toluene
oxidation products.
During the Track Record Period, the gross profit margin of our products sold in the
overseas markets was relatively higher than that in the PRC because we were able to charge a
relatively higher price considering the higher production costs of overseas manufacturers and
we were benefited from the lower production costs in the PRC.
Our products are required to comply with the local regulations and standards on product
quality and food safety in all international markets to which our products are sold. Our
international customers may also require us to follow the prescribed standards with respect of
quality, raw materials used and labeling. We rely on our PRC freight forwarder and our
overseas customers to complete all such relevant procedure, and they are also responsible for
complying with other aspects of the relevant PRC and foreign laws and regulations.
Specifically, our freight forwarder will (i) prepare the filing documents submitted to the
government authorities; (ii) prepare the shipping documents submitted to the shipping
companies; (iii) confirm with the latest sailing schedules; and (iv) liaise with our sales team to
provide updates regarding the details of export activities.
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As confirmed by our PRC Legal Advisors, we have obtained the necessary approvals and
filed with relevant governments of international trade under the requirements of PRC laws and
regulations during the Track Record Period and up to the Latest Practicable Date. Our
Directors confirm that we have completed all necessary procedures to obtain the applicable
approvals, certificates, registrations or other required confirmations from the relevant
government authorities and in the countries to which we export our products.
Our five largest customers
For the years ended December 31, 2021, 2022 and 2023, sales to our five largest
customers in each year were RMB731.5 million, RMB583.2 million and RMB581.2 million,
representing 26.3%, 18.6% and 21.8% of our total revenue for the same periods, respectively,
and sales to our single largest customer in each year accounted for 13.6%, 6.3% and 8.1% of
our total revenue for the same periods, respectively.
The tables below set forth certain information of our five largest customers in each year
during the Track Record Period:
For the year ended December 31, 2021
Five largest customers Sales amount
Type of products
purchased Background
Y ear of
incorporation
Registered
capital
Payment
method
Business
relationship since Credit term
Sales
channel
RMB’000 %
Jiangsu Hanrong 378,914.3 13.6% toluene products toluene and other products
trading company based in
the PRC
2014 RMB10.5
million
electronic
transfer
2017 Payment upon
delivery
Products
trading
Customer Group B
(1) 142,876.3 5.1% toluene oxidation
products
food & beverage additive,
feed additive and other
products manufacturer
based in Switzerland
1995 and
2004
USD66.95
million and
CHF50.0
million,
respectively
electronic
transfer
2010 90 days Direct
sales
Wego Chemical 93,860.2 3.4% toluene oxidation
products/benzoic
acid
ammonification
products
chemicals, minerals and
raw materials supplier
based in the U.S.
1978 USD10.0
million
electronic
transfer
1999 90 days Distribution
sales
Chongqing Tianxu
Chemical Co., Ltd.*
(ʮ̡ ,
the “ Chongqing
Tianxu ”)
60,366.4 2.2% toluene products toluene and other products
trading company based in
the PRC
2008 RMB50.0
million
electronic
transfer
2019 Payment upon
delivery
Products
trading
Changzhou Chemical and
Light Materials Co.,
Ltd.* ( ੬ψ̹ʷʈჀʈҿ
ᐼʮ̡ ,t h e
“Changzhou Chemical ”)
55,460.8 2.0% toluene products toluene and other products
trading company based in
the PRC
1978 approximately
RMB21.7
million
electronic
transfer
2021 Delivery after
payment
Products
trading
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For the year ended December 31, 2022
Five largest customers Sales amount
Type of products
purchased Background
Y ear of
incorporation
Registered
capital
Payment
method
Business
relationship since Credit term
Sales
channel
RMB’000 %
Customer Group B (1) 197,416.7 6.3% toluene oxidation
products
food & beverage additive,
feed additive and other
products manufacturer
based in Switzerland
1995 and
2004
USD66.95
million and
CHF50.0
million,
respectively
electronic
transfer
2010 90 days Direct
sales
Changzhou Chemical 149,435.2 4.8% toluene products toluene and other products
trading company based in
the PRC
1978 approximately
RMB21.7
million
electronic
transfer
2021 Delivery after
payment
Products
trading
Jiangsu Hanrong 146,191.2 4.7% toluene products toluene and other products
trading company based in
the PRC
2014 RMB10.5
million
electronic
transfer
2017 180 days Products
trading
Wego Chemical 51,011.7 1.6% toluene oxidation
products/benzoic
acid
ammonification
products
chemicals, minerals and
raw materials supplier
based in the U.S.
1978 USD10.0
million
electronic
transfer
1999 90 days Distribution
sales
Rich Chemical (Hubei)
Co.,Ltd.* ( ๿փʷʈಳ
ʮ̡ ,t h e“ Rich
Chemical ”)
39,119.1 1.2% toluene chlorination
products
Chemicals raw materials
supplier based in the
PRC
2012 RMB30.0
million
electronic
transfer
2015 Delivery after
payment
Direct
sales
For the year ended December 31, 2023
Five largest customers Sales amount
Type of products
purchased Background
Y ear of
incorporation
Registered
capital
Payment
method
Business
relationship since Credit term
Sales
channel
RMB’000 %
Changzhou Chemical 215,687.9 8.1% toluene products toluene and other products
trading company based in
the PRC
1978 approximately
RMB21.7
million
electronic
transfer
2021 Delivery after
payment
Products
trading
Customer Group B
(1) 214,842.1 8.0% toluene oxidation
products
food & beverage additive,
feed additive and other
products manufacturer
based in Switzerland
1995 and
2004
USD66.95
million and
CHF50.0
million,
respectively
electronic
transfer
2010 90 days Direct
sales
Wuhan Hengdazonglian
New Material Co., Ltd.*
(ࣘ
ʮ̡ )
51,098.0 1.9% toluene chlorination
products
rubber products,
mechanical equipment,
building materials,
chemical products,
exhibition services and
building materials based
in the PRC
2019 RMB2 million bank acceptance
bill and
electronic
wire transfer
2019 Delivery after
payment
Direct
sales
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Five largest customers Sales amount
Type of products
purchased Background
Y ear of
incorporation
Registered
capital
Payment
method
Business
relationship since Credit term
Sales
channel
RMB’000 %
Nanjing Aisijin 49,820.7 1.9% toluene oxidation
products
petroleum products,
chemical products and
other products sales and
trading company based in
the PRC
2015 RMB1.2 million Delivery after
payment
2022 Delivery after
payment
Distribution
sales
Wego Chemical 49,709.0 1.9% toluene oxidation
products/benzoic
acid
ammonification
products
chemicals, minerals and
raw materials supplier
based in the U.S.
1978 USD10.0
million
electronic
transfer
1999 90 days Distribution
sales
Note:
(1) Customer Group B refers to a company based in the PRC and Customer B based in Switzerland, collectively.
Both companies are under the control of the same ultimate controlling party.
The majority of our five largest customers during the Track Record Period were toluene
and other products trading companies based in the PRC, and they actively engage in
bulk-trading business. Generally, the upstream petroleum toluene suppliers may prioritize to
sell their products to purchasers ordering large amount of petroleum toluene engaged in
manufacturing while trading companies mainly source petroleum toluene on the Independent
Commodity Intelligence Services, which operates an independent information exchange
platform for companies of the chemical, fertilizer and energy industries. Since 2019, we
entered into annually-renewed framework sales and purchase agreements with upstream
petroleum toluene suppliers, which enable us to maintain a stable source of raw material
supply for our production and afford us the capacity to conduct toluene product trading with
any supply surplus. The foremost goal of our products trading business is to facilitate the
procurement of raw materials for our primary production operations, and we only engaged in
toluene product trading when inventory level exceeds our requirement for production.
Therefore, revenue generated from our toluene product trading business fluctuated during the
Track Record Period.
The composition of our five largest customers may change from time to time due to the
bulk-trading nature characterized by large purchases and sales under the product trading or
distribution sales segment of our operations. Therefore, certain customers with relatively
short business relationship with us may become our five largest customers during our Track
Record Period. Chongqing Tianxu became our fourth largest customers in 2021 and purchased
RMB60.4 million of toluene products under products trading shortly after their
commencement of business relationships with us. In 2022, Chongqing Tianxu’s purchases
decreased to RMB6.7 million. Similarly, in 2021, Changzhou Chemical became our fifth
largest customers shortly after establishing business relationship with us and purchased
RMB55.5 million of toluene products under products trading in 2021. In 2022, Changzhou
Chemical became our second largest customer with the purchase amount of RMB149.4
million and became our largest customer in 2023 with the purchase amount of RMB215.7
million. In 2023, Nanjing Aisijin became our fourth largest customers shortly after
establishing business relationship with us in 2022 and purchased RMB49.8 million of toluene
oxidation products from us. To the best of the Company’s knowledge, Nanjing Aisijin is
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operated by the core team of a toluene oxidation product manufacturer who exited the market
in 2022, and this team has established sales channels in distributing our products. We believe
these changes in the composition of our five largest customers during the Track Record Period
were primarily due to changes in purchase volume from these customers based on their
business planning and market activities for toluene product trading. We do not rely on any
particular customers to purchase our products under our self-produced products and product
trading segments, and the overall market demand for our products is not materially affected by
any particular customers’ business decision to increase or decrease their purchases from us
during a particular period. Therefore, the composition changes of our five largest customers
did not significantly affect our business operations and financial results.
None of our Directors or their respective associates or any Shareholder, who to the
knowledge of our Directors, owns more than 5% of the issued Shares immediately after
completion of the Global Offering, had any interest in any of our five largest customers during
the Track Record Period.
Credit period and payments
We generally do not extend credit to our domestic customers, and the substantial portion
of purchases placed with us were upon receipt of payment. For limited domestic customers
and certain international customers, we provide credit to them subject to various factors,
including their scale of operations, duration of our business relationship, customers’
historical payment records and industry practices. With this criteria in place, we may grant
credit to a limited number of trustworthy customers. During the Track Record Period, the
credit periods for our customers were generally from one to four months. Our customers in the
PRC are required to settle their payments in RMB. Our international customers mainly settle
their payments in US dollars.
We did not adopt hedging policy against fluctuations in foreign currencies in relation to
our overseas sales or hedging policy against fluctuations in the prices of raw materials and
products during the Track Record Period and up to the Latest Practicable Date.
During the Track Record Period, we did not experience any major default in payments by
our customers which could have a material adverse impact on our business and financial
condition and results.
For the years ended December 31, 2021 and 2022, our impairment loss from expected
credit losses on trade receivables amounted to RMB184,000 and RMB314,000, respectively.
Our gains due to to reversal of impairment of trade receivables was RMB188,000 for the year
ended December 31, 2023. Our expected credit losses on trade receivables increased in 2022
as compared with that of 2021 was in line with the revenue increases and were primarily due
to the increased amount of RMB36.6 million non-overdue trade receivables. For the amount of
expected credit losses to be made under our accounting policy, please refer to “Financial
Information — Material Accounting Policies and Significant Accounting Estimates —
Significant Accounting Estimates — Provision for expected credit losses on trade receivables”
in this prospectus.
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THIRD PARTY PA YMENTS
During the year ended December 31, 2021, a total of 38 customers (the “ Relevant
Customers ”) out of a total number of 1,021 customers, representing approximately 3.7% of
the total number of customers for the year ended December 31, 2021, mainly small local
merchants and distributors, settled their invoices (hereinafter referred to as the “ Third Party
Payments ”o r“ TPP”) through domestic third parties (the “ Third Party Payors ”). For the
year ended December 31, 2021, approximately RMB5.1 million of our Group’s revenue were
settled through Third Party Payors (the “ TPP Revenue ”), representing approximately 0.18%
of the total revenue of our Group in 2021. Our Group has fully ceased the acceptance of Third
Party Payments as of January 1, 2022.
The Third Party Payors were comprised of two groups of individuals and companies,
which were (i) shareholders, directors, legal representatives, senior management of the
Relevant Customers or their respective relatives or parties which previously owed money to
the Relevant Customers (collectively, the “ Related Parties ”); and (ii) downstream customers
of the Relevant Customers (the “ Downstream Customers ”). There were 21 Third Party
Payors who were Related Parties, which attributed to approximately 57.7% of the TPP
Revenue for the year ended December 31, 2021, and there were 17 Third Party Payors who
were Downstream Customers, which attributed to approximately 42.3% of the TPP Revenue
for the year ended December 31, 2021. To the best knowledge of the Directors and having
made all reasonable enquiries, all the Relevant Customers and their Third Party Payors were
Independent Third Parties, and did not have any past or present relationships (including
employment, trust or financing) with the Company and its connected persons other than the
purchase of toluene derivative products related to the Third Party Payments.
For a majority of the underlying sales transaction of the TPP Revenue, the Group
received payment instructions signed by the Relevant Customers and the Third Party Payors
confirming that the Third Party Payments were for the settlement of these sales transaction.
The Group did not enter into any tripartite agreements with the Relevant Customers and the
Third Party Payors. The Directors confirm that the Group did not provide or receive any
discount, commission or rebate under Third Party Payments.
Reasons for Third Party Payments
To the best knowledge of our Directors, after making reasonable enquiries with the
Relevant Customers and their corresponding Third Party Payors, the occurrence of Third Party
Payments was mainly due to:
a. For Third Party Payments by Related Parties, (i) these Relevant Customers settled
their invoices through Related Parties mainly for administrative convenience or
when Relevant Customers had insufficient funds; and (ii) the Relevant Customers
had repaid or set-off the amount due to their Related Parties through the Third Party
Payments. According to Frost & Sullivan, it is not uncommon for private enterprises
or corporate entities or individuals to settle their bills and invoices through their
Related Parties in the PRC mainly because (i) they have insufficient fund in their
transaction accounts; (ii) they have previous unsettled balances with these Related
Parties; or (iii) for administrative convenience (i.e., avoidance of bank charges for
transfer of funds and related costs for overdraft services).
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b. For Third Party Payments by Downstream Customers, (i) these Relevant Customers
were local merchants and distributors which generally resold our products to their
Downstream Customers, who were mainly small-sized retail users and individuals,
and arranged direct payment by their Downstream Customers to the Group for
efficiency purpose; and (ii) the payment obligations of the Relevant Customers had
been fulfilled when the Downstream Customers made the relevant payments to the
Group. As confirmed by Frost & Sullivan, it is not uncommon for Downstream
Customers to order sodium benzoate, a product mainly used for food preservatives,
via distributors of the Group (i.e. the Relevant Customers) and thereby enjoy a more
competitive price or discount typically offered to the distributors with large
purchases. To the best knowledge of the Directors having consulted with certain
Relevant Customers, these Relevant Customers generally charged their Downstream
Customers a mark-up on reselling of our products, which were either paid to our
Group by the Downstream Customers and credited to the account of the Relevant
Customers or settled between the Relevant Customers and their Downstream
Customers in their other transactions.
During the year ended December 31, 2021, we did not object to Third Party Payments
from Third Party Payors given that (i) our Directors believe, and Frost & Sullivan concurs,
based on the aforementioned reasoning, it is not uncommon for toluene derivative products
providers in PRC to adopt Third Party Payments; (ii) it would not cause any inconvenience or
delay in the Group’s payment collection; (iii) all products cannot be returned unless due to
product defect; and (iv) there was no material difference between the key commercial terms,
including pricing, time and credit period, between the sales contracts entered into with
customers who made payments directly and those who made payments via Third Party Payors.
Legality of Third Party Payments
As advised by our PRC Legal Advisors, based on the authenticity and validity of the trade
contracts involved, the acceptance of Third Party Payments is not prohibited under the PRC
laws and regulations.
Based on confirmation provided by our Group, the relevant sales contracts were
completed without any contractual dispute, and as the Third Party Payments were made to
fulfill payment obligations under actual trade contracts by the Third Party Payors on behalf of
the Relevant Customers, our PRC Legal Advisors further advise that the risks of our Group,
directors and employees being subjected to substantial civil liabilities arising from (i) civil
claims or disputes arising from acceptance of Third Party Payments; (ii) potential civil claims
from the Third Party Payors for return of the fund; and (iii) potential civil claims from the
Third Party Payors as to the legality of the Third Party Payments arrangement is low.
To the best information, knowledge and belief of our Directors and after making
reasonable enquiries, there were (i) no dispute related to the Third Party Payments during the
Track Record Period and up to the Latest Practicable Date; and (ii) we did not issue any
repayment or refund to our customers or the Third Party Payors related to the Third Party
Payments during the Track Record Period and up to the Latest Practicable Date.
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Money Laundering Risks
Pursuant to Article 191 of the Criminal Law of the PRC (), a
corporation commits a money laundering offence if it (i) fabricates or conceals third party
payments from proceeds or gains obtained from drug-related crimes, crimes committed by
criminal organizations, crimes of terrorism, smuggling, bribery and corruption, crimes
undermining the financial order of society and financial fraud (the “ Relevant Offences ”); and
(ii) commits certain acts for the purpose of concealing the source and nature of the above
proceeds or gains. If a money laundering offence is committed, the subject corporation may be
fined and the personnel directly responsible for the violation may be subject to a maximum of
10 years imprisonment.
There is no ground for our Directors to believe that the Third Party Payments were
proceeds or gains from the Relevant Offences on the following basis:
(i) to the best knowledge of our Directors and after making reasonable enquiries, the
reason for the Third Party Payments made by the Relevant Customers through the
Third Party Payors were for the settlement of invoices of authentic purchase orders
to the Group, and none of the Third Party Payments was made by cash;
(ii) our Directors were unaware of any Relevant Customers or Third Party Payors being
convicted of any criminal offences based on desktop search results and having
consulted with the relevant sales representatives of the Group, or any unusual
circumstances with respect to the Third Party Payments which, to the best
knowledge of the Directors, subject the Group to material risks of money
laundering; and
(iii) the Sole Sponsor has arranged independent interviews with selected Relevant
Customers and Third Party Payors, each of whom has confirmed that, among others,
(a) the funds for Third Party Payments were originated from legitimate sources and
were not associated with the Relevant Offences; (b) the source of funding of Third
Party Payors commonly originated from personal or business financial resources;
(c) the Relevant Customers and the Third Party Payors had not committed any acts
for the purpose of concealing any source and nature of any proceeds or gains from
any crimes; and (d) the Relevant Customers and the Third Party Payors have settled
the Third Party Payments, and there were no dispute or potential dispute regarding
the underlying sales transactions and their related Third Party Payments.
Each of the executive Directors, non-executive Directors, senior management of the
Company and sales representatives of the Group who was responsible for the accounts of the
Relevant Customers confirmed that (i) the trade contracts concerning Third Party Payments
were genuine and effective, and were fully settled; (ii) they had no knowledge of, or there was
no evidence which may indicate any Third Party Payments were funded by proceeds or gains
associated with the Relevant Offences; and (iii) they did not commit, or is committing or
intends to commit any act for the purpose of concealing the source and nature of the above
proceeds or gains, and had no knowledge of any Group member, management team or sales
representatives that committed, was committing or intend to commit any act for the purpose of
concealing the source and nature of the above proceeds or gains. As far as these individuals
were concerned, the acceptance of Third Party Payments by the Group was not for the purpose
of concealing or transferring the source and nature of the above proceeds or gains.
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Taking into account the above, our PRC Legal Advisors are of the view, and the PRC
legal advisors to the Sole Sponsor concur, that the risks of the acceptance of Third Party
Payments being deemed as money laundering under the Criminal Law of the PRC is low.
In addition, the Sole Sponsor conducted independent due diligence interviews with
selected Relevant Customers and Third Party Payors, obtained supporting documents to
ascertain their relationships and conducted independent background search and desktop
search to ascertain whether any of them have been convicted of a Relevant Offence during the
year ended December 31, 2021. Based on the independent due diligence works, nothing came
to the Sole Sponsor’s attention which would cast doubt on the views of the Directors and the
PRC Legal Advisors as detailed above.
Rectification Measures
The Group ceased to accept Third Party Payments since January 1, 2022. The Group has
taken the recommendations provided by the Internal Control Consultant and revised its
Receivables Management Policy (), and implemented the following
internal control measures to ensure the effective cessation of accepting Third Party Payments
(collectively, the “ Third Party Payments Policy ”):
(i) the Group has informed all existing customers and customers involved in Third
Party Payments for the year ended December 31, 2021 by public announcement of
the policy to cease the acceptance of Third Party Payments and requested customers
to make direct payment to the Group only;
(ii) the supervisor and relevant staff in the accounting and finance department of the
Group will perform internal reviews and inspections on a continual basis to ensure
all V AT invoices are addressed to the contractual customers, and customer payments
are remitted or deposited from the customer’s bank account or under the customer’s
own name. In the event that payment is received from a Third Party Payor purporting
to settle any invoice on behalf of a customer, the Group’s accounting and finance
staff will (a) set aside the fund; (b) inform the Relevant Customers that no Third
Party Payments will be accepted and request for settlement by the customer directly;
(c) arrange to refund the payment to the Third Party Payor; and (d) maintain all
payment and refund proof for record keeping; and
(iii) the supervisor and relevant staff of the business department of the Group has
circulated the revised Third Party Payments Policy as well as provided trainings to
staff regarding the cessation of accepting Third Party Payments.
Our Directors confirmed that since the adoption of the Third Party Payments Policy and
up to the Latest Practicable Date, our Group had not accepted any Third Party Payments, and
has strictly followed and enforced the Third Party Payments Policy. Furthermore, since the
TPP Revenue only accounted for an immaterial portion of the Group’s revenue for the year
ended December 31, 2021, and there was no dispute between the Group, the Relevant
Customers and the Third Party Payors during the Track Record Period and up to the Latest
Practicable Date, our Directors were of the view that the cessation of the Third Party
Payments did not and will not bring a material adverse impact on the Group’s business,
operation and financial performance.
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The Internal Control Consultant reviewed our Group’s Third Party Payments Policy and
performed sample testing on the Group’s sales transactions after January 1, 2022, and did not
identify any deficiency in relation to the Third Party Payments following the implementation
of the Third Party Payments Policy by our Group. Based on the foregoing, our Directors are of
the view that the Third Party Payments Policy is effective and adequate in preventing Third
Party Payments in the future.
Product pricing
We adopt three pricing approaches for product sales. For single orders with relatively
small volume, we set a minimum price for each category of product on a weekly basis taking
industry fluctuation into consideration, and our sales team are granted certain range of price
adjustment to determine the actual price according to market factors and customers’ needs.
The final price determination is reviewed by our sales managers and sales directors. For
certain specific products, the pricing is based on the reference to the price marked by our large
domestic industry customers at common marketplaces. For our major customers, we adopt an
annual pricing approach, by which we set prices throughout the year according to the price of
raw materials. These three approaches are adopted to ensure to capture market gains while
affording us the ability to foster long-term business relationships.
For our international customers, we usually require long-term contracts that specify a
minimum purchase quantity requirements. These long-term contracts are usually over one
year in contract term, and we use our pricing approaches to determine the contract price. We
occasionally execute five-year contracts with certain customers with large and continuous
demands, and these customers are credit-worthy entities with extensive operating history. The
price set under the five-year contract is generally calculated on a monthly basis with a
pre-determined formula and the price fluctuation from month-to-month takes into changes in
variable costs.
The price of our products and the raw materials we purchase fluctuate according to the
market oil price, and thus unexpected fluctuations in oil price may lead to certain pricing
risks. We entered into annual framework agreements with upstream suppliers of our primary
raw material, petroleum toluene. These framework agreements provide the annual purchase
amount and the purchase prices are calculated based on the monthly market settlement price,
which afford us a stable source of supply of raw material at a competitive price level.
Benefited from the dynamic pricing mechanism, which is in line with industry practice for
pioneering participants, we are able to overcome and minimize the impact of fluctuations in
the prices of raw materials and products to a certain extent to enhance our leading position.
Under common circumstances, if there are material increases in the average unit purchase cost
or fluctuation in exchange rates, we may transfer a portion of the cost increase to our
customers. However, under certain circumstances, we may not be able to fully transfer the
increased cost to the customers in light of the keen market competition and the volatile
downstream market demand. Therefore, we may also adopt market-oriented pricing policies to
reflect market fluctuations and maintain our market share. According to Frost & Sullivan,
with a steady growth in downstream market demand, the sales volume of specialty chemicals
(including toluene derivative products) is sensitive to the fluctuation of its selling price in
China and the global market.
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In addition, we have designed internal mechanisms to control various pricing risks by
taking into considerations of various factors, including its current stock level, future sales and
market trend of toluene price. Specifically, when the price of raw materials is rising, we will
timely adjust our selling price to the extent possible so as to pass on part of the increased
costs; when the price of raw materials falls, we will accelerate our product turnover and
maintain a lower inventory level. During the Track Record Period and up to the Latest
Practicable Date, we did not adopt any hedging policies for the fluctuations in the prices of
raw materials and products.
Logistics and product delivery
Generally, we are responsible for the logistics and transportation for the majority of our
domestic and international orders. Our customers may elect to arrange for logistics and
transportation on their own. We primarily cooperate with third-party logistics service
providers to deliver products from our production facilities and warehouses to the ports or
locations designated by our customers. Generally, we select the service provider through a
bidding process. For domestic delivery in the PRC, we go through the bidding process for each
order. For international delivery, we adopt a monthly tendering and bidding system. Delivery
of our products to our customers in the PRC is primarily made by trucks and trains, and our
sales to international customers are shipped mainly on cost, insurance and freight (CIF) basis
or free on board (FOB) basis. Our logistics and transportation service providers are generally
liable for any delay of delivery and loss in transit.
Except for the temporary interruption of our delivery and logistics process caused by the
COVID-19 pandemic, we did not experience any material disruption or damage to our
products in the delivery process to our customers during the Track Record Period and up to the
Latest Practicable Date.
Seasonality
Our products are generally not affected by persistent and long term seasonal fluctuations
due to our diverse client composition from a geographical and end-product perspective. We
supply our products to participants in both the PRC market and the global market, and our
customers use our products for a variety of purposes. These characteristics effectively limit
our exposure to significant seasonality fluctuations. Our monthly and quarterly sales may vary
due to consumption patterns of our customers and other market factors.
PROCUREMENT AND SUPPLIERS
The principal raw materials for our production are chemicals, including petroleum
toluene, sodium hydroxide, chlorine and sodium carbonate, which we purchase from our
suppliers. We also source various other types of materials and equipment from our suppliers,
such as additives, solvents, pumps, distillation towers, reaction kettles, storage tanks and
packaging materials. Our customers usually do not designate suppliers for raw materials and
equipment.
We have established a comprehensive procurement management system and
implemented specific procurement policies. The storage management department draws up
the procurement plan for raw materials and packaging materials according to the production
plan issued by the production department based on actual inventory level; the functional
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departments of each workshop draw up the procurement plan for regular materials according
to actual needs. In addition, we generally procure based on our production plans with certain
surplus amount to ensure the supply of raw material for our own manufacturing and to explore
the advantages of placing large-amount purchase orders. We usually purchase on a monthly
basis, and may sell its surplus toluene from time to time. The supply department is responsible
for generating purchase orders from the procurement plan and placing the purchase orders.
For equipment and other materials, we conduct procurement after receiving procurement
requests from relevant departments.
Unless the customer requires us to procure from a designated supplier, we generally
conduct procurement through tendering and bidding or negotiation with our suppliers. The
tendering and bidding process is usually initiated by our procurement personnel on our
procurement platform, and we usually require more than two suppliers to bid. After suppliers
submit their bids, our bid evaluation team will review the bidders’ qualifications from various
perspectives, including quality, price, delivery term, payment term, to select the winning
bidder. If the materials to be procured are specially requested by any internal department or
are in urgent need, our procurement personnel may negotiate with suppliers directly without
undergoing the tendering and bidding process. We source raw materials primarily from
suppliers in the PRC. A small portion of raw materials and equipment are procured from
overseas suppliers, and we ask our agents to perform customs clearance after we assess the
quality of raw materials.
In 2018, we launched the Yangguang Purchasing Platform ( ජΈમᒅ̨̻ ), which
enables us to select raw materials and other products and place orders on an electronic
platform. We can manually or automatically analyze prices quoted by suppliers on our
Yangguang Purchasing Platform, and place orders on the platform to purchase quality
products at a competitive price. The information gathered on our Yangguang Purchasing
Platform also allows us to gain a more comprehensive understanding of the market trends. As
of the Latest Practicable Date, the Yangguang Purchasing Platform provided online biddings
for a variety of products covering raw materials, packaging, equipment and spare parts.
We have adopted a set of procedures to inspect and test materials arrived at our
production plants before we accept these materials into storage. Our quality management
department are generally in charge of these procedures to ensure the quality of procured
materials. To achieve quality consistency, purchase orders are normally placed with suppliers
which are on our internal list of qualified suppliers. For more information about our quality
control on raw materials, please refer to “— Quality Management — Quality control on the
sourcing of raw materials” in this section.
Except for certain bulk materials, such as petroleum toluene, we have multiple sources
for most of our raw materials to reduce possible interruptions to our business operations and
over-reliance on any particular supplier. We closely monitor the supply and demand
conditions of raw materials and will make corresponding adjustments in our procurement plan
if there is any anticipated shortage of supply or changes in the prices of the raw materials.
During the Track Record Period, we did not experience any difficulty in sourcing suppliers for
raw materials or any material production disruption due to shortage of raw materials.
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Our purchases from our suppliers are generally made on individual purchase orders with
reference to our production plans and demand for our products. For certain bulk material
suppliers, we sign annual framework agreements with these suppliers and specify the quantity
and tentative price of raw materials to be supplied throughout the year. We include in our
purchase orders for raw materials the product specifications, quantity and quality, payment
terms, delivery schedules and liability for breach of contract. Our purchase orders for
equipment also include additional terms such as warranty and intellectual property rights. We
did not enter into long-term agreements with our suppliers during the Track Record Period, as
our Directors believe that it is an industry practice to maintain flexibility in purchase quantity
and price.
Payment terms granted by our suppliers may vary depending on various factors including
our business relationship with the suppliers and the size of our orders. Some suppliers require
payment prior to delivery, while others allow us to settle payment upon delivery. Our suppliers
generally extend to us credit terms ranging from nil to 60 days upon receipt of raw materials
and invoice.
For the years ended December 31, 2021, 2022 and 2023, purchases from our five largest
suppliers in each year, who were Independent Third Parties, were approximately RMB1,592.4
million, RMB1,716.4 million and RMB1,632.0 million, representing 76.6%, 78.0% and
79.7% of our total purchases respectively, and our largest supplier in each year accounted for
41.0%, 32.9% and 27.9% of our total purchase amount, respectively. Except for Hebei
Kangshi, a joint venture of our Group, none of our Directors or their respective associates or
any Shareholder, who to the knowledge of our Directors, owns more than 5% of the issued
Shares immediately after completion of the Global Offering, had any interest in any of our five
largest suppliers during the Track Record Period.
The tables below set forth certain information with respect to our Group’s five largest
suppliers in each year during the Track Record Period:
For the year ended December 31, 2021
Five largest
suppliers Purchase amount
Type of
products
supplied Background
Payment
method
Business
relationship
since Credit term
RMB’000 %
Distributor A 852,058.6 41.0% raw material
purchase
petroleum products, chemical
products and other products
sales and trading company
based in the PRC
electronic
transfer
2018 30 days
SINOPEC
Huazhong
377,031.5 18.1% raw material
purchase
acetone, toluene, sulfate,
hydrochloric acid and other
products sales company
based in the PRC
electronic
transfer and
bank
acceptance
bill
2010 Prepayment
before delivery
Yuanda Group
(1) 155,534.3 7.5% raw material
purchase
chemical products, petroleum
products and other products
sales company based in the
PRC
electronic
transfer
2018 15 days
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Five largest
suppliers Purchase amount
Type of
products
supplied Background
Payment
method
Business
relationship
since Credit term
RMB’000 %
Supplier D 111,290.0 5.4% raw material
purchase
chemical products, petroleum
products and other products
sales company based in the
PRC
electronic
transfer
2011 30 days
Jianghan Salt
Chemical
96,455.8 4.6% raw material
and energies
purchase
caustic soda, liquid chlorine,
hydrogen, hydrochloric
acid and other products
manufacturer and sales
company based in the PRC
electronic
transfer
1999 15 days
For the year ended December 31, 2022
Five largest
suppliers Purchase amount
Type of
products
supplied Background
Payment
method
Business
relationship
since Credit term
RMB’000 %
Distributor A 723,129.4 32.9% raw material
purchase
petroleum products, chemical
products and other products
sales and trading company
based in the PRC
electronic
transfer
2018 30 days
SINOPEC
Huazhong
561,484.5 25.5% raw material
purchase
acetone, toluene, sulfate,
hydrochloric acid and other
products sales company
based in the PRC
electronic
transfer and
bank
acceptance
bill
2010 Prepayment
before delivery
Yuanda Group
(1) 213,644.2 9.7% raw material
purchase
chemical products, petroleum
products and other products
sales company based in the
PRC
electronic
transfer
2018 15 days
Jianghan Salt
Chemical
113,112.6 5.1% raw material
and energies
purchase
caustic soda, liquid chlorine,
hydrogen, hydrochloric
acid and other products
manufacturer and sales
company based in the PRC
electronic
transfer and
bank
acceptance
bill
1999 15 days
Supplier D 104,995.1 4.8% raw material
purchase
chemical products, petroleum
products and other products
sales company based in the
PRC
electronic
transfer
2011 30 days
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For the year ended December 31, 2023
Five largest suppliers Purchase amount
Type of
products
supplied Background Payment method
Business
relationship
since Credit term
RMB’000 %
SINOPEC Huazhong
and Huabei (1)
571,688.0 27.9% raw material
purchase
acetone, toluene, sulfate,
hydrochloric acid and
other products sales
company based in the
PRC
electronic
transfer and
bank
acceptance bill
2010 & 2023 Prepayment
before
delivery
Distributor A 526,781.7 25.7% raw material
purchase
petroleum products,
chemical products and
other products sales
and trading company
based in the PRC
electronic
transfer
2018 30 days
Yuanda Group
(2) 231,233.7 11.3% raw material
purchase
chemical products,
petroleum products
and other products
sales company based
in the PRC
electronic
transfer
2018 15 days
Hebei Kangshi
(3) 151,221.5 7.4% raw material
and
processed
products
purchase
chemical products and
other products sales
company based in the
PRC
electronic
transfer
2023 Prepayment
before
delivery
Supplier D 151,032.7 7.4% raw material
purchase
chemical products,
petroleum products
and other products
sales company based
in the PRC
electronic
transfer
2011 30 days
Notes:
(1) SINOPEC Huazhong and Huabei refers to SINOPEC Chemical Commercial Holding Company Limited
Huazhong Branch (ʮ̡ശʕʱʮ̡ ,“ SINOPEC Huazhong ”) and SINOPEC
Chemical Commercial Holding Company Limited Huabei Branch (ʮ̡ശ̏ʱʮ̡ ,
“SINOPEC Huabei ”), collectively. Each of SINOPEC Huazhong and SINOPEC Huabei is a branch of a
wholly-owned subsidiary of SINOPEC. SINOPEC Huabei commenced business with our Group in 2023.
(2) Yuanda Group refers to Yuanda Energy Chemical Co., Ltd.* (ʮ̡ ) and Yuanda Petroleum
Chemical Co., Ltd.* (ʮ̡ ), collectively. Both companies are under the control of the same
ultimate controlling party.
(3) Hebei Kangshi is a joint venture of our Group.
OVERLAPPING OF CUSTOMERS AND SUPPLIERS
To the best knowledge and belief of our Directors, during the Track Record Period, (i)
Distributor A was one of the five largest suppliers in 2021, 2022 and 2023 and our customer in
the same period; and (ii) Hebei Kangshi was our fourth largest supplier in 2023 and our
customer in the same year (Distributor A and Hebei Kangshi, collectively, the “ Overlapping
Customers and Suppliers ”).
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For the years ended December 31, 2021, 2022 and 2023, revenue generated from the
Overlapping Customers and Suppliers were approximately RMB46.8 million, RMB25.9
million and RMB28.7 million, representing approximately 1.7%, 0.8% and 1.1% of our total
revenue for the same periods, respectively. Our purchase amount from the Overlapping
Customers and Suppliers were approximately RMB852.1 million, RMB723.1 million and
RMB678.0 million for the years ended December 31, 2021, 2022 and 2023, representing
approximately 41.0%, 32.9% and 33.1% of our total purchase amount for the corresponding
years, respectively. The gross profit margin of the sales to the Overlapping Customers and
Suppliers were approximately 39.3%, 14.1% and 15.7% for the years ended December 31,
2021, 2022 and 2023, respectively, whereas our overall gross profit margin for the
corresponding years were approximately 22.9%, 22.3% and 12.3%, respectively. Specifically,
the gross profit margin of the sales to Distributor A was 39.3%, 14.1% and 15.7% for the years
ended December 31, 2021, 2022 and 2023, respectively. The gross profit margin of sales to
Hebei Kangshi were 14.1% and 18.9% for the year ended December 31, 2022 and 2023,
respectively. In 2021, we did not sell products to Hebei Kangshi. In 2022, the gross profit
margin of our sales to Distributor A decreased to 14.1% and slightly increased to 15.7% in
2023. The decreases in gross profit margin for Distributor A compared to 2021 were primarily
due to the adoption of pricing strategy of lowering our toluene oxidation product price to
ensure our sales volume with Distributor A, which lowered our profit margin. This approach
aligns with our Group’s overall pricing strategy. Fluctuations in the gross profit margin of
sales to the Overlapping Customers and Suppliers during the Track Record Period were
primarily due to the changes in the gross profit margin of our sales to Distributor A.
Negotiations of the terms of our sales to and purchases from these Overlapping
Customers and Suppliers were conducted on an individual basis and the sales and purchases
were neither inter-connected or inter-conditional with each other. These sales and purchases
were solely determined by the demand of the Overlapping Customers and Suppliers and based
on their own business judgment, which were conducted in the ordinary course of business
under normal commercial terms. In addition, according to the Frost & Sullivan Report, it is a
common industry practice for customers and suppliers in the chemical industry to source raw
materials from each other in order to manage market fluctuations with more flexibility. Our
Directors confirmed that all of our sales to and purchases from the Overlapping Customers
and Suppliers were conducted in the ordinary course of business under normal commercial
terms and on an arm’s length basis with pricing and other terms of the transactions in
comparable terms as our transactions with other customers and suppliers purchasing or selling
the same type of products in similar quantities. Our Directors further confirmed, and Frost &
Sullivan concurs, that the terms of these transactions were in line with industry practice. To
the best knowledge and belief of our Directors, except for Hebei Kangshi, a joint venture of
our Group, all of the Overlapping Customers and Suppliers and their ultimate beneficial
owners are Independent Third Parties. Our Directors also confirmed that, to their best
knowledge, except for Hebei Kangshi, a joint venture of our Group, and other than the
business relationship with respect to our Group’s core business, none of our Company or any
of our subsidiaries, shareholders, directors, or respective associates had any past or present
relationship, including business, financial, employment, or otherwise, with any of our
Overlapping Customers and Suppliers during the Track Record Period and up to the Latest
Practicable Date.
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PRODUCTION PLANTS
We employ a centralized strategy and conduct our production in our advanced production
facilities in Wuhan and Qianjiang, Hubei Province to ensure quality control and quality
assurance.
During the Track Record Period, we operated two self-owned production plants located
in Wuhan and Qianjiang, Hubei Province through our wholly-owned subsidiaries. Our Wuhan
Production Plant and Qianjiang Xinyihong Production Plant have an aggregate site area of
326,618.9 sq.m. and an aggregate gross floor area of 78,256.0 sq.m.. Our production plants
are designed for the production of designated products with built-in flexibility. For more
details of the land parcels and buildings of our production facilities, please refer to
“— Properties” in this section.
The table below sets forth further information on our production plants as of the Latest
Practicable Date:
Our production plants
Y ear of commencement of
commercial production of
the first workshop
Total site
area
Aggregate
gross floor
area
Principal products produced as
of the Latest Practicable Date
(sq. m.) (sq. m.)
Wuhan Production Plant 2015 249,038.2 65,896.1 Benzoic acid, sodium benzoate,
benzoguanamine, benzonitrile,
benzaldehyde, benzyl benzoate,
and chlorohydrin rubber
Qianjiang Xinyihong
Production Plant
2009 77,580.7 12,359.9 Xylene products, benzyl chloride,
and benzyl alcohol
Total 326,618.9 78,256.0
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Production Capacity and Utilization Rates
The following table sets forth the designed production capacity, production volume and
utilization rate of our manufacturing facilities at our Wuhan Production Plant and Qianjiang
Xinyihong Production Plant during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
Wuhan Production Plant
Designed Production Capacity (1)
(tons) 302,500 302,500 302,500
Actual Production V olume (2) (tons) 309,683 371,579 314,679
Utilization Rate (3) (%) 102.4% 122.8% 104.0%
Qianjiang Xinyihong Production
Plant
Designed Production Capacity (1)
(tons) 144,040 144,040 144,040
Actual Production V olume (2) (tons) 132,190 132,050 124,414
Utilization Rate (3) (%) 91.8% 91.7% 86.4%
Notes:
(1) The designed production capacity figures are calculated based on a number of assumptions, including
the operation hours. The figures for the years ended December 31, 2021, 2022 and 2023 are based on the
assumption that each production plant operates approximately 8,000 hours (i.e., 330 days per year). The
designed production capacity is calculated with reference to (i) the annual production capacity of our
Group’s production equipment as designated by the equipment manufacturers and (ii) the registration
documents our Group filed with the PRC authorities for our production facilities.
(2) Actual production volume is the actual number of products manufactured by our Group for the indicated
period, including self-produced products and those used as raw material for other self-produced
products. As certain portion of self-produced products was used as raw materials for the manufacturing
of our Group’s other self-produced products, our Group’s production volume may exceed the sales
volume of our self-produced products during the Track Record Period.
(3) The utilization rate is calculated based on the actual production volume (with self-produced products
that used as raw materials for our downstream products calculated in) divided by the designed
production capacity in the relevant year multiplied by 100%. Our actual production volume may exceed
the designed production capacity, which leads to utilization rates exceeding 100% due to (i) certain
self-produced products manufactured by our Group can be sold as a final product or can be further
refined for the production of refined products of the same category, and (ii) technical improvements
were adopted in our manufacturing process which enable our actual production volume to exceed
certain designed production capacity. According to the PRC Legal Advisors of our Group, only
production volume of the end products is relevant for the assessment of our compliance with the
production volume limit approved in the relevant registration documents that filed with the PRC
authorities, but not the production volume used in the calculation of the utilisation rate. Therefore,
provided that the production volume of the end products during the Track Record Period is within the
production volume limit approved in the relevant registration documents that filed with the PRC
authorities, our manufacturing operation complies with the relevant laws and regulations in the PRC.
According to Frost & Sullivan, based on public information disclosed by listed companies, it is a
common situation for manufacturing companies to operate with a utilization rate exceeding 100%.
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The following table sets forth the utilization rate of the Group’s manufacturing facilities
by products during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
Toluene oxidation products 103.2% 125.3% 105.7%
Toluene chlorination products 84.0% 83.5% 78.5%
Benzoic acid ammonification
products 74.5% 68.6% 59.1%
Other fine chemical products 52.2% 48.8% 44.7%
During the Track Record Period, Wuhan Production Plant operated with a utilization rate
exceeding 100% in 2021, 2022 and 2023. From regulatory perspective, the output volumes of
end products are within the production volume limit approved in the relevant registration
documents that filed with the PRC authorities. According to the PRC Legal Advisors of our
Group, provided that the production volume is within the production volume limit approved in
the relevant registration documents that filed with the PRC authorities, our manufacturing
operation complies with the relevant laws and regulations in the PRC. We will continue to
adhere to this practice to ensure future operational and production compliance with the
relevant laws and regulations of the governing authorities of the PRC.
Utilization rates of our production plants
There are various factors affecting the utilization levels of our production plants. These
factors include the quality, supply and timely delivery of raw materials, the level of our
inventory, and any scheduled inspections and repairs and maintenance for our production
plants and testing and commissioning works required prior to the commencement of
production of each type of our principal products.
We have improved the automation level in our production process. Our current
production facilities comprise automated plant and machinery, and have been designed and
installed to suit our production needs. As part of our routine maintenance, we regularly
monitor our production facilities and equipment, and upgrade the production process to
enhance our production efficiency. Our in-house research and development teams collaborate
with our production equipment suppliers in the design of our production facilities for
continuous improvements to our production process.
In order to maximize the utilization level of our production plants, we have adopted a
comprehensive maintenance system, which includes scheduled downtimes for maintenance
and repairs and regular inspections. As of the Latest Practicable Date, our repairs and
maintenance team consisted of 33 employees under our production department. We carry out
routine daily cleaning and maintenance of our production facilities to extend their useful
lives. Our production plants and equipment are subject to different maintenance schedules and
downtime periods. We maximize our production capacity by scheduling major maintenance
works during holiday seasons, and the Chinese New Year holiday in particular, not exceeding
40 days on average for each year. We did not experience any material or prolonged
interruptions or unexpected suspension to our production process due to failure in our
production facilities during the Track Record Period.
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Major Production Machinery and Equipment
We purchase our major production machinery and equipment from reputable domestic
and overseas suppliers. As at the Latest Practicable Date, all machinery and equipment
material to our production process at our production plants in operation were owned by us.
The following table sets out further information on our major types of machinery and
equipment as of the Latest Practicable Date:
Types of machinery/equipment Principal usage or function
Oxidation tower Toluene oxidation reactor
Distillation tower Benzoic acid rectifying and separating tower
Crystallization tower Purification device of benzoic acid
Roller scraper Materials scraper
Automatic packaging line Packaging line of benzoic acid
Centrifugal air compressor Providing compressed air
Nickel tower Benzyl chloride rectifying and separating tower
Enamel reaction kettle Toluene chlorination reaction kettle
Graphite heat exchanger Condenser
Mechanical vapor recompression Benzyl alcohol wastewater treatment device
Our principal facilities and machinery generally have useful lives of around 10 to 30
years, and these useful lives may be extended for a longer period if they are under proper
repair and maintenance. We believe that our production facilities are well-maintained and are
in good operating condition, and none of our production facilities, or the production
technology involved, is obsolete or outdated. We have implemented standardized procedures
and guidelines for the operation, management, and maintenance of our production facilities.
We carry out regular inspections and assessments of the condition of our production facilities
and conduct regular repair and maintenance. We estimate that the average remaining useful
lives of our production facilities are generally over ten years.
BUSINESS COOPERA TION WITH MAJOR MARKET PARTICIPANTS
In-depth Cooperation and Development
In addition to allocating significant resources to enhance and expand our in-house
production capacity, we also aim to establish strategic partnerships with reputable companies
in the PRC and overseas to explore joint-development opportunities to strengthen our industry
leading position, develop our presence in strategic regions and sustain our long-term economy
of scale and profitability.
Cooperation with a prominent Thailand company
With the goal to expand our overseas sales and to maintain greater capability to adjust to
market fluctuations through establishing alternative production facilities in different
countries, on March 25, 2019, we entered into a memorandum of understanding with
Company Y to jointly build and operate a manufacturing plant based in Rayong, Thailand (the
“Thailand MOU ”). Company Y is a public company listed on the Stock Exchange of Thailand
and a prominent chemical derivative product manufacturer in Southeast Asia.
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Under the arrangement contemplated by the Thailand MOU, we and Company Y will
establish a joint-venture to conduct business operation where each party holds 50% of
shareholding interests. We will provide the process design package, license the necessary
technology and share market experience and information of benzoic acid and its derivatives,
and Company Y will provide land, utility and labor resource for the joint venture to operate the
manufacturing plant and secure the supply of toluene material for the production of benzoic
acid and its derivatives. As intended under our collaboration, we aim to expand our brand and
operations in this strategic region with significant growth potential by leveraging our
technical know-how and market experience while utilizing Company Y’s strong local
presence, assets and existing network.
On October 10, 2022, we entered into an Extension Agreement of the Thailand MOU
with Company Y , which the parties agreed to extend the Thailand MOU for an additional three
years, commencing retroactively from March 25, 2021 to March 24, 2024. On March 20, 2024,
we further extended the Thailand MOU with Company Y for another three years so that the
Thailand MOU will remain effective until March 24, 2027. As of the Latest Practicable Date,
the plan remained in the preliminary stage, and no definitive agreement has been entered into
between Company Y and us. The decision to proceed with the construction of the Thailand
Production Plant will be contingent upon the timing of the future improvement of the chemical
industry environment and consensus is reached with Company Y , and we will take into account
the industry environment at the relevant time in considering the timing of the construction of
the Thailand Production Plant.
Cooperation with SINOPEC
To solidify our manufacturing capacity in China and to expand our clientele, we have
entered into a cooperation agreement on December 18, 2018 with SINOPEC (the “ Kangshi
Cooperation Agreement ”) to establish Hebei Kangshi, our joint venture in Shijiazhuang,
Hebei Province. SINOPEC is one of the largest suppliers of petroleum toluene and a major
industry participant in China. Pursuant to the Kangshi Cooperation Agreement, (i) Hebei
Kangshi will primarily focus on the research and development, manufacture and sales of the
toluene oxidation and its downstream products; (ii) our Company and SINOPEC own 51% and
49% shareholding interests in Hebei Kangshi, respectively, which is in proportion to the
respective investment amount, and the parties paid the full investment amount in 2019; (iii)
Hebei Kangshi is entitled to use to our proprietary “XINKANG ( อੰ೐)” trademark and our
technologies for the upgrade of benzoic acid and the manufacturing of sodium benzoate; and
(iv) our Company is obligated to share our sales network with Hebei Kangshi to sell its
products, and SINOPEC is responsible for the provision of raw material supply of petroleum
toluene for Hebei Kangshi’s production. We believe our in-depth cooperation with SINOPEC
ensures that we will have stable access to the supply needed for the manufacturing of our
products and create long-term demand for our products, and this business synergy will further
sustain our long-term business development and results of operations.
Hebei Kangshi Production Plant
The Hebei Kangshi Production Plant is owned and operated by Hebei Kangshi, a joint
venture of our Group. Hebei Kangshi obtained the Working Permit on Construction Works (ܔ
ʈ஢̙ᗇ ) for the Hebei Kangshi Production Plant on September 29, 2020. Hebei
Kangshi has completed construction of Hebei Kangshi Production Plant, which has a designed
annual production capacity of approximately 60,000 tons of industrial-grade benzoic acid,
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15,000 tons of sodium benzoate, 2,000 tons of benzaldehyde and 2,000 tons of benzyl
benzoate. The Hebei Kangshi Production Plant commenced production in January 2023.
Upon commencement of production of Hebei Kangshi, we entered into several sales and
purchase agreements to purchase products from Hebei Kangshi. These agreements were
entered into based on arms-length negotiation, where the pricing is with reference to the listed
price of similar products of SINOPEC and generally provide that we shall pick up the products
at the warehouse of Hebei Kangshi, and Hebei Kangshi shall guarantee that its products
comply with the respective national/industrial standards. The Hebei Kangshi Production Plant
is designed to focus on the production of toluene oxidation derivative products. We were not
obligated to purchase all products manufactured by Hebei Kangshi but we strategically
prioritized sourcing these products from Hebei Kangshi over other suppliers to better serve
the customers in the northern China market, where the Hebei Kangshi Production Plant is
located.
In September 2023, to secure the production capacity of Hebei Kangshi and to sell the
products under our Xinkang brand so that we can leverage the established brand and cost
advantages to compete with competitors in northern China and capture market share, we
changed the cooperation model and entered into an entrusted processing service agreement
with Hebei Kangshi. The entrusted processing service agreement expires on June 30, 2024,
subject to renewal upon mutual consent of Hebei Kangshi and us. We intend to renew the
entrusted processing service agreement with Hebei Kangshi upon expiry. The principal
commercial terms of the entrusted processing service agreement are summarized as follows:
Service scope: We supply raw materials to Hebei Kangshi, while Hebei
Kangshi provides entrusted processing services by processing
these raw materials on our behalf to produce benzoic acid,
benzaldehyde, benzyl benzoate and sodium benzoate, and
deliver the products to us.
Service fee: The service fee charged by Hebei Kangshi is determined
pursuant to a formula that takes into consideration of various
factors, including the amount of raw materials supplied,
packing costs, and other adjustments.
Minimum
production
volume:
4,000 tons per month.
For the year ended December 31, 2023, the revenue generated from our sales of products
manufactured by Hebei Kangshi was RMB215.1 million, representing 8.0% of our total
revenue for the same year. The products manufactured by Hebei Kangshi were low-end
toluene oxidation products, and our gross profit margin for the sales of which was 4.9% in
2023.
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PRODUCTION EXPANSION PLAN
The following table sets forth certain information regarding our planned production
facilities that are currently under development:
Production facility Phase
Actual
construction
date
Expected capital expenditure (1) Expected payback
years since
production (2)use of proceeds internal resources
(RMB’million)
Hubei Xinxuanhong
Production Plant
Phase I July 2023 11.9 188.1 3
Phase II N/A (3) 27.8 522.2 6.9
Total 39.7 710.3
Notes:
(1) expected to be financed by a combination of IPO proceeds and internal resources, and is expected to be
incurred over the construction period up to 2029. As of December 31, 2023, we had incurred capital
expenditures of RMB55.1 million for the construction of Hubei Xinxuanhong Production Plant.
(2) derived from the feasibility study report for the respective production plant, which was primarily
calculated by the estimated total investment amount divided by the expected annual profit.
(3) The Phase II construction is expected to commence in the second half of 2025.
Product type and expected timeframe of our production expansion plan
To expand the production capacity of our production facilities for the manufacturing of
existing and new products in Qianjiang, we established a wholly-owned subsidiary, Hubei
Xinxuanhong, in Qianjiang, Hubei Province. The construction of our Hubei Xinxuanhong
Production Plant started in July 2023 with a designed annual production capacity of
approximately 100,000 tons of benzyl chloride, 50,000 tons of benzyl alcohol and 150,000
tons of other fine chemical products including new products such as vinylene carbonate.
Additional production capacity is considered necessary considering the significant growth in
sales volume of benzyl alcohol (a downstream product of benzyl chloride) and other fine
chemicals during the Track Record Period from 32,819 tons and 28,296 tons in 2021 to 36,436
tons and 56,102 tons in 2023, despite the downturn of the chemical industry in 2023. The
project is divided into two phases, and the total investment is expected to be RMB750.0
million. We expect Phase I and Phase II of the Hubei Xinxuanhong Production Plant to
commence production in the second half of 2024 and the second half of 2026, respectively.
For details, please refer to “Future Plans and Use of Proceeds — Use of Proceeds” in this
prospectus.
The Phase II of Hubei Xinxuanhong Production Plant will be developed in stages
commencing from the second half of 2025 and up to 2029, with additional production capacity
added to accommodate the continuous growth in the industry. The construction of the Hubei
Xinxuanhong Production Plant is essential for the future development of our Group
considering the relatively high utilization rates of both the Wuhan Production Plant and
Qianjiang Xiyihong Production Plant during the Track Record Period. In particular, despite
the challenges faced by the chemical industry in 2023, the utilization rates of these two
production plants remained notably high at 104.0% and 86.4%, respectively.
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The Hubei Xinxuanhong Production Plant will expand our production capacities in
toluene chlorination products and other fine chemical products, which have good market
potential both globally and also in the PRC. According to Frost & Sullivan, the sales revenue
of benzyl alcohol globally and in the PRC is estimated to grow by 55.2% and 66.2%,
respectively, from 2023 to 2028. Assuming the capacity utilization rate is maintained at the
current level, there will be sufficient market demand for the additional production capacity of
both benzyl alcohol and benzyl chloride in the Hubei Xinxuanhong Production Plant.
Additionally, the diversified product types of our Hubei Xinxuanhong Production Plant also
integrate with our existing product offerings, enabling us to capture the growing demands for
other fine chemical products.
Furthermore, the structural adjustment of the global and PRC toluene and toluene
derivative products markets, characterized by a general shift in sales toward leading Chinese
manufacturers and the withdrawal of small and medium-sized manufacturers from the
industry, along with a decrease in the output and production capacity utilization rate of
overseas manufacturers observed in 2023, is expected to continue in 2024. This trend benefits
us as a leading top-ranked toluene oxidation and toluene chlorination products provider in the
PRC and the global market, allowing us to capture additional market share. Our Hubei
Xinxuanhong Production Plant is strategically aligned with these market dynamics.
Designed annual production capacity for our major products before and after
production expansion plan
During the Track Record Period, we operated two production plants, the Wuhan
Production Plant and the Qianjiang Xinyihong Production Plant and our joint venture operated
the Hebei Kangshi Production Plant. We also plan to expand our production capacity through
the establishment of Hubei Xinxuanhong Production Plant. The following table sets forth the
designed annual production capacity of the production facilities operated by our subsidiaries
for our major products before and after our production expansion plan:
As of December 31, As of December 31,
2023 2024 2025 2026
Wuhan
Production
Plant (2)
Qianjiang
Xinyihong
Production
Plant (2)
Wuhan
Production
Plant (2)
Qianjiang
Xinyihong
Production
Plant (2)
Hubei
Xinxuanhong
Production
Plant (3)
Wuhan
Production
Plant (2)
Qianjiang
Xinyihong
Production
Plant (2)
Hubei
Xinxuanhong
Production
Plant (3)
Wuhan
Production
Plant (2)
Qianjiang
Xinyihong
Production
Plant (2)
Hubei
Xinxuanhong
Production
Plant (3)
(tons) (tons)
Toluene oxidation products
– benzoic acid 200,000 – 200,000 – – 200,000 – – 200,000 – –
– sodium benzoate 65,000 – 65,000 – – 65,000 – – 65,000
– others 12,000 – 12,000 – – 12,000 – – 12,000 – –
Toluene chlorination
products
– benzyl chloride – 74,000 – 74,000 – – 74,000 – – 74,000 50,000
– benzyl alcohol – 60,000 – 60,000 – – 60,000 – – 60,000 –
Benzoic acid
ammonification products
– benzonitrile 10,000 – 10,000 – – 10,000 – – 10,000 – –
– benzoguanamine 5,000 – 5,000 – – 5,000 – – 5,000 – –
Other fine chemical products 10,500 10,040 10,500 10,040 40,000 10,500 10,040 40,000 10,500 10,040 40,000
Subtotal 302,500 144,040 302,500 144,040 40,000 302,500 144,040 40,000 302,500 144,040 90,000
Designed Annual
Production Capacity
(1) 446,540 486,540 486,540 536,540
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Notes:
(1) The designed annual production capacity figures are calculated based on a number of assumptions,
including the assumption that each production plant operates approximately 8,000 hours per year.
(2) Wuhan Production Plant and Qianjiang Xinyihong Production Plant are not under our “Production
Expansion Plan”.
(3) The Hubei Xinxuanhong Production Plant will be developed in phases up to 2029. The Phase I
production is expected to begin in the second half of 2024 with a designed production capacity of
40,000 tons, which include approximately 10,000 tons of benzyl acetate, 20,000 tons of benzyltoluene
and 10,000 tons of dibenzylamine. The Phase II production is expected to commence in the second half
of 2026, with the remaining production capacity being developed and put into use in stages up to 2029.
The designed annual production capacity includes approximately 100,000 tons of benzyl chloride,
40,000 tons of benzotrichloride, 40,000 tons of benzoyl chloride, 50,000 tons of benzyl alcohol, 10,000
tons of benzyl acetate and 20,000 tons of dibenzylamine. It is anticipated that the total designed annual
production capacity will be up to 300,000 tons by 2029.
In addition, as at the Latest Practicable Date, our joint venture operated the Hebei
Kangshi Production Plant, which has a designed annual production capacity mainly includes
approximately 60,000 tons of industrial-grade benzoic acid, 15,000 tons of sodium benzoate,
2,000 tons of benzaldehyde and 2,000 tons of benzyl benzoate. The Hebei Kangshi Production
Plant commenced production in January 2023.
Planned total investment costs
The following tables set out the breakdown of our total investment costs incurred or
expected to be incurred in connection with the establishment and expansion of our self-owned
production facilities:
Hubei Xinxuanhong Production Plant
Items Amount
Phase I Phase II
(RMB’000)
Construction fees 62,500 151,100
Acquisition of machinery and equipment 123,300 169,800
Labor costs and related training costs 5,000 60,100
Miscellaneous costs
(1) 9,200 169,000
Total 200,000 550,000
Note:
(1) mainly include construction management fees, design fees and supervision fees.
We plan to finance the establishment of our new production facilities with the net
proceeds from the Global Offering and internal resources. As of December 31, 2023, we had
incurred capital expenditures of RMB55.1 million for the construction of our Hubei
Xinxuanhong Production Plant. For details on the use of proceeds in these production plants,
please refer to “Future Plans and Use of Proceeds — Use of Proceeds” in this prospectus.
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Considerations when determining our production expansion plan
Our Directors have determined our production expansion plan based on a number of
considerations, primarily including: (i) whether there is high market demand and future
growth potentiality in these areas; (ii) whether our technological advantages are duplicable
and sustainable in the new market; (iii) whether we have a comprehensive understanding of
the business and financial conditions of existing competitors in the potential market; (iv)
whether the macro-economic condition is feasible and suitable to conduct business; (v)
whether our financial position enables us to execute the business expansion plan; and (vi)
whether the new production plant is capable of elevating our internal market presence and
sustain the market fluctuation.
Based on the above, our Directors believe that our production expansion plan is feasible,
and there is sufficient demand for our products in support of our production expansion plan.
PRODUCTION PROCESS
Pre-production Preparation
Upon confirmation of sales order by our customers, our sales department delivers an
information sheet containing the graphic images of the products, design and packing
specifications and any special requirements requested by our customers, and the final sample
approved by our customers to our production department. Our production department is
responsible for carrying out the technical preparation works, which begin with the mapping of
the production flow and determining the amount and types of raw materials required. Upon
completion of all pre-production preparation, our production department will commence the
production process.
Production Process
The production process varies depending on the type of product manufactured. The
diagram below illustrates the major production processes for our products:
Adsorption
Oxidation Distillation Distillation
Distillation
Distillation Crystallization
by cooling
Melt
crystallizationFuel oil
Evacuation
Toluene
Benzene Industrial benzaldehyde
Low boilers
Leftovers
Benzyl benzoate Industrial
benzoic acid
Food grade or pharmaceutical
grade benzoic acid
Goes to the preparation
and production workshop
of benzoic acid
Recycled toluene
Air
Catalyst
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Further details on the various major production steps involved in our production
processes are set out below:
Raw material inspection and testing
The incoming raw materials are fully inspected and tested upon delivery according to our
quality control requirements and specifications. Raw materials are only stored in our
warehouses after they have passed the quality control tests. Solvents that have passed our
quality control tests are transported through a tanker pipeline system and pumped into storage
tanks for use.
Main production process
Oxidation : toluene, air and catalyst enter the oxidation process in a certain proportion,
and the oxidation reaction occurs under the actions of high temperature, high pressure and
catalyst to generate benzaldehyde, benzyl alcohol, benzoic acid, benzyl benzoate and other
aromatic compounds. This process generally takes approximately four to five hours to
complete.
Distillation : the reaction solution in the oxidation process is distilled to remove
unreacted toluene. The removed toluene is returned to the oxidation process to undergo the
oxidation reaction again, and the tower still liquid is pumped into the next distillation process.
Crystallization by cooling (for the benzoic acid): the liquid benzoic acid is converted
from liquid to solid benzoic acid after cooling. The distillation and crystallization by cooling
process generally take about one hour to complete.
Melt crystallization (for the benzoic acid): liquid benzoic acid is further purified by the
melt crystallization process to remove traces of impurities and produce high-quality benzoic
acid. The distillation and melt crystallization process generally take approximately three
hours to complete.
Inspection and packaging
Semi-finished products which were grounded, mixed, dispersed, cooled, filtered and
filled are thoroughly inspected to make sure they meet our quality standards and other product
specifications such as color, density, level of dispersion, texture, adhesivity and level of water
content. After passing our quality control inspection, the semi-finished products are poured
into labeled cans or buckets, sealed, packed and transported to our warehouses for storage
pending delivery to our customers.
QUALITY MANAGEMENT
We have established our quality control system in accordance with the industry standards
and the requirements of the relevant certification authorities, and have implemented quality
control measures throughout our production process. Our quality management department
consisted of a quality management team and an inspection team with four and 18 employees,
respectively, as of the Latest Practicable Date. Our quality management department’s core
team members hold bachelor’s degrees or above, with extensive technical work experience,
and are familiar with our production process. Our quality management team is responsible for
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the management and maintenance of our quality control system, including designing quality
control standards and policies, organizing monthly quality control meetings, implementing
quality improvement measures and participating in various quality assessment events. In
addition, our quality management department is in charge of supplier review and assessment
and contract review from the quality control perspective. Our inspection team is responsible
for the inspection of raw materials, finished products, intermediates and packaging materials
to ensure compliance with relevant quality management requirements. Our inspection team
reports to our management regularly regarding product quality. Members of our production
team and quality management team are required to acquire relevant knowledge and training in
relation to the production and product assessment for quality control.
Quality standards and certificates
During the Track Record Period and up to the Latest Practicable Date, our operations had
not been inspected or penalized by government authorities for noncompliance with relevant
PRC laws and regulations of quality. We are also subject to annual inspection by the relevant
government authorities. Our quality control system has received various domestic
international quality management certifications, including ISO 22000, ISO 9001, FSSC
22000, FAMI-QS, BRC, KOSHER, HALAL and GMP for quality control standards. We
received these certifications by applying for and passing the relevant documentary and on-site
inspections by independent accreditation bodies. These certifications are subject to
independent audits by the relevant accreditation bodies.
ISO 9001:2015
ISO 9001:2015 specifies requirements for quality management system pursuant to
organization needs to demonstrate its ability to consistently provide products that can meet
customer demand and applicable statutory and regulatory requirements, and aims to enhance
customer satisfaction through the effective application of the system, including continual
improvement of the system and the assurance of conformity to customer and applicable
statutory and regulatory requirements.
Our quality management systems with respect to our Wuhan Production Plant and our
Qianjiang Xinyihong Production Plant were certified in conformity to ISO 9001:2015
standard effective from March 5, 2021 to March 11, 2024 and April 29, 2021 to March 8, 2024,
respectively.
ISO22000:2018
ISO 22000:2018 specifies the requirements for food safety management system to
control food safety in order to ensure that the quality of food is safe for consumption.
Our Wuhan Production Plant was certified in conformity to ISO 22000:2018 from April
5, 2022 to April 4, 2025.
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Quality certifications
The table below sets forth the major certifications or licenses we have obtained for our
products and production facilities:
Production plant Date of issue Expiry date (1) Detailed information
ISO 22000:2018 Food Safety Management System Certification: issued by Intertek Certification Limited
Wuhan Production Plant April 5, 2022 April 4, 2025 Food safety management system for
manufacturers
ISO 9001:2015 Quality Management System Certification: issued by China Quality Certification Center
Wuhan Production Plant February 18, 2024 March 11, 2027 Quality management system for design,
production and sales
Qianjiang Xinyihong Production Plant February 4, 2024 March 8, 2027 Quality management system for design,
production and sales
FSSC 22000 Food Safety Management System: issued by Intertek Certification Limited
Wuhan Production Plant April 5, 2022 April 4, 2025 Food safety management system
FAMI-QS Certification: issued by SGS
Wuhan Production Plant August 24, 2023 August 23, 2026 Certification for the production of special
ingredients for animal feeds
BRC: issued by SGS
Wuhan Production Plant July 27, 2023 August 17, 2024 Food safety standard
KOSHER: issued by KOF-K Kosher Certification
Qianjiang Xinyihong Production Plant January 25, 2024 January 31, 2025 Certification for food that conforms to
regulations of Jewish religious
dietary laws
HALAL (ARA): issued by LPPOM MUI
Qianjiang Xinyihong Production Plant December 7, 2022 December 6, 2026 Certification of permissible food under
traditional Islamic law
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Production plant Date of issue Expiry date (1) Detailed information
GMP Certification: issued by Hubei Food and Medical Products Administration
Wuhan Production Plant July 17, 2017 July 17, 2022 (2) Raw materials (benzoic acid, sodium
benzoate) have been reviewed and
found to be in compliance with the
Quality Management Requirements for
Pharmaceutical Production (͛ପ
ሯඎ၍ଣ஝ᇍ) of the People’s
Republic of China
Notes:
(1) We will apply for renewal of these certificates and licenses when they are near expiration in accordance with
the respective renewal requirements. We do not anticipate that there is any legal impediment for the renewal as
of the date of this prospectus.
(2) From December 1, 2019, the PRC government has cancelled GMP Certification under the relevant laws and
regulations.
Quality control on the sourcing of raw materials
We have adopted a quality control system for raw materials to oversee and manage the
sample inspection and testing of raw materials delivered to our production plants. Our storage
management department and inspection department are required to issue various reports and
documents as written records for quality inspection to be reviewed and archived by other
departments, including the supply department and production management department. For
raw materials that have a greater impact on our product quality, we also require our production
plants to conduct a trial use when these materials are supplied to us for the first time. If a batch
of raw materials cannot pass our inspection and testing process, they are marked as
unqualified and handled according to our control procedures for unqualified materials.
We have adopted and maintained a set of procedures to manage and assess our suppliers.
We select our suppliers taking into account their pricing level, qualifications, production
capacity, delivery term, quality control and production facilities. We also evaluate the
performance of our suppliers annually according to our evaluation procedures. We will cease
procurement from suppliers who fail to meet our criteria and remove these suppliers from our
procurement list.
Quality control on the production process
Our production department is responsible for creating and executing our monthly
production plans. Our production plants operate in accordance with our standard operation
procedures. Our production personnel control the process to meet the specified parameters
and maintain written records for their operational duties. During the production process, we
apply and adhere to industry standards and certification requirements to ensure our product
quality.
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Each stage of our production is closely monitored by our quality control staff. Our
quality control team is responsible for ensuring our staff follow our guidelines on production
procedures and that our products meet the quality, hygiene and food safety standards of our
internal guidelines and the requirements and standards in the PRC and other countries our
products are exported to. Each batch of our finished products is tested on a sampling basis and
is inspected to ensure that they have proper and accurate labeling, and have met the relevant
quality standards and product specifications.
In addition, we dispose and monitor production wastes in compliance with relevant laws
and regulations. All our employees are required to follow designated sanitizing procedures,
wear caps, uniforms, gloves and overshoes before they are allowed to enter our production
facilities.
Quality control on packaging and transportation
We have specific operation procedures for product packaging and transportation. Product
packaging should meet the requirements of relevant national standards. Our packaging
containers are required to have anti-contamination features and meet various hygiene
standards. Products contaminated due to improper storage or transportation are handled as
scrap and cannot be reused.
Response to customers’ complaints and feedbacks
Our sales department is responsible for communication with customers and the handling
of customer requests. Upon receipt of customer complaints, our sales department directs these
complaints or feedbacks to the quality management department for investigation. We make
plans and keep records for corrective or preventative measures. General corrective measures
are usually completed within one month and long-term action plans are completed in three
months to prevent recurrence of similar incidents in the future.
Product return policy
We accept return for any defective products, and returned products are handled
differently according to the cause of return. During the Track Record Period, there was no
product returns due to product defects or otherwise, which could have a material adverse
impact on our business operations. For the risk of potential product liability to which we may
be exposed, please refer to “Risk Factors — Risks Relating to Our Business — We may not be
able to maintain effective quality control and may be subject to product liability claims which
could have a material adverse impact on our reputation, business and financial condition, and
operating results” in this prospectus.
INVENTORY MANAGEMENT
Our inventory consists mainly of finished products, raw materials and packing materials.
We have adopted and implemented various policies and control procedures to manage and
protect our inventories. For example, we require raw materials to be stored at different storage
zones based on their categories. We strictly monitor storage conditions such as temperature
and humidity, and implement fire prevention measures.
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We conduct our monthly procurement planning in conjunction with our monthly
production plan and inventory level. Upon receiving orders from our customers, we arrange
for production based on order terms and our inventory of finished products. In addition, by
leveraging our leading position and profound experience in the industry, we can seek
opportunities to stock up our inventories from other manufacturers through our products
trading business at a relatively low price and further enhance the flexibility of our inventory
management to ensure manufacturing continuity.
We conduct annual maintenance at our Wuhan Production Plant and Qianjiang Xinyihong
Production Plant during the Track Record Period, which usually lasts for one month to one
and a half months. During this maintenance period, we temporarily suspend our production
but sales and operations continue in reliance of our product inventory. The inventory turnover
rates for our Wuhan Production Plant were 14.2, 9.2 and 8.1 for the years ended December 31,
2021, 2022 and 2023, respectively. For the same periods, the inventory turnover rates for our
Qianjiang Xinyihong Production Plant were 8.1, 9.5 and 12.0, respectively.
RESEARCH AND DEVELOPMENT
We place great emphasis on research and development to strengthen our industry
competitiveness and to improve and diversify our products. As of the Latest Practicable Date,
we had established a product research center at our Wuhan Production Plant, and have
research and development team members based at each of our production plants. Our research
and development experts are devoted to our product development and assigned into three
focus areas: (i) technical research institute, which is responsible for the research and
development of future products; (ii) technical center, which is responsible for the
improvement of existing product processes and equipment; and (iii) multi-facet cooperative
research institutes, which provide technical support and new product suggestions. As of the
Latest Practicable Date, we had an aggregate of 139 research and development team members,
including 24 research and development experts. Our product research and development efforts
are currently led by Mr. Zou Xiaohong, our executive Director and one of our senior
management team members.
Our product research and development team focuses on (i) improving existing production
processes to increase production efficiency and decrease production costs; (ii) research and
development of new products and designing new solutions and formulas; (iii) providing
solutions to technical difficulties arising from the production process; (iv) gathering market
intelligence and closely monitoring the technological trends in our industry in the PRC and
globally; and (v) developing accurate measurements of raw materials and devising formulas or
specifications for production.
Our product research and development team works closely with our production team to
optimize the production process to enhance product quality and production efficiency. Our
product research and development efforts primarily focus on keeping track of market trends
and the changing needs and requirements of our customers in order to improve our products
and product formulas. We focus our efforts on improving the quality and product formula of
our products based on the feedback collected from our customers. We also endeavor to
enhance the automation level of our production processes and improvement of our machinery
and equipment to improve production efficiency.
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We have participated in the preparation and the drafting of the PRC food safety national
standards on food additive – benzoic acid (GB 1886.183-2016) and food additive – sodium
benzoate (GB 1886.184-2016) published by the National Health and Family Planning
Commission of the PRC (ึ ) in 2016, and the PRC chemical
industry standards on benzyl chloride for industrial use (HG/T 2027). Our participations in
the drafting of these mandates are a recognition of our research and development capability
and allow us to be well positioned in the development of new products with different features
for different applications in full compliance with the PRC national standards.
During the Track Record Period, we entered into cooperative agreements with several
universities and institutions in China for joint research projects for the advancement in
production and processing technologies as well as product development direction. We strive to
leverage cooperation with third party institutions to accelerate our product research and
development efforts. Pursuant to these cooperation agreements, (i) we are generally
responsible for industrialization research of the products, and our partners are generally
responsible for providing product synthesis formula and manufacturing route and (ii) we
retain the ownership of all know-how, conceptual or detail designs resulting from these
arrangements. We believe these research and development collaborations inspire us to develop
new technological solutions related to the manufacture of our products and enhance our
ability to explore new technology, know-how and skills, which we believe is crucial for a
strong foundation for our in-house research and development team.
For the years ended December 31, 2021, 2022 and 2023, our research and development
cost amounted to RMB110.8 million, RMB133.0 million and RMB100.0 million, respectively,
which primarily included staff costs, article of consumption, depreciation and amortization.
LICENSES AND PERMITS
As advised by our PRC Legal Advisors, we had obtained all necessary licenses and
permits for our business operations in the PRC in all material aspects as at the Latest
Practicable Date. Our Directors confirm that we did not experience any material difficulties in
obtaining and renewing these licenses and permits. Furthermore, our Directors are not aware
of any circumstances that would significantly hinder or delay the renewal of our licenses and
permits upon their expiration.
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The following table sets forth the key governmental licenses and permits that are material
to our business (apart from those pertaining to general business requirements):
Licenses/permits Grant date Expiry date
Wuhan Y ouji
Work Safety License ( τΌ͛ପ஢̙ᗇ ) October 27, 2022 October 26, 2025
Permits for Trading in Hazardous Chemicals
(຾ᐄ஢̙ᗇ )
August 1, 2023 July 31, 2026
Pollutant Discharge License ( રϮ஢̙ᗇ ) August 18, 2023 August 17, 2028
Food Production License (͛ପ஢̙ᗇ ) December 22, 2020 December 21, 2025
Feed Additive Production License
(૴̋ኒ͛ପ஢̙ᗇ )
December 31, 2020 December 31, 2025
Drug Production License (͛ପ஢̙ᗇ ) November 18, 2020 November 17, 2025
Qianjiang Xinyihong
National industrial Product Production License
(͛ପ஢̙ᗇ )
August 13, 2021 August 12, 2026
Work Safety License ( τΌ͛ପ஢̙ᗇ )(1) July 19, 2021 July 18, 2024
Permits for Trading in Hazardous Chemicals
(຾ᐄ஢̙ᗇ )
December 2, 2022 December 1, 2025
Pollutant Discharge License ( રϮ஢̙ᗇ ) June 9, 2022 June 16, 2027
Food Production License (͛ପ஢̙ᗇ ) February 17, 2020 February 16, 2025
Hubei Kangxin
Permits for Trading in Hazardous Chemicals
(຾ᐄ஢̙ᗇ )
August 28, 2023 September 2, 2026
Note:
(1) We have applied for the renewal of the license and we expect to complete it by early July 2024. Given
that Qianjiang Xinyihong has never failed to renew its Work Safety License since its initial issuance in
2012, our Directors are of the view that there will not be any material difficulties in the renewal of the
license.
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INTELLECTUAL PROPERTY
We developed and maintained a number of patents and trademarks for our products, and
sell and market our products under our proprietary trademarks. As at the Latest Practicable
Date, we held two registered trademarks under our “XINKANG ( อੰ೐)” brand in the PRC.
As of the Latest Practicable Date, we also had 80 registered patents and 10 pending patent
applications in the PRC. In addition, we had registered one domain name in the PRC for the
material use of our business operations. For further details, please refer to “Appendix IV —
Statutory and General Information — B. Further Information about Our Business — 2. Our
Intellectual Property Rights” in this prospectus.
We believe protecting and enforcing our intellectual property rights are of significant
importance to our business operations, reputation and branding. We seek to maintain
registration of intellectual property rights that are material to our business under appropriate
categories and in appropriate jurisdictions. However, a number of proprietary know-how that
is not patentable and processes for which patents are difficult to enforce are also important for
us.
We have entered into confidential agreements with all of our senior management team
members as well as research and development team members, which require these personnel
to strictly comply with our confidentiality requirements. These agreements also require our
employees to assign to us all of the inventions, designs and technologies developed in
connection with their employment with us.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our intellectual property rights. It is difficult to monitor
unauthorized use of technology and know-how. In addition, our competitors may
independently develop technology and know-how similar to ours. Our precautions may not
prevent misappropriation or infringement of our intellectual property. During the Track
Record Period and up to the Latest Practicable Date, to the best of our knowledge, we had not
been subject to any material intellectual property claims which could have a material adverse
effect on our business operations.
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PROPERTIES
Self-Owned Properties
Land
Our corporate headquarters is located in Wuhan, China. As of the Latest Practicable
Date, we owned five parcels of land of 475,761.4 sq.m. located in Wuhan and Qianjiang,
Hubei Province. These parcels of land were obtained by us through land grant from the
government for cash considerations, and are used for industrial purposes. As of the Latest
Practicable Date, we had obtained the land use right certificates and legally owns our land
parcels in the PRC. The following table sets forth the details of the parcels of land for which
we had obtained the relevant land use right certificates as of the Latest Practicable Date:
No.
Land Use
Right Owner Description/Location
Gross Site
Area Expiry Date
(sq.m.)
1. Wuhan Youji No.1 Second Huagong Road,
Hongshan District, Wuhan
(ဏʷኪʈุਜʷʈɚ༩ 1໮)
(the “ Parcel A ”)
249,038.2 March 5, 2064
2. Qianjiang
Xinyihong
No. 1 Park Road, Jianghan Salt
Chemical Industrial Park,
Qianjiang ( ᆑϪ̹Ϫဏ᜾ʷʈุ෤
෤ਜɓ༩ )
(the “ Parcel B ”)
58,452.7 January 3, 2058
3. Qianjiang
Xinyihong
No. 1 Park Road, Jianghan Salt
Chemical Industrial Park,
Qianjiang ( ᆑϪ̹Ϫဏ᜾ʷʈุ෤
෤ਜɓ༩ )
19,128.0 September 17,
2068
4. Hubei
Xinxuanhong
East of East Road, Jianghan Salt
Chemical Industrial Park,
Qianjiang ( ᆑϪ̹Ϫဏ᜾ʷʈุ෤
؇)
80,386.5 December 20,
2072
5. Hubei
Xinxuanhong
West of East Road, Jianghan Salt
Chemical Industrial Park,
Qianjiang ( ᆑϪ̹Ϫဏ᜾ʷʈุ෤
෤ਜГ)
68,756.0 December 20,
2072
As of the Latest Practicable Date, Parcel A and Parcel B were pledged to a commercial
bank located in Wuhan, Hubei Province in the ordinary course of business of our Group. A
portion of Parcel A with a gross site area of 9,506 sq.m. and the buildings on this site was
leased to Wuhan Eastman Organic Chemical Co., Ltd. (ʮ̡ ), an
associate of our Group which we hold 49% equity interests as of the Latest Practicable Date.
As advised by our PRC Legal Advisors, except for restrictions on Parcel A and Parcel B due to
the above-mentioned existing pledges and leases, we have legitimate ownership of our
self-owned land parcels, and we are entitled to occupy, use, transfer, lease, create a mortgage
on or by other means dispose of such land according to applicable laws.
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Buildings
Buildings with Building Ownership Certificates
As of the Latest Practicable Date, we had building ownership certificates for six
properties in the PRC with an aggregate gross floor area of 78,381.4 sq.m. These buildings are
primarily used for product manufacturing, warehousing and office functions. The following
table sets forth details of the buildings owned by our Group with building ownership
certificates as of the Latest Practicable Date:
No.
Holder of Building
Ownership
Certificate Description/Location
Gross Floor
Area
(sq.m.)
1. Wuhan Youji Building No. 3, No. 1 Second
Huagong Road, Hongshan District
(ဏʷኪʈุਜʷʈɚ
༩1ಊ3໮) (the “ Building A ”)
65,896.1
2. Qianjiang Xinyihong No. 1 Park Road, Jianghan Salt
Chemical Industrial Park ( ᆑϪ̹Ϫ
ဏ᜾ʷʈุ෤෤ਜɓ༩ ) (the
“Building B ”)
5,468.8
3. Qianjiang Xinyihong No. 1 Park Road, Jianghan Salt
Chemical Industrial Park ( ᆑϪ̹Ϫ
ဏ᜾ʷʈุ෤෤ਜɓ༩ )
1,178.2
4. Qianjiang Xinyihong No. 1 Park Road, Jianghan Salt
Chemical Industrial Park ( ᆑϪ̹Ϫ
ဏ᜾ʷʈุ෤෤ਜɓ༩ )
3,929.1
5. Qianjiang Xinyihong No. 1 Park Road, Jianghan Salt
Chemical Industrial Park ( ᆑϪ̹Ϫ
ဏ᜾ʷʈุ෤෤ਜɓ༩ )
1,783.8
6. Qianjiang Xinyihong Wangchang Branch of National Tax
Bureau ( ˮఙ਷೼ʱ҅ ) (the
“Wangchang Building ”)
125.4
As of the Latest Practicable Date, all of these buildings (except for the Wangchang
Building) were pledged to a commercial bank located in Wuhan, Hubei Province in the
ordinary course of business of our Group (the “ Restricted Buildings ”). As advised by our
PRC Legal Advisors, except for restrictions on our Restricted Buildings due to the
above-mentioned existing pledges and leases, we have legitimate ownership of such
properties and the land use right for the land occupied by such properties, and we are entitled
to occupy, use, transfer, lease, create a mortgage on or by other means dispose of such
properties according to applicable laws.
As of the Latest Practicable Date, (i) Building A owned by Wuhan Youji and certain
auxiliary facilities owned by Qianjiang Xinyihong had not completed the fire control
inspection ( ऊԣ᜕ϗ ) and the completion acceptance and completion filing ( ംʈ᜕ϗʿംʈ
ࣩbefore putting the properties into use; and (ii) Building B owned by Qianjiang
Xinyihong had completed the fire control inspection ( ऊԣ᜕ϗ ) and the completion
acceptance ( ംʈ᜕ϗ ) but not completed the completion filing (ࣩAs advised by our
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PRC Legal Advisors, it is required for the construction project to complete the fire control
inspection and the completion acceptance in accordance with regulations before its use. These
property-related non-compliance incidents were mainly due to administrative oversight. Our
staff (which we confirmed that none of the directors or senior management of the Company
and its subsidiaries were involved) were unfamiliar with and misunderstood certain fire
control-related and completion acceptance related laws and regulatory requirements and
procedures, and did not seek proper advice from external advisers or our management team.
As advised by our PRC Legal Advisors, (i) for the use of buildings without passing the fire
control inspection, we are subject to the risk of being prohibited from using these buildings or
being ordered to close our business relevant to the affected buildings and being fined between
RMB30,000 and RMB300,000; (ii) for the use of buildings without passing the completion
acceptance, according to the Regulation on the Quality Management of Construction Projects
(ணʈ೻ሯඎ၍ଣૢԷ ), if the construction project owner fails to organize the
completion-based acceptance and delivers it for use without passing the completion
acceptance, it may be ordered to make rectifications, and a fine of 2% to 4% of the project
contract price may be imposed; if any losses occur, the construction project owner may be
liable for these losses according to the relevant laws; and (iii) the construction project shall be
delivered for use after qualifying the completion acceptance, but if the construction project
owner fails to submit completion acceptance report for completion filing procedure, a fine of
RMB200,000 to RMB500,000 may be imposed.
In respect of the completion acceptance requirements, Wuhan Youji and Qianjiang
Xinyihong respectively engaged qualified independent appraisal and inspection agents to
appraise and inspect its relevant properties. Appraisal and inspection reports were issued for
Wuhan Youji (the “ Wuhan Y ouji Appraisal and Inspection Report ”) and Qianjiang
Xinyihong (the “ Xinyihong Appraisal and Inspection Report ”) in August 2021 and October
2022, respectively. According to the Wuhan Youji Appraisal and Inspection Report, the
assessed properties satisfy the relevant design and construction requirements, and are in
compliance with relevant laws, regulations and standards in all material aspects. According to
the Xinyihong Appraisal and Inspection Report, the assessed properties substantially satisfy
the requirements for safe use.
In respect of the fire control inspection requirements, Wuhan Youji and Qianjiang
Xinyihong respectively engaged qualified independent fire control assessment institutions to
conduct fire control safety assessment on its relevant production plants. Fire control safety
assessment reports were issued for Wuhan Youji and Qianjiang Xinyihong in August 2021 and
November 2022, respectively. According to the two fire control safety assessment reports, our
fire control safety assessment rating is at a general level, which signifies a controllable risk
and an acceptable level. We plan to better address our exposure to fire risk by undertaking the
fire risk control measures and a recertification process which focused on the specific
recommendations provided by the fire control assessment institution. Our Internal Control
Consultant confirms that, in September 2021, we have implemented the fire risk control
measures and made rectifications pursuant to the fire control safety assessment reports.
We conducted interviews on March 9, April 12 and May 26, 2022 with the Urban and
Rural Construction Bureau Fire Supervision Station of Qingshan District, Wuhan City (ဏ
ண҅ऊԣ္ຖ१ ). Based on the interviews, the government authority
confirmed that (i) Wuhan Youji has legally obtained the building ownership certificates, and it
is impracticable to complete the fire control inspection at this stage; (ii) Wuhan Youji has
satisfied the rectifications in accordance with the fire control assessment, and it has no further
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rectification requirements; (iii) Wuhan Youji may continue to operate normally in its current
buildings, and administrative inspections would not affect the normal use and operation of the
production plant; and (iv) the risk of administrative penalties imposed by it on Wuhan Youji
due to fire control inspection issues is remote.
We also conducted interviews on March 24 and May 23, 2022 with the Urban and Rural
Construction Bureau Quality Supervision Station of Qingshan District, Wuhan City (ဏ̹
ண҅ሯඎ္ຖ१ ). Based on the interviews, the government authority
confirmed that (i) Wuhan Youji has satisfied the rectifications in accordance with its
requirements, and has completed the quality identification procedures; (ii) it is impracticable
to complete the completion acceptance due to historical reasons; (iii) there was no
administrative penalties imposed on Wuhan Youji as of the date of the interview; and (iv)
Wuhan Youji has completed its rectification requirements accordingly and may continue its
current use of the production plant.
We have obtained a confirmation letter issued by the Urban-Rural Construction Bureau
of Qingshan District, Wuhan City (ண҅ ) on February 8, 2023,
confirming that from January 1, 2019 to the issuance date of the confirmation letter, (i) no
administrative penalty was imposed on Wuhan Youji; (ii) no report or complaint was filed
against Wuhan Youji; and (iii) no dispute arose from non-compliance activities against Wuhan
Youji.
We conducted an interview on March 24, 2022 with the Natural Resources and Planning
Bureau of Qianjiang City ( ᆑϪ̹І್༟๕ձ஝ྌ҅ ). Based on the interview, the
government authority confirmed that (i) Qianjiang Xinyihong may continue its current use of
Building B and the auxiliary facilities, and its normal business operations would not be
impacted; (ii) from January 1, 2019 to the date of the interview, there is no report or complaint
filed against Qianjiang Xinyihong with the provincial and local land administration and urban
planning administration; and (iii) no dispute arose from these events against Qianjiang
Xinyihong.
We conducted an interview on March 22, 2022 with the Housing and Urban-Rural
Construction Bureau of Qianjiang City (ண҅ ). Based on the interview,
the government authority confirmed that (i) it is impracticable for Qianjiang Xinyihong to
complete the fire control inspection and completion acceptance at this stage; (ii) Qianjiang
Xinyihong may continue its current use of these properties; and (iii) the department would not
impose penalties on Qianjiang Xinyihong or require other rectification measures.
As advised by our PRC Legal Advisors, (i) the Urban and Rural Construction Bureau Fire
Supervision Station of Qingshan District, Wuhan City, (ii) the Urban and Rural Construction
Bureau Quality Supervision Station of Qingshan District, Wuhan City, (iii) the Urban-Rural
Construction Bureau of Qingshan District, Wuhan City, (iv) the Natural Resources and
Planning Bureau of Qianjiang City and (v) the Housing and Urban-Rural Construction Bureau
of Qianjiang City are the competent authorities to provide the above confirmations. For
Building A, the Company has engaged qualified parties to issue the Appraisal and Inspection
Report and the Fire Control Safety Assessment Report at the rectification requests of the
relevant government authorities. As confirmed by the government authorities, the rectification
requirements have been satisfied, and there would be no further rectification requirements on
building quality and fire control issues. The Company may continue its current use of these
properties. For Building B and the auxiliary facilities, the relevant government authorities has
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confirmed that there would be no rectification requirements, and the Company may continue
its current use of these properties. Our PRC Legal Advisors advised us that the risk of our
Group receiving penalties for these non-compliances under PRC laws is low. During the Track
Record Period and up to the Latest Practicable Date, these non-compliance incidents
regarding fire control inspection did not lead to any fire safety issues.
Buildings without Title Certificates
As of the Latest Practicable Date, we had three properties with an aggregate gross floor
area of approximately 518.0 sq.m., which we held interest in but did not obtain the relevant
building ownership certificates in accordance with the laws and regulations of the PRC. These
properties are primarily used as dormitories for our employees. The following table sets forth
the details of these properties as of the Latest Practicable Date:
No.
Occupier of
Buildings
Gross Floor
Area Non-compliance
(sq.m.)
1. Qianjiang Xinyihong 124.7 Failure to obtain the building
ownership certificate
2. Qianjiang Xinyihong 124.7 Failure to obtain the building
ownership certificate
3. Qianjiang Xinyihong 268.6 Failure to obtain the building
ownership certificate
As of the Latest Practicable Date, these buildings, with an aggregate gross floor area of
518.0 sq.m., were purchased and owned by Qianjiang Xinyihong, but Qianjiang Xinyihong
failed to obtain the building ownership certificates. These buildings represent 0.7% of our
self-owned buildings in terms of gross floor area. Due to historical reasons, these buildings
were built by unidentifiable third parties on collective-ownership lands, and we commenced
use of these buildings in January 2012. These property-related non-compliance incidents were
mainly due to administrative oversight by our staff who were unfamiliar with or
misunderstood certain property-related laws, policies and regulatory requirements and
procedures; and our relevant staff did not seek proper advice from external advisors or our
management team at the relevant time. As advised by our PRC Legal Advisors, these buildings
without title certificate are at risk of being demolished by the competent government authority
under the PRC laws and regulation, and therefore Qianjiang Xinyihong would be unable to
continue its current use of these buildings if that occurs. Our Directors believe that such risk
is immaterial and is not expected to have any material impact to our business, results of
operations or financial condition.
As of the Latest Practicable Date, there were also certain auxiliary facilities constructed
and owned by Qianjiang Xinyihong that did not complete the fire control inspection ( ऊԣ᜕
ϗ) or completion acceptance and filing procedure (ࣩand had not obtained
the building ownership certificates. We have conducted interviews with competent authorities
and were confirmed that we may continue our current use of such auxiliary facilities. Based on
the interviews and confirmations, our PRC Legal Advisors advised that the risk of our Group
being penalized for the above non-compliances regrading auxiliary facilities under relevant
PRC laws is remote. During the Track Record Period and up to the Latest Practicable Date,
these non-compliance incidents regarding fire control inspection for these buildings without
title certificates did not lead to any fire safety issue. As confirmed by the relevant government
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authorities, there is no rectification requirements, and the Company may continue the normal
use and operation of these auxiliary facilities. For details, please refer to “— Properties —
Self-owned Properties — Buildings — Buildings with building ownership certificates” in this
section.
Construction in Progress
As of the Latest Practicable Date, we had one construction in progress in Qianjiang,
Hubei Province for a total gross construction area of approximately 7,650.8 sq.m. (the
“Xinyihong Construction in Progress ”) and one construction in progress in Qianjiang,
Hubei Province for a total gross construction area of approximately 41,869.78 sq.m. (the
“Xinxuanhong Construction in Progress ”).
As of the Latest Practicable Date, we had obtained the relevant land use rights certificate
(ࣣconstruction land planning permit (ண͜ή஝ྌ஢̙ᗇ ), construction
planning permit (ணʈ೻஝ྌ஢̙ᗇ ) and construction work commencement permit (ʈ
஢̙ᗇ) from the government authorities for the Xinyihong Construction in Progress and
Xinxuanhong Construction in Progress. Based on the foregoing, our PRC Legal Advisors are
of the view that we had obtained all requisite administrative permits required for the current
stage of construction. Accordingly, we expect to obtain the relevant building ownership
certificate for these properties in accordance with procedures after completion of the
construction.
Leased Land and Properties
As of the Latest Practicable Date, we leased one parcel of land, several buildings in
Wuhan and two buildings in Qianjiang. We leased one parcel of land with a total site area of
41,133.3 sq.m and several buildings with a gross floor area of 16,415.0 sq.m. from Linuo
Investment. We leased another building with a gross floor area of 10,146.0 sq.m. from Twin
Tigers Coatings. Both Linuo Investment and Twin Tigers Coatings are entities controlled by
Mr. Gao, who is one of our controlling shareholders. These lease agreements were determined
on arm’s length basis and under ordinary commercial terms. These properties are used by our
subsidiaries primarily as our production plant and offices. In 2022 and 2023, we also leased
three buildings in Qianjiang with a total gross floor area of 3,131.1 sq.m. from three
independent third parties. The buildings are primarily used as dormitories of our employees.
Five lease agreements for the properties leased by us were not registered with the
relevant PRC government authorities as of the Latest Practicable Date. As advised by our PRC
Legal Advisors, pursuant to the applicable PRC laws and regulations, lease agreements are
required to be registered with the relevant PRC government authorities, and we may be
required by the PRC authorities to register the lease agreements within a prescribed time limit.
If we fail to do so, we may be subject to a fine ranging from RMB1,000 to RMB10,000 for
each non-registered PRC lease agreement, subject to the maximum aggregate fine of
RMB20,000. As advised by our PRC Legal Advisors, our failure to register the lease
agreements would not affect the validity of the lease agreements or affect our use of these
leased properties to the extent permitted under the lease agreements. Our Directors are of the
view that the non-registration of the lease agreements would not have a material adverse
impact on our business operations.
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Property Valuation
As of the Latest Practicable Date, no single property interest forming part of our
non-property activities as defined under Rule 5.01(2) of the Listing Rules had a carrying
amount of 15% or more of our total assets. As such, according to Section 6(2) of Companies
(Exemption of Companies and Prospectuses from Compliance with Provisions) Notice
(Chapter 32L of the laws of Hong Kong), this prospectus is exempted from compliance with
the requirements of section 342(1)(b) under paragraph 34(2) of the Third Schedule to the
Companies (Winding Up and Miscellaneous Provisions) Ordinance, which requires us to
include a valuation report for any of our interests in land or buildings. Our properties are
primarily used for production, warehouse and office purposes.
A W ARDS AND RECOGNITIONS
Since the establishment of our Group, we have received a number of awards in
recognition of our business operations, quality management system and credit rating. Set forth
below are the major awards and recognitions we received in recent years:
Awards/recognitions
Y ear of
issuance Issuer of award Recipient
Top 100 Private Manufacturing
Enterprises in Hubei
(ಳ̏͏ᐄႡிΆุ 100 ੶)
2022 Hubei Federation of Industry and
Commerce (ʈਠุᑌΥึ )
Wuhan Youji Industries
Co., Ltd.
2021 China Top 100 Fine Chemical
Corporates List (2021 ʕ਷ၚ୚ʷ
ʈϵ੶࿮ఊ )
2021 China Fine Chemical Raw Material &
Intermediate Industry ( Ό਷ၚ୚ʷ
ʿʕග᜗Бุ՘Ъଡ଼ ), China
National Intelligence and
Information Association ( ʕ਷ʷʈ
՘ึ ) and China National
Chemical Information Center ( ʕ਷
ʕː )
Wuhan Youji Industries
Co., Ltd.
2020 China Top 100 Fine Chemical
Corporates List (2020 ʕ਷ၚ୚ʷ
ʈϵ੶࿮ఊ )
2020 China Fine Chemical Raw Material &
Intermediate Industry ( Ό਷ၚ୚ʷ
ʿʕග᜗Бุ՘Ъଡ଼ ), China
National Intelligence and
Information Association ( ʕ਷ʷʈ
՘ึ ) and China National
Chemical Information Center ( ʕ਷
ʕː )
Wuhan Youji Industries
Co., Ltd.
Top 50 Private Manufacturing
Enterprises in Wuhan
(ဏ͏ᐄႡிΆุ 50੶)
2020 Wuhan Federation of Industry and
Commerce (ဏ̹ʈਠุᑌΥึ )
Wuhan Youji Industries
Co., Ltd.
Top 100 Private Manufacturing
Enterprises in Hubei
(ಳ̏͏ᐄႡிΆุ 100 ੶)
2020 Hubei Federation of Industry and
Commerce (ʈਠุᑌΥึ )
Wuhan Youji Industries
Co., Ltd.
Top 50 Private Manufacturing
Enterprises in Wuhan
(ဏ͏ᐄႡிΆุ 50੶)
2019 Wuhan Federation of Industry and
Commerce (ဏ̹ʈਠุᑌΥึ )
Wuhan Youji Industries
Co., Ltd.
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Awards/recognitions
Y ear of
issuance Issuer of award Recipient
China’s Top 50 Enterprises in Light
Industry and Food Industry
(Бุʞɤ੶Άุ )
2019 China National Light Industry
Federation ( ʕ਷ჀʈุᑌΥึ )
Wuhan Youji Industries
Co., Ltd.
Hidden Champion of Hubei Pillar
Industry Segments, the Little
Giant in Science and Technology
(2018-2020)
(ڿ
Ҧʃ̶ɛɚཧɓɞϋЇ
ɚཧɚཧϋ)
2018 Hubei Economic and Information
Commission
(ึ )
Wuhan Youji Industries
Co., Ltd.
XINKANG Benzoic Acid 2018
Famous Product (͠ა
2018ۜ)
2018 Wuhan Enterprise Famous, Special
and Special Innovation Achievement
Examination Committee (ဏΆุ
ึ )
Wuhan Youji Industries
Co., Ltd.
National Labor Medal
(Ό਷ʞɓ௶ਗᆤ௝ )
2017 All-China Federation of Trade Unions
(ʕശΌ਷ᐼʈึ )
Wuhan Youji Industries
Co., Ltd.
Hubei Model Enterprise of
Integration of Industrialization
and Informatization
(ՇʷፄΥͪᇍΆุ )
2021 Hubei Economy and Information
Technology Department
(ᝂ )
Wuhan Youji Industries
Co., Ltd.
Specialized, Refined, Distinctive
and Innovative “Little Giant”
Enterprises in Hubei Province
(ਖ਼ၚतอʃ̶ɛ
Άุ)
2021 Hubei Economy and Information
Technology Department
(ᝂ )
Wuhan Youji Industries
Co., Ltd.
EMPLOYEES
As at the Latest Practicable Date, we had 625 employees who are all directly employed
by us. The following table sets forth a breakdown of our employees by function as at the Latest
Practicable Date:
Department/Function Number of employees
Production 390
General management 84
Sales 29
Quality management 22
Accounting and finance 19
Research and development expert 24
Operations and logistics 20
Human resources and administration 3
Other supporting staff 34
Total 625
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We take into consideration a number of factors including our business strategies,
development plans, industry trends and the competitive environment when making hiring
decisions. We recruit our employees based on various factors including education
background, work experience and our vacancy needs. Our employees are generally
remunerated by fixed salary and bonus based on performance.
We believe our success depends on our employees’ provision of consistent, quality and
reliable services. In order to develop the knowledge, skills and quality of our employees, we
place strong emphasis on employee training. We regularly conduct induction courses, training
programs and safety courses to enhance our employees’ skills. Apart from the above, we also
incentivize our employees to gain knowledge in the relevant field of studies. We believe this
will also increase the overall competitiveness of our workforce.
For the years ended December 31, 2021, 2022 and 2023, our total staff costs amounted to
approximately RMB98.5 million, RMB109.7 million and RMB82.3 million, respectively.
We maintain good working relationship with our employees. Our annual employee
turnover rate remained below 5.0% during the Track Record Period. During the Track Record
Period and up to the Latest Practicable Date, we did not experience any labor disputes that had
a material and adverse effect on our business, financial conditions or operating results.
INSURANCE
We maintain various insurance covering our properties, manufacturing facilities, plant
and machinery, equipment and inventories. We also maintain insurance coverage for our
employees, including pension insurance, medical insurance, unemployment insurance,
work-related injury insurance and maternity insurance.
Our Directors believe that we have sufficient insurance coverage in place and the terms
of our insurance policies are in line with the industry norm. For the years ended December 31,
2021, 2022 and 2023, the total amounts of insurance premium paid were approximately
RMB26.4 million, RMB29.2 million and RMB30.5 million, respectively. During the Track
Record Period and as at the Latest Practicable Date, we had not made and did not make or had
not been subject to any material insurance claims or product liability claims. We review and
assess our risks and make necessary adjustments to our insurance coverage in line with our
needs and industry practice in the PRC. However, there is a risk that we do not have sufficient
insurance coverage for losses and damages that may arise in our business operations. For
further details, please refer to “Risk Factors — Our existing insurance coverage may not be
sufficient to cover the risks related to our operations and we may incur significant losses
resulting from product liability claims or business interruptions” in this prospectus.
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ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Our Governance
We are subject to various health, safety, social and environmental laws and regulations
and regular inspections by governmental authorities. We are committed to environmental,
social responsibility and governance (collectively “ ESG”) issues which are essential to our
continuous business development and success. Our Board has the ultimate accountability for
our ESG strategy, management and performance. To effectively manage ESG related matters,
our Board established an ESG committee, which comprises three directors and two members
from our management team. Our ESG committee is led by our chairman Mr. Zou and joined by
Dr. Liu Zhongdong ( ᄎᙒಊ), Ms. Li Deye ( ҽᅃዊ), Mr. Shen Haifeng (ࢤand Mr. Zhou
Xu ( մϛ). Mr. Zou is primarily responsible to oversee our ESG related matters.
We have developed ESG policies which set out, among others, (i) the appropriate risk
governance on ESG matters, (ii) ESG strategy formation procedures, (iii) ESG risk
management and monitoring, and (iv) the identification of key performance indicators
(“KPIs ”) and measurements. The ESG policies were established in accordance with the
standards of Appendix C2 to the Listing Rules. In particular, when setting targets for each
KPI, we take into account the respective historical levels during the Track Record Period, and
consider our future business expansion with a view to balance business growth and the need of
ESG to achieve sustainable development. The material KPIs are reviewed regularly to ensure
that they remain appropriate to the needs of our Group.
Our Board sets targets for each material environmental KPI at the beginning of each
financial year in accordance with the disclosure requirement of Appendix C2 to the Listing
Rules and other rules and regulations. The ESG KPI targets are reviewed on an annual basis.
Our Board oversees the performance of our Group in achieving the ESG targets and objectives
and investigate the reasons for any deviation. Our Board will revise our ESG strategy as
appropriate when significant variance from the target is identified.
The ESG committee conducts regular assessments in relation to the current and potential
ESG matters we face in the course of our operation. We will then adopt specific steps to
address the potential matters and minimize any risks inherent in our business operations. Our
Group will continue to identify and manage ESG related issues and risks in order to achieve
our business objectives and ensure our stable development.
Actual and Potential Impact of Environmental and Climate-related Risks on Our
Businesses, Strategies and Financial Performance
We may be exposed to possible financial loss and non-financial detriments arising from
environmental and climate-related risks. These risks include the following:
(i) transition risks: risks arising from compliance with the applicable environmental
laws and regulations and the environmental protection standards; and
(ii) ph ysical damages: damages arising from acute climate-related events and
longer-term chronic shifts in climate patterns.
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Our production process involves the discharge of waste water and solid waste and the use
of chemical materials. Our production activities in the PRC are subject to the central
government’s environmental laws and regulations as well as the environmental regulations
and standards promulgated by local government authorities under the laws of the central
government. For details, please refer to “Regulatory Overview — Law and Regulations
Relating to Environmental Protection” in this prospectus. If we fail to comply with any of the
applicable environmental protection laws and regulations, we may be subject to fines or
penalties. The laws and regulations on environmental protection may change from time to
time, and any change may increase our cost of compliance and burden our operations. For
details, please refer to “Risk Factors — Risks Relating to the PRC — Changes in existing laws
and regulations or additional or more stringent laws and regulations on environmental
protection in the PRC may cause us to incur additional capital expenditure” in this prospectus.
These regulatory developments, together with the existing laws, regulations and expectations,
may have significant impacts on the production activities of our Group, and thus present
“transition” risks to us, which may affect our production and overall business operations.
Furthermore, if our Group breaches any environmental law and regulations or faces any
accusation of negligence in environmental protection, it will adversely affect our reputation
and our credibility. It may also affect our business performances and reduce the
competitiveness of our Group in the industry. Our business opportunities may also be
negatively impacted as our Group may be disadvantaged by the reputational damage and loss
of credibility, and our customers may be less willing to engage and do business with an
unsustainable supplier.
On the other hand, if the governments fail to enact policies to mitigate the impact that
may arise from climate change, such as global warming, high sea level and hostile climate
changes, our business operations could be susceptible to physicals damages as a result of
droughts, floods, inclement weather, El Nino and other phenomenons alike. For instance,
global warming and extreme climate conditions could affect the efficiency of different stages
in the value chain of our industry from the access of raw materials to the production, storage
and the delivery our customers. These physical damages could affect our business, financial
conditions, results of operation and prospects.
As advised by our PRC Legal Advisors, we had complied with the applicable
environmental laws and regulations in the PRC in all material respects during the Track
Record Period and up to the Latest Practicable Date. Save for the foregoing and up to the
Latest Practicable Date, our Directors were not aware of any actual environmental and
climate-related risks or damages that could negatively impact our businesses, strategies and
financial performance.
Global Environmental Opportunities
Protecting the environment is a priority for consumers, companies and governments. This
converging interest driven by increased global awareness of climate change, technological
advances and health concerns are underpinning a global drive to develop our industry as an
environment friendly segment of the economy. The development of our industry also benefits
from governments’ policy changes. The PRC government has been taking actions to plan and
support the development of our industry and related downstream industries which utilize
derivative products including food additives, food preservative and feed additives. According
to the Announcement No. 194 of the Ministry of Agriculture and Rural Affairs of the People’s
Republic of the PRC, starting from July 1, 2020, feed manufacturers stopped producing
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commercial feed containing growth-promoting drug feed additives (except for traditional
Chinese medicine), which promote the development of functional feed additives. The past few
years witnessed a more stringent and comprehensive regulation of the food and beverage
preservative industry in the PRC. In 2019, The Regulation on the Implementation of the Food
Safety Law of the People’s Republic of the PRCૢԷ was
released by the State Council, which proposed to establish food safety risk evaluation
mechanism and assess risks in terms of the biological, chemical and physical impact of food
additive and related products. In 2021, the National Cosmetic Safety Risk Monitoring Plan for
the second half of 2021 ( 2021ྌ ) was issued by the
National Medical Products Administration to provide scientific basis for developing cosmetic
quality and safety risk control measures and standards, and conducting cosmetic sampling and
testing. According to the Frost & Sullivan Report, disciplined regulations will further promote
the development of industries where the toluene and toluene derivative products are used.
Therefore, our Directors expect that the global response to environmental and
climate-related risks in relation to the use of our products will have a positive and long-term
impact on our Group. With this favorable development opportunity, we intend to expand our
production capacity to capture this market opportunity. For details, please refer to
“— Production Expansion Plan” in this section.
Environmental, social and climate-related risks identification, assessment and
management
Our Group plans to conduct enterprise risk assessment at least once a year on existing
and potential risks we face in our business, including risks related to ESG. In order to manage
environmental-related risks and social sustainability risks, our Board will establish our ESG
policies following the Listing and adopt measures specified in our ESG policies to address the
risks identified during the enterprise risk assessment and minimize any potential risks
inherent to our business operations.
Our Board has the overall responsibility for evaluating and determining our Group’s
ESG-related risks, and establishing, adopting and reviewing the ESG vision, policy and target
of our Group. Our ESG Committee (ESGึ) will monitor the implementation of the ESG
policy and ESG-related aspects of our production activities. We will also engage independent
third parties to evaluate the risks and review our Group’s existing strategy, target and internal
controls, and necessary improvement will be implemented to mitigate the risks.
Environmental Protection and Monitoring
Our production process involves the discharge of wastewater, gas and solid waste, and
the use of chemical materials. We endeavor to minimize any adverse impact on the
environment resulting from our business activities. The conduct of our business is subject to
various national laws, regulations, rules and standards on environmental protection, including
the Environmental Protection Law of the PRC. For further details in respect of applicable
environmental laws, regulations, rules and standards, please refer to “Regulatory Overview —
Laws and Regulations Relating to Environmental Protection” in this prospectus.
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We continue to observe the laws and regulations in relation to environmental protection
in the PRC in all material aspects. We have implemented environmental protection measures
in our operations including environmental protection procedures to treat and dispose of all of
our waste in accordance with national and local environmental laws and regulations.
According to our environmental and pollution control policies, we have various measures in
place to process and dispose of our industrial wastes to minimize the impact on the
environment. For example, we regularly inspect our production equipment to ensure exhaust
emissions are within the regulated limits. For waste water treatment, we have water quality
real-time monitoring equipment installed in our sewage pipelines to ensure pollutants meet
government standards before discharge. We also installed soundproof devices and walls to
control the noise generated during our production process. According to our policy on
procedures for identification and assessment of environmental impact, our employees should
be aware and monitor the impact of our operations from the following aspects: (i) air exhaust;
(ii) waste water; (iii) noise; (iv) solid waste; (v) fire safety; and (vi) resources consumption,
including energy, raw materials and other natural resources.
During the Track Record Period, the discharge of each of the key pollutants generated
during our production process had remained within prescribed regulatory limits, and we
believe that our business operations do not have a material adverse impact on the environment.
Our production facilities in the PRC are subject to regular inspection by PRC environmental
regulatory authorities. If our facilities are found not to be in compliance with applicable
environmental standards, we may be subject to penalties, which may range from fines to
suspension of production.
Air pollutant and waste gas
Air pollutants generated during our production process mainly include particle matters,
sulfur dioxide, nitrogen oxides, benzene, toluene, xylene, ammonia, hydrogen sulfide, odor
and volatile organic compounds. We adopted different tail gas treatment measures, such as
six-stage condensation and activated carbon canister recovery, water washing tower and
ammonia absorption tower to treat different pollutants produced in different manufacturing
processes. We also closely monitor the air quality level to ensure that (i) we use clean natural
gas for our heat conduction furnaces; (ii) the air pollutants and waste gas emission are
controlled in accordance with the Emission Standard of Air Pollutants for Boiler ( ᒢᘟɽं
ᅺ๟) (GB13271-2014) jointly issued by the General Administration of Quality
Supervision, Inspection and Quarantine of the PRC (ᐼ҅ ) and the
Ministry of Ecology and Environment of the PRC ( ʕശɛ͏΍ձ਷͛࿒ᐑྤ௅ ) (the
“MEE ”); (iii) ammonia, hydrogen sulfide and odor concentrations are controlled in
accordance with Emission Standards for Odor Pollutants (ᅺ๟ )
(GB14554-93) issued by MEE, and (iv) other monitoring items are controlled in accordance
with Integrated Emission Standard of Air Pollutants (ᅺ๟ )
(GB16297-1996) issued by MEE.
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Wastewater
Water pollutants such as ammonia, phosphorus, particulates, organic particles, acid and
alkali wastewater generated from our production process and domestic wastewater are
processed in our sewage treatment plant before discharge to the third-party sewage treatment
plant in the industrial park where our production plants are located for further processing. We
conduct our sewage treatment in accordance with the discharge requirements implemented by
the third-party sewage treatment plant and the Integrated Wastewater Discharge Standard
(ᅺ๟) (GB8978-1996) issued by the State Administration for Market
Regulation (̹ఙ္ຖ၍ଣᐼ҅ ). We also installed on-line monitoring facilities at the
discharge outlets, which are connected with the network of the Wuhan Ecological
Environment Bureau (ဏ̹͛࿒ᐑྤ҅ ) to ensure that the discharge complies with laws,
regulations and relevant provisions.
Noise
Noise may be generated during the operation of our production equipment such as
crushers, air compressors, various pumps, stirring motors and boiler fans. We minimize our
noise emission by (i) adopting advanced and low-noise equipment, vibration isolation, shock
absorption measures and muffler installation to reduce the noise source; (ii) rationally
arranging the production plant layouts to place equipment with higher noise emissions in the
distant areas to increase the noise transmission distance and reduce the negative effect; and
(iii) planting high and dense-leaved shrubs and trees surrounding the wall of our production
plants to reduce noise.
Hazardous solid waste
Our manufacturing process may generate hazardous solid wastes, which primarily include
distillation residue and sludge (HW11(900-013-11)), waste packaging (HW49(900-041-49)),
waste activated carbon (HW49(900-039-49)), waste oil (HW08 (900-219), laboratory waste
(HW49(900-047-49)) and waste resin (HW13(265-103-13)). Hazardous wastes are properly
packaged, labeled, set up in a ledger, temporarily stored in a hazardous wastes warehouse, and
finally transported to a qualified hazardous wastes treatment plant for treatment. We closely
monitor and control the hazardous wastes in accordance with the Standard for Pollution Control
on Hazardous Waste Storage (છՓᅺ๟) (GB18597-2001) issued by the
MEE.
Resources consumption
We aim to carry out our production in an environmental-friendly manner. Minimizing the
resource consumption of electricity, natural gas and water in our production process is one of
the key considerations in our operations. We make constant technical improvements to our
production equipment to reduce energy and water consumption. We place great importance to
water resource management and the efficient use of water. We also advocate the concept of
green office and encourage our employees to reduce energy consumption, including the use of
energy efficient electrical appliances in the office and electricity-saving initiatives such as
switching off the lights in public areas during non-working hours, minimize water
consumption by using water-saving appliances, and reduce waste generation through the use
of recycling bins to minimize the impact on the environment.
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Energy conservation
Our energy conservation measures are supervised under the annual review of carbon
emission and carbon compliance conducted by the Department of Ecology and Environment
of Hubei Province (ᝂ , the “ HBEE ”). In accordance with the requirements
implemented by the HBEE, we strictly follow the carbon compliance, cooperate with the
review authorities to conduct the carbon emission review, eliminate out-of-date equipment in
accordance with the relevant environmental laws and regulations, adopt compliant measuring
instruments, and regularly report energy consumption data according to statistical
requirements. In 2017, we were awarded the Green Energy Efficiency Award ( ၠЍືঐᆤ )b y
the China Chemical Energy Conservation Technology Association ( ʕ਷ʷʈືঐҦஔ՘ึ )
and Benzoic Acid Energy Conservation and Green Manufacturing Professional Committee (߽
ึ ) for our efforts.
Upon listing, our ESG Committee will be responsible for monitoring the ESG
performance of our Group and reports to the Board on a regular basis. The Board oversees the
performance of our Group in achieving the ESG targets and objectives. The ESG Committee
will investigate the reasons for any deviation from the targets and objectives and the Board
will revise our ESG strategy as appropriate when significant variance from the target is
identified.
As of the Latest Practicable Date, we had been accredited with ISO9001, FSSC22000,
FAMI-QS, HALAL, BRC, ISO50001, ISO14001, OHSAS18001 and ISO45001 for our quality
management system, environmental management system and occupational health and safety
management system. We strive to maintain an effective internal control system on both
environmental and social aspects to meet the ISO standards.
Our costs of compliance with applicable environmental rules and regulations were
approximately RMB14.3 million, RMB7.5 million and RMB9.6 million respectively for the
years ended December 31, 2021, 2022 and 2023. As the PRC legal system continues to evolve,
we may be requested to undertake significant expenditures in order to comply with
environmental laws and regulations that may be adopted in the future.
Our environmental protection performance
In line with our vision for sustainable development, we oversee our environmental
protection performances in various aspects, such as efficiency in the use of resources,
emissions and water and energy consumption. In order to monitor and have effective control
over our environmental protection measures and to evaluate any deviation from the emission
standards under the applicable laws and regulations, we utilize the pollution control
equipment and devices we installed at our production facilities to control and record the
emission level of air pollutants, waste gas and wastewater. Monitoring of the emission level of
air pollutants, waste gas and wastewater on a regular basis allows us to have prompt
investigation and undertake rectification measures in a timely manner. Pursuant to the
applicable PRC laws and regulations, the discharge of pollutants must comply with the waste
discharge permitted levels and emission standards promulgated by the relevant government
authorities. We have obtained confirmations from the relevant environmental protection
authorities to confirm that the discharge of key pollutants had remained within the prescribed
regulatory limits during the Track Record Period.
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The table below sets forth the analysis of our environmental protection performance
during the Track Record Period:
Y ear ended December 31,
Discharge
Permitted
Level2021 2022 2023
Wuhan Production Plant
Air pollutant
and waste gas
Sulfur dioxide emission (tons/year) 2.60 2.63 0.12
Nitrogen oxides emission
(tons/year) 20.62 20.86 3.64 ≤53.86
V olatile organic compounds 22.96 18.97 13.37 ≤48.04
Wastewater
(1)
Chemical oxygen demand (mg/L) 4.43 4.36 3.63 ≤32.46
Ammonia nitrogen (mg/L) 0.02 0.02 0.03 ≤4.13
Water consumption
Total water consumption (m
3) 761,979 793,008 677,381
Water consumption intensity
(m3 per million RMB revenue) 342.1 310.4 301.8
Energy consumption
Total energy consumption
(tons of coal equivalent) 37,918.1 38,858.6 35,472.1
Energy consumption intensity
(tons of coal equivalent per
million RMB revenue) 17.0 15.2 15.8
Greenhouse gas emission
(2)
Scope 1 emission (tCO 2e) 27,668.2 28,083.4 26,502.9
Scope 2 emission (tCO 2e) 77,192.3 83,651.5 75,558.7
Qianjiang Xinyihong Production
Plant
Wastewater (1)
Chemical oxygen demand (mg/L) 21.76 13.46 9.36 ≤500
5-day biochemical oxygen demand
(mg/L) 15.5 28.6 32.5 ≤130
Ammonia nitrogen (mg/L) 0.0080 0.2850 0.2610 ≤35
Particulates intensity (mg/L) 34 37 13 ≤300
Water consumption
Total water consumption (m
3) 175,541 119,418 113,791
Water consumption intensity
(m3 per million RMB revenue) 296.5 123.7 148.4
Energy consumption
Total energy consumption
(tons of coal equivalent) 25,355.0 21,687.2 23,386.4
Energy consumption intensity
(tons of coal equivalent per
million RMB revenue) 42.8 22.5 30.5
Greenhouse gas emission
(2)
Scope 1 emission (tCO 2e) 22.0 22.0 24.3
Scope 2 emission (tCO 2e) 64,198.6 66,845.9 63,999.6
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Notes:
(1) Wastewater of Wuhan Production Plant and Qianjiang Xinyihong Production Plant is treated by the
professional wastewater treatment plant of the respective industrial park (where several other third
party production plants are located) after the primary treatment by the respective production plant of
our Group. Therefore, the wastewater index during the Track Record Period was only available and
reported based on the processing volume of the entire industrial park.
(2) Pursuant to Appendix 2 of “How to Prepare an ESG Report” set out by the Stock Exchange, Scope 1
greenhouse gas emissions refer to direct emissions from equipment and operations that are owned or
controlled by our Group; Scope 2 greenhouse gas emissions refer to energy indirect emissions resulting
from the generation of purchased or acquired electricity, heating, cooling, and steam consumed within
our Group.
We strictly adhere to the standards, metrics and targets set or issued by the ESG-related
laws and regulations in assessing and managing our impacts on the environment as a result of
our business activities, such as the discharge of pollutants or harmful substances in the course
of our production. At the same time, we are in the process of establishing more detailed
ESG-related metrics and targets after consulting with relevant stakeholders. We will continue
to monitor climate-related matters and governmental developments to combat climate change
and act to minimize the impact on our operations.
Furthermore, to better manage our ESG-related risks, we aim to reduce our greenhouse
gas emissions and resource consumption in the foreseeable future. Although our total overall
greenhouse gas emissions and resource consumption may increase in the future in view of our
expansion plan for Hubei Xinxuanhong Production Plant, we plan to reduce our Scope 1 and
Scope 2 greenhouse gas emissions at the Wuhan Production Plant and Qianjiang Xinyihong
Production Plant by emission per ton of production by approximately 5% by the year ending
December 31, 2026 based on our emissions in 2023. We also aim to reduce our electricity
consumption and water consumption by consumption per ton of production by approximately
5% and 3%, respectively, by the year ending December 31, 2026 based on our electricity and
water consumption in 2023.
Scope 3 emissions are indirect emissions that arise as a result of business activities but
are under the operational control of another entity. The greenhouse gas protocol defines 15
different categories of Scope 3 emissions, and we currently identify major Scope 3 emission
sources from our raw material suppliers and business travel during our operations.
To mitigate our indirect impact through raw material suppliers, we plan to strengthen our
ESG practices and actively research the carbon footprint of our raw material suppliers and
enlist environmental protection capability as one of our assessment elements when evaluating
such raw material suppliers. Our major suppliers are subject to applicable environmental laws
or regulations and demonstrate a strong commitment to ESG principles. With respect to raw
materials that we have stable access to and diversified supplier base for, we will ensure that
the raw material suppliers are competent in carrying out sustainable operations and exert
continuous effort to minimize environmental impact to the extent practicable. When screening
third-party raw material suppliers to be newly engaged in the future, we will consider low
carbon emissions as one of our top priority criteria with evaluation metrics emphasizing
environmental impact, energy and resource utilization, use of renewable energy and other
innovative means for producing a smaller carbon footprint.
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Additionally, we actively promote the use of remote video conference and similar
collaborative methods among our employees to curtail unnecessary business travel and further
diminish Scope 3 emissions. We plan to gradually develop statistics and monitoring of Scope
3 green gas emissions in accordance with the applicable guidelines, and we will comply with
the relevant disclosure requirements starting from the fiscal year ending on December 31,
2025.
Social Responsibilities
The well-being of our employees is crucial to our business operation. We pay close
attention to the ethical treatment of our employees, strive to foster a strong sense of belonging
within our workforce, and provide our employees with an environment for continuous career
development. We also provide them with a wide range of training programs covering different
key aspects of our business operation. These programs provide continuous training for
employees at different levels to specialize and strengthen their skills.
For our new employees, we assign experienced staff as mentors to provide in-depth
instructions, share useful experience and give feedback to new employees to guide them
through the transitional period. In addition, we offer remuneration packages to our employees,
which include a number of subsidies and are subject to adjustments based on their
performance.
We adopt equal opportunity principle for the recruitment and promotion of our
employees based on their ability and performance. We are also committed to create a work
environment with diverse genders and age groups. We provide fair and equal career
development and learning opportunities to all staff, regardless of gender, age and personal
status. Discrimination of any kind is strictly forbidden at our workplace.
Occupational Health and Work Safety
In the PRC, we are subject to laws and regulations on labor, safety and work-related
incidents such as the Work Safety Law of the PRC (). For
further details, please refer to “Regulatory Overview — Laws and Regulations Relating to
Safe Production” in this prospectus. We have put in place safety guidelines and operating
manuals on the safety measures for our production process, including the Safety Inspection
and Hazard Investigation and Control System ( ), which
establishes a long-term mechanism for investigating and controlling safety hazards through
various forms of periodical inspections and graded governance for identified hazards to
monitor the control status and ensure timely completion of potential hazard control. We also
provide our employees with trainings on workplace safety to raise their awareness of safety
procedures and policies, which include guidelines for safety management, proper operation
and usage of equipment and machinery, emergency situations handling, and accident reporting
rules. We implemented various work safety policies and procedures to ensure that our
operations are in compliance with the applicable laws and regulations. The equipment and
machinery of our production facilities are also subject to periodic maintenance, and our
employees are required to receive trainings to enhance their awareness of workplace safety.
In addition, our daily operation involves the storage, handling and use of flammable,
toxic, and explosive materials. Improper handling of these materials may result in serious
health effects on our employees or personal injury. Certain products produced by us are toxic
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and/or flammable in nature. According to the relevant categories classified by the PRC
Ministry of Emergency Management (၍ଣ௅ ), benzyl chloride and
benzonitrile are classified as Category VI (toxic ingredients) under hazardous chemicals, but
not the highly toxic chemicals. According to the List of Hazardous Chemicals (ۜ
ͦ፽), only the hazardous chemicals with severe acute toxic hazards are highly toxic
chemicals, and most hazardous chemicals are not highly toxic chemicals. We have put in place
guidelines and policies on the management of toxic and/or inflammable materials for our
operation, including the Hazardous Chemicals Safety Management Policy (τΌ
), which regulates the safety management of hazardous chemicals in the process of
procurement, production, use, storage, transportation, sales and scrapping. For examples, for
manufacturing process that involves usage and storage of toxic chemicals, relevant
departments are required to set up corresponding anti-toxicity and anti-leakage safety
facilities and equipment in production and storage devices, workshops, warehouses and other
workplaces according to the types and characteristics of toxic chemicals, and carry out regular
maintenance and maintenance of safety facilities and equipment in accordance with
applicable laws, regulations and standards. For the transportation of toxic chemicals, vehicles
carrying toxic chemicals are required to display safety warning signs, and install with the
necessary emergency treatment and safety protection equipment in accordance with
applicable laws, regulations and standards. As confirmed by our internal control advisors, we
have implemented the necessary measures in accordance with the internal policies. During the
Track Record Period, we have not received any complaints on material issues on production
safety or any claims from our employee on serious personal injuries. As at the Latest
Practicable Date, there were no claims or penalties from the relevant authorities in the
jurisdiction that we operate in. We have designated warehouses in place for the storage of raw
materials or goods that are classified as hazardous substances. These warehouses are equipped
with safety and fire control systems and equipment in accordance with PRC laws and
regulations. As at the Latest Practicable Date, the storage levels of our inventory, including
hazardous substances, remained satisfactory and were within our storage capacity.
As of the Latest Practicable Date, we had identified historical non-compliance incidents
set forth below in respect of occupational health and work safety.
“Three Simultaneities (
ࣛProcedures Regarding Occupational Diseases Prevention
and Control
As advised by our PRC Legal Advisors, the “Three Simultaneities (ࣛProcedures
for the prevention and control of occupational disease hazards require that the main project
and its occupational disease protection facilities should be designed, constructed, and put to
use simultaneously. Specifically, for the construction project with potential occupational
hazards, the construction project owner should design the occupational disease prevention
facilities in accordance with the relevant requirements before construction. Before the project
is completed and accepted or during trial operation, the construction project owner should
evaluate the control effect of occupational hazards and prepare an evaluation report.
Furthermore, prior to the acceptance of occupational disease prevention facilities, the
construction project owner should prepare an acceptance plan. In the course of constructing
our Qianjiang Xinyihong Production Plant, we did not attend to the “Three Simultaneities ( ɧ
ࣛprocedures for the prevention and control of occupational disease hazards for certain
sectors of the construction project. This was primarily due to an inadvertent error of our
administrative staff for failing to comprehend the legal requirements of the “Three
Simultaneities (ࣛprocedures.
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As advised by our PRC Legal Advisors, according to the Measures for the Supervision
and Administration of “Three Simultaneities” of Facilities for the Prevention and Control of
Occupational Diseases of Construction Projects (္ຖ
) of the PRC and relevant laws and regulations, the government authority may issue
a warning regarding the violation and impose a correction order requiring an entity to
undertake rectification measures within a prescribed time. The government authority may also
impose a fine of no less than RMB100,000 and not exceeding RMB500,000, and for more
severe violations, order the project to cease the operation that causes occupational disease
hazards, or report the violation to another proper government authority in order to impose an
order requiring an entity to undergo mandatory suspension of construction or closure of
business for (i) the failure to conduct occupational health pre-assessments before
commencing production and operation or (ii) the failure to design, construct and put into
construction and use of the occupational disease protection facilities of a construction project
concurrent to the main construction in accordance with the laws and regulations.
In September 2019, Qianjiang Xinyihong engaged a qualified third party occupational
diseases assessment agent to conduct a series of occupational diseases assessments on the
Qianjiang Xinyihong Production Plant, and issued the Occupational Diseases Assessment
Report on September 17, 2019 (the “ 2019 Occupational Diseases Assessment Report ”). An
updated occupational diseases assessment report was issued in November 2022 (the “ 2022
Occupational Diseases Assessment Report ”). Pursuant to the two Occupational Diseases
Assessment Reports, Qianjiang Xinyihong has substantially satisfied the requirements for the
prevention and control of occupational diseases under the relevant laws and regulations.
We have obtained a confirmation letter issued by the Health Commission of Qianjiang
City (ึ ) on January 9, 2024, confirming that (i) Qianjiang Xinyihong
has been complying with the national and local laws and regulations as well as the
administrative and other normative documents on occupational health supervision, and has
satisfied the requirements for the construction of occupational disease prevention facilities
and the use of relevant evaluation records for its workplace in accordance with relevant laws
and regulations; and (ii) that since January 1, 2019 to the date of the confirmation letter, no
violation of laws, regulations, administrative and other normative documents were found with
respect to the occupational health supervision and management, no dispute with this
commission was pending, and no report or complaint was received by this commission from
others against Qianjiang Xinyihong. As advised by our PRC Legal Advisors, the Health
Commission of Qianjiang City is the competent authority to issue this confirmations.
We conducted an interview on March 24, 2022 with the Health Commission of Qianjiang
City (ึ ). Based on the interview, the government authority confirmed
that as of the date of the interview (i) Qianjiang Xinyihong may continue its current use of and
conduct its normal production and operation in the construction projects; and (ii) there were
no corrections or rectification measures imposed on Qianjiang Xinyihong, and there were no
situation that would affect its normal operation. As advised by our PRC Legal Advisors, the
Health Commission of Qianjiang City is the competent authorities to provide the above
confirmations.
We have implemented internal control policies to monitor compliance with the “Three
Simultaneities (ࣛProcedures requirements, including the following procedures (i) the
project management team should simultaneously review the design of both the main project
and occupational disease protection facilities of the project, simultaneously check the
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construction of both the main project and occupational disease protection facilities, and
simultaneously conduct project acceptance of both the main project and occupational disease
protection facilities; (ii) the construction team should simultaneously manage the
construction process of both the main project and occupational disease protection facilities,
and check the construction quality of both the main project and occupational disease
protection facilities; and (iii) the security and environment protection team should supervise
and inspect whether all relevant procedures are carried out according to the “Three
Simultaneities (ࣛProcedures requirements.
According to the Occupational Diseases Assessment Reports, Qianjiang Xinyihong has
substantially satisfied the relevant requirements and standards. Based on the confirmations
obtained from interviews with the Health Commission of Qianjiang City, the government
authorities did not impose any rectification measures on Qianjiang Xinyihong for the
non-compliance regarding the “Three Simultaneities (ࣛProcedures. Therefore, based
on the above, our PRC Legal Advisors are of the view that the risks for Qianjiang Xinyihong
being imposed any rectification measures or penalties for failure to make timely rectification
measures due to the aforementioned non-compliance is remote; and the risk for Qianjiang
Xinyihong being ordered to stop construction, suspend or terminate its manufacturing, or end
use of the production plant for this historical non-compliance incidents is remote.
Energy Conservation Review (
ݟ)
Qianjiang Xinyihong did not attend to the energy conservation review for (i) the project
of benzyl alcohol production with a designed annual production capacity of approximately
10,000 tons (the “ Benzyl Alcohol Project (10,000 tons) ”), and (ii) the project of benzyl
chloride and ester production with a designed annual production capacity of approximately
50,000 tons and 1,000 tons, respectively, (the “ Benzyl Chloride and Ester Products
Project ”) in our Qianjiang Xinyihong Production Plant. As advised by our PRC Legal
Advisors, corporate entity should obtain the energy conservation review opinion for its fixed
assets investment projects from the authorities before commencing project construction. The
Benzyl Alcohol Project (10,000 tons) and the Benzyl Chloride and Ester Products Project have
already commenced construction, and it is impracticable to complete the energy conservation
review at this stage. As advised by our PRC Legal Advisors, according to the Measures for
Examining Energy Conservation of Fixed Assets Investment Projects (༟ପҳ༟ධͦື
), in case of failure of conducting energy conservation review, the government
authority may order the suspension of construction, production and use of fixed asset of the
investment project and to renovate within certain period. For production projects that cannot
be renovated or has not been renovated within the time limit, the relevant authority may shut
down the project and hold the responsible persons liable for these actions.
We have engaged a qualified third party assessment agent to assess energy efficiency of
our Benzyl Alcohol Project (10,000 tons) and Benzyl Chloride and Ester Products Project.
The assessment reports were issued in May 2022, and the assessment agent is of the view that
our Benzyl Alcohol Project (10,000 tons) and Benzyl Chloride and Ester Products Project
conform to the requirements of national and local industrial policies and industrial
energy-saving specifications, and the project construction schemes conform to the
requirements of relevant energy-saving standards. On May 12, 2022, the Development and
Reform Commission of Qianjiang City ( ᆑϪ̹೯ҷ։ ) issued two separate notices for the
Benzyl Alcohol Project (10,000 tons) and Benzyl Chloride and Ester Products Project of
Qianjiang Xinyihong, which confirmed that the Benzyl Alcohol Project (10,000 tons) and
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Benzyl Chloride and Ester Products Project of Qianjiang Xinyihong have satisfied the
approval requirements on energy conservation review for construction project and the
rectification measures of these two projects have been satisfactorily completed. On January 9,
2024, the Development and Reform Commission of Qianjiang City issued a confirmation
letter to confirm that Qianjiang Xinyihong was not currently under investigations or subject to
administrative penalties related to energy conservation management. As advised by our PRC
Legal Advisors, the Development and Reform Commission of Qianjiang City is the competent
authority to issue such confirmations.
Based on the above confirmations and documents, our PRC Legal Advisors are of the
view that the risk for Qianjiang Xinyihong being ordered to stop construction, suspend or
terminate its manufacturing or end use of the production plant for the above-mentioned
historical non-compliance incidents is remote.
Our Directors confirm that during the Track Record Period and up to the Latest
Practicable Date, we did not encounter any incidents or complaints that would materially and
adversely affect our operations. According to the examinations conducted by our PRC Legal
Advisors, our PRC Legal Advisors did not find our Group incurring any material
administrative penalties for violations of energy conservation review requirements during the
Track Record Period.
LEGAL PROCEEDINGS AND NON-COMPLIANCE OF OTHER MA TTERS
From time to time, we may be subject to legal proceedings, investigations and claims
incidental to the conduct of our business. During the Track Record Period and up to the Latest
Practicable Date, we were not involved in any material litigation, arbitration or claims
(including personal injuries, employee compensation or product liability claims) and we are
not aware of any material litigation, arbitration or claims pending or threatened against us that
would have a material adverse effect on our business, financial condition or results of
operations. Our Directors are not involved in any actual or threatened claims or litigations.
However, we may from time to time become a party to various legal, arbitration or
administrative proceedings arising from the ordinary course of business operations.
During the Track Record Period, we did not commit any material violations of the laws or
regulations which is likely to have a material adverse effect on our business, financial
condition or results of operations. We understand from our PRC Legal Advisors that, other
than (i) our failure to (a) complete certain inspections or filings; and (b) obtain certain
building ownership certificates as disclosed in the subsection headed “— Properties —
Self-Owned Properties — Buildings”, (ii) our failure to attend to (a) the “Three Simultaneities
(ࣛprocedures for the prevention and control of occupational disease hazards for
certain sectors of the construction project; and (b) the energy conservation review for certain
projects as disclosed in the subsection headed “— Environmental, Social and Governance —
Occupational Health and Work Safety” and (iii) the non-compliance of our Group relating to
advances arrangement as disclosed in the subsection headed “— Non-compliance relating to
Advances Arrangement” in this prospectus, we had complied with all relevant laws and
regulations in all material respects during the Track Record Period and the subsequent period
up to the Latest Practicable Date.
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NON-COMPLIANCE RELA TING TO ADV ANCES ARRANGEMENT
The following table summarises the non-compliance of our Group relating to advances arrangement during the Track Record Period:
Non-compliance incident Reasons for the non-compliance Legal consequences and maximum penalty Rectification actions taken
Potential operational and
financial impact
During the year ended December 31, 2021, our Group
provided loans to Linuo Group and Linuo Investment,
each being a related party of our Group, in the amount
of RMB259.6 million and RMB229.1 million,
respectively. Such advances were made by our Group
using a majority of cash and bank balances and a small
portion of bank acceptance bills (the “ bills ”) and were
recorded as other receivables due from related parties as
of December 31, 2021.
Our Group endorsed 245 and 87 bills and the aggregate
amount of RMB50.8 million and RMB12.2 million to
Linuo Group and Linuo Investment, respectively, for the
year ended December 31, 2021 (the “ Advances
Arrangement ”).
As advised by our Directors, our Group did not provide
any advances via endorsement of Bills to its related
parties other than Linuo Group and Linuo Investment
during the Track Record Period, and it received all the
bills under the Advances Arrangement through actual
underlying transaction and was not the drawer of such
bills.
According to Article 10 of the Negotiable Instruments
Laws of the PRC () (the
“PRC Negotiable Instruments Laws ”), the issue,
acquisition and endorsement of the bills shall follow the
principle of good faith and shall be supported by actual
underlying transaction or pre-existing debt relationship.
As advised by our PRC Legal Advisors, the Advances
Arrangement was not in compliance with Article 10 of
the PRC Negotiable Instruments Laws as it was not
supported by actual underlying transaction or
pre-existing debt relationships (i.e. our Group was not a
creditor of the related parties at the time of endorsement
of bills).
As advised by our Directors, the Advances
Arrangement was principally conducted to
provide working capital support to Linuo
Group and Linuo Investment and was due
to lack of understanding of the laws and
regulations in the PRC by the finance
department of our Group, which was
delegated to handle these financing
arrangements. Our Directors confirmed
that at the material time, our Group’s
finance department decided to extend the
advances by endorsement of bills instead
of lending of cash in order to maintain
cash balances. The relevant staff thought
that such lending was an “intra-group”
transactions, and genuinely misinterpreted
that it was also an actual underlying debt
relationship to support the transfer of bills
under the PRC Negotiable Instruments
Laws. They also understood that the
extension of advances by endorsement of
bills was a common market practice in the
PRC.
As advised by our PRC Legal Advisors, as of the Latest Practicable
Date, there were no specific provisions in the PRC Negotiable
Instruments Laws, the Measures for the Implementation of
Administration of Negotiable Instruments ()
(the “ PRC Negotiable Instruments Measures ”) that impose any
administrative liability on the endorser or its directors or senior
management for the endorsement of bills without actual underlying
transaction or debt relationship.
Our PRC Legal Advisors are of the view that the endorsement of bills
without actual underlying transaction or debt relationship does not
constitute any of the conducts listed in Article 102 and Article 103
of the PRC Negotiable Instruments Laws, which may be subject to
administrative penalties or criminal liabilities. Those conducts
which are subject to administrative penalties or criminal liabilities
under Article 102 of the PRC Negotiable Instruments Laws include
(i) forging or altering a negotiable instrument; (ii) deliberately
using forged or altered negotiable instruments; (iii) the act of
issuing dishonourable checks or deliberately issue checks of which
the signature or seal does not tally with the signature or seal in the
correct name pre-submitted for counter-checking; (iv) issuing drafts
or promissory notes without reliable sources of funds in order to
obtain money by deception; (v) drawer of drafts or promissory notes
making false recordings at the time of issuing the relevant drafts or
promissory notes in order to obtain property or money by deception;
(vi) using negotiable instruments of others or deliberately use
negotiable instruments overdue or voided in order to obtain
property and money by deception; and (vii) payor has committed
one of the aforesaid acts in vicious collaboration with the drawer or
holder.
Our Group has ceased to extend any advance by
endorsement of bills since December 28, 2021. To
prevent reoccurrence of this non-compliance
incident, our Group has adopted the following
internal control measures to prevent recurrence of
such non-compliance incident:
(i). implementation of internal guidelines and
policies for (a) approving, reporting and
monitoring bills transactions, and (b)
prohibiting issue, acquisition or endorsement
of bills without underlying transactions or
debt relationships;
(ii). arranged our PRC Legal Advisors to provide
training materials to our Group’s finance
department, members of the senior
management of the Company and all
Directors (including the proposed
independent non-executive Directors)
regarding the PRC Negotiable Instruments
Laws and the PRC Negotiable Instruments
Measures, and the relevant interpretation and
legal compliance in relation thereto;
(iii). Mr. Shen Haifeng, the chief financial officer
shall review and approve all applications for
bills transactions exceeding the amount of
RMB500,000 together with the relevant
underlying agreements and assess the
genuineness of the information contained in
the applications. For the qualifications and
experience of Mr. Shen, please refer to the
section headed “Directors and Senior
Management” in this prospectus; and
Our Directors are of the view
that the non-compliance
incident would not have any
material and adverse impact
on our operation or financial
condition after taking into
account (i) the legal advice
from our PRC Legal Advisors;
(ii) as of the Latest
Practicable Date, all the
non-trade other receivables
due from Linuo Group and
Linuo Investment as of
December 31, 2021 have been
subsequently settled and our
Group did not earn any
interests or proceeds from the
Advances Arrangement during
the Track Record Period; and
(iii) that we have ceased to
extend any advance by
endorsement of bills since
December 28, 2021.
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Non-compliance incident Reasons for the non-compliance Legal consequences and maximum penalty Rectification actions taken
Potential operational and
financial impact
According to Article 73 of the General Lending Provisions
issued by the People’s Bank of China (the “ PBOC ”)
() (the “ General Lending
Provisions ”), the PBOC may impose on the
non-compliant lender a fine of one to five times the
income received by the lender from such loans. Our
PRC Legal Advisors are of the view that the Advances
Arrangement may be deemed as private loan
relationship with Linuo Group and Linuo Investment.
According to the telephone consultation by our PRC Legal Advisors to
the Wuhan Branch of the People’s Bank of China (the “ Wuhan
PBOC ”), the staff of Wuhan PBOC confirmed that the PBOC
generally does not impose administrative penalty on endorsement of
bills without actual underlying transaction. In addition, the
Company has further made a written submission setting out the
details of the Advances Arrangement to the Wuhan Branch of the
PBOC through the Office of the Leading Group for Listing Affairs
of Hubei Province and
sought their view and guidance as to the implication of the
Advances Arrangement from a regulator’s perspective. On
December 6, 2022, the Wuhan PBOC formally issued a written
reply which confirmed that subsequent to January 1, 2021 and up to
the date of the written reply (during which the Advances
Arrangement occurred), it had not imposed any administrative
penalty on Wuhan Youji (as a result of, including but not limited to,
the Advances Arrangement). According to Article 3 of the PRC
Negotiable Instruments Measures, the PBOC is the competent
authority governing and administering negotiable instruments.
Wuhan PBOC, as a local branch of the PBOC, operates under the
direct instructions of the PBOC to perform the functions of the
PBOC within Hubei Province.
Based on the above, our PRC Legal Advisors are of the view that the
risk of our Group and our directors and senior management being
subject to administrative penalty for the Advances Arrangement by
the PBOC is remote.
Our PRC Legal Advisors are of the view that the Advances
Arrangement may be deemed as private loan relationship with
Linuo Group and Linuo Investment. According to the Article 73 of
the General Lending Provisions, for such private loan, the PBOC
may impose a fine on the lending party of between 100 and 500 per
cent of its illegal proceeds, and concurrently, abolish the private
loan. As confirmed by our Directors, our Group did not earn any
interests or proceeds from the Advances Arrangement during the
Track Record Period. Though the private loan did not comply with
the General Lending Provisions, as the Provisions of the Supreme
People’s Court on Several Issues concerning the Application of Law
in the Trial of Private Lending Cases have confirmed the validity of
the private loan with certain qualifications, our PRC Legal Advisors
are of the view that the risk of our Group being subject to
administrative penalty under the General Lending Provisions by the
PBOC is remote.
(iv). our Group’s finance department shall conduct
a monthly review of all the bills transaction
processed by our Group and report any
irregularities or suspicious transactions to the
chief financial officer and our Board.
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The 816 Incident
On August 16, 2022, our employees reported an accidental fire at the epichlorohydrin
tank storage sector of our Wuhan Production Plant (the “ 816 Incident ”). Epichlorohydrin is a
type of raw material primarily used for the manufacturing of chloro-alcohol rubber and resin
under our other fine chemical products segment. We have one epichlorohydrin tank at our
Wuhan Production Plant to store epichlorohydrin, which was put into use in December 2015.
During the Track Record Period, we only used a total amount of approximately 1,337.8 tons of
epichlorohydrin for our manufacturing. Therefore, epichlorohydrin served minimal purpose
for the manufacturing of our products.
During the filling process of epichlorohydrin, the hot weather caused flammable gases to
accelerate evaporation and accumulate, and inadequate anti-static measures during the filling
process resulted in a flash explosion and fire in the epichlorohydrin tank. Wuhan Youji
immediately called for standby fire engines at our Wuhan Production Plant at the onset of the
816 Incident to extinguish the fire, undertook safety and security measures to evacuate all
personnel, and restricted access to the premises. Open flame was extinguished shortly after,
and there were no injuries or significant property damages as a result of the 816 Incident. We
voluntarily reported the 816 Incident immediately to the Wuhan Municipal Qingshan District
Emergency Management Bureau (၍ଣ҅ ) (the “ Wuhan Qingshan EMB ”)
on the same day. The Wuhan Qingshan EMB conducted an onsite inspection on August 16,
2022 and issued its decision letter on August 17, 2022 titled the Qingshan Yingji Xianjue
[2022] No. 03-3 (ତӔ [2022]03-3 ໮,t h e“ On-site Decision ”), which required
Wuhan Youji to temporarily suspend its production at the Wuhan Production Plant and restrict
access to the tank storage area. The restricted premises were approximately 5,000 sq.m.
We strictly followed the instructions provided by the Wuhan Qingshan EMB, including
suspension of production at our Wuhan Production Plant. In addition, we undertook
immediate procedures and actions to re-emphasize and further supplement our internal
guidelines and policies to ensure that (i) all flammable liquids are properly stored and kept
away from fire and heat sources; (ii) only non-sparking tools and explosion-proof electrical
appliances and equipment are used at the warehouse where hazardous chemicals are stored;
(iii) anti-static measures are fully adopted to prevent accumulation and discharge of static
electricity; and (iv) preventive measures are strictly implemented to prevent steam leakage
and to avoid contact with contraindicated substances.
Furthermore, we conducted internal risk assessment to identify specific safety risks to
ensure (i) the sufficiency of our safety training; (ii) the prevention of static discharge and fire
risk; (iii) our emergency incident response capability; and (iv) our ability to use specialized
equipment during an outbreak of emergency incidents. We also provided further safety
education and training to our production staff at all of our production sites to enhance our
safety measures and to improve our staff’s ability to respond to emergency incidents. Based on
(i) the sufficient safety trainings courses and training performance reviews conducted in
accordance with the Safety Training and Education Management Policy ( τΌ੃৅઺ԃ၍ଣ
); (ii) the routine and specific inspections and daily operating parameter monitoring
conducted in accordance with the Safety Inspection and Hidden Danger Screening and
Management Policy ( ); (iii) the prompt and responsive
emergency plans implemented and the routine safety drills conducted in accordance with the
Comprehensive Emergency Plan () and Hazardous Chemicals Safety
Management Policy (); and (iv) the specialized and professional
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team staffed in accordance with the Fire Control Team On-duty Responsibilities ( ऊԣછՓ
ᔖப). As of the Latest Practicable Date, the 816 Incident was concluded and no
fine or punishment was imposed on our Group by the regulatory authorities. Our Internal
Control Consultant advises that there was no internal control weaknesses which led to the 816
Incident and there is no potential impact of the 816 Incident on our Group’s ESG measures and
policies.
To prevent potential re-occurrences, we immediately implemented the rectification
measures pursuant to the On-site Decision; transported other storage tanks from the affected
premises; and performed comprehensive and in-depth investigation of potential safety
hazards. In addition, we strengthened our internal controls including (i) refined operation
procedures of the loading and unloading of hazardous chemicals in conjunction with strictly
monitored manufacturing process; (ii) notices issued to re-emphasize the importance of safety
management and key points of safety production under high temperature; (iii) trainings
specifically designed to strengthen safe production awareness; and (iv) emergency drills
specifically organized to improve emergency response ability.
Except for the On-site Decision, there was no administrative penalty (including fines,
suspension of license, reduction of qualification level and revocation of license, etc.),
compulsory administrative measures, or administrative, civil or criminal liability imposed on
Wuhan Youji in relation to the 816 Incident as of the date of this prospectus. There was no
prior record of operational incident that triggered government investigation or sanction.
On September 5, 2022, the Wuhan Qingshan EMB issued the rectification review
decision letter titled the Qingshan Yingji Fucha [2022] No. 05049 (ݟ
[2022]05049 ໮, the “ Review Decision ”), which concluded that Wuhan Youji has implemented
the rectification measures in accordance with the regulatory requirements, and our Wuhan
Production Plant was permitted to resume production. Except for the manufacturing
suspension of certain other fine products due to the repair of the epichlorohydrin tank, our
Wuhan Production Plant fully resumed its normal business operations and products
manufacturing on September 5, 2022. The epichlorohydrin tank was replaced and
manufacturing was fully resumed by January 2023.
We believe this temporary production suspension does not have a material adverse
impact on our business operations and financial conditions because (i) we maintained
sufficient inventory to satisfy our sales orders and expected market demands; (ii) our average
daily sales volume during the suspension period was at the same level with the average daily
sales volume during the six months ended June 30, 2022; and (iii) we modified our planning
and schedule to adjust to our production needs for the remaining periods in 2022. First, the use
of epichlorohydrin accounts for a relatively small amount of the production of our other fine
chemical products, and based on our observations on our inventory consumptions since
August 2022, our inventory of other fine chemical products is able to meet the expected
market demand until our epichlorohydrin tank is replaced. While our Wuhan Production
Plant’s operation was suspended from August 16 to September 5, 2022, the temporary
suspension did not materially affect our ability to meet our sales orders due to our sufficient
inventory at our Wuhan Production Plant. Specifically, Wuhan Production Plant maintained
approximately 18,729 tons in inventory of its major products immediately before the 816
Incident. Based on the average sales volume of approximately 455 tons per day for the first
half of 2022, this inventory level is sufficient to make up for the production suspension and
meet expected demands during the production suspension period. As of September 5, 2022
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when we resumed production at our Wuhan Production Plant, the Wuhan Production Plant still
maintained approximately 10,788 tons in inventory of its major products. Second, the
temporary suspension of our Wuhan Production Plant did not materially affect our financial
performance due to our ability to meet our sales demands. During the 21 days of temporary
suspension period, we still maintained normal order placement and delivery with our
customers. Lastly, in addition to the continued efficient operation of our Wuhan Production
Plant, we postponed our annual maintenance originally planned in December 2022 to January
2023 to coordinate our production schedule to allocate additional production days for the
calendar year.
The estimated direct economic loss caused by the 816 Incident was approximately
RMB435,000, comprised of (i) the amount of epichlorohydrin stored in the tank valued at
approximately RMB364,000; (ii) the carrying amount of the epichlorohydrin tank after
amortization of approximately RMB65,000; and (iii) miscellaneous losses of approximately
RMB6,000. As advised by our PRC Legal Advisors, the 816 Incident is likely to be regarded
as a general accident by the competent authorities and the liable entity may be fined for no less
than RMB300,000 but not exceeding RMB1,000,000 under the relevant PRC laws and
regulations. Our PRC Legal Advisors’ opinion is based on the following: (i) pursuant to the
Regulations on the Reporting, Investigation and Disposition of Work Safety Accidents
promulgated (ஈଣૢԷ ) by the State Council of the People’s
Republic of China issued on April 9, 2007, production safety accidents are classified into four
levels: especially serious accident, major accident, more accidents, and general accident,
depending on the casualties or direct economic losses. The general accident refers to an
accident that causes less than three casualties, or less than 10 serious injuries, or less than
RMB10,000,000 of direct economic loss; (ii) pursuant to the Work Safety Law of the People’s
Republic of China () amended by the Standing Committee of
the National People’s Congress on June 10, 2021, the liable entity for the general accident
shall be imposed of a fine for no less than RMB300,000 and not exceeding RMB1,000,000;
and (iii) according to the Company’s confirmation, the 816 Incident did not cause any
casualties or injuries, and the estimated direct economic loss was approximately
RMB435,000. According to the interview with the Wuhan Qingshan EMB on November 10,
2022, the government authority confirmed that as of the date of the interview: (i) there were no
administrative penalties imposed on Wuhan Youji; (ii) the rectification measures have been
satisfactorily completed; and (iii) after replacing the epichlorohydrin tank and finishing the
check procedure of the competent authorities, Wuhan Youji can fully resume its normal
business operations and products manufacturing. According to the confirmation letter issued
by the Wuhan Qingshan EMB on November 1, 2022, subsequent to January 1, 2022 and up to
the confirmation letter issuance date (during which the 816 Incident occurred), there was no
material or severe manufacturing safety accidents incurred by Wuhan Youji. As of the Latest
Practicable Date, there was no litigation or claim raised by any party in relation to the 816
Incident.
RISK MANAGEMENT AND INTERNAL CONTROL
Risk management
With the growth and expansion of our operations, potential risks associated with our
business increase as well. In order to identify, assess and control the risks that may impede our
business growth, we designed and implemented risk management policies to address various
potential risks identified in relation to our operations, including operational risks, credit risks,
BUSINESS
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market risks, financial risks and legal risks. Our risk management policies set forth
procedures to identify, analyze, categorize, mitigate and monitor various risks as well as the
reporting hierarchy of risks identified in the course of our operation. Each of our business
departments and functions is responsible for identifying and evaluating the risks relating to its
area of operations and implementing our risk management and internal control systems. Our
Audit Committee is responsible for overseeing our management in the implementation of our
overall risk management and internal control systems and assessing the efficiency of our risk
management and internal control systems. Key personnel of our internal control team include
one internal audit manager and two internal auditors with extensive experience in the
professional field.
Internal control
Our Board takes the responsibility to ensure that we maintain sound and effective
internal controls to safeguard our Shareholders’ investment and our assets. We have adopted,
or expect to adopt before the Listing, a series of internal control policies, procedures and
programs designed to provide reasonable assurance to achieve these objectives, including
effective and efficient operations, reliable financial reporting and compliance with applicable
laws and regulations. In particular, these measures include the following:
• we have adopted internal control system and procedures to cover corporate
governance, risk management, business operations, and legal and compliance
matters;
• we will assess and monitor the due implementation of our risk management and
internal control system and procedures by the relevant departments through regular
reviews and inspections;
• we will provide internal trainings to our staff to enable them to adhere to the internal
control system and procedures;
• we will establish an audit committee comprising three independent non-executive
Directors. The terms of reference to be adopted by the audit committee set out its
duties and obligations to ensure our Group’s compliance with applicable laws and
regulations. In this regard, the audit committee will be authorized under its terms of
reference to review any arrangements which may cause potential irregularities in
financial reporting, internal control or other matters; and
• we have appointed BOCOM International (Asia) Limited as our Company’s
compliance adviser pursuant to the Listing Rules to ensure that, among other things,
we are properly guided and advised as to the compliance with the Listing Rules and
all other applicable laws, rules, codes and guidelines.
We have taken steps to ensure the effective implementation of our internal control system
by establishing a team to organize and review our internal control system and by providing
guidance to our Directors, senior management and employees with respect to our internal
control policies and the duties and responsibilities of directors and management of listed
companies under the Listing Rules and other applicable laws and regulation.
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OVERVIEW
Upon Listing, our Board will comprise eight Directors, including two executive
Directors, three non-executive Directors and three independent non-executive Directors,
namely:
Name Age
Date of
joining our
Group
Date of
appointment
as Director Position(s) Roles and responsibilities
Executive Directors
Mr. Zou Xiaohong
(ࠀ)
64 July 1981 March 25,
2022
Executive
Director and
chairman of
the Board
Responsible for the overall
strategic and major
operational
decision-making of our
Group
Mr. Chen Ping
(௓̻)
61 October 2010 September 23,
2016
Executive
Director and
joint company
secretary
Responsible for the Board
affairs, corporate
governance and capital
operations of our Group
Non-executive Directors
Mr. Gao Lei
(৷ཤ)
40 April 2010 September 23,
2016
Non-executive
Director
Responsible for
shareholder related
matters and advising on
corporate governance
and internal control of
our Group
Mr. Shen Yingming
(׼ߵ)
65 September
2004
September 23,
2016
Non-executive
Director
Responsible for
shareholder related
matters and advising on
corporate governance
and internal control of
our Group
M s .L iD e y e
(ҽᅃዊ)
57 March 25,
2022
March 25,
2022
Non-executive
Director
Responsible for providing
advice on operation and
management of our
Group
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Name Age
Date of
joining our
Group
Date of
appointment
as Director Position(s) Roles and responsibilities
Independent Non-executive Directors
Dr. Liu Zhongdong
(ᄎᙒಊ)
65 Listing Date Listing Date Independent
non-executive
Director
Responsible for providing
independent advice on
the Group’s technology
and research
Dr. Yuan Kang
(঺ੰ)
35 Listing Date Listing Date Independent
non-executive
Director
Responsible for providing
independent advice on
the operations and
management of our
Group
Mr. Liu
Kai Yu Kenneth
(࿋઼ρ)
54 Listing Date Listing Date Independent
non-executive
Director
Responsible for providing
independent advice on
the operations and
management of our
Group
Our senior management team, in addition to the executive Directors listed above,
comprises the following:
Name Age
Date of
joining our
Group
Date of
appointment
as senior
management
Existing
position(s) in
our Group Roles and responsibilities
Mr. Zhou Xu
(մϛ)
54 August 1988 March 25,
2022
Chief executive
officer
Responsible for the
operations and
management of our
Group
Mr. Shen Haifeng
(ࢤ)
53 December
2009
March 25,
2022
Chief financial
officer
Responsible for the
financial management,
financing and investment
activities of our Group
Save as may be disclosed below, none of our Directors and members of our senior
management are related to the other Directors or members of senior management.
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DIRECTORS
Executive Directors
Mr . Zou Xiaohong (ࠀ) aged 64, was appointed as our executive Director and
chairman of the Board on March 25, 2022. Mr. Zou has also been the chairman of Wuhan Youji
since May 2015, and the director of Qianjiang Xinyihong and Youji HK since June 2015 and
June 2016, respectively. Mr. Zou is primarily responsible for the overall strategic and major
operational decision-making of our Group.
Mr. Zou has over 42 years of experience in the organic chemical industry and has been
working for our Group since his graduation. Mr. Zou joined our Group in July 1981 as a
technician of Wuhan Youji and re-joined in September 1985 after three years study in Wuhan
Gedian Chemical Plant Staff University (ʷʈᅀᔖʈɽኪ ), with his last position
as the chairman since May 2015. Except for working experience in our Group, Mr. Zou also
served other companies. Mr. Zou has been the chairman at Yingcheng Wuhan Organic Material
Co. Ltd. (ʮ̡ )( “ Yingcheng Wuhan Organic ”) and HUBEI
SINEM FLA VOR CO., LTD. (ʮ̡ )( “ Hubei Sinem ”) since July 2014
and February 2018, respectively. Since October 2018, he has served as the vice chairman and
a director at Shandong Keyuan Pharmaceutical Co., Ltd. (ʮ̡ ), a
pharmaceutical company that is listed on the Shenzhen Stock Exchange (stock code: 301281),
where he is mainly responsible for the company’s overall management.
Mr. Zou was awarded the May 1st Labor Medal ( ʞɓ௶ਗᆤ௝ ) by Wuhan Federation of
Trade Union (ဏ̹ᐼʈึ ) in April 2002 and was granted with the Special Government
Allowance (൨ ) by Wuhan Municipal People’s Government and Wuhan Municipal
Committee of the Communist Party of China (ึ ) in December 2008.
In addition, Mr. Zou was recognized as the 15th Model Worker of Wuhan City (ဏ̹ୋɤʞ
௶ਗᅼᇍ ) by Wuhan Municipal People’s Government in April 2012 and the Middle-aged
and Youth Experts with Outstanding Contribution (࢕by Hubei
Provincial People’s Government and Hubei Provincial Committee of the Communist Party of
China (ึ ) in January 2013.
Mr. Zou was the general manager of Wuhan Organic Import & Export Co., Ltd. (ဏϞ
ʮ̡ ) within 12 months prior to its dissolution by deregistration for change of
business strategy in July 23, 2011. Mr. Zou confirms that, to the best of his knowledge, (i) the
dissolved company was solvent immediately prior to its dissolution and had no outstanding
claim or liabilities; (ii) he has not received any notification in respect of penalty, acting or
proceeding from PRC authorities as a result of the dissolution; and (iii) he is not aware of any
actual or potential claim which has been or will be made against him as a result of the
dissolution.
Mr. Zou obtained a tertiary degree in chemical machinery from Wuhan Gedian Chemical
Plant Staff University in the PRC in September 1985. He holds the qualification of senior
operation manager (ࢪgranted by Department of Labor and Social Security of
Hubei Province (ღᝂ ) (currently known as Department of Human
Resources and Social Security of Hubei Province (ღᝂ )) in
December 2002, the qualification of professorate senior engineer (ࢪ)
granted by Department of Human Resources and Social Security of Hubei Province in March
2015.
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Mr . Chen Ping ( ௓̻), aged 61, was appointed as our Director on September 23, 2016
and was re-designated as our executive Director on March 25, 2022. Mr. Chen joined our
Group in October 2010 as the board secretary and has served as a director of Wuhan Youji
since August 2016. He has also been the director of Hebei Kangshi since its establishment in
January 2019. He is primarily responsible for the Board affairs, corporate governance and
capital operations of our Group.
Mr. Chen has over 26 years of experience of corporate management. Prior to joining our
Group, he served as a deputy general manager at Shenzhen Asia Link Investment Co., Ltd. ( ଉ
ʮ̡ ) (currently known as Shenzhen Hengrun Taifu Investment Co., Ltd.
(ʮ̡ )) from July 1997 to September 1999, responsible for
investment and financing management; Wuhan Plastics Industrial Group Co., Ltd. (ࣘ
ʮ̡ ) (currently known as Hubei Radio & Television Information Network
Co., Ltd. (ʮ̡ )), a company listed on the Shenzhen Stock
Exchange (stock code: 000665); and the general manager at Wuhan Xianglong Trading Co.,
Ltd. (ʮ̡ ) (currently known as Wuhan Xianglong New Energy Co., Ltd.
(ʮ̡ )) from August 2003 to November 2005, responsible for the overall
management of the company. From November 2006 to July 2008, he worked at Wuhan
Fengfan Surface Engineering Co., Ltd. (ʮ̡ ) as a director and a
standing vice manager. From August 2008 to September 2010, Mr. Chen served as the
international affairs department head of Hunan Nonferrous Metals Corporation Limited (ی
ʮ̡ ), where he was mainly responsible for company’s international
affairs. He also served as the director at HNC (Canada) Antimony Mine Limited and BEA VER
BROOK ANTIMONY MINE INC. from August 2009 to September 2010.
Mr. Chen graduated from Beijing Institute of Foreign Trade (ኪ৫ )
(currently known as University of International Business and Economics (ɽ
ኪ)) in the PRC in July 1983, majoring in English for Foreign Trade. He obtained a bachelor’s
degree in economics from Beijing Institute of Foreign Trade in September 1983 and a master’s
degree in economics from Fudan University ( ూ͇ɽኪ ) in the PRC in July 1990. He holds the
qualification of economist granted by Wuhan Municipal Personnel Bureau (ဏ̹ɛԫ҅ )
(currently known as Wuhan Municipal Human Resources and Social Security Bureau (ဏ̹
ღ҅ )) in October 2001.
Non-executive Directors
Mr . Gao Lei ( ৷ཤ), aged 40, was appointed as our Director on September 23, 2016 and
was re-designated as our non-executive Director on March 25, 2022. Mr. Gao joined our
Group in April 2010 and has been serving as a director of Wuhan Youji since June 2016. He is
primarily responsible for shareholder related matters and advising on corporate governance
and internal control of our Group.
Mr. Gao has more than ten years of experience in investment management. Prior to
joining our Group, Mr. Gao worked as general manager assistant at Shanghai Sanwei
Investment Development Co., Ltd. (ʮ̡ ), a company principally
engaged in investment management, where he was responsible for investment management.
Since December 2013, Mr. Gao has been serving as the general manager at Shanghai Linuo
Industry & Trade Co., Ltd. (ʮ̡ ), a company in the property lease
and management industry, where he was responsible for its overall management. Since April
2017, he has been serving as a director at Linuo Sunshine (Hong Kong) Investment Limited
(ʮ̡ ), an investment company.
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Mr. Gao was a director of Hong Kong Linuo Pharmaceutical Co., Limited (ಥɢፕᖹุ
ʮ̡ ) prior to its dissolution by deregistration for change of business strategy on
October 16, 2015. Mr. Gao confirms that, to the best of his knowledge, (i) the dissolved
company was solvent immediately prior to its dissolution and had no outstanding claim or
liabilities; (ii) he has not received any notification in respect of penalty, acting or proceeding
from Hong Kong authorities as a result of the dissolution; and (iii) he is not aware of any
actual or potential claim which has been or will be made against him as a result of the
dissolution.
Mr. Gao obtained his master’s degree of business administration from National
University in the United States in April 2010.
Mr . Shen Yingming (׼ߵ) aged 65, was appointed as our Director on September 23,
2016 and was re-designated as our non-executive Director on March 25, 2022. He is mainly
responsible for shareholder related matters and advising on corporate governance and internal
control of our Group.
Mr. Shen has over 30 years of experience in business administration. Prior to joining our
Group, from March 1994 to November 2001, he served as the general manager of Jinan
Sanwei Glass Products Co. Ltd. (ʮ̡ ). From November 2001 to
January 2010, he worked at Wuhan Linuo Solar Energy Group Co., Ltd. (ဏɢፕ˄ජঐණྠ
ʮ̡ ) (currently known as Hongfa Technology Co., Ltd. (ʮ̡ )),
a company principally engaged in solar energy industry then and listed on the Shanghai Stock
Exchange (stock code: 600885), with his last position as chairman of the board of supervisors.
Since January 2010, he has been the chairman of the board of supervisors at Linuo Group
Holdings Co., Ltd. (ʮ̡ ), a solar thermal products and photovoltaic products
manufacturer. In the meanwhile, he has also been the supervisor at Shandong Keyuan
Pharmaceutical Co., Ltd., a pharmaceutical company that is listed on Shenzhen Stock Exchange
(stock code: 301281).
Mr. Shen was a director, supervisor or general manager of the following PRC companies
prior to their dissolution by deregistration:
Name of company
Nature of
business
Date of
dissolution
Reason for
dissolution
Linuo Solar Energy
Technology (Taiyuan)
Co Ltd (translated from

ʮ̡ )
Consultancy
service
December 15,
2021
Change of business
strategy
Hubei Twin Tigers Coating
Engineering Co., Ltd.
(෩ༀʈ೻
ʮ̡ )
Construction November 19,
2019
Change of business
strategy
Wuhan Linuo Investment
Co., Ltd. (ဏɢፕ
ʮ̡ )
Investment October 16,
2019
Tax planning
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Name of company
Nature of
business
Date of
dissolution
Reason for
dissolution
Shaanxi Linuo Glass
Vessel Co Ltd
(ۜ
ʮ̡ )
Manufacturing August 17,
2017
Change of business
strategy
Wuhan Twin Tigers
Anticorrosion Coating
Co., Ltd. (ԣၵ
ʮ̡ )
Manufacturing June 30, 2017 Change of business
strategy
Wuhan Twin Tigers Powder
Coating Co Ltd
(translated fromဏ
ʮ̡ )
Retail May 26, 2015 Change of business
strategy
Hanyang Linuo Industry
and Trade Co., Ltd.
(ʮ̡ )
Trade March 20,
2015
Change of business
strategy
Mr. Shen confirms that, to the best of his knowledge, (i) each of the dissolved companies
above was solvent immediately prior to its dissolution and had no outstanding claim or
liabilities; (ii) he has not received any notification in respect of penalty, acting or proceeding
from the PRC authorities as a result of the dissolution; and (iii) he is not aware of any actual
or potential claim which has been or will be made against him as a result of the dissolution.
Mr. Shen obtained the professional certificate of completing economic management courses
delivered by Shandong University (ɽኪ) in the PRC in October 1997. In March 2006, he
obtained the certificate of completing the graduate courses of masters of business administration
granted by the Training College of Renmin University of China ( ʕ਷ɛ͏ɽኪ ) in the PRC.
Ms. Li Deye ( ҽᅃዊ ), aged 57, was appointed as our non-executive Director on March
25, 2022. She is mainly responsible for providing advice on operation and management of our
Group.
Ms. Li has over 25 years of experience in supply chain management and business
administration. She had extensive experience serving the subsidiaries of Linuo Group
Holdings Co., Ltd. (ʮ̡ ), a solar thermal products and photovoltaic
products manufacturer, including serving as the purchasing director of Shandong Sanli
Industrial Group Co., Ltd. (ʮ̡ ) from December 1998 to November
2009, the supply chain director of Shandong Linuo Electric Power Co., Ltd. (ٰ
ʮ̡ ) from November 2009 to December 2015, and the general manager and
chairperson of Shandong Linuo Photovoltaic Hi-Tech Co., Ltd. (ʮ
̡) from November 2017 to January 2022. She has also been the supply chain director and the
resources management director at Linuo Group Holdings Co., Ltd. from January 2016 to
October 2017 and since February 2022, respectively.
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Ms. Li was a manager of Jinan Dexincheng Trading Co., Ltd. (ʮ
̡) prior to its dissolution by deregistration for change of business strategy on June 11, 2019.
Ms. Li confirms that, to the best of her knowledge, (i) the dissolved company was solvent
immediately prior to its dissolution and had no outstanding claim or liabilities; (ii) she has not
received any notification in respect of penalty, acting or proceeding from PRC authorities as a
result of the dissolution; and (iii) she is not aware of any actual or potential claim which has
been or will be made against her as a result of the dissolution.
Ms. Li obtained a bachelor’s degree of administrative management and a completion
certificate of business administration from Shandong University (ɽኪ ) in the PRC in
October 2009 and June 2011 respectively. In April 2008, Ms. Li was qualified as a senior
certified purchasing professional (ࢪby CHC Manager Human Resource
Committee of China High-technology Education Working Committee (CHCҦ઺ʈ
ึ ).
Independent non-executive Directors
Dr . Liu Zhongdong ( ᄎᙒಊ ), aged 65, will be our independent non-executive Director
upon Listing, and be mainly responsible for providing independent advice on the Group’s
technology and research.
Dr. Liu has over 34 years of experience in academic research of food additives. He
worked at Zhengzhou Grain College (ኪ৫ ) (currently known as Henan University of
Technology (ʈุɽኪ )) since August 1989, with his last position as a level-2 professor.
Dr. Liu was appointed as a member or an expert of various food additives related
associations, including the member of the First National Food Safety Standards Review
Committee (ึ ) in January 2010, an expert of the
“Tri-new” Foods Administrative Licensing Review Experts Pool (“ ɧอ”஢̙൙ᄲ
࢕in April 2021 and the secretary-general of the Professional Committee of China Food
Additives and Ingredients Association (ึ ) since 2002,
a member of Chinese delegation to the International Annual Meeting of Institute of Food
Technologies (ึ , IFT) since 2005 and a member of Chinese
delegation in Codex Committee on Food Additives of the Food and Agriculture organization
of the United Nations and World Health Organization since 2007.
Dr. Liu obtained his master’s degree in engineering from Zhengzhou Grain College ( ቍψ
ኪ৫ ) in the PRC in June 1989 and his doctorate degree in science from Xiamen
University (ɽኪ ) in the PRC in September 2006, majoring in organic chemistry.
Dr . Yuan Kang ( ঺ੰ), aged 35, will be our independent non-executive Director upon
Listing, and be mainly responsible for providing independent advice on the operations and
management of our Group.
Dr. Yuan has been a lecturer and an associate professor at Law School of Wuhan
University (ኪ৫ ) from February 2016 to February 2019 and since March 2019,
respectively.
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Since December 2020, Dr. Yuan served as an independent director at Hubei Color Root
Technology Co., Ltd. (ʮ̡ ), a reactive dyes manufacturer, whose
shares were delisted from National Equities Exchange and Quotations (stock code: 836620) in
February 2018. Since February 2021, he served as an independent director at Shandong
Keyuan Pharmaceutical Co., Ltd., a pharmaceutical company that is listed on Shenzhen Stock
Exchange (stock code: 301281). Since April 2021, Dr. Yuan has also been an independent
director at Hubei Zhenhua Chemical Co., Ltd. (ʮ̡ ), a chromium salt
and vitamin K3 producer, whose shares are listed on Shanghai Stock Exchange (stock code:
603067.SH), where he is mainly responsible for providing independent advice on the
operations and management.
Dr. Yuan obtained his bachelor’s degree in law and doctorate degree in economic law
from Wuhan University (ဏɽኪ ) in the PRC in June 2010 and December 2015 respectively.
Dr. Yuan received his Legal Professional Qualification Certificate (ࣣfrom
Ministry of Justice of the People’s Republic of China (௅ ) in August
2010 and the Qualification Certificate for Independent Directors of Listing Companies ( ɪ̹
ࣣfrom Shanghai Stock Exchange in April 2021.
Mr . Liu Kai Yu Kenneth ( ࿋઼ρ ), aged 54, will be our independent non-executive
Director upon Listing and be mainly responsible for providing independent advice on the
operations and management of our Group.
Mr. Liu is an experienced audit professional. Prior to joining our Group, he served as a
junior accountant in the audit department of Kwan Wong Tan & Fong (merged with Deloitte
Touche Tohmatsu in 1997) from May 1994 to August 1994, an accountant at Ernst & Young
from August 1994 to May 1996, an assistant manager of the audit and control division of the
Hong Kong branch of Banque Nationale de Paris from August 1996 to September 1997, and an
audit officer in the internal audit department of Kowloon-Canton Railway Corporation from
January 2000 to September 2000. After that, he worked at VC CEF Capital Limited (currently
known as VC Capital Limited) from September 2000 to May 2003, with his last position as an
assistant manager in the corporate finance department. From June 2004 to October 2016, he
worked at Hong Kong Exchanges and Clearing Limited, the shares of which are listed on the
Main Board of the Stock Exchange (stock code: 388), with his last position as assistant vice
president in IPO Transactions, Listing & Regulatory Affairs Division, responsible for vetting
initial public offering applications.
Mr. Liu has also served as an independent non-executive director in Fourace Industries
Group Holdings Limited (ʮ̡ ), a personal care and electrical
appliances provider listed on the Stock Exchange of Hong Kong (stock code: 1455), since
August 2020; Hangzhou Tigermed Consulting Co. Ltd. (ʮ̡ ), a
clinical research services provider listed on the Stock Exchange of Hong Kong (stock code:
3347) and ChiNext of the Shenzhen Stock Exchange (stock code: 300347), since April 2020;
Tianli Education International Holdings Limited (ʮ̡ ), an education
service provider listed on the Stock Exchange of Hong Kong (stock code: 1773), since June
2018; Sisram Medical Ltd., an energy-based medical esthetic devices provider listed on the
Stock Exchange of Hong Kong (stock code: 1696), since August 2017.
Mr. Liu obtained his bachelor of engineering degree in mechanical engineering from
Imperial College of Science, Technology and Medicine of the University of London in the
United Kingdom in August 1991. He received his master of business administration degree in
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international banking and finance from the University of Birmingham in the United Kingdom
in December 1998. Mr. Liu has been a member of the Hong Kong Institute of Certified Public
Accountants since July 1999 and a fellow of the Association of Chartered Certified
Accountants since April 2004.
Save as disclosed above, none of our Directors have held any other directorships in listed
companies during the three years immediately preceding the date of this prospectus.
Disclosure Required under the Listing Rules
Rule 3.09D of the Listing Rules
Each of our Directors confirms that he or she (i) has obtained the legal advice referred to
in Rule 3.09D of the Listing Rules on March 25, 2022, and (ii) understands his or her
obligations as a director of a listed issuer under the Listing Rules.
Rule 3.13 of the Listing Rules
Each of the independent non-executive Directors confirms (i) his or her independence as
regards each of the factors referred to in Rule 3.13(1) to (8) of the Listing Rules; (ii) that he or
she has no past or present financial or other interest in the business of our Company or its
subsidiaries or any connection with any core connected person of our Company; and (iii) that
there are no other factors that may affect his or her independence at the time of his or her
appointments.
Rule 8.10 of the Listing Rules
As of the Latest Practicable Date, Mr. Zou Xiaohong was the chairman of Yingcheng
Wuhan Organic and Hubei Sinem. Yingcheng Wuhan Organic is principally engaged in the
manufacturing and sales of cinnamaldehyde (which can be used as flavorings and food
adulterant), cinnamyl alcohol (which can be used in perfumery and as a deodorant) and
cinnamic acid (which can be used in flavorings and certain pharmaceuticals), and spices made
from cinnamaldehyde, cinnamyl alcohol and cinnamic acid. For the year ended December 31,
2023, Yingcheng Wuhan Organic had a revenue of RMB65.3 million. As of the Latest
Practicable date, Hubei Sinem had yet to commence operation. It is intended to carry out the
same principal business as Yingcheng Wuhan Organic, manufacturing cinnamaldehyde,
cinnamyl alcohol, cinnamic acid and spices made from cinnamaldehyde, cinnamyl alcohol
and cinnamic acid (collectively, the “ Relevant Businesses ”). Our Directors are of the view
that the Relevant Businesses are clearly delineated from our Group and that there will be no
direct or indirect competition of the Relevant Businesses with our principal business for the
following reasons:
(a) Different nature of products . The products offered by the Relevant Businesses are
different from those offered by our Group. On the one hand, we focus on the
manufacture of toluene oxidation and chlorination products, benzoic acid
ammonification products and other fine chemical products. On the other, each of
Yingcheng Wuhan Organic and Hubei Sinem focuses on the manufacture of
cinnamaldehyde, cinnamyl alcohol and cinnamic acid, which as demonstrated above
has different practical use than our products. In terms of production process,
cinnamaldehyde, cinnamyl alcohol and cinnamic acid are regarded as downstream
DIRECTORS AND SENIOR MANAGEMENT
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--- page 247 ---
products of our products, as they are directly and indirectly manufactured by the
aldol condensation of benzaldehyde and acetaldehyde. The aldol condensation is an
organic reaction process in which benzaldehyde reacts with acetaldehyde to
generate cinnamaldehyde, which can be further synthesized to produce cinnamyl
alcohol (through reduction) and cinnamic acid (through oxidation). The
manufacturing of these products are typically under room temperature and ambient
pressure, while most products of our Group are generated under higher temperature
and higher pressure. In view of the different nature, use and production process, our
Directors believe there will be no direct or indirect competition between products of
the Relevant Businesses and ours.
(b) Different target customers . Due to the different use of our products and the
downstream nature of the Relevant Businesses’ products, the target customers of
our Group and the Relevant Businesses are clearly distinguished. As disclosed in
“Business — Sales and Customers,” we sell our products directly to end users such
as chemical companies (including Yingcheng Wuhan Organic), food producing and
processing companies, pharmaceutical companies and animal feed producing
companies in the PRC and global markets, as well as distribute and sell our products
through our distributors, who we expect will distribute or resell our products to their
distributors and/or end users in the PRC and global markets. However, Yingcheng
Wuhan Organic (and Hubei Sinem once it commences operation) sell their products
to spice processing companies to produce, for example, appetite stimulants to
animal feed manufacturers. For the years ended December 31, 2021, 2022 and 2023,
52, 54 and 56 of our customers also procured from Yingcheng Wuhan Organic
products that are of a different nature from those of our Group. These overlapping
customers, none of which are our major customers, contributed to 4.5%, 4.9% and
5.3% of our revenue for the same years, respectively.
(c) Corporate governance structure . As the chairman of Yingcheng Wuhan Organic and
Hubei Sinem, Mr. Zou serves a primarily advisory and supervisory role in these
companies, and is not involved in the daily management of their operations. The
daily management of Yingcheng Wuhan Organic and Hubei Sinem are vested in
their respective boards of directors and senior management, whose members (other
than Mr. Zou) do not overlap with our Board and senior management. Furthermore,
Mr. Zou is aware of his fiduciary duties as a Director which require that he must,
among others, act in good faith for the benefit of our Company as a whole, and avoid
conflicts between his personal interests (such as his interests in Yingcheng Wuhan
Organic and Hubei Sinem) and the interests of our Company. In particular:
(i) pursuant to our Articles of Association, unless otherwise provided, Mr. Zou
shall not vote on any resolution approving any contract or arrangement or any
other proposal in which he or any of his associates have a material interest
(including his interest in Yingcheng Wuhan Organic and Hubei Sinem) nor
shall Mr. Zou be counted in the quorum present at the meeting; and
(ii) if Mr. Zou has material interests, he shall make full disclosure in respect of
matters that conflict or potentially conflict with our interest and absent himself
from the Board meetings on matters in which he or his close associates have a
material interest, unless his attendance or participation at such Board meeting
is specifically requested by a majority of the independent non-executive
Directors.
DIRECTORS AND SENIOR MANAGEMENT
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Save as disclosed above, each of our Directors confirms that as of the Latest Practicable
Date, he/she did not have any interest in a business which competes or is likely to compete,
directly or indirectly, with our business and requires disclosure under Rule 8.10 of the Listing
Rules.
SENIOR MANAGEMENT
Our senior management are responsible for the day-to-day management and operation of
our business.
Mr . Zhou Xu ( մϛ), aged 54, is the chief executive officer of our Company, primarily
responsible for the operations and management of our Group. Mr. Zhou has also been the
general manager of Wuhan Youji since June 2016.
Mr. Zhou has over 35 years of experience of toluene derivative products industry, with
most of his time devoted to the development of our Group. He has been working continuously
for our Group since August 1988, and was appointed as our chief executive officer on March
25, 2022.
Mr. Zhou obtained his tertiary degree in industrial management engineering from Wuhan
University of Automotive Technology (ဏӛԓʈุɽኪ ) (currently known as Wuhan
University of Technology (ဏଣʈɽኪ )) in the PRC in June 1995 and his master’s degree in
economics from Party School of the Wuhan Municipal Committee of the Communist Party of
China (ࣧin the PRC in January 2002. Mr. Zhou was awarded the
“Model Worker of Wuhan City (ဏ̹௶ਗᅼᇍ )” by Wuhan Municipal People’s Government
(ִ݁in April 2015 and the Excellent Communist Party Member of Wuhan City
“(ࡰby Wuhan Municipal Committee of the Communist Party of China
(ဏ̹։ ) in June 2021.
Mr . Shen Haifeng (ࢤ) aged 53, is the chief financial officer of our Company,
primarily responsible for the financial management, financing and investment activities of our
Group. He also serves as a deputy general manager of Wuhan Youji, a director of Hebei
Kangshi and a supervisor of multiple subsidiaries of our Group, including Qianjiang
Xinyihong, Hubei Kangxin and Hubei Xinxuanhong.
Mr. Shen has more than 20 years of experience of financial management. Prior to joining
our Group in 2009, Mr. Shen served as the financial manager at Huasheng Jiangquan Group
Co., Ltd. (ʮ̡ ) from August 2003 to October 2005. He then served as the
deputy director of audit center at Linuo Group Holdings Co., Ltd. (ʮ̡ )
from December 2005 to July 2006 and the chief financial officer at Wuhan Linuo Chemical
Group Co., Ltd. (ʮ̡ ) from August 2006 to November 2009, where
he was responsible for overall financial management.
Mr. Shen obtained his bachelor’s degree in economics majoring in planning statistics
from Northeast Forestry University (ุɽኪ ) in July 1992. He was qualified as an
auditor by the National Audit Office of the People’s Republic of China (ࠇ
໇) in November 1996, an accountant by the Ministry of Finance of the People’s Republic of
China in May 1997 and a Certified Public Accountant by The Chinese Institute of Certified
Public Accountants (՘ึ ) in December 2004.
DIRECTORS AND SENIOR MANAGEMENT
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JOINT COMPANY SECRETARIES
Mr . Chen Ping ( ௓̻), our executive Director, was appointed as one of our joint
company secretaries on March 25, 2022. For the biographical details of Mr. Chen, please refer
to “Directors — Executive Directors — Mr. Chen Ping ( ௓̻)” in this prospectus.
Ms. Lai Ho Yan (ࢸ) was appointed as one of our joint company secretaries on
March 25, 2022. Ms. Lai is currently a manager of Corporate Services of Tricor Services
Limited, where she is responsible for providing corporate secretarial and compliance services
to listed companies at the Stock Exchange and other multinational, private and offshore
companies. Ms. Lai has more than five years of experience in the company secretary
profession.
Ms. Lai obtained her bachelor’s degree in business administration in financial services
and master’s degree in corporate governance from The Hong Kong Polytechnic University in
September 2016 and September 2020, respectively. She has been qualified as a Chartered
Secretary, a Chartered Governance Professional, an associate of The Hong Kong Chartered
Governance Institute (HKCGI) (formerly known as “The Hong Kong Institute of Chartered
Secretaries” (HKICS)) and an associate of The Chartered Governance Institute (CGI)
(formerly known as “The Institute of Chartered Secretaries and Administrators” (ICSA)) in
the United Kingdom.
MANAGEMENT AND CORPORA TE GOVERNANCE
Board Committees
Audit Committee
Our Board has established the Audit Committee with written terms of reference in
compliance with Rule 3.21 of the Listing Rules and the Corporate Governance Code set out in
Appendix C1 to the Listing Rules (the “ Corporate Governance Code ”). The primary duties
of the Audit Committee are to review and supervise the financial reporting process and
internal controls system of our Group, review and approve connected transactions and provide
advice and comments to the Board. The Audit Committee comprises Mr. Liu Kai Yu Kenneth,
Dr. Liu Zhongdong, Dr. Yuan Kang, Mr. Gao Lei and Mr. Shen Yingming, with Mr. Liu Kai Yu
Kenneth (being our independent non-executive Director with appropriate professional
qualifications) as the chairperson.
Remuneration Committee
Our Board has established the Remuneration Committee with written terms of reference
in compliance with Rule 3.25 of the Listing Rules and the Corporate Governance Code. The
primary duties of the Remuneration Committee are to review and make recommendations to
the Board on the terms of remuneration packages, bonuses and other compensation payable to
our Directors and other senior management. The Remuneration Committee comprises Mr. Liu
Kai Yu Kenneth, Dr. Liu Zhongdong, Dr. Yuan Kang, Mr. Zou Xiaohong and Mr. Gao Lei, with
Mr. Liu Kai Yu Kenneth as the chairperson.
DIRECTORS AND SENIOR MANAGEMENT
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Nomination Committee
Our Board has established the Nomination Committee with written terms of reference in
compliance with Rule 3.27A of the Listing Rules and the Corporate Governance Code. The
primary duties of the Nomination Committee are to make recommendations to our Board on
the appointment of Directors and management of Board succession. The Nomination
Committee comprises Mr. Zou Xiaohong, Dr. Liu Zhongdong, Dr. Yuan Kang, Mr. Liu Kai Yu
Kenneth and Mr. Gao Lei, with Mr. Zou Xiaohong as the chairperson.
Corporate Governance Code
We aim to achieve high standards of corporate governance which are crucial to our
development and safeguard the interests of our Shareholders. In order to accomplish this, we
expect to comply with all applicable code provisions of the Corporate Governance Code upon
Listing.
Board Diversity
Our Company has adopted a board diversity policy which sets out the approach to
achieve diversity of the Board. We recognize and embraces the benefits of having a diverse
Board and sees increasing diversity at the Board level, including gender diversity, as an
essential element in maintaining our competitive advantage and enhancing our ability to
attract, retain and motivate employees from the widest possible pool of available talent. In
reviewing and assessing suitable candidates to serve as a Director, the Nomination Committee
will consider a number of aspects, including but not limited to gender, age, cultural and
educational background, professional qualifications, skills, knowledge, and industry and
regional experience. The Nomination Committee will discuss periodically and when
necessary, agree on the measurable objectives for achieving diversity, including gender
diversity, on the Board and recommend them to the Board for adoption.
COMPLIANCE ADVISER
Our Company has appointed BOCOM International (Asia) Limited as our compliance
adviser pursuant to Rule 3A.19 of the Listing Rules. Pursuant to Rule 3A.23 of the Listing
Rules, our compliance adviser will advise our Company in the following circumstances:
• before the publication of any regulatory announcement, circular or financial report;
• where a transaction, which might be a notifiable or connected transaction, is
contemplated, including shares issues and share repurchases;
• where our Company proposes to use the proceeds of the Global Offering in a manner
different from that detailed in this prospectus or where our business activities,
developments or results deviate from any forecast, estimate or other information in
this prospectus; and
• where the Stock Exchange makes an inquiry of our Company under Rule 13.10 of
the Listing Rules.
The term of the appointment of our compliance adviser shall commence on the Listing
Date and is expected to end on the date on which we comply with Rule 13.46 of the Listing
Rules in respect of our financial results for the first full financial year commencing after the
Listing Date.
DIRECTORS AND SENIOR MANAGEMENT
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COMPENSA TION OF DIRECTORS AND SENIOR MANAGEMENT
Our Directors and members of our senior management receive compensation from our
Company in the form of salaries, annual performance bonuses, special bonuses, social
insurance and housing benefits. The aggregate remuneration (including fees, salaries,
contributions to pension schemes, bonus, retirement benefits scheme, allowance and other
benefits in kind) paid to our Directors for the years ended December 31, 2021, 2022 and 2023
were RMB4.4 million, RMB5.0 million and RMB2.4 million, respectively. Save as disclosed
above, no other amounts have been paid or are payable by any member of our Group to our
Directors during the Track Record Period.
The aggregate amount of salaries, bonuses, pension costs, housing funds, medical
insurance and other social insurances in kind paid to our five highest paid individuals for the
years ended December 31, 2021, 2022 and 2023 were RMB12.5 million, RMB14.3 million
and RMB5.7 million, respectively.
During the Track Record Period, no remuneration was paid to, or received by, our
Directors or five highest paid individuals as an inducement to join or upon joining us. No
compensation was paid to, or received by, our Directors, past directors or five highest paid
individuals for the loss of office as a director of any member of our Group or of any other
office in connection with the management of the affairs of any member of our Group. Further,
none of our Directors had waived or agreed to waive any remuneration during the same
periods.
Under the arrangement currently in force, the aggregate remuneration (including fees,
salaries, contributions to pension schemes, bonus, share-based payments, retirement benefits
scheme, allowances and other benefits in kind) of our Directors for the year ending December
31, 2024 is estimated to be no more than RMB4.6 million.
Our Board will review and determine the remuneration and compensation packages of
our Directors and senior management and, following the Listing, will receive
recommendation from the Remuneration Committee which will take into account salaries paid
by comparable companies, time commitment and responsibilities of our Directors and
performance of our Group.
DIRECTORS AND SENIOR MANAGEMENT
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OUR CONTROLLING SHAREHOLDERS
Mr. Gao is one of our non-executive Directors. As of the date of this prospectus, Mr. Gao,
through Vastocean Capital Limited, his wholly-owned investment holding vehicle, is
interested in 66.86% of the issued shares capital of our Company. Immediately upon
completion of the Global Offering (assuming the Over-allotment Option is not exercised), Mr.
Gao will, indirectly and beneficially, be entitled to exercise 53.75% of the voting power at
general meetings of our Company. Accordingly, upon Listing, Mr. Gao and Vastocean Capital
Limited will constitute a group of controlling shareholders of our Company under the Listing
Rules.
INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS
Each of our Controlling Shareholders confirms that he/it does not have any interest in a
business apart from the business of our Group which competes or is likely to compete,
whether directly or indirectly, with our business, which would require disclosure under Rule
8.10 of the Listing Rules.
Having considered the following factors, our Directors are satisfied that, we are capable
of carrying on our business independently of our Controlling Shareholders and their
respective close associates after Listing.
Management Independence
Our Board comprises two executive Directors, three non-executive Directors and three
independent non-executive Directors, of whom Mr. Gao is our Controlling Shareholder as
detailed above.
Each of our Directors is aware of his/her fiduciary duties as a Director which require,
among other things, that he/she acts in good faith for the benefit and in the best interests of our
Company and does not allow any conflict between his duties as a Director and his personal
interests. In the event that there is any potential conflict of interest arising out of any
transaction to be entered into between our Group and any of our Directors or their respective
close associates, the interested Director(s) shall abstain from voting at the relevant board
meetings of our Company in respect of such transactions and shall not be counted in the
quorum.
Based on the above, our Directors are satisfied that our Board as a whole together with
our senior management is able to perform the managerial role in our Group independently of
our Controlling Shareholders and their respective close associates after Listing.
Operational Independence
We have full rights to make all decisions on, and to carry out, our own business
operations independently from our Controlling Shareholders and their respective close
associates and will continue to do so after the Listing. Our Group is able to operate without
reliance on our Controlling Shareholder and his close associates.
Licenses required for operation
We hold and enjoy the benefit of all relevant licenses and permits material to the
operation of our own business independent of our Controlling Shareholders.
RELA TIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
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Access to customers, suppliers and business partners
Our Group has a large and diversified base of customers who are unrelated to our
Controlling Shareholders and/or their respective close associates. We have independent
access to our customers, our suppliers as well as our other business partners.
Operational facilities
Our Group has sufficient production facilities and technology to operate its business
independently from our Controlling Shareholders and their respective close associates.
Employees
As of the Latest Practicable Date, all of our full-time employees were recruited
independently from our Controlling Shareholders and their respective close associates and
primarily from the open market through both internal referrals and external sources such as
recruitment advertisements, recruitment agencies and online platforms.
Financial Independence
All loans, advances and balances due to or from the Controlling Shareholders or their
respective close associates which were not arising out of the ordinary course of business will
be fully settled upon Listing. All share pledges and guarantees provided by the Controlling
Shareholders or their respective close associates on the borrowings of our Group and vice
versa will be fully released upon Listing.
In addition, we have our own internal control and accounting systems, accounting and
finance department, independent treasury function for cash receipts and payment and
independent access to third party financing. Accordingly, we believe we are able to maintain
financial independence from our Controlling Shareholders and their respective close
associates.
CORPORA TE GOVERNANCE MEASURES
Our Company will comply with the provisions of the Corporate Governance Code in
Appendix C1 to the Listing Rules, which sets out principles of good corporate governance.
Our Directors believe that there are adequate corporate governance measures in place to
manage existing and potential conflicts of interest between our Group and our Controlling
Shareholders. In order to further avoid potential conflicts of interest, we have implemented
the following measures:
(a) we have established internal control mechanisms to identify connected transactions.
Upon the Listing, if our Group enters into connected transactions with our
Controlling Shareholders or their respective close associates, our Company will
comply with the applicable requirements under the Listing Rules;
(b) where a Shareholders’ meeting is to be held for considering proposed transactions
in which our Controlling Shareholders or any of his close associates has any
material interest, our Controlling Shareholders and their respective close associates
(as applicable) will not vote on the resolutions and shall not be counted in the
quorum for the voting;
RELA TIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
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(c) our Board consists of a balanced composition of executive Directors, non-executive
Directors and independent non-executive Directors to ensure that our Board is able
to effectively exercise independent judgment in its decision-making process and
provide independent advice to our Shareholders. We believe our independent
non-executive Directors individually and collectively possess the requisite
knowledge and sufficient experience to perform their duties. They are free of any
business or other relationship which could interfere in any material manner with the
exercise of their independent judgment and will be able to provide an impartial,
external opinion to protect the interests of our public Shareholders;
(d) we have appointed BOCOM International (Asia) Limited as our compliance adviser,
which will provide advice and guidance to us in respect of compliance with the
applicable laws in Hong Kong and the Listing Rules including various requirements
relating to Directors’ duties and corporate governance matters;
(e) as required by the Listing Rules, our independent non-executive Directors shall
review any continuing connected transactions annually and confirm in our annual
report that such transactions (if any) have been entered into in our ordinary and
usual course of business, either on normal commercial terms or on terms no less
favorable to us than those available to or from independent third parties and on
terms that are fair and reasonable and in the interests of our Shareholders as a
whole.
RELA TIONSHIP WITH OUR CONTROLLING SHAREHOLDERS
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OVERVIEW
We have entered into, and expect to continue, certain transactions with the following
persons who will be our connected persons upon Listing. Such transactions, which are set out
in this section, will constitute our continuing connected transactions under Rule 14A.31 of the
Listing Rules.
Connected Person Relationship
Linuo Group Linuo Group is ultimately held by Mr. Gao
Yuankun, the father of Mr. Gao, our executive
Director and Controlling Shareholder, as to 80%.
Therefore, Linuo Group will be an associate of
Mr. Gao and our connected person upon Listing.
Wuhan Twin Tigers Coatings
Co., Ltd.
(ʮ̡ )
(“Twin Tigers Coatings ”)
Twin Tigers Coatings is a subsidiary of Linuo
Group. Therefore, Twin Tigers Coatings will be
an associate of Mr. Gao and our connected person
upon Listing.
Linuo Investment Linuo Investment is a subsidiary of Linuo Group.
Therefore, Linuo Investment will be an associate
of Mr. Gao and our connected person upon
Listing.
Wuhan Xinkang Chemical
Equipment Co., Ltd.
(ʮ̡ )
(“Xinkang Chemical ”)
Xinkang Chemical is indirectly held by Mr. Gao
as to 66.86%. Therefore, Xinkang Chemical will
be an associate of Mr. Gao and our connected
person upon Listing.
SUMMARY OF OUR CONTINUING CONNECTED TRANSACTIONS
The table below sets forth a summary of the transactions that will constitute our
continuing connected transactions under Rule 14A.31 of the Listing Rules upon Listing.
Transaction
Applicable
Listing Rules Waiver sought
Proposed annual caps for the
year ending December 31,
2024 2025 2026
(RMB million)
Fully-exempt continuing connected transactions
1. Lease of tanks to Twin Tigers Coatings 14A.76(1) N/A N/A N/A N/A
2. Provision of chemical processing
services to Twin Tigers Coatings
14A.76(1) N/A N/A N/A N/A
3. Provision of utilities to Linuo Group and
Xinkang Chemical
14A.97 N/A N/A N/A N/A
CONTINUING CONNECTED TRANSACTIONS
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Transaction
Applicable
Listing Rules Waiver sought
Proposed annual caps for the
year ending December 31,
2024 2025 2026
(RMB million)
Partially-exempt continuing connected transactions
4. Provision of property management
services from Linuo Investment
14A.35,
14A.76(2)
and 14A.105
Announcement
requirement
15.2 15.2 15.2
5. Provision of equipment production,
installation and maintenance services
from Xinkang Chemical
14A.35,
14A.76(2)
and 14A.105
Announcement
requirement
63.4 63.4 63.4
FULLY-EXEMPT CONTINUING CONNECTED TRANSACTIONS
1. Lease of Tanks to Twin Tigers Coatings
Twin Tigers Coatings is a paint manufacturer located in the Wuhan Linuo Industrial Zone
(ဏɢፕପุ෤ ) inside the Wuhan Chemical Industrial Park. We have leased and will
continue to lease several tanks located in the middle area of Wuhan Linuo Industrial Zone to
Twin Tigers Coatings for the storage of chemical materials. The rental charged by us from
Twin Tigers Coatings will be determined on arm’s length negotiations between the parties
with reference to, among others, the land use right amortization expenses, the depreciation of
fixed assets of the equipment in the tank area, the labor costs, steam costs, land use tax and
property management costs incurred by us.
Since the highest applicable percentage ratio calculated under Chapter 14A of the Listing
Rules in respect of the above transaction, which is conducted on normal commercial terms or
better, is expected to be less than 0.1%, by virtue of Rule 14A.76(1), it will be exempt from the
shareholders’ approval, annual review and all disclosure requirements under Chapter 14A of
the Listing Rules.
2. Provision of chemical processing services to Twin Tigers Coatings
During our ordinary and usual course of business, we have provided and will continue to
provide chemical processing services to Twin Tigers Coatings, including electrophoretic
emulsion and resin dissolution. The service fees charged by us from Twin Tigers Coatings will
be determined after arm’s length negotiations between the parties with reference to, among
others, historical price and the prevailing market rate.
Since the highest applicable percentage ratio calculated under Chapter 14A of the Listing
Rules in respect of the above transaction, which is conducted on normal commercial terms or
better, is expected to be less than 5% and the total consideration is expected to be less than
HK$3 million, by virtue of Rule 14A.76(1), it will be exempt from the shareholders’ approval,
annual review and all disclosure requirements under Chapter 14A of the Listing Rules.
CONTINUING CONNECTED TRANSACTIONS
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3. Provision of Utilities to Linuo Group and Xinkang Chemical
On May 21, 2024, we entered into an operation management service framework
agreement (the “ Operation Management Service Framework Agreement ”) with Mr. Gao
and Mr. Gao Yuankun, to regulate, among others, the provision of utilities to their associates
following the Listing. Pursuant to the Operation Management Service Framework Agreement,
we agreed to provide utilities, including without limitation water, steam, natural gas, nitrogen
and electricity, to Linuo Group and its subsidiaries (including Twin Tigers Coatings and
Wuhan Kangjian New Materials Co., Ltd. (ʮ̡ )( “ Kangjian New
Materials ”)) and Xinkang Chemical, which are also occupants of the Wuhan Linuo Industrial
Zone. Linuo Group is the holding company of the group of companies constituting the “Linuo
(ɢፕ)” conglomerate, which is principally engaged in the manufacturing of glass, new energy
products (particularly in relation to solar power) and medicine.
The Operation Management Service Framework Agreement is valid for a term
commencing on the Listing Date and ending on December 31, 2026, subject to renewal upon
parties’ mutual agreement.
The properties under the Operation Management Service Framework Agreement are
leased by us from Linuo Investment, an investment and asset holding company wholly-owned
by Linuo Group, as our office and place of business. Due to the design of the Wuhan Linuo
Industrial Zone, other occupants of the Wuhan Linuo Industrial Zone have no independent
water, steam, natural gas, nitrogen or electricity meters with the relevant utility providers and
need to share such facilities with us, who maintain the relevant and only utility account for the
entire Wuhan Linuo Industrial Zone. Hence, the procurement of utilities to other occupants in
the Wuhan Linuo Industrial Zone, including Twin Tigers Coatings, Kangjian New Materials
and Xinkang Chemical, has been made an integral part of the lease of the properties and the
provision of property management services provided by Linuo Investment as detailed in “—
Partially-exempt Continuing Connected Transactions — 4. Provision of Property
Management Services from Linuo Investment.”
The fees payable by Linuo Group and Xinkang Chemical to us will be determined at an
at-cost basis at the government-prescribed rates charged on the factories and the consumption
amount will be confirmed by both parties by jointly inspecting the readings on the relevant
meters on a monthly basis. We will subsequently settle the amount with the relevant utility
providers.
Since the utilities are (i) for Linuo Group and Xinkang Chemical’s own consumption and
use and not processed into their products or resale, (ii) consumed or used by Linuo Group and
Xinkang Chemical in the same state as when they are bought, and (iii) provided on no more
favorable terms to Linuo Group and Xinkang Chemical than those available from independent
third parties, the transactions are fully exempt from the independent shareholders’ approval,
annual review and all disclosure requirements under Rule 14A.97 of the Listing Rules.
PARTIALLY-EXEMPT CONTINUING CONNECTED TRANSACTIONS
Since the highest applicable percentage ratio calculated under Chapter 14A of the Listing
Rules in respect of the following transactions, which are conducted on normal commercial
terms or better, is expected to be more than 0.1% but less than 5% on an annual basis, by virtue
of Rule 14A.76(2), these transactions will be subject to the reporting, annual review and
CONTINUING CONNECTED TRANSACTIONS
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announcement requirements, but exempt from the circular (including independent financial
advice) and independent shareholders’ approval requirements under Chapter 14A of the
Listing Rules.
4. Provision of Property Management Services from Linuo Investment
Principal terms
Pursuant to the Operation Management Service Framework Agreement, Linuo
Investment agreed to provide property management services to us for our occupation in the
Wuhan Linuo Industrial Zone, including property operation, maintenance and management.
Reasons and benefits of the transactions
The properties under the Operation Management Service Framework Agreement are
leased by us from Linuo Investment as our office and place of business. The lease with Linuo
Investment is recognized as right-of-use assets in accordance with HKFRS 16 “Leases” and is
treated as one-off acquisitions of capital assets by our Group which are not subject to the
shareholders’ approval, annual review and all disclosure requirements with regard to
continuing connected transaction under Chapter 14A of the Listing Rules. In connection with
such leases, we have also been engaging Linuo Investment’s property management services
for our occupation in the Wuhan Linuo Industrial Zone.
As we expect that we will continue to lease these properties after Listing, the continued
provision of property management services by Linuo Investment to us contemplated under the
Operation Management Service Framework Agreement will be beneficial to us because (i) it
would save administrative costs and time that would otherwise be spent on negotiating and
entering into contracts with independent third party lessors and property management service
providers, and (ii) relocation of our office from the existing leased premises from Linuo
Investment to other properties managed by independent third party property management
service providers may cause unnecessary disruptions to our business and additional costs and
expenses. In addition, we are not bound and will not be bound to lease properties owned and
managed by Linuo Investment only. The Operation Management Service Framework
Agreement is convenient and cost-effective for us and is in line with our business needs and
economic interests.
Pricing policy
Under the Operation Management Service Framework Agreement, the service fees to be
incurred by Wuhan Youji to Linuo Investment shall be determined after arm’s length
negotiation between the parties with reference to the prevailing market rate in respect of
similar property management services provided by other independent property management
service providers. To evaluate and assess the level of service fees charged by Linuo
Investment for the provision of property management services under the Operation
Management Service Framework Agreement, we will, on an annual basis, conduct research on
comparable companies or obtain quotations from independent third party service providers
with comparable scale, such that we could ensure the service fees and terms offered by Linuo
Investment are on normal commercial terms or better, fair and reasonable, and in the interests
of our Company and our Shareholders as a whole.
CONTINUING CONNECTED TRANSACTIONS
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Historical amounts and annual caps
The table below sets out the historical amounts of service fees paid by us to Linuo
Investment during the Track Record Period and the expected maximum amounts payable by us
for the three years ending December 31, 2026.
Historical amounts Proposed annual caps
Y ear ended December 31, Y ear ending December 31,
2021 2022 2023 2024 2025 2026
(RMB million) (RMB million)
3.3 10.4 11.0 15.2 15.2 15.2
We engaged Linuo Investment for property management services in respect of the office
area of the Wuhan Linuo Industrial Zone in 2021, which has a gross floor area of 172,667.5
sq.m. To facilitate a unified and orderly management of the Wuhan Linuo Industrial Zone, we
further engaged Linuo Investment in 2022 for property management services in respect of the
production area, which has a gross floor area of 248,667.9 sq.m. We also utilize the south gate
of the Wuhan Linuo Industrial Zone from time to time, which is included in the production
area, to accommodate our increased transportation needs from business operation and
logistics management, incurring additional expenses from property management services
(i.e., additional security personnel and security services expenses) to be provided by Linuo
Investment. Starting from 2024, we also expect to incur property management service fees in
respect of the lease of warehouse area from Linuo Investment with a gross floor area of
41,133.5 sq.m. When determining the proposed annual caps, we have taken into consideration
(i) the historical property management fees paid by us to Linuo Investment in respect of the
abovementioned office area and production area, (ii) the prevailing market rate for the
provision of similar property management services of similar types of properties, and (iii) the
expected increase in demand of our Group for the property management services to be
provided by Linuo Investment and/or its associates in 2024. Since we do not have current
intention to occupy additional land in the Wuhan Linuo Industrial Zone up to 2026, and do not
expect a change in the rate to be charged by Linuo Investment on its property management
services, the total service fees are expected to remain stable for each of the three years ended
December 31, 2026.
5. Provision of Equipment Production, Installation and Maintenance Services from
Xinkang Chemical
Principal terms
On May 21, 2024, we entered into an equipment production, installation and
maintenance service framework agreement with Xinkang Chemical, pursuant to which
Xinkang Chemical agreed to supply to us equipment, pipes and fittings including stainless
steel and carbon steel vessels, condenser, heat exchanger, and provide installation services to
us (the “ Equipment Production, Installation and Maintenance Service Framework
Agreement ”). The Equipment Production, Installation and Maintenance Service Framework
Agreement is valid for a term commencing on the Listing Date and ending on December 31,
2026, subject to renewal upon parties’ mutual agreement.
CONTINUING CONNECTED TRANSACTIONS
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Reasons for and benefits of the transactions
Xinkang Chemical is a qualified manufacturer of pressure vessels located in the Wuhan
Linuo Industrial Zone, and has been a long-term supplier of our Group of such vessels as well
as other equipment, pipes and fittings. Due to its proximity to our production facilities,
Xinkang Chemical is able to deliver and install such equipment for us within a relative short
time and provide timely maintenance service when requested. The continued provision of
equipment production, installation and maintenance services by Xinkang Chemical to us
contemplated under the Equipment Production, Installation and Maintenance Service
Framework Agreement will be beneficial to us because (i) Xinkang Chemical is familiar with
our needs as a result of our long-term working relationship, and (ii) it would save
administrative costs and time that would otherwise be spent on negotiating and entering into
contracts with independent third party service providers. In addition, we are not bound and
will not be bound to source such equipment, pipes and fittings from Xinkang Chemical only.
The Equipment Production, Installation and Maintenance Service Framework Agreement is
convenient and cost-effective for us and is in line with our business needs and economic
interests.
Pricing policy
The service fees to be incurred by Wuhan Youji to Xinkang Chemical shall be determined
after arm’s length negotiation between the parties with reference to the prevailing market rate
in respect of similar equipment production, installation and maintenance services provided by
other independent service providers. To evaluate and assess the level of service fees charged
by Xinkang Chemical for the provision of equipment production, installation and maintenance
services under the Equipment Production, Installation and Maintenance Service Framework
Agreement, we will, on an annual basis, conduct research on comparable companies or obtain
quotations from independent third party service providers with comparable scale, such that we
could ensure the service fees and terms offered by Xinkang Chemical are on normal
commercial terms or better, fair and reasonable, and in the interests of our Company and our
Shareholders as a whole.
Historical amounts and annual caps
The table below sets out the service fees paid by us to Xinkang Chemical during the
Track Record Period and the expected maximum service fees payable by us for the three years
ending December 31, 2026.
Historical amounts Proposed annual caps
Y ear ended December 31, Y ear ending December 31,
2021 2022 2023 2024 2025 2026
(RMB million) (RMB million)
33.2 40.4 25.7 63.4 63.4 63.4
When determining the proposed annual caps, we have taken into consideration (i) the
historical service fees paid by us to Xinkang Chemical, and (ii) the projected growth rate of
our volume of business and the expansion plan of the production facilities, in particular the
establishment of the Hubei Xinxuanhong Production Plant. Based on our procurement plan of
CONTINUING CONNECTED TRANSACTIONS
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equipment from Xinkang Chemical taking into consideration our current construction plan of
the Hubei Xinxuanhong Production Plant and the production capacity of Xinkang Chemical,
and the expected steady fees for the procurement, installation and maintenance of such
equipment, the capital expenditure on the procurement of equipment from Xinkang Chemical
is expected to remain stable for each of the three years ending December 31, 2026.
W AIVER
The transactions described under “— Partially-exempt Continuing Connected
Transactions” will constitute our continuing connected transactions upon Listing, and will be
subject to the reporting, annual review and announcement requirements, but exempt from the
circular (including independent financial advice) and independent shareholders’ approval
requirements under Chapter 14A of the Listing Rules.
As such partially-exempt continuing connected transactions are expected to be carried
out on a recurring basis, and their material terms have been disclosed in this prospectus, our
Directors consider that strict compliance with the aforesaid announcement requirement
immediately after Listing will be unduly burdensome and would impose unnecessary
administrative costs on our Company. Accordingly, we have applied to the Stock Exchange
for, and the Stock Exchange has agreed to grant, a waiver pursuant to Rule 14A.105 of the
Listing Rules from strict compliance with the announcement requirement in respect of the
partially-exempt continuing connected transactions.
We will, however, comply at all times with the other applicable provisions under Chapter
14A of the Listing Rules in respect of these partially-exempt continuing connected
transactions. In addition, we will immediately inform the Stock Exchange if any of the
proposed annual caps set out in this section have been exceeded, or when there is any material
change in the terms of the non-exempt continuing connected transactions described in this
section.
CONFIRMA TION FROM OUR DIRECTORS
Our Directors (including the independent non-executive Directors) are of the view that
the partially-exempt continuing connected transactions set out above have been and will be
entered into in the ordinary and usual course of our business, on normal commercial terms or
better that are fair and reasonable and in the interests of our Company and our Shareholders as
a whole, and the proposed annual caps for these transactions are fair and reasonable and in the
interest of our Company and our Shareholders as a whole.
CONFIRMA TION FROM THE SOLE SPONSOR
Based on the data and information provided by our Company and the necessary
representations and confirmations from our Company and Directors, having made reasonable
inquiries and after due and careful consideration, the Sole Sponsor is of the view that, as of the
date of this prospectus, the partially-exempt continuing connected transactions described
above, and for which waivers have been sought, will be entered into in the ordinary and usual
course of business of our Company, on normal commercial terms or better that are fair and
reasonable, and in the interests of our Shareholders as a whole, and that the proposed annual
caps in respect of such transactions are fair and reasonable and in the interests of our
Shareholders as a whole.
CONTINUING CONNECTED TRANSACTIONS
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AUTHORIZED AND ISSUED SHARE CAPITAL
Authorized Share Capital
As of the Latest Practicable Date, our authorized share capital was US$50,000 divided
into 500,000,000 Shares of a par value of US$0.0001 each.
Issued Share Capital
As of the Latest Practicable Date, our issued share capital consisted of 75,000,000 Shares
of a par value of US$0.0001 each. Assuming the Over-allotment Option is not exercised, the
share capital of our Company immediately following completion of the Global Offering will
be as follows:
Number of
Shares
Aggregate
nominal value
US$
Shares in issue 75,000,000 7,500
Shares to be issued pursuant to
the Global Offering 18,300,000 1,830
Total 93,300,000 9,330
RANKING
The Shares are ordinary shares in the share capital of our Company and rank equally with
all Shares currently in issue or to be issued and, in particular, will rank in full for all dividends
or other distributions declared, made or paid on the Shares in respect of a record date which
falls after the date of this prospectus.
CIRCUMSTANCES UNDER WHICH GENERAL MEETINGS AND CLASS
MEETINGS ARE REQUIRED
Upon completion of the Global Offering, our Company has only one class of Shares,
namely ordinary shares, each of which ranks pari passu with the other Shares.
Pursuant to the Cayman Companies Act and the terms of our Articles of Association, our
Company may from time to time by ordinary resolution of Shareholders (i) increase its
capital; (ii) consolidate and divide its capital into Shares of larger amount; (iii) divide its
unissued Shares into classes; (iv) subdivide its Shares or any of them into Shares of smaller
amount; and (v) cancel any Shares which at the date of the passing of resolution which have
not been taken or agreed to be taken by any person, and diminish the amount of its share
capital by the amount of the Shares so canceled. In addition, our Company may reduce or
redeem its share capital by Shareholders’ special resolution. For details, please refer to
“Appendix III — Summary of Our Constitution and Cayman Islands Companies Law — 2.
Articles of Association — (a) Shares — (iii) Alteration of capital” in this prospectus.
SHARE CAPITAL
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Pursuant to the Cayman Companies Act and the terms of our Articles of Association, if at
any time the share capital of our Company is divided into different classes of shares, all or any
of the special rights attached to the share or any class of shares (unless otherwise provided for
in the terms of issue of the shares of that class) may be varied, modified or abrogated either
with the consent in writing of the holders of not less than three-fourths in nominal value of the
issued Shares of that class or with the sanction of a special resolution passed at a separate
general meeting of the holders of the shares of that class. For details, please refer to
“Appendix III — Summary of Our Constitution and Cayman Islands Companies Law — 2.
Articles of Association — (a) Shares — (ii) Variation of rights of existing shares or classes of
shares” in this prospectus.
GENERAL MANDA TE TO ISSUE AND REPURCHASE SHARES
Subject to the conditions stated in “Structure and Conditions of the Global Offering —
Conditions of the Global Offering,” our Directors have been granted general unconditional
mandates to issue and repurchase our Shares.
For further details of these general mandates, please refer to “Appendix IV — Statutory
and General Information — A. Further Information about our Group — 4. Resolutions of our
Shareholders” in this prospectus.
SHARE CAPITAL
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So far as our Directors are aware, immediately following completion of the Global
Offering (assuming the Over-allotment Option is not exercised), the following persons will
have an interest or a short position in Shares and/or underlying Shares of our Company which
would fall to be disclosed to our Company under the provisions of Divisions 2 and 3 of Part
XV of the SFO, or will be, directly or indirectly, interested in 10% or more of the issued voting
shares of our Company.
Name of Shareholder Nature of interest (1)
Number of
Shares or
underlying
Shares held
Approximate
percentage
of interest
after the
Global
Offering (2)
Vastocean Capital
Limited
Beneficial interest (3) 50,150,842 53.75%
Mr. Gao Interest in controlled
corporation (3)
50,150,842 53.75%
SYM Holdings
Limited
Beneficial interest (4) 12,537,710 13.44%
Mr. Shen Interest in controlled
corporation (4)
12,537,710 13.44%
Custodian Capital Ltd. Nominee interest (5) 7,271,448 7.79%
Notes:
(1) All interests stated are long positions.
(2) The calculation is based on the total number of 93,300,000 Shares in issue immediately following
completion of the Global Offering (assuming the Over-allotment Option is not exercised).
(3) As of the Latest Practicable Date, Vastocean Capital Limited was wholly owned by Mr. Gao. By virtue
of the SFO, Mr. Gao is deemed to be interested in the Shares held by Vastocean Capital Limited.
(4) As of the Latest Practicable Date, SYM Holdings Limited was wholly owned by Mr. Shen. By virtue of
the SFO, Mr. Shen is deemed to be interested in the Shares held by SYM Holdings Limited.
(5) As of the Latest Practicable Date, Custodian Capital Ltd., the nominee of the Retaining Shareholders
and the Unresponsive Shareholders, was wholly owned by Mr. Gao.
For details of shareholders who will be, directly or indirectly, interested in 10% or more
of the issued voting shares of other members of our Group, please refer to “Appendix IV —
Statutory and General Information — C. Further Information about Our Directors and
Substantial Shareholders — 1. Disclosure of Interests — (b) Interests of our Substantial
Shareholders” in this prospectus.
SUBSTANTIAL SHAREHOLDERS
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Y ou should read the following discussion and analysis with our consolidated
financial information, including the notes thereto, included in the Accountants’ Report
in Appendix I to this prospectus. Our consolidated financial information has been
prepared in accordance with HKFRS.
The following discussion and analysis contains forward-looking statements that
reflect our current views with respect to future events and financial performance. These
statements are based on our assumptions and analysis in light of our experience and
perception of historical trends, current conditions and expected future developments, as
well as other factors we believe are appropriate under the circumstances. However,
whether actual outcomes and developments will meet our expectations and predictions
depends on a number of risks and uncertainties, many of which we cannot control or
foresee. In evaluating our business, you should carefully consider all of the information
provided in this prospectus, including the sections headed “Risk F actors” and
“Business. ”
For the purpose of this section, unless the context otherwise requires, references to
2021, 2022 and 2023 refer to our financial years ended December 31 of such years.
Unless the context otherwise requires, financial information described in this section is
described on a consolidated basis.
OVERVIEW
We are a renowned toluene derivative products provider in the PRC and the global
market, primarily focusing on the manufacture of toluene oxidation and chlorination products,
benzoic acid ammonification products and other fine chemical products through organic
synthesis process. Our toluene derivative products are primarily used for food preservatives,
household chemicals, animal feed acidifier, and synthetic intermediates for agrochemical and
pharmaceutical uses. Leveraging our PRC-based product development and manufacturing
capabilities, we market and sell our products in over 70 countries. Under the leadership of our
experienced management team, we will continue to leverage our product development and
innovation, manufacturing capabilities and global sales network to strengthen our industry
leading position in the PRC and globally.
As of the Latest Practicable Date, we had a self-produced product portfolio primarily
consisting of five types of toluene oxidation products, two types of toluene chlorination
products, two types of benzoic acid ammonification products and more than 20 types of other
fine chemical products for broad market uses. In 2021, 2022 and 2023, we recorded sales
volume of approximately 362,302 tons, 375,848 tons, and 346,147 tons of products,
respectively. Our products are widely recognized around the world. We are the contract
supplier of many renowned global companies, including a number of Fortune 500 companies
and regional industry participants. We have established long-term business relationships with
these companies, which enable our customers to procure high-quality products at a
competitive price while providing us with a solid customer base. Sales to our Fortune 500
customers contributed to approximately 7.6%, 8.5% and 10.5% of our total revenue for the
years ended December 31, 2021, 2022 and 2023, respectively. While our existing products
enjoy broad market appeal and use, we strive to maintain our competitive advantages by
allocating additional resources to product development to ensure a growing portfolio of
products to our customers.
FINANCIAL INFORMA TION
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According to the Frost & Sullivan Report, we are the largest manufacturer for both
benzoic acid and sodium benzoate and the second largest benzyl alcohol manufacturer in the
PRC in terms of sales revenue in 2023. In the global market, we ranked second among
manufacturers for benzoic acid and sodium benzoate and third place among manufacturers for
benzyl alcohol in 2023.For the years ended December 31, 2021, 2022 and 2023, we generated
revenue of RMB2,789.5 million, RMB3,133.8 million and RMB2,677.1 million, respectively.
Our net profits for the corresponding periods were RMB309.1 million, RMB340.5 million and
RMB72.9 million.
BASIS OF PREPARA TION
The consolidated statements of profit or loss and other comprehensive income,
statements of changes in equity and statements of cash flows of the Group for each of the years
ended December 31, 2021, 2022 and 2023, and the consolidated statements of financial
position of the Group as at December 31, 2021, 2022 and 2023 and the summary of material
accounting policies and other explanatory information (together, the “ Historical Financial
Information ”) have been prepared in accordance with Hong Kong Financial Reporting
Standards (“ HKFRSs ”) (which include all Hong Kong Financial Reporting Standards, Hong
Kong Accounting Standards (“ HKASs ”) and Interpretations) issued by the Hong Kong
Institute of Certified Public Accountants and accounting principles generally accepted in
Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance.
All HKFRSs effective for the accounting period commencing from January 1, 2023,
together with the relevant transitional provisions, have been early adopted by our Group in the
preparation of the Historical Financial Information throughout the Track Record Period.
The Historical Financial Information has been prepared under the historical cost
convention except for bills receivable and investment in a fund which have been measured at
fair value at the end of each of the Track Record Period.
FACTORS AFFECTING OUR RESULTS OF OPERA TIONS AND FINANCIAL
CONDITION
Our results of operations and financial condition have been, and are expected to continue
to be, affected by a variety of factors, including those set forth below.
Demand of Toluene Derivative Products in China and Globally
We believe our financial performance and future growth depend on the overall growth of
the toluene derivative products market, especially toluene oxidation products and toluene
chlorination products, in China and globally. According to the Frost & Sullivan Report, the
global sales volume of benzoic acid increased from approximately 246,700 tons in 2018 to
265,100 tons in 2023, representing a CAGR of 1.4%, and is expected to reach 357,300 tons in
2028. The global sales revenue of benzoic acid increased from approximately RMB1,728.2
million in 2018 to RMB2,120.7 million in 2023, representing a CAGR of 4.2%, and is
estimated to reach RMB3,153.0 million in 2028. According to the Frost & Sullivan Report, the
global sales volume of benzyl alcohol increased from approximately 149,300 tons in 2018 to
175,500 tons in 2023, representing a CAGR of 3.3%, and is expected to reach 238,700 tons in
2028. The global sales revenue of benzyl alcohol increased from approximately RMB1,844.1
million in 2018 to RMB2,251.3 million in 2023, representing a CAGR of 4.1%, and is
estimated to reach RMB3,494.6 million in 2028.
FINANCIAL INFORMA TION
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Furthermore, toluene derivative products are widely used in food and beverage
preservatives and feed additives. China is one of the largest markets for food and beverage
preservatives and feed additives, and is currently showing positive development trends.
According to the Frost & Sullivan Report, the PRC market size for the food and beverage
preservative industry by revenue increased from RMB4.8 billion in 2018 to RMB6.0 billion in
2023, representing a CAGR of 4.9%, and is expected to reach RMB7.6 billion in 2028. The
PRC market size for the feed additives industry by revenue increased from RMB94.4 billion in
2018 to RMB122.3 billion in 2023, representing a CAGR of 5.3%, and is expected to reach
RMB160.4 billion in 2028 with a CAGR of 6.0% from 2024.
For the years ended December 31, 2021, 2022 and 2023, sales of toluene oxidation
products and toluene chlorination products comprised 64.5%, 76.1% and 72.6% of our total
revenue, respectively. We will continue to solidify our leading position and focus on the
production of toluene oxidation and toluene chlorination products to take advantage of the
growing demands. We believe by leveraging our leading position in the toluene oxidation and
toluene chlorination products market in China and globally, we are well-positioned to capture
the tremendous market opportunities to improve our results of operation and financial
performance.
Expansion of Our Production Capacity
We generate our revenue from the products we produce and sell. Our sales volumes
primarily depend on industry demands for our products, and more importantly, our production
capacity to meet these market demands. We believe that our production capacity and the
utilization rate of our production facilities have a significant impact on our business
operations and financial results, and our future growths will largely rely on the continued
expansion of our production capability.
During the Track Record Period, we operated two production facilities through our
wholly-owned subsidiaries located in Wuhan (the “ Wuhan Production Plant ”) and Qianjiang
(the “ Qianjiang Xinyihong Production Plant ”), Hubei Province with a total site area of
326,618.9 sq.m. As at December 31, 2023, the designed annual production capacity for our
Wuhan Production Plant and Qianjiang Xinyihong Production Plant were approximately
302,500 tons and 144,040 tons, respectively. The utilization rates were 102.4%, 122.8% and
104.0% for our Wuhan Production Plant, and 91.8%, 91.7% and 86.4% for our Qianjiang
Xinyihong Production Plant for the years ended December 31, 2021, 2022 and 2023. In
anticipation of the industry trends and our business growth in the larger organic synthetic
chemical products industry, and to better serve our clients in the PRC and the global market,
we have undertaken efforts to expand our current production capacity. We completed the
expansion plan of our Wuhan Production Plant and commenced production in January 2022.
This new facility is mainly designed for the production of melt-crystallized benzoic acid,
which is a downstream product of benzoic acid obtained through melt-crystallization process.
We commenced production at the new facility in the January 2022. We also established a new
wholly-owned subsidiary, Hubei Xinxuanhong in 2021, and this manufacturing facility (the
“Hubei Xinxuanhong Production Plant ”) is designed to produce toluene chlorination
derivative products. We have initiated the design and regulatory application processes for
Hubei Xinxuanhong Production Plant, and expect to complete the Phase I construction by the
first half of 2024. In addition to expanding our domestic production facilities, we also plan to
establish our global footprints with production capabilities overseas in support of our global
sales to achieve greater economy of scale.
FINANCIAL INFORMA TION
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Our Ability to Manage Costs and Expenses
Our ability to manage and control our costs and expenses is one of the key factors
affecting our results of operation. During the Track Record Period, we devoted efforts to
control our cost of sales, which primarily includes costs of consumed raw materials, staff
costs, utilities, depreciation, transportation costs, packaging expenses and others. For the
years ended December 31, 2021, 2022 and 2023, our cost of sales were RMB2,150.4 million,
RMB2,434.6 million and RMB2,347.3 million, respectively, representing 77.1%, 77.7% and
87.7% of our revenue for the corresponding periods.
Cost of consumed raw materials constitutes a major portion of our cost of sales. For the
years ended December 31, 2021, 2022 and 2023, our cost of consumed raw materials were
RMB1,175.6 million, RMB1,569.5 million and RMB1,384.2 million, which accounted for
54.7%, 64.5% and 59.0% of our total cost of sales, respectively. Fluctuations in raw material
prices, especially the market prices of petroleum toluene primarily affected by the
international crude oil prices, may increase our costs of sales. For more information about
risks related to raw material price fluctuation, please refer to “Risk Factors — Any shortage in
supply of raw materials or material fluctuation in their purchase prices may adversely affect
our profit margins and results of operation” in this prospectus.
We have adopted diversified measures to mitigate the adverse impact imposed by the
price fluctuation of raw materials. For example, we maintain a steady and reliable supply of
raw materials by leveraging our industry position and solid customer base. On December 19,
2022, we entered into a cooperation agreement with SINOPEC Jianghan Salt Chemical Hubei
Co., Ltd. (ʮ̡ ), a wholly-owned subsidiary of SINOPEC, to
purchase liquid caustic soda, which is one of our main raw materials. Jianghan Salt Chemical
provides us with a discount on the purchase price compared to what it charges other
customers. We believe that similar cooperation promotes the smooth operation of our business
and maximizes our business efficiency. For details on the cooperation with our suppliers,
please refer to “Business — Our Strategies — Further increase our domestic and international
market shares by forming in-depth cooperation with established market participants” in this
prospectus.
In addition, we have been rated as the “AAA” customers of SINOPEC Huazhong since
2012. SINOPEC Huazhong is a branch of a wholly-owned subsidiary of SINOPEC, which is
one of the largest suppliers of petroleum toluene and a major industry participant in China. On
December 21, 2020, January 1, 2022 and December 31, 2022, we entered into framework sales
and purchase agreements with SINOPEC Huazhong, under which we are able to purchase
approximately 71,000 tons, 80,000 tons and 64,000 tons of petroleum toluene from SINOPEC
Huazhong for 2021, 2022 and 2023, respectively, with the actual monthly purchase quantity to
be further agreed among the parties upon submission of the purchase plan for the following
month by the Group to SINOPEC Huazhong. We also entered into a strategic cooperation
agreement with Distributor A, who is our largest supplier during the Track Record Period, on
June 13, 2018, under which we are able to purchase approximately 15,000 tons of petroleum
toluene per month (subject to adjustments of ± 5,000 tons) from June 1, 2019 to June 30, 2021.
On January 6, 2022, we entered into additional framework sales and purchase agreements with
Distributor A, under which we are able to purchase approximately 15,000 tons of petroleum
toluene per month (subject to ±15% of quantity adjustment) from January 2022 to December
2022. We extended our agreement with Distributor A on January 6, 2023, under which we are
able to purchase 9,000 tons to 15,000 tons of petroleum toluene per month (subject to ±15% of
FINANCIAL INFORMA TION
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quantity adjustment) from January 2023 to December 2023. These framework agreements not
only represent our long-standing relationship with the largest raw material suppliers in our
industry, but also affords us the ability to make large-scale procurement. According to the
Frost & Sullivan Report, large-scale procurement of petroleum toluene generally leads to
significant advantage in cost saving of raw material, and further strengthen our competition in
product price and steady raw material supply. Meanwhile, sufficient stock of the primary raw
material in our industry, petroleum toluene, also affords us the capability and flexibility in
managing our inventory and conducting petroleum toluene products trading business as well
as facing market fluctuations.
Nevertheless, there are costs and other factors affecting our operational efficiency that
are beyond our control. In addition, despite our continued investments in production
technology and efforts to optimize our operations, future efficiency gains cannot be assured.
Our ability to manage costs and expenses will remain a key factor with direct impact on our
business, financial condition, results of operations and prospects.
Our Ability to Expand Our Sales Network and Market Penetration
Our business operations rely on our multi-faceted sales network to provide our products
to customers. According to the Frost & Sullivan Report, we are the largest manufacturer for
both benzoic acid and sodium benzoate and the second largest benzyl alcohol manufacturer in
the PRC in terms of the sales revenue in 2023, accounting for 62.0%, 37.9% and 33.9% of the
PRC total market revenue for these products, respectively. In the global market, we ranked
second among manufacturers for benzoic acid and sodium benzoate and third place among
manufacturers for benzyl alcohol in 2023, accounting for 37.0%, 22.4% and 20.6% of the
global total market revenue for these products, respectively. Our leading market position is
elevated by our extensive distribution network for our products. We have established a fully
functional distribution network in both the PRC and the international market. As of December
31, 2023, our distribution network comprised 435 distributors across China, and we had
established an overseas distribution network comprising 251 distributors. We endeavor to
leverage our established network of distributors to supplement our direct sales and further
penetrate the local markets and expand the breadth and depth of our market presence.
For the years ended December 31, 2021, 2022 and 2023, 43.9%, 51.8% and 45.8% of our
revenue for the corresponding periods were generated from direct sales, in which our products
were directly sold to end users such as chemical companies, food producing and processing
companies and pharmaceutical companies; 35.5%, 35.0% and 37.2% of our revenue from the
corresponding periods were generated from distribution sales, in which our products were
sold to distributors that we believe will resell our products to their customers and their
sub-distributors; and 20.6%, 13.2% and 17.0% of our revenue from the corresponding periods
were generated though products trading in which we purchase petroleum toluene and other
products from suppliers and resell them directly to our customers.
We believe that the performance of our sales network, and our ability to expand our
product distribution and market penetration are crucial to our business and directly affect our
sales volume and profitability. As we enter into new domestic and international markets, and
increase our production capacity, we will broaden our sales network to further develop our
market penetration.
FINANCIAL INFORMA TION
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MATERIAL ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING
ESTIMA TES
We have identified certain accounting policies that are most material and certain
estimates that are most significant to the preparation of our consolidated financial statements.
For details of these accounting policies and estimates, please refer to “Appendix I —
Accountants’ Report — II Notes to the Historical Financial Information — 2.3 Summary of
Material Accounting Policy Information” and “Appendix I — Accountants’ Report — II Notes
to the Historical Financial Information — 3. Significant Accounting Judgments and
Estimates” in this prospectus.
Material Accounting Policies
Revenue Recognition
Revenue from Contracts with Customers
Revenue from contracts with customers is recognized when control of goods or services
is transferred to the customers at an amount that reflects the consideration to which we expect
to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of
consideration is estimated to which we will be entitled in exchange for transferring the goods
or services to the customer. The variable consideration is estimated at contract inception and
constrained until it is highly probable that a significant revenue reversal in the amount of
cumulative revenue recognized will not occur when the associated uncertainty with the
variable consideration is subsequently resolved.
When the contract contains a financing component which provides the customer with a
significant benefit of financing the transfer of goods or services to the customer for more than
one year, revenue is measured at the present value of the amount receivable, discounted using
the discount rate that would be reflected in a separate financing transaction between the us and
the customer at contract inception. When the contract contains a financing component which
provides us with a significant financial benefit for more than one year, revenue recognized
under the contract includes the interest expense accreted on the contract liability under the
effective interest method. For a contract where the period between the payment by the
customer and the transfer of the promised goods or services is one year or less, the transaction
price is not adjusted for the effects of a significant financing component, using the practical
expedient in HKFRS 15.
Revenue from the sales of industrial products is recognized at the point in time when
control of the asset is transferred to the customer, generally on delivery of the industrial
products.
Other Income
Rental income is recognized on a time proportion basis over the lease terms. Variable
lease payments that do not depend on an index or a rate are recognized as income in the
accounting period in which they are incurred.
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Interest income is recognized on an accrual basis using the effective interest method by
applying the rate that exactly discounts the estimated future cash receipts over the expected
life of the financial instrument or a shorter period, when appropriate, to the net carrying
amount of the financial asset.
Dividend income is recognized when the shareholders’ right to receive payment has been
established, it is probable that the economic benefits associated with the dividend will flow to
the Group and the amount of the dividend can be measured reliably.
Entrusted processing services income is recognized when the products entrusted for
processing are delivered to the customer.
Investments and other financial assets
Initial Recognition and Measurement
Financial assets are classified, at initial recognition and subsequently measured at
amortized cost, and fair value through profit or loss (“ FVTPL ”).
The classification of financial assets at initial recognition depends on the financial
asset’s contractual cash flow characteristics and our business model for managing them. With
the exception of trade receivables that do not contain a significant financing component or for
which we have applied the practical expedient of not adjusting the effect of a significant
financing component, we initially measure a financial asset at its fair value plus, in the case of
a financial asset not at fair value through profit or loss, transaction costs. Trade receivables
that do not contain a significant financing component or for which we have applied the
practical expedient are measured at the transaction price determined under HKFRS 15 in
accordance with our policies of revenue recognition.
In order for a financial asset to be classified and measured at amortized cost, it needs to
give rise to cash flows that are solely payments of principal and interest (“ SPPI ”) on the
principal amount outstanding. Financial assets with cash flows that are not SPPI are classified
and measured at fair value through profit or loss, irrespective of the business model.
Our business model for managing financial assets refers to how we manage our financial
assets in order to generate cash flows. The business model determines whether cash flows will
result from collecting contractual cash flows, selling the financial assets, or both. Financial
assets classified and measured at amortized cost are held within a business model with the
objective to hold financial assets in order to collect contractual cash flows, while financial
assets classified and measured at fair value through other comprehensive income are held
within a business model with the objective of both holding to collect contractual cash flows
and selling. Financial assets which are not held within the aforementioned business models
are classified and measured at fair value through profit or loss.
All regular purchases and sales of financial assets are recognized on the trade date, that
is, the date that we commit to purchase or sell the asset. Regular purchases or sales are
purchases or sales of financial assets that require delivery of assets within the period generally
established by regulation or convention in the marketplace.
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Subsequent Measurement
The subsequent measurement of financial assets depends on their classification as
follows:
• Financial assets at amortized cost (debt instruments)
Financial assets at amortized cost are subsequently measured using the effective interest
method and are subject to impairment. Gains and losses are recognized in profit or loss when
the asset is derecognized, modified or impaired.
• Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are carried in the statement of
financial position at fair value with net changes in fair value recognized in profit or loss.
This category includes derivative instrument and equity investments which we had not
irrevocably elected to classify at fair value through other comprehensive income. Dividends
on equity investments classified as financial assets at fair value through profit or loss are also
recognized as other income in profit or loss when the right of payment has been established, it
is probable that the economic benefits associated with the dividend will flow to us and the
amount of the dividend can be measured reliably.
Derecognition of Financial Assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of
similar financial assets) is primarily derecognized (i.e., removed from our consolidated
statement of financial position) when:
the rights to receive cash flows from the asset have expired; or
we have transferred our rights to receive cash flows from the asset or have assumed an
obligation to pay the received cash flows in full without material delay to a third party
under a “pass-through” arrangement; and either (a) we have transferred substantially all
the risks and rewards of the asset, or (b) we have neither transferred nor retained
substantially all the risks and rewards of the asset, but have transferred control of the
asset.
When we have transferred our rights to receive cash flows from an asset or have entered
into a pass-through arrangement, we evaluate if, and to what extent, we have retained the risk
and rewards of ownership of the asset. When we have neither transferred nor retained
substantially all the risks and rewards of the asset nor transferred control of the asset, we
continue to recognize the transferred asset to the extent of our continuing involvement. In that
case, we also recognize the associated liability. The transferred asset and the associated
liability are measured on a basis that reflects the rights and obligations that we have retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is
measured at the lower of the original carrying amount of the asset and the maximum amount of
consideration that we could be required to repay.
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Impairment of Financial Assets
We recognize an allowance for expected credit losses (“ ECLs ”) for all debt instruments
not held at fair value through profit or loss. ECLs are based on the difference between the
contractual cash flows due in accordance with the contract and all the cash flows that we
expect to receive, discounted at an approximation of the original effective interest rate. The
expected cash flows will include cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms.
General Approach
ECLs are recognized in two stages. For credit exposures for which there has not been a
significant increase in credit risk since initial recognition, ECLs are provided for credit losses
that result from default events that are possible within the next 12 months. For those credit
exposures for which there has been a significant increase in credit risk since initial
recognition, a loss allowance is required for credit losses expected over the remaining life of
the exposure, irrespective of the timing of the default.
At each reporting date, we assess whether the credit risk on a financial instrument has
increased significantly since initial recognition. When making the assessment, we compare
the risk of a default occurring on the financial instrument as at the reporting date with the risk
of a default occurring on the financial instrument as at the date of initial recognition and
consider reasonable and supportable information that is available without undue cost or effort,
including historical and forward-looking information.
We consider a financial asset in default when contractual payments are 30-90 days past
due. However, in certain cases, we may also consider a financial asset to be in default when
internal or external information indicates that we are unlikely to receive the outstanding
contractual amounts in full before taking into account any credit enhancements held by us. A
financial asset is written off when there is no reasonable expectation of recovering the
contractual cash flows.
Financial assets at amortized cost are subject to impairment under the general approach
and they are classified within the following stages for measurement of ECLs except for trade
receivables and contract assets which apply the simplified approach as detailed below.
Stag e 1 – Financial instruments for which credit risk has not increased significantly since
initial recognition and for which the loss allowance is measured at an amount equal to
12-month ECLs.
Stag e 2 – Financial instruments for which credit risk has increased significantly since
initial recognition but that are not credit-impaired financial assets and for which the loss
allowance is measured at an amount equal to lifetime ECLs.
Stag e 3 – Financial assets that are credit-impaired at the reporting date (but that are not
purchased or originated credit-impaired) and for which the loss allowance is measured at an
amount equal to lifetime ECLs.
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Simplified Approach
For trade receivables that do not contain a significant financing component or when we
apply the practical expedient of not adjusting the effect of a significant financing component,
we apply the simplified approach in calculating ECLs. Under the simplified approach, we do
not track changes in credit risk, but instead recognize a loss allowance based on lifetime ECLs
at each reporting date. We have established a provision matrix that is based on our historical
credit loss experience, adjusted for forward-looking factors specific to the debtors and the
economic environment.
Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost less accumulated depreciation and any
impairment losses. The cost of an item of property, plant and equipment comprises its
purchase price and any directly attributable costs of bringing the asset to its working condition
and location for its intended use.
Expenditure incurred after items of property, plant and equipment have been put into
operation, such as repairs and maintenance, is normally charged to profit or loss in the period
in which it is incurred. In situations where the recognition criteria are satisfied, the
expenditure for a major inspection is capitalized in the carrying amount of the asset as a
replacement. Where significant parts of property, plant and equipment are required to be
replaced at intervals, we recognize such parts as individual assets with specific useful lives
and depreciate them accordingly.
Depreciation is calculated on the straight-line basis to write off the cost of each item of
property, plant and equipment to its residual value over its estimated useful life. The principal
annual rates used for this purpose are as follows:
Buildings 3.2%–9.5%
Plant and machinery 7.9%–47.5%
Furniture and fixtures 9.5%–23.8%
Motor vehicles 19.0%–23.8%
Where parts of an item of property, plant and equipment have different useful lives, the
cost of that item is allocated on a reasonable basis among the parts and each part is depreciated
separately. Residual values, useful lives and the depreciation method are reviewed, and
adjusted if appropriate, at least at the end of each year in the Track Record Period.
An item of property, plant and equipment including any significant part initially
recognized is derecognized upon disposal or when no future economic benefits are expected
from its use or disposal. Any gain or loss on disposal or retirement recognized in profit or loss
in the year the asset is derecognized is the difference between the net sales proceeds and the
carrying amount of the relevant asset.
Construction in progress represents a building under construction, and machinery and
furniture under installation, which is stated at cost less any impairment losses, and is not
depreciated. Cost comprises the direct costs of construction during the period of construction.
Construction in progress is reclassified to the appropriate category of plant and equipment
when completed and ready for use.
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Leases
We assess at contract inception whether a contract is, or contains, a lease. A contract is,
or contains, a lease if the contract conveys the right to control the use of an identified asset for
a period of time in exchange for consideration.
As lessee
We apply a single recognition and measurement approach for all leases, except for
short-term leases and leases of low-value assets. We recognize lease liabilities to make lease
payments and right-of-use assets representing the right to use the underlying assets.
Right-of-use Assets
Right-of-use assets are recognized at the commencement date of the lease (i.e., the date
the underlying asset is available for use). Right-of-use assets are measured at cost, less any
accumulated depreciation and any impairment losses, and adjusted for any re-measurement of
lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities
recognized, initial direct costs incurred, and lease payments made at or before the
commencement date less any lease incentives received. Where applicable, the cost of a
right-of-use asset also includes an estimate of costs to dismantle and remove the underlying
asset or to restore the underlying asset or the site on which it is located. Right-of-use assets
are depreciated on a straight-line basis over the shorter of the lease terms and the estimated
useful lives of the assets as follows:
Leasehold land 5–50 years
Buildings 2.6–5 years
Storage tanks 3–7 years
Motor vehicles 3–5 years
If ownership of the leased asset transfers to our Group by the end of the lease term or the
cost reflects the exercise of a purchase option, depreciation is calculated using the estimated
useful life of the asset.
Lease liabilities
Lease liabilities are recognized at the commencement date of the lease at the present
value of lease payments to be made over the lease term. The lease payments include fixed
payments (including in-substance fixed payments) less any lease incentives receivable,
variable lease payments that depend on an index or a rate, and amounts expected to be paid
under residual value guarantees. The lease payments also include the exercise price of a
purchase option reasonably certain to be exercised by us and payments of penalties for
termination of a lease, if the lease term reflects our exercise of the option to terminate. The
variable lease payments that do not depend on an index or a rate are recognized as an expense
in the period in which the event or condition that triggers the payment occurs.
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In calculating the present value of lease payments, we use our incremental borrowing rate
at the lease commencement date because the interest rate implicit in the lease is not readily
determinable. After the commencement date, the amount of lease liabilities is increased to
reflect the accretion of interest and reduced for the lease payments made. In addition, the
carrying amount of lease liabilities is re-measured if there is a modification, a change in the
lease term, a change in lease payments (e.g., a change to future lease payments resulting from
a change in an index or rate) or a change in assessment of an option to purchase the underlying
asset.
Short-term leases
Our Group applies the short-term lease recognition exemption to short-term leases of
machinery and equipment (that is those leases that have a lease term of 12 months or less from
the commencement date and do not contain a purchase option). Lease payments on short-term
leases are recognized as an expense on a straight-line basis over the lease term.
As lessor
When we act as a lessor, we classify at lease inception (or when there is a lease
modification) each of our leases as either an operating lease or a finance lease.
Leases in which we do not transfer substantially all the risks and rewards incidental to
ownership of an asset are classified as operating leases. When a contract contains lease and
non-lease components, we allocate the consideration in the contract to each component on a
relative stand-alone selling price basis. Rental income is accounted for on a straight-line basis
over the lease terms and is included in revenue in the statement of profit or loss due to its
operating nature. Initial direct costs incurred in negotiating and arranging an operating lease
are added to the carrying amount of the leased asset and recognized over the lease term on the
same basis as rental income. Contingent rents are recognized as revenue in the period in which
they are earned.
Leases that transfer substantially all the risks and rewards incidental to ownership of an
underlying asset to the lessee are accounted for as finance leases.
Government Grants
Government grants are recognized at their fair value where there is reasonable assurance
that the grant will be received and all attaching conditions will be complied with. When the
grant relates to an expense item, it is recognized as income on a systematic basis over the
periods that the costs, for which it is intended to compensate, are expensed. When the grant
relates to expenses or losses already incurred or for the purpose of giving immediate financial
support to us with no future costs and obligations, it is recognized in profit or loss in the
period in which it becomes receivable.
Where the grant relates to an asset, the fair value is credited to a deferred income account
and is released to profit or loss over the expected useful life of the relevant asset by equal
annual installments or deducted from the carrying amount of the asset and released to profit or
loss by way of a reduced depreciation charge.
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Significant Accounting Estimates
Provision for expected credit losses on trade receivables
Our Group uses a provision matrix to calculate ECLs for trade receivables. The provision
rates are based on days past due for groupings of various customer segments that have similar
loss patterns.
The provision matrix is initially based on the Group’s historical observed default rates.
The Group will calibrate the matrix to adjust the historical credit loss experience with
forward-looking information. For instance, if forecast economic conditions (i.e., gross
domestic products) are expected to deteriorate over the next year which can lead to an
increased number of defaults in the manufacturing sector, the historical default rates are
adjusted. At each reporting date, the historical observed default rates are updated and changes
in the forward-looking estimates are analyzed.
The assessment of the correlation among historical observed default rates, forecast
economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to
changes in circumstances and forecast economic conditions. The Group’s historical credit loss
experience and forecast of economic conditions may also not be representative of a customer’s
actual default in the future. The information about the ECLs on the Group’s trade receivables
is disclosed in note 20 to the Historical Financial Information.
Provision for expected credit losses on other receivables
Our Group estimates the provision for ECLs on other receivables based on the historical
loss record and adjusts for forward-looking information. When assessing the loss given
default, the Group also considers the financial capability of the debtors and future prospects
of the industry in which the debtors operate. The assessment of the debtors’ financial
capability and estimates of future prospects of the industry and economic conditions involved
significant management judgment and estimation.
Leases – Estimating the incremental borrowing rate
We cannot readily determine the interest rate implicit in a lease, and therefore, we use an
incremental borrowing rate (“ IBR”) to measure lease liabilities. The IBR is the interest rate
that we would have to pay to borrow over a similar term, and with a similar security, the funds
necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic
environment. The IBR therefore reflects what we “would have to pay”, which requires
estimation when no observable rates are available (such as for subsidiaries that do not enter
into financing transactions) or when it needs to be adjusted to reflect the terms and conditions
of the lease (for example, when leases are not in the subsidiary’s functional currency). We
estimate the IBR using observable inputs (such as market interest rates) when available and is
required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit
rating).
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Deferred Tax Assets
Deferred tax assets are recognized for unused tax losses to the extent that it is probable
that taxable profit will be available against which the losses can be utilized. Significant
management judgment is required to determine the amount of deferred tax assets that can be
recognized, based upon the likely timing and level of future taxable profits together with
future tax planning strategies.
DESCRIPTION OF KEY STA TEMENT OF PROFIT OR LOSS ITEMS
The table below sets forth our consolidated statements of profit or loss for the periods
indicated derived from our consolidated statements of profit or loss and other comprehensive
income set out in the Accountants’ Report included in Appendix I to this prospectus:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Revenue 2,789,477 3,133,836 2,677,103
Cost of sales (2,150,355) (2,434,558) (2,347,338)
Gross profit 639,122 699,278 329,765
Other income and gains 39,901 34,514 25,505
Selling and distribution expenses (19,820) (24,009) (20,717)
Administrative expenses (100,457) (116,498) (95,416)
Research and development expenses (110,831) (133,001) (99,959)
Other expenses (22,753) (5,366) (4,798)
Finance costs (34,066) (31,026) (32,281)
Share of profits and losses of:
Joint venture (6,010) (8,044) (11,834)
Associates 8,450 11,842 4,473
Profit before tax 393,536 427,690 94,738
Income tax expense (84,399) (87,220) (21,836)
Profit for the year 309,137 340,470 72,902
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Revenue
The following table sets forth the breakdown of our revenue during the Track Record
Period:
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Sale of self-produced products 2,213,551 79.4 2,721,500 86.8 2,221,064 83.0
Products trading 575,926 20.6 412,336 13.2 456,039 17.0
Total 2,789,477 100.0 3,133,836 100.0 2,677,103 100.0
Sale of self-produced products. We generate our revenue primarily from sales of
self-produced products, accounting for revenue from toluene oxidation product sales, toluene
chlorination product sales, benzoic acid ammonification product sales and other fine chemical
product sales. Revenue contribution from sales of self-produced products accounted for
79.4%, 86.8% and 83.0% of our total revenue for the years ended December 31, 2021, 2022
and 2023, respectively.
Products trading . We engage in products trading to supplement our primary production
operations to ensure the procurement of raw materials for production and as a strategy to
effectively manage our inventory. We also believe this common business strategy adopted
among industry manufacturers will expand our product coverage and lead to greater business
advantages by providing greater product variety to our clients. We categorize our products
trading by toluene product trading and other products trading. Revenue contribution from
products trading accounted for 20.6%, 13.2% and 17.0% of our total revenue for the years
ended December 31, 2021, 2022 and 2023, respectively. We engage in products trading
despite fluctuating profits as we anticipate greater business advantage by maintaining
products trading operations and stable access to raw material supply in the long run, and aim
to be at the forefront of this developing trend.
Petroleum toluene is the primary raw material used for the manufacturing of our
self-produced products, and we secure our supply through purchases of petroleum toluene
from a selected number of major suppliers in the PRC market. According to Frost & Sullivan,
these major suppliers may prioritize selling their products to purchasers with established
business relationship, and these purchasers can place large purchase amount orders, which
enables these purchasers to maintain a stable supply of raw materials at relatively lower costs.
As a result of our long-term business relationship and framework agreement with large
purchase amounts with these suppliers, we have been able to maintain a stable supply of raw
materials at relatively lower costs for the manufacturing of our products. In addition, as we
carry out our expansion plans to increase our production capacity, we expect our demands for
raw materials to increase in the future, and persistent access to raw materials is of particular
importance to us. Given the importance of these strategic relationships with our suppliers, we
engage in toluene product trading to help us manage our inventory of raw materials when we
have sufficient supply for our own production. For example, we increased our procurement
amount of petroleum toluene when the average unit price of petroleum toluene was relatively
low at the end of 2021 to benefit from the market condition and to ensure our supply of raw
materials. In 2022, we resold the surplus amounts when the average unit price of petroleum
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toluene was favourable and after taking our internal demands into consideration. According to
the Frost & Sullivan Report, large-scale procurement of petroleum toluene generally leads to
significant advantage in cost of raw material, and further strengthening our competitiveness in
product pricing and ensure a steady supply of raw materials.
Revenue by Product Type
The following table sets forth our revenue by product type during the Track Record
Period.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Sale of self-produced products 2,213,551 79.4 2,721,500 86.8 2,221,064 83.0
Toluene oxidation products 1,311,522 47.0 1,555,182 49.6 1,356,387 (1) 50.7
– benzoic acid 752,321 27.0 910,379 29.0 784,461 29.3
– sodium benzoate 451,129 16.2 543,084 17.3 437,519 16.3
– others 108,072 3.8 101,719 3.3 134,407 5.1
Toluene chlorination products 487,513 17.5 831,305 26.5 587,599 21.9
– benzyl chloride 124,810 4.5 189,440 6.0 124,841 4.7
– benzyl alcohol 362,703 13.0 641,865 20.5 462,758 17.2
Benzoic acid ammonification
products 237,010 8.5 130,392 4.2 116,250 4.3
– benzonitrile 48,319 1.7 27,180 0.9 39,538 1.5
– benzoguanamine 188,691 6.8 103,212 3.3 76,712 2.8
Other fine chemical products
(2) 177,506 6.4 204,621 6.5 160,828 6.1
Products trading 575,926 20.6 412,336 13.2 456,039 17.0
Toluene product trading 541,042 19.4 360,815 11.6 320,085 12.0
Other products trading
(3) 34,884 1.2 51,521 1.6 135,954 5.0
Total 2,789,477 100.0 3,133,836 100.0 2,677,103 100.0
Notes:
(1) include sales revenue of products processed by Hebei Kangshi under the entrusted processing service
arrangement
(2) mainly include benzyl acetate and p-methyl chlorobenzyl
(3) mainly includes p-tolualdehyde, titanium dioxide, benzyl trichloride and p-methyl benzoic acid
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Sale of self-produced products
Toluene oxidation products . Our toluene oxidation products mainly include benzoic acid,
sodium benzoate and other products such as benzaldehyde and benzyl benzoate. We currently
generate a substantial portion of our revenue from sales of toluene oxidation products, which
accounted for 47.0%, 49.6% and 50.7% of our total revenue for the years ended December 31,
2021, 2022 and 2023, respectively. For details of this business segment, please refer to
“Business — Our Products — Toluene oxidation products and derivatives” in this prospectus.
Toluene chlorination products . Our toluene chlorination products mainly include benzyl
chloride and benzyl alcohol. Revenue from toluene chlorination products accounted for
17.5%, 26.5% and 21.9% of our total revenue for the years ended December 31, 2021, 2022
and 2023, respectively. For details of this business segment, please refer to “Business — Our
Products — Toluene chlorination products and derivatives” in this prospectus.
Benzoic acid ammonification products. Our benzoic acid ammonification products
mainly include benzonitrile and benzoguanamine. Revenue from benzoic acid ammonification
products accounted for 8.5%, 4.2% and 4.3% of our total revenue for the years ended
December 31, 2021, 2022 and 2023, respectively. For details of this business segment, please
refer to “Business — Our Products — Benzoic acid ammonification products and derivatives”
in this prospectus.
Other fine chemical products . Our other products mainly include benzyl acetate and
p-methyl chlorobenzyl. Revenue from other fine chemical products accounted for 6.4%, 6.5%
and 6.1% of our total revenue for the years ended December 31, 2021, 2022 and 2023,
respectively. For details of this business segment, please refer to “Business — Our Products
— Other fine chemical products” in this prospectus.
Products trading
Toluene product trading. We purchase toluene products from our suppliers and resell
them to our customers as part of our business operation. Revenue from toluene product trading
accounted for 19.4%, 11.6% and 12.0% of our total revenue for the years ended December 31,
2021, 2022 and 2023, respectively.
Other products trading. Apart from toluene products, we also engage in trading of other
non-toluene based products. Revenue from other products trading accounted for 1.2%, 1.6%
and 5.0% of our total revenue for the years ended December 31, 2021, 2022 and 2023,
respectively.
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Cost of Sales
Our cost of sales consists primarily of costs of consumed raw materials, staff costs,
depreciation, utilities, transportation costs, packaging expenses and others. The following
table sets forth the major components of our cost of sales which is also the production cost
adjusted by changes in work in progress and finished goods and as percentages of total cost of
sales for the periods indicated.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Consumed raw materials 1,175,641 54.7 1,569,488 64.5 1,384,237 59.0
Transportation costs 116,962 5.4 115,024 4.7 79,796 3.4
Staff costs 44,028 2.0 42,361 1.7 42,989 1.8
Utilities 172,871 8.0 195,210 8.0 192,285 8.2
Depreciation 75,974 3.5 82,252 3.4 98,645 4.2
Changes in work in progress and
finished goods (93,194) (4.3) (20,972) (0.9) 9,447 0.4
Packaging expenses 61,122 2.8 58,485 2.4 50,747 2.2
Cost of toluene product trading 543,743 25.3 335,895 13.8 307,909 13.1
Cost of other products trading 28,579 1.3 38,562 1.6 132,093 5.6
Others 24,629 1.3 18,253 0.8 49,190 2.1
Total 2,150,355 100.0 2,434,558 100.0 2,347,338 100.0
For the years ended December 31, 2021, 2022 and 2023, our cost of sales were
RMB2,150.4 million, RMB2,434.6 million and RMB2,347.3 million, respectively.
The following table sets forth the breakdown of our cost of sales by product type and as
a percentage of total cost of sales during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Sale of self-produced products 1,578,033 73.4 2,060,101 84.6 1,907,336 81.3
Toluene oxidation products 923,317 42.9 1,244,414 51.1 1,221,249 52.1
Toluene chlorination products 396,579 18.4 602,314 24.7 472,969 20.1
Benzoic acid ammonification products 107,513 5.0 61,948 2.5 78,793 3.4
Other fine chemical products
(1) 150,624 7.1 151,425 6.3 134,325 5.7
Products trading 572,322 26.6 374,457 15.4 440,002 18.7
Toluene products trading 543,743 25.3 335,895 13.8 307,909 13.1
Other products trading
(2) 28,579 1.3 38,562 1.6 132,093 5.6
Total 2,150,355 100.0 2,434,558 100.0 2,347,338 100.0
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Notes:
(1) mainly include benzyl acetate and p-methyl chlorobenzyl
(2) mainly includes p-tolualdehyde, titanium dioxide, benzyl trichloride and p-methyl benzoic acid
Cost of consumed raw materials constitutes a major portion of our cost of sales. For the
years ended December 31, 2021, 2022 and 2023, our cost of consumed raw materials were
RMB1,175.6 million, RMB1,569.5 million and RMB1,384.2 million, respectively, which
accounted for 54.7%, 64.5% and 59.0% of our total cost of sales for the corresponding
periods. The following table sets forth the breakdown of our cost of consumed raw materials
during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Petroleum toluene 898,422 76.4 1,318,317 84.0 1,220,459 88.2
Chlorine gas 64,940 5.5 45,486 2.9 8,089 0.6
Dicyandiamide 44,001 3.7 22,987 1.5 19,289 1.4
Pure soda 42,989 3.7 58,039 3.7 52,412 3.8
Liquid caustic soda 37,218 3.2 53,242 3.4 38,112 2.8
Others 88,071 7.5 71,417 4.5 45,876 3.2
Total 1,175,641 100.0 1,569,488 100.0 1,384,237 100.0
Fluctuations in prices of our raw materials, especially the market prices of petroleum
toluene which are primarily affected by the international crude oil prices, may increase our
costs of sales. For more information about risks related to raw material price fluctuation,
please refer to “Risk Factors — Any shortage in supply of raw materials or material
fluctuation in their purchase prices may adversely affect our profit margins and results of
operation” in this prospectus.
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The table below sets forth the sensitivity analysis on fluctuations in cost of consumed
raw materials of petroleum toluene. The analysis illustrates the hypothetical impact on our net
profit with 5%, and 10% increase or decrease in cost of consumed raw materials of petroleum
toluene. Due to a number of assumptions applied involved in the calculation, the sensitivity
analysis below is for illustration purpose only, and the actual results may differ from the
illustrations below:
Change in net profit for change in cost of
consumed raw materials of petroleum toluene
+/-5% +/-10%
RMB’000 RMB’000
Year ended December 31, 2021 -/+35,308 -/+70,616
Year ended December 31, 2022 -/+52,469 -/+104,938
Year ended December 31, 2023 -/+46,988 -/+93,975
Gross Profit and Gross Profit Margin
For the years ended December 31, 2021, 2022 and 2023, our gross profit were RMB639.1
million, RMB699.3 million and RMB329.8 million, respectively. For the same periods, our
gross profit margin were 22.9%, 22.3% and 12.3%, respectively. The following table sets forth
the breakdown of our gross profit by product and business segment, and as a percentage of
total gross profit during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Sale of self-produced products 635,518 99.4 661,399 94.5 313,728 95.1
Toluene oxidation products 388,205 60.7 310,768 44.4 135,138 41.0
Toluene chlorination products 90,933 14.2 228,991 32.7 114,630 34.7
Benzoic acid ammonification
products 129,497 20.3 68,444 9.8 37,457 11.4
Other fine chemical products 26,883 4.2 53,196 7.6 26,503 8.0
Products trading 3,604 0.6 37,879 5.5 16,037 4.9
Toluene product trading (2,701) (0.4) 24,920 3.6 12,176 3.7
Other products trading 6,305 1.0 12,959 1.9 3,861 1.2
Total 639,122 100.0 699,278 100.0 329,765 100.0
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The following table sets forth our gross profit margin by product and business segment
during the Track Record Period:
Y ear ended December 31,
2021 2022 2023
Sale of self-produced products 28.7% 24.3% 14.1%
Toluene oxidation products 29.6% 20.0% 10.0%
Toluene chlorination products 18.7% 27.5% 19.5%
Benzoic acid ammonification
products 54.6% 52.5% 32.2%
Other fine chemical products 15.1% 26.0% 16.5%
Products trading 0.6% 9.2% 3.5%
Toluene product trading (0.5)% 6.9% 3.8%
Other products trading 18.1% 25.2% 2.8%
Gross profit margin 22.9% 22.3% 12.3%
Our gross profit margins fluctuated during the Track Record Period, which was mainly
affected by the fluctuation in average selling prices as well as costs of our self-produced
products and products trading, including the cost of petroleum toluene, our major raw material
used for production, and other manufacturing costs. Generally, our Company is able to
transfer the fluctuations in cost of raw materials to our downstream buyers, but occasionally
this may not be fully and instantly reflected in the sales prices of our products due to the
changes in the market condition and the pricing policy we adopted from time to time. Despite
market fluctuations, we maintain a relatively high gross profit margin for our self-produced
products in 2021 and 2022, which was primarily due to: (i) the relative lower purchase price
for the primary raw material as a result of our long-term sound relationship with our suppliers
and capability to procure large quantities of raw materials; (ii) our market bargaining power
benefitted from our long-standing operation history and leading market position, please refer
to the “Industry Overview” in this prospectus for our leading market position for toluene
derivative products; (iii) the relatively higher production utilisation rates which enable us to
maintain scale-effect advantages; (iv) our refined manufacturing technologies which
significantly reduced waste of raw materials and extended the production line to produce more
marketable downstream products; and (v) high-quality of our products that commands a
higher selling price. Our gross profit margin decreased in 2023 primarily due to a
disproportional decrease in average selling prices of our major products due to
macroeconomic and industry factors. For details of the decrease of our gross profit margins in
2023, please refer to “— Discussion of Results of Operations — Year ended December 31,
2022 compared with the year ended December 31, 2023” in this section.
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Petroleum toluene is the primary raw material used for the manufacturing of our
self-produced products, and we secure our supply through purchases and trade of petroleum
toluene which is also the main component of our products trading business. We obtain our
supply of petroleum toluene from a selected number of major suppliers in the PRC market
during the Track Record Period. Generally, the major suppliers of petroleum toluene may
prioritize selling their products to purchasers with established business relationship, and these
purchasers commonly place large purchase amount orders to ensure that they maintain a stable
supply of raw materials at a relatively lower costs for the manufacturing of their products.
According to Frost & Sullivan, one of the key criteria used by these major suppliers is the
purchasers’ consistent demand for petroleum toluene at a stable quantity from year to year. As
one of the most long-standing toluene derivative products manufacturer in China, we have
established long-term business relationships with a number of petroleum toluene suppliers.
Since 2012, we have been rated as an “AAA” customer by SINOPEC Huazhong, a branch of a
wholly-owned subsidiary of SINOPEC and one of the largest suppliers of petroleum toluene in
China. Due to our top rating and established business relationship, we are afforded the right to
place large-scale procurement orders of petroleum toluene as a result of this qualification.
We entered into framework procurement agreements with major petroleum toluene
suppliers and are entitled to place large-scale procurement orders at a relatively low price.
During the Track Record Period, the average unit cost for our petroleum toluene was
approximately RMB4,973 per ton, RMB6,710 per ton and RMB6,654 per ton for the years
ended December 31, 2021, 2022 and 2023, respectively, whereas the average market price (tax
included) of toluene was approximately RMB5,628 per ton, RMB7,410 per ton and
RMB7,249 per ton for the same periods. We use the purchased petroleum toluene as the
primary raw material for the manufacturing of our self-produced products, and our large-scale
procurements afford us the ability to secure petroleum toluene at a relatively low price which
enabled us to record higher gross profit and gross profit margin for our self-produced
products. Our industry consultant, Frost & Sullivan, is of the view that it is not uncommon for
chemical manufacturers with a leading position in the market and established business
relationship with major suppliers to enjoy strong pricing power and advantages in purchase
cost and economic of scale, and therefore command high gross profit margin.
Moreover, we maintained a high-level production capacity utilisation rates for our
production plants during the Track Record Period, which were 102.4%, 122.8% and 104.0%
for our Wuhan Production Plant and 91.8%, 91.7% and 86.4% for our Qianjiang Xinyihong
Production Plant for the year ended December 31, 2021, 2022 and 2023, respectively.
As we execute our expansion plans to increase our production capacity, we expect our
demand for petroleum toluene to increase in the future. To ensure our ability to access a steady
supply of petroleum toluene in the long-run, we maintained a consistent large-scale
procurement from our suppliers from year to year to solidify our business relationship with
our suppliers in light of our expansion plan and adopt products trading as a strategy to manage
our inventory. Generally, when our raw material inventory meets and exceeds the
requirements for our production, we may engage in toluene product trading business to sell
our surplus inventory by obtaining information and tracking market opportunities on the
Independent Commodity Intelligence Services (ICIS) to improve our cash-flow position.
According to Frost & Sullivan, products trading business is a common strategy used by the
industry to ensure a steady supply of raw materials and minimize the impact of excess
purchases.
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We utilize this strategy and normally purchase a consistent supply of petroleum toluene
from year to year based on our market projections and resell certain portion of the petroleum
toluene when our raw material inventory meets our production requirement on an annual
basis. Furthermore, we conduct product trading to ensure our fluent access to raw materials
due to the adoption of product trading which in turn enhances our capacity to manufacture
cost-efficient self-produced products and maintain our market leading position. In 2022, we
were able to generate substantial gross profit for our products trading business in the amount
of RMB37.9 million and a gross profit of RMB24.9 million for toluene product trading due to
our efficient inventory management in taking advantage of the favourable market price trends
in the first half of 2022. According to Frost & Sullivan, the average market price of toluene
increased from approximately RMB5,852 per ton in January to RMB8,672 per ton in June in
the first half of 2022.
Going forward, in order to control the potential risks associated with our large-scale
purchase amount of petroleum toluene such as price fluctuation under the framework
procurement agreements, we intend to further enhance our raw material inventory
management through (i) monthly production schedule meetings to determine the raw material
consumption amount for the next month; (ii) close and amicable communications with our
major suppliers to maintain certain flexibility in the purchase amount for each month; and (iii)
enhanced coordination with third-party shipping companies and warehousing companies to
improve the accuracy of the loading time and transit time of main raw materials, so that we can
better manage our inventory and avoid unexpected transportation delays.
Other Income and Gains
Our other income and gains primarily consist of interest income and government grants.
Government grants mainly represent subsidies we received from the local governments to
subsidize us for expenses spent on research, funds for retaining professional talents and
subsidies received for purchase of assets, and for export development. The amount of
government grants were subject to the discretion of the relevant government authority, and the
government grants related to income increased significantly in 2022 because the amount of
government grants for export development increased from RMB1.0 million in 2021 to
RMB8.1 million in 2022. The amount of government grants for export development decreased
to RMB0.2 million in 2023. Our sundry income mainly includes technology service earnings
and income from sales of manufacturing residuals, which decreased from 2021 because there
was technology service earnings of RMB3.0 million and sales of manufacturing residuals of
FINANCIAL INFORMA TION
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RMB1.6 million in 2021. The table below sets forth a breakdown of our other income and
gains and the respective percentage of total other income and gains for the periods indicated.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Other income
Interest income 19,295 48.4 5,632 16.3 3,310 13.0
Government grants related
to income 3,882 9.7 12,447 36.1 6,425 25.2
Government grants related
to assets 3,230 8.1 4,570 13.2 5,353 21.0
Sundry income 10,767 27.0 6,009 17.4 2,669 10.5
Entrusted processing
service income 959 2.4 1,248 3.6 1,398 5.5
Rental income – fixed
lease payments 1,562 3.9 1,774 5.1 1,774 7.0
Gain on disposal of items
of property,
plant and equipment – – – – 3 0.0
Gain on lease
modification – – – – 81 0.3
Other gains
Foreign exchange
differences, net – – 2,268 6.6 3,617 14.2
Others 206 0.5 566 1.7 875 3.4
Total 39,901 100.0 34,514 100.0 25,505 100.0
Selling and Distribution Expenses
Our selling and distribution expenses consist of staff costs, depreciation and
amortization, marketing expenses, business hospitality expenses, property insurance
premiums, technology service charges, and others. Staff costs consist of the salaries and
benefits to our in-house sales team. Marketing expenses include promotional expenses that
mainly consist of expenses associated with various marketing and development activities, and
business hospitality expenses that mainly consist of expense incurred by our marketing team
conducting sales activities. For the years ended December 31, 2021, 2022 and 2023, we
recorded selling and distribution expenses of RMB19.8 million, RMB24.0 million and
RMB20.7 million, respectively.
FINANCIAL INFORMA TION
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The following table sets forth a breakdown and the respective percentage of our selling
and distribution expenses for the periods indicated.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Staff costs 11,573 58.4 14,472 60.3 13,049 63.0
Business hospitality expenses 2,933 14.8 3,284 13.7 2,213 10.7
Technology service charges 1,543 7.8 1,942 8.1 611 2.9
Property insurance premiums 715 3.6 684 2.8 847 4.1
Depreciation and amortization 292 1.5 256 1.1 189 0.9
Marketing expenses 452 2.2 361 1.5 2,202 10.6
Others 2,312 11.7 3,010 12.5 1,607 7.8
Total 19,820 100.0 24,009 100.0 20,717 100.0
Administrative Expenses
Our administrative expenses consist of general management expenses, tax and
surcharges and listing expenses. General management expenses consist of staff costs for our
administrative and management personnel, depreciation and amortization, property
management fees, and other expenses including travel expenses and utilities, technology
service charges and consulting fees. For the years ended December 31, 2021, 2022 and 2023,
we recorded administrative expenses of RMB100.5 million, RMB116.5 million and RMB95.4
million, respectively.
The following table sets forth the breakdown and respective percentage of our
administrative expenses for the periods indicated.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Staff costs 45,284 45.1 48,503 41.6 33,315 34.9
Tax and Surcharges 11,350 11.3 16,709 14.3 13,545 14.2
Depreciation and amortization 17,062 17.0 14,461 12.5 13,931 14.6
Property management fees 5,352 5.3 8,704 7.5 8,935 9.4
Listing expenses 7,840 7.8 14,371 12.4 10,118 10.6
Others 11,569 13.5 13,750 11.8 15,571 16.3
Total 100,457 100.0 116,498 100.0 95,416 100.0
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Research and Development Expenses
Our research and development expenses consist of staff costs for our research and
development personnel, article of consumption, depreciation and amortization of research and
development equipment, and other expenses including technology service charges and
consulting fees. For the years ended December 31, 2021, 2022 and 2023, we recorded research
and development expenses of RMB110.8 million, RMB133.0 million and RMB100.0 million,
respectively.
The following table sets forth a breakdown and respective percentage of our research and
development expenses for the periods indicated.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Article of consumption 54,948 37.9 66,294 49.8 42,798 42.8
Staff costs 42,039 49.6 46,693 35.1 35,506 35.5
Depreciation and amortization 6,891 6.2 8,098 6.1 10,399 10.4
Others 6,953 6.3 11,916 9.0 11,256 11.3
Total 110,831 100.0 133,001 100.0 99,959 100.0
Other Expenses
Our other expenses consist primarily of impairment for long-term equity investment and
other non-operating expenses. For the years ended December 31, 2021, 2022 and 2023, we
recorded other expenses of RMB22.8 million, RMB5.4 million and RMB4.8 million,
respectively.
Finance Costs
Our finance costs mainly consist of interest expenses on bank loans, other borrowings
and lease liabilities. For the years ended December 31, 2021, 2022 and 2023, we recorded
finance costs of RMB34.1 million, RMB31.0 million and RMB32.3 million, respectively.
Y ear ended December 31,
2021 2022 2023
RMB’000 % RMB’000 % RMB’000 %
Interest on bank loans and
other borrowings 30,894 90.7 27,832 89.7 30,267 93.8
Interest on discounted
bills 1,485 4.4 798 2.6 89 0.2
Interest on lease liabilities 1,687 4.9 2,396 7.7 1,925 6.0
Total 34,066 100.0 31,026 100.0 32,281 100.0
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Income Tax Expense
Our income tax expense primarily consists of the current income tax at the statutory rates
applicable to our assessable profit before tax as determined under relevant laws and
regulations in China and Hong Kong. We incurred current withholding tax of RMB117.8
million and RMB30.0 million in 2022 and 2023 respectively, as a result of dividends declared
and distributed by our mainland subsidiary Wuhan Youji to its offshore shareholders in 2022
and 2023 respectively. Therefore, a 10% withholding tax was charged and paid to the China
tax authorities pursuant to the relevant PRC laws and regulations. For the years ended
December 31, 2021, 2022 and 2023, our effective tax rate were 21.4%, 20.4% and 23.0%,
respectively.
Profit for the Y ear
We recorded net profit of RMB309.1 million, RMB340.5 million and RMB72.9 million
for the years ended December 31, 2021, 2022 and 2023, respectively.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands as a company with limited liability under the
Companies Act and, accordingly, are not subject to income tax in the Cayman Islands.
British Virgin Islands
We are not subject to tax on income or capital gains under the current laws of British
Virgin Islands.
Hong Kong
Our subsidiaries in Hong Kong are subject to profits tax at the rate of 16.5% for each year
of period on the estimated assessable profits arising in Hong Kong during the year, except for
one subsidiary of our Company, Wuhan Youji (Hong Kong) Co., Limited, which is a qualifying
entity under the two-tiered profits tax rates regime. The first HK$2,000,000 of assessable
profits of this subsidiary are taxed at 8.25% and the remaining assessable profits are taxed at
16.5%.
PRC
Our subsidiaries in China are subject to Enterprise Income Tax (“ EIT”) on the taxable
income as reported in their respective statutory financial statements adjusted in accordance
with the Enterprise Income Tax Law (“ EIT Law ”). Our subsidiaries in China are generally
subject to EIT at the statutory rate of 25% pursuant to the EIT Law. Our subsidiaries, Wuhan
Youji Industries Co., Ltd. and Qianjiang Xinyihong Organic Chemical Co., Ltd. are qualified
as High and New Technology Enterprise and have been subject to tax at a preferential income
tax rate of 15% throughout the Track Record Period. The qualifications were extended in 2021
for three years. Since May 1, 2016, certain PRC enterprises have been required to pay a
value-added tax (“ VAT”) in lieu of business tax. All our subsidiaries in China are subject to
13% V AT. For more information on PRC taxation policies, please refer to “Regulatory
Overview — Laws and Regulations Relating to Tax in the PRC” in this prospectus.
FINANCIAL INFORMA TION
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Any discontinuation of preferential tax treatment to which we are currently entitled to or
any unfavorable tax policy change against us or our operating subsidiaries could have an
adverse impact on the results of our operations. For more information about such risk, please
refer to “Risk Factors — Our business operations may be affected by regulatory changes” in
this prospectus.
DISCUSSION OF RESULTS OF OPERA TIONS
Y ear ended December 31, 2022 compared with the year ended December 31, 2023
Revenue
Our total revenue decreased by 14.6% from RMB3,133.8 million in 2022 to RMB2,677.1
million in 2023.
The chemical industry, in particular toluene oxidation and chlorination products
industry, experienced a challenging year in 2023 as impacted by the uncertainty surrounding
the economic environment globally as well as in the PRC following the slower than expected
recovery from COVID-19 and the geopolitical tension, which in turn has a widespread
negative impact on the customers’ spending on various downstream industries. Although our
downstream customers mainly relates to daily necessities such as food and beverages and
pharmaceutical which have relatively stable demands, they could delay their purchases and
reduce their inventory level in light of the uncertain economic environment, which in turn
adversely affects their demand on chemical products. At the same time, the petroleum price
remained at a relatively low level throughout 2023, which is unfavourable to chemical prices.
According to the National Bureau of Statistics, the Purchasing Manager’s Index (PMI) was
consistently below 50 throughout majority of 2023 while the Producer Price Index (PPI) in the
PRC dropped from 9.1% in January 2022 to negative level since October 2022 and throughout
2023, representing a shrink in the upstream manufacturing industries and a drop in ex-factory
price. At the same time, Consumer Price Index (CPI) in the PRC also dropped to a level close
to zero in 2023 indicating an overall weak consumer sentiment in 2023. According to the
World Bank, global economy shown a decelerating trend with the global GDP growth fell
from 3.0% in 2022 to 2.6% in 2023.
In light of the unfavorable economic environment and the reduced consumer demand, as
a prudence measure to maintain greater liquidity and flexibility at the time of uncertainties,
many downstream industry customers tend to lower their inventory level or slow down their
inventory replenishment, resulting in sluggish demand for fine chemicals. This was
completely opposite to the market circumstances in 2022 where the chemical industry was at
a boom and the downstream industrial customers were stocking up as they foresee there could
be an increase in selling prices of chemicals, including the price of toluene oxidation and
chlorination products. The above are coupled with the expansion in capacity of some of the
market players in toluene oxidation products which were put into operation since late 2022
which further increases the market supply of toluene oxidation products. These factors had an
immediate adverse impact on the chemical industry. The increase in market supply of toluene
oxidation products further intensified the market competition amid time of weak demands,
which has an immediate adverse impact on the market participants as it takes time to digest the
increased production capacity. All of which further exert significant downward pressure on
product pricing. This circumstance was a reversal of the marketing condition in 2022 when
demand was much higher than the supply, which positioned chemical manufacturers in an
ideal market position.
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To cope with the unfavourable market sentiment, we adopted a strategy to sell our
products at a lower prices so as to maintain our market position and the utilization rate of our
production facilities at an optimal level while at the same time, maintain or even increase our
market shares. With our competitive advantages as a leading player in the market, we view it
as an opportunity to further strengthen our market position as we are able to effectively
compete in the market in such circumstances. According to Frost and Sullivan, our Group
remained as the largest manufacturer for both benzoic acid and sodium benzoate in the PRC in
terms of the sales revenue in 2023 with our market share increased from 59.1% and 37.3% in
2022 to 62.0% and 37.9% in 2023.
As a result of the foregoing, the total sales volume of our products decreased from
approximately 375,848 tons in 2022 to 346,147 tons in 2023. In addition to the decrease in
sales volume, the market price of our products also decreased due to the market slowdown and
uncertainties. For example, the average sales price of our toluene oxidation products
decreased from RMB9,150 per ton in 2022 to RMB8,267 per ton in 2023. As a result, our
revenue decreased in 2023.
Sale of self-produced products . Revenue from sales of our self-produced products
decreased by 18.4% from RMB2,721.5 million in 2022 to RMB2,221.1 million in 2023,
primarily due to the decrease in average sales price of our self-produced products from
RMB8,536 per ton to RMB7,957 per ton for the corresponding periods. The decrease in
market demands also lowered our sales volume from 318,818 tons in 2022 to 279,147 tons in
2023. To maintain our market share, we adopted a market-oriented pricing strategy to sell our
products at a relatively lower price. For details of our strategy in response to the changes in
market circumstances, please refer to “Business — Our Strategies — Timely respond to
changes in market circumstances by adjusting sales and pricing strategies” in this prospectus.
• Toluene oxidation products . Revenue from toluene oxidation product sales
decreased by 12.8% from RMB1,555.2 million in 2022 to RMB1,356.4 million in
2023, primarily due to the decrease in downstream market demand and the increase
in market supply. Therefore, we adopted a market-oriented pricing strategy to sell
our products at a relatively lower price to maintain our market share. The sales
volume for toluene oxidation products decreased from approximately 169,962 tons
in 2022 to 164,071 tons in 2023. The average sales price for toluene oxidation
products decreased from approximately RMB9,150 per ton to RMB8,267 per ton for
the corresponding periods.
• Toluene chlorination products . Revenue from toluene chlorination product sales
decreased by 29.3% from RMB831.3 million in 2022 to RMB587.6 million in 2023,
as a result of the decreases in sales volume from 61,988 tons to 52,299 tons as well
as the decrease in average sales price from RMB13,411 per ton to RMB11,235 per
ton for the corresponding periods. There was a downward trend in the downstream
market demand in 2023, and we strategically sold our products at a relatively lower
price in light of the challenging economic environment and to enhance our market
position. The drop in price of chlorine gas as our raw material also has an impact on
our pricing.
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• Benzoic acid ammonification products . Our revenue from benzoic acid
ammonification product sales decreased by 10.8% from RMB130.4 million in 2022
to RMB116.3 million in 2023, as a result of the decrease in average sales price from
approximately RMB28,232 per ton to RMB17,415 per ton for the corresponding
periods. This decrease was partially offset by the increase in sales volume from
approximately 4,619 tons to 6,675 tons for the corresponding periods.
• Other fine chemical products . Our revenue from other product sales decreased by
21.4% from RMB204.6 million in 2022 to RMB160.8 million in 2023, primarily due
to the decrease in sales volume from approximately 82,249 tons to 56,102 tons for
the corresponding periods.
Products trading . Our revenue from products trading increased by 10.6% from
RMB412.3 million in 2022 to RMB456.0 million in 2023. This increase was primarily due to
the increase in sales volume from approximately 57,030 tons to 67,000 tons for the
corresponding periods.
• Toluene product trading . Our revenue from toluene product trading decreased by
11.3% from RMB360.8 million in 2022 to RMB320.1 million in 2023. This
decrease was primarily the result of the decrease in trading volume from
approximately 54,823 tons to 49,295 tons for the corresponding periods.
• Other products trading . Our revenue from other products trading increased
significantly by 163.9% from RMB51.5 million in 2022 to RMB136.0 million in
2023, primarily due to the significant increase in sales volume from approximately
2,207 tons to 17,705 tons for the corresponding periods mainly attributable to the
purchase of finished products from Hebei Kangshi for products trading as it ramp up
its production in 2023.
Cost of Sales
Our cost of sales decreased by 3.6% from RMB2,434.6 million in 2022 to RMB2,347.3
million in 2023, as the result of the decrease in total sales volume of our self-produced
products from approximately 318,818 tons to 279,147 tons and toluene product trading from
approximately 54,823 tons to 49,295 tons for the corresponding periods.
Sale of self-produced products. Cost of sales for our self-produced products decreased by
7.4% from RMB2,060.1 million in 2022 to RMB1,907.3 million in 2023, which was primarily
due to the decrease in sales volume from approximately 318,818 tons to 279,147 tons and the
decrease in raw material, in particular, chlorine gas prices for the corresponding periods.
• Toluene oxidation products . Cost of sales of our toluene oxidation products
decreased by 1.9% from RMB1,244.4 million in 2022 to RMB1,221.2 million in
2023, primarily due to the decrease of sales volume from approximately 169,962
tons to 164,071 tons for the corresponding periods.
• Toluene chlorination products . Cost of sales of our toluene chlorination products
decreased by 21.5% from RMB602.3 million in 2022 to RMB473.0 million in 2023,
primarily due to the decrease in sales volume from approximately 61,988 tons to
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52,299 tons and the decrease in chlorine gas prices from RMB967 per ton to
RMB186 per ton in the corresponding periods.
• Benzoic acid ammonification products . Cost of sales of our benzoic acid
ammonification products increased by 27.2% from RMB61.9 million in 2022 to
RMB78.8 million in 2023, primarily due to the increase in sales volume from
approximately 4,619 tons to 6,675 tons for the corresponding periods. This increase
was partially offset by the decrease in raw material costs of dicyandiamide from
approximately RMB21,466 per ton to RMB12,560 per ton for the corresponding
periods.
• Other fine chemical products . Cost of sales of our other fine chemical products
decreased by 11.3% from RMB151.4 million in 2022 to RMB134.3 million in 2023,
which was primarily attributed to the decrease in the sales volume of certain other
fine chemical products, such as p-methyl benzyl chloride.
Products trading . Cost of products trading increased by 17.5% from RMB374.5 million
in 2022 to RMB440.0 million in 2023. This increase was primarily due to the increase in sales
volume of trading products from approximately 57,030 tons to 67,000 tons.
• Toluene product trading . Cost of sales for toluene product trading decreased by
8.3% from RMB335.9 million in 2022 to RMB307.9 million in 2023. The decrease
in cost of sales for toluene product trading primarily resulted from the decrease in
sales volume from approximately 54,823 tons in 2022 to 49,295 tons in 2023 and
partially offset by the increase in average unit cost of toluene from approximately
RMB6,127 per ton to RMB6,246 per ton.
• Other products trading . Cost of sales for other products trading increased
significantly by 242.5% from RMB38.6 million in 2022 to RMB132.1 million in
2023, due to the increase in sales volume from approximately 2,207 tons to 17,705
tons for the corresponding periods.
Gross Profit and Gross Profit Margin
Our gross profit decreased by 52.8% from RMB699.3 million in 2022 to RMB329.8
million in 2023. The significant decrease is mainly attributable to the combined effects of the
following:
(1) The decrease in our products’ sales volume and price due to macroeconomic and
industry factors adversely impacted our gross profits and gross profit margins. The
slower-than-expected recovery of economy from the pandemic caused significant
reduction in downstream demand amid the significant economic uncertainties in the
PRC and globally. In addition, the increase in market supply of toluene oxidation
products further intensified the market competition. For details, please refer to
“— Discussion of Results of Operations — Year ended December 31, 2022
compared with the year ended December 31, 2023 — Revenue” in this section. This
levied significant pressure on the Group’s pricing. Therefore, we strategically
lowered the selling prices of its products in order to effectively compete with its
competitors to maintain the utilization rate of its production facilities at an optimal
level and to keep our market share, which adversely impacted the gross profit
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margin. For details of our strategy in response to the changes in market
circumstances, please refer to “Business — Our Strategies — Timely respond to
changes in market circumstances by adjusting sales and pricing strategies” in this
prospectus; and
(2) A relatively lower production plant utilization rate compared to our past
performance and the maintenance of our production plant in February 2023, also
impacted our gross profit margin. Generally, we conduct annual maintenance for our
production plants each year. However, the length and timing of annual maintenance
may vary based on our manufacturing arrangement. We scheduled an annual
maintenance from late January to late February 2023 when most of the
manufacturing and trading activities had been temporarily suspended. In the past,
we conducted maintenance from late December 2021 to early January 2022. As a
result of the challenging market environment and our annual maintenance, the
utilization rate of our Wuhan Production Plant decreased from 122.8% in 2022 to
104.0% in 2023, and the utilization rate of our Qianjiang Xinyihong Production
Plant decreased from 91.7% in 2022 to 86.4% in 2023. This lower utilization rate in
turn increased the per unit costs of our products and thus adversely affecting our
gross profit and gross profit margin.
Sale of self-produced products . Our gross profit of self-produced product sales decreased
by 52.6% from RMB661.4 million in 2022 to RMB313.7 million in 2023, which was
consistent with the decrease of revenue generated from sales of self-produced products from
RMB2,721.5 million to RMB2,221.1 million for the corresponding periods. The gross profit
margin of our self-produced products decreased from 24.3% in 2022 to 14.1% in 2023.
• Toluene oxidation products . Our gross profit of toluene oxidation product sales
decreased by 56.5% from RMB310.8 million in 2022 to RMB135.1 million in 2023,
which was the combined effect of the decrease in average sales price from
approximately RMB9,150 per ton to RMB8,267 per ton and the decrease in sales
volume from approximately 169,962 tons to 164,071 tons for the corresponding
periods. The gross profit margin of our toluene oxidation products decreased from
20.0% to 10.0% due to the decrease in downstream market demands and our
decision to reduce our sales prices in order to compete with our competitors to
maintain our market share and maintain the utilization rate of our production
facilities at an optimal level. The increase in market supply of toluene oxidation
products further intensified the market competition, which exerted further pressure
on our pricing. Our one-month maintenance shutdown in our Wuhan Production
Plant from January to February in 2023 and lower utilization rate, which led to the
lower production volume of our products and higher average unit cost, also
contributed to this decrease.
• Toluene chlorination products . Our gross profit of toluene chlorination product
sales decreased by 49.9% from RMB229.0 million in 2022 to RMB114.6 million in
2023, which was due to the decrease in sales volume from 61,988 tons to 52,299
tons and the decrease in gross profit margin of our toluene chlorination products
from 27.5% to 19.5% for the corresponding periods. This decrease was primarily
due to the decrease in average sales price from approximately RMB13,411 per ton to
RMB11,235 per ton for the corresponding periods as a result of the decrease in
downstream market demands and our decision to reduce our sales prices in order to
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compete with our competitors to maintain our market share and maintain the
utilization rate of our production facilities at an optimal level.
• Benzoic acid ammonification products . Our gross profit of benzoic acid
ammonification product sales decreased by 45.3% from RMB68.4 million in 2022
to RMB37.5 million in 2023, which was in line with the decrease in average sales
price in 2023 from approximately RMB28,232 per ton to RMB17,415 per ton for the
corresponding periods which caused the decrease in revenue of our benzoic acid
ammonification products, and partially offset by the increase in sales volume from
4,619 tons to 6,675 tons. The gross profit margin of our benzoic acid
ammonification products decreased from 52.5% to 32.2%. The overall market for
benzoic acid ammonification products experienced a contraction in 2023. In
response, we adopted a market-oriented pricing strategy to sell our products at a
relatively lower price to effectively compete in the market. As a result of our pricing
strategy, we achieved an increase in sales volume in 2023 to partially offset the
decrease in revenue caused by the decrease in market price.
• Other fine chemical product sales . Our gross profit of other fine chemical product
sales decreased by 50.2% from RMB53.2 million in 2022 to RMB26.5 million in
2023, primarily due to the decrease in sales volume from 82,249 tons to 56,102 for
the corresponding periods. The gross profit margin of our other fine chemical
product sales decreased from 26.0% to 16.5% for the corresponding periods due to
the fact that a greater percentage of our other fine chemicals sold were sold with
lower profit margin in light of the weak chemical market sentiment.
Products trading . Our gross profit of products trading decreased by 57.7% from
RMB37.9 million to RMB16.0 million for the year ended December 31, 2022 and 2023,
respectively, as a result of the decrease in the gross profit margin from 9.2% to 3.5%.
• Toluene product trading . Our gross profit of toluene product trading decreased by
51.1% from RMB24.9 million in 2022 to RMB12.2 million in 2023, mainly due to
the decrease in trading volume from approximately 54,823 tons to 49,295 tons for
the corresponding periods and the decrease in the gross profit margin from 6.9% to
3.8% caused by the slight decrease in sales price due to the slight decrease in
petroleum toluene price in 2023.
• Other products trading . Gross profit of other products trading decreased by 70.2%
from RMB13.0 million in 2022 to RMB3.9 million in 2023, and the gross profit
margin decreased from 25.2% to 2.8% for the corresponding periods. These
decreases were primarily due to the increase of trading volume of certain products
purchased from Hebei Kangshi during its ramp up period which had relatively lower
gross profit margin as well as the decrease in trading of benzaldehyde, which is a
product of higher gross profit margin, due to weak market demand.
Other Income and Gains
Our other income and gains decreased by 26.1% from RMB34.5 million in 2022 to
RMB25.5 million in 2023 due to (i) the settlement of loans to Linuo Group, which led to the
decrease in interest income, and (ii) the decrease in government grants related to income
received during the period.
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Selling and Distribution Expenses
Our selling and distribution expenses decreased by 13.7% from RMB24.0 million in
2022 to RMB20.7 million in 2023, primarily due to the decrease in performance bonus to our
employees.
Research and Development Expenses
Our research and development expenses decreased by 24.8% from RMB133.0 million in
2022 to RMB100.0 million in 2023, primarily due to the decrease in staff costs for our
research and development employees resulting from the decrease in performance bonus to our
employees and the decrease in articles of consumption.
Administrative Expenses
Our administrative expenses decreased by 18.1% from RMB116.5 million in 2022 to
RMB95.4 million in 2023, primarily due to the decrease in staff costs resulting from the
decrease in performance bonus to our employees and the decrease in listing expenses and tax
and surcharges.
Other Expenses
Our other expenses decreased by 10.6% from RMB5.4 million in 2022 to RMB4.8
million in 2023, primarily due to the decrease in handling charges.
Finance Costs
Our finance costs increased by 4.0% from RMB31.0 million in 2022 to RMB32.3 million
in 2023 due to the increased bank loans. For details, please refer to “— Indebtedness —
Interest-Bearing Bank and Other Borrowings” in this section.
Income Tax Expense
Our income tax expenses decreased by 75.0% from RMB87.2 million in 2022 to
RMB21.8 million in 2023 due to the significant decrease in profit before tax. Our effective tax
rate slightly increased from 20.4% to 23.0% for the same corresponding period.
Profit for the Y ear
As the result of the foregoing reasons, our profit for the year decreased by 78.6% from
RMB340.5 million in 2022 to RMB72.9 million in 2023.
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Y ear ended December 31, 2021 compared with the year ended December 31, 2022
Revenue
Our total revenue increased by 12.3% from RMB2,789.5 million in 2021 to RMB3,133.8
million in 2022, primarily due to the increase in average sales price and sales volume of our
toluene oxidation and chlorination products, and partially offset by the decrease in average
sales price and sales volume of our benzoic acid ammonification products and the decrease in
sales volume of toluene trading products. The total sales volume of our products increased
from approximately 362,302 tons in 2021 to 375,848 tons in 2022.
Sale of self-produced products . Revenue from sales of our self-produced products
increased by 22.9% from RMB2,213.6 million in 2021 to RMB2,721.5 million in 2022,
primarily due to the increase in average sales price and sales volume of our toluene oxidation
and chlorination products, and partially offset by the decrease in average sales price and sales
volume of our benzoic acid ammonification products. The average sales price of our toluene
chlorination products increased significantly in 2022 due to (i) the market supply shortage and
our market bargaining power established through our ability to supply these products; and (ii)
the significant increase in the average purchase price of petroleum toluene, the major raw
materials used in the production, as a result of changes in the macro-environment of global
politics and economy.
• Toluene oxidation products . Revenue from toluene oxidation product sales
increased by 18.6% from RMB1,311.5 million in 2021 to RMB1,555.2 million in
2022, primarily due to the increases in sales volume and average sales price of
toluene oxidation products. The sales volume for toluene oxidation products
increased from approximately 161,028 tons in 2021 to 169,962 tons in 2022. The
average sales price for toluene oxidation products increased from approximately
RMB8,145 per ton in 2021 to RMB9,150 per ton in 2022.
• Toluene chlorination products . Revenue from toluene chlorination product sales
increased significantly by 70.5% from RMB487.5 million in 2021 to RMB831.3
million in 2022, primarily as a result of the significant increase in average sales
price from approximately RMB9,519 per ton in 2021 to RMB13,411 per ton in
2022. The significant increase in average sales price was due to market supply
shortages, and our ability to supply these products increased our market bargaining
power. In addition, the sales volume of our toluene chlorination products also
increased from approximately 51,217 tons in 2021 to 61,988 tons in 2022, primarily
due to the increase sales of benzyl alcohol.
• Benzoic acid ammonification products . Our revenue from benzoic acid
ammonification product sales decreased by 45.0% from RMB237.0 million in 2021
to RMB130.4 million in 2022, as a result of the decrease in sales volume from
approximately 7,921 tons in 2021 to 4,619 tons in 2022, and the decrease in average
sales price from approximately RMB29,920 per ton to RMB28,232 per ton in the
corresponding years. The decreases in sales volume and average sales price of our
benzoic acid ammonification products were primarily due to the general increase in
market supply.
• Other fine chemical products . Our revenue from other product sales increased by
15.3% from RMB177.5 million in 2021 to RMB204.6 million in 2022, primarily due
to the increase in sales volume of other fine chemical products with high-quality in
2022.
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Products trading . Our revenue from products trading decreased by 28.4% from
RMB575.9 million in 2021 to RMB412.3 million in 2022. This decrease was the result of the
decrease in sales volume from 113,840 tons in 2021 to 57,030 tons in 2022, and partially
offset by the increase in average sales price of our traded products from approximately
RMB5,059 per ton to RMB7,230 per ton in the corresponding years.
• Toluene product trading . Our revenue from toluene product trading decreased by
33.3% from RMB541.0 million in 2021 to RMB360.8 million in 2022. This
decrease was the result of the decrease in sales volume from approximately 112,272
tons in 2021 to 54,823 tons in 2022, which was in turn due to our increased internal
demand for petroleum toluene for the manufacturing of our self-produced products
in 2022 as well as market fluctuations in 2022. This decrease was partially offset by
the increase in average sales price from approximately RMB4,819 per ton to
RMB6,581 per ton in the corresponding years.
• Other products trading . Our revenue from other products trading increased by
47.7% from RMB34.9 million in 2021 to RMB51.5 million in 2022, primarily due to
the increase in sales volume from approximately 1,568 tons in 2021 to 2,207 tons in
2022.
Cost of Sales
Our cost of sales increased by 13.2% from RMB2,150.4 million in 2021 to RMB2,434.6
million in 2022, as the result of the increase in total sales volume from approximately 362,302
tons in 2021 to 375,848 tons in 2022. Similarly, the average unit price of petroleum toluene,
the primary raw material used for our production, increased from approximately RMB4,973
per ton to RMB6,710 per ton in the corresponding years.
Sale of self-produced products. Cost of sales for our self-produced products increased by
30.5% from RMB1,578.0 million in 2021 to RMB2,060.1 million in 2022, which was
primarily due to the increase in sales volume of our toluene oxidation and chlorination
products as well as the increase in price of raw materials.
• Toluene oxidation products . Cost of sales of our toluene oxidation products
increased by 34.8% from RMB923.3 million in 2021 to RMB1,244.4 million in
2022, primarily due to the increase of sales volume from approximately 161,028
tons to 169,962 tons and the increase in raw material costs of petroleum toluene
from approximately RMB4,973 per ton to RMB6,710 per ton in the corresponding
years. In the first half of year 2022, we commenced expansion of our production of
melt-crystallized benzoic acid with an increased annual designed production
capacity of approximately 60,000 tons under our toluene oxidation products, which
also contributed to the increase in cost of sales.
• Toluene chlorination products . Cost of sales of our toluene chlorination products
increased by 51.9% from RMB396.6 million in 2021 to RMB602.3 million in 2022,
due to the combined effects of the increase in sales volume from approximately
51,217 tons to 61,988 tons and the increase in raw material costs of petroleum
toluene from approximately RMB4,973 per ton to RMB6,710 per ton in the
corresponding years.
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• Benzoic acid ammonification products . Cost of sales of our benzoic acid
ammonification products decreased by 42.4% from RMB107.5 million in 2021 to
RMB61.9 million in 2022, primarily due to the decrease in sales volume from
approximately 7,921 tons to 4,619 tons in the corresponding years resulted from the
increased supply of benzoic acid ammonification products from our domestic
competitors.
• Other fine chemical products . Cost of sales of our other fine chemical products
remained stable at RMB150.6 million in 2021 and RMB151.4 million in 2022.
Products trading . Cost of products trading decreased by 34.6% from RMB572.3 million
in 2021 to RMB374.5 million in 2022. This decrease was primarily due to the decrease in sales
volume from approximately 113,840 tons in 2021 to 57,030 tons in 2022, and partially offset
by the increase in average unit cost from approximately RMB5,027 per ton to RMB6,566 per
ton in the corresponding years mainly due to the increased average unit price of petroleum
toluene in 2022.
• Toluene product trading . Cost of sales for toluene product trading decreased by
38.2% from RMB543.7 million in 2021 to RMB335.9 million in 2022, as the sales
volume decreased from approximately 112,272 tons to 54,823 tons in the
corresponding years. The decrease in cost of sales for toluene product trading was
partially offset by the increase in average unit cost from approximately RMB4,843
per ton in 2021 to RMB6,127 per ton in 2022, due to the increased average unit price
of petroleum toluene in 2022.
• Other products trading . Cost of sales for other products trading increased by 34.9%
from RMB28.6 million in 2021 to RMB38.6 million in 2022, primarily attributed to
the increase in sales volume from approximately 1,568 tons to 2,207 tons in the
corresponding years.
Gross Profit and Gross Profit Margin
Our gross profit increased by 9.4% from RMB639.1 million in 2021 to RMB699.3
million in 2022, which was in line with our revenue growth. Our gross profit margin decreased
slightly from 22.9% to 22.3% in the corresponding years, primarily due to the decreased gross
profit margin of our self-produced products.
Sale of self-produced products . Our gross profit of self-produced product sales increased
by 4.1% from RMB635.5 million in 2021 to RMB661.4 million in 2022, which was consistent
with the increase in revenue generated from sales of self-produced products from
RMB2,213.6 million to RMB2,721.5 million in the corresponding years, representing a
growth rate of 22.9%. The gross profit margin of our self-produced products decreased from
28.7% in 2021 to 24.3% in 2022 mainly due to the increase in average unit cost of petroleum
toluene purchased by our Group, the primary raw material used for our production, which
increased from approximately RMB4,973 per ton to RMB6,710 per ton in the corresponding
years, and the increased cost was not fully transferred to the customers in light of the keen
market competition and the volatile downstream market demand as well as our adoption of a
market-oriented pricing strategy for some of our products in 2022.
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• Toluene oxidation products . Our gross profit of toluene oxidation product sales
decreased by 19.9% from RMB388.2 million in 2021 to RMB310.8 million in 2022,
primarily due to the increase in average unit cost of our toluene oxidation products,
which outpaced the increase in average sales price and partially offset by the
increase in revenue and sales volume of these products. The gross profit margin of
our toluene oxidation products decreased from 29.6% in 2021 to 20.0% in 2022, in
light of the keen market competition and the volatile downstream market demand
and we employed a market-oriented pricing strategy to sell our products at a
relatively lower markup to gain market share. According to Frost & Sullivan, with a
steady growth in downstream market demand, the sales volume of specialty
chemicals (including toluene derivative products) we provided is sensitive to the
fluctuation of its selling price. We adjust our pricing strategy to reflect market
competition in order to maintain and enhance our market leading position.
• Toluene chlorination products . Our gross profit of toluene chlorination product
sales increased significantly by 151.8% from RMB90.9 million in 2021 to
RMB229.0 million in 2022 due to the significant increase in average sales price of
toluene chlorination products, and in particular at a higher rate of increase relative
to the increase in cost of sales for these products. As a result, the gross profit margin
of our toluene chlorination products increased significantly from 18.7% to 27.5% in
the corresponding years. This increase was primarily due to market supply
shortages, and our business strategy and ability to allocate resources in order to
manufacture and supply these products which increased our market bargaining
power and allowed us to sell our products at a higher price.
• Benzoic acid ammonification products . Our gross profit of benzoic acid
ammonification product sales decreased by 47.1% from RMB129.5 million in 2021
to RMB68.4 million in 2022, which was in line with the decrease in sales volume by
41.7% from approximately 7,921 tons to 4,619 tons and the decrease in average
sales price by 5.6% from approximately RMB29,920 per ton to RMB28,232 per ton
in the corresponding years. The gross profit margin of our benzoic acid
ammonification products decreased slightly from 54.6% in 2021 to 52.5% in 2022,
as we employed a market-oriented pricing strategy to sell our products at a
relatively lower price to gain market share.
• Other fine chemical product sales . Our gross profit of other fine chemical product
sales increased significantly by 97.9% from RMB26.9 million in 2021 to RMB53.2
million in 2022, primarily because we refined our manufacturing technologies,
which resulted in the advanced quality and pureness of our other fine chemical
products. As we gradually gained increased market shares, we adopted a pricing
strategy to sell our products with a relatively higher gross profit margin to enhance
our profitability.
Products trading . Our gross profit for products trading increased significantly from
RMB3.6 million in 2021 to RMB37.9 million in 2022, and the gross profit margin increased
significantly from 0.6% to 9.2% in the corresponding years, primarily due to the increase in
average sales price of our traded products. Petroleum toluene is our major trading products,
and according to Frost & Sullivan Report, the market price of toluene increased significantly
from approximately RMB5,628 per ton in 2021 to RMB7,410 per ton in 2022. Benefited from
our long-standing relationship with the suppliers, large-scale purchase amount and in-depth
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market understanding, we profited from toluene product trading by selling the surplus toluene
that we purchased at a relatively lower price compared to the prevailing market price at which
we sold them. As a result, our gross profit margin increased in 2022.
• Toluene product trading . We recorded gross profit of RMB24.9 million for our
toluene product trading in 2022 as compared to a gross loss of RMB2.7 million in
2021 and the gross profit margin also increased to 6.9%, primarily because the
market price of toluene increased in the first half of year 2022 from approximately
RMB5,852 per ton to RMB8,672 per ton as toluene is a chemical raw material that
primarily derived from petroleum, the increasing market price of brent crude oil in
first half of 2022, caused by macro-environment of global policies and economy,
has led to the upward trend of the price of toluene, and we capture this market trend
and resold our in-stock petroleum toluene at a relatively higher price compared to
our purchase price. We incurred a gross loss and a negative gross profit margin for
toluene product trading in 2021 due to the fluctuation of market price for toluene
products that year which caused us to sell toluene at a price lower than our purchase
price. As the price of toluene stabilized and experienced an upward trend in 2022,
we were able to generate a profit.
• Other products trading . Gross profit of other products trading increased by 105.5%
from RMB6.3 million in 2021 to RMB13.0 million in 2022, and the gross profit
margin increased from 18.1% to 25.2% in the corresponding years, primarily due to
the increase in average sales price of certain other trading products in 2022, such as
p-tolualdehyde, and new trade products, such as benzoyl chloride and potassium
diformate, with relatively higher gross profit.
Other Income and Gains
Our other income and gains decreased by 13.5% from RMB39.9 million in 2021 to
RMB34.5 million in 2022 as a result of the decrease in interest income from RMB19.3 million
in 2021 to RMB5.6 million in 2022 due to the settlement of loans to related party, and partially
offset by the increase in government grants from RMB7.1 million to RMB17.0 million in the
corresponding years.
Selling and Distribution Expenses
Our selling and distribution expenses increased by 21.1% from RMB19.8 million in 2021
to RMB24.0 million in 2022, primarily due to the increase in staff salaries as well as the
engagement and use of third-party information platforms to enhance our knowledge of the
export market to support our overseas business expansions.
Research and Development Expenses
Our research and development expenses increased by 20.0% from RMB110.8 million in
2021 to RMB133.0 million in 2022, primarily due to the increase in staff costs for our research
and development employees and articles of consumption.
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Administrative Expenses
Our administrative expenses increased by 16.0% from RMB100.5 million in 2021 to
RMB116.5 million in 2022, primarily due to the increase in (i) tax and surcharges as a result
of our increased revenue; and (ii) general management expenses resulted from our increased
property management fees and staff costs in 2022. The incurrence of more listing expenses
also contributed to the increase in administrative expenses.
Other Expenses
Our other expenses decreased by 76.4% from RMB22.8 million in 2021 to RMB5.4
million in 2022, primarily due to the decrease in loss from disposal of fixed asset and
equipment, and the absence of foreign exchange losses in 2022.
Finance Costs
Our finance costs decreased by 8.9% from RMB34.1 million in 2021 to RMB31.0 million
in 2022 due to the decrease in interest on bank and other borrowings because we utilized bank
loans with relatively lower interest rate, and partially offset by the increase in interest on lease
liabilities due to the increase in leased properties for our office and research and development
purposes. For details, please refer to “— Indebtedness — Interest-Bearing Bank and Other
Borrowings” in this section.
Income Tax Expense
Our income tax expenses increased by 3.3% from RMB84.4 million in 2021 to RMB87.2
million in 2022, and our effective tax rate decreased from 21.4% in 2021 to 20.4% in 2022.
The increase in income tax expense was primarily the result of the increased revenue and
taxable profit.
Profit for the Y ear
As the result of the foregoing reasons, our profit for the year increased by 10.1% from
RMB309.1 million in 2021 to RMB340.5 million in 2022.
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DISCUSSION OF SELECTED ITEMS FROM THE CONSOLIDA TED STA TEMENTS
OF FINANCIAL POSITION
The table below sets forth selected information from our consolidated statements of
financial position as at the dates indicated, which have been extracted from the Accountants’
Report included in Appendix I to this Prospectus:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Total non-current assets 1,182,574 1,292,451 1,283,308
Total current assets 1,753,796 864,887 832,574
Total assets 2,936,370 2,157,338 2,115,882
Total current liabilities 1,228,303 1,218,688 1,422,654
Net current assets/(liabilities) 525,493 (353,801) (590,080)
Total assets less current liabilities 1,708,067 938,650 693,228
Total non-current liabilities 187,749 212,543 163,611
Total liabilities 1,416,052 1,431,231 1,586,265
Net assets 1,520,318 726,107 529,617
Share capital 339 48 48
Reserves 1,519,979 726,059 529,569
Total equity 1,520,318 726,107 529,617
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NET CURRENT ASSETS/LIABILITIES
The following table sets forth our current assets and current liabilities as at the dates
indicated:
As at December 31,
As at
April 30,
20242021 2022 2023
RMB’000 RMB’000 RMB’000 RMB’000
(unaudited)
Current assets
Inventories 305,621 320,481 285,333 327,109
Trade and bills receivables 234,358 326,979 296,314 382,621
Prepayments, deposits and
other receivables 1,094,852 69,301 145,367 138,996
Pledged deposits 49,504 64,675 40,127 59,001
Cash and cash equivalents 69,461 83,451 65,433 123,653
Total current assets 1,753,796 864,887 832,574 1,031,380
Current liabilities
Trade and bills payables 196,250 171,228 149,705 257,765
Other payables and accruals 263,173 362,086 372,971 391,594
Interest-bearing bank and other
borrowings 716,107 662,300 852,020 1,027,520
Lease liabilities 7,262 16,308 15,850 13,332
Income tax payable 45,511 6,766 32,108 698
Total current liabilities 1,228,303 1,218,688 1,422,654 1,690,909
Net current assets/(liabilities) 525,493 (353,801) (590,080) (659,529)
We recorded net current assets of RMB525.5 million as at December 31, 2021. Our net
current assets in 2021 was primarily in line with our business expansion, which led to the
continued increase in revenue and profitable operations. Our net current assets in 2021 were
partially offset by increase in interest-bearing bank loans and other borrowings as a result of
borrowings incurred in the ordinary course of our business operations and the expansion of
our production plants.
We recorded net current liabilities of RMB353.8 million, RMB590.1 million and
RMB659.5 million as at December 31, 2022 and 2023 and April 30, 2024, respectively. Our
net current liabilities as at December 31, 2022 and 2023 and April 30, 2024 was primarily due
to the dividend of RMB1,102.8 million and RMB270.0 million declared in 2022 and 2023,
respectively, to our shareholders, and was partially offset by the profit recognised during the
corresponding periods.
FINANCIAL INFORMA TION
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Our Board of Directors has the absolute discretion to decide whether to declare or
distribute dividends at a particular point in time. Any payment proposal and dividend
distribution in the future will be made at the discretion of our Board and will depend on our
general business condition and strategies, cash flows, financial results and capital
requirements, the interests of our Shareholders, taxation conditions, statutory and regulatory
restrictions and other factors that our Board deems relevant.
We incurred net current liabilities as at December 31, 2022 due to the distribution of the
February 2022 Dividend and the December 2022 Dividend (together, the “ 2022 Dividend ”).
The 2022 Dividend was a one-time event to settle our Group’s historical receivables due from
our related parties, Linuo Group and Linuo Investment, which constituted a significant
portion of our receivables due from third parties. As a result of the 2022 Dividend distribution,
the amounts due from Linuo Investment and the Linuo Group decreased substantially and we
recorded net current liabilities of RMB353.8 million as at December 31, 2022. Our net current
liabilities further increased to RMB590.1 million as at December 31, 2023 due to the
distribution of dividend of RMB270.0 million. During the Track Record Period, we recorded
net profit of RMB309.1 million, RMB340.5 million, and RMB72.9 million for the year ended
December 31, 2021, 2022 and 2023, respectively. Overall, our continuous profitable
operations provide the foundation to our Group’s financial soundness and liquidity. In
addition, we closely monitor our cash flow and plan to make continuous efforts to improve our
financial positions, including (i) adopt various strategies and measures including enhance our
production capacity and market share to continuously maintain and improve our revenue
growth and profitability; (ii) maintain our sound relationships with banks and other financial
institutions to obtain financial facilities to support our business operations as required. As of
the Latest Practicable Date, we had unutilized banking facilities of RMB555.4 million; (iii)
strictly follow our receivable collection rules and standards to ensure our cash flow and
liquidity; and (iv) adjust our financing structure to replace short-term bank loans with
long-term bank loans.
FINANCIAL INFORMA TION
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Inventories
Our inventories consist of raw materials, work in progress and finished goods. The table
below sets forth our inventory balances as at the dates indicated:
As at December 31,
2021 2022 2023
RMB’000 tons/units RMB’000 tons/units RMB’000 tons/units
Raw materials
(measured in tons) (1) 135,671 23,640 129,633 20,374 104,487 16,737
Raw materials
(measured in
units)
(2) 5,690 1,038,149 5,617 825,848 5,333 777,224
Work in progress
(measured in tons) 11,148 2,413 13,827 2,703 13,269 2,391
Finished goods
(measured in tons) 153,112 17,133 171,404 18,513 164,008 17,945
305,621 320,481 287,097
Impairment –––– (1,764) –
Total 305,621 320,481 285,333
Notes:
(1) mainly includes raw materials used for production, such as petroleum toluene and other chemical
materials.
(2) mainly includes packaging materials.
Our inventory balance (net of impairment) increased from RMB305.6 million as at
December 31, 2021 to RMB320.5 million as at December 31, 2022, primarily due to the
increase in finished goods resulted from our expanded production of benzoic acid and sodium
benzoate, and our increased inventory of benzonitrile and benzaldehyde for our production.
Our inventory balance decreased to RMB285.3 million as at December 31, 2023, primarily
due to our production and sales strategy in an effort to lower inventory amid a slow market. On
the sales side, we lowered our sales price in order to increase inventory turnover. On the
production side, we planned our production with greater synchronization with incoming
orders and current inventory level. These strategies effectively reduced our inventory balance.
Y ear ended December 31,
2021 2022 2023
Inventory turnover days (note) 36 47 47
Note: Inventory turnover days for a year is the arithmetic mean of the beginning and ending balances of
inventory for the relevant year divided by cost of inventory sold for the relevant year and multiplied by
365 days.
FINANCIAL INFORMA TION
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For the years ended December 31, 2021, 2022 and 2023, our inventory turnover days
were 36 days, 47 days and 47 days, respectively. Our inventory turnover days remained fairly
stable during the Track Record Period as we actively manage our inventory balance.
The following table sets forth the ageing analysis of our inventories.
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 6 months 300,234 277,011 218,190
Over 6 months but within 12 months 4,580 38,822 35,259
Over 12 months 807 4,648 33,648
Total 305,621 320,481 287,097
As of the Latest Practicable Date, RMB240.3 million or 83.7% of the RMB287.1 million
inventories (before impairment) as of December 31, 2023 were subsequently utilized or sold.
Trade and Bills Receivables
Our trade and bills receivables consist of trade receivables and bills receivable balances
due from our customers. Our trading terms with our existing customers are mainly on credit
while we normally require new customers to make payments in advance. The credit period we
grant to our established customers generally ranges from one to four months. Each customer
has a particular and maximum credit limit based on our business history with this customer.
We seek to maintain strict control over our outstanding receivables and has a credit control
pre-alert mechanism to minimize credit risk. Under our credit control mechanism, our
accounting and finance team conduct monthly reviews and sort out the outstanding
receivables with relatively short credit period, and then our accounting and finance team
informs the respective sales team member and the sales managers of the billing status in
writing. Overdue balances are reviewed regularly by senior management. In view of the
measures we have implemented and that our trade and bills receivables are associated with a
large number of diversified customers, the expected credit loss is minimal. Our trade and bills
receivables are non-interest-bearing.
FINANCIAL INFORMA TION
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The table below sets forth our trade and bills receivables as at the dates indicated:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Trade receivables 99,655 143,218 97,211
Bills receivables 135,201 184,573 199,727
234,856 327,791 296,938
Impairment (498) (812) (624)
Total 234,358 326,979 296,314
Our trade and bills receivables (net of impairment) increased from RMB234.4 million as
at December 31, 2021 to RMB327.0 million as at December 31, 2022, which were primarily
due to the increases in bill receivables collected over the corresponding years. It decreased to
RMB296.3 million as at December 31, 2023 due to our collection efforts and the decrease in
sales volume. In particular, our bills receivables increased from RMB135.2 million in 2021 to
RMB184.6 million in 2022 primarily due to our increase in sales volume in 2022. Our bills
receivables further increased to RMB199.7 million in 2023 despite a decrease in sales volume
due to our customers’ increased use of bills as their payment method as a result of our
customers’ need to maintain short-term liquidity in an overall challenging market
environment. Our trade receivables due from our associates accounted for nil, RMB5.2
million and RMB1.3 million as at December 31, 2021, 2022 and 2023, representing nil, 1.6%
and 0.4% of our total trade and bills receivables as at the same dates, respectively.
As of the Latest Practicable Date, RMB268.0 million or 90.3% of the RMB296.9 million
trade and bills receivables balance (before impairment) as of December 31, 2023 were
subsequently settled.
The table below sets forth our trade and bills receivables turnover days for the periods
indicated:
Y ear ended December 31,
2021 2022 2023
Trade and bills receivables turnover
days (note) 24 33 42
Note: Trade and bills receivables turnover days for a year equals the arithmetic mean of the beginning and
ending trade and bills receivable balances (before impairment) divided by revenue for that year and
multiplied by 365 days.
FINANCIAL INFORMA TION
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For the years ended December 31, 2021, 2022 and 2023, our average trade and bills
receivables turnover days were 24 days, 33 days and increased to 42 days, respectively. Our
trade and bill receivables turnover days increased to 42 days in 2023 due to our customers’
preference to use bills, which have a longer payment term, in order to maintain their short
term cash liquidity. Our trade and bills receivables turnover days remained stable during the
Track Record Period as we effectively managed our receivables and credit periods extended to
customers with appropriate internal management system. We will continue to devote
sufficient attention and efforts to collect payments and monitor our trade and bills receivable
turnover days.
The table below sets forth an aging analysis based on the invoice date and net of loss
allowance of our trade receivables as at the dates indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 4 months 98,865 123,601 95,913
Over 4 months but within 6 months 65 17,612 –
Over 6 months but within 12 months 227 1,193 674
Total 99,157 142,406 96,587
The table below sets forth the maturity date analysis for bills receivables as at the dates
indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 3 months 76,999 112,436 80,859
Over 3 months but within 6 months 47,072 68,658 118,868
Over 6 months but within 12 months 11,130 3,479 –
Total 135,201 184,573 199,727
Our bill receivables matured in over 3 months but within 6 months increased
significantly in 2023 due to our customers’ increased use of bills as their payment method as
a result of our customers’ need to maintain short-term liquidity in an overall challenging
market environment. We will continue to increase our efforts to collect these payments to
avoid prolonging these payments. Based on the systems and policies we have in place, we
believe that the collection of trade and bills receivables aged six months or older is not a
material risk to our business and results of operations. We expect to collect these trade and
bills receivables in the ordinary course of business at a rate that is largely in line with our
historical performance. Generally, the credit periods we extend to our customers for trade
receivables does not exceed 120 days. Based on our historical performance and collection
history of trade and bill receivables, we believe that there is no recoverability issue for the
trade and bills receivables as at December 31, 2023. We also believe that sufficient provision
has been made according to the assessment of credit of our customers at the end of each
reporting period.
FINANCIAL INFORMA TION
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Current Prepayments, Deposits and Other Receivables
Our current prepayments, deposits and other receivables consist of deposits and other
receivables, prepayments, deductible input V AT and loans to directors. Deposits and other
receivables primarily include loans to related parties. Prepayments primarily include our
prepayments for raw materials. Deductible input V AT represents our non-deducted input
value-added tax. The table below sets forth our prepayments, deposits and other receivables as
at the dates indicated.
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Amounts due from related parties 1,008,171 13,255 59,414
– Linuo Investment (trade in
nature) 7,309 4,800 –
– Hebei Kangshi (trade in nature) – 5,000 3,000
– Xinkang Chemical (trade in
nature) – – 10,326
– Linuo Group (non-trade in
nature) 562,480 5 –
– Linuo Investment (non-trade in
nature) 435,134 – –
– Hebei Kangshi (non-trade in
nature) – – 44,734
– others (non-trade in nature) 3,248 3,450 1,345
Deposits and other receivables 10,640 9,293 13,644
Prepayments 62,118 27,701 29,311
Deductible input V AT 13,234 12,811 31,711
Prepaid income tax – 5,692 438
Investment in a fund – – 10,500
Loans to directors (non-trade in
nature) 689 549 349
Total 1,094,852 69,301 145,367
Our current prepayments, deposits and other receivables decreased significantly from
RMB1,094.9 million as at December 31, 2021 to RMB69.3 million as at December 31, 2022,
primarily due to significant decrease in receivables from Linuo Group and Linuo Investment.
Our current prepayments, deposits and other receivables increased to RMB145.4 million as at
December 31, 2023, primarily due to the increase in loans to Hebei Kangshi, increase in
deductible input V AT and a payment we are entitled to from the dissolution of an investment
we made in an investment fund.
FINANCIAL INFORMA TION
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The decrease of our amounts due from related parties from RMB1,008.1 million as of
December 31, 2021, to RMB13.3 million as at December 31, 2022 as a result of dividends of
RMB1,013.0 million and RMB89.8 million we declared in February 2022 and December
2022, respectively. Among the dividends of RMB1,102.8 million in aggregate, RMB886.0
million in aggregate was used to offset our Group’s receivables due from Linuo Group and
Linuo Investment. For details, please refer to “— Dividend” in this section. As at December
31, 2023, amounts due from related parties of RMB59.4 million mainly represents loans to
Hebei Kangshi of RMB44.7 million which is non-trade in nature.
As of the Latest Practicable Date, RMB102.6 million or 70.6% of the RMB145.4 million
in prepayments, deposits and other receivables as of December 31, 2023 were subsequently
settled. The non-trade outstanding amounts due from related parties and loans to directors will
be settled prior to the Listing.
Cash and Cash Equivalents and Pledged Deposits
Our cash and cash equivalents refer to cash and bank balances deducting pledged
deposits. Our pledged deposits primarily include pledged time deposits for bills payable and
letter of credit. The table below sets forth our cash and cash equivalents and pledged deposits
as at the dates indicated.
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Cash and bank balances 118,965 148,126 105,560
Less: Pledged time deposits: 49,504 64,675 40,127
– Pledged for bills payable 39,433 10,000 –
– Pledged for letter of credit 10,071 50,174 40,127
– Others – 4,501 –
Total 69,461 83,451 65,433
Our pledged time deposits increased from RMB49.5 million as at December 31, 2021 to
RMB64.7 million as at December 31, 2022, primarily due to the increase in pledged time
deposits for letter of credit, and partially offset by the decrease in pledged time deposits for
bills payable. Our pledged time deposits decreased from RMB64.7 million as at December 31,
2022 to RMB40.1 million as at December 31, 2023 due to the decrease in pledged time
deposits for bills payables and letter of credit.
Trade and Bills Payables
Our trade and bills payables mainly consist of payment obligations related to the
purchase of raw materials and packaging materials. In addition to trade payables, we also use
bank acceptance bills, which are promised future payments by a bank, to facilitate the
payment of the amounts due to our creditors.
FINANCIAL INFORMA TION
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The trade payables are non-interest bearing and are normally settled within 30 days. The
table below sets forth our trade and bills payables as at the dates indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Trade payables 125,250 161,228 149,705
Bills payable 71,000 10,000 –
Total 196,250 171,228 149,705
Trade and bills payables decreased from RMB196.3 million as at December 31, 2021 to
RMB171.2 million as at December 31, 2022, primarily due to the maturity of bills payable to
our suppliers. Our trade and bills payables further decreased to RMB149.7 million as at
December 31, 2023, primarily due to the decrease in the amount of raw materials purchased.
The table below sets forth our average trade and bills payables turnover days for the years
indicated:
Y ear ended December 31,
2021 2022 2023
Trade and bills payables
turnover days (note) 27 28 25
Note: Trade and bills payable turnover days for a year equals the arithmetic mean of the beginning and ending
trade and bills payable balances divided by cost of sales for that year and multiplied by 365 days.
For the years ended December 31, 2021, 2022 and 2023, our average trade and bills
payables turnover days were 27 days, 28 days and 25 days, respectively. Our trade and bills
payables turnover days remain relatively stable during the Track Record Period.
The following table sets forth the aging analysis based on the posting date of our trade
payables as at the dates indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 1 year 123,829 156,772 149,444
1 year to 2 years 668 4,170 152
Over 2 years 753 286 109
Total 125,250 161,228 149,705
FINANCIAL INFORMA TION
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The following table sets forth the maturity date analysis of our bills payables as at the
dates indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 3 months – 10,000 –
3 months to 6 months 25,000 – –
6 months to 12 months 46,000 – –
Total 71,000 10,000 –
As of the Latest Practicable Date, RMB140.0 million or 93.5% of the RMB149.7 million
trade and bills payables as of December 31, 2023 were subsequently settled. Our Directors
confirm that we had no material defaults in our trade and bills and other payables during the
Track Record Period and up to the Latest Practicable Date.
Other Payables and Accruals
Our other payables and accruals include other tax payable, contract liabilities, other
payables and payroll payables. Contract liabilities include short-term advances received to
deliver our products. Other payables are non-interest-bearing, and mainly comprise of
construction fees, transportation fees and spare parts fees. The table below sets forth our other
payables and accruals as at the dates indicated:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Deferred output V AT 7,110 6,235 6,049
Contract liabilities 64,322 42,919 50,596
Amounts due to related parties 2,213 6,614 5,825
– included in other payables
(trade in nature) 2,213 6,607 5,825
– included in other payables
(non-trade in nature) – 7 –
Other payables and accruals 159,880 159,248 160,878
– construction fees 55,880 53,144 61,315
– transportation expenses 46,546 50,414 49,383
– spare parts fees 27,250 23,372 17,881
– energies 5,724 10,252 6,185
– deposits and others 24,480 22,066 26,114
Accrued wages and salaries 24,704 27,022 19,990
Dividend payable – 113,170 127,077
Other tax payable 4,944 6,878 2,556
Total 263,173 362,086 372,971
FINANCIAL INFORMA TION
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Our other payables and accruals increased from RMB263.2 million as at December 31,
2021 to RMB362.1 million as at December 31, 2022, primarily due to dividend payable of
RMB113.2 million as at December 31, 2022. Other payables and accruals remained fairly
stable at RMB373.0 million as at December 31, 2023. As of the Latest Practicable Date,
RMB49.4 million or 97.5% of the RMB50.6 million in contract liabilities as of December 31,
2023 were subsequently recognized as revenue.
Our construction fees among other payables decreased from RMB55.9 million as at
December 31, 2021 to RMB53.1 million as at December 31, 2022 due to the settlement of
construction fees. The construction fees increased to RMB61.3 million as at December 31,
2023 due to the implementation of our production plant expansion. Our transportation
expenses payable increased from RMB46.5 million as at December 31, 2021 to RMB50.4
million as at December 31, 2022 because of the increased use of bills for payment of our
transportation fees, some of which were to be derecognized only upon maturity. Our
transportation fee payable remained fairly stable at RMB49.4 million as at December 31,
2023. Overall, our other payables and accruals were generally stable during the Track Record
Period as result of our consistent operations with slight variations due to changes in market
costs for services, production volume and other market factors.
Except for dividends payable to the out-of-contact shareholders, the balance for dividend
payables has been settled as of the Latest Practicable Date. For the out-of-contact
shareholders, we are undertaking continuous effort to contact these shareholders through
news publication of the dividend payment, contacting these shareholders through their last
known contact information, actively monitoring and responding to the municipal hotline and
Wuhan Youji Employee Trust consultation hotline and encouraging word-of-the-mouth
dissemination of this dividend payment by employees. We will make payment with internal
resources to these shareholders in due course once they establish contact.
FINANCIAL INFORMA TION
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INDEBTEDNESS
Indebtedness Statement
The table below sets forth details of our indebtedness which includes (i) interest-bearing
bank and other borrowings; and (ii) lease liabilities.
As at December 31,
As at
April 30,
2021 2022 2023 2024
RMB’000 RMB’000 RMB’000 RMB’000
(unaudited)
Interest-bearing bank and other
borrowings 716,107 734,300 917,520 1,027,520
Bank loans repayable:
– within one year 581,527 557,000 812,020 978,520
– After one year but within two
years – 30,000 65,500 –
– After two years but within five
years – 42,000 – –
Other borrowings repayable:
– within one year 134,580 105,300 40,000 49,000
Lease liabilities 30,353 46,835 27,590 24,610
Lease liabilities
– current portion 7,262 16,308 15,850 13,332
– non-current portion 23,091 30,527 11,740 11,278
Total 746,460 781,135 945,110 1,052,130
Our Directors confirm that as of the Latest Practicable Date, the loan and borrowing
agreements did not contain any covenant that would have a material adverse effect on our
ability to make additional borrowings, issue debt or equity securities in the future. Our
Directors further confirm that we had no material defaults in bank and other borrowings, nor
did we breach any covenants (that were not waived) during the Track Record Period and up to
the Latest Practicable Date. Our Directors further confirm that during the Track Record Period
and up to the Latest Practicable Date, we did not experience any material difficulties in
obtaining credit facilities, or withdrawal of facilities, or receive requests for early repayment
by banks and other institutions.
Save as disclosed under sections headed “— Indebtedness”, we did not have any
outstanding loan, capital issued or agreed to be issued, debt securities, mortgages, charges,
debentures, bank overdrafts, loans, unutilized banking facilities or other similar indebtedness,
liabilities under acceptances or acceptance credits, hire purchase commitments or other
contingent liabilities as of December 31, 2023.
Our Directors confirm that there is no material change to our Company’s indebtedness
since the Latest Practicable Date and up to the date of the Prospectus.
FINANCIAL INFORMA TION
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Interest-Bearing Bank and Other Borrowings
Our interest-bearing bank and other borrowings were primarily borrowings to fund our
operations in the ordinary course of business. The following table sets forth our
interest-bearing bank and other borrowings as of the dates indicated.
As at December 31,
As at
April 30,
2021 2022 2023 2024
RMB’000 RMB’000 RMB’000 RMB’000
(unaudited)
Bank loans repayable:
– within one year 581,527 557,000 812,020 978,520
– After one year but within
two years – 30,000 65,500 –
– After two years but
within five years – 42,000 – –
Other borrowings repayable:
– within one year 134,580 105,300 40,000 49,000
Total 716,107 734,300 917,520 1,027,520
During the Track Record Period, interest-bearing bank and other borrowings were all
denominated in RMB. Our bank loans of RMB556.6 million of our total bank loans as at
December 31, 2021, were guaranteed by entities controlled by a close family member of our
controlling shareholder. Certain other borrowings with carrying amounts of RMB25.0 million
as at December 31, 2021, were guaranteed by Linuo Group, an entity controlled by a close
family member of our controlling shareholder. These guarantees were subsequently released
as of August 2022. As at December 31, 2023, none of our bank and other borrowings were
guaranteed by related parties.
The increase of our interest-bearing bank and other borrowings from RMB716.1 million
as at December 31, 2021, to RMB734.3 million, RMB917.5 million and RMB1,027.5 million
as at December 31, 2022 and 2023 and April 30, 2024, respectively. The increases were
primarily due to additional loans financing for our daily business operation as well as for the
expansion of our production capacity. Our bank and other loans repayable within one year as
at April 30, 2024 was RMB1,027.5 million, incurred in the regular course of our business
operations and for the expansion of our production capacity. We expect to roll-forward or
repay these loans on schedule using the cashflows we generate from our business operations
and additional debt financing, if necessary. In particular, we maintain a revolving credit
account with a number of large commercial banks in the amount of RMB1.5 billion in
aggregate including both short term and long term credits. Therefore, we do not foresee any
difficulties in repaying these loans as and when required. As of the Latest Practicable Date, we
had unutilized banking facilities of RMB555.4 million.
FINANCIAL INFORMA TION
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Lease Liabilities
As at December 31, 2021, 2022 and 2023, our aggregated unpaid contractual lease
payments (calculated by the present value of lease payments to be made over the lease term,
including fixed payments) were RMB30.4 million, RMB46.8 million and RMB27.6 million in
relation to the corresponding current and non-current lease liabilities. The table below sets
forth the lease liabilities as of the dates indicated:
As at December 31,
As at
April 30,
2021 2022 2023 2024
RMB’000 RMB’000 RMB’000 RMB’000
(unaudited)
Lease liabilities
– current portion 7,262 16,308 15,850 13,332
– non-current portion 23,091 30,527 11,740 11,278
Total 30,353 46,835 27,590 24,610
KEY FINANCIAL RA TIOS
The following tables set forth certain of our key financial ratios as of the dates and for the
periods indicated.
Y ear ended December 31,
2021 2022 2023
Gross profit margin (1) 22.9% 22.3% 12.3%
Net profit margin (2) 11.1% 10.9% 2.7%
Return on equity (3) 20.3% 46.9% 13.8%
Return on assets (4) 10.5% 15.8% 3.4%
As at December 31,
2021 2022 2023
Current Ratio (5) 1.4 0.7 0.6
Gearing Ratio (6) 41.3% 87.2% 158.5%
Notes:
(1) Gross profit margin equals gross profit divided by revenue for the periods.
(2) Net profit margin equals net profit for the periods divided by revenue for the periods.
(3) Return on equity equals net profit for the periods divided by total equity as at end of the periods.
(4) Return on assets equals net profit for the periods divided by total assets as at end of the periods.
(5) Current ratio equals current assets divided by current liabilities as of the end of the periods.
(6) Gearing ratio equals net debt divided by total equity as at end of the periods.
FINANCIAL INFORMA TION
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Gross profit margin
For discussion about fluctuations of our gross profit margin during the Track Record
Period, please refer to “— Discussion of Results of Operations” in this section.
Net profit margin
Our net profit margin decreased from 11.1% in 2021 to 10.9% in 2022 primarily because
of the slight decrease in gross profit margin from 22.9% in 2021 to 22.3% in 2022. Our net
profit margin further decreased to 2.7% due to the decrease in gross profit margin from 22.3%
in 2022 to 12.3% in 2023.
Return on Equity
Our return on equity increased from 20.3% in 2021 to 46.9% in 2022 because of our
increase in net profit and the dividends declared in 2022 of RMB1,102.8 million in aggregate.
Our return on equity was 13.8% for 2023, mainly attributable to the decrease in net profit for
the year.
Return on Assets
Our return on assets increased from 10.5% in 2021 to 15.8% in 2022 because of the
dividends declared in 2022 of RMB1,102.8 million in aggregate. Our return on assets
decreased to 3.4% in 2023 primarily due to the decrease in net profit.
Current ratio
Our current ratio decreased from 1.4 as at December 31, 2021 to 0.7 as at December 31,
2022, primarily due to the dividends declared in 2022 of RMB1,102.8 million in aggregate.
Our current ratio decreased slightly to 0.6 as at December 31, 2023 primarily due to the
dividends declared in 2023 of RMB270.0 million. For details, please refer to “— Net Current
Assets/Liabilities” in this section.
Gearing ratio
Our gearing ratio increased from 41.3% as at December 31, 2021 to 87.2% as at
December 31, 2022, primarily due to a decrease in equity resulted from the dividend of
RMB1,013.0 million and RMB89.8 million declared to shareholders in February and
December 2022, respectively. Our gearing ratio increased to 158.5% due to the utilization of
additional debt to finance our operations and expansion of production capacity. For details,
please refer to “— Net Current Assets/Liabilities” in this section.
LIQUIDITY AND CAPITAL RESOURCES
During the Track Record Period, we funded our working capital and other capital
expenditure requirements through a combination of income generated from our business
operations and bank loans obtained. The following table sets forth a summary of our cash
flows for the periods indicated.
FINANCIAL INFORMA TION
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Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Cash generated from operations
before working capital changes 522,869 564,398 262,151
Changes in working capital (380,227) (220,661) (90,023)
Income taxes paid (18,409) (195,375) (11,599)
Net cash flows from operating
activities 124,233 148,362 160,529
Net cash flows (used in)/from
investing activities (236,724) 53,904 (79,831)
Net cash flows from/(used in)
financing activities 139,713 (188,969) (98,905)
Net increase/(decrease) in cash and
cash equivalents 27,222 13,297 (18,207)
Cash and cash equivalents at
beginning of year 42,354 69,461 83,451
Effect of foreign exchange rate
changes (115) 693 189
Cash and cash equivalents at end
of year 69,461 83,451 65,433
Net Cash Flows from Operating Activities
For the year ended December 31, 2023, our net cash flows from operating activities of
RMB160.5 million reflect our profit before tax of RMB94.7 million, as positively adjusted
primarily by (i) a decrease in inventories of RMB33.4 million, and (ii) depreciation of
property, plant and equipment of RMB111.2 million, and was partially offset by negative
adjustment due to the increase in trade and bills receivables of RMB91.0 million.
For the year ended December 31, 2022, our net cash flows from operating activities of
RMB148.4 million reflect our profit before tax of RMB427.7 million, as negatively adjusted
primarily by (i) an increase in trade and bills receivables of RMB205.1 million; (ii) income
tax paid of RMB195.4 million and positively adjusted by depreciation of plant and equipment
of RMB99.1 million.
For the year ended December 31, 2021, our net cash flows from operating activities of
RMB124.2 million reflect our profit before tax of RMB393.5 million, as negatively adjusted
primarily by (i) an increase in inventories of RMB189.5 million, (ii) an increase in trade and
bills receivables of RMB264.3 million, and positively adjusted by depreciation of plant and
equipment of RMB93.7 million.
FINANCIAL INFORMA TION
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Net Cash Flows from/(Used in) Investing Activities
For the year ended December 31, 2023, our net cash flows used in investing activities
were RMB79.8 million, primarily attributed to (i) loans to a joint-venture of RMB51.0
million, (ii) purchases of items of property, plant and equipment of RMB34.3 million, and (iii)
a fund investment of RMB10.5 million devoted to investment opportunities in the industrial
and chemical sectors, and was partially offset by dividends received from associates of
RMB13.5 million.
For the year ended December 31, 2022, our net cash flows from investing activities were
RMB53.9 million, primarily attributed to amounts received from loans to related parties of
RMB171.5 million, and partially offset by purchases of items of property, plant and
equipment of RMB61.6 million for operation of our production facilities, prepayment for
leasehold land of RMB21.4 million and loans to related parties of RMB53.8 million.
For the year ended December 31, 2021, our net cash flows used in investing activities was
RMB236.7 million, primarily attributed to purchases of items of property, plant and
equipment of RMB51.3 million for operation of our production facilities, additions to
right-of-use assets of RMB51.3 million and loans to related parties of RMB433.1 million, and
partially offset by amounts received from loans to related parties of RMB286.5 million.
Net Cash Flows from/(Used in) Financing Activities
For the year ended December 31, 2023, we had RMB98.9 million of net cash flows used
in financing activities, primarily attributed to the repayment of bank loans and other
borrowings of RMB805.8 million and dividends paid of RMB256.1 million, and was partially
offset by the proceeds from interest-bearing bank loan and other borrowings of RMB989.0
million.
For the year ended December 31, 2022, we had RMB189.0 million of net cash flows used
in financing activities, primarily attributed to repayment of bank loans and other borrowings
of RMB832.0 million, dividends payment of RMB103.7 million and payment for the share
repurchase of RMB36.6 million, and partially offset by proceeds from interest-bearing bank
loan and other borrowings of RMB850.1 million.
For the year ended December 31, 2021, we had RMB139.7 million of net cash flows from
financing activities, primarily attributed to proceeds from interest-bearing bank loan and
other borrowings of RMB937.8 million to fund the day-to-day operation of our business, and
partially offset by the repayment of bank loans and other borrowings of RMB780.1 million
from revenues generated from our operations.
Working Capital Confirmation
The Directors are of the opinion that, after due and careful inquiry and taking into
account the following financial resources available to us described below, we have sufficient
working capital to cover our operating costs for at least the next 12 months from the date of
this prospectus considering our:
• future operating cash flows;
• cash and cash equivalents;
• the available facilities maintained with financial institutions; and
• estimated net proceeds from the Global Offering.
FINANCIAL INFORMA TION
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CAPITAL EXPENDITURES
Over the Track Record Period, principal capital expenditures related primarily to the
purchase of equipment and the establishment of an automatic laboratory. The following table
sets forth our capital expenditures for the periods indicated.
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Purchase of property, plant and
equipment 153,026 164,118 163,622
Purchase of intangible assets – 123 1,461
Purchase of leasehold land 51,258 12,563 21,996
Total 204,284 176,804 187,079
We expect to fund our future capital expenditures through cash generated from our
business operations, various financing alternatives and the net proceeds from the Global
Offering. Our current capital expenditure plans for any future period are subject to change,
and we may adjust our capital expenditures according to our future cash flows, results of
operations and financial condition, our business plans, market conditions and various other
factors. For details, please also refer to “Future Plans and Use of Proceeds – Use of Proceeds”
in this section.
CONTINGENT LIABILITIES
During the Track Record Period and up to the Latest Practicable Date, we had no
significant contingent liabilities.
CONTRACTUAL OBLIGA TIONS
Capital Commitments
A summary of our capital commitments as at December 31, 2021, 2022 and 2023 are set
forth in the following table:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Contracted, but not provided for:
Plant and machinery 17,730 60,623 42,700
Total 17,730 60,623 42,700
FINANCIAL INFORMA TION
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OFF-BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
As of the Latest Practicable Date, we do not have any off-balance sheet transactions.
RELA TED PARTY TRANSACTIONS AND BALANCES
Historically, we have entered into transactions with related parties by means of purchases
of goods or service, purchases of machinery, sales of goods or render of service, loans,
borrowings, and repayments of borrowings. The tables below set forth the amounts due from
and due to our related parties over the Track Record Period. For more details of our historical
transactions with related parties, please refer to “Appendix I — Accountants’ Report — II
Notes to the Historical Financial Information — 36. Related Party Transactions” in this
prospectus.
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Due from related parties
Included in prepayments, deposits
and other receivables (non-trade
in nature) 1,001,551 4,004 46,437
Included in trade receivables (trade
in nature) 3,011 5,893 1,261
Included in prepayments, deposits
and other receivables (trade in
nature) 7,309 9,800 13,326
Total amounts due from related
parties 1,011,871 19,697 61,024
Due to related parties
Included in other payables and
accruals (non-trade in nature) – 7 –
Included in other borrowings 20,000 – –
Included in other payables and
accruals (trade in nature) 2,213 6,607 5,825
Included in contract liabilities
(trade in nature) 7 16 2
Included in trade payable (trade in
nature) – – 139
Total amounts due to related
parties 22,220 6,630 5,966
FINANCIAL INFORMA TION
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Over the Track Record Period, we leased properties from Twin Tigers Coatings, an entity
controlled by a close member of our controlling shareholder, from July 13, 2020 to July 12,
2025. The amount of rent payable under the lease agreements was approximately
RMB171,000 per month. Right-of-use assets and lease liabilities were recognized at the
commencement date of the leases.
We have also leased properties from Linuo Investment, an entity controlled by a close
member of our controlling shareholder for a lease period from January 1, 2021 to December
31, 2021. The amount of rent payable under the lease agreements was approximately
RMB200,000 per month. We have applied short-term lease recognition exemption to this
lease. In 2022, our Group entered into three long-term lease agreements for the lease of
buildings from Linuo Investment. The first lease agreement is for a three years’ lease term
from January 1, 2022 to December 31, 2024 at a monthly rental fee of RMB0.6 million. The
second agreement is for a thirty-one months’ lease term from June 1, 2022 to December 31,
2024 at a monthly rental fee of RMB50,000. The third agreement is for a five-year lease term
from July 1, 2022 to June 30, 2027 at an annual rental fee of RMB3.0 million. The new lease
agreements have been recognized as lease liabilities and right-of-use assets.
Amounts Due from Related Parties
The amounts due from related parties primarily consist of loans we provided to these
related parties. As at December 31 2021, 2022 and 2023, we recorded amounts due from
related parties of RMB1,011.9 million, RMB19.7 million and RMB61.0 million, respectively.
The amounts due from related parties of RMB1,011.9 million as at December 31, 2021
consisted mainly of RMB562.5 million in amounts due from Linuo Group and RMB435.1
million from Linuo Investment for loans we provided to these parties. Both entities are
controlled by close associate of our controlling shareholder. As at December 31, 2022, the
amounts due from related parties decreased to RMB19.7 million because other receivables
due from related parties (non-trade nature) reduced significantly to RMB4.0 million,
primarily as a result of the settlement of other receivables due from Linuo Group and Linuo
Investment. As at December 31, 2023, the amounts due from related parties increased to
RMB61.0 million mainly due to the loans to Hebei Kangshi in the amount of RMB44.7
million.
Except for the other receivables due from (i) Linuo Investment in relation to prepaid
operation management service, (ii) Hebei Kangshi in relation to prepayment for purchase and
(iii) Xinkang Chemical in relation to our purchase of its equipment, all other receivables due
from related parties are non-trade in nature and will be settled prior to the Listing.
Amounts Due to Related Parties
The amounts due to related parties consist of other payables, contract liabilities, trade
payables and inter-company loans. As at December 31, 2021, 2022 and 2023, we recorded
amounts due to related parties of RMB22.2 million, RMB6.6 million and RMB5.8 million,
respectively. The amounts due to related parties of RMB22.2 million as at December 31, 2021
consisted of other borrowings of RMB20.0 million due to Yingcheng Wuhan Organic Material
Co., Ltd. (ʮ̡ , the “ Yingcheng Wuhan Organic ”). The amount
due to related parties decreased to RMB6.6 million as at December 31, 2022 as a result of the
settlement of the other borrowing due to Yincheng Wuhan Organic, and partially offset by the
increase of trade payables due to Xinkang Chemical. The amounts due to related parties
remained stable at RMB6.0 million as at December 31, 2023.
FINANCIAL INFORMA TION
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The non-trade amounts due to related parties are expected to be settled prior to the
Listing.
Our Directors confirm that our transactions with related parties during the Track Record
Period were conducted on an arm’s length basis, and they did not distort our result of
operations or render our historical results not reflective of our future performance.
QUALITA TIVE AND QUANTITA TIVE DISCLOSURE ABOUT MARKET RISKS
We are exposed to a variety of market risks, mainly including foreign currency risk,
credit risk and liquidity risk, as set out below. We manage and monitor these exposures to
ensure appropriate measures are implemented on a timely and effective manner.
Foreign Currency Risk
The transactional foreign currency exposures arises from sales in currencies other than
our functional currencies. Approximately 22.0%, 23.0% and 23.0% of our sales for the
periods ended December 31, 2021, 2022 and 2023 were denominated in currencies other than
the functional currencies of the operating units making the sale, respectively. For further
details of the sensitivity at the end of the reporting period to a reasonably possible change in
exchange rate, please refer to “Appendix I — Accountants’ Report — II Notes to the
Historical Financial Information — 39. Financial Risk Management Objectives and Policies
— Foreign currency risk” in this prospectus.
Credit Risk
The carrying amounts of cash and cash equivalents, trade and bills receivables,
prepayments, deposits and other receivables, and pledged deposits included in the statements
of financial position represent our maximum exposure to credit risk in relation to our financial
assets. As at December 31, 2021, 2022 and 2023, cash and cash equivalents and pledged
deposits were deposited in established and credible banks without significant credit risk. The
credit quality of our financial assets included in prepayments, deposits and other receivables
is considered to be normal as they are not past due and there is no information indicating that
the financial assets had a significant increase in credit risk since initial recognition. For
further details of our credit quality and maximum credit risk exposure, please refer to
“Appendix I — Accountants’ Report — II Notes to the Historical Financial Information — 39.
Financial Risk Management Objectives and Policies — Credit risk” in this prospectus.
Liquidity Risk
The liquidity of our Group is primarily dependent on our ability to maintain adequate
cash inflows from our profitable operations to meet payment obligations as they fall due and
our ability to finance future capital expenditures. We monitor and maintain a level of cash and
cash equivalents deemed adequate by our management to finance the operations and mitigate
the effects of fluctuations in cash flows. For the maturity profile of our financial liabilities as
at the end of each of the Track Record Period, based on the contractual undiscounted
payments, please refer to “Appendix I — Accountants’ Report — II Notes to the Historical
Financial Information — 39. Financial Risk Management Objectives and Policies — Liquidity
Risk” in this prospectus.
FINANCIAL INFORMA TION
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DIVIDEND
Currently, we do not have a formal dividend policy or a fixed dividend distribution ratio.
Any declaration and payment of dividends will be subject to our constitutional documents and
the Companies Act. We will review our dividend policy from time to time.
On February 28, 2022, the directors of our Company passed a series of resolutions for the
distribution of a total dividends of RMB1,013.0 million to our sole shareholder, Cougar
International Growth Holding II Ltd. (the “ February 2022 Dividend ”). On the same date, the
directors of Cougar International Growth Holding II Ltd. passed resolutions for the
distribution of the entire February 2022 Dividend declared by our Company to its sole
shareholder Cougar Holdings Limited. Cougar Holdings Limited’s shareholders then passed
resolutions for the distribution of the February 2022 Dividend to its shareholders including
Mr. Gao, Mr. Shen, Linuo Investment, Wuhan Youji Employee Trust and Hubei Tuopu. On
March 31, 2022, based on an agreement entered into by Cougar Holdings Limited, Mr. Gao,
Mr. Shen, Linuo Investment, Linuo Group, Wuhan Youji Employee Trust and Wuhan Youji, the
relevant parties agreed that the total dividends of RMB820.0 million entitled by Mr. Gao, Mr.
Shen and Linuo Investment would be used to offset our Group’s receivables due from Linuo
Group and Linuo Investment as of March 31, 2022.
On December 28, 2022, the directors of our Company passed a series of resolutions for
the dividend distribution in the amount of RMB89.8 million to its shareholders including
Vastocean Capital Limited, SYM Holdings Limited, Custodian Capital Ltd., Fullfaith Capital
Limited, NovaVision Holdings I Ltd., NovaVision Holdings II Ltd. and NovaVision Holdings
III Ltd. (the “ December 2022 Dividend ”). Based on an agreement entered into by the above
shareholders, Mr. Gao, Mr. Shen, Linuo Investment, Linuo Group and Wuhan Youji on
December 28, 2022, the relevant parties agreed that RMB65.9 million of the total December
2022 Dividend entitled by Vastocean Capital Limited and SYM Holdings Limited will be used
to offset our Group’s receivables due from Linuo Group and Linuo Investment as of December
31, 2022.
On December 31, 2023, the directors of our Company passed a series of resolutions for
the dividend distribution in the amount of RMB270.0 million to its shareholders including
Vastocean Capital Limited, SYM Holdings Limited, Custodian Capital Ltd., Fullfaith Capital
Limited, NovaVision Holdings I Ltd., NovaVision Holdings II Ltd. and NovaVision Holdings
III Ltd. (the “ December 2023 Dividend ”). This dividend was distributed as a cash dividend.
Among the February 2022 Dividend, the December 2022 Dividend, and the December
2023 Dividend of RMB1,372.8 million in aggregate, (i) dividends of RMB886.0 million in
aggregate was used to offset our Group’s receivables due from Linuo Group and Linuo
Investment; (ii) dividends of RMB353.7 million in aggregate was paid in cash to shareholders
other than the Wuhan Youji Employee Trust as of the Latest Practicable Date; and (iii)
dividends of RMB133.1 million were distributed to the Wuhan Youji Employee Trust,
including (a) dividends of RMB21.4 million attributable to 632 contactable shareholders
which were fully settled as of the Latest Practicable Date and (b) the remaining dividends
attributable to 4,713 shareholders that could not be contacted as of the Latest Practicable
Date. We are undertaking continuous effort to contact these shareholders through news
publication of the dividend payment, contacting these shareholders through their last known
contact information, actively monitoring and responding to the municipal hotline and Wuhan
Youji Employee Trust consultation hotline and encourage word-of-the-mouth dissemination
of this dividend payment by employees.
FINANCIAL INFORMA TION
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Our Board of Directors has the absolute discretion to decide whether to declare or
distribute dividends in any particular point in time. We will implement our dividend policies
in the future based on multi-factors including the business operation and financial position of
our Group. Subject to the Cayman Islands law and the Articles and Memorandum, the proposal
of payment and the amount of our dividends in the future will be made at the discretion of our
Board and will depend on our general business condition and strategies, cash flows, financial
results and capital requirements, the interests of our Shareholders, taxation conditions,
statutory and regulatory restrictions and other factors that our Board deems relevant. Under
Cayman Islands law, dividends may be paid out of profit or, if the Articles allow for it, out of
share premium account of the Company provided relevant laws are complied with.
LISTING EXPENSES
The total listing expenses of our Company are estimated to be approximately HK$74.8
million (or approximately RMB67.9 million) assuming the Over-allotment Option is not
exercised and based on an Offer Price of HK$7.0 (being the mid-point of our Offer Price range
of HK$5.5 to HK$8.5 per Offer Share), representing 58.4% of the gross proceeds from the
Global Offering. These listing expenses are mainly comprised of underwriting-related
expenses of approximately HK$14.9 million (or approximately RMB13.5 million), and
non-underwriting related expenses of approximately HK$59.9 million (or approximately
RMB54.4 million), which are comprised of (i) accountant and legal adviser fees and expenses
of approximately HK$37.4 million (or approximately RMB34.0 million) and (ii) printing and
other fees and expenses of approximately HK$22.5 million (or approximately RMB20.4
million). The listing expenses above are the latest practicable estimate for reference only, and
the actual amount may differ from this estimate.
There were no underwriting commissions incurred up to December 31, 2023 by our
Company. The listing expenses incurred up to same by our Company in relation to the Listing
and the Global Offering were RMB41.9 million, of which (i) RMB7.8 million, RMB14.4
million and RMB10.1 million were charged to our consolidated statement of profit or loss for
the year ended December 31, 2021, 2022 and 2023, respectively, and (ii) RMB9.6 million will
be deducted from equity upon Listing.
We estimate that additional listing expenses of approximately RMB26.1 million
(including underwriting commissions and other expenses, assuming the Over-allotment
Option is not exercised and based on the mid-point of our Offer Price range of HK$5.5 to
HK$8.5 per Offer Share) will be incurred by our Company, approximately RMB9.5 million of
which is expected to be charged to our consolidated statements of profit or loss, and
approximately RMB16.6 million of which is expected to be deducted from equity upon
Listing.
NO MA TERIAL ADVERSE CHANGE
Our Directors confirm that, as of the date of this prospectus, there has been no material
adverse change to our financial or trading position, indebtedness, mortgage, contingent
liabilities, guarantees or prospects since December 31, 2023, the end of the period reported on
the Accountants’ Report included in Appendix I to this prospectus.
FINANCIAL INFORMA TION
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UNAUDITED PRO FORMA ADJUSTED CONSOLIDA TED NET TANGIBLE ASSETS
The following statement of our unaudited pro forma adjusted consolidated net tangible
assets is prepared in accordance with Rule 4.29 of the Listing Rules and is set out below to
illustrate the effect of the Global Offering on our consolidated net tangible assets as of
December 31, 2023 as if the Global Offering had taken place on that date.
Our unaudited pro forma adjusted consolidated net tangible assets has been prepared for
illustrative purposes only, and because of its hypothetical nature, it may not give a true picture
of our consolidated net tangible assets as of December 31, 2023 or at any future dates
following the Global Offering. It is prepared based on our audited consolidated net tangible
assets as of December 31, 2023 as set out in the Accountant’s Report in Appendix I to this
prospectus, and adjusted as described below. No adjustment has been made to reflect any
trading result or other transactions of our Group entered into subsequent to December 31,
2023:
Consolidated net
tangible assets
attributable to
owners of the
Company as at
December 31,
2023
Estimated net
proceeds from
the Global
Offering
Unaudited pro
forma adjusted
consolidated net
tangible assets
attributable to
owners of the
Company as at
December 31,
2023
Unaudited pro
forma adjusted
consolidated net
tangible assets
attributable to
owners of the
Company per
Share as at
December 31,
2023
Unaudited pro
forma adjusted
consolidated net
tangible assets
attributable to
owners of the
Company per
S h a r ea sa t
December 31,
2023
RMB’000 RMB’000 RMB’000 RMB (HK$ equivalent)
(Note 1) (Note 2) (Note 3) (Note 4)
Based on an Offer Price of
HK$5.5 per Share 525,561 55,823 581,384 6.23 6.86
Based on an Offer Price of
HK$7.0 per Share 525,561 80,758 606,319 6.50 7.16
Based on an Offer Price of
HK$8.5 per Share 525,561 105,694 631,255 6.77 7.45
Notes:
1. The consolidated net tangible assets of the Group attributable to equity holders of the parent as at
December 31, 2023 were arrived at after deducting other intangible assets of RMB4,056,000 from the
consolidated net assets attributable to owners of the parent as at December 31, 2023 of
RMB529,617,000 set out in the Accountants’ Report in Appendix I to this prospectus.
2. The estimated net proceeds from the Global Offering are based on an Offer Price of HK$5.5 per Share,
HK$7.0 per Share and HK$8.5 per Share, after deduction of the underwriting fees and other related
expenses payable by the Company (excluding approximately RMB32,329,000 which have been
recognized in profit or loss up to December 31, 2023) and do not take into account any Shares which
may be issued upon the exercise of the Over-allotment Option.
3. The unaudited pro forma adjusted consolidated net tangible assets per Share is arrived at after
adjustments referred to notes 1 and 2 above and on the basis that 93,300,000 Shares are in issue,
assuming the Global Offering has been completed on December 31, 2023.
4. For the purpose of this unaudited pro forma statement of adjusted net tangible assets, the balances stated
in RMB are converted into HK$ at the rate of RMB1.00 to HK$1.1008 prevailing on the Latest
Practicable Date.
FINANCIAL INFORMA TION
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5. No adjustments have been made to reflect the trading results or other transactions of the Group entered
into after December 31, 2023.
6. No dividends had been declared subsequent to December 31, 2023 and up to the Latest Practicable Date.
DISCLOSURE REQUIRED UNDER THE LISTING RULES
We confirm that, as of the Latest Practicable Date, there were no circumstances that
would give rise to disclosure required under Rules 13.13 to 13.19 of the Listing Rules.
FINANCIAL INFORMA TION
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FUTURE PLANS
For a detailed description of our future plans, please refer to “Business — Our
Strategies” in this prospectus.
USE OF PROCEEDS
In the event that the Over-allotment Option is not exercised, we estimate the net proceeds
from the Global Offering which we will receive, assuming an Offer Price of HK$7.0 per Offer
Share (being the mid-point of the Offer Price range stated in this prospectus), will be
approximately HK$53.3 million, after deduction of underwriting fees and commissions and
other estimated expenses in connection with the Global Offering.
In the event that the Over-allotment Option is exercised in full and assuming an Offer
Price of HK$7.0 per Offer Share (being the mid-point of the Offer Price range stated in this
prospectus), we will receive additional net proceeds from the Global Offering of
approximately HK$19.2 million.
If the Offer Price is fixed at HK$8.5 per Offer Share (being the high end of the Offer
Price range stated in this prospectus), we will receive (i) additional net proceeds from the
Global Offering of approximately HK$27.5 million, assuming the Over-allotment Option is
not exercised; and (ii) additional net proceeds from the Global Offering of approximately
HK$50.8 million, assuming the Over-allotment Option is exercised in full.
If the Offer Price is fixed at HK$5.5 per Offer Share (being the low end of the Offer Price
range stated in this prospectus), the net proceeds from the Global Offering we receive will be
(i) reduced by approximately HK$27.5 million, assuming the Over-allotment Option is not
exercised; and (ii) reduced by approximately HK$12.4 million, assuming the Over-allotment
Option is exercised in full.
We intend to use the net proceeds from the Global Offering for the following purposes
assuming the Over-allotment Option is not exercised and assuming an Offer Price of HK$7.0
per Offer Share, being the mid-point of the Offer Price range stated in this prospectus:
• approximately 82.0% of the net proceeds from the Global Offering (or
approximately HK$43.7 million), will be used to increase our production capacity
at Hubei Xinxuanhong Production Plant by constructing new production facilities
focusing mainly on manufacturing toluene chlorination products and derivatives,
among which:
(a) approximately 24.6% of the net proceeds from the Global Offering (or
approximately HK$13.1 million), will be used for the construction of Phase I
production facilities as well as public auxiliary facilities, which is designed
with an annual production capacity of approximately 10,000 tons of benzyl
acetate, 20,000 tons of benzyltoluene and 10,000 tons of dibenzylamine;
The total investment amount of the Phase I production facilities is
approximately RMB200 million. The construction of Phase I production
facilities was commenced in July 2023 and the Phase I production is expected
to begin in the second half of 2024. For details, please refer to “Business —
Production Expansion Plan” in this prospectus; and
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(b) approximately 57.4% of the net proceeds from the Global Offering (or
approximately HK$30.6 million), will be used for the construction of Phase II
production facilities, which is expected to further enhance the production
capacity of Hubei Xinxuanhong Production Plant as well as upgrade certain
public auxiliary facilities. The designed annual production capacity includes
approximately 100,000 tons of benzyl chloride, 40,000 tons of
benzotrichloride, 40,000 tons of benzoyl chloride, 50,000 tons of benzyl
alcohol, 10,000 tons of benzyl acetate and 20,000 tons of dibenzylamine;
The total investment amount of the Phase II production facilities is
approximately RMB550 million. The Phase II production is expected to begin
in the second half of 2026. For details, please refer to “Business — Production
Expansion Plan” in this prospectus;
• approximately 3.0% of the net proceeds from the Global Offering (or approximately
HK$1.6 million), will be used for our research and development activities, among
which:
(a) approximately 0.9% of the net proceeds from the Global Offering (or
approximately HK$0.5 million), will be used for the joint establishment of
photocatalytic laboratory with Central China Normal University (ᇍɽ
ኪ) to explore the industrial application of photocatalytic reactions; and
(b) approximately 2.1% of the net proceeds from the Global Offering (or
approximately HK$1.1 million), will be used for the construction of pilot
plants ( ʕ༊ԓග ) at the site of Hubei Xinlianhong located in Qianjiang, Hubei
Province. The pilot plant is used to test the amplification effect of laboratory
results, which is a critical platform to promote the realization of scientific and
technology achievements from development to commercialization;
• approximately 5.0% of the net proceeds from the Global Offering (or approximately
HK$2.7 million), will be used for sales and marketing activities to enhance our
brand recognition in the PRC and overseas. The intended allocation of this portion
of the net proceeds is primarily as follows:
(a) approximately 3.0% of the net proceeds from the Global Offering (or
approximately HK$1.6 million), will be used in participation in domestic and
overseas exhibitions; and
(b) approximately 2.0% of the net proceeds from the Global Offering (or
approximately HK$1.1 million), will be used for establishing branch offices in
United States;
• approximately 10.0% of the net proceeds from the Global Offering (or
approximately HK$5.3 million), will be used for our working capital and general
corporate purposes, including procurement of raw materials and management of
inventory level.
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The above allocation of the net proceeds from the Global Offering will be adjusted on a
pro rata basis in the event that the Offer Price is fixed at a higher or lower level compared to
the mid-point of the proposed Offer Price range. In the event that the Over-allotment Option is
exercised in full, we intend to apply the additional net proceeds from the Global Offering to
the above uses in the proportions stated above.
To the extent that the net proceeds from the Global Offering are not immediately applied
to the above purposes and to the extent permitted by applicable law and regulations, we intend
to deposit the net proceeds from the Global Offering into short-term interest bearing accounts
at licensed commercial banks and/or other authorized financial institutions (as defined under
the Securities and Futures Ordinance or applicable laws and regulations in relevant
jurisdictions). We will make an appropriate announcement if there is any change to the above
proposed use of proceeds.
FUTURE PLANS AND USE OF PROCEEDS
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HONG KONG UNDERWRITERS
BOCOM International Securities Limited
ABCI Securities Company Limited
CCB International Capital Limited
CEB International Capital Corporation Limited
China Everbright Securities (HK) Limited
China Industrial Securities International Capital Limited
CMBC Securities Company Limited
Essence International Securities (Hong Kong) Limited
Futu Securities International (Hong Kong) Limited
ICBC International Securities Limited
Phillip Securities (Hong Kong) Limited
Quam Securities Limited
Sinomax Securities Limited
SPDB International Capital Limited
Yue Xiu Securities Company Limited
Zhongtai International Securities Limited
China Sunrise Securities (International) Ltd
CNI Securities Group Limited
Fortune Origin Securities Limited
Maxa Capital Limited
UNDERWRITING ARRANGEMENTS AND EXPENSES
Hong Kong Public Offering
Hong Kong Underwriting Agreement
Pursuant to the Hong Kong Underwriting Agreement, our Company has agreed to
initially offer 1,830,000 new Shares (subject to reallocation) for subscription by members of
the public in Hong Kong on and subject to the terms and conditions of this prospectus at the
Offer Price.
Subject to, among other conditions, the granting of the approval for the listing of, and
permission to deal in, all the Shares in issue and any Shares to be issued as mentioned in this
prospectus by the Stock Exchange and to certain other conditions set out in the Hong Kong
Underwriting Agreement, the Hong Kong Underwriters have severally, but not jointly, agreed
to subscribe or procure subscribers for their respective applicable proportions of the Hong
Kong Offer Shares which are not taken up under the Hong Kong Public Offering on the terms
and conditions of this prospectus and the Hong Kong Underwriting Agreement. In addition,
the Hong Kong Underwriting Agreement is conditional on and subject to the International
Underwriting Agreement having been executed, becoming, and continuing to be,
unconditional and not having been terminated.
UNDERWRITING
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Grounds for termination
The respective obligations of the Hong Kong Underwriters to subscribe, or procure
subscribers for, the Hong Kong Offer Shares under the Hong Kong Underwriting Agreement
are subject to termination. The Sole Overall Coordinator (for itself and on behalf of the Hong
Kong Underwriters) shall have the right, in its sole and absolute discretion to terminate the
Hong Kong Underwriting Agreement by notice in writing to our Company, the Controlling
Shareholders and our executive Directors with immediate effect at any time at or prior to 8:30
a.m. (Hong Kong time) on the Listing Date if:
(a) there has come to the notice of the Sole Overall Coordinator:
(i) that any statement contained in this prospectus, the formal notice in relation to
the Hong Kong Public Offering in the agreed form required to be published in
accordance with the Listing Rules (the “ Formal Notice ”) and/or any notices,
announcements, advertisements, communications or other documents issued or
used by or on behalf of our Company in connection with the Global Offering
(including any supplement or amendment thereto) was, when it was issued, or
has become, untrue, incorrect, inaccurate or misleading or deceptive in any
material respects, or that any estimate, forecast, expression of opinion,
intention or expectation contained in any of such documents is in any material
respect not, in the reasonable opinion of the Sole Overall Coordinator (for
itself and on behalf of the other Underwriters), fair and honest and based on
reasonable assumptions when taken as a whole; or
(ii) that any matter has arisen or has been discovered which would, had it arisen or
been discovered immediately before the date of this prospectus, the Price
Determination Date and the Listing Date, constitute an omission that is
material in the context of the Global Offering which gives or likely to give rise
to any liability of our Company; or
(iii) any event, act or omission which gives or is likely to give rise to any liability in
any material respect of our Company, our Controlling Shareholders or any of
our executive Directors pursuant to the indemnities given by any of them under
the Underwriting Agreements; or
(iv) that the approval by the Stock Exchange of the listing of, and permission to
deal in, the Shares in issue and the Offer Shares to be issued pursuant to the
Global Offering (including any additional Shares that may be issued upon the
exercise of the Over-allotment Option) is refused or not granted, or is qualified
other than subject to customary conditions, on or before the Listing Date or
such other date as may be extended pursuant to the Hong Kong Underwriting
Agreement, or if granted, the approval is subsequently withdrawn, qualified
(other than by customary conditions) or withheld; or
(v) our Company withdraws this prospectus (and/or any other documents issued or
used in connection with the Global Offering) or the Global Offering; or
(vi) any person (other than the Sole Sponsor, and any of the Hong Kong
Underwriters) has withdrawn or sought to withdraw its consent to being named
in this prospectus as expert or to the issue of this prospectus; or
UNDERWRITING
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(vii) any material breach of any of the obligations or undertakings imposed or to be
imposed upon any party to the Hong Kong Underwriting Agreement or the
International Underwriting Agreement (other than upon any of the Sole
Sponsor, the Sole Overall Coordinator, the Sole Global Coordinator, the Joint
Bookrunners, the Joint Lead Managers or the Underwriters); or
(viii) any material adverse change or development in the results of operations,
financial position or business prospects of our Group as stated in this
prospectus as a whole; or
(ix) any material breach of, or any event rendering untrue or incorrect in any
material respect, any of the warranties given by our Company and our
Controlling Shareholders (the “ Warrantors ”) in the Hong Kong Underwriting
Agreement; or
(x) a portion of the orders confirmed in the book building process, at the time the
International Underwriting Agreement is entered into, have been withdrawn,
terminated or cancelled and such orders have not been covered or replaced by
other orders, which would render it, in the Sole Overall Coordinator’s sole
opinion, commercially impracticable or incapable to proceed with the Global
Offering; or
(xi) any loss or damage has been sustained by any members of the Group
(howsoever caused and whether or not the subject of any insurance or claim
against any person) which is considered by the Sole Overall Coordinator (for
itself and on behalf of the other Hong Kong Underwriters) in its sole opinion to
be material; or
(xii) the acceptance of the CSRC of the filings in respect of the Global Offering (the
“CSRC Filings ”) and the publication of the filing results in respect of the
CSRC Filings on its website is rejected or not granted, on or before the date of
the Listing, or if granted or accepted, the acceptance is subsequently
withdrawn, cancelled, qualified, revoked, invalidated or withheld;
(b) there develops, occurs, exists, or comes into effect:
(i) any local, national, regional, international event or circumstance, or series of
events or circumstances, beyond the reasonable control of the Underwriters
(including, without limitation, any acts of government or orders of any courts,
strikes, calamity, crisis, lock-outs, fire, explosion, flooding, civil commotion,
acts of war, outbreak or escalation of hostilities (whether or not war is
declared), acts of God, acts of terrorism, declaration of a national or
international emergency, riot, public disorder, outbreaks of diseases,
pandemics or epidemics (including, without limitation, COVID-19 (and such
related/mutated form), Severe Acute Respiratory Syndrome, avian influenza A
(H5N1), Swine Flu (H1N1), Middle East Respiratory Syndrome), in or
affecting Hong Kong, the PRC, the United States, the Cayman Islands, the BVI
or any other jurisdiction relevant to any member of our Group (the “ Relevant
Jurisdictions ”) or the Global Offering; or
UNDERWRITING
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(ii) any change or development involving a prospective material adverse change, or
any event or series of events, resulting or likely to result in any material
adverse change, in any local, national, regional or international financial,
economic, political, military, industrial, fiscal, legal, regulatory, currency,
credit or market conditions (including, without limitation, conditions in the
stock and bond markets, money and foreign exchange markets, the interbank
markets and credit markets), in or affecting any of the Relevant Jurisdictions;
or
(iii) any new laws or regulation or any change in existing laws or regulations, or any
change in the interpretation or application thereof by any court or other
competent authority (“ Governmental Authority ”) in or affecting any of the
Relevant Jurisdictions; or
(iv) any moratorium, suspension or restriction (including, without limitation, any
imposition of or requirement for any minimum or maximum price limit or price
range) in or on trading in securities generally on any of the Stock Exchange,
the New York Stock Exchange, the NASDAQ Global Market, the Shanghai
Stock Exchange or the Shenzhen Stock Exchange; or
(v) any material change or development involving a prospective material change in
or affecting taxation or exchange control, currency exchange rates or foreign
investment laws (including, without limitation, a material devaluation of the
Hong Kong dollar or Renminbi against any foreign currencies), or the
implementation of any exchange control, in any of the Relevant Jurisdictions
or affecting an investment in the Shares; or
(vi) the imposition of economic sanctions, in whatever form, directly or indirectly,
by, or for, any of the Relevant Jurisdictions; or
(vii) any general moratorium on commercial banking activities in any Relevant
Jurisdictions or any disruption in commercial banking or foreign exchange
trading or securities settlement or clearance services, procedures or matters in
those places or jurisdictions; or
(viii) any order or petition for the winding up of any member of our Group, or any
composition or arrangement made by any member of our Group with its
creditors or a scheme of arrangement entered into by any member of our Group
or any resolution for the winding up of any member of our Group or the
appointment of a provisional liquidator, receiver or manager over all or part of
the material assets or undertaking of any member of our Group or anything
analogous thereto occurring in respect of any member of our Group; or
(ix) any material litigation or claim of any third party being threatened or instigated
against our Group or any of the Warrantors; or
(x) any Director or any member of senior management of the Company being
charged with an indictable offense or prohibited by operation of law or
otherwise disqualified from taking part in the management of a company; or
UNDERWRITING
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(xi) the chief executive officer, chief financial officer, any executive Director or
Mr. Gao Lei vacating his office; or
(xii) any governmental authority or a political body or organization in any Relevant
Jurisdictions is commencing any action, or announcing an intention to take
such action, against any Director in his or her capacity as such; or
(xiii) any contravention, other than those disclosed in this prospectus, by any
member of our Group or any Director of the Listing Rules, the Companies
Ordinance or any other laws applicable to the Global Offering; or
(xiv) any non-compliance of this prospectus (or any other documents used in
connection with the Global Offering) or any aspect of the Global Offering with
the Listing Rules or any other applicable laws, rules, regulations, orders,
judgments, decrees, guidelines, opinions, notices, circulars or rulings of any
court, Governmental Authority; or
(xv) any change or development involving a prospective material change in, or a
materialization of, any of the risks set out in the section headed “Risk Factors”
in this prospectus; or
(xvi) other than with the prior written consent of the Sole Overall Coordinator, the
issue of or the requirement by our Company to issue any supplement or
amendment to the prospectus published by our Company in accordance with
the Hong Kong Underwriting Agreement (or any other documents used in
connection with the Global Offering) pursuant to the Companies Ordinance,
the Companies (Winding Up and Miscellaneous Provisions) Ordinance or the
Listing Rules or any requirement or request of the Stock Exchange, the SFC
and/or CSRC; or
(xvii) a prohibition on our Company for whatever reason from allotting, issuing or
selling the Offer Shares and/or the Over-allotment Shares pursuant to the terms
of the Global Offering; or
(xviii) a valid demand by any creditor for repayment or payment of any indebtedness
of any member of our Group or in respect of which any member of our Group is
liable prior to its stated maturity,
which, in each case individually or in aggregate, in the sole opinion of the Sole Overall
Coordinator (for itself and on behalf of the Hong Kong Underwriters):
(i) has or will or is likely to have a material adverse effect on the management,
condition (financial, operational, legal or otherwise), business, prospects,
operations, shareholders’ equity, as applicable, or results of operations of our Group
taken as a whole; or
(ii) has or will or is likely to have a materially adverse effect on the success or pricing of
the Global Offering or the level of applications under the Hong Kong Public
Offering or the level of interest under the International Offering; or
UNDERWRITING
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(iii) makes or will make or is likely to make it inadvisable or inexpedient or
impracticable for the Global Offering to be performed or implemented or proceed
with as envisaged or to market the Global Offering on terms and in the manner
contemplated by this prospectus; or
(iv) has or will or is likely have the effect of making any part of the Hong Kong
Underwriting Agreement (including underwriting) incapable of performance in
accordance with its terms in material respect or which prevents the processing of
applications and/or payments pursuant to the Global Offering or pursuant to the
underwriting thereof.
Indemnity
Our Company has agreed to indemnify the Sole Sponsor, the Sole Overall Coordinator,
the Sole Global Coordinator, the Joint Bookrunners, the Joint Lead Managers and the Hong
Kong Underwriters for certain losses which they may suffer, including losses arising from
their performance of their obligations under the Hong Kong Underwriting Agreement and any
breach by us of the Hong Kong Underwriting Agreement.
Undertakings to the Hong Kong Underwriters
Undertakings by our Company
Our Company has undertaken to each of the Sole Sponsor, the Sole Overall Coordinator,
the Sole Global Coordinator, the Joint Bookrunners and the Joint Lead Managers and the
Hong Kong Underwriters that:
(a) except for the issue of the Shares pursuant to the Global Offering, the exercise of the
Over-allotment Option or as otherwise with the prior written consent from the Sole
Overall Coordinator, and unless in compliance with the Listing Rules, our Company
will not, and will procure that none of our subsidiaries will, during the period
commencing on the date by reference to which disclosure of the shareholding of our
Controlling Shareholders in our Company is made in this prospectus and ending on
the date which is six months from the Listing Date (the “ First Six-Month Period ”):
(i) allot, issue, sell, accept subscription for, offer to allot, issue or sell, contract or
agree to allot, issue or sell, mortgage, charge, pledge, hypothecate, lend, grant
or sell any option, warrant, contract or right to subscribe for or purchase, grant
or purchase any option, warrant, contract or right to allot, issue or sell, or
otherwise transfer or dispose of or create an encumbrance over, or agree to
transfer or dispose of or create an encumbrance over, either directly or
indirectly, conditionally or unconditionally, any Shares or other securities of
our Company, as applicable, or any interest in any of the foregoing (including,
without limitation, any securities convertible into or exchangeable or
exercisable for or that represent the right to receive, or any other warrants or
other rights to purchase, any Shares or any shares of such other member of our
Group, as applicable), or deposit any Shares or other securities of our
Company, as applicable, with a depositary in connection with the issue of
depositary receipts; or repurchase any Shares or other securities of our
Company, as applicable; or
UNDERWRITING
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(ii) enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of any Shares or other
securities of our Company, as applicable, or any interest in any of the foregoing
(including, without limitation, any securities convertible into or exchangeable
or exercisable for or that represent the right to receive, or any warrants or other
rights to purchase, any Shares or other securities of our Company, as
applicable); or
(iii) enter into any transaction with the same economic effect as any transaction
described in paragraph (i) or (ii) above; or
(iv) offer to or to agree or announce any intention to effect, any transaction
described in paragraph (i), (ii) or (iii) above,
whether any of the foregoing transactions described in paragraph (i), (ii) or (iii)
above is to be settled by delivery of share capital or such other securities of our
Company, in cash or otherwise (whether or not the issue of our Shares or such other
securities will be completed within the aforesaid period); and
(b) our Company will not enter into any of the transactions specified in (a) (i), (ii) or
(iii) above or offer to or agree to or announce any intention to effect any such
transaction, such that any of our Controlling Shareholders would cease to be a
controlling shareholder (as defined in the Listing Rules) of our Company during the
period of six months immediately following the expiry of the First Six-Month
Period (the “ Second Six-Month Period ”).
(c) in the event of our Company entering into or agreeing to enter into any of the
foregoing transactions in respect of any Share or other securities of our Company or
any member of our Group or any interest therein by virtue of the aforesaid
exceptions or during the Second Six-Month Period, it will take all reasonable steps
to ensure that such action will not create a disorderly or false market in any of the
Shares or other securities of our Company.
Undertakings by our Controlling Shareholders
Our Controlling Shareholders jointly and severally undertake to each of the Sole
Sponsor, the Sole Overall Coordinator, the Sole Global Coordinator, the Joint Bookrunners,
the Joint Lead Managers and the Hong Kong Underwriters that, except pursuant to the Stock
Borrowing Agreement or otherwise in compliance with the requirements under the Listing
Rules, without the prior written consent of the Sole Sponsor and the Sole Overall Coordinator
(for itself and on behalf of the other Hong Kong Underwriters):
(a) at any time during the First Six-Month Period, it/he shall not, and shall procure that
the relevant registered holder(s), any nominee or trustee holding on trust for it/him
and the companies controlled by it/he (together, the “ Controlled Entities ”) shall
not, (i) sell, offer to sell, contract or agree to sell, mortgage, charge, pledge,
hypothecate, lend, grant or sell any option, warrant, contract or right to sell, or
otherwise transfer or dispose of or create an encumbrance over, or agree to transfer
or dispose of or create an encumbrance over, either directly or indirectly,
conditionally or unconditionally, any Shares or other securities of our Company or
UNDERWRITING
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any interest therein (including, without limitation, any securities convertible into or
exchangeable or exercisable for or that represent the right to receive, or any
warrants or other rights to purchase, any Shares) beneficially owned by it/him
directly or indirectly through its Controlled Entities (for the avoidance of doubts,
exclude the Shares held by Custodian Capital Ltd. on behalf of the Retaining
Shareholders and the Unresponsive Shareholders) (the “ Relevant Securities ”), or
deposit any Relevant Securities with a depositary in connection with the issue of
depositary receipts; or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of the
Relevant Securities; (iii) enter into or effect any transaction with the same economic
effect as any of the transactions referred to in sub-paragraphs (i) or (ii) above; or
(iv) offer to or agree to or announce any intention to enter into or effect any of the
transactions referred to in sub-paragraphs (i), (ii) or (iii) above, in each case
whether any of the foregoing transactions referred to in sub-paragraphs (i), (ii) or
(iii) is to be settled by delivery of Shares or any other securities of our Company or
in cash or otherwise (whether or not the issue of such Shares or other securities will
be completed within the First Six-Month Period);
(b) at any time during the Second Six-Month Period, it/he shall not, and shall procure
that the Controlled Entities shall not, enter into any of the transactions referred to in
paragraphs (a) (i), (ii) or (iii) above or offer to or agree to or announce any intention
to enter into any such transaction if, immediately following any sale, transfer or
disposal or upon the exercise or enforcement of any option, right, interest or
encumbrance pursuant to such transaction, it/he would cease to be a “controlling
shareholder” (as defined in the Listing Rules) of the Company or would together
with the other Controlling Shareholders cease to be “controlling shareholders” (as
defined in the Listing Rules) of the Company;
(c) in the event that it/he enters into any of the transactions specified in paragraphs (a)
(i), (ii) or (iii) above or offer to or agrees to or announce any intention to effect any
such transaction within the Second Six-Month Period, it/he shall take all reasonable
steps to ensure that it/he will not create a disorderly or false market for any Shares
or other securities of our Company; and
(d) it/he shall, and shall procure that the relevant registered holder(s) and other
Controlled Entities shall, comply with all the restrictions and requirements under
the Listing Rules on the sale, transfer or disposal by it/he or by the registered
holder(s) and/or other Controlled Entities of any Shares or other securities of our
Company (for the avoidance of doubts, exclude the Shares held by Custodian
Capital Ltd. on behalf of the Retaining Shareholders and the Unresponsive
Shareholders).
UNDERWRITING
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Our Controlling Shareholders further undertake to each of the Sole Sponsor, the Sole
Overall Coordinator, the Sole Global Coordinator, the Joint Bookrunners, the Joint Lead
Managers and the Hong Kong Underwriters that within the period from the date by reference
to which disclosure of their shareholding in our Company is made in this prospectus and
ending on the date which is twelve months from the Listing Date, it/he will:
(a) when it/he pledges or charges any securities or interests in the Relevant Securities in
favour of an authorised institution pursuant to Note (2) to Rule 10.07(2) of the
Listing Rules, promptly inform the Company, the Sole Sponsor and the Sole Overall
Coordinator in writing of such pledges or charges together with the number of
securities and nature of interest so pledged or charged; and
(b) when it/he receives indications, either verbal or written, from any pledgee or
chargee that any of the pledged or charged securities or interests in the securities of
our Company will be sold, transferred or disposed of, promptly inform our
Company, the Sole Sponsor and the Sole Overall Coordinator in writing of such
indications.
Our Company will inform the Stock Exchange in writing as soon as it has been informed
of any of the matters referred to above (if any) by our Controlling Shareholders and disclose
such matters by way of an announcement to be published in accordance with the Listing Rules
as soon as possible.
Undertakings to the Stock Exchange
Undertakings by our Company
Pursuant to Rule 10.08 of the Listing Rules, our Company has undertaken to the Stock
Exchange that no further Shares or securities convertible into our equity securities (whether or
not of a class already listed) may be issued by our Company or form the subject of any
agreement to such an issue by our Company within six months from the Listing Date (whether
or not such issue of Shares or securities will be completed within six months from the Listing
Date), except in certain circumstances permitted by Rule 10.08 of the Listing Rules.
Undertakings by our Controlling Shareholders
In accordance with Rule 10.07(1) of the Listing Rules, our Controlling Shareholders
have, irrevocably and unconditionally, undertaken to the Stock Exchange and our Company
that except pursuant to the Global Offering and exercise of the Over-allotment Option, he/it
shall not, and shall procure that the relevant registered holder(s) shall not:
(a) at any time during the First Six-Month Period, dispose of, nor enter into any
agreement to dispose of or otherwise create any options, rights, interests or
encumbrances in respect of, any of the Shares in respect of which he/it is shown by
this prospectus to be the beneficial owner(s) (for the avoidance of doubts, exclude
the Shares held by Custodian Capital Ltd. on behalf of the Retaining Shareholders
and the Unresponsive Shareholders); and
UNDERWRITING
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(b) at any time during the Second Six-Month Period, dispose of, nor enter into any
agreement to dispose of or otherwise create any options, rights, interests or
encumbrances in respect of, any of the Shares referred to in paragraph (a) above if,
immediately following such disposal or upon the exercise or enforcement of such
options, rights, interests or encumbrances, he/it would cease to be our Controlling
Shareholder (as defined in the Listing Rules) or would together with the other
Controlling Shareholders cease to be, or regarded as, a group of Controlling
Shareholders (as defined in the Listing Rules) of our Company.
Our Controlling Shareholders have further undertaken to the Stock Exchange and our
Company that, within a period commencing from the date on which disclosure of his/its
shareholding in our Company is made in this prospectus and ending on the date which is 12
months from the Listing Date, he/it will:
(a) when he/it pledges or charges any of the Shares or securities of our Company
beneficially owned by him/it (for the avoidance of doubts, exclude the Shares held
by Custodian Capital Ltd. on behalf of the Retaining Shareholders and the
Unresponsive Shareholders), whether directly or indirectly, in favor of an
authorized institution pursuant to Note (2) to Rule 10.07(2) of the Listing Rules,
immediately inform our Company of such pledge or charge together with the
number of Shares or securities of our Company so pledged or charged; and
(b) if he/it receives indications, either verbal or written, from the pledgee or chargee
that any of the pledged or charged Shares or securities of our Company will be
disposed of, immediately inform our Company of such indications.
International Offering
In connection with the International Offering, it is expected that our Company will enter
into the International Underwriting Agreement with the Sole Sponsor, the Sole Overall
Coordinator, the Sole Global Coordinator, the Joint Bookrunners, the Joint Lead Managers
and the International Underwriters, on terms and conditions that are substantially similar to
the Hong Kong Underwriting Agreement as described above and on the additional terms
described below.
Under the International Underwriting Agreement, subject to the conditions set out
therein, the International Underwriters would, subject to certain conditions, severally, but not
jointly, agree to procure subscribers for the International Offer Shares initially being offered
pursuant to the International Offering (excluding, for the avoidance of doubt, the Offer Shares
which are subject to the Over-allotment Option). The International Underwriting Agreement
may be terminated on similar grounds as the Hong Kong Underwriting Agreement. Potential
investors shall be reminded that in the event that the International Underwriting Agreement is
not entered into, the Global Offering will not proceed.
The International Underwriting Agreement is conditional on and subject to the Hong
Kong Underwriting Agreement having been executed, becoming unconditional and not having
been terminated. Pursuant to the International Underwriting Agreement, our Company will
make similar undertakings as those given pursuant to the Hong Kong Underwriting Agreement
as described in the subsection headed “– Undertakings to the Hong Kong Underwriters –
Undertakings by our Company” in this section of the prospectus.
UNDERWRITING
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Commission and Expenses
The Hong Kong Underwriters will, and the International Underwriters are expected to,
receive a commission of 2.70% of the aggregate Offer Price of all the Offer Shares (including
any Offer Shares to be issued pursuant to the exercise of the Over-allotment Option)
underwritten by them or approximately HK$14.9 million in aggregate, whichever is higher
(the “ Fixed Fees ”), out of which they shall pay any sub-underwriting commissions. Our
Company may, at our sole and absolute discretion, pay to the Sole Overall Coordinator (for
itself and on behalf of the Underwriters) for their respective accounts an incentive fee up to
1.0% of the Offer Price for each Offer Share (the “ Discretionary Fees ”). Assuming the Offer
Price is HK$7.0, being the mid-point of the indicative Offer Price range and the Discretionary
Fees are paid in full, the ratio of the Fixed Fees and Discretionary Fees payable is 92:8.
Assuming the Over-allotment Option is not exercised, the underwriting commission,
documentation and advisory fee, listing fees, the Stock Exchange trading fee, the SFC
transaction levy, legal and other professional fees together with printing and other expenses
relating to the Global Offering, assuming an Offer Price of HK$7.0 (being the mid-point of the
indicative Offer Price range), are estimated to amount to approximately HK$74.8 million in
total, and are payable by our Company.
SOLE OVERALL COORDINA TOR’S AND UNDERWRITERS’ INTEREST IN OUR
COMPANY
The Sole Overall Coordinator and the other Underwriters will receive underwriting
commissions. For particulars of these underwriting commissions and expenses, please refer to
“— Underwriting Arrangements and Expenses — Commission and expenses” in this
prospectus.
We have appointed BOCOM International (Asia) Limited as our compliance adviser
pursuant to Rule 3A.19 of the Listing Rules for the period commencing on the Listing Date
and ending on the date on which our Company complies with Rule 13.46 of the Listing Rules
in respect of the despatch of our annual report for the first full financial year commencing
after the Listing Date.
Save as disclosed above, none of the Underwriters is interested legally or beneficially in
shares of any members of our Group or has any right or option (whether legally enforceable or
not) to subscribe for or purchase or to nominate persons to subscribe for or purchase securities
in any members of our Group nor any interest in the Global Offering.
SOLE SPONSOR’S INDEPENDENCE
The Sole Sponsor satisfies the independence criteria applicable to sponsors as set out in
Rule 3A.07 of the Listing Rules.
MINIMUM PUBLIC FLOA T
Our Directors will ensure that there will be a minimum of 25.0% of the total issued
Shares held in public hands in accordance with Rule 8.08 of the Listing Rules after completion
of the Global Offering.
UNDERWRITING
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THE GLOBAL OFFERING
The Global Offering comprises:
(a) the Hong Kong Public Offering of 1,830,000 Shares (subject to reallocation as
mentioned below) for subscription by the public in Hong Kong as described in “The
Hong Kong Public Offering” in this section; and
(b) the International Offering of an aggregate of 16,470,000 Shares (subject to
reallocation as mentioned below and the Over-allotment Option) outside the United
States (including to professional and institutional investors within Hong Kong) in
offshore transactions in reliance on Regulation S, as described in “– The
International Offering” below.
Investors may either apply for Offer Shares under the Hong Kong Public Offering or
apply for or indicate an interest for Offer Shares under the International Offering, but may not
do both. References in this prospectus to applications, application monies or the procedures
for application relate solely to the Hong Kong Public Offering.
The Offer Shares will represent approximately 19.6% of the total issued share capital of
our Company immediately after completion of the Global Offering (assuming that the
Over-allotment Option is not exercised).
THE HONG KONG PUBLIC OFFERING
Number of Shares initially offered
We are initially offering 1,830,000 Shares for subscription by the public in Hong Kong at
the Offer Price, representing 10.0% of the total number of Shares initially available under the
Global Offering. Subject to the reallocation of Shares between the Hong Kong Public Offering
and the International Offering, the Hong Kong Offer Shares will initially represent
approximately 2.0% of the total issued share capital of our Company immediately following
the completion of the Global Offering (assuming that the Over-allotment Option is not
exercised). The Hong Kong Public Offering is open to members of the public in Hong Kong as
well as to professional, institutional and/or other investors. Professional investors generally
include brokers, dealers, companies (including fund managers) whose ordinary business
involves dealings in shares and other securities and corporate entities which regularly invest
in shares and other securities.
Completion of the Hong Kong Public Offering is subject to the conditions as set out in
the paragraphs headed “Conditions of the Hong Kong Public Offering” in this section.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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Allocation
The allocation of the Offer Shares to investors under the Hong Kong Public Offering will
be based solely on the level of valid applications received under the Hong Kong Public
Offering. The basis of allocation may vary, depending on the number of Hong Kong Offer
Shares validly applied for by applicants. Such allocation could, where appropriate, consist of
balloting, which would mean that some applicants may receive a higher allocation than others
who have applied for the same number of Hong Kong Offer Shares, and those applicants who
are not successful in the ballot may not receive any Hong Kong Offer Shares.
For allocation purposes only, the total number of Offer Shares available under the Hong
Kong Public Offering is to be divided equally into two pools:
• Pool A: The Hong Kong Offer Shares in pool A will be allocated on an equitable
basis to applicants who have applied for the Hong Kong Offer Shares with an
aggregate subscription price of HK$5.0 million or less (excluding brokerage, SFC
transaction levy, Stock Exchange trading fee and AFRC transaction levy); and
• Pool B: The Hong Kong Offer Shares in pool B will be allocated on an equitable
basis to applicants who have applied for the Hong Kong Offer Shares with an
aggregate subscription price of more than HK$5.0 million and up to the total value
of pool B (excluding brokerage, SFC transaction levy, Stock Exchange trading fee
and AFRC transaction levy).
Investors should be aware that applications in Pool A and applications in Pool B may
receive different allocation ratios. If Hong Kong Offer Shares in one (but not both) of the
pools are under-subscribed, the surplus Hong Kong Offer Shares will be transferred to the
other pool to satisfy demand in that other pool and be allocated accordingly. For the purpose
of this paragraph only, the “price” for Offer Shares means the price payable on application
therefore (without regard to the Offer Price as finally determined). Applicants can only
receive an allocation of Hong Kong Offer Shares from either Pool A or Pool B but not from
both pools.
Multiple applications or suspected multiple applications within either pool or between
pools and any application for more than 915,000 Hong Kong Offer Shares are liable to be
rejected.
Reallocation
The allocation of Offer Shares between the Hong Kong Public Offering and the
International Offering is subject to adjustment. Paragraph 4.2 of Practice Note 18 of the
Listing Rules requires a clawback mechanism to be put in place which would have the effect
of increasing the number of Offer Shares under the Hong Kong Public Offering to a certain
percentage of the total number of Offer Shares offered under the Global Offering if the
International Offering is fully subscribed or oversubscribed and certain prescribed total
demand levels are reached as further described below:
• if the number of Offer Shares validly applied for under the Hong Kong Public
Offering represents 15 times or more but less than 50 times the number of Offer
Shares initially available for subscription under the Hong Kong Public Offering,
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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then Offer Shares will be reallocated to the Hong Kong Public Offering from the
International Offering so that the total number of Offer Shares available under the
Hong Kong Public Offering will be 5,490,000 Offer Shares, representing 30% of the
Offer Shares initially available under the Global Offering;
• if the number of Offer Shares validly applied for under the Hong Kong Public
Offering represents 50 times or more but less than 100 times the number of Offer
Shares initially available for subscription under the Hong Kong Public Offering,
then the number of Offer Shares to be reallocated to the Hong Kong Public Offering
from the International Offering will be increased so that the total number of Offer
Shares available under the Hong Kong Public Offering will be 7,320,000 Offer
Shares, representing 40% of the Offer Shares initially available under the Global
Offering; and
• if the number of Offer Shares validly applied for under the Hong Kong Public
Offering represents 100 times or more the number of Offer Shares initially available
for subscription under the Hong Kong Public Offering, then the number of Offer
Shares to be reallocated to the Hong Kong Public Offering from the International
Offering will be increased so that the total number of Offer Shares available under
the Hong Kong Public Offering will be 9,150,000 Offer Shares, representing 50% of
the Offer Shares initially available under the Global Offering.
In addition, the Offer Shares to be offered in the Hong Kong Public Offering and the
International Offering may, in certain circumstances, be reallocated as between these
offerings at the discretion of the Sole Sponsor, subject to the requirements of Chapter 4.14 of
the Guide for New Listing Applicants published by the Stock Exchange. If the Hong Kong
Public Offering is not fully subscribed for, the Sole Overall Coordinator has the authority to
reallocate all or any unsubscribed Hong Kong Offer Shares to the International Offering. In
addition, the Sole Overall Coordinator may in its discretion reallocate Offer Shares from the
International Offering to the Hong Kong Public Offering to satisfy valid applications under
the Hong Kong Public Offering. In particular, if (i) the International Offering is not fully
subscribed and the Hong Kong Public Offering is fully subscribed or oversubscribed
irrespective of the number of times; or (ii) the International Offering is fully subscribed or
oversubscribed and the Hong Kong Public Offering is fully subscribed or oversubscribed with
the number of Offer Shares validly applied for in the Hong Kong Public Offering representing
less than 15 times of the number of Shares initially available for subscription under the Hong
Kong Public Offering, the Sole Overall Coordinator has the authority to reallocate
International Offer Shares originally included in the International Offering to the Hong Kong
Public Offering, subject to the requirements of Chapter 4.14 of the Guide for New Listing
Applicants published by the Stock Exchange. In accordance with Chapter 4.14 of the Guide
for New Listing Applicants, if such reallocation is done other than pursuant to Practice Note
18 of the Listing Rules, (i) the maximum total number of Offer Shares that may be reallocated
to the Hong Kong Public Offering following such reallocation shall be not more than double
the initial allocation to the Hong Kong Public Offering (i.e. up to a maximum of 3,660,000
Offer Shares), and (ii) the final Offer Price shall be fixed at HK$5.5 per Offer Share, the
low-end of the Offer Price range stated in this prospectus.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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In each case, the additional Offer Shares reallocated to the Hong Kong Public Offering
will be allocated between Pool A and Pool B and the number of Offer Shares allocated to the
International Offering will be correspondingly reduced in such manner as the Sole Sponsor in
its discretion considers appropriate.
In the event that both the Hong Kong Public Offering and International Offering are
undersubscribed, the Global Offering will not proceed unless the Underwriters would
subscribe or procure subscribers for their respective applicable proportions of the Offer
Shares being offered which are not taken up under the Global Offering on the terms and
conditions of this prospectus and the Underwriting Agreements.
Any such clawback and reallocation between the International Offering and the Hong
Kong Public Offering will be completed prior to any adjustments of the number of the Offer
Shares pursuant to the exercise of the Over-allotment Option, if any.
Applications
Each applicant under the Hong Kong Public Offering will also be required to give an
undertaking and confirmation in the application submitted by him/her/it that he/she/it and any
person(s) for whose benefit he is making the application have not applied for or taken up, or
indicated an interest for, and will not apply for or take up, or indicate an interest for, any Offer
Shares under the International Offering, and such applicant’s application is liable to be
rejected if the said undertaking and/or confirmation is breached and/or untrue (as the case may
be) or it has been or will be placed or allocated Offer Shares under the International Offering.
Multiple or suspected multiple applications within either pool or between pools and any
application for more than 50% of the Hong Kong Offer Shares initially comprised in the Hong
Kong Public Offering are liable to be rejected.
Applicants under the Hong Kong Public Offering may be required to pay (subject to
application channels), on application, the maximum price of HK$8.5 per Offer Share in
addition to the brokerage, SFC transaction levy, Stock Exchange trading fee and AFRC
transaction levy, amounting to a total of HK$4,292.86 per board lot of 500 Offer Shares. If the
Offer Price, as finally determined in the manner described in the “Price Determination of the
Global Offering” in this section, is less than the maximum price of HK$8.5 per Offer Share,
appropriate refund payments (including the brokerage, SFC transaction levy, Stock Exchange
trading fee and AFRC transaction levy attributable to the surplus application monies) will be
made to successful applicants (subject to application channels), without interest. For further
details, please refer to “How to Apply for Hong Kong Offer Shares” in this prospectus.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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THE INTERNA TIONAL OFFERING
Number of Offer Shares offered
The International Offering will consist of an initial offering of 16,470,000 Shares
(subject to reallocation and the Over-allotment Option), representing 90% of the total number
of Offer Shares initially available under the Global Offering and approximately 17.7% of the
total issued share capital immediately after completion of the Global Offering (assuming that
the Over-allotment Option is not exercised). The International Offering will be offered by us
to professional, institutional and/or other investors in Hong Kong.
Allocation
The International Offering will include selective marketing of the International Offer
Shares to professional, institutional and/or other investors anticipated to have a sizeable
demand for the International Offer Shares. Professional investors generally include brokers,
dealers, companies (including fund managers) whose ordinary business involves dealings in
shares and other securities and corporate entities which regularly invest in shares and other
securities. Allocation of the International Offer Shares pursuant to the International Offering
will be effected in accordance with the “book-building” process described in “Price
Determination of the Global Offering” below and based on a number of factors, including the
level and timing of demand, and whether or not it is expected that the relevant investor is
likely to buy further Offer Shares, and/or hold or sell its Offer Shares, after the listing of the
Offer Shares on the Stock Exchange. Such allocation is intended to result in a distribution of
the Offer Shares on a basis which would lead to the establishment of a solid shareholder base
to the benefit of our Company and the Shareholders as a whole.
The Sole Overall Coordinator (for itself and on behalf of the Underwriters) may require
any investor who has been offered International Offer Shares under the International Offering,
and who has made an application under the Hong Kong Public Offering to provide sufficient
information to the Sole Overall Coordinator so as to allow it to identify the relevant
applications under the Hong Kong Public Offering and to ensure that it is excluded from any
application of the Hong Kong Offer Shares under the Hong Kong Public Offering.
Reallocation
The total number of Offer Shares to be issued pursuant to the International Offering may
change as a result of the clawback arrangement as described in “The Hong Kong Public
Offering – Reallocation” in this section and/or the exercise of the Over-allotment Option in
whole or in part. In addition, the Sole Overall Coordinator may reallocate International Offer
Shares from the International Offering to the Hong Kong Public Offering to satisfy the valid
applications under the Hong Kong Public Offering that exceeds the number of Hong Kong
Offer Shares initially offered. The Offer Shares to be offered in the Hong Kong Public
Offering and the International Offering may, in certain circumstances, be reallocated as
between these offerings at the discretion of the Sole Overall Coordinator, subject to the
requirements of Chapter 4.14 of the Guide for New Listing Applicants published by the Stock
Exchange.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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PRICE DETERMINA TION OF THE GLOBAL OFFERING
The International Underwriters will be soliciting from prospective investors’ indications
of interest in acquiring Offer Shares in the International Offering. Prospective investors will
be required to specify the number of International Offer Shares under the International
Offering they would be prepared to acquire either at different prices or at a particular price.
This process, known as “book-building”, is expected to continue up to, and to cease on or
around, the last day for lodging applications under the Hong Kong Public Offering.
Pricing for the Offer Shares for the purpose of the various offerings under the Global
Offering will be fixed on the Price Determination Date, which is expected to be on or about
Friday, June 14, 2024 by agreement between the Sole Overall Coordinator (for itself and on
behalf of the Underwriters) and our Company, and the number of Offer Shares to be allocated
or sold under various offerings will be determined shortly thereafter.
The Offer Price will not be more than HK$8.5 per Offer Share and is expected to be not
less than HK$5.5 per Offer Share unless otherwise announced, as further explained below, not
later than the morning of the last day for lodging applications under the Hong Kong Public
Offering. Prospective investors should be aware that the Offer Price to be determined on the
Price Determination Date may be, but is not expected to be, lower than the indicative Offer
Price range stated in this prospectus. If you apply for the Offer Shares under the Hong Kong
Public Offering, you may be required to pay the maximum price of HK$8.5 per Offer Share
(subject to application channels), plus brokerage of 1%, SFC transaction levy of 0.0027%,
Stock Exchange trading fee of 0.00565% and AFRC transaction levy of 0.00015%.
If the Offer Price, as finally determined in the manner described below, is lower than
HK$8.5, we will refund the respective difference, including brokerage, SFC transaction levy,
Stock Exchange trading fee and AFRC transaction levy attributable to the surplus application
monies (subject to application channels). We will not pay interest on any refunded amounts.
For more details, please refer to “How to Apply for Hong Kong Offer Shares” in this
prospectus.
The Sole Overall Coordinator (for itself and on behalf of the Underwriters) may, where
considered appropriate, based on the level of interest expressed by prospective professional,
institutional and other investors during the book-building process, and with the consent of our
Company, reduce the number of Offer Shares and/or the Offer Price Range below that stated in
this prospectus at any time prior to the morning of the last day for lodging applications under
the Hong Kong Public Offering. In such a case, we will as soon as practicable following the
decision to make such reduction and in any event not later than the morning of the last day for
lodging applications under the Hong Kong Public Offering publish a notice on the website of
the Stock Exchange at www.hkexnews.hk and our website at www.chinaorganic.com (the
contents of the website do not form a part of this prospectus). Our Company will also, as soon
as practicable following the decision to make such a change, issue a supplemental prospectus
updating investors of the change in the number of Offer Shares being offered under the Global
Offering and/or the Offer Price. The Global Offering must first be canceled and subsequently
relaunched on FINI pursuant to the supplemental prospectus.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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Before submitting applications for the Hong Kong Offer Shares, applicants should have
regard to the possibility that any announcement of a reduction in the number of Offer Shares
and/or the Offer Price Range may not be made until the day which is the last day for lodging
applications under the Hong Kong Public Offering. Such notice will also confirm or revise, as
appropriate, the working capital statement, the Global Offering statistics as currently set out
in “Summary” in this prospectus, and any other financial information which may change as a
result of such reduction. In the absence of any such notice so published, the Offer Price, if
agreed upon with our Company, the Sole Overall Coordinator (for itself and on behalf of the
Underwriters) will under no circumstances be set outside the Offer Price Range as stated in
this prospectus. However, if the number of Offer Shares and/or the Offer Price is reduced, our
Company will issue a supplemental prospectus updating investors of the change in the number
of Offer Shares being offered under the Global Offering and/or the Offer Price. The Global
Offering must first be canceled and subsequently relaunched on FINI pursuant to the
supplemental prospectus.
If you have already submitted an application for the Hong Kong Offer Shares before the
last day for lodging applications under the Hong Kong Public Offering, you will not be
allowed to subsequently withdraw your application. If there is any change to the offer size due
to change in the number of Offer Shares initially offered in the Global Offering (other than
pursuant to the exercise of the Over-allotment Option and/or reallocation mechanism as
disclosed in this prospectus), or change to the Offer Price which leads to the resulting price
falling outside the indicative Offer Price Range as stated in this prospectus, or if our Company
becomes aware that there has been a significant change affecting any matter contained in this
prospectus or a significant new matter has arisen, the inclusion of information in respect of
which would have been required to be in this prospectus if it had arisen before this prospectus
was issued, after the issue of this prospectus and before the commencement of dealings in our
Shares as prescribed under Rule 11.13 of the Listing Rules, we are required to cancel the
Global Offering and relaunch the offer and issue a supplemental prospectus or a new
prospectus and complete the requisite associated settlement processes on the FINI platform
afresh.
In the event of a reduction in the number of Offer Shares, the Sole Overall Coordinator
(for itself and on behalf of the Underwriters) may, at its discretion, reallocate the number of
Offer Shares to be offered in the Hong Kong Public Offering and the International Offering,
provided that the number of Offer Shares comprised in the Hong Kong Public Offering shall
not be less than 10% of the total number of Offer Shares available under the Global Offering
(assuming the Over-allotment Option is not exercised).
The net proceeds of the Global Offering accruing to our Company (after deduction of
underwriting fees and estimated expenses payable by our Company in relation to the Global
Offering) are estimated to be approximately HK$53.3 million, assuming an Offer Price per
Offer Share of HK$7.0 (being the mid-point of the stated indicative Offer Price range of
HK$5.5 to HK$8.5 per Offer Share).
The final Offer Price, the indications of interest in the Global Offering, the results of
applications and the basis of allotment of the Hong Kong Offer Shares available under the
Hong Kong Public Offering, are expected to be announced on Monday, June 17, 2024 on the
website of our Company ( www.chinaorganic.com ) and the website of the Stock Exchange
(www.hkexnews.hk ).
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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If the Sole Overall Coordinator (for itself and on behalf of the Underwriters) and
our Company are unable to reach an agreement on the Offer Price on or before 12:00
noon on Friday, June 14, 2024, the Global Offering will not become unconditional and
will lapse immediately.
UNDERWRITING AGREEMENTS
The Hong Kong Public Offering is fully underwritten by the Hong Kong Underwriter(s)
under the terms of the Hong Kong Underwriting Agreement and is conditional upon the
International Underwriting Agreement being signed and becoming unconditional.
Our Company, our Controlling Shareholders, our executive Directors, the Sole Sponsor,
the Sole Overall Coordinator, the Sole Global Coordinator, the Joint Bookrunners, the Joint
Lead Managers, and the International Underwriters expect to enter into the International
Underwriting Agreement relating to the International Offering on or about the Price
Determination Date. These underwriting arrangements, and the respective Underwriting
Agreements, are summarized in “Underwriting” in this prospectus.
SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
Subject to the approval of the listing of, and permission to deal in, the Shares on the
Stock Exchange and the compliance with the stock admission requirements of HKSCC, the
Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement
in CCASS with effect from the Listing Date or any other date as determined by HKSCC.
Settlement of transactions between participants of the Stock Exchange is required to take
place in CCASS on the second settlement day after any trading day. All activities under
CCASS are subject to the General Rules of HKSCC and HKSCC Operational Procedures in
effect from time to time. All necessary arrangements have been made for the Shares to be
admitted into CCASS.
OVER-ALLOTMENT OPTION
In connection with the Global Offering, it is expected that our Company will grant to the
Sole Overall Coordinator (for itself and on behalf of the Underwriters) the Over-allotment
Option, exercisable by the Sole Overall Coordinator (for itself and on behalf of the
Underwriters) to cover over-allocations under the International Offering (if any). Pursuant to
the Over-allotment Option, the Sole Overall Coordinator (for itself and on behalf of the
Underwriters) will have the right, exercisable at any time from the Listing Date until Saturday,
July 13, 2024, being the 30th day after the last date for lodging applications under the Hong
Kong Public Offering, to require our Company to issue up to 2,745,000 Shares, representing
15.0% of the Offer Shares initially available under the Global Offering, at the Offer Price
under the International Offering to cover over-allocation in the International Offering, if any.
If the Over-allotment Option is exercised in full, the additional Offer Shares will
represent approximately 2.9% of the enlarged issued share capital of our Company in issue
following completion of the Global Offering and the exercise of the Over-allotment Option.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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The additional net proceeds that we would receive if the Over-allotment Option is
exercised in full (assuming the Offer Price of HK$7.0 per Share (being the mid-point of the
indicative Offer Price range)) are estimated to be approximately HK$19.2 million, which
would be applied to the respective uses on a pro-rata basis as disclosed in “Future Plans and
Use of Proceeds – Implementation Plans” in this prospectus.
STABILIZA TION
Stabilization is a practice used by underwriters in some markets to facilitate the
distribution of securities. To stabilize, the underwriters may bid for, or purchase, the securities
in the secondary market, during a specified period of time, to retard and, if possible, prevent a
decline in the initial public market price of the securities below the Offer Price. Such
transactions may be effected in all jurisdictions where it is permissible to do so, in each case
in compliance with all applicable laws and regulatory requirements, including those of Hong
Kong. In Hong Kong, the price at which stabilization is effected is not permitted to exceed the
Offer Price.
In connection with the Global Offering, the Stabilizing Manager, or its affiliates or any
person acting for it, on behalf of the Underwriters, may over-allocate or effect transactions
with a view to stabilizing or supporting the market price of our Shares at a level higher than
that which might otherwise prevail in the open market for a limited period on and after the
Listing Date. However, there is no obligation on the Stabilizing Manager or any persons acting
for it, to conduct any such stabilizing action. Such stabilizing action, if taken, will be
conducted at the sole and absolute discretion of the Stabilizing Manager or its affiliates or any
person acting for it and may be discontinued at any time, and is required to be brought to an
end by Saturday, July 13, 2024, being the 30th day after the last day for lodging applications
under the Hong Kong Public Offering.
Stabilization action permitted in Hong Kong under the Securities and Futures (Price
Stabilizing) Rules of the SFO includes (i) over-allocating for the purpose of preventing or
minimizing any reduction in the market price of our Shares, (ii) selling or agreeing to sell our
Shares so as to establish a short position in them for the purpose of preventing or minimizing
any reduction in the market price of our Shares, (iii) purchasing, or agreeing to purchase, our
Shares pursuant to the Over-allotment Option in order to close out any position established
under (i) or (ii) above, (iv) purchasing, or agreeing to purchase, any of our Shares for the sole
purpose of preventing or minimizing any reduction in the market price of our Shares, (v)
selling or agreeing to sell any Shares in order to liquidate any position established as a result
of those purchases, and (vi) offering or attempting to do anything as described in (ii), (iii), (iv)
or (v) above.
Specifically, prospective applicants for and investors in the Shares should note that:
(a) the Stabilizing Manager (or any person acting for it) may, in connection with the
stabilizing action, maintain a long position in the Shares;
(b) there is no certainty as to the extent to which and the time or period for which the
Stabilizing Manager (or any person acting for it) will maintain such a long position;
(c) liquidation of any such long position by the Stabilizing Manager (or any person
acting for it) and selling in the open market, may have an adverse impact on the
market price of the Shares;
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(d) no stabilizing action can be taken to support the price of the Shares for longer than
the stabilizing period which will begin on the Listing Date and is expected to expire
on Saturday, July 13, 2024, being the 30th day after the last day for lodging
applications under the Hong Kong Public Offering. After such date, when no further
action may be taken to support the price of the Shares, demand for the Shares, and
therefore the price of the Shares, could fall;
(e) the price of the Shares cannot be assured to stay at or above the Offer Price by the
taking of any stabilizing action; and
(f) stabilizing bids or transactions effected in the course of the stabilizing action may
be made at any price at or below the Offer Price, which means that stabilizing bids
or transactions effected may be made at a price below the price paid by applicants
for, or investors in, the Offer Shares.
Our Company will ensure or procure that an announcement in compliance with the
Securities and Futures (Price Stabilizing) Rules of the SFO will be made within seven days of
the expiration of the stabilization period.
Over-allocation
Following any over-allocation of Shares in connection with the Global Offering, the
Stabilizing Manager (or any person acting for it) may cover such over-allocations by (among
other methods) exercising the Over-allotment Option in full or in part, using Shares purchased
by the Stabilizing Manager (or any person acting for it) in the secondary market at prices that
do not exceed the Offer Price, or through the stock borrowing arrangement as detailed below
or a combination of these means.
Stock Borrowing Agreement
In order to facilitate the settlement of over-allocations in connection with the Global
Offering, the Stabilizing Manager (or any person acting for it) may choose to enter into an
agreement with Vastocean Capital Limited, our Controlling Shareholder, to borrow, whether
on its own or through its affiliates, up to 2,745,000 Shares, representing 15.0% of the total
number of the Offer Shares initially available for the Global Offering. The stock borrowing
arrangement under such an agreement, if entered into, will not be subject to the restrictions of
Rule 10.07(1)(a) of the Listing Rules, provided that the requirements set forth in Rule
10.07(3) of the Listing Rules are complied with as follows:
(a) such stock borrowing arrangement is fully described in this prospectus and must be
for the sole purpose of covering any short position prior to the exercise of the
Over-allotment Option;
(b) the maximum number of Shares to be borrowed from Vastocean Capital Limited by
the Stabilizing Manager (or any person acting for it) is the maximum number of
Shares that may be issued upon full exercise of the Over-allotment Option;
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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--- page 355 ---
(c) the same number of Shares so borrowed must be returned to Vastocean Capital
Limited or its nominee(s) within three business days following the earlier of (a) the
last day on which the Over-allotment Option may be exercised, and (b) the day on
which the Over-allotment Option is exercised in full; and
(d) no payment will be made to Vastocean Capital Limited by the Underwriters and the
Stabilizing Manager.
CONDITIONS OF THE HONG KONG PUBLIC OFFERING
Acceptance of all applications for the Hong Kong Offer Shares pursuant to the Hong
Kong Public Offering will be conditional on:
(a) the Stock Exchange granting the listing of, and permission to deal in, the Shares
being offered pursuant to the Global Offering (including any Shares to be issued
upon the exercise of the Over-allotment Option);
(b) the Offer Price having been fixed on or about the Price Determination Date;
(c) the execution and delivery of the International Underwriting Agreement on or about
the Price Determination Date; and
(d) the obligations of the Hong Kong Underwriters under the Hong Kong Underwriting
Agreement and those of the International Underwriters under the International
Underwriting Agreement becoming and remaining unconditional and not having
been terminated in accordance with its terms, on or before the dates and times
specified in the respective agreements.
If, for any reason, the Offer Price is not agreed between the Sole Overall Coordinator (for
itself and on behalf of the Underwriters) and our Company, or the International Underwriting
Agreement is not entered into, the Global Offering will not proceed and will lapse.
The consummation of each of the Hong Kong Public Offering and the International
Offering is conditional upon, among other things, the other offering becoming unconditional
and not having been terminated in accordance with its terms.
If the above conditions are not fulfilled or waived prior to the times and dates specified,
the Global Offering will lapse and the Stock Exchange will be notified immediately. Notice of
the lapse of the Global Offering will be published on our Company’s website
(www.chinaorganic.com ) and the Stock Exchange’s website ( www.hkexnews.hk )o nt h e
next day following such lapse. In such eventuality, all application monies will be returned,
without interest, on the terms set out in the section headed “How to Apply for Hong Kong
Offer Shares” in this prospectus. In the meantime, all application monies will be held in
separate bank account(s) with the receiving banks or other licensed bank(s) in Hong Kong
licensed under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) (as amended).
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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Share certificates for the Shares are expected to be issued on Monday, June 17, 2024 but
will only become valid evidence of title at 8:00 a.m. on Tuesday, June 18, 2024 provided that
(i) the Global Offering has become unconditional in all respects and (ii) the right of
termination as described in “Underwriting – Underwriting Arrangements and Expenses –
Hong Kong Public Offering – Grounds for termination” in this prospectus has not been
exercised.
DEALINGS
Assuming that the Global Offering becomes unconditional at or before 8:30 a.m. in Hong
Kong on Tuesday, June 18, 2024, it is expected that dealings in the Shares on the Stock
Exchange will commence at 9:00 a.m. on Tuesday, June 18, 2024.
The Shares will be traded in board lots of 500 Shares each. The stock code of the Shares
is 2881.
STRUCTURE AND CONDITIONS OF THE GLOBAL OFFERING
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IMPORTANT NOTICE TO INVESTORS:
FULLY ELECTRONIC APPLICA TION PROCESS
We have adopted a fully electronic application process for the Hong Kong
Public Offering. We will not provide printed copies of this prospectus to the public in
relation to the Hong Kong Public Offering.
This prospectus is available at the website of the Stock Exchange at
www.hkexnews.hk under the “ HKEXnews > New Listings > New Listing Information ”
section, and our website at www.chinaorganic.com . If you require a printed copy of this
prospectus, you may download and print from the website addresses above.
The contents of the electronic version of the prospectus are identical to the printed
prospectus as registered with the Registrar of Companies in Hong Kong pursuant to
Section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.
Set out below are procedures through which you can apply for the Hong Kong Offer
Shares electronically. We will not provide any physical channels to accept any application
for the Hong Kong Offer Shares by the public.
If you are an intermediary, broker or agent, please remind your customers, clients or
principals, as applicable, that this prospectus is available online at the website addresses
above.
A. APPLICA TION FOR HONG KONG OFFER SHARES
1. Who Can Apply
You can apply for Hong Kong Offer Shares if you or the person(s) for whose benefit you
are applying for:
• are 18 years of age or older; and
• have a Hong Kong address (for the HK eIPO White Form service only).
Unless permitted by the Listing Rules or a waiver and/or consent has been granted by the
Stock Exchange to us, you cannot apply for any Hong Kong Offer Shares if you or the
person(s) for whose benefit you are applying for:
• are an existing Shareholder or close associate;
• are a Director or any of his/her close associates;
HOW TO APPLY FOR HONG KONG OFFER SHARES
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2. Application Channels
The Hong Kong Public Offering period will begin at 9:00 a.m. on Friday, June 7,
2024 and end at 12:00 noon on Thursday, June 13, 2024 (Hong Kong time).
To apply for Hong Kong Offer Shares, you may use one of the following application
channels:
Application
Channel Platform Target Investors Application Time
HK eIPO White
Form service
(1) the IPO App , which can be
downloaded by searching “ IPO
App” in App Store or Google Play
or downloaded at
www.hkeipo.hk/IPOApp or
www.tricorglobal.com/IPOApp
(2) the designated website
www.hkeipo.hk
Investors who would like to receive a
physical Share certificate. Hong
Kong Offer Shares successfully
applied for will be allotted and
issued in your own name.
From 9:00 a.m. on Friday,
June 7, 2024 to
11:30 a.m. on Thursday, June
13, 2024, Hong Kong time.
The latest time for completing
full payment of application
monies will be 12:00 noon on
Thursday, June 13, 2024,
Hong Kong time.
HKSCC EIPO
channel
Your broker or custodian who is a
HKSCC Participant will submit an
EIPO application on your behalf
through HKSCC’s FINI system in
accordance with your instruction
Investors who would not like to
receive a physical Share certificate.
Hong Kong Offer Shares
successfully applied for will be
allotted and issued in the name of
HKSCC Nominees, deposited
directly into CCASS and credited to
your designated HKSCC
Participant’s stock account.
Contact your broker or
custodian for the earliest and
latest time for giving such
instructions, as this may vary
by broker or custodian.
The HK eIPO White Form service and the HKSCC EIPO channel are facilities subject
to capacity limitations and potential service interruptions and you are advised not to wait until
the last day of the application period to apply for Hong Kong Offer Shares.
For those applying through the HK eIPO White Form service, once you complete
payment in respect of any application instructions given by you or for your benefit through the
HK eIPO White Form service to make an application for Hong Kong Offer Shares, an actual
application shall be deemed to have been made. For the avoidance of doubt, giving an
application instruction under the HK eIPO White Form service more than once and obtaining
different payment reference numbers without effecting full payment in respect of a particular
reference number will not constitute an actual application.
If you apply through the HK eIPO White Form service, you authorize the HK eIPO
White Form Service Provider to apply on the terms and conditions in this prospectus, as
supplemented and amended by the terms and conditions of the HK eIPO White Form service.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 359 ---
By instructing your broker or custodian to apply for the Hong Kong Offer Shares on your
behalf through the HKSCC EIPO Channel, you (and, if you are joint applicants, each of you
jointly and severally) are deemed to have instructed and authorized HKSCC to cause HKSCC
Nominees (acting as nominee for the relevant HKSCC Participants) to apply for Hong Kong
Offer Shares on your behalf and to do on your behalf all the things stated in this prospectus
and any supplement to it.
For those applying through HKSCC EIPO channel, an actual application will be deemed
to have made for any application instructions given by you or for your benefit to HKSCC (in
which case an application will be made by HKSCC Nominees on your behalf) provided such
application instruction has not been withdrawn or otherwise invalidated before the closing
time of the Hong Kong Public Offering.
HKSCC Nominees will only be acting as a nominee for you and neither HKSCC nor
HKSCC Nominees shall be liable to you or any other person in respect of any actions taken by
HKSCC or HKSCC Nominees on your behalf to apply for Hong Kong Offer Shares or for any
breach of the terms and conditions of this prospectus.
3. Information Required to Apply
You must provide the following information with your application:
For Individual Applicants For Corporate Applicants
• Full name(s) (2) as shown on your
identity document
• Identity document’s issuing country
or jurisdiction
• Identity document type, with order
of priority:
i. HKID card; or
ii. National identification
document; or
iii. Passport; and
• Identity document number
• Full name(s)
(2) as shown on your
identity document
• Identity document’s issuing country
or jurisdiction
• Identity document type, with order
of priority:
i. LEI registration document; or
ii. Certificate of incorporation; or
iii. Business registration certificate;
or
iv. Other equivalent document; and
• Identity document number
Notes:
(1) If you are applying through the HK eIPO White Form service, you are required to provide a valid
e-mail address, a contact telephone number and a Hong Kong Address. You are also required to declare
that the identity information provided by you follows the requirements as described in Note 2 below. In
particular, where you cannot provide a HKID number, you must confirm that you do not hold a HKID
card. The number of joint applicants may not exceed four. If you are a firm, the applicant must be in the
individual members’ names.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 360 ---
(2) The applicant’s full name as shown on their identity document must be used. If an applicant’s identity
document contains both an English and Chinese name, both English and Chinese names must be used.
Otherwise, either English or Chinese names will be accepted. The order of priority of the applicant’s
identity document type must be strictly followed and where an individual applicant has a valid HKID
card, the HKID number must be used when making an application to subscribe for shares in a public
offer. Similarly for corporate applicants, a LEI number must be used if an entity has a LEI certificate.
(3) If the applicant is a trustee, the client identification data (“ CID”) of the trustee, as set out above, will be
required. If the applicant is an investment fund (i.e. a collective investment scheme, or CIS), the CID of
the asset management company or the individual fund, as appropriate, which has opened a trading
account with the broker will be required, as above.
(4) The maximum number of joint account holders on FINI is capped at 4
1 in accordance with market
practice.
(5) If you are applying as a nominee, you must provide: (i) the full name (as shown on the identity
document), the identity document’s issuing country or jurisdiction, the identity document type; and (ii),
the identity document number, for each of the beneficial owners or, in the case(s) of joint beneficial
owners, for each joint beneficial owner. If you do not include this information, the application will be
treated as being made for your benefit.
(6) If you are applying as an unlisted company and (i) the principal business of that company is dealing in
securities; and (ii) you exercise statutory control over that company, then the application will be treated
as being for your benefit and you should provide the required information in your application as stated
above.
“Unlisted company” means a company with no equity securities listed on the Stock Exchange or any
other stock exchange.
“Statutory control” means you:
• control the composition of the board of directors of the company;
• control more than half of the voting power of the company; or
• hold more than half of the issued share capital of the company (not counting any part of it which
carries no right to participate beyond a specified amount in a distribution of either profits or
capital).
For those applying through HKSCC EIPO channel, and making an application under a
power of attorney, we and the Sole Overall Coordinator, as our agent, may accept it at our
discretion and on any conditions we think fit, including evidence of the attorney’s authority.
1 Subject to change, if the Company’s Articles of Incorporation and applicable company law prescribe a lower
cap.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 361 ---
Failing to provide any required information may result in your application being
rejected.
4. Permitted Number of Hong Kong Offer Shares for Application
Board lot size : 500
Permitted number of
Hong Kong Offer
Shares for application
and amount payable
on application/
successful allotment
: Hong Kong Offer Shares are available for application
in specified board lot sizes only. Please refer to the
amount payable associated with each specified board
lot size in the table below.
The maximum Offer Price is HK$8.50 per Share.
If you are applying through the HKSCC EIPO
channel, you are required to pre-fund your
application based on the amount specified by your
broker or custodian, as determined based on the
applicable laws and regulations in Hong Kong.
By instructing your broker or custodian to apply for
the Hong Kong Offer Shares on your behalf through
the HKSCC EIPO Channel, you (and, if you are joint
applicants, each of you jointly and severally) are
deemed to have instructed and authorized HKSCC to
cause HKSCC Nominees (acting as nominee for the
relevant HKSCC Participants) to arrange payment of
the final Offer Price, brokerage, SFC transaction
levy, the Stock Exchange trading fee and the AFRC
transaction levy by debiting the relevant nominee
bank account at the Designated Bank for your broker
or custodian.
If you are applying through the HK eIPO White
Form service, you may refer to the table below for
the amount payable for the number of Shares you
have selected. You must pay the respective maximum
amount payable on application in full upon
application for Hong Kong Offer Shares.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 362 ---
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2) on
application/
successful
allotment
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2)
on application/
successful
allotment
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2)
on application/
successful
allotment
No. of
Hong Kong
Offer Shares
applied for
Maximum
amount
payable (2)
on application/
successful
allotment
HK$ HK$ HK$ HK$
500 4,292.86 7,000 60,100.06 50,000 429,286.13 400,000 3,434,289.00
1,000 8,585.72 8,000 68,685.78 60,000 515,143.36 450,000 3,863,575.13
1,500 12,878.58 9,000 77,271.50 70,000 601,000.58 500,000 4,292,861.26
2,000 17,171.45 10,000 85,857.23 80,000 686,857.80 600,000 5,151,433.50
2,500 21,464.30 15,000 128,785.83 90,000 772,715.03 700,000 6,010,005.76
3,000 25,757.17 20,000 171,714.46 100,000 858,572.26 800,000 6,868,578.00
3,500 30,050.02 25,000 214,643.07 150,000 1,287,858.38 915,000
(1) 7,855,936.09
4,000 34,342.89 30,000 257,571.68 200,000 1,717,144.50
4,500 38,635.75 35,000 300,500.29 250,000 2,146,430.63
5,000 42,928.61 40,000 343,428.90 300,000 2,575,716.76
6,000 51,514.34 45,000 386,357.51 350,000 3,005,002.88
(1) Maximum number of Hong Kong Offer Shares you may apply for and this is 50% of the Hong Kong
Offer Shares initially offered.
(2) The amount payable is inclusive of brokerage, SFC transaction levy, the Stock Exchange trading fee and
AFRC transaction levy. If your application is successful, brokerage will be paid to the Exchange
Participants (as defined in the Listing Rules) or to the HK eIPO White Form Service Provider (for
applications made through the application channel of the HK eIPO White Form Service Provider)
while the SFC transaction levy, the Stock Exchange trading fee and the AFRC transaction levy will be
paid to the SFC, the Stock Exchange and the AFRC, respectively.
5. Multiple Applications Prohibited
You or your joint applicant(s) shall not make more than one application for your own
benefit, except where you are a nominee and provide the information in your application as
required under the paragraph headed “– A. Applications for Hong Kong Offer Shares –
3. Information Required to Apply” in this section. If you are suspected of submitting or cause
to submit more than one application, all of your applications will be rejected.
Multiple applications made either through (i) the HK eIPO White Form service, (ii)
HKSCC EIPO channel, or (iii) both channels concurrently are prohibited and will be rejected.
If you have made an application through the HK eIPO White Form service or HKSCC EIPO
channel, you or the person(s) for whose benefit you have made the application shall not apply
for any Hong Kong Offer Shares.
The Hong Kong Share Registrar would record all applications into its system and identify
suspected multiple applications with identical names and identification document numbers
according to the Best Practice Note on Treatment of Multiple/Suspected Multiple
Applications (“Best Practice Note”) issued by the Federation of Share Registrars Limited.
Since applications are subject to personal information collection statements,
identification document numbers displayed are redacted.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 363 ---
6. Terms and Conditions of An Application
By applying for Hong Kong Offer Shares through the HK eIPO White Form service or
HKSCC EIPO channel, you (or as the case may be, HKSCC Nominees will do the following
things on your behalf):
(i) undertake to execute all relevant documents and instruct and authorise us and/or the
Sole Overall Coordinator, as our agents, to execute any documents for you and to do
on your behalf all things necessary to register any Hong Kong Offer Shares
allocated to you in your name or in the name of HKSCC Nominees as required by
the Articles of Association, and (if you are applying through the HKSCC EIPO
channel) to deposit the allotted Hong Kong Offer Shares directly into CCASS for
the credit of your designated HKSCC Participant’s stock account on your behalf;
(ii) confirm that you have read and understand the terms and conditions and application
procedures set out in this prospectus and the IPO App or designated website of the
HK eIPO White Form service (or as the case may be, the agreement you entered
into with your broker or custodian), and agree to be bound by them;
(iii) (if you are applying through the HKSCC EIPO channel) agree to the arrangements,
undertakings and warranties under the participant agreement between your broker
or custodian and HKSCC and observe the General Rules of HKSCC and the HKSCC
Operational Procedures for giving application instructions to apply for Hong Kong
Offer Shares;
(iv) confirm that you are aware of the restrictions on offers and sales of shares set out in
this prospectus and they do not apply to you, or the person(s) for whose benefit you
have made the application;
(v) confirm that you have read this prospectus and any supplement to it and have relied
only on the information and representations contained therein in making your
application (or as the case may be, causing your application to be made) and will not
rely on any other information or representations;
(vi) agree that the Relevant Persons
2, the Hong Kong Share Registrar and HKSCC will
not be liable for any information and representations not in this prospectus and any
supplement to it;
(vii) agree to disclose the details of your application and your personal data and any other
personal data which may be required about you and the person(s) for whose benefit
you have made the application to us, the Relevant Persons, the Hong Kong Share
Registrar, HKSCC, HKSCC Nominees, the Stock Exchange, the SFC and any other
statutory regulatory or governmental bodies or otherwise as required by laws, rules
or regulations, for the purposes under the paragraph headed “– G. Personal Data –
3. Purposes and 4. Transfer of personal data” in this section;
2 For the purpose of this prospectus, Relevant Persons would include the Sole Sponsor, the Sole Overall
Coordinator, the Sole Global Coordinator, the Joint Bookrunners, the Joint Lead Managers, the Underwriters,
any of their or the Company’s respective directors, officers, employees, partners, agents, advisers and any
other parties involved in the Global Offering.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 364 ---
(viii) agree (without prejudice to any other rights which you may have once your
application (or as the case may be, HKSCC Nominees’ application) has been
accepted) that you will not rescind it because of an innocent misrepresentation;
(ix) agree that subject to Section 44A(6) of the Companies (Winding Up and
Miscellaneous Provisions) Ordinance, any application made by you or HKSCC
Nominees on your behalf cannot be revoked once it is accepted, which will be
evidenced by the notification of the result of the ballot by the Hong Kong Share
Registrar by way of publication of the results at the time and in the manner as
specified in the paragraph headed “– B. Publication of Results” in this section;
agree that once any application made by you or HKSCC Nominees on your behalf is
accepted, the application cannot be revoked, and that acceptance of the application
will be evidenced by the notification of the result of the ballot by the Hong Kong
Share Registrar;
(x) confirm that you are aware of the situations specified in the paragraph headed
“– C. Circumstances In Which You Will Not Be Allocated Hong Kong Offer Shares”
in this section;
(xi) agree that your application or HKSCC Nominees’ application, any acceptance of it
and the resulting contract will be governed by and construed in accordance with the
laws of Hong Kong;
(xii) agree to comply with the Companies Ordinance, the Companies (Winding Up and
Miscellaneous Provisions) Ordinance, the Articles of Association and laws of any
place outside Hong Kong that apply to your application and that neither we nor the
Relevant Persons will breach any law inside and/ or outside Hong Kong as a result of
the acceptance of your offer to purchase, or any action arising from your rights and
obligations under the terms and conditions contained in this prospectus;
(xiii) confirm that (a) your application or HKSCC Nominees’ application on your behalf
is not financed directly or indirectly by the Company, any of the directors, chief
executives, substantial Shareholder(s) or existing shareholder(s) of the Company or
any of its subsidiaries or any of their respective close associates; and (b) you are not
accustomed or will not be accustomed to taking instructions from the Company, any
of the directors, chief executives, substantial shareholder(s) or existing
shareholder(s) of the Company or any of its subsidiaries or any of their respective
close associates in relation to the acquisition, disposal, voting or other disposition
of the Shares registered in your name or otherwise held by you;
(xiv) warrant that the information you have provided is true and accurate;
(xv) confirm that you understand that we and the Sole Overall Coordinator will rely on
your declarations and representations in deciding whether or not to allocate any
Hong Kong Offer Shares to you and that you may be prosecuted for making a false
declaration;
(xvi) agree to accept Hong Kong Offer Shares applied for or any lesser number allocated
to you under the application;
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 365 ---
(xvii) declare and represent that this is the only application made and the only application
intended by you to be made to benefit you or the person for whose benefit you are
applying;
(xviii) (if the application is made for your own benefit) warrant that no other application
has been or will be made for your benefit by giving electronic application
instructions to HKSCC directly or indirectly or through the application channel of
the HK eIPO White Form Service Provider or by any one as your agent or by any
other person; and
(xix) (if you are making the application as an agent for the benefit of another person)
warrant that (1) no other application has been or will be made by you as agent for or
for the benefit of that person or by that person or by any other person as agent for
that person by giving electronic application instructions to HKSCC and the HK
eIPO White Form Service Provider and (2) you have due authority to give
electronic application instructions on behalf of that other person as its agent.
B. PUBLICA TION OF RESULTS
Results of Allocation
You can check whether you are successfully allocated any Hong Kong Offer Shares
through:
Platform Date/ Time
Applying through the HK eIPO White Form service or HKSCC EIPO channel :
IPO APP and
Website
from the “IPO Results” function in the IPO App and the
designated results of allocation website at
www.tricor .com.hk/ipo/result or
www.hkeipo.hk/IPOResult with a “search by ID”
function.
The full list of (i) wholly or partially successful applicants
using the HK eIPO White Form service and HKSCC
EIPO channel, and (ii) the number of Hong Kong Offer
Shares conditionally allotted to them, among other things,
will be displayed on the designated results of allocation
website at www.tricor .com.hk/ipo/result or
www.hkeipo.hk/IPOResult
24 hours, from 11:00 p.m. on
Monday, June 17, 2024 to
12:00 midnight on Sunday,
June 23, 2024 (Hong Kong
time)
The Stock Exchange’s website at www.hkexnews.hk and
our website at www.chinaorganic.com which will
provide links to the above mentioned websites of the
Hong Kong Share Registrar.
No later than 11:00 p.m. on
Monday, June 17, 2024
(Hong Kong time).
HOW TO APPLY FOR HONG KONG OFFER SHARES
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Platform Date/ Time
Telephone +852 3691 8488 – the allocation results telephone enquiry
line provided by the Hong Kong Share Registrar
between 9:00 a.m. and
6:00 p.m. from Tuesday, June
18, 2024, to Friday, June 21,
2024 (Hong Kong time) on a
business day
For those applying through HKSCC EIPO channel, you may also check with your broker
or custodian from 6:00 p.m. on Friday, June 14, 2024 (Hong Kong time).
HKSCC Participants can log into FINI and review the allotment result from 6:00 p.m. on
Friday, June 14, 2024 (Hong Kong time) on a 24-hour basis and should report any
discrepancies on allotments to HKSCC as soon as practicable.
Allocation Announcement
We expect to announce the results of the final Offer Price, the level of indications of
interest in the Global Offering, the level of applications in the Hong Kong Public Offer and the
basis of allocations of Hong Kong Offer Shares on the Stock Exchange’s website at
www.hkexnews.hk and our website at www.chinaorganic.com by no later than 11:00 p.m. on
Monday, June 17, 2024 (Hong Kong time).
C. CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOCA TED HONG KONG
OFFER SHARES
You should note the following situations in which Hong Kong Offer Shares will not be
allocated to you or the person(s) for whose benefit you are applying for:
1. If your application is revoked:
Your application or the application made by HKSCC Nominees on your behalf may be
revoked pursuant to Section 44A(6) of the Companies (Winding Up and Miscellaneous
Provisions) Ordinance.
2. If we or our agents exercise our discretion to reject your application:
We, the Sole Overall Coordinator, the Hong Kong Share Registrar and their respective
agents and nominees have full discretion to reject or accept any application, or to accept only
part of any application, without giving any reasons.
3. If the allocation of Hong Kong Offer Shares is void:
The allocation of Hong Kong Offer Shares will be void if the Stock Exchange does not
grant permission to list the Shares either:
• within three weeks from the closing date of the application lists; or
• within a longer period of up to six weeks if the Stock Exchange notifies us of that
longer period within three weeks of the closing date of the application lists.
HOW TO APPLY FOR HONG KONG OFFER SHARES
– 358 –


--- page 367 ---
4. If:
• you make multiple applications or suspected multiple applications. You may refer to
the paragraph headed “– A. Applications for Hong Kong Offer Shares – 5. Multiple
Applications Prohibited” in this section on what constitutes multiple applications;
• your application instruction is incomplete;
• your payment (or confirmation of funds, as the case may be) is not made correctly;
• the Underwriting Agreements do not become unconditional or are terminated;
• we or the Sole Overall Coordinator believe that by accepting your application, it or
we would violate applicable securities or other laws, rules or regulations.
5. If there is money settlement failure for allotted Shares:
Based on the arrangements between HKSCC Participants and HKSCC, HKSCC
Participants will only be required to hold sufficient application funds on deposit with their
Designated Bank before balloting. After balloting of Hong Kong Offer Shares, the banks will
collect the portion of these funds required to settle each HKSCC Participant’s actual Hong
Kong Offer Share allotment from their Designated Bank.
There is a risk of money settlement failure. In the extreme event of money settlement
failure by a HKSCC Participant (or its Designated Bank), who is acting on your behalf in
settling payment for your allotted shares, HKSCC will contact the defaulting HKSCC
Participant and its Designated Bank to determine the cause of failure and request such
defaulting HKSCC Participant to rectify or procure to rectify the failure.
However, if it is determined that such settlement obligation cannot be met, the affected
Hong Kong Offer Shares will be reallocated to the International Offering. Hong Kong Offer
Shares applied by you through the broker or custodian may be affected to the extent of the
settlement failure. In the extreme case, you will not be allocated any Hong Kong Offer Shares
due to the money settlement failure by such HKSCC Participant. None of us, the Relevant
Persons, the Hong Kong Share Registrar and HKSCC is or will be liable if Hong Kong Offer
Shares are not allocated to you due to the money settlement failure.
D. DESPATCH/COLLECTION OF SHARE CERTIFICATES AND REFUND OF
APPLICA TION MONIES
You will receive one Share certificate for all Hong Kong Offer Shares allotted to you
under the Hong Kong Public Offering (except pursuant to applications made through the
HKSCC EIPO channel where the Share certificates will be deposited into CCASS as described
below).
No temporary document of title will be issued in respect of the Shares. No receipt will be
issued for sums paid on application.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 368 ---
Share certificates will only become valid at 8:00 a.m. on Tuesday, June 18, 2024 (Hong
Kong time), provided that the Global Offering has become unconditional and the right of
termination described in the section headed “Underwriting” has not been exercised. Investors
who trade Shares prior to the receipt of Share certificates or the Share certificates becoming
valid do so entirely at their own risk.
The right is reserved to retain any Share certificate(s) and (if applicable) any surplus
application monies pending clearance of application monies.
The following sets out the relevant procedures and time:
HK eIPO White Form service HKSCC EIPO channel
Despatch/collection of Share certificate 3
For application of 500,000
Hong Kong Offer Shares or
more
Collection in person at at the Hong Kong Share
Registrar, Tricor Investor Services Limited,
17/F, Far East Finance Centre, 16 Harcourt
Road, Hong Kong
Time: from 9:00 a.m. to 1:00 p.m. on Tuesday,
June 18, 2024 (Hong Kong time)
If you are an individual, you must not authorise
any other person to collect for you. If you are
a corporate applicant, your authorised
representative must bear a letter of
authorization from your corporation stamped
with your corporation’s chop.
Both individuals and authorised representatives
must produce, at the time of collection,
evidence of identity acceptable to the Hong
Kong Share Registrar.
Note: If you do not collect your Share
certificate(s) personally within the time
above, it/they will be sent to the address
specified in your application instructions by
ordinary post at your own risk.
Share certificate(s) will be
issued in the name of
HKSCC Nominees,
deposited into CCASS
and credited to your
designated HKSCC
Participant’s stock
account.
No action by you is
required.
3 Except in the event of a tropical cyclone warning signal number 8 or above, a black rainstorm warning and/or
an “extreme conditions” announcement issued after a super typhoon in force in Hong Kong in the morning on
Monday, June 17, 2024 rendering it impossible for the relevant Share certificates to be dispatched to HKSCC
in a timely manner, the Company shall procure the Share Registrar to arrange for delivery of the supporting
documents and Share certificates in accordance with the contingency arrangements as agreed between them.
You may refer to “– E. Severe Weather Arrangements” in this section.
HOW TO APPLY FOR HONG KONG OFFER SHARES
– 360 –


--- page 369 ---
HK eIPO White Form service HKSCC EIPO channel
For application of less than
500,000 Hong Kong Offer
Shares
Your Share certificate(s) will be sent to the
address specified in your application
instructions by ordinary post at your own
risk.
Date: Monday, June 17, 2024
Refund mechanism for surplus application monies paid by you
Date Tuesday, June 18, 2024 Subject to the arrangement
between you and your
broker or custodian
Responsible party Hong Kong Share Registrar Your broker or custodian
Application monies paid through
single bank account
e-Auto Refund payment instructions to your
designated bank account
Your broker or custodian
will arrange refund to
your designated bank
account subject to the
arrangement between you
and it.
Application monies paid through
multiple bank accounts
Refund cheque(s) will be despatched to the
address as specified in your application
instructions by ordinary post at your own
risk.
E. SEVERE WEA THER ARRANGEMENTS
The Opening and Closing of the Application Lists
The application lists will not open or close on Thursday, June 13, 2024 if, there is:
• a tropical cyclone warning signal number 8 or above;
• a black rainstorm warning; and/or
• Extreme Conditions,
(collectively, “ Severe Weather Signals ”),
in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Thursday, June 13,
2024.
Instead they will open between 11:45 a.m. and 12:00 noon and/or close at 12:00 noon on
the next business day which does not have Severe Weather Signals in force at any time
between 9:00 a.m. and 12:00 noon.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 370 ---
Prospective investors should be aware that a postponement of the opening/closing of the
application lists may result in a delay in the listing date. Should there be any changes to the
dates mentioned in the section headed “Expected Timetable” in this prospectus, an
announcement will be made and published on the Stock Exchange’s website at
www.hkexnews.hk and our website at www.chinaorganic.com of the revised timetable.
If a Severe Weather Signal is hoisted on Monday, June 17, 2024, the Hong Kong Share
Registrar will make appropriate arrangements for the delivery of the Share certificates to the
CCASS Depository’s service counter so that they would be available for trading on Tuesday,
June 18, 2024.
If a Severe Weather Signal is hoisted on Monday, June 17, 2024, for application of less
than 500,000 Offer Shares, the despatch of physical Share certificates will be made by
ordinary post when the post office re-opens after the Severe Weather Signal is lowered or
cancelled (e.g. in the afternoon of Monday, June 17, 2024 or on Tuesday, June 18, 2024).
If a Severe Weather Signal is hoisted on Tuesday, June 18, 2024, for application of
500,000 Offer Shares or more, the physical Share certificates will be available for collection
in person at the Hong Kong Share Registrar’s office after the Severe Weather Signal is lowered
or cancelled (e.g. in the afternoon of Tuesday, June 18, 2024 or on Wednesday, June 19, 2024).
Prospective investors should be aware that if they choose to receive physical Share
certificates issued in their own name, there may be a delay in receiving the Share
certificates.
F . ADMISSION OF THE SHARES INTO CCASS
If the Stock Exchange grants the listing of, and permission to deal in, the Shares on the
Stock Exchange and we comply with the stock admission requirements of HKSCC, the Shares
will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in
CCASS with effect from the date of commencement of dealings in the Shares or any other date
HKSCC chooses. Settlement of transactions between Exchange Participants is required to
take place in CCASS on the second settlement day after any trading day.
All activities under CCASS are subject to the General Rules of HKSCC and HKSCC
Operational Procedures in effect from time to time.
All necessary arrangements have been made enabling the Shares to be admitted into
CCASS.
You should seek the advice of your broker or other professional advisor for details of the
settlement arrangement as such arrangements may affect your rights and interests.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 371 ---
G. PERSONAL DA TA
The following Personal Information Collection Statement applies to any personal data
collected and held by the Company, the Hong Kong Share Registrar, the receiving banks and
the Relevant Persons about you in the same way as it applies to personal data about applicants
other than HKSCC Nominees. This personal data may include client identifier(s) and your
identification information. By giving application instructions to HKSCC, you acknowledge
that you have read, understood and agree to all of the terms of the Personal Information
Collection Statement below.
1. Personal Information Collection Statement
This Personal Information Collection Statement informs the applicant for, and holder of,
Hong Kong Offer Shares, of the policies and practices of the Company and the Hong Kong
Share Registrar in relation to personal data and the Personal Data (Privacy) Ordinance
(Chapter 486 of the Laws of Hong Kong).
2. Reasons for the collection of your personal data
It is necessary for applicants and registered holders of Hong Kong Offer Shares to ensure
that personal data supplied to the Company or its agents and the Hong Kong Share Registrar is
accurate and up-to-date when applying for Hong Kong Offer Shares or transferring Hong
Kong Offer Shares into or out of their names or in procuring the services of the Hong Kong
Share Registrar.
Failure to supply the requested data or supplying inaccurate data may result in your
application for Hong Kong Offer Shares being rejected, or in the delay or the inability of the
Company or the Hong Kong Share Registrar to effect transfers or otherwise render their
services. It may also prevent or delay registration or transfers of Hong Kong Offer Shares
which you have successfully applied for and/or the despatch of Share certificate(s) to which
you are entitled.
It is important that applicants for and holders of Hong Kong Offer Shares inform the
Company and the Hong Kong Share Registrar immediately of any inaccuracies in the personal
data supplied.
3. Purposes
Your personal data may be used, held, processed, and/or stored (by whatever means) for
the following purposes:
• processing your application and refund cheque and e-Auto Refund payment
instruction(s), where applicable, verification of compliance with the terms and
application procedures set out in this prospectus and announcing results of
allocation of Hong Kong Offer Shares;
• compliance with applicable laws and regulations in Hong Kong and elsewhere;
• registering new issues or transfers into or out of the names of the holders of the
Shares including, where applicable, HKSCC Nominees;
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 372 ---
• maintaining or updating the register of members of the Company;
• verifying identities of applicants for and holders of the Shares and identifying any
duplicate applications for the Shares;
• facilitating Hong Kong Offer Shares balloting;
• establishing benefit entitlements of holders of the Shares, such as dividends, rights
issues, bonus issues, etc.;
• distributing communications from the Company and its subsidiaries;
• compiling statistical information and profiles of the holder of the Shares;
• disclosing relevant information to facilitate claims on entitlements; and
• any other incidental or associated purposes relating to the above and/or to enable the
Company and the Hong Kong Share Registrar to discharge their obligations to
applicants and holders of the Shares and/or regulators and/or any other purposes to
which applicants and holders of the Shares may from time to time agree.
4. Transfer of personal data
Personal data held by the Company and the Hong Kong Share Registrar relating to the
applicants for and holders of Hong Kong Offer Shares will be kept confidential but the
Company and the Hong Kong Share Registrar may, to the extent necessary for achieving any
of the above purposes, disclose, obtain or transfer (whether within or outside Hong Kong) the
personal data to, from or with any of the following:
• the Company’s appointed agents such as financial advisers, receiving banks and
overseas principal share registrar;
• HKSCC or HKSCC Nominees, who will use the personal data and may transfer the
personal data to the Hong Kong Share Registrar, in each case for the purposes of
providing its services or facilities or performing its functions in accordance with its
rules or procedures and operating FINI and CCASS (including where applicants for
the Hong Kong Offer Shares request a deposit into CCASS);
• any agents, contractors or third-party service providers who offer administrative,
telecommunications, computer, payment or other services to the Company or the
Hong Kong Share Registrar in connection with their respective business operation;
• the Stock Exchange, the SFC and any other statutory regulatory or governmental
bodies or otherwise as required by laws, rules or regulations, including for the
purpose of the Stock Exchange’s administration of the Listing Rules and the SFC’s
performance of its statutory functions; and
• any persons or institutions with which the holders of Hong Kong Offer Shares have
or propose to have dealings, such as their bankers, solicitors, accountants or brokers
etc.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 373 ---
5. Retention of personal data
The Company and the Hong Kong Share Registrar will keep the personal data of the
applicants and holders of Hong Kong Offer Shares for as long as necessary to fulfil the
purposes for which the personal data were collected. Personal data which is no longer required
will be destroyed or dealt with in accordance with the Personal Data (Privacy) Ordinance
(Chapter 486 of the Laws of Hong Kong).
6. Access to and correction of personal data
Applicants for and holders of Hong Kong Offer Shares have the right to ascertain whether
the Company or the Hong Kong Share Registrar hold their personal data, to obtain a copy of
that data, and to correct any data that is inaccurate. The Company and the Hong Kong Share
Registrar have the right to charge a reasonable fee for the processing of such requests. All
requests for access to data or correction of data should be addressed to the Company and the
Hong Kong Share Registrar, at their registered address disclosed in the section headed
“Corporate information” in this prospectus or as notified from time to time, for the attention
of the company secretary, or the Hong Kong Share Registrar for the attention of the privacy
compliance officer.
HOW TO APPLY FOR HONG KONG OFFER SHARES
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--- page 374 ---
The following is the text of a report, prepared for the purpose of incorporation in this
prospectus, received from the independent reporting accountants, Ernst & Young, Certified
Public Accountants, Hong Kong.
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Ernst & Young
27/F, One Taikoo Place
979 King’s Road
Quarry Bay, Hong Kong
Tel ཥ༑: +852 2846 9888
Fax ෂॆ: +852 2868 4432
ey.com
ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMA TION TO THE
DIRECTORS OF WUHAN YOUJI HOLDINGS LTD. AND BOCOM INTERNA TIONAL
(ASIA) LIMITED
INTRODUCTION
We report on the historical financial information of Wuhan Youji Holdings Ltd. (the
“Company”, and previously known as Centelligence Holdings Ltd.) and its subsidiaries
(together, the “Group”) set out on pages I-3 to I-76, which comprises the consolidated
statements of profit or loss and other comprehensive income, statements of changes in equity
and statements of cash flows of the Group for each of the years ended December 31, 2021,
2022 and 2023 (the “Relevant Periods”), and the consolidated statements of financial position
of the Group and the statements of financial position of the Company as at December 31,
2021, 2022 and 2023 and material accounting policy information and other explanatory
information (together, the “Historical Financial Information”). The Historical Financial
Information set out on pages I-3 to I-76 forms an integral part of this report, which has been
prepared for inclusion in the prospectus of the Company dated June 7, 2024 (the “Prospectus”)
in connection with the initial listing of the shares of the Company on the Main Board of The
Stock Exchange of Hong Kong Limited (the “Stock Exchange”).
DIRECTORS’ RESPONSIBILITY FOR THE HISTORICAL FINANCIAL
INFORMA TION
The directors of the Company are responsible for the preparation of the Historical
Financial Information that gives a true and fair view in accordance with the basis of
preparation set out in note 2.1 to the Historical Financial Information, and for such internal
control as the directors determine is necessary to enable the preparation of the Historical
Financial Information that is free from material misstatement, whether due to fraud or error.
REPORTING ACCOUNTANTS’ RESPONSIBILITY
Our responsibility is to express an opinion on the Historical Financial Information and to
report our opinion to you. We conducted our work in accordance with Hong Kong Standard on
Investment Circular Reporting Engagements 200 Accountants’ Reports on Historical
Financial Information in Investment Circulars issued by the Hong Kong Institute of Certified
Public Accountants (“HKICPA”). This standard requires that we comply with ethical
standards and plan and perform our work to obtain reasonable assurance about whether the
Historical Financial Information is free from material misstatement.
APPENDIX I ACCOUNTANTS’ REPORT
– I-1 –


--- page 375 ---
Our work involved performing procedures to obtain evidence about the amounts and
disclosures in the Historical Financial Information. The procedures selected depend on the
reporting accountants’ judgment, including the assessment of risks of material misstatement
of the Historical Financial Information, whether due to fraud or error. In making those risk
assessments, the reporting accountants consider internal control relevant to the entity’s
preparation of the Historical Financial Information that gives a true and fair view in
accordance with the basis of preparation set out in note 2.1 to the Historical Financial
Information, in order to design procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Our work also included evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by the directors, as well as evaluating the
overall presentation of the Historical Financial Information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
OPINION
In our opinion, the Historical Financial Information gives, for the purposes of the
accountants’ report, a true and fair view of the financial position of the Group and the
Company as at December 31, 2021, 2022 and 2023 and of the financial performance and cash
flows of the Group for each of the Relevant Periods in accordance with the basis of
preparation set out in note 2.1 to the Historical Financial Information.
REPORT ON MATTERS UNDER THE RULES GOVERNING THE LISTING OF
SECURITIES ON THE STOCK EXCHANGE AND THE COMPANIES (WINDING UP
AND MISCELLANEOUS PROVISIONS) ORDINANCE
Adjustments
In preparing the Historical Financial Information, no adjustments to the Underlying
Financial Statements as defined on page 3 have been made.
Dividends
We refer to note 11 to the Historical Financial Information which contains information
about dividends declared and paid by the Company in respect of the Relevant Periods.
No historical financial statements for the Company
As at the date of this report, no statutory financial statements have been prepared for the
Company since its date of incorporation.
Ernst & Y oung
Certified Public Accountants
Hong Kong
June 7, 2024
APPENDIX I ACCOUNTANTS’ REPORT
– I-2 –


--- page 376 ---
I. HISTORICAL FINANCIAL INFORMA TION
Preparation of the Historical Financial Information
Set out below is the Historical Financial Information which forms an integral part of this
accountants’ report.
The financial statements of the Group for the Relevant Periods, on which the Historical
Financial Information is based, were audited by Ernst & Young in accordance with Hong Kong
Standards on Auditing issued by the HKICPA (the “Underlying Financial Statements”).
The Historical Financial Information is presented in Renminbi (“RMB”) and all values
are rounded to the nearest thousand (RMB’000) except when otherwise indicated.
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
Y ear ended December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
REVENUE 5 2,789,477 3,133,836 2,677,103
Cost of sales (2,150,355) (2,434,558) (2,347,338)
Gross profit 639,122 699,278 329,765
Other income and gains 5 39,901 34,514 25,505
Selling and distribution
expenses (19,820) (24,009) (20,717)
Administrative expenses (100,457) (116,498) (95,416)
Research and development
expenses (110,831) (133,001) (99,959)
Other expenses (22,753) (5,366) (4,798)
Finance costs 7 (34,066) (31,026) (32,281)
Share of profits and losses of:
Joint venture 16 (6,010) (8,044) (11,834)
Associates 17 8,450 11,842 4,473
PROFIT BEFORE TAX 6 393,536 427,690 94,738
Income tax expense 10 (84,399) (87,220) (21,836)
PROFIT FOR THE YEAR 309,137 340,470 72,902
APPENDIX I ACCOUNTANTS’ REPORT
– I-3 –


--- page 377 ---
Y ear ended December 31,
2021 2022 2023
Note RMB’000 RMB’000 RMB’000
Profit attributable to owners of
the parent 309,137 340,470 72,902
OTHER COMPREHENSIVE
INCOME/(LOSS)
Other comprehensive
income/(loss) that may be
reclassified to profit or loss
in subsequent periods:
Exchange differences on
translation of foreign
operations (115) 693 189
OTHER COMPREHENSIVE
INCOME/(LOSS) FOR THE
YEAR, NET OF TAX (115) 693 189
TOTAL COMPREHENSIVE
INCOME FOR THE YEAR 309,022 341,163 73,091
Attributable to owners of
the parent 309,022 341,163 73,091
EARNINGS PER SHARE
ATTRIBUTABLE TO
ORDINARY EQUITY
HOLDERS OF THE
PARENT
Basic and diluted (RMB) 12 4.12 4.54 0.97
APPENDIX I ACCOUNTANTS’ REPORT
– I-4 –


--- page 378 ---
CONSOLIDA TED STA TEMENTS OF FINANCIAL POSITION
As at December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
NON-CURRENT ASSETS
Property, plant and equipment 13 914,604 979,143 1,020,081
Right-of-use assets 14 178,275 192,187 190,527
Other intangible assets 15 4,413 3,573 4,056
Investment in a joint venture 16 30,997 23,502 11,668
Investments in associates 17 25,655 33,306 24,272
Prepayments 21 28,630 60,740 32,704
Total non-current assets 1,182,574 1,292,451 1,283,308
CURRENT ASSETS
Inventories 19 305,621 320,481 285,333
Trade and bills receivables 20 234,358 326,979 296,314
Prepayments, deposits and
other receivables 21 1,094,852 69,301 145,367
Pledged deposits 23 49,504 64,675 40,127
Cash and cash equivalents 23 69,461 83,451 65,433
Total current assets 1,753,796 864,887 832,574
CURRENT LIABILITIES
Trade and bills payables 24 196,250 171,228 149,705
Other payables and accruals 25 263,173 362,086 372,971
Interest-bearing bank and other
borrowings 26 716,107 662,300 852,020
Lease liabilities 14 7,262 16,308 15,850
Income tax payable 45,511 6,766 32,108
Total current liabilities 1,228,303 1,218,688 1,422,654
NET CURRENT
ASSETS/(LIABILITIES) 525,493 (353,801) (590,080)
TOTAL ASSETS LESS CURRENT
LIABILITIES 1,708,067 938,650 693,228
APPENDIX I ACCOUNTANTS’ REPORT
– I-5 –


--- page 379 ---
As at December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
NON-CURRENT LIABILITIES
Interest-bearing bank borrowings 26 – 72,000 65,500
Government grants 27 39,950 49,026 45,740
Lease liabilities 14 23,091 30,527 11,740
Deferred tax liabilities 28 124,708 60,990 40,631
Total non-current liabilities 187,749 212,543 163,611
NET ASSETS 1,520,318 726,107 529,617
EQUITY
Equity attributable to owners of the
parent:
Share capital 29 339 48 48
Reserves 31 1,519,979 726,059 529,569
TOTAL EQUITY 1,520,318 726,107 529,617
APPENDIX I ACCOUNTANTS’ REPORT
– I-6 –


--- page 380 ---
CONSOLIDA TED STA TEMENTS OF CHANGES IN EQUITY
Y ear ended December 31, 2021
Attributable to owners of the parent
Share
capital
Merger
reserve
Other
reserves
Statutory
reserve
Retained
profits
Exchange
fluctuation
reserve
Total
equity
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
(note 29) (note 31) (note 31) (note 31)
At January 1, 2021 339 64,802 – 68,712 1,077,198 (174) 1,210,877
Profit for the year –––– 309,137 – 309,137
Other comprehensive
loss for the year:
Exchange differences
related to foreign
operations ––––– (115) (115)
Total comprehensive
income/(loss)
for the year –––– 309,137 (115) 309,022
Share award scheme
arrangements (note 30) – – 419 – – – 419
At December 31, 2021 339 64,802* 419* 68,712* 1,386,335* (289)* 1,520,318
Y ear ended December 31, 2022
Attributable to owners of the parent
Share
capital
Merger
reserve
Capital
reserve
Other
reserves
Statutory
reserve
Retained
profits
Exchange
fluctuation
reserve
Total
equity
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
(note 29) (note 31) (note 31) (note 31) (note 31)
At January 1, 2022 339 64,802 – 419 68,712 1,386,335 (289) 1,520,318
Profit for the year ––––– 340,470 – 340,470
Other comprehensive income for
the year:
Exchange differences related to
foreign operations –––––– 6 9 3 6 9 3
Total comprehensive income for
the year ––––– 340,470 693 341,163
Repurchase of shares (note 29) (339) – (32,670) –––– (33,009)
Issue of shares (note 29) 4 8–––––– 4 8
Dividend distributions (note 11) ––––– (1,102,832) – (1,102,832)
Share award scheme arrangements
(note 30) ––– 4 1 9––– 4 1 9
At December 31, 2022 48 64,802* (32,670)* 838* 68,712* 623,973 404* 726,107
APPENDIX I ACCOUNTANTS’ REPORT
– I-7 –


--- page 381 ---
Y ear ended December 31, 2023
Attributable to owners of the parent
Share
capital
Merger
reserve
Capital
reserve
Other
reserves
Statutory
reserve
Retained
profits
Exchange
fluctuation
reserve
Total
equity
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
(note 29) (note 31) (note 31) (note 31) (note 31)
At January 1, 2023 48 64,802 (32,670) 838 68,712 623,973 404 726,107
Profit for the year ––––– 72,902 – 72,902
Other comprehensive income
for the year:
Exchange differences related to
foreign operations –––––– 1 8 9 1 8 9
Total comprehensive income
for the year ––––– 72,092 189 73,091
Dividend distributions (note 11) ––––– (270,000) – (270,000)
Share award scheme arrangements
(note 30) ––– 4 1 9––– 4 1 9
At December 31, 2023 48 64,802* (32,670)* 1,257* 68,712* 426,875* 593* 529,617
* These reserve accounts comprise the consolidated reserves of RMB1,519,979,000, RMB726,059,000 and
RMB529,569,000 as at December 31, 2021, 2022 and 2023, respectively.
APPENDIX I ACCOUNTANTS’ REPORT
– I-8 –


--- page 382 ---
CONSOLIDA TED STA TEMENTS OF CASH FLOWS
Y ear ended December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
CASH FLOWS FROM
OPERATING ACTIVITIES
Profit before tax 393,536 427,690 94,738
Adjustments for:
Finance costs 7 34,066 31,026 32,281
Interest income 5 (19,295) (5,632) (3,310)
Depreciation of property, plant
and equipment 13 93,697 99,123 111,198
Depreciation of right-of-use
assets 14 9,743 18,592 19,809
Amortisation of other intangible
assets 15 1,015 963 978
Share award scheme expenses 30 419 419 419
Loss/(gain) on disposal of property,
plant and equipment and lease
modification 5, 6 15,174 271 (84)
Income from government grants
related to assets 5, 27 (3,230) (4,570) (5,353)
Share of loss of a joint venture 16 6,010 8,044 11,834
Share of profits of associates 17 (8,450) (11,842) (4,473)
Write-down of inventories 6 – – 1,764
Impairment/(reversal of
impairment) of trade receivables 20 184 314 (188)
Impairment of construction in
progress 13 – – 2,538
522,869 564,398 262,151
Decrease/(increase) in inventories (189,491) (14,860) 33,384
Increase in trade and bills
receivables (264,323) (205,084) (90,972)
Decrease/(increase) in prepayments,
deposits and other receivables (34,486) 36,886 (11,985)
Increase/(decrease) in contract
liabilities 19,345 (21,403) 7,677
Increase/(decrease) in trade
and bills payables 75,188 (24,882) (21,523)
Increase/(decrease) in other
payables and accruals 13,540 8,682 (6,604)
Cash generated from operations 142,642 343,737 172,128
Income taxes paid (18,409) (195,375) (11,599)
Net cash generated from operating
activities 124,233 148,362 160,529
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 383 ---
Y ear ended December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of items of property,
plant and equipment (51,315) (61,603) (34,341)
Investment in a fund – – (30,500)
Withdrawal of investment in a fund – – 20,000
Prepayment for leasehold land – (21,350) –
Additions to right-of-use assets 14 (51,258) (102) (646)
Additions to other intangible assets 15 – (123) (1,461)
Interest received from bank deposits 1,775 1,312 2,278
Loans to related parties 32(a)
36(b) (433,137) (53,845) –
Loans to a joint venture 36(b) – – (50,955)
Received from loans to related
parties 36(b) 286,466 171,464 205
Proceeds from disposal of property,
plant
and equipment 59 4 –
Dividend received from associates 17 4,256 – 13,522
Receipt of government grants for
acquisition of assets 27 6,430 13,646 2,067
Proceeds from liquidation of an
associate 17 – 4,501 –
Net cash flows (used in)/from
investing activities (236,724) 53,904 (79,831)
CASH FLOWS FROM
FINANCING ACTIVITIES
Payments for transaction costs for
the issue of shares (2,016) (4,790) (2,982)
Interest paid 32(b) (32,379) (28,630) (30,356)
Proceeds from interest-bearing bank
loans and other borrowings 937,837 850,147 989,020
Repayment of bank loans and other
borrowings (780,073) (831,954) (805,800)
Lease payments (including related
interest) 14 (8,123) (18,316) (17,242)
Placement of pledged bank deposits (109,532) (84,695) (56,780)
Withdrawal of pledged bank
deposits 133,999 69,524 81,328
Dividends paid – (103,700) (256,093)
Payment for the share repurchase 29 – (36,555) –
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 384 ---
Y ear ended December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
Net cash flows (used in)/from
financing activities 139,713 (188,969) (98,905)
NET INCREASE IN CASH AND
CASH EQUIV ALENTS 27,222 13,297 (18,207)
Cash and cash equivalents at
beginning of year 42,354 69,461 83,451
Effect of foreign exchange rate
changes (115) 693 189
CASH AND CASH
EQUIV ALENTS AT END OF
YEAR 23 69,461 83,451 65,433
ANALYSIS OF BALANCES OF
CASH AND CASH
EQUIV ALENTS
Cash and bank balances 69,461 83,451 65,433
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 385 ---
STA TEMENTS OF FINANCIAL POSITION OF THE COMPANY
As at December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
NON-CURRENT ASSETS
Investment in a subsidiary 18 431,724 431,724 431,724
CURRENT ASSETS
Cash and cash equivalents – 283 267
Amount due from a subsidiary 21 – 113,170 127,077
Prepayments, deposits and
other receivables 21 3,410 9,066 9,909
Total current assets 3,410 122,519 137,253
CURRENT LIABILITIES
Dividend payable 25 – 113,170 127,077
Amounts due to subsidiaries 25 11,250 31,401 42,379
Total current liabilities 11,250 144,571 169,456
NET CURRENT
LIABILITIES (7,840) (22,052) (32,203)
NET ASSETS 423,884 409,672 399,521
EQUITY
Share capital 29 339 48 48
Retained earnings/
(accumulated losses) 31 (7,840) 10,909 758
Capital reserve 31 431,385 398,715 398,715
TOTAL EQUITY 423,884 409,672 399,521
APPENDIX I ACCOUNTANTS’ REPORT
– I-12 –


--- page 386 ---
II. NOTES TO THE HISTORICAL FINANCIAL INFORMA TION
1. CORPORATE AND GROUP INFORMATION
Wuhan Youji Holdings Ltd. was incorporated in the Cayman Islands as an exempted company with limited
liability on September 23, 2016. The registered address of the office of the Company is PO Box 472, 2nd Floor,
Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1106, Cayman Islands. The principal
place of business of the Company is 5/F, Manulife Place, 348 Kwun Tong Road, Kowloon, Hong Kong.
The Company is an investment holding company. During the Relevant Periods, the major subsidiaries of the
Company were principally engaged in the manufacturing and sales of products from the oxidation, chlorinating
process of toluene, and ammonification process of benzoic acid in the People’s Republic of China (the “PRC”).
In the opinion of the directors of the Company, Cougar Holdings Limited (“Cougar Holdings”) was the then
ultimate holding company of the Company at December 31, 2020 and 2021, and Vastocean Capital Limited was the
ultimate holding company of the Company at December 31, 2022 and 2023.
Information about subsidiaries
As of the end of the Relevant Periods, the Company had direct and indirect interests in its subsidiaries, all of
which are private limited liability companies (if incorporated outside Hong Kong have substantially similar
characteristics to a private company), the particulars of which are set out below:
Name
Place and date of
incorporation/
registration and place
of operations
Issued
ordinary/
registered
share capital
Percentage of
equity attributable
to the Company Principal activities
Direct Indirect
Centelligence Holdings
Limited. (Note a)
British Virgin Islands
(“BVI”)
September 27, 2016
United States
Dollars
(“USD”) 50
thousand
100% – Investment-holding
Centelligence International
Holdings Limited (Note e)
Hong Kong
November 4, 2016
USD59.58
million
– 100% Investment-holding
Wuhan International Holding I
Limited (Note a)
BVI
May 26, 2016
USD50
thousand
– 100% Investment-holding
Wuhan International Holding II
Limited (Note a)
BVI
May 26, 2016
USD50
thousand
– 100% Investment-holding
Wuhan Youji Industries Co.,
Ltd.* (“Wuhan Youji”)
(Note b and c)
ʮ̡
The PRC/Mainland
China
January 12, 1990
RMB55.84
million
– 100% Toluene organic
manufacturing
Qianjiang Xinyihong Organic
Chemical Co., Ltd.*
(Note b and d)
ʮ̡
The PRC/Mainland
China
December 5, 2006
RMB30 million – 100% Toluene organic
manufacturing
Hubei Kangxin Chemical
Trading Co., Ltd.*
(Note a and d)
ப΂
ʮ̡
The PRC/Mainland
China
December 12, 2018
RMB50 million – 100% Toluene trading
APPENDIX I ACCOUNTANTS’ REPORT
– I-13 –


--- page 387 ---
Name
Place and date of
incorporation/
registration and place
of operations
Issued
ordinary/
registered
share capital
Percentage of
equity attributable
to the Company Principal activities
Direct Indirect
Hubei Xinxuanhong New
Materials Co., Ltd.*
(Notes a and d)
ʮ̡
The PRC/Mainland
China
January 5, 2021
RMB50 million – 100% Toluene organic
manufacturing
Hubei Xinlianhong New
Materials Technology
Co.,Ltd.*
(Notes a and d)
Ҧ
ʮ̡
The PRC/Mainland
China
November 28, 2022
RMB20 million – 100% Toluene organic
research &
development
Wuhan Youji (Hong Kong) Co.,
Limited* (Note e)
ʮ̡
Hong Kong
June 10, 2016
Hong Kong
Dollars
(“HKD”)
10 thousand
– 100% Product trading
(a) No audited financial statements have been prepared for these entities since their date of incorporation or
registration as they are not subject to any statutory audit requirements under the relevant rules and regulations
in their jurisdictions of incorporation or registration.
(b) The statutory financial statements of the entities for the years ended December 31, 2021 and 2022 prepared
under the PRC Generally Accepted Accounting Principles were audited by Hubei Gongxin Certified Public
Accountants Co., Ltd. (ʮ̡ ), a certified public accountant registered in the PRC.
(c) Wuhan Youji is registered as a wholly-foreign-owned enterprise under the laws of the PRC.
(d) Qianjiang Xinyihong Organic Chemical Co., Ltd. (ʮ̡ ), Hubei Kangxin Chemical
Trading Co., Ltd. (ப΂ʮ̡ ), Hubei Xinxuanhong New Materials Co., Ltd. ( ಳ̏อ
ʮ̡ ), Hubei Xinlianhong New Materials Technology Co.,Ltd. (ࠢ
ʮ̡) are limited liability companies established under the laws of the PRC.
(e) The statutory financial statements of these entities for the year ended December 31, 2020 and 2021 prepared
in accordance with Hong Kong Small and Medium-sized Entity Financial Reporting Standard (“SME-FRS”)
were audited by G&H CPA Limited (ʮ̡ ), a certified public accountant registered in
Hong Kong.
The statutory financial statements of these entities for the year ended December 31, 2022 prepared in
accordance with SME-FRS were audited by SINNO INTERNATIONAL CPA LIMITED (ࠇ
ʮ̡ ), a certified public accountant registered in Hong Kong.
* The English names of these subsidiaries registered in the PRC represent the best efforts made by management
of the Company to translate their Chinese names as these subsidiaries do not have official English names.
2.1 BASIS OF PREPARATION
The Historical Financial Information has been prepared in accordance with Hong Kong Financial Reporting
Standards (“HKFRSs”) (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting
Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants
(“HKICPA”) and the disclosure requirements of the Hong Kong Companies Ordinance. All HKFRSs effective for
the accounting period commencing from January 1, 2023, together with the relevant transitional provisions, have
been early adopted by the Group in the preparation of the Historical Financial Information throughout the Relevant
Periods.
The Historical Financial Information has been prepared under the historical cost convention except for bills
receivable and investment in a fund which have been measured at fair value at the end of each of the Relevant
Periods.
APPENDIX I ACCOUNTANTS’ REPORT
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Basis of going concern assumption
Despite that the Group had net current liabilities of approximately RMB590 million and capital commitments
of approximately RMB43 million as at December 31, 2023, the directors of the Company is of the opinion that the
Group will have adequate funds available to enable it to operate as a going concern after taking into account the
historical operating performance and future forecasted operating cash inflow of the Group and its available credit
facilities of approximately RMB712 million to meet its financial obligations as they fall due for the following
twelve months. Accordingly, this Historical Financial Information has been prepared on the going concern basis.
Basis of consolidation
The Historical Financial Information includes the financial information of the Company and its subsidiaries
(collectively referred to as the “Group”) for the Relevant Periods. A subsidiary is an entity (including a structured
entity), directly or indirectly, controlled by the Company. Control is achieved when the Group is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its
power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of
the investee).
Generally, there is a presumption that a majority of voting rights results in control. When the Company has,
directly or indirectly, less than a majority of the voting or similar rights of an investee, the Group considers all
relevant facts and circumstances in assessing whether it has power over an investee, including:
(a) the contractual arrangement with the other vote holders of the investee;
(b) rights arising from other contractual arrangements; and
(c) the Group’s voting rights and potential voting rights.
The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using
consistent accounting policies. The results of subsidiaries are consolidated from the date on which the Group
obtains control, and continue to be consolidated until the date that such control ceases.
Profit or loss and each component of other comprehensive income are attributed to the owners of the parent of
the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit
balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions
between members of the Group are eliminated in full on consolidation.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are
changes to one or more of the three elements of control described above. A change in the ownership interest of a
subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognizes (i) the assets (including goodwill) and liabilities
of the subsidiary, (ii) the carrying amount of any non-controlling interests and (iii) the cumulative translation
differences recorded in equity; and recognizes (i) the fair value of the consideration received, (ii) the fair value of
any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Group’s share of components
previously recognized in other comprehensive income is reclassified to profit or loss or retained profits, as
appropriate, on the same basis as would be required if the Group had directly disposed of the related assets or
liabilities.
2.2 ISSUED BUT NOT YET EFFECTIVE HKFRSs
The Group has not applied the following revised HKFRSs that have been issued but are not yet effective, in the
Historical Financial Information.
Amendments to HKFRS 10 and
HKAS 28
Sale or Contribution of Assets between an Investor and its Associate
or Joint V enture
2
Amendments to HKFRS 16 Lease Liability in a Sale and Leaseback 1
Amendments to HKAS 1 Classification of Liabilities as Current or Non-current (the “2020
Amendments”) 1,3
Amendments to HKAS 1 Non-current Liabilities with Covenants (the “2022 Amendments”) 1, 3
Amendments to HKAS 7 and
HKFRS 7
Supplier Finance Arrangements 1
Amendments to HKAS 21 Lack of Exchangeability 4
APPENDIX I ACCOUNTANTS’ REPORT
– I-15 –


--- page 389 ---
1 Effective for annual periods beginning on or after January 1, 2024
2 No mandatory effective date yet determined but available for adoption
3 As a consequence of the 2020 Amendments and 2022 Amendments, Hong Kong Interpretation 5
Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a
Repayment on Demand Clause was revised to align the corresponding wording with no change in
conclusion
4 Effective for annual periods beginning on or after January 1, 2025
The Group is in the process of making a detailed assessment of the impact of these revised HKFRSs upon
initial application. So far, the Group considers that these revised HKFRSs may result in changes in certain
accounting policies and are unlikely to have a significant impact on the Group’s results of operations and financial
position in the period of initial application.
2.3 SUMMARY OF MATERIAL ACCOUNTING POLICY INFORMATION
Investment in a subsidiary
In the Company’s statements of financial position, an investment in a subsidiary is stated at cost less any
impairment losses unless the investment is classified as held for sale (or included in a disposal group) and accounted
for in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations . Dividends from a
subsidiary are recognized in the Company’s profit or loss when the Company’s right to receive the dividends is
established.
Investments in associates and joint ventures
An associate is an entity in which the Group has a long-term interest of generally not less than 20% of the
equity voting rights and over which it is in a position to exercise significant influence. Significant influence is the
power to participate in the financial and operating policy decisions of the investee, but is not control or joint control
over those policies.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the
parties sharing control.
The Group’s investments in associates and joint ventures are stated in the consolidated statements of financial
position at the Group’s share of net assets under the equity method of accounting, less any impairment losses.
The Group’s share of the post-acquisition results and other comprehensive income of associates and joint
ventures is included in profit or loss and other comprehensive income, respectively. In addition, when there has been
a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share of any
changes, when applicable, in the consolidated statement of changes in equity. Unrealized gains and losses resulting
from transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group’s
investments in the associates or joint ventures, except where unrealized losses provide evidence of an impairment of
the assets transferred. Goodwill arising from the acquisition of associates or joint ventures is included as part of the
Group’s investments in associates or joint ventures.
Upon loss of significant influence over the associate or joint control over the joint venture, the Group
measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the
associate or joint venture upon loss of significant influence or joint control and the fair value of the retained
investment and proceeds from disposal is recognized in profit or loss.
When an investment in an associate or a joint venture is classified as held for sale, it is accounted for in
accordance with HKFRS 5.
Fair value measurement
The Group measures its bills receivables and investment in a fund at fair value at the end of each of the
reporting periods. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. The fair value measurement is based on
the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market
for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or
liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset
APPENDIX I ACCOUNTANTS’ REPORT
– I-16 –


--- page 390 ---
or a liability is measured using the assumptions that market participants would use when pricing the asset or
liability, assuming that market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data
are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of
unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the Historical Financial Information
are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is
significant to the fair value measurement as a whole:
Level 1 – based on quoted prices (unadjusted) in active markets for identical assets or
liabilities
Level 2 – based on valuation techniques for which the lowest level input that is significant to
the fair value measurement is observable, either directly or indirectly
Level 3 – based on valuation techniques for which the lowest level input that is significant to
the fair value measurement is unobservable
For assets and liabilities that are recognized in the Historical Financial Information on a recurring basis, the
Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation
(based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each of the
reporting periods.
Impairment of non-financial assets
Where an indication of impairment exists, or when annual impairment testing for an asset is required (other
than financial assets, inventories and deferred tax assets), the asset’s recoverable amount is estimated. An asset’s
recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs of
disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely
independent of those from other assets or groups of assets, in which case the recoverable amount is determined for
the cash-generating unit to which the asset belongs.
An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset. An
impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent
with the function of the impaired asset.
An assessment is made at the end of each of the reporting periods as to whether there is an indication that
previously recognized impairment losses may no longer exist or may have decreased. If such an indication exists,
the recoverable amount is estimated. A previously recognized impairment loss of an asset other than goodwill is
reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but
not to an amount higher than the carrying amount that would have been determined (net of any
depreciation/amortization) had no impairment loss been recognized for the asset in prior years. A reversal of such an
impairment loss is credited to profit or loss in the period in which it arises.
Related parties
A party is considered to be related to the Group if:
(a) the party is a person or a close member of that person’s family and that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or of a parent of the Group; or
(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Group are members of the same Group;
(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow
subsidiary of the other entity);
APPENDIX I ACCOUNTANTS’ REPORT
– I-17 –


--- page 391 ---
(iii) the entity and the Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an
entity related to the Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity); and
(viii) the entity, or any member of a Group of which it is a part, provides key management personnel
services to the Group or to the parent of the Group.
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The
cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of
bringing the asset to its working condition and location for its intended use.
Expenditure incurred after items of property, plant and equipment have been put into operation, such as
repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations
where the recognition criteria are satisfied, the expenditure for a major inspection is capitalized in the carrying
amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be
replaced at intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciates
them accordingly.
Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and
equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as
follows:
Buildings 3.2 %-9.5%
Plant and machinery 7.9%-47.5%
Furniture and fixtures 9.5%-23.8%
Motor vehicles 19.0%-23.8%
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is
allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives
and the depreciation method are reviewed, and adjusted if appropriate, at least at the end of each of the reporting
periods.
An item of property, plant and equipment including any significant part initially recognized is derecognized
upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on
disposal or retirement recognized in profit or loss in the year the asset is derecognized is the difference between the
net sales proceeds and the carrying amount of the relevant asset.
Construction in progress represents buildings under construction, and machinery and furniture under
installation, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct
costs of construction and installation during the period of construction. Construction in progress is reclassified to
the appropriate category of plant and equipment when completed and ready for use.
Intangible assets (other than goodwill)
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets
acquired in a business combination is the fair value at the date of acquisition. The useful lives of intangible assets
are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortized over the
useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be
impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are
reviewed at least at each financial year end.
APPENDIX I ACCOUNTANTS’ REPORT
– I-18 –


--- page 392 ---
Patents and licenses
Purchased patents and licenses are stated at cost less any impairment losses and are amortized on the
straight-line basis over their estimated useful lives of 10 years. The estimated useful life of intangible assets is
determined by considering the period of the economic benefits to the Group and period of validity protected by the
relevant laws.
Software
Software is stated at cost less any impairment loss and is amortised on the straight-line basis over its estimated
useful life of 10 years, which is determined based on the expected technological lives of the software.
Research and development costs
All research costs are charged to profit or loss as incurred.
Expenditure incurred on projects to develop new products is capitalized and deferred only when the Group can
demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its
intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the
availability of resources to complete the project and the ability to measure reliably the expenditure during the
development. Product development expenditure which does not meet these criteria is expensed when incurred.
Leases
The Group assesses at contract inception whether a contract is, or contains, a lease. A contract is, or contains,
a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for
consideration.
Group as a lessee
The Group applies a single recognition and measurement approach for all leases, except for short-term leases
and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets
representing the right to use the underlying assets.
(a) Right-of-use assets
Right-of-use assets are recognized at the commencement date of the lease (i.e., the date the underlying asset
is available for use). Right-of-use assets are measured at cost, less accumulated depreciation and any impairment
losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of
lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement
date less any lease incentives received. Where applicable, the cost of a right-of-use asset also includes an estimate of
costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is
located. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the
estimated useful lives of the assets as follows:
Leasehold land 5-50 years
Buildings 2.6-5 years
Storage tanks 3-7 years
Motor vehicles 3-5 years
If ownership of the leased asset transfers to the Group by the end of the lease term or the cost reflects the
exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
(b) Lease liabilities
Lease liabilities are recognized at the commencement date of the lease at the present value of lease payments
to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments)
less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected
to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option
reasonably certain to be exercised by the Group and payments of penalties for termination of a lease, if the lease
term reflects the Group exercising the option to terminate the lease. The variable lease payments that do not depend
on an index or a rate are recognized as an expense in the period in which the event or condition that triggers the
payment occurs.
APPENDIX I ACCOUNTANTS’ REPORT
– I-19 –


--- page 393 ---
In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease
commencement date because the interest rate implicit in the lease is not readily determinable. After the
commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for
the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a
modification, a change in the lease term, a change in lease payments (e.g., a change to future lease payments
resulting from a change in an index or rate) or a change in assessment of an option to purchase the underlying asset.
(c) Short-term leases
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and
equipment (that is those leases that have a lease term of 12 months or less from the commencement date and do not
contain a purchase option). Lease payments on short-term leases are recognized as an expense on a straight-line
basis over the lease term.
Group as a lessor
When the Group acts as a lessor, it classifies at lease inception (or when there is a lease modification) each of
its leases as either an operating lease or a finance lease.
Leases in which the Group does not transfer substantially all the risks and rewards incidental to ownership of
an asset are classified as operating leases. When a contract contains lease and non-lease components, the Group
allocates the consideration in the contract to each component on a relative stand-alone selling price basis. Rental
income is accounted for on a straight-line basis over the lease terms and is included in other income in profit or loss
due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to
the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income.
Contingent rents are recognized as revenue in the period in which they are earned.
Leases that transfer substantially all the risks and rewards incidental to ownership of an underlying asset to
the lessee are accounted for as finance leases.
Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost and fair
value through profit or loss (“FVTPL”).
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash
flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that
do not contain a significant financing component or for which the Group has applied the practical expedient of not
adjusting the effect of a significant financing component, the Group initially measures a financial asset at its fair
value plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables
that do not contain a significant financing component or for which the Group has applied the practical expedient are
measured at the transaction price determined under HKFRS 15 Revenue from Contracts with Customers in
accordance with the policies set out for “Revenue recognition” below.
In order for a financial asset to be classified and measured at amortized cost, it needs to give rise to cash flows
that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets
with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the
business model.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order
to generate cash flows. The business model determines whether cash flows will result from collecting contractual
cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held
within a business model with the objective to hold financial assets in order to collect contractual cash flows, while
financial assets classified and measured at fair value through other comprehensive income are held within a business
model with the objective of both holding to collect contractual cash flows and selling. Financial assets which are not
held within the aforementioned business models are classified and measured at fair value through profit or loss.
All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that
the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial
assets that require delivery of assets within the period generally established by regulation or convention in the
marketplace.
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Subsequent measurement
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at amortized cost (debt instruments)
Financial assets at amortized cost are subsequently measured using the effective interest method and are
subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or
impaired.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are carried in the statement of financial position at fair
value with net changes in fair value recognized in profit or loss.
This category includes derivative instrument and equity investments which the Group had not irrevocably
elected to classify at fair value through other comprehensive income. Dividends on equity investments classified as
financial assets at fair value through profit or loss are recognized as other income in profit or loss when the right of
payment has been established, it is probable that the economic benefits associated with the dividend will flow to the
Group and the amount of the dividend can be measured reliably.
Derecognition of financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets)
is primarily derecognized (i.e., removed from the Group’s consolidated statements of financial position) when:
• the rights to receive cash flows from the asset have expired; or
• the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to
pay the received cash flows in full without material delay to a third party under a ‘pass-through’
arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset,
or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset,
but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a
pass-through arrangement, it evaluates if, and to what extent, it has retained the risk and rewards of ownership of the
asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred
control of the asset, the Group continues to recognize the transferred asset to the extent of its continuing
involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated
liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower
of the original carrying amount of the asset and the maximum amount of consideration that the Group could be
required to repay.
Impairment of financial assets
The Group recognizes an allowance for expected credit losses (“ECLs”) for all debt instruments not held at
fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in
accordance with the contract and all the cash flows that the Group expects to receive, discounted at an
approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale
of collateral held or other credit enhancements that are integral to the contractual terms.
General approach
ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in
credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are
possible within the next 12 months (a 12-month ECL). For those credit exposures for which there has been a
significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected
over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased
significantly since initial recognition. When making the assessment, the Group compares the risk of a default
occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial
instrument as at the date of initial recognition and considers reasonable and supportable information that is available
APPENDIX I ACCOUNTANTS’ REPORT
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without undue cost or effort, including historical and forward-looking information. The Group considers that there
has been a significant increase in credit risk when contractual payments are more than 30 days past due.
The Group considers a financial asset in default when contractual payments are 30-90 days past due. However,
in certain cases, the Group may also consider a financial asset to be in default when internal or external information
indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account
any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation
of recovering the contractual cash flows.
Financial assets at amortized cost are subject to impairment under the general approach and they are classified
within the following stages for measurement of ECLs except for trade receivables and contract assets which apply
the simplified approach as detailed below:
Stage 1 – Financial instruments for which credit risk has not increased significantly since
initial recognition and for which the loss allowance is measured at an amount equal
to 12-month ECLs
Stage 2 – Financial instruments for which credit risk has increased significantly since initial
recognition but that are not credit-impaired financial assets and for which the loss
allowance is measured at an amount equal to lifetime ECLs
Stage 3 – Financial assets that are credit-impaired at the reporting date (but that are not
purchased or originated credit-impaired) and for which the loss allowance is
measured at an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do not contain a significant financing component or when the Group applies the
practical expedient of not adjusting the effect of a significant financing component, the Group applies the simplified
approach in calculating ECLs. Under the simplified approach, the Group does not track changes in credit risk, but
instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a
provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific
to the debtors and the economic environment.
Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or
loss, financial liabilities at amortised cost, or as derivatives designated as hedging instruments in an effective hedge,
as appropriate.
All financial liabilities are recognized initially at fair value and, in the case of liabilities at amortised cost, net
of directly attributable transaction costs.
Subsequent measurement
The subsequent measurement of financial liabilities depends on their classification as follows:
Financial liabilities at amortized cost
After initial recognition, interest-bearing loans and borrowings and payables are subsequently measured at
amortized cost, using the effective interest rate method unless the effect of discounting would be immaterial, in
which case they are stated at cost. Gains and losses are recognized in profit or loss when the liabilities are
derecognized as well as through the effective interest rate amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs
that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance
costs in profit or loss.
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Derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or
expired.
When an existing financial liability is replaced by another from the same lender on substantially different
terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as
a derecognition of the original liability and a recognition of a new liability, and the difference between the
respective carrying amounts is recognized in profit or loss.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the statements of financial
position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to
settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined on the weighted average
basis and, in the case of work in progress and finished goods, comprises direct materials, direct labor and an
appropriate proportion of overheads. Net realizable value is based on estimated selling prices less any estimated
costs to be incurred to completion and disposal.
Cash and cash equivalents
Cash and cash equivalents in the statements of financial positions comprise cash on hand and at banks, and
short-term demand deposits, which are subject to an insignificant risk of changes in value and held for the purpose
of meeting short term cash commitments.
For the purpose of the consolidated statements of cash flows, cash and cash equivalents comprise cash on hand
and at banks, as defined above, less any bank overdrafts, which are repayable on demand and form an integral part
of the Group’s cash management.
Provisions
A provision is recognized when a present obligation (legal or constructive) has arisen as a result of a past
event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a
reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognized for a provision is the present value at the
end of each of the reporting periods of the future expenditures expected to be required to settle the obligation. The
increase in the discounted present value amount arising from the passage of time is included in finance costs in
profit or loss.
Income tax
Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss
is recognized outside profit or loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the
taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of
the Relevant Periods, taking into consideration interpretations and practices prevailing in the countries in which the
Group operates.
Deferred tax is provided, using the liability method, on all temporary differences at the end of each reporting
period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
• when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a
transaction that is not a business combination and, at the time of the transaction, affects neither the
accounting profit nor taxable profit or loss; and does not give rise to equal taxable and deductible
temporary differences;
• in respect of taxable temporary differences associated with investments in subsidiaries, associates and
joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is
probable that the temporary differences will not reverse in the foreseeable future.
APPENDIX I ACCOUNTANTS’ REPORT
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Deferred tax assets are recognized for all deductible temporary differences, and the carryforward of unused
tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences, and the carryforward of unused tax
credits and unused tax losses can be utilized, except:
• when the deferred tax asset relating to the deductible temporary differences arises from the initial
recognition of an asset or liability in a transaction that is not a business combination and, at the time of
the transaction, affects neither the accounting profit nor taxable profit or loss; and does not give rise to
equal taxable and deductible temporary differences;
• in respect of deductible temporary differences associated with investments in subsidiaries, associates
and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the
temporary differences will reverse in the foreseeable future and taxable profit will be available against
which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the
extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred
tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each Relevant Periods and are
recognized to the extent that it has become probable that sufficient taxable profit will be available to allow all or part
of the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when
the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted by the end of each of the reporting periods.
Deferred tax assets and deferred tax liabilities are offset if and only if the Group has a legally enforceable
right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities
relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable
entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle
the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets
are expected to be settled or recovered.
Government grants
Government grants are recognized at their fair value where there is reasonable assurance that the grant will be
received and all attaching conditions will be complied with. When the grant relates to an expense item, it is
recognized as income on a systematic basis over the periods that the costs, for which it is intended to compensate,
are expensed. When the grant relates to expenses or losses already incurred or for the purpose of giving immediate
financial support to the Group with no future costs and obligations, it is recognized in profit or loss in the period in
which it becomes receivable.
Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to
profit or loss over the expected useful life of the relevant asset by equal annual installments or deducted from the
carrying amount of the asset and released to profit or loss by way of a reduced depreciation charge.
Revenue recognition
Revenue from contracts with customers
Revenue from contracts with customers is recognized when control of goods or services is transferred to the
customers at an amount that reflects the consideration to which the Group expects to be entitled in exchange for
those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration is estimated to
which the Group will be entitled in exchange for transferring the goods or services to the customer. The variable
consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue
reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the
variable consideration is subsequently resolved.
When the contract contains a financing component which provides the customer with a significant benefit of
financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present
value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing
transaction between the Group and the customer at contract inception. When the contract contains a financing
component which provides the Group with a significant financial benefit for more than one year, revenue recognized
under the contract includes the interest expense accreted on the contract liability under the effective interest method.
APPENDIX I ACCOUNTANTS’ REPORT
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For a contract where the period between the payment by the customer and the transfer of the promised goods or
services is one year or less, the transaction price is not adjusted for the effects of a significant financing component,
using the practical expedient in HKFRS 15.
Sale of industrial products
Revenue from the sale of industrial products is recognized at the point in time when control of the asset is
transferred to the customer, generally on delivery of the industrial products.
Other income
Rental income is recognized on a time proportion basis over the lease terms. Variable lease payments that do
not depend on an index or a rate are recognized as income in the accounting period in which they are incurred.
Interest income is recognized on an accrual basis using the effective interest method by applying the rate that
exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter
period, when appropriate, to the net carrying amount of the financial asset.
Dividend income is recognized when the shareholders’ right to receive payment has been established, it is
probable that the economic benefits associated with the dividend will flow to the Group and the amount of the
dividend can be measured reliably.
Entrusted processing services income is recognized when the products entrusted for processing are delivered
to the customer.
Contract liabilities
A contract liability is recognized when a payment is received or a payment is due (whichever is earlier) from
a customer before the Group transfers the related goods or services. Contract liabilities are recognized as revenue
when the Group performs under the contract (i.e., transfers control of the related goods or services to the customer).
Share-based payments
The Group operates a share award scheme for the purpose of providing incentives and rewards to eligible
participants who contribute to the success of the Group’s operations. Employees (including directors) of the Group
receive remuneration in the form of share-based payments, whereby employees render services in exchange for
equity instruments (“equity-settled transactions”).
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on
which they are granted. The fair value is determined by an external valuer using the discounted cash flow method.
The cost of equity-settled transactions is recognized in employee benefit expense, together with a
corresponding increase in equity, over the period in which the performance and service conditions are fulfilled. The
cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting
date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity
instruments that will ultimately vest. The charge or credit to profit or loss for a period represents the movement in
the cumulative expense recognized as at the beginning and end of that period.
Other employee benefits
Pension scheme
The employees of the Group’s subsidiaries which operate in Mainland China are required to participate in a
central pension scheme operated by the local municipal government. The subsidiaries are required to contribute a
certain percentage of their payroll costs to the central pension scheme. The contributions are charged to profit or loss
as they become payable in accordance with the rules of the central pension scheme. The Group’s employee
contributions vest fully with the employees when contributed into the scheme and there are no forfeited
contributions that may be used by the Group.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e.,
assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized as
part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially
ready for their intended use or sale. All other borrowing costs are expensed in the period in which they are incurred.
Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 399 ---
Dividends
Final dividends are recognized as a liability when they are approved by the shareholders in a general meeting.
Proposed final dividends are disclosed in the notes to the Historical Financial Information.
Interim dividends are simultaneously proposed and declared, because the Company’s memorandum and
articles of association grant the directors the authority to declare interim dividends. Consequently, interim dividends
are recognized immediately as a liability when they are proposed and declared.
Foreign currencies
The Historical Financial Information is presented in Renminbi (RMB), which is the Company’s functional
currency. Foreign currency transactions recorded by the entities in the Group are initially recorded using their
respective functional currency rates prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of
each of the reporting periods. Differences arising on settlement or translation of monetary items are recognized in
profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the
exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was measured. The gain or loss
arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain
or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is
recognized in other comprehensive income or profit or loss is also recognized in other comprehensive income or
profit or loss, respectively).
In determining the exchange rate on initial recognition of the related asset, expense or income on the
derecognition of a non-monetary asset or non-monetary liabilities relating to an advance consideration, the date of
initial transaction is the date on which the Group initially recognizes the non-monetary asset or non-monetary
liabilities arising from the advance consideration. If there are multiple payments or receipts in advance, the Group
determines the transaction date for each payment or receipt of the advance consideration.
The functional currencies of certain overseas subsidiaries are currencies other than the RMB. As at the end of
each reporting period, the assets and liabilities of these entities are translated into RMB at the exchange rates
prevailing at the end of each reporting period and their profit or loss are translated into RMB at the exchange rates
that approximate to those prevailing at the dates of the transactions.
The resulting exchange differences are recognized in other comprehensive income and accumulated in the
exchange fluctuation reserve. On disposal of a foreign operation, the component of other comprehensive income
relating to that particular foreign operation is recognized in profit or loss.
For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries are
translated into RMB at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of
overseas subsidiaries which arise throughout the year are translated into RMB at the weighted average exchange
rates for each of the reporting periods.
3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES
The preparation of the Group’s Historical Financial Information requires management to make judgments,
estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their
accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and
estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or
liabilities affected in the future.
Estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of each
of the Relevant Periods, that have a significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year, are described below.
Provision for expected credit losses on trade receivables
The Group uses a provision matrix to calculate ECLs for trade receivables. The provision rates are based on
days past due for groupings of various customer segments that have similar loss patterns.
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 400 ---
The provision matrix is initially based on the Group’s historical observed default rates. The Group will
calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if
forecast economic conditions (i.e., gross domestic products) are expected to deteriorate over the next year which can
lead to an increased number of defaults in the manufacturing sector, the historical default rates are adjusted. At each
reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are
analyzed.
The assessment of the correlation among historical observed default rates, forecast economic conditions and
ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and forecast economic
conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be
representative of a customer’s actual default in the future. The information about the ECLs on the Group’s trade
receivables is disclosed in note 20 to the Historical Financial Information.
Provision for expected credit losses on other receivables
The Group estimates the provision for ECLs on other receivables based on the historical loss record and
adjusts for forward-looking information. When assessing the loss given default, the Group also considers the
financial capability of the debtors and future prospects of the industry in which the debtors operate. The assessment
of the debtors’ financial capability and estimates of future prospects of the industry and economic conditions
involved significant management judgment and estimation.
Leases – Estimating the incremental borrowing rate
The Group cannot readily determine the interest rate implicit in a lease, and therefore, it uses an incremental
borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay
to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to
the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group “would have to
pay”, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter
into financing transactions) or when it needs to be adjusted to reflect the terms and conditions of the lease (for
example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using
observable inputs (such as market interest rates) when available and is required to make certain entity-specific
estimates (such as the subsidiary’s stand-alone credit rating).
Deferred tax assets
Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences can be utilised. Significant
management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon
the likely timing and level of future taxable profits together with future tax planning strategies.
4. OPERATING SEGMENT INFORMATION
Operating Segment information
HKFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reporting
about components of the Group that are regularly reviewed by the chief operating decision-maker in order to
allocate resources to segments and to assess their performance. The information reported to the directors of the
Company, who are the chief operating decision-makers, for the purpose of the resource allocation and assessment of
performance does not contain discrete operating segment financial information and the directors reviewed the
financial results of the Group as a whole. Therefore, no further information about the operating segment is
presented.
Geographical Information
(a) Details of the revenue from external customers by geographical market are included in note 5 to the
Historical Financial information.
(b) Non-current assets
As at the end of each of the Relevant Periods, all of the Group’s non-current assets were located in
Mainland China, no geographical segment information is presented in accordance with HKFRS 8.
APPENDIX I ACCOUNTANTS’ REPORT
– I-27 –


--- page 401 ---
Information about a major customer
Revenue from a major external customer is as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Customer A 378,914 N/A* N/A*
* less than 10% of the Group’s revenue.
5. REVENUE AND OTHER INCOME AND GAINS
Revenue from contracts with customers
An analysis of revenue is as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Revenue from contracts with customers 2,789,477 3,133,836 2,677,103
(a) Disaggregated revenue information
Types of goods or services Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Sale of industrial products 2,789,477 3,133,836 2,677,103
Geographical markets Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Mainland China 2,171,112 2,452,017 2,060,003
Asia (except Mainland China) 262,513 308,110 287,508
America 212,821 159,116 135,882
Europe 119,477 185,654 175,848
Other countries/regions 23,554 28,939 17,862
Total revenue from contracts with customers 2,789,477 3,133,836 2,677,103
The revenue information above is based on the locations of the customers.
Timing of revenue recognition Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Goods transferred at a point in time 2,789,477 3,133,836 2,677,103
APPENDIX I ACCOUNTANTS’ REPORT
– I-28 –


--- page 402 ---
For the years ended December 31, 2021, 2022 and 2023, the amounts of revenue from sale of industrial
products of RMB44,977,000, and RMB64,322,000, RMB42,919,000, respectively, were recognized that were
included in the contract liabilities at the beginning of each of the Relevant Periods.
(b) Performance obligations
Information about the Group’s performance obligations is summarized below:
Sale of industrial products
The performance obligation is satisfied upon delivery of the industrial products and payment is generally due
within 30 to 120 days from delivery, where payment in advance is normally required.
As the remaining performance obligations (unsatisfied or partially satisfied) as at December 31, 2021, 2022
and 2023 are part of contracts that have an original expected duration of one year or less, the transaction price
allocated to them is not separately disclosed, as permitted by the practical expedient as required by HKFRS 15.
Other income and gains
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Other income
Interest income 19,295 5,632 3,310
Government grants related to income* 3,882 12,447 6,425
Government grants related to assets**
(note 27) 3,230 4,570 5,353
Sundry income 10,767 6,009 2,669
Entrusted processing service income 959 1,248 1,398
Rental income – fixed lease payments
(note 14) 1,562 1,774 1,774
Gain on disposal of items of property,
plant and equipment – – 3
Gain on lease modification – – 81
Other gains
Foreign exchange differences, net – 2,268 3,617
Others 206 566 875
39,901 34,514 25,505
* The government grants represent subsidies received from the local governments for the purpose of
compensation of expenses incurred by the Group, including foreign trade development, land use tax,
research, off-peak electricity consumption, and certain employee related costs.
** Government grants related to assets are those received for purchase of assets. If the related capital
expenditure has not yet been undertaken, the grants received are included in government grants in the
consolidated statements of financial position. For those grants for which capital expenditures have been
undertaken, the amounts received are released to profit or loss over the expected useful lives of the
relevant assets. There are no unfulfilled conditions or contingencies relating to these grants (note 27).
APPENDIX I ACCOUNTANTS’ REPORT
– I-29 –


--- page 403 ---
6. PROFIT BEFORE TAX
The Group’s profit before tax is arrived at after charging/(crediting):
Y ear ended December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
Cost of inventories sold 2,150,355 2,434,558 2,347,338
Research and development costs (current
year expenditures) 110,831 133,001 99,959
Depreciation of property, plant and
equipment 13 93,697 99,123 111,198
Amortization of other intangible assets* 15 1,015 963 978
Depreciation of right-of-use assets 14 9,743 18,592 19,809
Write-down of inventories to net
realizable value – – 1,764
Loss/(gain) on disposal of items of
property, plant and equipment, net 15,174 271 (3)
Gain on lease modification – – (81)
Impairment/reversal of impairment of
trade receivables 20 184 314 (188)
Foreign exchange differences, net 2,930 (2,268) (3,617)
Auditor’s remuneration 129 137 151
Listing expenses 7,840 14,371 10,118
Employee benefit expense (including
directors’ emoluments):
Salaries, allowances and benefits in
kind 69,748 81,553 66,117
Share award scheme expenses 30 419 419 419
Performance-based bonuses 15,666 11,643 –
Pension scheme contributions** 12,672 16,052 15,753
98,505 109,667 82,289
* The amortization of other intangible assets for each of the Relevant Periods is included in
“Administrative expenses” in profit or loss.
** There are no forfeited contributions that may be used by the Group as the employer to reduce the
existing level of contributions.
7. FINANCE COSTS
An analysis of finance costs is as follows:
Y ear ended December 31,
2021 2022 2023
Note RMB’000 RMB’000 RMB’000
Interest on bank and other
borrowings 30,894 27,832 30,267
Interest on discounted bills 1,485 798 89
Interest on lease liabilities 14 1,687 2,396 1,925
34,066 31,026 32,281
APPENDIX I ACCOUNTANTS’ REPORT
– I-30 –


--- page 404 ---
8. DIRECTORS’ AND CHIEF EXECUTIVE’S REMUNERATION
Directors’ and chief executive’s remuneration as recorded in each of the Relevant Periods, disclosed pursuant
to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange (the “Listing Rules”), section
383(1)(a), (b), (c) and (f) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of
Information about Benefits of Directors) Regulation, is set out below:
An executive director and a chief executive of the Company received remuneration from a subsidiary of the
Company during each of the Relevant Periods prior to their appointment as a director and chief executive of the
Company. The remuneration of them is included in the Historical Financial Information as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Fees – – –
Other emoluments:
Salaries, allowances and benefits in kind 3,314 3,717 3,811
Performance-based bonuses* 4,700 5,317 –
Equity-settled share award expenses 88 88 29
Pension scheme contributions 180 180 108
8,282 9,302 4,007
* Certain executive directors of the Company were entitled to bonus payments which are determined as a
percentage of the profit after tax of the Group.
(a) Independent non-executive directors
The Company did not have any independent non-executive directors at any time before December 31, 2023.
(b) Executive directors, non-executive directors and the chief executive
Y ear ended December 31, 2021
Fees
Salaries,
allowances,
and benefits
in kind
Equity-
settled share
award
expenses
Performance-
based bonuses
Pension
scheme
contributions Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Executive directors:
Mr. Zou Xiaohong (note (i)) – 1,271 25 2,200 – 3,496
Mr. Chen Ping (note (ii)) – 511 14 300 90 915
– 1,782 39 2,500 90 4,411
Non-executive directors:
Mr. Gao Lei (note (iii)) ––––––
Mr. Shen Yingming (note (iv)) –– 2 4–– 2 4
–– 2 4–– 2 4
Chief executive:
Mr. Zhou Xu (note (v)) – 1,532 25 2,200 90 3,847
– 3,314 88 4,700 180 8,282
APPENDIX I ACCOUNTANTS’ REPORT
– I-31 –


--- page 405 ---
Y ear ended December 31, 2022
Fees
Salaries,
allowances
and benefits
in kind
Equity-settled
share award
expenses
Performance-
based bonuses
Pension
scheme
contributions Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Executive directors:
Mr. Zou Xiaohong (note (i)) – 1,358 25 2,489 – 3,872
Mr. Chen Ping (note (ii)) – 743 14 339 78 1,174
– 2,101 39 2,828 78 5,046
Non-executive directors:
Mr. Gao Lei (note (iii)) ––––––
Mr. Shen Yingming (note (iv)) –– 2 4–– 2 4
Ms. Li Deye (note (vi)) ––––––
–– 2 4–– 2 4
Chief executive:
Mr. Zhou Xu (note (v)) – 1,616 25 2,489 102 4,232
– 3,717 88 5,317 180 9,302
Y ear ended December 31, 2023
Fees
Salaries,
allowances
and benefits
in kind
Equity-settled
share award
expenses
Performance-
based bonuses
Pension
scheme
contributions Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Executive directors:
Mr. Zou Xiaohong (note (i)) – 1,464 25 – – 1,488
Mr. Chen Ping (note (ii)) – 919 14 – – 933
– 2,382 39 – – 2,421
Non-executive directors:
Mr. Gao Lei (note (iii)) ––––––
Mr. Shen Yingming (note (iv)) –– 2 4–– 2 4
Ms. Li Deye (note (vi)) ––––––
–– 2 4–– 2 4
Chief executive:
Mr. Zhou Xu (note (v)) – 1,429 25 – 108 1,562
– 3,811 88 – 108 4,007
APPENDIX I ACCOUNTANTS’ REPORT
– I-32 –


--- page 406 ---
(i) Mr. Zou Xiaohong was appointed as an executive director of the Company on March 25, 2022.
(ii) Mr. Chen Ping was appointed as an executive director of the Company on September 23, 2016.
(iii) Mr. Gao Lei was appointed as a non-executive director of the Company on September 23, 2016.
(iv) Mr. Shen Yingming was appointed as a non-executive director of the Company on September 23, 2016.
(v) Mr. Zhou Xu was appointed as the chief executive of the Company on March 25, 2022.
(vi) Ms. Li Deye was appointed as a non-executive director of the Company on March 25, 2022.
During the Relevant Periods, no remuneration was paid or payable by the Group to the directors and chief
executive as an inducement to join or upon joining the Group or as compensation for the loss of office.
There was no arrangement under which a director or the chief executive waived or agreed to waive any
remuneration during the Relevant Periods.
9. FIVE HIGHEST PAID EMPLOYEES
The five highest paid employees during the years ended December 31, 2021, 2022 and 2023 included two, two
and three directors and chief executive, respectively, details of whose remuneration are set out in note 8 above.
Details of the remuneration for the remaining three, three and two highest paid employees who are neither a director
nor chief executive of the Company during the years ended December 31, 2021, 2022 and 2023 are as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Salaries, allowances and benefits in kind 1,489 1,963 1,413
Performance-based bonuses 2,400 2,716 –
Equity-settled share award expenses 41 41 41
Pension scheme contributions 270 307 217
4,200 5,027 1,671
The number of non-director and non-chief executive highest paid employees whose remuneration fell within
the following band is as follows:
Number of employees
Y ear ended December 31,
2021 2022 2023
HK$ nil to HK$1,000,000 – – 1
HK$1,000,001 to HK$1,500,000 3 3 1
There was no emolument paid by the Group to any of the non-director, highest paid employees as an
inducement to join or upon joining the Group or as compensation for the loss of office during the Relevant Periods.
APPENDIX I ACCOUNTANTS’ REPORT
– I-33 –


--- page 407 ---
10. INCOME TAX
The Group is subject to income tax on an entity basis on profits arising in or derived from the jurisdictions in
which members of the Group are domiciled and operate.
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Current – Hong Kong 283 129 89
Current – Mainland China 47,453 32,984 12,106
Current – Withholding Tax – 117,825 30,000
Deferred (note 28) 36,663 (63,718) (20,359)
Total tax charge 84,399 87,220 21,836
Cayman Islands and British Virgin Islands
Under the current tax laws of the Cayman Islands and British Virgin Islands, the Company and its subsidiaries
incorporated in Cayman Islands and BVI are not subject to tax on income or capital gains.
Hong Kong
Hong Kong profits tax has been provided at the rate of 16.5% on the estimated assessable profits arising in
Hong Kong during each of the Relevant Periods, except for one subsidiary of the Group which is a qualifying entity
under the two-tiered profits tax rates regime. The first HK$2,000,000 of assessable profits of this subsidiary are
taxed at 8.25% and the remaining assessable profits are taxed at 16.5%.
Mainland China
The provision for corporate income tax in Mainland China is based on the statutory rate of 25% of the taxable
profits determined in accordance with the PRC Corporate Income Tax Law, except for Wuhan Youji Industries Co.,
Ltd. and Qianjiang Xinyihong Organic Chemical Co., Ltd., which were qualified as a High and New Technology
Enterprise to enjoy a preferential income tax rate of 15% for each of the Relevant Periods.
A reconciliation of the tax expense applicable to profit before tax using the statutory rates for the country or
jurisdictions in which the Group are domiciled to the tax expense at the effective tax rate is as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Profit before tax 393,536 427,690 94,738
Tax charged at the statutory tax rates 98,316 111,282 26,808
Preferential tax rate reduction (39,268) (46,586) (10,835)
Profits and losses attributable to a joint
venture and associates (610) (950) 1,840
Expenses not deductible for tax purpose 188 452 233
Additional tax deduction for research and
development expenses (8,540) (16,780) (5,489)
Withholding tax on undistributed profits of
subsidiaries in Mainland China* 34,396 39,802 9,279
Others (83) – –
Tax charge at the Group’s effective rate 84,399 87,220 21,836
APPENDIX I ACCOUNTANTS’ REPORT
– I-34 –


--- page 408 ---
* Pursuant to the PRC Corporate Income Tax Law, a 10% withholding tax is levied on dividends declared
to foreign investors from the foreign investment enterprises established in Mainland China. The
requirement is effective from January 1, 2008 and applies to earnings after December 31, 2007. A lower
withholding tax rate may be applied if there is a tax treaty between Mainland China and the jurisdiction
of the foreign investors. For the Group, the applicable rate is 10%. The Group is therefore liable for
withholding taxes on dividends distributed by those subsidiaries established in Mainland China in
respect of earnings generated from January 1, 2008.
At December 31, 2021, 2022 and 2023, deferred tax liabilities have been recognized for withholding taxes that
would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiaries
established in Mainland China. The current withholding tax for the year ended December 31, 2022 and 2023
represents the income tax payable for the dividends distribution of a subsidiary of the Group in Mainland China to
its shareholders in BVI.
11. DIVIDENDS
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Final dividends declared – 1,102,832 270,000
On February 28, 2022, dividends of RMB1,048,975,210 were declared by a wholly-owned subsidiary,
Centelligence Holdings Limited to the Company. On the same day, the directors of the Company passed two
resolutions for the distribution of dividends of RMB1,012,975,210 to its sole shareholder, Cougar International
Growth Holding II Ltd. (“Cougar International”), and on the same day, the directors of Cougar International passed
two resolutions for the distribution of dividends with the same amount to its sole shareholder Cougar Holdings.
Cougar Holdings’ shareholders then passed two resolutions for the distribution of dividends of RMB1,012,975,210
to its shareholders including Mr. Gao Lei, Mr. Shen Yingming, Wuhan Linuo Investment, Holdings Group Co., Ltd.
(“Linuo Investment”), an entity controlled by Mr. Gao Yuankun, Wuhan Youji Employee Trust and Hubei Tuopu
Organic and Phosphoric Chemicals Import & Export Co., Ltd.
Based on an agreement entered into by Cougar Holdings, Mr. Gao Lei, Mr. Shen Yingming, Linuo Investment,
Linuo Group Holdings Co., Ltd. (“Linuo Group”), an entity controlled by Mr. Gao Yuankun, Wuhan Youji Employee
Trust and Wuhan Youji on March 31, 2022, it was agreed that dividends of RMB820,026,606 declared by Cougar
Holdings attributable to Mr. Gao Lei, Mr. Shen Yingming and Linuo Investment were used to offset the Group’s
receivables due from Linuo Group and Linuo Investment.
On August 3, 2022, dividends of USD7,500 (equivalent to RMB50,860) were declared by the Company. Based
on the distribution agreement, it was agreed that dividends of USD5,465, USD727, USD1,254, and USD54 were
used to set-off the subscription price of the issuance of 75,000,000 ordinary shares (note 12) to Vastocean Capital
Limited, Custodian Capital Ltd., SYM Holdings Limited and Fullfaith Capital Limited, respectively.
On December 28, 2022, dividends of RMB89,807,559 were declared by a wholly-owned subsidiary,
Centelligence Holdings Limited to the Company. On the same day, the directors of the Company passed a resolution
for the distribution of dividends of RMB89,807,559 to its shareholders including Vastocean Capital Limited, SYM
Holdings Limited, Custodian Capital Ltd., Fullfaith Capital Limited, NovaVision Holdings I Ltd., NovaVision
Holdings II Ltd. and NovaVision Holdings III Ltd. of RMB60,052,329, RMB15,013,082, RMB8,707,080,
RMB646,614, RMB1,963,173, RMB1,963,840, and RMB1,461,441, respectively.
Based on an agreement entered into by Wuhan Youji Holdings Ltd, Mr. Gao Lei, Mr. Shen Yingming,
Vastocean Capital Limited, SYM Holdings Limited, Custodian Capital Ltd., Linuo Investment, Linuo Group and
Wuhan Youji Industries Co., Ltd. on December 28, 2022, it was agreed that dividends of RMB65,886,529 declared
by the Company attributable to Mr. Gao Lei and Mr. Shen Yingming were used to offset the Group’s receivables due
from Linuo Group and Linuo Investment.
On December 31, 2023, dividends of RMB270,000,000 were declared by a wholly-owned subsidiary,
Centelligence Holdings Limited to the Company. On the same day, the directors of the Company passed a resolution
for the distribution of dividends of RMB270,000,000 to its shareholders including Vastocean Capital Limited, SYM
Holdings Limited, Custodian Capital Ltd., Fullfaith Capital Limited, NovaVision Holdings I Ltd, NovaVision
Holdings II Ltd and NovaVision Holdings III Ltd of RMB180,543,031, RMB45,135,756, RMB26,177,213,
RMB1,944,000, RMB5,902,139, RMB5,904,144, and RMB4,393,717, respectively.
APPENDIX I ACCOUNTANTS’ REPORT
– I-35 –


--- page 409 ---
12. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITY HOLDERS OF THE PARENT
The calculation of the basic earnings per share amounts is based on the profit for each of the Relevant Periods
attributable to ordinary equity holders of the parent. On March 7, 2022, the Company carried out a 1-to-10,000 share
subdivision whereby the authorized and issued number of ordinary shares of the Company became 500,000,000 with
a par value of US$0.0001. On the same day, after the repurchase and issuance of ordinary shares as disclosed in note
29, the issued number of ordinary shares of the Company became 75,000,000 with a par value of US$0.0001. The
weighted average number of ordinary shares was calculated based on the assumption that the share subdivision and
consolidation on March 7, 2022 had been completed at the beginning of the Relevant Periods.
The Group had no potentially dilutive ordinary shares in issue during each of the Relevant Periods.
The calculations of basic and diluted earnings per share are based on:
Y ear ended December 31,
2021 2022 2023
Earnings
Profit attributable to ordinary equity holders
of the parent (RMB’000) 309,137 340,470 72,902
Shares
Weighted average number of ordinary shares
in issue during the year in the basic and
diluted earnings per share calculation 75,000,000 75,000,000 75,000,000
Earnings per share (basic and diluted), RMB
per share 4.12 4.54 0.97
13. PROPERTY, PLANT AND EQUIPMENT
Buildings
Plant and
machinery
Furniture and
fixtures
Motor
vehicles
Construction
in progress Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At January 1, 2021:
Cost 354,405 724,222 7,345 4,622 70,662 1,161,256
Accumulated depreciation (76,095) (204,525) (4,091) (4,240) – (288,951)
Net carrying amount 278,310 519,697 3,254 382 70,662 872,305
At January 1, 2021, net of
accumulated depreciation 278,310 519,697 3,254 382 70,662 872,305
Additions – 2,003 157 152 150,714 153,026
Depreciation provided during the year (16,661) (75,713) (1,219) (104) – (93,697)
Transfers – 44,128 236 – (44,364) –
Disposals – (17,024) (3) (3) – (17,030)
At December 31, 2021, net of
accumulated depreciation 261,649 473,091 2,425 427 177,012 914,604
At December 31, 2021:
Cost 354,405 735,891 7,669 4,716 177,012 1,279,693
Accumulated depreciation (92,756) (262,800) (5,244) (4,289) – (365,089)
Net carrying amount 261,649 473,091 2,425 427 177,012 914,604
APPENDIX I ACCOUNTANTS’ REPORT
– I-36 –


--- page 410 ---
Buildings
Plant and
machinery
Furniture and
fixtures
Motor
vehicles
Construction
in progress Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At January 1, 2022:
Cost 354,405 735,891 7,669 4,716 177,012 1,279,693
Accumulated depreciation (92,756) (262,800) (5,244) (4,289) – (365,089)
Net carrying amount 261,649 473,091 2,425 427 177,012 914,604
At January 1, 2022, net of
accumulated depreciation 261,649 473,091 2,425 427 177,012 914,604
Additions – 1,477 678 647 161,316 164,118
Depreciation provided during
the year (16,809) (81,512) (680) (122) – (99,123)
Transfers 10,183 219,260 – – (229,443) –
Disposals – (440) – (16) – (456)
At December 31, 2022, net of
accumulated depreciation 255,023 611,876 2,423 936 108,885 979,143
At December 31, 2022:
Cost 364,588 955,866 8,347 5,048 108,885 1,442,734
Accumulated depreciation (109,565) (343,990) (5,924) (4,112) – (463,591)
Net carrying amount 255,023 611,876 2,423 936 108,885 979,143
At January 1, 2023:
Cost 364,588 955,866 8,347 5,048 108,885 1,442,734
Accumulated depreciation (109,565) (343,990) (5,924) (4,112) – (463,591)
Net carrying amount 255,023 611,876 2,423 936 108,885 979,143
At January 1, 2023, net of
accumulated depreciation 255,023 611,876 2,423 936 108,885 979,143
Additions 906 403 689 398 161,226 163,622
Depreciation provided during the year (17,310) (93,104) (616) (168) – (111,198)
Impairment* –––– (2,538) (2,538)
Transfers 47,742 66,600 274 – (114,616) –
Disposals – – – (20) (8,928) (8,948)
At December 31, 2023, net of
accumulated depreciation 286,361 585,775 2,770 1,146 144,029 1,020,081
At December 31, 2023:
Cost 413,236 1,022,869 9,310 5,058 146,567 1,597,040
Accumulated depreciation and
impairment (126,875) (437,094) (6,540) (3,912) (2,538) (576,959)
Net carrying amount 286,361 585,775 2,770 1,146 144,029 1,020,081
APPENDIX I ACCOUNTANTS’ REPORT
– I-37 –


--- page 411 ---
At December 31, 2021, certain of the Group’s plant and machinery with a net carrying amount of
approximately RMB240,435,000, respectively, were pledged to secure the Group’s bank loans (note 26).
At December 31, 2022 and 2023, certain of the Group’s buildings with an aggregate carrying amount of
RMB139,731,000 and RMB130,554,000 were pledged to secure the Group’s bank loans and other borrowings (note
26).
* During the year ended December 31, 2023, the construction of the Group’s Wuhan production plant for
hydrogenation production line was ceased due to geographical conditions. Certain assets of this
hydrogenation production line at Wuhan could not be used anymore. Management of the Group assessed
the recoverable amounts of the related idle assets, and a full impairment of RMB2,538,000 was made
accordingly.
14. LEASES
The Group as a lessee
The Group has lease contracts for various items of land use rights, buildings, toluene storage tanks and motor
vehicles used in its operations. Lump sum payments were made upfront to acquire certain leased land from the
owners with lease terms of 50 years, and no ongoing payments will be made under the terms of these land leases. The
lease term of other lease land is 5 years with annual lease payment to be made during the lease term. Except for lease
arrangements with Linuo Investment, a related entity as disclosed in note 36(e)(ii) to the Historical Financial
Information, leases of buildings (including factories and warehouses) generally have lease terms between 2.6 and 5
years, while those of toluene storage tanks generally have lease terms between 3 and 7 years. Motor vehicles have
lease terms between 3 and 5 years. Other equipment generally has lease terms of 12 months or less. Generally, the
Group is restricted from assigning and subleasing the leased assets outside the Group.
(a) Right-of-use assets
Leasehold
land Buildings
Storage
tanks
Motor
vehicles Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
As at January 1, 2021 101,491 7,987 20,905 1,368 131,751
Additions 51,258 – 4,075 934 56,267
Depreciation charge (2,840) (1,807) (4,440) (656) (9,743)
As at December 31, 2021
and January 1, 2022 149,909 6,180 20,540 1,646 178,275
Additions 12,563 19,941 – – 32,504
Depreciation charge (4,687) (8,310) (4,807) (788) (18,592)
As at December 31, 2022
and January 1, 2023 157,785 17,811 15,733 858 192,187
Additions 21,996 – – 115 22,111
Depreciation charge (5,932) (8,525) (4,749) (603) (19,809)
Lease modification (3,962) – – – (3,962)
As at December 31, 2023 169,887 9,286 10,984 370 190,527
At December 31, 2021 and 2022 and 2023, certain of the Group’s leasehold land with a net carrying amount of
approximately RMB94,570,000, RMB143,339,000 and RMB139,971,000, respectively, were pledged to secure the
Group’s bank loans and other borrowings (note 26).
APPENDIX I ACCOUNTANTS’ REPORT
– I-38 –


--- page 412 ---
(b) Lease liabilities
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Carrying amount at beginning of year 31,780 30,353 46,835
New leases 5,009 32,402 115
Accretion of interest recognized
during the year 1,687 2,396 1,925
Payments (8,123) (18,316) (17,242)
Lease modification – – (4,043)
Carrying amount at end of year 30,353 46,835 27,590
Analyzed into:
– Current portion 7,262 16,308 15,850
– Non-current portion 23,091 30,527 11,740
The maturity analysis of lease liabilities is as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within one year 7,262 16,308 15,850
After one year but within two years 7,337 16,826 7,973
After two years but within five years 15,754 13,701 3,767
30,353 46,835 27,590
(c) The amounts recognized in profit or loss in relation to leases are as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Interest on lease liabilities (note 7) 1,687 2,396 1,925
Depreciation charge of right-of-use
assets (note 6) 9,743 18,592 19,809
Expenses relating to short-term leases 2,449 – 4
Gain on lease modification – – (81)
Variable lease payments not included in the
measurement of lease liabilities (included
in cost of sales) 589 2,088 –
Total amount recognized in profit or loss 14,468 23,076 21,657
APPENDIX I ACCOUNTANTS’ REPORT
– I-39 –


--- page 413 ---
(d) Variable lease payments
The Group has lease contracts for toluene storage tanks that contains variable payments based on the storage
capacity being leased every 6 months. The following provides information on the Group’s variable lease payments,
including the magnitude in relation to fixed payments:
Fixed
payments
Variable
payments Total
RMB’000 RMB’000 RMB’000
Year ended December 31, 2021
Fixed rent 5,412 – 5,412
Variable rent only – 589 589
Year ended December 31, 2022
Fixed rent 5,569 – 5,569
Variable rent only – 2,088 2,088
Year ended December 31, 2023
Fixed rent 5,569 – 5,569
Variable rent only – – –
(e) The total cash outflow for leases and maturity profile of lease liabilities based on the contractual undiscounted
payments are disclosed in notes 32(c) and 39, respectively, to the Historical Financial Information.
The Group as a lessor
The Group leases its owned storage tanks under operating lease arrangements for a period of 5 years since
August 2020, which was renegotiated as a long term contract without a specific lease term in January 2022. Any
early termination of the long-term contract requires a consensus from both the Group and the lessee. In addition, the
Group leased a workshop for a period of one year from January 1 to December 31, with contract signed annually
during the years ended December 31, 2021, 2022 and 2023. Rental income recognized by the Group during each of
the Relevant Periods were RMB1,562,000, RMB1,774,000 and RMB1,774,000, respectively (note 5).
At the end of each of the Relevant Periods, the undiscounted lease payments receivable by the Group in future
periods under non-cancellable operating leases, excluding the long-term contract without a specific lease term
disclosed above, with its lessees are as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within one year 1,062 – –
After one year but within two years 1,062 – –
After two years but within three years 1,062 – –
After three years but within four years 531 – –
3,717 – –
At December 31, 2022 and 2023, the undiscounted lease payments receivable by the Group based on the
long-term contract for the storage tanks without a specific lease term disclosed above are RMB1,321,000 in each
coming year.
APPENDIX I ACCOUNTANTS’ REPORT
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15. OTHER INTANGIBLE ASSETS
Patent and
licenses Software Total
RMB’000 RMB’000 RMB’000
As at December 31, 2021
Cost at January 1, 2021, net of accumulated
amortization 2,543 2,885 5,428
Amortization provided during the year (507) (508) (1,015)
At December 31, 2021 2,036 2,377 4,413
At December 31, 2021
Cost 4,897 5,078 9,975
Accumulated amortization (2,861) (2,701) (5,562)
Net carrying amount 2,036 2,377 4,413
As at December 31, 2022
Cost at January 1, 2022, net of accumulated
amortization 2,036 2,377 4,413
Additions – external purchase 123 – 123
Amortisation provided during the year (479) (484) (963)
At December 31, 2022 1,680 1,893 3,573
At December 31, 2022
Cost 5,020 5,078 10,098
Accumulated amortisation (3,340) (3,185) (6,525)
Net carrying amount 1,680 1,893 3,573
As at December 31, 2023
Cost at January 1, 2023, net of accumulated
amortisation 1,680 1,893 3,573
Additions – external purchase 101 1,360 1,461
Amortisation provided during the year (466) (512) (978)
At December 31, 2023 1,315 2,741 4,056
At December 31, 2023
Cost 5,121 6,438 11,559
Accumulated amortisation (3,806) (3,697) (7,503)
Net carrying amount 1,315 2,741 4,056
APPENDIX I ACCOUNTANTS’ REPORT
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16. INVESTMENT IN A JOINT VENTURE
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Share of net assets 30,997 23,502 11,668
Particulars of the Group’s joint venture is as follows:
Name
Particulars of
issued shares
held
Place of
registration and
business
Percentage of ownership
interest attributable
to the Group Principal activity
As at December 31,
2021 2022 2023
Hebei Kangshi New Materials
Co., Ltd. (“Hebei Kangshi”)
ʮ̡
Ordinary shares The PRC/
Mainland China
51% 51% 51% Manufacture and sale of
industrial products
Hebei Kangshi, which is considered a material joint venture of the Group, acts as the Group’s manufacturer of
industrial products in Mainland China and is accounted for using the equity method.
The following table illustrates the summarized financial information of Hebei Kangshi adjusted for any
differences in accounting policies and reconciled to the carrying amount in the Historical Financial Information:
December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Current assets 71,372 29,553 41,406
Non-current assets 66,518 122,956 141,562
Current liabilities 12,036 47,467 137,290
Non-current liabilities 64,000 58,960 22,800
Net assets 61,854 46,082 22,878
Reconciliation to the Group’s interest in the joint
venture:
Proportion of the Group’s ownership 51% 51% 51%
Adjustments of unrealised profit arising from
sales by the Group to the joint venture (549) – –
Carrying amount of the investment 30,997 23,502 11,668
Revenue 57 1,902 231,766
Loss for the year (11,785) (15,772) (23,204)
Hebei Kangshi was set up in January 2019 and the Group initially contributed RMB40,579,000 to the joint
venture. During each of the Relevant Periods, the Group shared the loss of this joint venture amounting to
RMB6,010,000, RMB8,044,000, and RMB11,834,000, respectively, before any adjustments of unrealised profit
arising from sales by Hebei Kangshi to the Group.
Management assessed that there was no impairment indicator at the end of each of the Relevant Periods. Since
Hebei Kangshi was in the startup stage where the construction of its factory was completed in January 2023, the
financial performance was consistent with management’s expectations.
APPENDIX I ACCOUNTANTS’ REPORT
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17. INVESTMENTS IN ASSOCIATES
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Share of net assets 29,110 33,306 24,272
Less: Accumulated impairment (3,455) – –
25,655 33,306 24,272
The Group’s trade receivable balances due from the associates are disclosed in notes 20 and 36(d) to the
Historical Financial Information respectively.
Particulars of the Group’s associates are as follows:
Name
Particulars of
issued shares
held
Place of
incorporation/
registration and
business
Percentage of ownership
interest attributable
to the Group Principal activity
As at December 31,
2021 2022 2023
Wuhan Eastman Organic
Chemical Co., Ltd.
(“Wuhan Eastman”)
ဏͺɻਟϞዚʷʈ
ʮ̡
Ordinary shares PRC/
Mainland China
49% 49% 49% Manufacture of
industrial products
Tiantong Fine Chemicals
(Nantong) Co., Ltd.
(“Tiantong Fine Chemicals”)
ஷ
ʮ̡
Ordinary shares PRC/
Mainland China
25% – – Manufacture of
industrial products
Wuhan Eastman was set up in December 2010 and the Group initially contributed RMB5,553,000 to the
associate. During each of the Relevant Periods, the Group shared profit of RMB8,450,000, RMB7,341,000, and
RMB4,473,000, respectively. The investment in Wuhan Eastman is accounted for using the equity method.
Tiantong Fine Chemicals was set up in Nantong, Jiangsu province. The Group acquired its 25% interests for a
consideration of RMB5,302,000 in January 2018, and it became an associate of the Group accordingly. As at
December 31, 2019, the recoverable amount of the investment in Tiantong Fine Chemicals was determined to be nil
based on its value in use due to the local government’s decision to close the chemical factory in the area where
Tiantong Fine Chemicals locates. Tiantong Fine Chemicals ceased its operation in 2020 and had been in the process
of liquidation since August 2020. An impairment loss on the investment in the associate of RMB3,455,000 was
recognized during the year ended December 31, 2019, and a gain from liquidations of RMB4,501,000 was
recognized during the year ended December 31, 2022, with the final liquidation of Tiantong Fine Chemicals in
August 2022.
The Group has discontinued the recognition of its share of loss of Tiantong Fine Chemicals since January 1,
2020 because the share of loss of the associate exceeded the Group’s interest in the associate and the Group has no
obligation to take up further losses. The amount of the Group’s unrecognised share of loss of this associate for the
year ended December 31, 2021 was nil and the cumulative unrecognised share of losses was RMB2,254,000 as at
December 31, 2021.
APPENDIX I ACCOUNTANTS’ REPORT
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The following table illustrates the summarized financial information of Wuhan Eastman, a material associate
adjusted for any differences in accounting policies and reconciled to the carrying amount in the Historical Financial
Information.
December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Current assets 44,478 68,038 43,166
Non-current assets, excluding goodwill 12,330 11,689 10,686
Current liabilities 3,141 11,124 3,725
Non-current liabilities 293 248 240
Net assets 53,374 68,355 49,887
Reconciliation to the Group’s interest in the
associate:
Proportion of the Group’s ownership 49% 49% 49%
Adjustments of unrealized profit arising from
sales by the Group to the associate (498) (188) (173)
Carrying amount of the investment 25,655 33,306 24,272
Revenue 106,737 83,358 62,881
Profit for the year 17,245 14,981 9,128
Dividend declared by the associate to the Group – – 13,522
December 31,
Tiantong Fine Chemicals 2021 2022 2023
RMB’000 RMB’000 RMB’000
Share of the associate’s gain from
liquidation – 4,501 –
Carrying amount of the investment – – –
18. INVESTMENT IN A SUBSIDIARY
The Company
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Investment cost 431,724 431,724 431,724
The amount represents the investment in the Company’s wholly-owned subsidiary, Centelligence Holdings
Limited, which is stated at cost as at December 31, 2021 and 2022 and 2023, respectively.
APPENDIX I ACCOUNTANTS’ REPORT
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19. INVENTORIES
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Raw materials 141,361 135,250 109,820
Work in progress 11,148 13,827 13,269
Finished goods 153,112 171,404 164,008
305,621 320,481 287,097
Impairment – – (1,764)
305,621 320,481 285,333
At December 31, 2021, certain of the Group’s inventories with a net carrying amount of approximately
RMB31,944,000, were pledged to secure the Group’s bank loans (note 26), and no inventories were pledged as at
December 31, 2022 and 2023.
20. TRADE AND BILLS RECEIV ABLES
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Trade receivables 99,655 143,218 97,211
Bills receivable 135,201 184,573 199,727
234,856 327,791 296,938
Impairment (498) (812) (624)
234,358 326,979 296,314
The Group’s trading terms with its customers are mainly paid in advance, except for some customers with
good credit, where payment on credit is permitted. Generally, the credit period is one month and extending up to 120
days for major customers. Each customer has a maximum credit limit. The Group seeks to maintain strict control
over its outstanding receivables and has a credit control department to minimize credit risk. Overdue balances are
reviewed regularly by senior management. Trade receivables are non-interest-bearing.
Bills receivable are measured at fair value through profit or loss. Bills receivable are bank acceptance bills
that are unconditionally accepted by banks within the maturity period. Bills receivable are all aged within 12
months.
Included in the Group’s trade receivables are amounts due from associates of the Group of nil, RMB5,245,000
and RMB1,261,000 (netted of RMB6,000 impairment allowance) as at December 31, 2021, 2022 and 2023,
respectively, which are repayable on credit terms similar to those offered to the major customers of the Group.
Details of trade receivable balances due from other related parties are disclosed in note 36(d) to the Historical
Financial Information.
Transferred financial assets that are not derecognized in their entirety
At December 31, 2021, 2022 and 2023, the Group endorsed certain bills receivable accepted by banks (the
“Bank Bills”) in Mainland China (the “Endorsed Bills”) with a carrying amount of RMB133,293,000,
RMB159,147,000 and RMB161,271,000, respectively, to certain of its suppliers in order to settle the trade and other
payables due to such suppliers (the “Endorsement”).
APPENDIX I ACCOUNTANTS’ REPORT
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The Group also transferred certain Bank Bills in Mainland China with a carrying amount of nil, RMB300,000
and nil to certain banks in order to obtain cash from such banks (the “Discounted Bills”) as at December 31, 2021,
2022 and 2023, respectively (note 26(d)).
In the opinion of the Company’s directors, the Group has retained the substantial risks and rewards, which
include default risks relating to such Endorsed Bills and Discounted Bills, and accordingly, the Group continued to
recognize (i) the full carrying amounts of the Endorsed Bills and the relevant associated trade and other payables
settled and (ii) the full carrying amounts of the Discounted Bills and the associated other borrowings associated with
cash received. Subsequent to the Endorsement or Discount, the Group did not retain any rights on the use of the
Endorsed or Discounted Bills, including the sale, transfer or pledge of the Endorsed and Discounted Bills to any
other third parties.
At December 31, 2021, 2022 and 2023, the aggregated carrying amount of the trade payables and other
payables settled by the Endorsed Bills to which the suppliers have recourse are RMB66,068,000, RMB94,795,000
and RMB96,457,000, respectively, and RMB67,225,000, RMB64,352,000 and RMB64,814,000, respectively.
At December 31, 2021, 2022 and 2023, the aggregated carrying amount of the other borrowings are nil,
RMB15,300,000 and nil, respectively.
Transferred financial assets that are derecognized in their entirety
At December 31, 2021, 2022 and 2023, the Group endorsed certain Bank Bills in Mainland China with a
carrying amount of RMB233,631,000, RMB270,250,000 and RMB149,474,000 respectively, to certain of its
suppliers in order to settle the trade payables due to such suppliers. At December 31, 2021, 2022 and 2023, the
Group also transferred certain Bank Bills in Mainland China with a carrying amount of RMB7,594,000,
RMB38,433,000 and RMB9,646,000, respectively, to certain banks in order to obtain cash from such banks. These
bills receivables being endorsed and transferred are collectively referred to derecognized bills (the “Derecognized
Bills”).
The Derecognized Bills had a maturity of one to twelve months at the end of each of the Relevant Periods. In
accordance with the Law of Negotiable Instruments in the PRC, the holders of the Derecognized Bills may exercise
the right of recourse against any, several or all of the persons liable for the Derecognized Bills, including the Group,
in disregard of the order of precedence (the “Continuing Involvement”). In the opinion of the Company’s directors,
the risk of the Group being claimed by the holders of the Derecognized Bills is remote in the absence of a default of
the accepted banks. The Group has transferred substantially all risks and rewards relating to the Derecognized Bills.
Accordingly, it has derecognized the full carrying amounts of the Derecognized Bills and the associated trade
payables and other borrowings. The maximum exposure to loss from the Group’s Continuing Involvement in the
Derecognized Bills and the undiscounted cash flows to repurchase these Derecognized Bills is equal to their
carrying amounts. In the opinion of the Company’s directors, the fair values of the Group’s Continuing Involvement
in the Derecognized Bills are not significant.
During each of the Relevant Periods, the Group has not recognized any gain or loss on the date of transfer of
the Derecognized Bills. No gains or losses were recognized from the Continuing Involvement during each of the
Relevant Periods. The endorsement and transfer have been made evenly throughout the Relevant Periods.
An aging analysis of the trade receivables as at the end of each of the Relevant Periods, based on the invoice
date and net of loss allowance, is as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 4 months 98,865 123,601 95,913
Over 4 months but within 6 months 65 17,612 –
Over 6 months but within 12 months 227 1,193 674
99,157 142,406 96,587
APPENDIX I ACCOUNTANTS’ REPORT
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The maturity date analysis for bills receivable is as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 3 months 76,999 112,436 80,859
Over 3 months but within 6 months 47,072 68,658 118,868
Over 6 months but within 12 months 11,130 3,479 –
135,201 184,573 199,727
The movements in the loss allowance for impairment of trade receivables are as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
At beginning of year 314 498 812
Impairment losses 184 314 (188)
At end of year 498 812 624
An impairment analysis is performed at each reporting date using a provision matrix to measure expected
credit losses. The provision rates are based on days past due for groupings of various customer segments with
similar loss patterns. The calculation reflects the probability-weighted outcome, the time value of money and
reasonable and supportable information that is available at the reporting date about past events, current conditions
and forecasts of future economic conditions. Generally, trade receivables are written off if past due for more than
one year and are not subject to enforcement activity. Given there were no significant changes in the historical and
forecasts of future conditions, the expected loss rates for trade receivables remained substantially the same
throughout the Relevant Periods.
Set out below is the information about the credit risk exposure on the Group’s trade receivables using a
provision matrix:
As at December 31, 2021
Past due
Current
Less than
3 months 3 to 6 months Total
RMB’000
Expected credit loss rate 0.4% 1.0% 3.0%
Gross carrying amount 94,399 4,183 1,073 99,655
Expected credit losses 424 42 32 498
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 421 ---
As at December 31, 2022
Past due
Current
Less than
3 months 3 to 6 months Total
RMB’000
Expected credit loss rate 0.5% 1.0% 3.0%
Gross carrying amount 130,974 10,544 1,700 143,218
Expected credit losses 656 105 51 812
As at December 31, 2023
Past due
Current
Less than
3 months 3 to 6 months Total
RMB’000
Expected credit loss rate 0.5% 1.0% 3.0%
Gross carrying amount 83,667 12,573 971 97,211
Expected credit losses 452 143 29 624
21. PREPA YMENTS, DEPOSITS AND OTHER RECEIV ABLES
The Group
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Non-current:
Prepayments for property, plant and
equipment and leasehold land 28,630 60,740 32,704
Current:
Loans to directors (note 22) 689 549 349
Amounts due from other related parties (note
36(d)) 1,008,171 13,255 59,414
Deposits and other receivables 10,640 9,293 13,644
Prepayments 62,118 27,701 29,311
Deductible input V AT 13,234 12,811 31,711
Prepaid income tax – 5,692 438
Investment in a fund* – – 10,500
1,094,852 69,301 145,367
* The fund was set up in July 2023 in Mainland China, and the Group’s investment in the fund was
measured at fair value through profit or loss. Pursuant to a resolution of the fund’s investors in
December 2023, the fund was being cancelled as at December 31, 2023. The Group received the
investment proceeds in January 2024 and the fund was then liquidated in February 2024.
None of the above financial assets is either past due or impaired. The other financial assets included in the
above balances relate to receivables for which there was no recent history of default. As at the end of each of the
Relevant Periods, the loss allowance was assessed to be minimal as the loss given default are minimal.
APPENDIX I ACCOUNTANTS’ REPORT
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The Company
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Current:
Due from a subsidiary (note) – 113,170 127,077
Deposits and other receivables 2,614 6,193 9,555
Prepayments 796 2,873 354
3,410 122,236 136,986
None of the financial assets included above is either past due or impaired. As at the end of each of the Relevant
Periods, the loss allowance was assessed to be minimal as the loss given default are minimal.
Note: As disclosed in note 11, Centelligence Holdings Limited, a wholly-owned subsidiary declared
dividends of RMB1,048,975,210 on February 28, 2022, RMB89,807,559 on December 28, 2022 and
RMB270,000,000 on December 31, 2023 to the Company, respectively. As of December 31, 2023,
RMB1,281,705,833 of declared dividends has been settled, while the remaining unsettled balance of
RMB127,076,936 was recorded as other payable. As certain shareholders of the Wuhan Youji
Employee Trust could not be contacted by December 31, 2023, the Group was unable to settle the
dividend payable to these shareholders and therefore, the subsidiary has not yet settled the dividend
payable to the Company.
The outstanding dividends receivable are non-interest bearing.
22. LOANS TO DIRECTORS
Name
At
January 1,
2021
Maximum
amount
outstanding in
2021
At
December 31,
2021
RMB’000 RMB’000 RMB’000
Mr. Zou Xiaohong 589 589 549
Mr. Gao Lei – 108 108
Mr. Shen Yingming – 32 32
589 689
Name
At
January 1,
2022
Maximum
amount
outstanding in
2022
At
December 31,
2022
Maximum
amount
outstanding in
2023
At
December 31,
2023
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Mr. Zou Xiaohong 549 549 549 549 349
Mr. Gao Lei 108 108 – – –
Mr. Shen Yingming 32 32 – – –
689 549 349
The loans granted to directors are unsecured, non-interest-bearing and repayable on demand.
The loans granted to directors are non-trade in nature and will be settled prior to the Listing.
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 423 ---
23. CASH AND CASH EQUIV ALENTS AND PLEDGED DEPOSITS
The Group
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Cash and bank balances 118,965 148,126 105,560
Less: Pledged time deposits:
Pledged for bills payable (39,433) (10,000) –
Pledged for letter of credit (10,071) (50,174) (40,127)
Others – (4,501) –
(49,504) (64,675) (40,127)
Cash and cash equivalents 69,461 83,451 65,433
Cash and bank balances denominated in:
RMB 90,679 105,125 84,151
EUR 617 762 425
USD 27,669 42,239 20,984
The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange
Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the
Group is permitted to exchange RMB for other currencies through banks authorized to conduct foreign exchange
business.
Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances and pledged
deposits are deposited with creditworthy banks with no recent history of default.
24. TRADE AND BILLS PA Y ABLES
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Trade payables 125,250 161,228 149,705
Bills payable 71,000 10,000 –
196,250 171,228 149,705
An aging analysis of the trade payables as at the end of the reporting period, based on the posting date, is as
follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 1 year 123,829 156,772 149,444
1 year to 2 years 668 4,170 152
Over 2 years 753 286 109
125,250 161,228 149,705
APPENDIX I ACCOUNTANTS’ REPORT
– I-50 –


--- page 424 ---
The maturity date analysis for bills payable is as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within 3 months – 10,000 –
3 months to 6 months 25,000 – –
6 months to 12 months 46,000 – –
71,000 10,000 –
Trade payables are non-interest-bearing and are normally settled within 90-day terms.
25. OTHER PA Y ABLES AND ACCRUALS
The Group
As at December 31,
2021 2022 2023
Notes RMB’000 RMB’000 RMB’000
Deferred output V AT 7,110 6,235 6,049
Contract liabilities (a) 64,322 42,919 50,596
Other payables and accruals (b) 159,880 159,248 160,878
Amounts due to related parties 36(d) 2,213 6,614 5,825
Dividend payable – 113,170 127,077
Accrued wages and salaries 24,704 27,022 19,990
Other tax payable 4,944 6,878 2,556
263,173 362,086 372,971
(a) Details of contract liabilities are as follows:
As at
January 1, As at December 31,
2021 2021 2022 2023
RMB’000 RMB’000 RMB’000 RMB’000
Short-term advances received from customers* 44,977 64,322 42,919 50,596
* Contract liabilities include short-term advances received to deliver industrial products. The
fluctuation in contract liabilities at December 31, 2021, 2022 and 2023 was due to the changes of
short-term advances received from customers based on their demand at the end of each of the
Relevant Periods.
APPENDIX I ACCOUNTANTS’ REPORT
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(b) Other payables are unsecured and non-interest-bearing. Details of other payables are as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Construction fees 55,880 53,144 61,315
Transportation expenses 46,546 50,414 49,383
Spare parts fees 27,250 23,372 17,881
Energies 5,724 10,252 6,185
Deposits and others 24,480 22,066 26,114
159,880 159,248 160,878
The Company
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Current:
Dividend payable*** – 113,170 127,077
Amounts due to subsidiaries** 11,250 31,401 42,364
Others – – 15
11,250 144,571 169,456
** The subsidiaries are Wuhan Youji Industry Co., Ltd and Wuhan International Holding II Limited. The
above payables are non-trade in nature, unsecured, non-interest-bearing and repayable on demand.
*** The balance as at December 31, 2023 mainly represents payable to shareholders previously under the
Wuhan Youji Employee Trust whom could not be contacted.
26. INTEREST-BEARING BANK AND OTHER BORROWINGS
As at December 31, 2021
Effective interest
rate (%) Maturity RMB’000
Current
Bank loans – secured 2-9 2022 581,527
Other borrowings – unsecured 2-12 2022 134,580
716,107
APPENDIX I ACCOUNTANTS’ REPORT
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--- page 426 ---
As at December 31, 2022 As at December 31, 2023
Effective
interest
rate (%) Maturity RMB’000
Effective
interest
rate (%) Maturity RMB’000
Current
Bank loans – secured 4-5 2023 200,000 4-5 2024 268,020
Bank loans –
unsecured 4-5 2023 345,000 3-5 2024 514,000
Current portion of
long-term bank
loans – secured 5 2023 10,000 5 2024 12,000
Current portion of
long-term bank
loans – unsecured 4 2023 2,000 4 2024 18,000
Other borrowings –
secured 2023 50,000 –
Other borrowings –
unsecured 2023 55,300 2024 40,000
662,300 852,020
Non Current
Bank loans –
unsecured 4 2023-2024 18,000 4 2025 23,500
Bank loans – secured 5 2023-2025 54,000 5 2025 42,000
72,000 65,500
734,300 917,520
As at December 31
2021 2022 2023
RMB’000 RMB’000 RMB’000
Analysed into:
Bank loans repayable:
Within one year 581,527 557,000 812,020
After one year but within two years – 30,000 65,500
After two years but within five years – 42,000 –
581,527 629,000 877,520
Other borrowings repayable:
Within one year 134,580 105,300 40,000
716,107 734,300 917,520
Notes:
(a) Bank loans and other borrowings of the Group are secured by:
(i) mortgages over the Group’s plant, equipment and buildings situated in Mainland China, which
had an aggregate carrying amount as at December 31, 2021, 2022 and 2023 of RMB240,435,000,
RMB139,731,000 and RMB130,554,000 respectively (note 13);
APPENDIX I ACCOUNTANTS’ REPORT
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(ii) mortgages over the Group’s leasehold lands situated in Mainland China, which had an aggregate
carrying amount as at December 31, 2021, 2022 and 2023 of RMB94,570,000, RMB143,339,000
and RMB139,971,000 respectively (note 14);
(iii) mortgages over the Group’s inventories situated in Mainland China, which had an aggregate
carrying amount as at December 31, 2021 of RMB31,944,000 (note 19);
In addition to the mortgages mentioned above, bank loans of RMB556,554,000 as at December
31, 2021, were guaranteed by certain entities controlled by a close family member of Mr. Gao Lei,
a director of the Company and substantial shareholder of the Company’s parent (note 36). These
guarantees provided by related parties have been subsequently released after August 19, 2022.
(b) All bank loans and other borrowings of the Group are denominated in RMB and at fixed interest rates
except for an unsecured bank loan with the amount of RMB23,500,000 as at December 31, 2023 is at
floating interest rate.
(c) Certain other borrowings with carrying amounts of RMB20,000,000, nil and nil as at December 31,
2021, 2022 and 2023, respectively, are borrowed from related parties (note 36(d)).
(d) Certain other borrowings are associated with the discounted bills but not derecognized, with carrying
amounts of nil, RMB300,000 and nil as at December 31, 2021, 2022 and 2023, respectively (note 20).
(e) Certain other borrowings with carrying amounts of RMB25,000,000 as at December 31, 2021, were
guaranteed by Linuo Group, a related party (note 36(c)(vii)).
27. GOVERNMENT GRANTS
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Government grants* 39,950 49,026 45,740
The movements in government grants during the Relevant Periods are as follows:
Total
RMB’000
At January 1, 2021 36,750
Received during the year 6,430
Released to profit or loss (3,230)
At December 31, 2021 and January 1, 2022 39,950
Received during the year 13,646
Released to profit or loss (4,570)
At December 31, 2022 and January 1, 2023 49,026
Received during the year 2,067
Released to profit or loss (5,353)
At December 31, 2023 45,740
* The Group received government grants for capital expenditure incurred for the purchase of plant and
equipment. The amounts are deferred and amortized over the estimated useful lives of the respective
assets.
APPENDIX I ACCOUNTANTS’ REPORT
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28. DEFERRED TAX
The movements in deferred tax liabilities and assets during each of the Relevant Periods are as follows:
Deferred tax liabilities
Depreciation
difference for
tax purpose
Right of use
assets
Withholding
tax on
undistributed
profits of
subsidiaries
in Mainland
China Total
RMB’000 RMB’000 RMB’000 RMB’000
At January 1, 2021 25,044 4,539 74,053 103,636
Deferred tax charged/(credited) to
profit or loss during the year (note
10) 2,594 (284) 34,396 36,706
Gross deferred tax liabilities at
December 31, 2021 27,638 4,255 108,449 140,342
Deferred tax charged/(credited) to
profit or loss during the year
(note 10) 17,207 2,587 (78,023) (58,229)
Gross deferred tax liabilities at
December 31, 2022 44,845 6,842 30,426 82,113
Deferred tax charged/(credited) to
profit or loss during the year
(note 10) 4,132 (2,960) (20,721) (19,549)
Gross deferred tax liabilities at
December 31, 2023 48,977 3,882 9,705 62,564
Deferred tax assets
Government
grants
Impairment
losses
Lease
liability
Unpaid
payroll Others Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
At January 1, 2021 5,513 203 4,735 3,231 1,909 15,591
Deferred tax credited/(charged)
to profit or loss during the
year (note 10) (411) (203) (209) 475 391 43
Gross deferred tax assets at
December 31, 2021 5,102 – 4,526 3,706 2,300 15,634
Deferred tax credited to profit
or loss during the year (note
10) 2,252 – 2,499 346 392 5,489
Gross deferred tax assets at
December 31, 2022 7,354 – 7,025 4,052 2,692 21,123
Deferred tax credited/(charged)
to profit or loss during the
year (note 10) (493) – (2,887) (1,053) 5,243 810
Gross deferred tax assets at
December 31, 2023 6,861 – 4,138 2,999 7,935 21,933
APPENDIX I ACCOUNTANTS’ REPORT
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The Group had accumulated tax losses arising in Mainland China of RMB4,207,000 as at December 31, 2023,
which are available for offsetting against future taxable profits in ten years.
For presentation purposes, deferred tax assets and liabilities have been offset in the consolidated statements of
financial position as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Net deferred tax liabilities recognized in
the consolidated statements of financial
position (124,708) (60,990) (40,631)
29. SHARE CAPITAL
The Company was incorporated on September 23, 2016 with an authorized share capital of US$50,000 divided
into 50,000 ordinary shares with a par value of US$1.00 each.
On March 7, 2022, the Company carried ou ta1t o 10,000 share subdivision whereby the authorized and issued
number of ordinary shares of the Company became 500,000,000 with a par value of US$0.0001. The authorized and
issued share capital remained unchanged at US$50,000.
On the same day, the Company entered into a subscription, repurchase and transfer agreement whereby:
(i) the Company repurchased the entire 500,000,000 ordinary shares from Cougar International at a
consideration of US$5,200,000, which was subsequently settled in September 2022; and
(ii) the Company issued ordinary shares of 75,000,000 with par value of US$0.0001 each at par, the
consideration of which was subsequently settled in August 2022.
The authorised number of ordinary shares of the Company keeps unchanged and is 500,000,000 with a par
value of US$0.0001.
A summary of movements in the Company’s issued share capital is as follows:
Number of shares
in issue Share capital
RMB’000
At January 1, 2021 and December 31, 2021 50,000 339
Share subdivision with an adjusted par value of US$0.0001 499,950,000 –
Shares repurchased (500,000,000) (339)
Issue of new ordinary shares 75,000,000 48
At December 31, 2022 and 2023 75,000,000 48
30. SHARE A W ARD SCHEME
On January 18, 2021, Wuhan Linuo Investment Holdings Group Co., Ltd. (“Linuo Investment”) and Cougar
Holdings approved a share award scheme (the “Scheme”) of Wuhan Youji, pursuant to which Linuo Investment (a
substantial shareholder of Cougar Holdings) agreed to grant share awards representing an aggregate of 600 shares in
Cougar Holdings (the “Awarded Shares”) to 104 eligible employees of the Group, including the senior and middle
management of Wuhan Youji at the time. The purpose of the scheme is to provide incentives and rewards to eligible
participants who contribute to the success of the Group’s operations.
The agreed and approved award price was RMB48,511.31 per share with a total award consideration of
RMB29,106,786. The underlying Awarded Shares had been transferred by Linuo Investment to the eligible
employees when a share transfer agreement was signed with Linuo Investment. Meanwhile, as the registration
procedures of the employees ruling by relevant regulation had not been completed when the Awarded Shares were
granted, such shares remained to be held by Linuo Investment according to the share transfer agreement. The award
APPENDIX I ACCOUNTANTS’ REPORT
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considerations were fully paid by the eligible employees to Linuo Investment in November 2021. Pursuant to the
Scheme, the eligible employees of the Awarded Shares are required to provide services to the Group for five years
starting from January 18, 2021.
The fair value of the Awarded Shares under the Scheme as at the date of grant was determined based on the
discounted cash flow method by an independent professional valuer.
Based on the valuation, the fair value of each Awarded Share is determined at RMB52,007.93 and the total fair
value of the Awarded Shares is amounted to RMB31,204,755. Hence, the total share-based payment expenses of the
Scheme are RMB2,097,969. Set out below is a summary of the Scheme:
Date of grant
Fair value at
the date of
grant
Award price
paid by
employees
Total
share-based
payment
expenses
RMB’000 RMB’000 RMB’000
January 18, 2021 31,205 29,107 2,098
Total
share-based
payment
expenses
Amortisation
to profit or
loss in 2021
Deferred
expenses as at
December 31,
2021
Amortisation
to profit or
loss in 2022
Deferred
expenses as at
December 31,
2022
Amortisation
to profit or
loss in 2023
Deferred
expenses as at
December 31,
2023
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
2,098 419 1,679 419 1,260 419 841
During the corporate reorganisation undergone by the Group in preparation of the initial listing for the shares
of the Company on the Stock Exchange (“Listing”) in March 2022, the Awarded Shares were replaced by 4,500,000
ordinary shares newly issued (which were included in the new issuance of 75,000,000 ordinary shares as described
in note 29(ii)) by the Company and the effective interest in the Group under the Scheme remained the same at 6%.
According to the Scheme, Mr. Shen Yingming will purchase the shares of the Company from the eligible employees
if they leave the Group within 5 years from January 18, 2021 at a price which equals to the award price paid by the
respective eligible employees plus an interest (based on bank deposit interest rate) for the period commencing from
the date the employee paid the award price.
31. RESERVES
The Group
The amounts of the Group’s reserves and the movements therein during each of the Relevant Periods are
presented in the consolidated statements of changes in equity on pages I-7 to I-8 of the Historical Financial
Information.
(i) Merger reserve
The merger reserve of the Group represents the difference between the par value of the Company’s shares
issued in exchange for the shares of the then holding company and the carrying amount of the issued share capital
and capital contribution of the then holding company of the Group.
(ii) Statutory reserve
In accordance with the Company Law of the PRC, certain subsidiaries of the Group are required to allocate
10% of their profit after tax, as determined in accordance with the relevant PRC accounting standards, to their
respective statutory reserves until the reserve reach 50% of their respective registered capital.
(iii) Capital reserve
Capital reserve represents the difference between the consideration of US$5,200,000 for the repurchase of
Company’s shares and the carrying amount of the Company’s share capital of US$50,000, according to the
subscription, repurchase and transfer agreement entered into as at March 7, 2022.
(iv) Other reserves
Other reserves represent equity-settled share award arrangements (note 30).
APPENDIX I ACCOUNTANTS’ REPORT
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The Company
The Company’s capital reserve includes: (i) the difference between the par value of the Company’s shares
issued and the cost of investment in a subsidiary; and (ii) the difference between the consideration for the repurchase
of Company’s shares and the carrying amount of the Company’s share capital on March 7, 2022.
The movements of the Company’s reserves are as follows:
Retained
earnings/
(accumulated
losses) Capital reserve Total
RMB’000 RMB’000 RMB’000
As at January 1, 2021 – 431,385 431,385
Loss and total comprehensive loss for the
year (7,840) – (7,840)
As at December 31, 2021 (7,840) 431,385 423,545
Repurchase of shares – (32,670) (32,670)
Profit and total comprehensive income for
the year 1,121,581 – 1,121,581
Dividend distribution (1,102,832) – (1,102,832)
As at December 31, 2022 10,909 398,715 409,624
Profit and total comprehensive income for
the year 259,849 – 259,849
Dividend distribution (270,000) – (270,000)
As at December 31, 2023 758 398,715 399,473
32. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
(a) Major non-cash transactions
(i) During the years ended December 31, 2021, 2022 and 2023, the Group had non-cash additions of
right-of-use assets of RMB5,009,000, RMB32,402,000 and RMB115,000, and non-cash additions of
lease liabilities of RMB5,009,000, RMB32,402,000, and RMB115,000, respectively, in respect of the
Group’s lease arrangements.
(ii) During the years ended December 31, 2021, 2022 and 2023, the Group endorsed bills receivable of
RMB108,486,000, RMB104,156,000 and RMB114,652,000, respectively, to settle the payables for
purchase of property, plant and equipment.
(iii) During the year ended December 31, 2021, the Group endorsed bills receivable of RMB50,765,000 and
RMB12,177,000, respectively, to related parties, Linuo Group and Wuhan Linuo Investment Holdings
Group Co., Ltd. for funding purpose.
(iv) Based on an agreement entered into by Cougar Holdings, Mr. Gao Lei, Mr. Shen Yingming, Linuo
Investment, Linuo Group, Wuhan Youji Employee Trust and Wuhan Youji on March 31, 2022, it was
agreed that dividends of RMB820,026,606 that belongs to Mr. Gao Lei, Mr. Shen Yingming and Linuo
Investment were used to offset the Group’s receivables due from Linuo Group and Linuo Investment
(note 11).
Based on the distribution agreement dated August 3, 2022, it was agreed that dividends of USD5,465,
USD727, USD1,254, and USD54 were used to set-off the subscription price of the issuance of
75,000,000 ordinary shares (note 12) to Vastocean Capital Limited, Custodian Capital Ltd., SYM
Holdings Limited and Fullfaith Capital Limited, respectively (note 11).
APPENDIX I ACCOUNTANTS’ REPORT
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Based on an agreement entered into by Wuhan Youji Holdings Ltd, Mr. Gao Lei, Mr. Shen Yingming,
Vastocean Capital Limited, SYM Holdings Limited, Custodian Capital Ltd., Linuo Investment, Linuo
Group and Wuhan Youji Industries Co., Ltd. on December 28, 2022, it was agreed that dividends of
RMB65,886,529 that belongs to Mr. Gao Lei and Mr. Shen Yingming were used to offset the Group’s
receivables due from Linuo Group and Linuo Investment (note 11).
(v) Based on an agreement entered into by Hebei Kangshi and Wuhan Youji Industries Co., Ltd. on
December 31, 2023, it was agreed that loans of RMB13,394,417 that Hebei Kangshi borrowed from
Wuhan Youji Industries Co., Ltd. were used to offset the Group’s payables due to Hebei Kangshi.
(vi) During the year ended 31 December 2023, Hebei Kangshi received prepayment of RMB7,172,869 from
its customers, while Wuhan Youji fulfilled the contracts obligations by delivering goods to those
customers on behalf of Hebei Kangshi. Since Hebei Kangshi should settle the payment of
RMB7,172,869 to Wuhan Youji, Hebei Kangshi and Wuhan Youji entered into an agreement in
September 2023, where both parties agreed that the amount due from Hebei Kangshi was repayable
within one year and carried interest at 4.8% per annum.
(b) Changes in liabilities arising from financing activities
Interest-
bearing
bank and
other
borrowings
Pledged
deposits
Interest
payable
Lease
liabilities Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
(note 26) (note 23) (note 14(b))
At January 1, 2021 558,343 (73,971) – 31,780 516,152
Changes from financing
cash flow 157,764 24,467 (32,379) (8,123) 141,729
New leases – – – 5,009 5,009
Interest expenses – – 32,379 1,687 34,066
At December 31, 2021 and
January 1, 2022 716,107 (49,504) – 30,353 696,956
Changes from financing
cash flow 18,193 (15,171) (28,630) (18,316) 43,924
New leases – – – 32,402 32,402
Interest expenses – – 28,630 2,396 31,026
At December 31, 2022 and
January 1, 2023 734,300 (64,675) – 46,835 716,460
Changes from financing
cash flow 183,220 24,548 (30,356) (17,242) 160,170
New leases – – – 115 115
Lease modification – – – (4,043) (4,043)
Interest expenses – – 30,356 1,925 32,281
At December 31, 2023 917,520 (40,127) – 27,590 904,983
APPENDIX I ACCOUNTANTS’ REPORT
– I-59 –


--- page 433 ---
(c) The total cash outflows for leases included in the statements of cash flows are as follows:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Within operating activities 3,038 2,088 4
Within investing activities 51,258 21,452 646
Within financing activities 8,123 18,316 17,242
62,419 41,856 17,892
33. CONTINGENT LIABILITIES
At the end of each of the Relevant Periods, the Group had no significant contingent liabilities.
34. PLEDGE OF ASSETS
Details of the Group’s assets pledged for the Group’s bank loans are included in notes 13, 14, 19, 20 and 23,
respectively, to the Historical Financial Information.
35. COMMITMENTS
The Group had the following capital commitments at the end of each of the Relevant Periods:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Contracted, but not provided for:
Plant and machinery 17,730 60,623 42,700
36. RELATED PARTY TRANSACTIONS
In addition to the transactions and balances detailed in note 11, note 17, note 25 and note 32(a) to the
Historical Financial Information, the Group had the following transactions and balances with related parties during
the Relevant Periods.
(a) Name and relationship
Name of related parties Relationship with the Group
Mr. Gao Lei Non-executive director and single largest
shareholder of the Company’s parent
Mr. Gao Yuankun Father of Mr. Gao Lei
Ms. Chen Lianna Mother of Mr. Gao Lei
Mr. Shen Yingming Non-executive director
Mr. Zou Xiaohong Executive director
Vastocean Capital Limited Immediate and ultimate parent of the Company,
controlled by Mr. Gao Lei (since March 2022)
APPENDIX I ACCOUNTANTS’ REPORT
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Name of related parties Relationship with the Group
Custodian Capital Ltd. Entity controlled by Mr. Gao Lei (since March
2022)
SYM Holdings Limited Entity controlled by Mr. Shen Yingming (since
March 2022)
Fullfaith Capital Limited A shareholder of the Company (since March 2022)
Cougar Holdings Sole shareholder of the Company’s parent (up to
March 2022)
Cougar International Sole shareholder of the Company (up to March
2022)
ʮ̡ Linuo Group Entity controlled by Mr. Gao Yuankun
ʮ̡ Linuo Investment Entity controlled by Mr. Gao Yuankun
ʮ̡ Wuhan Xinkang
Chemical Equipment Co., Ltd. (“Xinkang
Chemical”)
Entity controlled by Mr. Gao Lei
Tiantong Fine Chemicals Associate
Wuhan Eastman Associate
Hebei Kangshi Joint venture
ʮ̡ Shandong
Hongjitang Pharmaceutical Group Co., Ltd.
(“Shandong Hongjitang”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Shandong Keyuan
Pharmaceutical Co., Ltd. (“Shandong Keyuan”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Wuhan Twin Tigers
Coatings Co., Ltd. (“Twin Tigers Coatings”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Wuhan Linuo
Wisdom Park Technology Management Co., Ltd.
(“Linuo Wisdom Park Technology”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Shandong Chengan
Industrial Co., Ltd. (“Shandong Chengan”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Yingcheng Wuhan
Organic Material Co., Ltd. (“Yingcheng Wuhan
Organic”)
Mr. Zou Xiaohong is the corporate representative
and minority shareholder of the entity
ʮ̡ Shandong Linuo
Pharmaceutical Co., Ltd. (“Shandong Linuo
Pharmaceutical”)
Entity controlled by Mr. Gao Yuankun
APPENDIX I ACCOUNTANTS’ REPORT
– I-61 –


--- page 435 ---
Name of related parties Relationship with the Group
ʮ̡ Hainan Linuo New
Energy Development Co., Ltd. (“Hainan Linuo”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Shandong Linuo
Photovoltaic Hi-tech Co., Ltd. (“Shandong Linuo
Photovoltaic”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Shanxian Xinnuo
Photoelectric Technology Co., Ltd. (“Shanxian
Xinnuo Photoelectric”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Hubei Tuopu
Organic and Phosphoric Chemicals Import &
Export Co., Ltd. (“Hubei Tuopu”)
A non-controlling shareholder of the Cougar
Holdings
ʮ̡ Shandong
Hongjitang Health Industry Co., Ltd. (“Shandong
Hongjitang Health”)
Entity controlled by Mr. Gao Yuankun
ʮ̡ Shandong Linuo
Import and Export Trading Co., Ltd. (“Shandong
Linuo Import and Export”)
Entity controlled by Mr. Gao Yuankun
(b) Significant related party transactions
The Group had the following material related party transactions during each of the Relevant Periods:
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Purchases of goods or services
Linuo Investment (i) 5,780 17,713 21,190
Linuo Wisdom Park Technology (ii) 2,324 825 77
Twin Tigers Coatings (iii) 4,733 2,215 2,054
Shandong Hongjitang Health (iv) 1,115 556 8
Shandong Linuo Photovoltaic 50 – –
Hebei Kangshi (iv) – – 151,222
14,002 21,309 174,551
Purchases of machinery
Xinkang Chemical (v) 33,176 40,408 25,660
APPENDIX I ACCOUNTANTS’ REPORT
– I-62 –


--- page 436 ---
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Sales of goods
Hubei Tuopu (vi) 24,325 4,689 7,637
Twin Tigers Coatings (vi) 15,694 194 –
Yingcheng Wuhan Organic (vi) 3,297 5,764 1,158
Shandong Keyuan 539 – –
Hebei Kangshi – 2,294 28
Linuo Wisdom Park Technology 150 401 426
Shandong Linuo Import and Export 38 – –
Linuo Investment 19 – –
Shandong Hongjitang 15 – –
44,077 13,342 9,249
Wuhan Eastman (vi) 30,633 29,022 25,749
Tiantong Fine Chemicals (vi) 5 6 4––
31,197 29,022 25,749
75,274 42,364 34,998
Render of services
Xinkang Chemical (vi) 4,796 2,491 1,084
Twin Tigers Coatings (vi) 2,695 2,650 2,506
7,491 5,141 3,590
Disposal of machinery and equipment
Xinkang Chemical (x) 1,590 124 8,928
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Loans to
Linuo Group (vii) 259,791 3,140 –
Linuo Investment (vii) 229,148 53,845 –
Twin Tigers Coatings 5,000 – –
Shanxian Xinnuo Photoelectric 2,000 – –
Mr. Gao Lei 108 – –
Mr. Shen Yingming 32 – –
Hebei Kangshi (xi) – – 58,128
496,079 56,985 58,128
APPENDIX I ACCOUNTANTS’ REPORT
– I-63 –


--- page 437 ---
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Settled from loans to
Linuo Investment (vii) 188,387 487,835 –
Linuo Group (vii) 92,039 570,194 5
Twin Tigers Coatings 5,000 – –
Shanxian Xinnuo Photoelectric 1,000 1,000 –
Mr. Gao Lei – 108 –
Mr. Zou Xiaohong 40 – 200
Mr. Shen Yingming – 32 –
Hebei Kangshi (xi) – – 13,394
286,466 1,059,029 13,599
Borrowings from
Yingcheng Wuhan Organic (viii) 86,542 177 –
Hebei Kangshi (ix) 26,030 – –
112,572 177 –
Repayments of borrowings from
Yingcheng Wuhan Organic (viii) 76,542 20,177 –
Hebei Kangshi (ix) 26,030 – –
102,572 20,177 –
Notes:
(i) During the Relevant Periods, the Group leased buildings and received property management service
from Linuo Investment.
(ii) During the years ended December 31, 2021, 2022, and 2023, the Group received dining service and
property management service from Linuo Wisdom Park Technology. During the year ended December
31, 2023, the Group only receives dining service from Linuo Wisdom Park Technology.
(iii) During the Relevant Periods, the Group leased buildings and purchased industrial products from Twin
Tigers Coatings.
(iv) During the Relevant Periods, the Group purchased industrial products from Tiantong Fine Chemicals
and Hebei Kangshi, purchased processing service provided by Hebei Kangshi since September 2023,
and purchased health products from Shandong Hongjitang Health.
(v) During the Relevant Periods, the Group purchased machinery from Xinkang Chemical and Twin Tigers
Coatings.
(vi) During the Relevant Periods, the Group sold industrial products to Wuhan Eastman, Hubei Tuopu, Twin
Tigers Coatings, Tiantong Fine Chemicals, and Yingcheng Wuhan Organic. In addition, the Group
provided processing and leasing of storage tanks to Twin Tigers Coatings and other services to Xinkang
Chemical.
APPENDIX I ACCOUNTANTS’ REPORT
– I-64 –


--- page 438 ---
(vii) During the years ended December 31, 2021, and 2022, and 2023, the Group provided loans to and
received payments from Linuo Group. Certain loans with aggregate principal amount of
RMB200,000,000 at December 31, 2021, are interest-bearing at rates ranging from 6.96% to 8.64% per
annum. During the years ended December 31, 2021, and 2022, the interest income was RMB17,520,000,
and RMB4,320,000, respectively. The remaining loans are interest-free. All loans are unsecured and
repayable within one year.
RMB502,307,362 of the outstanding loans recorded in other receivables due from Linuo Group were
offset by the dividends declared to Mr. Gao Lei and Mr. Shen Yingming in 2022 (note 11), including the
RMB200,000,000 interest-bearing loan being offset in full.
RMB383,605,772 of the outstanding loans recorded in other receivables due from Linuo Investment
were offset by the dividends declared to Mr. Gao Lei and Linuo Investment in 2022 (note 11).
(viii) During the years ended December 31, 2021, and 2022, the Group borrowed from Yingcheng Wuhan
Organic at an interest rate of 12% per annum. During the years ended December 31, 2021, and 2022, the
interest expenses were RMB1,542,000, and RMB177,000, respectively. The loan is unsecured and
repayable within one month.
(ix) During the years ended December 31, 2021, the Group borrowed from Hebei Kangshi at an interest rate
of 4.78% per annum. During the years ended December 31, 2021, the interest expense was RMB30,000.
The loan is unsecured and repayable within one year.
(x) In 2021, the Group disposed certain machinery and equipment with an aggregate carrying amount of
RMB17,030,000 to Xinkang Chemical for a consideration of RMB1,590,000, with a disposal loss of
RMB15,440,000 was recognized.
In 2022, the Group disposed certain machinery and equipment with an aggregate carrying amount of
RMB120,000 to Xinkang Chemical for a consideration of RMB124,000, with a disposal gain of
RMB4,000 was recognised.
(xi) In 2023, the Group disposed certain machinery and equipment included in a construction in progress
project with an aggregate carrying amount of RMB8,928,000 to Xinkang Chemical for a consideration
of RMB8,928,000, with a disposal loss of nil was recognised.
(xii) During the year ended December 31, 2023, the Group provided loans to Hebei Kangshi at an interest
rate of 4.8% per annum, and the related interest income of RMB1,032,000 was recognised during the
year. The loan is unsecured and repayable within one year.
The sales and purchase prices of goods were made with reference to published prices and conditions of the
goods, and were mutually agreed by the Group and the related parties.
Except as mentioned in the notes (vii) above, the loans advanced to related parties are unsecured, non-interest
bearing and repayable on demand. The loan receivables as at the end of each of the Relevant Periods are classified
as current and included in “Prepayments, deposits and other receivables” on the face of the consolidated statements
of financial position.
(c) Other transactions with related parties
(i) Linuo Group guaranteed certain bank loans to the Group of RMB100,120,000, as at December 31, 2021,
respectively, as disclosed in note 26(a) to the Historical Financial Information.
(ii) Linuo Group and Linuo Investment jointly guaranteed certain bank loans to the Group of
RMB145,186,000, as at December 31, 2021 as disclosed in note 26(a) to the Historical Financial
Information.
(iii) Linuo Group, Mr. Gao Yuankun and Ms. Chen Lianna jointly guaranteed certain bank loans to the Group
of RMB49,618,000, as at December 31, 2021 as disclosed in note 26(a) to the Historical Financial
Information.
(iv) Linuo Group, Linuo Investment, Twin Tigers Coatings, Mr. Gao Yuankun and Ms. Chen Lianna jointly
guaranteed certain bank loans to the Group of RMB100,168,000, as at December 31, 2021, as disclosed
in note 26(a) to the Historical Financial Information.
APPENDIX I ACCOUNTANTS’ REPORT
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(v) Linuo Group, Hainan Linuo, Twin Tigers Coatings, Mr. Gao Yuankun and Ms. Chen Lianna jointly
guaranteed certain bank loans to the Group of RMB30,072,000, as at December 31, 2021, as disclosed
in note 26(a) to the Historical Financial Information.
(vi) Linuo Group and Mr. Gao Yuankun jointly guaranteed certain bank loans to the Group of
RMB131,390,000, as at December 31, 2021 as disclosed in note 26(a) to the Historical Financial
Information.
(vii) Linuo Group guaranteed certain other borrowings to the Group of RMB25,000,000, as at December 31,
2021 as disclosed in note 26(e) to the Historical Financial Information.
All the above-mentioned guarantees provided by related parties over the Group’s certain bank loans and
other borrowings have been released as of December 31, 2022, as disclosed in note 26 to the Historical
Financial Information.
(viii) At December 31, 2021, the Group provided guarantees of RMB267,000,000, RMB40,000,000,
RMB3,000,000 and RMB64,000,000 to to the loans borrowed by Linuo Investment, Twin Tigers
Coatings, Xinkang Chemical and Hebei Kangshi, respectively. At December 31, 2022, the Group
provided guarantee of RMB24,960,000 to the loan borrowed by Hebei Kangshi, which was released as
of July 20, 2023. The guarantees provided by the Group to other related parties has been released as of
December 31, 2022.
The Group did not pay or incur any liability during the Relevant Periods for the purpose of fulfilling the
guarantees. The Group did not hold any collateral or other credit enhancements over the guarantees. The
carrying amount of the financial guarantees as at the end of each of the Relevant Periods was not
significant. The credit exposure of the financial guarantee contracts is classified as stage 1. During the
Relevant Periods, there were no transfers between stages.
(d) Outstanding balances with related parties
The Group had the following outstanding balances with related parties at December 31, 2021, 2022 and 2023.
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Due from related parties included in
prepayments, deposits and other receivables
(non-trade in nature)
Linuo Group (note(b)(vii))* 562,480 5 –
Linuo Investment* 435,134 – –
Cougar Holdings 1,595 1,595 –
Shanxian Xinnuo Photoelectric 1,000 – –
Mr. Zou Xiaohong (note 22) 549 549 349
Wuhan Eastman 499 188 220
Mr. Gao Lei (note 22) 1 0 8––
Twin Tigers Coatings 100 641 1,134
Hebei Kangshi 51 – 44,734
Mr. Shen Yingming (note 22) 3 2––
Xinkang Chemical 3 1,026 –
1,001,551 4,004 46,437
Included in prepayments, deposits and other
receivables (trade in nature)
Xinkang Chemical – – 10,326
Hebei Kangshi – 5,000 3,000
Linuo Investment 7,309 4,800 –
7,309 9,800 13,326
APPENDIX I ACCOUNTANTS’ REPORT
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As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Included in trade receivables (trade in nature)
Twin Tigers Coatings 1,616 – –
Xinkang Chemical 1,410 291 –
Wuhan Eastman – 5,245 1,267
Hebei Kangshi – 355 –
Hubei Tuopu – 32 –
Impairment (15) (30) (6)
3,011 5,893 1,261
Total amounts due from related parties 1,011,871 19,697 61,024
The Group’s trading terms with related parties are the same as other customers of the Group (note 20).
The trade receivables due from related parties are non-interest-bearing and unsecured. The ECL assessment of
the trade receivables is disclosed in note 20 to the Historical Financial Information.
Except for the loans due from Linuo Group as disclosed in note 36(b)(vii) above, the other receivables due
from related parties are non-interest bearing, unsecured and repayable on demand and with no recent history of
default and past due amounts. The loss allowance was assessed to be minimal.
The above non-trade balances due from related parties included in prepayments, deposits and other
receivables will be settled by the Group prior to the Listing.
* On March 31, 2022, according to the agreement entered into by Cougar Holdings, Mr. Gao Lei, Mr. Shen
Yingming, Linuo Investment, Linuo Group, Wuhan Youji Employee Trust and Wuhan Youji, the dividends of
RMB820,026,606 declared by the Company were used to settle receivables due from related parties.
Dividends of RMB428,194,573 declared to Mr. Gao Lei and RMB48,420,215 declared to Mr. Shen Yingming
were used to offset the Group’s receivables due from Linuo Group, and dividends of RMB343,411,818
declared to Linuo Investment were used to offset the Group’s receivables due from Linuo Investment as of
March 31, 2022 (note 11).
On December 28, 2022, according to the agreement entered into by Wuhan Youji Holdings Ltd, Mr. Gao Lei,
Mr. Shen Yingming, Vastocean Capital Limited, SYM Holdings Limited, Custodian Capital Ltd., Linuo
Investment, Linuo Group and Wuhan Youji Industries Co., Ltd., the dividends of RMB65,886,529 declared by
the Company were used to settle receivables due from related parties. Dividends of RMB12,515,269 declared
to Mr. Gao Lei and RMB13,177,305 declared to Mr. Shen Yingming were used to offset the Group’s
receivables due from Linuo Group, and dividends of RMB40,193,955 declared to Mr. Gao Lei were used to
offset the Group’s receivables due from Linuo Investment as of December 28, 2022 (note 11).
APPENDIX I ACCOUNTANTS’ REPORT
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As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Due to related parties included in other
payables and accruals (non-trade in
nature)
Hebei Kangshi – 7 –
Due to related parties included in other
payables and accruals (trade in nature)
Mr. Zou Xiaohong – – 1
Shandong Hongjitang – – 5
Linuo Investment – – 3,245
Xinkang Chemical 380 5,387 2,407
Shandong Chengan 660 283 74
Linuo Wisdom Park Technology 1,109 873 36
Shandong Linuo Photovoltaic 57 57 57
Twin Tigers Coatings 7 7 –
2,213 6,607 5,825
Included in other borrowings
Yingcheng Wuhan Organic (note 36(b)(viii)) 20,000 – –
Included in contract liabilities (trade in
nature)
Yingcheng Wuhan Organic 7 16 2
Included in trade payable (trade in
nature)
Hebei Kangshi – – 139
Total amounts due to related parties 22,220 6,630 5,966
The financial liabilities included in the above balances are non-interest bearing, unsecured and repayable
within one year.
The above non-trade balances due to related parties included in other payables and accruals will be settled by
the Group prior to the Listing.
(e) Financing arrangements
The following transactions were carried out with the related parties:
(i) Pursuant to the agreements between the Group and Twin Tigers Coatings, the Group leased land and
plant from Twin Tigers Coatings for a lease term from July 13, 2020 to July 12, 2025. The lease terms
were mutually agreed between parties. Right-of-use assets and lease liabilities were recognized at the
commencement date of the leases. The amount of rent payable by the Group under the lease was
approximately RMB171,000 per month.
APPENDIX I ACCOUNTANTS’ REPORT
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As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Included in lease liabilities:
Amounts owed to Twin Tigers
Coatings 6,495 4,738 2,890
Related interest expenses 384 298 206
Related depreciation charged 1,806 1,806 1,806
(ii) Pursuant to an agreement between the Group and Linuo Investment, the Group leased buildings from
Linuo Investment for a lease term from January 1, 2021 to December 31, 2021. The lease terms were
mutually agreed between parties. The Group has applied short-term lease recognition exemption to this
lease. The amount of rent payable by the Group under the lease was RMB200,000 per month. In 2022,
the Group entered into three long-term lease agreements leasing buildings and leasehold land from
Linuo Investment including:
• A lease agreement with 3-years lease term from January 1, 2022 to December 31, 2024 at a
monthly rental of RMB600,000;
• A lease agreement with 2.6-year lease term from June 1, 2022 to December 31, 2024 at a monthly
rental of RMB50,000;
• A lease agreement with 5-year lease term from July 1, 2022 to June 30, 2027 at an annual rental
of RMB3,000,000, which was amended on July 1, 2023, with reduced leasing area at an annual
rental of RMB1,800,000, charged at the same rent per unit area.
These agreements have been recognized as lease liabilities and right-of-use assets (note 14).
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Included in lease liabilities:
Amounts owed to Linuo Investment – 23,712 11,711
Related interest expenses – 943 849
Related depreciation charged – 7,750 8,731
(f) Compensation of key management personnel of the Group
Y ear ended December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Salaries, allowances and benefits in kind 3,910 4,518 4,712
Performance-based bonuses 5,400 6,110 –
Equity-settled share award expenses 102 102 102
Pension scheme contributions 270 282 217
9,682 11,012 5,031
APPENDIX I ACCOUNTANTS’ REPORT
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37. FINANCIAL INSTRUMENTS BY CATEGORY
The carrying amounts of each of the categories of financial instruments as at the end of each of the Relevant
Periods are as follows:
As at December 31, 2021
Financial assets
Financial assets
at amortized
cost
Financial assets
at FVTPL Total
RMB’000 RMB’000 RMB’000
Trade and bills receivables 99,157 135,201 234,358
Financial assets included in prepayments,
deposits and other receivables 1,019,500 – 1,019,500
Pledged deposits 49,504 – 49,504
Cash and cash equivalents 69,461 – 69,461
1,237,622 135,201 1,372,823
Financial liabilities
Financial
liabilities at
amortized cost
RMB’000
Interest-bearing bank and other borrowings 716,107
Trade and bills payables 196,250
Financial liabilities included in other payables and accruals 162,093
Lease liabilities 30,353
1,104,803
As at December 31, 2022
Financial assets
Financial assets
at amortized
cost
Financial assets
at FVTPL Total
RMB’000 RMB’000 RMB’000
Trade and bills receivables 142,406 184,573 326,979
Financial assets included in prepayments,
deposits and other receivables 23,097 - 23,097
Pledged deposits 64,675 - 64,675
Cash and cash equivalents 83,451 - 83,451
313,629 184,573 498,202
APPENDIX I ACCOUNTANTS’ REPORT
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Financial liabilities
Financial
liabilities at
amortized cost
RMB’000
Interest-bearing bank and other borrowings 734,300
Trade and bills payables 171,228
Financial liabilities included in other payables and accruals 279,032
Lease liabilities 46,835
1,231,395
As at December 31, 2023
Financial assets
Financial assets
at amortized
cost
Financial assets
at FVTPL Total
RMB’000 RMB’000 RMB’000
Trade and bills receivables 96,587 199,727 296,314
Financial assets included in prepayments,
deposits and other receivables 70,407 10,500 80,907
Pledged deposits 40,127 – 40,127
Cash and cash equivalents 65,433 – 65,433
272,554 210,227 482,781
Financial liabilities
Financial
liabilities at
amortized cost
RMB’000
Interest-bearing bank and other borrowings 917,520
Trade and bills payables 149,705
Financial liabilities included in other payables and accruals 293,780
Lease liabilities 27,590
1,388,595
38. FAIR V ALUE AND FAIR V ALUE HIERARCHY OF FINANCIAL INSTRUMENTS
Management has assessed that the fair values of cash and cash equivalents, pledged deposits, trade
receivables, financial assets included in prepayments, deposits and other receivables, financial liabilities included in
other payables and accruals, trade and bills payables and the current portion of interest-bearing bank and other
borrowings approximate to their carrying amounts largely due to the short-term maturities of these instruments.
The Group’s finance department headed by the finance manager is responsible for determining the policies
and procedures for the fair value measurement of financial instruments. At the end of each of the Relevant Periods,
the finance department analyzes the movements in the values of financial instruments and determines the major
inputs applied in the valuation. The valuation is reviewed and approved by the chief financial officer. The valuation
process and results are discussed with the directors of the Company once a year for annual financial reporting.
APPENDIX I ACCOUNTANTS’ REPORT
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The fair values of the financial assets and liabilities are included at the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair
values of bills receivable and other current asset have been calculated by discounting the expected future cash flows
using rates currently available for instruments with similar terms, credit risk and remaining maturities. The changes
in fair value during each of the Relevant Periods were assessed to be insignificant.
The fair values of the non-current portion of interest-bearing bank loans have been calculated by discounting
the expected future cash flows using rates currently available for instruments with similar terms, credit risk and
remaining maturities. The fair values of the non-current portion of interest-bearing bank loans are assessed to be
approximate to its carrying amount as at December 31, 2022 and 2023. The changes in fair values as a result of the
Group’s own non-performance risk for interest-bearing bank loans as at December 31, 2022 and 2023 were assessed
to be insignificant.
Fair value hierarchy
The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:
Assets measured at fair value:
As at December 31, 2021
Fair value measurement using
Quoted prices
in active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3) Total
RMB’000 RMB’000 RMB’000 RMB’000
Bills receivable – 135,201 – 135,201
As at December 31, 2022
Fair value measurement using
Quoted prices
in active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3) Total
RMB’000 RMB’000 RMB’000 RMB’000
Bills receivable – 184,573 – 184,573
As at December 31, 2023
Fair value measurement using
Quoted prices
in active
markets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3) Total
RMB’000 RMB’000 RMB’000 RMB’000
Bills receivable – 199,727 – 199,727
Investment in a fund – 10,500 – 10,500
– 210,227 – 210,227
There were no transfers of fair value measurements between Level 1 and Level 2 and no transfers into or out
of Level 3 for financial assets during each of the Relevant Periods.
APPENDIX I ACCOUNTANTS’ REPORT
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39. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group’s principal financial instruments comprise interest-bearing bank and other borrowings, cash and
cash equivalents, and pledged deposits. The main purpose of these financial instruments is to raise finance for the
Group’s operations. The Group has various other financial assets and liabilities such as trade and bills receivables,
trade and bills payables and other receivables and payables, which arise directly from its operations.
The main risks arising from the Group’s financial instruments are foreign currency risk, credit risk and
liquidity risk. The directors of the Company review and agree policies for managing each of these risks and they are
summarized below.
Foreign currency risk
The Group has transactional currency exposures. Such exposures arise from sales in currencies other than the
units’ functional currencies. Approximately 22%, 23% and 23% for the years ended December 31, 2021, 2022 and
2023, respectively, of the Group’s sales were denominated in currencies other than the functional currencies of the
operating units making the sale.
The following table demonstrates the sensitivity to a reasonably possible change in the Euro (“EUR”) and
RMB exchange rate, USD and RMB exchange rate, of the Group’s profit before tax and equity.
Increase/(decrease)
in exchange rate
Increase/(decrease)
in profit before tax
Increase/(decrease)
in equity
% RMB’000 RMB’000
2023
If the USD weakens against the RMB (5) (4,453) (3,370)
If the USD strengthens against the RMB 5 4,453 3,370
If the EUR weakens against the RMB (5) (48) (36)
If the EUR strengthens against the RMB 5 48 36
2022
If the USD weakens against the RMB (5) (3,360) (2,540)
If the USD strengthens against the RMB 5 3,360 2,540
If the EUR weakens against the RMB (5) (16) (12)
If the EUR strengthens against the RMB 5 16 12
2021
If the USD weakens against the RMB (5) (3,683) (2,748)
If the USD strengthens against the RMB 5 3,683 2,748
If the EUR weakens against the RMB (5) (31) (23)
If the EUR strengthens against the RMB 5 31 23
Credit risk
The Group has no significant concentrations of credit risk. The carrying amounts of cash and cash equivalents,
trade and bills receivables, prepayments, deposits and other receivables, and pledged deposits included in the
statements of financial position represent the Group’s maximum exposure to credit risk in relation to its financial
assets.
As at the end of each of the Relevant Periods, cash and cash equivalents and pledged deposits were deposited
in banks of high quality without significant credit risk. Management does not expect any loss to arise from
non-performance by these banks.
APPENDIX I ACCOUNTANTS’ REPORT
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Maximum exposure and year-end staging
The table below shows the credit quality and the maximum exposure to credit risk based on the Group’s credit
policy, which is mainly based on past due information unless other information is available without undue cost or
effort, and year-end staging classification. The amounts presented are gross carrying amounts for financial assets.
As at December 31, 2021
12-month
ECLs Lifetime ECLs
Stage 1 Stage 2 Stage 3
Simplified
approach Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade receivables – – – 99,655 99,655
Financial assets included in
prepayments, deposits and
other receivables
– Normal* 1,019,500 – – – 1,019,500
Pledged deposits 49,50 4––– 49,504
Cash and cash equivalents 69,46 1––– 69,461
1,138,465 – – 99,655 1,238,120
As at December 31, 2022
12-month
ECLs Lifetime ECLs
Stage 1 Stage 2 Stage 3
Simplified
approach Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade receivables – – – 143,218 143,218
Financial assets included in
prepayments, deposits and
other receivables
– Normal* 23,09 7––– 23,097
Pledged deposits 64,67 5––– 64,675
Cash and cash equivalents 83,45 1––– 83,451
171,223 – – 143,218 314,441
As at December 31, 2023
12-month
ECLs Lifetime ECLs
Stage 1 Stage 2 Stage 3
Simplified
approach Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Trade receivables – – – 97,211 97,211
Financial assets included in
prepayments, deposits and
other receivables
– Normal* 70,40 7––– 70,407
Pledged deposits 40,12 7––– 40,127
Cash and cash equivalents 65,43 3––– 65,433
175,967 – – 97,211 273,178
APPENDIX I ACCOUNTANTS’ REPORT
– I-74 –


--- page 448 ---
Since the Group trades only with recognized and creditworthy third parties, there is no requirement for
collateral on normal basis.
There are no significant concentrations of credit risk within the Group as the customer bases of the Group’s
trade receivables are widely dispersed in industries.
* The credit quality of the financial assets included in prepayments, deposits and other receivables is considered
to be “normal” when they are not past due and there is no information indicating that the financial assets had
a significant increase in credit risk since initial recognition. Otherwise, the credit quality of the financial
assets is considered to be “doubtful”.
Liquidity risk
The Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management
of the Group to finance the operations and mitigate the effects of fluctuations in cash flows.
The maturity profile of the Group’s financial liabilities as at the end of each of the Relevant Periods, based on
the contractual undiscounted payments, is as follows:
As at December 31, 2021
Less than
12 months or
on demand
After
1 year but
within
2 years
After
2 year but
within
3 years
After
3 year but
within
4 years
After
4 year but
within
5 years Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Lease Liabilities 8,683 8,409 8,019 6,811 2,785 34,707
Interest-bearing bank and other borrowings 731,737 –––– 731,737
Trade and bills payables 196,250 –––– 196,250
Financial liabilities included in other
payables and accruals 162,093 –––– 162,093
1,098,763 8,409 8,019 6,811 2,785 1,124,787
As at December 31, 2022
Less than
12 months or
on demand
After
1 year but
within
2 years
After
2 year but
within
3 years
After
3 year but
within
4 years
After
4 year but
within
5 years Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Lease Liabilities 18,317 17,928 9,609 5,537 – 51,391
Interest-bearing bank and other borrowings 677,293 33,058 42,554 – – 752,905
Trade and bills payables 171,228 –––– 171,228
Financial liabilities included in other
payables and accruals 279,032 –––– 279,032
1,145,870 50,986 52,163 5,537 – 1,254,556
APPENDIX I ACCOUNTANTS’ REPORT
– I-75 –


--- page 449 ---
As at December 31, 2023
Less than
12 months or
on demand
After
1 year but
within
2 years
After
2 year but
within
3 years
After
3 year but
within
4 years
After
4 year but
within
5 years Total
RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Lease Liabilities 16,868 8,550 4,440 – – 29,858
Interest-bearing bank and other borrowings 873,793 66,310 – – – 940,103
Trade and bills payables 149,705 –––– 149,705
Financial liabilities included in other
payables and accruals 293,780 –––– 293,780
1,334,146 74,860 4,440 – – 1,413,446
Capital management
The primary objectives of the Group’s capital management are to safeguard the Group’s abilities to continue
as a going concern and to maintain healthy capital ratios in order to support its business and maximize shareholders’
value.
The Group manages its capital structure and makes adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Group
may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group is
not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or
processes for managing capital as at the end of each of the Relevant Periods.
The Group uses the gearing ratio which is net debt divided by total equity to monitor its capital structure. The
gearing ratio as at the end of each of the Relevant Periods were as follows:
As at December 31,
2021 2022 2023
RMB’000 RMB’000 RMB’000
Interest-bearing bank and other borrowings
(note 26) 716,107 734,300 917,520
Lease liabilities (note 14) 30,353 46,835 27,590
Less: Cash and cash equivalents (note 23) (69,461) (83,451) (65,433)
Pledged deposits (49,504) (64,675) (40,127)
Net debt 627,495 633,009 839,550
Equity attributable to owners of the parent 1,520,318 726,107 529,617
Gearing ratio 41% 87% 159%
40. EVENTS AFTER THE RELEV ANT PERIODS
The Group has no significant events subsequent to the end of the Relevant Periods.
41. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the Company, the Group or any of its subsidiaries in
respect of any period subsequent to December 31, 2023.
APPENDIX I ACCOUNTANTS’ REPORT
– I-76 –


--- page 450 ---
The following information does not form part of the Accountants’ Report from Ernst &
Young, Certified Public Accountants, Hong Kong, the Company’s reporting accountants, as
set out in Appendix I to this prospectus, and is included herein for information purpose only.
The unaudited pro forma financial information should be read in conjunction with the section
headed “Financial Information” in this prospectus and the Accountants’ Report set out in
Appendix I to this prospectus.
A. UNAUDITED PRO FORMA STA TEMENT OF ADJUSTED CONSOLIDA TED NET
TANGIBLE ASSETS
The following unaudited pro forma adjusted consolidated net tangible assets of the
Group prepared in accordance with paragraph 4.29 of the Rules Governing the Listing of
Securities on The Stock Exchange of Hong Kong Limited and with reference to Accounting
Guideline 7 Preparation of Pro F orma Financial Information for Inclusion in Investment
Circulars issued by the Hong Kong Institute of Certified Public Accountants for illustration
purposes only, and is set out here to illustrate the effect of the Global Offering on the
consolidated net tangible assets of the Group attributable to owners of the parent as if the
Global Offering had taken place on December 31, 2023.
The unaudited pro forma statement of adjusted consolidated net tangible assets of the
Group has been prepared for illustrative purpose only and, because of its hypothetical nature,
it may not give a true picture of the consolidated net tangible assets of the Group to owners of
the parent had the Global Offering been completed as of December 31, 2023 or as at any future
dates.
Consolidated net
tangible assets of
the Group
attributable to
owners of the
parent as at
December 31,
2023
Estimated net
Proceeds from
the Global
Offering
Unaudited pro
forma adjusted
consolidated net
tangible assets as
at December 31,
2023
Unaudited pro forma
adjusted consolidated net
tangible assets per Share as at
December 31, 2023
RMB’000 RMB’000 RMB’000 RMB HK$
(Note 1) (Note 2) (Note 3) (Note 4)
Based on an Offer Price of
HK$5.5 per Share 525,561 55,823 581,384 6.23 6.86
Based on an Offer Price of
HK$7.0 per Share 525,561 80,758 606,319 6.50 7.16
Based on an Offer Price of
HK$8.5 per Share 525,561 105,694 631,255 6.77 7.45
APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
– II-1 –


--- page 451 ---
Notes:
1. The consolidated net tangible assets of the Group attributable to equity holders of the parent as at
December 31, 2023, was arrived at after deducting other intangible assets of RMB4,056,000 from the
consolidated net assets attributable to owners of the parent as at December 31, 2023 of
RMB529,617,000 set out in the Accountants’ Report in Appendix I to this document.
2. The estimated net proceeds from the Global Offering are based on an Offer Price of HK$5.5 per Share,
HK$7.0 per Share and HK$8.5 per Share, after deduction of the underwriting fees and other related
expenses payable by the Company (excluding approximately RMB32,329,000 which have been
recognised in profit or loss up to December 31, 2023) and do not take into account any Shares which
may be issued upon the exercise of the Over-allotment Option.
3. The unaudited pro forma adjusted consolidated net tangible assets per Share is arrived at after
adjustments referred to notes 1 and 2 above and on the basis that 93,300,000 Shares are in issue,
assuming the Global Offering has been completed on December 31, 2023.
4. For the purpose of this unaudited pro forma statement of adjusted net tangible assets, the balances stated
in RMB are converted into HK$ at the rate of RMB1.00 to HK$1.1008 prevailing on the Latest
Practicable Date.
5. No adjustments have been made to reflect any trading results or other transactions of the Group entered
into subsequent to December 31, 2023.
6. No dividends had been declared subsequent to December 31, 2023 and up to the Latest Practicable Date.
APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
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B. INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE
COMPILA TION OF PRO FORMA FINANCIAL INFORMA TION
The following is the text of a report received from our reporting accountants, Ernst &
Young, Certified Public Accountants, Hong Kong, prepared for the purpose of incorporation
in this Document, in respect of the pro forma financial information of the Group.
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Ernst & Young
27/F, One Taikoo Place
979 King’s Road
Quarry Bay, Hong Kong
Tel ཥ༑: +852 2846 9888
Fax ෂॆ: +852 2868 4432
ey.com
To the Directors of Wuhan Youji Holdings Ltd.
We have completed our assurance engagement to report on the compilation of pro forma
financial information of Wuhan Youji Holdings Ltd. (the “ Company ”) and its subsidiaries
(hereinafter collectively referred to as the “ Group ”) by the directors of the Company (the
“Directors ”) for illustrative purposes only. The pro forma financial information consists of
the pro forma consolidated net tangible assets as at December 31, 2023, and related notes as
set out on pages II-1 to II-2 of the prospectus dated June 7, 2024 issued by the Company (the
“Pro Forma Financial Information ”). The applicable criteria on the basis of which the
Directors have compiled the Pro Forma Financial Information are described on pages II-1 and
II-2 to the prospectus.
The Pro Forma Financial Information has been compiled by the Directors to illustrate the
impact of the global offering of shares of the Company on the Group’s financial position as at
December 31, 2023 as if the transaction had taken place at December 31, 2023. As part of this
process, information about the Group’s financial position has been extracted by the Directors
from the Group’s financial statements for the period ended December 31, 2023, on which an
accountants’ report has been published.
Directors’ responsibility for the Pro Forma Financial Information
The Directors are responsible for compiling the Pro Forma Financial Information in
accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock
Exchange of Hong Kong Limited (the “ Listing Rules ”) and with reference to Accounting
Guideline (“ AG”) 7 Preparation of Pro F orma Financial Information for Inclusion in
Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (the
“HKICPA ”).
Our independence and quality management
We have complied with the independence and other ethical requirements of the Code of
Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental
principles of integrity, objectivity, professional competence and due care, confidentiality and
professional behavior.
Our firm applies Hong Kong Standard on Quality Management 1 Quality Management
for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or
Related Services Engagements which requires the firm to design, implement and operate a
system of quality management including policies or procedures regarding compliance with
ethical requirements, professional standards and applicable legal and regulatory
requirements.
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--- page 453 ---
Reporting accountants’ responsibilities
Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the
Listing Rules, on the Pro Forma Financial Information and to report our opinion to you. We do
not accept any responsibility for any reports previously given by us on any financial
information used in the compilation of the Pro Forma Financial Information beyond that owed
to those to whom those reports were addressed by us at the dates of their issue.
We conducted our engagement in accordance with Hong Kong Standard on Assurance
Engagements 3420 Assurance Engagements to Report on the Compilation of Pro F orma
Financial Information Included in a Prospectus issued by the HKICPA. This standard requires
that the reporting accountants plan and perform procedures to obtain reasonable assurance
about whether the Directors have compiled the Pro Forma Financial Information in
accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the
HKICPA.
For purposes of this engagement, we are not responsible for updating or reissuing any
reports or opinions on any historical financial information used in compiling the Pro Forma
Financial Information, nor have we, in the course of this engagement, performed an audit or
review of the financial information used in compiling the Pro Forma Financial Information.
The purpose of the Pro Forma Financial Information included in the prospectus is solely
to illustrate the impact of the global offering of shares of the Company on unadjusted financial
information of the Group as if the transaction had been undertaken at an earlier date selected
for purposes of the illustration. Accordingly, we do not provide any assurance that the actual
outcome of the transaction would have been as presented.
A reasonable assurance engagement to report on whether the Pro Forma Financial
Information has been properly compiled on the basis of the applicable criteria involves
performing procedures to assess whether the applicable criteria used by the Directors in the
compilation of the Pro Forma Financial Information provide a reasonable basis for presenting
the significant effects directly attributable to the transaction, and to obtain sufficient
appropriate evidence about whether:
• the related pro forma adjustments give appropriate effect to those criteria; and
• the Pro Forma Financial Information reflects the proper application of those
adjustments to the unadjusted financial information.
The procedures selected depend on the reporting accountants’ judgment, having regard
to the reporting accountants’ understanding of the nature of the Group, the transaction in
respect of which the Pro Forma Financial Information has been compiled, and other relevant
engagement circumstances.
The engagement also involves evaluating the overall presentation of the Pro Forma
Financial Information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
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--- page 454 ---
Opinion
In our opinion:
(a) the Pro Forma Financial Information has been properly compiled on the basis
stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purpose of the Pro Forma Financial
Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
Ernst & Y oung
Certified Public Accountants
Hong Kong
June 7, 2024
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--- page 455 ---
Set out below is a summary of certain provisions of the Memorandum and Articles of
Association of the Company and of certain aspects of Cayman Islands company law.
The Company was incorporated in the Cayman Islands as an exempted company with
limited liability on September 23, 2016 under the Cayman Companies Act. The Company’s
constitutional documents consist of its Amended and Restated Memorandum of Association
(Memorandum ) and its Amended and Restated Articles of Association ( Articles ).
1. MEMORANDUM OF ASSOCIA TION
(a) The Memorandum provides, inter alia , that the liability of members of the Company
is limited and that the objects for which the Company is established are unrestricted
(and therefore include acting as an investment company), and that the Company
shall have and be capable of exercising any and all of the powers at any time or from
time to time exercisable by a natural person or body corporate whether as principal,
agent, contractor or otherwise and, since the Company is an exempted company, that
the Company will not trade in the Cayman Islands with any person, firm or
corporation except in furtherance of the business of the Company carried on outside
the Cayman Islands.
(b) By special resolution the Company may alter the Memorandum with respect to any
objects, powers or other matters specified in it.
2. ARTICLES OF ASSOCIA TION
The Articles were conditionally adopted on May 21, 2024 and effective on the Listing
Date. A summary of certain provisions of the Articles is set out below.
(a) Shares
(i) Classes of shares
The share capital of the Company consists of ordinary shares.
(ii) V ariation of rights of existing shares or classes of shares
Subject to the Cayman Companies Act, if at any time the share capital of the
Company is divided into different classes of shares, all or any of the special rights
attached to any class of shares may (unless otherwise provided for by the terms of
issue of the shares of that class) be varied, modified or abrogated with the consent of
at least three-fourths of the voting rights of the holders of the shares of that class
present and voting in person or by proxy at a separate general meeting of the holders
of the shares of that class. The provisions of the Articles relating to general
meetings shall mutatis mutandis apply to every such separate general meeting,
provided that the necessary quorum shall be not less than two persons together
holding (or, in the case of a shareholder being a corporation, by its duly authorized
representative) or representing by proxy not less than one-third in nominal value of
the issued shares of that class. Every holder of shares of the class shall be entitled on
a poll to one vote for every such share held by him, and any holder of shares of the
class present in person or by proxy may demand a poll.
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Any special rights conferred upon the holders of any shares or class of shares
shall not, unless otherwise expressly provided in the rights attaching to the terms of
issue of such shares, be deemed to be varied by the creation or issue of further
shares ranking pari passu therewith.
(iii) Alteration of capital
The Company may, by an ordinary resolution of its members: (a) increase its
share capital by the creation of new shares of such amount as it thinks expedient; (b)
consolidate or divide all or any of its share capital into shares of larger or smaller
amount than its existing shares; (c) divide its unissued shares into several classes
and attach to such shares any preferential, deferred, qualified or special rights,
privileges or conditions; (d) subdivide its shares or any of them into shares of an
amount smaller than that fixed by the Memorandum; (e) cancel any shares which, at
the date of the resolution, have not been taken or agreed to be taken by any person
and diminish the amount of its share capital by the amount of the shares so canceled;
(f) make provision for the allotment and issue of shares which do not carry any
voting rights; and (g) change the currency of denomination of its share capital.
(iv) Transfer of shares
Subject to the Cayman Companies Act and the requirements of The Stock
Exchange of Hong Kong Limited (the “ Stock Exchange ”), all transfers of shares
shall be effected by an instrument of transfer in the usual or common form or in such
other form as the Board may approve and may be under hand or, if the transferor or
transferee is a Clearing House or its nominee(s), under hand or by machine
imprinted signature, or by such other manner of execution as the Board may approve
from time to time.
Execution of the instrument of transfer shall be by or on behalf of the transferor
and the transferee, provided that the Board may dispense with the execution of the
instrument of transfer by the transferor or transferee or accept mechanically
executed transfers. The transferor shall be deemed to remain the holder of a share
until the name of the transferee is entered in the register of members of the
Company in respect of that share.
The Board may, in its absolute discretion, at any time and from time to time
remove any share on the principal register to any branch register or any share on any
branch register to the principal register or any other branch register. Unless the
Board otherwise agrees, no shares on the principal register shall be removed to any
branch register nor shall shares on any branch register be removed to the principal
register or any other branch register. All removals and other documents of title shall
be lodged for registration and registered, in the case of shares on any branch
register, at the relevant registration office and, in the case of shares on the principal
register, at the place at which the principal register is located.
The Board may, in its absolute discretion, decline to register a transfer of any
share (not being a fully paid up share) to a person of whom it does not approve or on
which the Company has a lien. It may also decline to register a transfer of any share
issued under any share option scheme upon which a restriction on transfer subsists
or a transfer of any share to more than four joint holders.
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The Board may decline to recognize any instrument of transfer unless a certain
fee, up to such maximum sum as the Stock Exchange may determine to be payable,
is paid to the Company, the instrument of transfer is properly stamped (if
applicable), is in respect of only one class of share and is lodged at the relevant
registration office or the place at which the principal register is located
accompanied by the relevant share certificate(s) and such other evidence as the
Board may reasonably require is provided to show the right of the transferor to make
the transfer (and if the instrument of transfer is executed by some other person on
his behalf, the authority of that person so to do).
The register of members may, subject to the Listing Rules, be closed at such
time or for such period not exceeding in the whole 30 days in each year as the Board
may determine.
Fully paid shares shall be free from any restriction on transfer (except when
permitted by the Stock Exchange) and shall also be free from all liens.
(v) Power of the Company to purchase its own shares
The Company may purchase its own shares subject to certain restrictions and
the Board may only exercise this power on behalf of the Company subject to any
applicable requirement imposed from time to time by the Articles or any, code, rules
or regulations issued from time to time by the Stock Exchange and/or the Securities
and Futures Commission of Hong Kong.
Where the Company purchases for redemption a redeemable Share, purchases
not made through the market or by tender shall be limited to a maximum price and,
if purchases are by tender, tenders shall be available to all members alike.
(vi) Power of any subsidiary of the Company to own shares in the Company
There are no provisions in the Articles relating to the ownership of shares in the
Company by a subsidiary.
(vii) Calls on shares and forfeiture of shares
The Board may, from time to time, make such calls as it thinks fit upon the
members in respect of any monies unpaid on the shares held by them respectively
(whether on account of the nominal value of the shares or by way of premium) and
not by the conditions of allotment of such shares made payable at fixed times. A call
may be made payable either in one sum or by installments. If the sum payable in
respect of any call or installment is not paid on or before the day appointed for
payment thereof, the person or persons from whom the sum is due shall pay interest
on the same at such rate not exceeding 20% per annum as the Board shall fix from
the day appointed for payment to the time of actual payment, but the Board may
waive payment of such interest wholly or in part. The Board may, if it thinks fit,
receive from any member willing to advance the same, either in money or money’s
worth, all or any part of the money uncalled and unpaid or installments payable
upon any shares held by him, and in respect of all or any of the monies so advanced
the Company may pay interest at such rate (if any) not exceeding 20% per annum as
the Board may decide.
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If a member fails to pay any call or installment of a call on the day appointed
for payment, the Board may, for so long as any part of the call or installment
remains unpaid, serve not less than 14 days’ notice on the member requiring
payment of so much of the call or installment as is unpaid, together with any interest
which may have accrued and which may still accrue up to the date of actual
payment. The notice shall name a further day (not earlier than the expiration of 14
days from the date of the notice) on or before which the payment required by the
notice is to be made, and shall also name the place where payment is to be made.
The notice shall also state that, in the event of non-payment at or before the
appointed time, the shares in respect of which the call was made will be liable to be
forfeited.
If the requirements of any such notice are not complied with, any share in
respect of which the notice has been given may at any time thereafter, before the
payment required by the notice has been made, be forfeited by a resolution of the
Board to that effect. Such forfeiture will include all dividends and bonuses declared
in respect of the forfeited share and not actually paid before the forfeiture.
A person whose shares have been forfeited shall cease to be a member in
respect of the forfeited shares but shall, nevertheless, remain liable to pay to the
Company all monies which, at the date of forfeiture, were payable by him to the
Company in respect of the shares together with (if the Board shall in its discretion so
require) interest thereon from the date of forfeiture until payment at such rate not
exceeding 20% per annum as the Board may prescribe.
(b) Directors
(i) Appointment, retirement and removal
At any time or from time to time, the Board shall have the power to appoint any
person as a Director either to fill a casual vacancy on the Board or as an additional
Director to the existing Board subject to any maximum number of Directors, if any,
as may be determined by the members in general meeting. Any Director so
appointed to fill a casual vacancy or as an addition to the existing Board shall hold
office only until the first annual general meeting of the Company after his
appointment and be eligible for re-election at such meeting. Any Director so
appointed by the Board shall not be taken into account in determining the Directors
or the number of Directors who are to retire by rotation at an annual general
meeting.
At each annual general meeting, one third of the Directors for the time being
shall retire from office by rotation. However, if the number of Directors is not a
multiple of three, then the number nearest to but not less than one third shall be the
number of retiring Directors. The Directors to retire in each year shall be those who
have been in office longest since their last re-election or appointment but, as
between persons who became or were last re-elected Directors on the same day,
those to retire shall (unless they otherwise agree among themselves) be determined
by lot.
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No person, other than a retiring Director, shall, unless recommended by the
Board for election, be eligible for election to the office of Director at any general
meeting, unless notice in writing of the intention to propose that person for election
as a Director and notice in writing by that person of his willingness to be elected has
been lodged at the head office or at the registration office of the Company. The
Company shall include the particulars of such proposed person for election as a
Director in its announcement or supplementary circular, and shall give the
shareholders at least seven days to consider the relevant information disclosed in
such announcement or supplementary circular prior to the date of the meeting of the
election.
A Director is not required to hold any shares in the Company by way of
qualification nor is there any specified upper or lower age limit for Directors either
for accession to or retirement from the Board.
A Director may be removed by an ordinary resolution of the members of the
Company before the expiration of his term of office (but without prejudice to any
claim which such Director may have for damages for any breach of any contract
between him and the Company) and the Company may by ordinary resolution
appoint another in his place. Any Director so appointed shall be subject to the
“retirement by rotation” provisions. The number of Directors shall not be less than
two.
The office of a Director shall be vacated if he:
(aa) resign;
(bb) dies;
(cc) is declared to be of unsound mind and the Board resolves that his office be
vacated;
(dd) becomes bankrupt or has a receiving order made against him or suspends
payment or compounds with his creditors generally;
(ee) he is prohibited from being or ceases to be a director by operation of law;
(ff) without special leave, is absent from meetings of the Board for six
consecutive months, and the Board resolves that his office is vacated;
(gg) has been required by the stock exchange of the Relevant Territory (as
defined in the Articles) to cease to be a Director; or
(hh) is removed from office by no less than three-fourths in number of the
Directors pursuant to the Articles.
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From time to time the Board may appoint one or more of its body to be
managing director, joint managing director or deputy managing director or to hold
any other employment or executive office with the Company for such period and
upon such terms as the Board may determine, and the Board may revoke or
terminate any of such appointments. The Board may also delegate any of its powers
to committees consisting of such Director(s) or other person(s) as the Board thinks
fit, and from time to time it may also revoke such delegation or revoke the
appointment of and discharge any such committees either wholly or in part, and
either as to persons or purposes, but every committee so formed shall, in the
exercise of the powers so delegated, conform to any regulations that may from time
to time be imposed upon it by the Board.
(ii) Power to allot and issue shares and warrants
Subject to the provisions of the Cayman Companies Act, the Memorandum and
Articles and without prejudice to any special rights conferred on the holders of any
shares or class of shares, any share may be issued with or have attached to it such
rights, or such restrictions, whether with regard to dividend, voting, return of capital
or otherwise, as the Company may by ordinary resolution determine (or, in the
absence of any such determination or so far as the same may not make specific
provision, as the Board may determine). Any share may be issued on terms that,
upon the happening of a specified event or upon a given date and either at the option
of the Company or the holder of the share, it is liable to be redeemed.
The Board may issue warrants to subscribe for any class of shares or other
securities of the Company on such terms as it may from time to time determine.
Where warrants are issued to bearer, no certificate in respect of such warrants
shall be issued to replace one that has been lost unless the Board is satisfied beyond
reasonable doubt that the original certificate has been destroyed and the Company
has received an indemnity in such form as the Board thinks fit with regard to the
issue of any such replacement certificate.
Subject to the provisions of the Cayman Companies Act, the Articles and,
where applicable, the rules of any stock exchange of the Relevant Territory (as
defined in the Articles) and without prejudice to any special rights or restrictions for
the time being attached to any shares or any class of shares, all unissued shares in
the Company shall be at the disposal of the Board, which may offer, allot, grant
options over or otherwise dispose of them to such persons, at such times, for such
consideration and on such terms and conditions as it in its absolute discretion thinks
fit, provided that no shares shall be issued at a discount.
Neither the Company nor the Board shall be obliged, when making or granting
any allotment of, offer of, option over or disposal of shares, to make, or make
available, any such allotment, offer, option or shares to members or others whose
registered addresses are in any particular territory or territories where, in the
absence of a registration statement or other special formalities, this is or may, in the
opinion of the Board, be unlawful or impracticable. However, no member affected
as a result of the foregoing shall be, or be deemed to be, a separate class of members
for any purpose whatsoever.
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(iii) Power to dispose of the assets of the Company or any of its subsidiaries
While there are no specific provisions in the Articles relating to the disposal of
the assets of the Company or any of its subsidiaries, the Board may exercise all
powers and do all acts and things which may be exercised or done or approved by the
Company and which are not required by the Articles or the Cayman Companies Act
to be exercised or done by the Company in general meeting, but if such power or act
is regulated by the Company in general meeting, such regulation shall not invalidate
any prior act of the Board which would have been valid if such regulation had not
been made.
(iv) Borrowing powers
The Board may exercise all the powers of the Company to raise or borrow
money, to mortgage or charge all or any part of the undertaking, property and
uncalled capital of the Company and, subject to the Cayman Companies Act, to
issue debentures, debenture stock, bonds and other securities of the Company,
whether outright or as collateral security for any debt, liability or obligation of the
Company or of any third party.
(v) Remuneration
The Directors shall be entitled to receive, as ordinary remuneration for their
services, such sums as shall from time to time be determined by the Board or the
Company in general meeting, as the case may be, such sum (unless otherwise
directed by the resolution by which it is determined) to be divided among the
Directors in such proportions and in such manner as they may agree or, failing
agreement, either equally or, in the case of any Director holding office for only a
portion of the period in respect of which the remuneration is payable, pro rata. The
Directors shall also be entitled to be repaid all expenses reasonably incurred by
them in attending any Board meetings, committee meetings or general meetings or
otherwise in connection with the discharge of their duties as Directors. Such
remuneration shall be in addition to any other remuneration to which a Director who
holds any salaried employment or office in the Company may be entitled by reason
of such employment or office.
Any Director who, at the request of the Company, performs services which in
the opinion of the Board go beyond the ordinary duties of a Director may be paid
such special or extra remuneration as the Board may determine, in addition to or in
substitution for any ordinary remuneration as a Director. An executive Director
appointed to be a managing director, joint managing director, deputy managing
director or other executive officer shall receive such remuneration and such other
benefits and allowances as the Board may from time to time decide. Such
remuneration shall be in addition to his ordinary remuneration as a Director.
The Board may establish, either on its own or jointly in concurrence or
agreement with subsidiaries of the Company or companies with which the Company
is associated in business, or may make contributions out of the Company’s monies
to, any schemes or funds for providing pensions, sickness or compassionate
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allowances, life assurance or other benefits for employees (which expression as
used in this and the following paragraph shall include any Director or former
Director who may hold or have held any executive office or any office of profit with
the Company or any of its subsidiaries) and former employees of the Company and
their dependents or any class or classes of such persons.
The Board may also pay, enter into agreements to pay or make grants of
revocable or irrevocable, whether or not subject to any terms or conditions, pensions
or other benefits to employees and former employees and their dependents, or to any
of such persons, including pensions or benefits additional to those, if any, to which
such employees or former employees or their dependents are or may become
entitled under any such scheme or fund as mentioned above. Such pension or benefit
may, if deemed desirable by the Board, be granted to an employee either before and
in anticipation of, or upon or at any time after, his actual retirement.
(vi) Compensation or payments for loss of office
Payments to any present Director or past Director of any sum by way of
compensation for loss of office or as consideration for or in connection with his
retirement from office (not being a payment to which the Director is contractually or
statutorily entitled) must be approved by the Company in general meeting.
(vii) Loans and provision of security for loans to Directors
The Company shall not directly or indirectly make a loan to a Director or a
director of any holding company of the Company or any of their respective close
associates, enter into any guarantee or provide any security in connection with a
loan made by any person to a Director or a director of any holding company of the
Company or any of their respective close associates, or, if any one or more of the
Directors hold(s) (jointly or severally or directly or indirectly) a controlling interest
in another company, make a loan to that other company or enter into any guarantee
or provide any security in connection with a loan made by any person to that other
company.
(viii) Disclosure of interest in contracts with the Company or any of its
subsidiaries
With the exception of the office of auditor of the Company, a Director may hold
any other office or place of profit with the Company in conjunction with his office of
Director for such period and upon such terms as the Board may determine, and may
be paid such extra remuneration for that other office or place of profit, in whatever
form, in addition to any remuneration provided for by or pursuant to any other
Articles. A Director may be or become a director, officer or member of any other
company in which the Company may be interested, and shall not be liable to account
to the Company or the members for any remuneration or other benefits received by
him as a director, officer or member of such other company. The Board may also
cause the voting power conferred by the shares in any other company held or owned
by the Company to be exercised in such manner in all respects as it thinks fit,
including the exercise in favor of any resolution appointing the Directors or any of
them to be directors or officers of such other company.
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No Director or intended Director shall be disqualified by his office from
contracting with the Company, nor shall any such contract or any other contract or
arrangement in which any Director is in any way interested be liable to be avoided,
nor shall any Director so contracting or being so interested be liable to account to
the Company for any profit realized by any such contract or arrangement by reason
only of such Director holding that office or the fiduciary relationship established by
it. A Director who is, in any way, materially interested in a contract or arrangement
or proposed contract or arrangement with the Company shall declare the nature of
his interest at the earliest meeting of the Board at which he may practically do so.
There is no power to freeze or otherwise impair any of the rights attaching to
any share by reason that the person or persons who are interested directly or
indirectly in that share have failed to disclose their interests to the Company.
A Director shall not vote or be counted in the quorum on any resolution of the
Board in respect of any contract or arrangement or proposal in which he or any of
his close associate(s) has/have a material interest, and if he shall do so his vote shall
not be counted nor shall he be counted in the quorum for that resolution, but this
prohibition shall not apply to any of the following matters:
(aa) the giving of any security or indemnity to the Director or his close
associate(s) in respect of money lent or obligations incurred or undertaken
by him or any of them at the request of or for the benefit of the Company
or any of its subsidiaries;
(bb) the giving of any security or indemnity to a third party in respect of a debt
or obligation of the Company or any of its subsidiaries for which the
Director or his close associate(s) has/have himself/themselves assumed
responsibility in whole or in part whether alone or jointly under a
guarantee or indemnity or by the giving of security;
(cc) any proposal concerning an offer of shares, debentures or other securities
of or by the Company or any other company which the Company may
promote or be interested in for subscription or purchase, where the
Director or his close associate(s) is/are or is/are to be interested as a
participant in the underwriting or sub-underwriting of the offer;
(dd) any proposal or arrangement concerning the benefit of employees of the
Company or any of its subsidiaries, including the adoption, modification
or operation of either: (i) any employees’ share scheme or any share
incentive or share option scheme under which the Director or his close
associate(s) may benefit; or (ii) any of a pension fund or retirement, death
or disability benefits scheme which relates to Directors, their close
associates and employees of the Company or any of its subsidiaries and
does not provide in respect of any Director or his close associate(s) any
privilege or advantage not generally accorded to the class of persons to
which such scheme or fund relates; and
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(ee) any contract or arrangement in which the Director or his close associate(s)
is/are interested in the same manner as other holders of shares, debentures
or other securities of the Company by virtue only of his/their interest in
those shares, debentures or other securities.
(ix) Proceedings of the Board
The Board may meet anywhere in the world for the despatch of business and
may adjourn and otherwise regulate its meetings as it thinks fit. Questions arising at
any meeting shall be determined by a majority of votes. In the case of an equality of
votes, the chairman of the meeting shall have a second or casting vote.
(c) Alterations to the constitutional documents and the Company’s name
To the extent that the same is permissible under the Cayman Islands laws and
subject to the Articles, the Memorandum and Articles of the Company may only be
altered or amended, and the name of the Company may only be changed, with the
sanction of a special resolution of the Company.
(d) Meetings of member
(i) Special and ordinary resolutions
A special resolution of the Company must be passed by a majority of not less
than three-fourths of the voting rights held cast by such members as, being entitled
so to do, vote in person or by proxy or, in the case of members which are
corporations, by their duly authorized representatives or by proxy at a general
meeting of which notice specifying the intention to propose the resolution as a
special resolution has been duly given.
Under the Cayman Companies Act, a copy of any special resolution must be
forwarded to the Registrar of Companies in the Cayman Islands within 15 days of
being passed.
An “ordinary resolution”, by contrast, is a resolution passed by a simple
majority of the votes of such members of the Company as, being entitled to do so,
vote in person or, in the case of members which are corporations, by their duly
authorized representatives or by proxy at a general meeting of which notice has been
duly given.
A resolution in writing signed by or on behalf of all members shall be treated as
an ordinary resolution duly passed at a general meeting of the Company duly
convened and held, and where relevant as a special resolution so passed.
(ii) V oting rights and right to demand a poll
Subject to any special rights, restrictions or privileges as to voting for the time
being attached to any class or classes of shares at any general meeting: (a) on a poll
every member present in person or by proxy or, in the case of a member being a
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corporation, by its duly authorized representative shall have one vote for every share
which is fully paid or credited as fully paid registered in his name in the register of
members of the Company provided that no amount paid up or credited as paid up on
a share in advance of calls or installments is treated for this purpose as paid up on
the share; and (b) on a show of hands every member who is present in person (or, in
the case of a member being a corporation, by its duly authorized representative) or
by proxy shall have one vote. Where more than one proxy is appointed by a member
which is a Clearing House (as defined in the Articles) or its nominee(s), each such
proxy shall have one vote on a show of hands. On a poll, a member entitled to more
than one vote need not use all his votes or cast all the votes he does use in the same
way.
At any general meeting a resolution put to the vote of the meeting is to be
decided by poll save that the chairman of the meeting may, pursuant to the Listing
Rules, allow a resolution to be voted on by a show of hands. Where a show of hands
is allowed, before or on the declaration of the result of the show of hands, a poll may
be demanded by (in each case by members present in person or by proxy or by a duly
authorized corporate representative):
(A) at least two members;
(B) any member or members representing not less than one-tenth of the total
voting rights of all the members having the right to vote at the meeting; or
(C) a member or members holding shares in the Company conferring a right to
vote at the meeting on which an aggregate sum has been paid equal to not
less than one-tenth of the total sum paid up on all the shares conferring
that right.
Should a Clearing House or its nominee(s) be a member of the Company, it
may authorize such person or persons as it thinks fit to act as its representative(s),
who enjoy rights equivalent to the rights of other Shareholders, at any meeting of
the Company or at any meeting of any class of members of the Company provided
that, if more than one person is so authorized, the authorisation shall specify the
number and class of shares in respect of which each such person is so authorized. A
person authorized in accordance with this provision shall be deemed to have been
duly authorized without further evidence of the facts and be entitled to exercise the
same rights and powers on behalf of the Clearing House or its nominee(s) as if such
person were an individual member including the right to vote individually on a show
of hands or on a poll.
All Shareholders of the Company (including a Shareholder which is a Clearing
House (or its nominee(s))) shall have the right to speak and vote at a general
meeting except where the Company has knowledge that any member is, under the
Listing Rules, required to abstain from voting on any particular resolution or
restricted to voting only for or only against any particular resolution, in which case
any votes cast by or on behalf of such member in contravention of such requirement
or restriction shall not be counted. Otherwise, all members shall have the right to
vote at a general meeting.
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(iii) Annual general meetings
The Company must hold an annual general meeting in each financial year. Such
meeting must be held within six months after the end of the Company’s financial
year unless a longer period would not infringe the rule of the Stock Exchange.
(iv) Requisition of general meetings
Extraordinary general meetings may be convened on the requisition of one or
more members holding, at the date of deposit of the requisition, not less than one
tenth of the paid up capital of the Company having the right of voting at general
meetings. Such requisition shall be made in writing to the Board or the secretary of
the Company for the purpose of requiring an extraordinary general meeting to be
called by the Board for the transaction of any business specified in such requisition.
Such meeting shall be held within two months after the deposit of such requisition.
If within 21 days of such deposit, the Board fails to proceed to convene such
meeting, the requisitionist(s) himself (themselves) may do so in the same manner,
and all reasonable expenses incurred by the requisitionist(s) as a result of the failure
of the Board shall be reimbursed to the requisitionist(s) by the Company.
(v) Notices of meetings and business to be conducted
An annual general meeting of the Company shall be called by at least 21 days’
notice in writing, and any other general meeting of the Company shall be called by
at least 14 days’ notice in writing. The notice shall be exclusive of the day on which
it is served or deemed to be served and of the day for which it is given, and must
specify the time, place and agenda of the meeting and particulars of the
resolution(s) to be considered at that meeting and, in the case of special business,
the general nature of that business.
Except where otherwise expressly stated, any notice or document (including a
share certificate) to be given or issued under the Articles shall be in writing, and
may be served by the Company on any member personally, by post to such member’s
registered address or (in the case of a notice) by advertisement in the newspapers.
Any member whose registered address is outside Hong Kong may notify the
Company in writing of an address in Hong Kong which shall be deemed to be his
registered address for this purpose. Subject to the Cayman Companies Act and the
Listing Rules, a notice or document may also be served or delivered by the Company
to any member by electronic means.
Although a meeting of the Company may be called by shorter notice than as
specified above, such meeting may be deemed to have been duly called if it is so
agreed:
(i) in the case of an annual general meeting, by all members of the Company
entitled to attend and vote thereat; and
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(ii) in the case of any other meeting, by a majority in number of the members
having a right to attend and vote at the meeting holding not less than 95%
of the total voting rights in the Company.
All business transacted at an extraordinary general meeting shall be deemed
special business. All business shall also be deemed special business where it is
transacted at an annual general meeting, with the exception of certain routine
matters which shall be deemed ordinary business.
(vi) Quorum for meetings and separate class meetings
No business shall be transacted at any general meeting unless a quorum is
present when the meeting proceeds to business, and continues to be present until the
conclusion of the meeting.
The quorum for a general meeting shall be two members present in person (or
in the case of a member being a corporation, by its duly authorized representative)
or by proxy and entitled to vote. In respect of a separate class meeting (other than an
adjourned meeting) convened to sanction the modification of class rights the
necessary quorum shall be two persons holding or representing by proxy not less
than one-third in nominal value of the issued shares of that class.
(vii) Proxies
Any member of the Company entitled to attend and vote at a meeting of the
Company is entitled to appoint another person as his proxy to attend and vote
instead of him. A corporation which is a Shareholder may execute a form of proxy
under the hand of a duly authorized officer. A member who is the holder of two or
more shares may appoint more than one proxy to represent him and vote on his
behalf at a general meeting of the Company or at a class meeting. A proxy need not
be a member of the Company and shall be entitled to exercise the same powers on
behalf of a member who is an individual and for whom he acts as proxy as such
member could exercise. In addition, a proxy shall be entitled to exercise the same
powers on behalf of a member which is a corporation and for which he acts as proxy
as such member could exercise as if it were an individual member present in person
at any general meeting. On a poll or on a show of hands, votes may be given either
personally (or, in the case of a member being a corporation, by its duly authorized
representative) or by proxy.
The instrument appointing a proxy shall be in writing under the hand of the
appointor or of his attorney duly authorized in writing, or if the appointor is a
corporation, either under seal or under the hand of a duly authorized officer or
attorney. Every instrument of proxy, whether for a specified meeting or otherwise,
shall be in such form as the Board may from time to time approve, provided that it
shall not preclude the use of the two-way form. Any form issued to a member for
appointing a proxy to attend and vote at an extraordinary general meeting or at an
annual general meeting at which any business is to be transacted shall be such as to
enable the member, according to his intentions, to instruct the proxy to vote in favor
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of or against (or, in default of instructions, to exercise his discretion in respect of)
each resolution dealing with any such business.
(viii) Members’ requisition for meetings
One or more members holding, as at the date of deposit of the requisition, in
aggregate not less than one-tenth of the voting rights (on a one vote per share basis)
in the share capital of the Company may also make a requisition to convene an
extraordinary general meeting and add resolutions to the agenda of a meeting. Such
requisition shall be made in writing to the Board or the secretary of the Company for
the purpose of requiring an extraordinary general meeting to be called by the Board
for the transaction of any business specified in such requisition. Such meeting shall
be held within two months after the deposit of such requisition. If within 21 days of
such deposit, the Board fails to proceed to convene such meeting, the
requisitionist(s) himself (themselves) may do so in the same manner, and all
reasonable expenses incurred by the requisitionist(s) as a result of the failure of the
Board shall be reimbursed to the requisitionist(s) by the Company.
(e) Accounts and audit
The Board shall cause proper books of account to be kept of the sums of money
received and expended by the Company, and of the assets and liabilities of the Company
and of all other matters required by the Cayman Companies Act (which include all sales
and purchases of goods by the company) necessary to give a true and fair view of the state
of the Company’s affairs and to show and explain its transactions.
The books of accounts of the Company shall be kept at the head office of the
Company or at such other place or places as the Board decides and shall always be open
to inspection by any Director. No member (other than a Director) shall have any right to
inspect any account, book or document of the Company except as conferred by the
Cayman Companies Act or ordered by a court of competent jurisdiction or authorized by
the Board or the Company in general meeting.
The Board shall from time to time cause to be prepared and laid before the Company
at its annual general meeting balance sheets and profit and loss accounts (including every
document required by law to be annexed thereto), together with a copy of the Directors’
report and a copy of the auditors’ report, not less than 21 days before the date of the
annual general meeting. Copies of these documents shall be sent to every person entitled
to receive notices of general meetings of the Company under the provisions of the
Articles together with the notice of annual general meeting, not less than 21 days before
the date of the meeting.
Subject to the rules of the stock exchange of the Relevant Territory (as defined in the
Articles), the Company may send summarized financial statements to members who
have, in accordance with the rules of the stock exchange of the Relevant Territory,
consented and elected to receive summarized financial statements instead of the full
financial statements. The summarized financial statements must be accompanied by any
other documents as may be required under the rules of the stock exchange of the Relevant
Territory, and must be sent to those members that have consented and elected to receive
the summarized financial statements not less than 21 days before the general meeting.
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The members shall appoint auditor(s) to hold office by an ordinary resolution of the
members until the conclusion of the next annual general meeting on such terms and with
such duties as may be agreed with the Board. The auditors’ remuneration shall be fixed
by the members in general meeting by an ordinary resolution of the members or by the
Board if authority is so delegated by the members.
The members may, at a general meeting remove the auditor(s) by an ordinary
resolution at any time before the expiration of the term of office of the auditor(s) and
shall, by an ordinary resolution, at that meeting appoint new auditor(s) in place of the
removed auditor(s) for the remainder of the term.
The auditors shall audit the financial statements of the Company in accordance with
generally accepted accounting principles of Hong Kong, the International Accounting
Standards or such other standards as may be permitted by the Stock Exchange.
(f) Dividends and other methods of distribution
The Company in general meeting may declare dividends in any currency to be paid
to the members but no dividend shall be declared in excess of the amount recommended
by the Board.
Except in so far as the rights attaching to, or the terms of issue of, any share may
otherwise provide:
(i) all dividends shall be declared and paid according to the amounts paid up on
the shares in respect of which the dividend is paid, although no amount paid up
on a share in advance of calls shall for this purpose be treated as paid up on the
share;
(ii) all dividends shall be apportioned and paid pro rata in accordance with the
amount paid up on the shares during any portion(s) of the period in respect of
which the dividend is paid; and
(iii) the Board may deduct from any dividend or other monies payable to any
member all sums of money (if any) presently payable by him to the Company
on account of calls, installments or otherwise.
Where the Board or the Company in general meeting has resolved that a
dividend should be paid or declared, the Board may resolve:
(aa) that such di vidend be satisfied wholly or in part in the form of an
allotment of shares credited as fully paid up, provided that the members
entitled to such dividend will be entitled to elect to receive such dividend
(or part thereof) in cash in lieu of such allotment; or
(bb) that the members entitled to such dividend will be entitled to elect to
receive an allotment of shares credited as fully paid up in lieu of the whole
or such part of the dividend as the Board may think fit.
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Upon the recommendation of the Board, the Company may by ordinary resolution in
respect of any one particular dividend of the Company determine that it may be satisfied
wholly in the form of an allotment of shares credited as fully paid up without offering any
right to members to elect to receive such dividend in cash in lieu of such allotment.
Any dividend, bonus or other sum payable in cash to the holder of shares may be
paid by cheque or warrant sent through the post. Every such cheque or warrant shall be
made payable to the order of the person to whom it is sent and shall be sent at the holder’s
or joint holders’ risk and payment of the cheque or warrant by the bank on which it is
drawn shall constitute a good discharge to the Company. Any one of two or more joint
holders may give effectual receipts for any dividends or other monies payable or property
distributable in respect of the shares held by such joint holders.
Whenever the Board or the Company in general meeting has resolved that a dividend
be paid or declared, the Board may further resolve that such dividend be satisfied wholly
or in part by the distribution of specific assets of any kind.
The Board may, if it thinks fit, receive from any member willing to advance the
same, and either in money or money’s worth, all or any part of the money uncalled and
unpaid or installments payable upon any shares held by him, and in respect of all or any
of the monies so advanced may pay interest at such rate (if any) not exceeding 20% per
annum, as the Board may decide, but a payment in advance of a call shall not entitle the
member to receive any dividend or to exercise any other rights or privileges as a member
in respect of the share or the due portion of the shares upon which payment has been
advanced by such member before it is called up.
All dividends, bonuses or other distributions unclaimed for one year after having
been declared may be invested or otherwise used by the Board for the benefit of the
Company until claimed and the Company shall not be constituted a trustee in respect
thereof. All dividends, bonuses or other distributions unclaimed for six years after
having been declared may be forfeited by the Board and, upon such forfeiture, shall
revert to the Company.
No dividend or other monies payable by the Company on or in respect of any share
shall bear interest against the Company.
The Company may exercise the power to cease sending cheques for dividend
entitlements or dividend warrants by post if such cheques or warrants remain uncashed
on two consecutive occasions or after the first occasion on which such a cheque or
warrant is returned undelivered.
(g) Inspection of corporate records
For so long as any part of the share capital of the Company is listed on the Stock
Exchange, any member may inspect any register of members of the Company maintained
in Hong Kong (except when the register of members is closed) without charge and
require the provision to him of copies or extracts of such register in all respects as if the
Company were incorporated under and were subject to the Hong Kong Companies
Ordinance.
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(h) Rights of minorities in relation to fraud or oppression
There are no provisions in the Articles concerning the rights of minority members in
relation to fraud or oppression. However, certain remedies may be available to members
of the Company under the Cayman Islands laws, as summarized in paragraph 3(f) of this
Appendix.
(i) Procedures on liquidation
A resolution that the Company be wound up by the court or be wound up voluntarily
shall be a special resolution.
Subject to any special rights, privileges or restrictions as to the distribution of
available surplus assets on liquidation for the time being attached to any class or classes
of shares:
(i) if the Company is wound up, the surplus assets remaining after payment to all
creditors shall be divided among the members in proportion to the capital paid
up on the shares held by them respectively; and
(ii) if the Company is wound up and the surplus assets available for distribution
among the members are insufficient to repay the whole of the paid-up capital,
such assets shall be distributed, subject to the rights of any shares which may
be issued on special terms and conditions, so that, as nearly as may be, the
losses shall be borne by the members in proportion to the capital paid up on the
shares held by them, respectively.
If the Company is wound up (whether the liquidation is voluntary or compelled by
the court), the liquidator may, with the sanction of a special resolution and any other
sanction required by the Cayman Companies Act, divide among the members in specie or
kind the whole or any part of the assets of the Company, whether the assets consist of
property of one kind or different kinds, and the liquidator may, for such purpose, set such
value as he deems fair upon any one or more class or classes of property to be so divided
and may determine how such division shall be carried out as between the members or
different classes of members and the members within each class. The liquidator may,
with the like sanction, vest any part of the assets in trustees upon such trusts for the
benefit of members as the liquidator thinks fit, but so that no member shall be compelled
to accept any shares or other property upon which there is a liability.
(j) Subscription rights reserve
Provided that it is not prohibited by and is otherwise in compliance with the Cayman
Companies Act, if warrants to subscribe for shares have been issued by the Company and
the Company does any act or engages in any transaction which would result in the
subscription price of such warrants being reduced below the par value of the shares to be
issued on the exercise of such warrants, a subscription rights reserve shall be established
and applied in paying up the difference between the subscription price and the par value
of such shares.
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3. CA YMAN ISLANDS COMPANY LA W
The Company was incorporated in the Cayman Islands as an exempted company on
September 23, 2016 subject to the Cayman Companies Act. Certain provisions of Cayman
Islands company law are set out below but this section does not purport to contain all
applicable qualifications and exceptions or to be a complete review of all matters of the
Cayman Companies Act and taxation, which may differ from equivalent provisions in
jurisdictions with which interested parties may be more familiar.
(a) Company operations
An exempted company such as the Company must conduct its operations mainly
outside the Cayman Islands. An exempted company is also required to file an annual
return each year with the Registrar of Companies of the Cayman Islands and pay a fee
which is based on the amount of its authorized share capital.
(b) Share capital
Under the Cayman Companies Act, a Cayman Islands company may issue ordinary,
preference or redeemable shares or any combination thereof. Where a company issues
shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount
or value of the premiums on those shares shall be transferred to an account, to be called
the “share premium account”. At the option of a company, these provisions may not
apply to premiums on shares of that company allotted pursuant to any arrangements in
consideration of the acquisition or cancelation of shares in any other company and issued
at a premium. The share premium account may be applied by the company subject to the
provisions, if any, of its memorandum and articles of association, in such manner as the
company may from time to time determine including, but without limitation, the
following:
(i) paying distributions or dividends to members;
(ii) paying up unissued shares of the company to be issued to members as fully
paid bonus shares;
(iii) any manner provided in section 37 of the Cayman Companies Act;
(iv) writing-off the preliminary expenses of the company; and
(v) writing-off the expenses of, or the commission paid or discount allowed on,
any issue of shares or debentures of the company.
Notwithstanding the foregoing, no distribution or dividend may be paid to members
out of the share premium account unless, immediately following the date on which the
distribution or dividend is proposed to be paid, the company will be able to pay its debts
as they fall due in the ordinary course of business.
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Subject to confirmation by the court, a company limited by shares or a company
limited by guarantee and having a share capital may, if authorized to do so by its articles
of association, by special resolution reduce its share capital in any way.
(c) Financial assistance to purchase shares of a company or its holding company
There are no statutory prohibitions in the Cayman Islands on the granting of
financial assistance by a company to another person for the purchase of, or subscription
for, its own, its holding company’s or a subsidiary’s shares. Therefore, a company may
provide financial assistance provided the directors of the company, when proposing to
grant such financial assistance, discharge their duties of care and act in good faith, for a
proper purpose and in the interests of the company. Such assistance should be on an
arm’s-length basis.
(d) Purchase of shares and warrants by a company and its subsidiaries
A company limited by shares or a company limited by guarantee and having a share
capital may, if so authorized by its articles of association, issue shares which are to be
redeemed or are liable to be redeemed at the option of the company or a member and, for
the avoidance of doubt, it shall be lawful for the rights attaching to any shares to be
varied, subject to the provisions of the company’s articles of association, so as to provide
that such shares are to be or are liable to be so redeemed. In addition, such a company
may, if authorized to do so by its articles of association, purchase its own shares,
including any redeemable shares; an ordinary resolution of the company approving the
manner and terms of the purchase will be required if the articles of association do not
authorize the manner and terms of such purchase. A company may not redeem or
purchase its shares unless they are fully paid. Furthermore, a company may not redeem or
purchase any of its shares if, as a result of the redemption or purchase, there would no
longer be any issued shares of the company other than shares held as treasury shares. In
addition, a payment out of capital by a company for the redemption or purchase of its
own shares is not lawful unless, immediately following the date on which the payment is
proposed to be made, the company shall be able to pay its debts as they fall due in the
ordinary course of business.
Shares that have been purchased or redeemed by a company or surrendered to the
company shall not be treated as canceled but shall be classified as treasury shares if held
in compliance with the requirements of Section 37A(1) of the Cayman Companies Act.
Any such shares shall continue to be classified as treasury shares until such shares are
either canceled or transferred pursuant to the Cayman Companies Act.
A Cayman Islands company may be able to purchase its own warrants subject to and
in accordance with the terms and conditions of the relevant warrant instrument or
certificate. Thus there is no requirement under Cayman Islands law that a company’s
memorandum or articles of association contain a specific provision enabling such
purchases. The directors of a company may under the general power contained in its
memorandum of association be able to buy, sell and deal in personal property of all kinds.
A subsidiary may hold shares in its holding company and, in certain circumstances,
may acquire such shares.
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(e) Dividends and distributions
Subject to a solvency test, as prescribed in the Cayman Companies Act, and the
provisions, if any, of the company’s memorandum and articles of association, a company
may pay dividends and distributions out of its share premium account. In addition, based
upon English case law which is likely to be persuasive in the Cayman Islands, dividends
may be paid out of profits.
For so long as a company holds treasury shares, no dividend may be declared or
paid, and no other distribution (whether in cash or otherwise) of the company’s assets
(including any distribution of assets to members on a winding up) may be made, in
respect of a treasury share.
(f) Protection of minorities and shareholders’ suits
It can be expected that the Cayman Islands courts will ordinarily follow English
case law precedents (particularly the rule in the case of Foss v. Harbottle and the
exceptions to that rule) which permit a minority member to commence a representative
action against or derivative actions in the name of the company to challenge acts which
are ultra vires, illegal, fraudulent (and performed by those in control of the Company)
against the minority, or represent an irregularity in the passing of a resolution which
requires a qualified (or special) majority which has not been obtained.
Where a company (not being a bank) is one which has a share capital divided into
shares, the court may, on the application of members holding not less than one-fifth of
the shares of the company in issue, appoint an inspector to examine the affairs of the
company and, at the direction of the court, to report on such affairs. In addition, any
member of a company may petition the court, which may make a winding up order if the
court is of the opinion that it is just and equitable that the company should be wound up.
In general, claims against a company by its members must be based on the general
laws of contract or tort applicable in the Cayman Islands or be based on potential
violation of their individual rights as members as established by a company’s
memorandum and articles of association.
(g) Disposal of assets
There are no specific restrictions on the power of directors to dispose of assets of a
company, however, the directors are expected to exercise certain duties of care, diligence
and skill to the standard that a reasonably prudent person would exercise in comparable
circumstances, in addition to fiduciary duties to act in good faith, for proper purpose and
in the best interests of the company under English common law (which the Cayman
Islands courts will ordinarily follow).
(h) Accounting and auditing requirements
A company must cause proper records of accounts to be kept with respect to: (i) all
sums of money received and expended by it; (ii) all sales and purchases of goods by it and
(iii) its assets and liabilities.
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Proper books of account shall not be deemed to be kept if there are not kept such
books as are necessary to give a true and fair view of the state of the company’s affairs
and to explain its transactions.
If a company keeps its books of account at any place other than at its registered
office or any other place within the Cayman Islands, it shall, upon service of an order or
notice by the Tax Information Authority pursuant to the Tax Information Authority Act
(as revised) of the Cayman Islands, make available, in electronic form or any other
medium, at its registered office copies of its books of account, or any part or parts
thereof, as are specified in such order or notice.
(i) Exchange control
There are no exchange control regulations or currency restrictions in effect in the
Cayman Islands.
(j) Taxation
Pursuant to section 6 of the Tax Concessions Act (as revised) of the Cayman Islands,
the Company may obtain an undertaking from the Financial Secretary that:
(i) no law which is enacted in the Cayman Islands imposing any tax to be levied on
profits or income or gains or appreciation shall apply to the Company or its
operations; and
(ii) no tax be levied on profits, income gains or appreciations or which is in the
nature of estate duty or inheritance tax shall be payable by the Company:
(aa) on or in respect of the shares, debentures or other obligations of the
Company; or
(bb) by way of withholding in whole or in part of any relevant payment as
defined in section 6(3) of the Tax Concessions Act (as revised).
The Cayman Islands currently levy no taxes on individuals or corporations based
upon profits, income, gains or appreciations and there is no taxation in the nature of
inheritance tax or estate duty. There are no other taxes likely to be material to the
Company levied by the Government of the Cayman Islands save for certain stamp duties
which may be applicable, from time to time, on certain instruments.
(k) Stamp duty on transfers
No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman
Islands companies save for those which hold interests in land in the Cayman Islands.
(l) Loans to directors
There is no express provision prohibiting the making of loans by a company to any
of its directors. However, the company’s articles of association may provide for the
prohibition of such loans under specific circumstances.
APPENDIX III SUMMARY OF OUR CONSTITUTION AND
CA YMAN ISLANDS COMPANIES LA W
– III-21 –


--- page 476 ---
(m) Inspection of corporate records
The members of a company have no general right to inspect or obtain copies of the
register of members or corporate records of the company. They will, however, have such
rights as may be set out in the company’s articles of association.
(n) Register of members
A Cayman Islands exempted company may maintain its principal register of
members and any branch registers in any country or territory, whether within or outside
the Cayman Islands, as the company may determine from time to time. There is no
requirement for an exempted company to make any returns of members to the Registrar
of Companies in the Cayman Islands. The names and addresses of the members are,
accordingly, not a matter of public record and are not available for public inspection.
However, an exempted company shall make available at its registered office, in electronic
form or any other medium, such register of members, including any branch register of
member, as may be required of it upon service of an order or notice by the Tax
Information Authority pursuant to the Tax Information Authority Act (as revised) of the
Cayman Islands.
(o) Register of Directors and officers
Pursuant to the Cayman Companies Act, the Company is required to maintain at its
registered office a register of directors, alternate directors and officers. The Registrar of
Companies shall make available the list of the names of the current directors of the
Company (and, where applicable, the current alternate directors of the Company) for
inspection by any person upon payment of a fee by such person. A copy of the register of
directors and officers must be filed with the Registrar of Companies in the Cayman
Islands and any change must be notified to the Registrar of Companies within 30 days of
any change in such directors or officers, including a change of the name of such directors
or officers.
(p) Winding up
A Cayman Islands company may be wound up by: (i) an order of the court; (ii)
voluntarily by its members; or (iii) under the supervision of the court.
The court has authority to order winding up in a number of specified circumstances
including where, in the opinion of the court, it is just and equitable that such company be
so wound up.
A voluntary winding up of a company (other than a limited duration company, for
which specific rules apply) occurs where the company resolves by special resolution that
it be wound up voluntarily or where the company in general meeting resolves that it be
wound up voluntarily because it is unable to pay its debt as they fall due. In the case of a
voluntary winding up, the company is obliged to cease to carry on its business from the
commencement of its winding up except so far as it may be beneficial for its winding up.
Upon appointment of a voluntary liquidator, all the powers of the directors cease, except
so far as the company in general meeting or the liquidator sanctions their continuance.
APPENDIX III SUMMARY OF OUR CONSTITUTION AND
CA YMAN ISLANDS COMPANIES LA W
– III-22 –


--- page 477 ---
In the case of a members’ voluntary winding up of a company, one or more
liquidators are appointed for the purpose of winding up the affairs of the company and
distributing its assets.
As soon as the affairs of a company are fully wound up, the liquidator must make a
report and an account of the winding up, showing how the winding up has been
conducted and the property of the company disposed of, and call a general meeting of the
company for the purposes of laying before it the account and giving an explanation of
that account.
When a resolution has been passed by a company to wind up voluntarily, the
liquidator or any contributory or creditor may apply to the court for an order for the
continuation of the winding up under the supervision of the court, on the grounds that: (i)
the company is or is likely to become insolvent; or (ii) the supervision of the court will
facilitate a more effective, economic or expeditious liquidation of the company in the
interests of the contributories and creditors. A supervision order takes effect for all
purposes as if it was an order that the company be wound up by the court except that a
commenced voluntary winding up and the prior actions of the voluntary liquidator shall
be valid and binding upon the company and its official liquidator.
For the purpose of conducting the proceedings in winding up a company and
assisting the court, one or more persons may be appointed to be called an official
liquidator(s). The court may appoint to such office such person or persons, either
provisionally or otherwise, as it thinks fit, and if more than one person is appointed to
such office, the court shall declare whether any act required or authorized to be done by
the official liquidator is to be done by all or any one or more of such persons. The court
may also determine whether any and what security is to be given by an official liquidator
on his appointment; if no official liquidator is appointed, or during any vacancy in such
office, all the property of the company shall be in the custody of the court.
(q) Reconstructions
Reconstructions and amalgamations may be approved by a majority in number
representing 75% in value of the members or creditors, depending on the circumstances,
as are present at a meeting called for such purpose and thereafter sanctioned by the
courts. Whilst a dissenting member has the right to express to the court his view that the
transaction for which approval is being sought would not provide the members with a fair
value for their shares, the courts are unlikely to disapprove the transaction on that ground
alone in the absence of evidence of fraud or bad faith on behalf of management, and if the
transaction were approved and consummated the dissenting member would have no
rights comparable to the appraisal rights (i.e. the right to receive payment in cash for the
judicially determined value of their shares) ordinarily available, for example, to
dissenting members of a United States corporation.
(r) Take-overs
Where an offer is made by a company for the shares of another company and, within
four months of the offer, the holders of not less than 90% of the shares which are the
subject of the offer accept, the offeror may, at any time within two months after the
expiration of that four-month period, by notice require the dissenting members to
APPENDIX III SUMMARY OF OUR CONSTITUTION AND
CA YMAN ISLANDS COMPANIES LA W
– III-23 –


--- page 478 ---
transfer their shares on the terms of the offer. A dissenting member may apply to the
Cayman Islands courts within one month of the notice objecting to the transfer. The
burden is on the dissenting member to show that the court should exercise its discretion,
which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion
as between the offeror and the holders of the shares who have accepted the offer as a
means of unfairly forcing out minority members.
(s) Indemnification
Cayman Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, save to the extent
any such provision may be held by the court to be contrary to public policy, for example,
where a provision purports to provide indemnification against the consequences of
committing a crime.
(t) Economic Substance
The Cayman Islands enacted the International Tax Co-operation (Economic
Substance) Act (as revised) together with the Guidance Notes published by the Cayman
Islands Tax Information Authority from time to time. The Company is required to comply
with the economic substance requirements from July 1, 2019 and make an annual report
in the Cayman Islands as to whether or not it is carrying on any relevant activities and if
it is, it must satisfy an economic substance test.
4. GENERAL
Travers Thorp Alberga, the Company’s legal advisors on Cayman Islands law, has sent to
the Company a letter of advice which summarizes certain aspects of the Cayman Islands
company law. This letter, together with a copy of the Cayman Companies Act, is available for
inspection as referred to in the paragraph headed “Appendix V — Documents Delivered to the
Registrar of Companies and Available on Display — Documents on Display” in this
prospectus. Any person wishing to have a detailed summary of Cayman Islands company law
or advice on the differences between it and the laws of any jurisdiction with which he is more
familiar is recommended to seek independent legal advice.
APPENDIX III SUMMARY OF OUR CONSTITUTION AND
CA YMAN ISLANDS COMPANIES LA W
– III-24 –


--- page 479 ---
A. FURTHER INFORMA TION ABOUT OUR GROUP
1. Incorporation of our Company
Our Company was incorporated under the laws of the Cayman Islands on September 23,
2016 as an exempted company with limited liability. As our Company is incorporated in the
Cayman Islands, our operation is subject to the relevant laws and regulations of the Cayman
Islands, the Memorandum and the Articles. A summary of certain aspects of the Cayman
Islands company law and our constitution is set out in “Appendix III – Summary of our
Constitution and Cayman Companies Law” in this prospectus.
We have established a principal place of business in Hong Kong at 5/F, Manulife Place,
348 Kwun Tong Road, Kowloon, Hong Kong, and have been registered with the Registrar of
Companies in Hong Kong as a non-Hong Kong company under Part 16 of the Companies
Ordinance on April 22, 2022. Ms. Lai Ho Yan has been appointed as the authorized
representative of our Company for the acceptance of service of process and notices in Hong
Kong.
2. Changes in the Share Capital of our Company
Save as disclosed in “History, Reorganization and Corporate Structure – Reorganization”
and “– A. Further Information about our Group – 4. Resolutions of our Shareholders,” there
has been no alteration in our authorized or issued share capital within the two years
immediately preceding the date of this prospectus.
3. Changes in the Share Capital of Our Subsidiaries
A summary of the corporate information and the particulars of our subsidiaries are set
out in Note 1 to the Accountants’ Report in Appendix I.
The following sets out the changes in the share capital of our subsidiaries within the two
years immediately preceding the date of this prospectus:
• On November 28, 2022, Hubei Xinlianhong was established in the PRC with an
initial registered capital of RMB20,000,000 wholly owned by Wuhan Youji.
Save as disclosed above, there has been no alteration in the share capital of our
subsidiaries within the two years immediately preceding the date of this prospectus.
4. Resolutions of our Shareholders
On May 21, 2024, resolutions of our Shareholders were passed pursuant to which, among
other things:
(a) the Memorandum and the Articles was approved and adopted with effect from the
Listing Date;
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
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--- page 480 ---
(b) subject to the conditions stated in “Structure and Conditions of the Global Offering
– Conditions of the Hong Kong Public Offering” being fulfilled:
(i) the Global Offering (including the Hong Kong Public Offering, International
Offering and Over-allotment Option) and the Listing were approved and our
Directors were authorized to allot and issue the Offer Shares pursuant to the
Global Offering;
(ii) a general unconditional mandate (the “ Issue Mandate ”) was granted to our
Directors to exercise all powers of our Company to allot, issue and deal with
Shares, securities convertible into Shares, or options, warrants or similar rights
to subscribe for Shares or such convertible securities, and to make or grant
offers, agreements, or options which would or might require Shares to be
issued, allotted or dealt with, whether during the continuance of the Applicable
Period (as defined below) or thereafter, provided that the aggregate number of
Shares so allotted or agreed to be allotted shall not exceed the aggregate of
20% of the number of Shares in issue immediate following completion of the
Global Offering;
(iii) a general unconditional mandate (the “ Repurchase Mandate ”) was granted to
our Directors to exercise all powers of our Company to repurchase Shares on
the Stock Exchange or on any other stock exchange on which the Shares may
be listed (and which is recognized by the SFC and the Stock Exchange for this
purpose), provided that such number of Shares so repurchased shall not exceed
10% of the number of the Share in issue immediately following completion of
the Global Offering; and
(iv) the Issue Mandate was extended by the addition to the aggregate number of the
Shares which may be allotted and issued, or agreed to be allotted and issued, by
our Directors pursuant to such general mandate of an amount representing the
aggregate number of the Shares purchased by our Company pursuant to the
Repurchase Mandate, provided that such extended amount shall not exceed
10% of the number of Shares in issue immediately following completion of the
Global Offering.
Each of the general mandates referred to above will continue in force until:
• the conclusion of the next annual general meeting of our Company;
• the expiration of the period within which the next annual general meeting of
our Company is required to be held under any applicable laws or the
Memorandum and Articles of Association, or
• revoked or varied by an ordinary resolution of the Shareholders in general
meeting,
whichever occurs first (the “ Applicable Period ”).
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 2–


--- page 481 ---
5. Repurchases of our Own Securities
The following paragraphs set out the restrictions imposed by the Listing Rules on share
repurchases and provide further information about the repurchase of our own securities.
(a) Shareholders’ approval
A listed company whose primary listing is on the Stock Exchange may only
purchase shares on the Stock Exchange, either directly or indirectly, if (i) the shares
proposed to be purchased are fully-paid up, and (ii) its shareholders have given a specific
approval or a general mandate to its directors by way of an ordinary resolution passed at
a general meeting.
Pursuant to a resolution passed by our Shareholders on May 21, 2024, the
Repurchase Mandate was granted to our Directors, which will continue in force during
the Applicable Period.
(b) Size of mandate
The total number of shares which a listed company is authorized to purchase may
not exceed 10% of the number of issued shares of the company as of the date of the
resolution granting the general mandate.
The exercise in full of the Repurchase Mandate, on the basis of 93,300,000 Shares in
issue immediately following completion of the Global Offering (assuming the
Over-allotment Option is not exercised), could accordingly result in up to 9,330,000
Shares being repurchased by our Company.
(c) Reasons for repurchases
Our Directors believe that the ability to repurchase Shares is in the interests of our
Company and the Shareholders. Repurchases may, depending on the circumstances,
result in an increase in the net assets and/or earnings per Share. Our Directors sought the
grant of a general mandate to repurchase Shares to give our Company the flexibility to do
so if and when appropriate. The number of Shares to be repurchased on any occasion and
the price and other terms upon which the same are repurchased will be decided by our
Directors at the relevant time having regard to the circumstances then pertaining.
Repurchases of Shares will only be made when our Directors believe that such
repurchases will benefit our Company and our Shareholders.
(d) Source of funds
In repurchasing securities, our Company may only apply funds legally available for
such purpose in accordance with its Memorandum and Articles of Association, the
Listing Rules and the applicable laws of the Cayman Islands. There could be a material
adverse impact on the working capital and/or gearing position of our Company (as
compared with the position disclosed in this prospectus) in the event that the proposed
repurchases were to be carried out in full at any time during the Applicable Period.
However, our Directors do not propose to exercise the general mandate to such extent as
would, in the circumstances, have a material adverse effect on the working capital
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 3–


--- page 482 ---
requirements of our Company or the gearing levels which in the opinion of our Directors
are from time to time appropriate for our Company.
Our Company shall not purchase its own securities on the Stock Exchange for a
consideration other than cash or for settlement otherwise than in accordance with the
trading rules of the Stock Exchange from time to time.
(e) Dealing restrictions
A listed company whose primary listing is on the Stock Exchange may not make a
new issue of shares or announce a proposed new issue of shares for a period of 30 days
after any purchase by it of shares, whether on the Stock Exchange or otherwise (other
than an issue of securities pursuant to the exercise of warrants, share options or similar
instruments requiring the company to issue securities, which were outstanding prior to
that purchase of its own securities), without the prior approval of the Stock Exchange. In
additional, a listed company shall not purchase its shares on the Stock Exchange if the
purchase price is higher by 5% or more than the average closing market price for the five
preceding trading days on which its shares were traded on the Stock Exchange. The
Listing Rules also prohibit a listed company from purchasing its shares on the Stock
Exchange if that purchase would result in the number of listed securities which are in the
hands of the public falling below the relevant prescribed minimum percentage as
required by the Stock Exchange.
A listed company shall procure that any broker appointed by it to effect the purchase
of its shares shall disclose to the Stock Exchange such information with respect to the
purchases made on behalf of the company as the Stock Exchange may require.
(f) Status of purchased Shares
The listing of all shares which are purchased by a listed company (whether on the
Stock Exchange or otherwise) shall be automatically cancelled upon purchase and the
company shall ensure that the documents of title of purchased shares are cancelled and
destroyed as soon as reasonably practicable following settlement of any such purchase.
(g) Suspension of repurchase
A listed company shall not purchase its shares on the Stock Exchange at any time
after inside information has come to its knowledge until the information is made publicly
available. In particular, during the period of one month immediately preceding the earlier
of (i) the date of the board meeting (as such date is first notified to the Stock Exchange in
accordance with the Listing Rules) for the approval of the company’s results for any year,
half-year, quarterly or any other interim period (whether or not required under the
Listing Rules); and (ii) the deadline for the company to announce its results for any year
or half-year under the Listing Rules, or quarterly or any other interim period (whether or
not required under the Listing Rules), and ending on the date of the results
announcement, the listed company may not purchase its shares on the Stock Exchange,
unless the circumstances are exceptional.
In addition, the Stock Exchange may prohibit a listed company from making
purchases of shares on the Stock Exchange if the Stock Exchange considers that the
company has committed a breach of the Listing Rules which apply to that company.
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 4–


--- page 483 ---
(h) Reporting requirements
Certain information relating to repurchases of securities on the Stock Exchange or
otherwise must be reported to the Stock Exchange not later than 30 minutes before the
earlier of the commencement of the morning trading session or any pre-opening session
on the following business day. In addition, a listed company’s annual report is required to
disclose details regarding repurchases of securities made during the year, including a
monthly analysis of the number of securities repurchased, the purchase price per share or
the highest and lowest price paid for all such repurchases, where relevant, and the
aggregate prices paid.
(i) Core connected persons
A listed company shall not knowingly purchase its shares on the Stock Exchange
from a core connected person and a core connected person shall not knowingly sell
shares to the company on the Stock Exchange.
None of our Directors nor, to the best of their knowledge having made all reasonable
enquiries, any of their respective close associates have any present intention to sell any
Shares to our Company.
None of our core connected persons have notified our Company that they have a
present intention to sell Shares to our Company, or have undertaken not to sell any of the
Shares held by them to our Company, in the event that the Repurchase Mandate is
approved.
(j) General
Our Directors have undertaken to the Stock Exchange to exercise the Repurchase
Mandate in accordance with the Listing Rules and the applicable laws in the Cayman
Islands.
If, as a result of any repurchase of Shares, a Shareholder’s proportionate interest in
the voting rights of our Company is increased, such increase will be treated as an
acquisition for the purposes of the Takeovers Code. Accordingly, a Shareholder or a
group of Shareholders acting in concert could obtain or consolidate control of our
Company and become obliged to make a mandatory offer in accordance with Rule 26 of
the Takeovers Code. Save as aforesaid, our Directors are not aware of any consequences
which would arise under the Takeovers Code as a consequence of any repurchases
pursuant to the Repurchase Mandate.
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 5–


--- page 484 ---
B. FURTHER INFORMA TION ABOUT OUR BUSINESS
1. Summary of Material Contract
The following contract (not being contract entered into in the ordinary course of the
business carried on or intended to be carried on by our Company) was entered into by our
Group within the two years preceding the date of this prospectus and is or may be material:
(a) the Hong Kong Underwriting Agreement.
2. Our Intellectual Property Rights
(a) Trademarks
As of the Latest Practicable Date, we had registered the following trademarks which
we consider to be material in relation to our business:
No. Trademark Class Registrant
Place of
registration
Registration
number Expiry date
1.
 1 Wuhan Youji PRC 521684 June 19,
2030
2.
 17 Wuhan Youji PRC 504788 Nov ember 19,
2029
3.
 1, 17 Wuhan Youji Hong Kong 305706216 August 2,
2031
4.
 1, 17 Wuhan Youji Hong Kong 305706199 August 2,
2031
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 6–


--- page 485 ---
(b) Domain Names
As of the Latest Practicable Date, we had registered the following domain names
which we consider to be material in relation to our business:
No. Domain name Registrant Expiry date
1. chinaorganic.com Wuhan Youji March 29, 2031
(c) Copyrights
As of the Latest Practicable Date, we had registered the following copyrights which
we consider to be material in relation to our business:
(i) Computer software
No. Copyright
Registered
owner
Registration
number
Registration
date
1. Organic Industry Pressure Control
Device System V1.0
(ϞዚྼุᏀɢછՓༀໄӻ୕ V1.0)
Wuhan Youji 2014SR203264 December 26,
2013
2. Organic Industry Pressure Intelligent
Monitoring System V1.0
(ϞዚྼุᏀɢ౽ᅆ္છӻ୕ V1.0)
Wuhan Youji 2014SR201721 November 13,
2013
3. Organic Industry Ingredients Smart
System V1.0 (౽ᅆӻ୕
V1.0)
Wuhan Youji 2014SR201612 December 17,
2012
4. Organic Industry Feeding Intelligent
Control System V1.0
(౽છӻ୕ V1.0)
Wuhan Youji 2014SR201552 December 5,
2012
5. Organic Industry Smart Temperature
Control System V1.0
(Ϟዚྼุ౽ᅆ๝છӻ୕ V1.0)
Wuhan Youji 2014SR201635 November 14,
2012
6. Organic Industry Flow Intelligent
Control System V1.0
(ඎ౽છӻ୕ V1.0)
Wuhan Youji 2014SR201610 November 7,
2012
(ii) Works
No. Copyright
Registered
owner
Registration
number
Registration
date
1. Wuhan Youji Logo
(ဏϞዚΆุ LOGO)
Wuhan Youji ඈЪ೮ο-2023-
F-00002561
December 30,
2022
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 7–


--- page 486 ---
(d) Patents
As of the Latest Practicable Date, we had registered the following patents which we
consider to be material in relation to our business:
No. Patent Patentee Patent number Patent type
Registration
date
1. A reactor for continuous
reaction and devolatilization
(ஹᚃˀᏐၾ
ˀᏐኜ )
Wuhan Youji 2020223171782 Utility model October 15,
2020
2. A kind of tail gas absorption
treatment device for sodium
benzoate production
(ٙ
҈ंіϗஈଣༀໄ )
Wuhan Youji 2020217784943 Utility model August 24,
2020
No. Patent Patentee Patent number Patent type
Registration
date
3. A kind of neutralization device
for preparing potassium
benzoate
(ٙ
ʕձༀໄ )
Wuhan Youji 2020217785109 Utility model August 24,
2020
4. A kind of continuous
neutralization device for
sodium benzoate production
(ٙ
ஹᚃʕձༀໄ )
Wuhan Youji 202021791192X Utility model August 24,
2020
5. A dual-shaft material
continuous mixing reaction
device
(ஹᚃ૿Υˀ
Ꮠༀໄ)
Wuhan Youji 2020217641668 Utility model August 21,
2020
6. A catalyst intermittent loop
reactor
(ɓ၇ළʷኒග๊ృᐑ
ˀᏐ২)
Wuhan Youji 2020217641672 Utility model August 21,
2020
7. A continuous mixing reaction
device for high viscosity
materials
(ஹᚃ
૿ΥˀᏐༀໄ )
Wuhan Youji 2020217641742 Utility model August 21,
2020
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 8–


--- page 487 ---
No. Patent Patentee Patent number Patent type
Registration
date
8. Batch reactor
(ග๊ˀᏐༀໄ )
Wuhan Youji 2020217774316 Utility model August 21,
2020
9. A spliced clapboard for a
partition tower
(ٙ
ؐ)
Wuhan Youji 2020217539585 Utility model August 20,
2020
10. Method for recovering perfume
grade benzyl benzoate from
benzoic acid rectification
raffinate
(࠰
ج)
Wuhan Youji 2018113380488 Invention November 12,
2018
11. Reusable high-efficiency
activated carbon adsorption
and decolorization device
(ލ׌ݺࣖ
୭Ѝༀໄ )
Wuhan Youji 2018203076078 Utility model March 5,
2018
12. Decolorization method of
benzoic acid heavy
by-product benzyl benzoate
(͠ა䗣◐
ج)
Wuhan Youji 2017107497964 Invention August 28,
2017
13. Reaction heat recovery device
during liquid-phase catalytic
oxidation of toluene
(ළʷःʷཀ೻ʕ
ˀᏐᆠΫϗༀໄ )
Wuhan Youji 2017209255560 Utility model July 25,
2017
14. Device and method for
continuous production of
spherical sodium benzoate
(ٙ
ج)
Wuhan Youji 201610785892X Invention August 31,
2016
15. The production method of
benzonitrile
(ج)
Wuhan Youji 2013100024514 Invention January 4,
2013
16. The purification method of
benzoic acid
(ج)
Wuhan Youji 201010568840X Invention November 29,
2010
17. A kind of new technology of
p-xylylene dimethyl ether
manufacturing method
(ɚ͠ਿɚ͠⺀
อʈᖵ )
Qianjiang
Xinyihong
2013102013660 Invention May 27,
2013
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
–I V - 9–


--- page 488 ---
No. Patent Patentee Patent number Patent type
Registration
date
18. Method for treating high
boilers in industrial benzyl
alcohol
(͠ቐ
ج)
Qianjiang
Xinyihong
2020105868961 Invention June 24,
2020
19. Vacuum sampling device for
low and medium viscosity
materials of epoxy resin
(ॆ
՟ᅵༀໄ )
Wuhan Youji 2021225844565 Utility model October 26,
2021
20. Vacuum sampling device for
high viscosity materials such
as polyester and
polyurethane insulating
paints ( ၳ◐eၳऄ◐ഒᇝဒ
՟ᅵༀໄ )
Wuhan Youji 2021225846024 Utility model October 26,
2021
21. Bubble tower apparatus and its
method for the production of
benzoic acid by oxidation of
toluene in liquid phase (ظ
ः
ج)
Wuhan Youji 2019104196343 Invention May 20,
2019
22. The method for synthesizing
benzyl acetate with
the use of a combined
catalytic system
(л͜ଡ଼Υළʷ᜗ӻΥϓɔა
ج)
Qianjiang
Xinyihong
2021101953813 Invention February 20,
2021
23. The wastewater treatment in
the process of industrial
production of benzyl alcohol
(ᄻ˥ஈଣ
ج)
Qianjiang
Xinyihong
202010585920X Invention June 24, 2020
24. The automatic oil-water rapid
separation device for active
diluent of epoxy resin
(˥
Ҟ஺ʱᕎༀໄ )
Wuhan Youji 2022207037312 Utility model March 29,
2022
25. The high-efficiency circulation
and filtration system
(ృᐑཀᓩӻ୕ )
Wuhan Youji 2022208217435 Utility model April 11, 2022
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-10 –


--- page 489 ---
No. Patent Patentee Patent number Patent type
Registration
date
26. The energy efficiency
crystallization and
purification system
for benzoic acid
(͠აഐ౺
౤ॱӻ୕ )
Wuhan Youji 202221119113X Utility model May 11, 2022
27. The high-efficiency circulating
mixing and filtration system
for insulating paint
(ࣘ
ཀᓩӻ୕ )
Wuhan Youji 2022209905004 Utility model April 27, 2022
28. The wastewater treatment
device for abnormal
production of benzoic acid
(͍੬͛ପᄻ˥ஈଣ
ༀໄ)
Wuhan Youji 2022229539208 Utility mode November 7,
2022
29. A chlorohydrin rubber
production device
(ɓ၇ಣቐዖᇭ͛ପༀໄ )
Wuhan Youji 202320075976X Utility mode January 9,
2023
30. Method of continuous
synthesis of synthetic
chlorol rubber using
kneading reactors
(ΥˀᏐኜஹᚃʷΥϓ
ج)
Wuhan Youji 2020111144350 Invention October 15,
2020
31. System and method for
continuous production of
high-quality, highly selective
benzoaldehyde and benzoic
acid using injection
circulation reactors
(ˀᏐኜஹᚃʷ
͠⺂ձ
ج)
Wuhan Youji 2020104902895 Invention June 2, 2020
32. The purification method of
industrial benzene methanol
(ج)
Qianjiang
Xinyihong
2020105859233 Invention June 24, 2020
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-11 –


--- page 490 ---
No. Patent Patentee Patent number Patent type
Registration
date
33. A method for synthesizing
benzonitrile through
recycling and reusing
by-products of benzinated
melamine
(Ϋ
ج)
Wuhan Youji 2021109162016 Invention August 11,
2021
34. Method for reducing acid value
in benzaldehyde using
composite packed columns
(͠⺂ʕ
ج)
Wuhan Youji 202210056462X Invention January 18,
2022
35. Method for recovering
food-grade benzaldehyde
from benzoic acid
distillation low boilers
(ʕΫϗ
ج)
Wuhan Youji 2021107547705 Invention July 5, 2021
36. Preparation method of
electronic grade benzinated
melamine
(Ⴁ௪
ج)
Wuhan Youji 2022109118412 Invention July 29, 2022
37. A method and device for
production of benzoyl
alcohol to reduce
consumption of pure alkali
(͠ቐ
ձༀໄ )
Qianjiang
Xinyihong
2022112019499 Invention September 29,
2022
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-12 –


--- page 491 ---
C. FURTHER INFORMA TION ABOUT OUR DIRECTORS AND SUBSTANTIAL
SHAREHOLDERS
1. Disclosure of Interests
(a) Interests of our Directors and chief executive
Immediately following completion of the Global Offering (assuming the
Over-allotment Option is not exercised), the interests or short positions of our Directors
and chief executive in the shares, underlying shares and debentures of our Company or
our associated corporations (within the meaning of Part XV of the SFO) which will have
to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of
Part XV of the SFO (including interests or short positions which they are taken or
deemed to have under such provisions of the SFO) or which will be required, pursuant to
section 352 of the SFO, to be entered in the register referred to therein, or which will be
required, pursuant to the Model Code for Securities Transactions by Directors of Listed
Issuers as set out in Appendix C3 to the Listing Rules, to be notified to our Company and
the Stock Exchange, once the Shares are listed, are set out below:
(i) Interest in our Company
Name of Director or
chief executive Nature of interest (1)
Number of
Shares or
underlying
Shares held
Approximate
percentage of
interest after
the Global
Offering (2)
Mr. Gao Lei (3) Interest in controlled
corporation
50,150,842 53.75%
Mr. Shen Yingming (4) Interest in controlled
corporation
12,537,710 13.44%
Notes:
(1) All interests stated are long positions.
(2) The calculation is based on the total number of 93,300,000 Shares in issue immediately
following completion of the Global Offering (assuming the Over-allotment Option is not
exercised).
(3) As of the Latest Practicable Date, Vastocean Capital Limited was wholly owned by Mr.
Gao. By virtue of the SFO, Mr. Gao is deemed to be interested in the Shares held by
Vastocean Capital Limited.
(4) As of the Latest Practicable Date, SYM Holdings Limited was wholly owned by Mr. Shen.
By virtue of the SFO, Mr. Shen is deemed to be interested in the Shares held by SYM
Holdings Limited.
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-13 –


--- page 492 ---
(ii) Interest in our associated corporations
So far as our Directors are aware, immediately following the completion of the
Global Offering, no Directors or the chief executive will, directly or indirectly, be
interested in the shares or underlying shares of the associated corporations of our
Company.
(b) Interests of our Substantial Shareholders
Save as disclosed in “Substantial Shareholders,” our Directors and chief executive
are not aware of any person (other than a Director or chief executive of our Company)
who will have an interest or a short position in the shares or underlying shares of our
Company which would fall to be disclosed to our Company under the provisions of
Divisions 2 and 3 of Part XV of the SFO, or will be, directly or indirectly, interested in
10% or more of the issued voting shares of any other member of our Group.
2. Directors’ Service Contracts and Letters of Appointment
Each of our executive Directors has entered into a service contract with our Company on
May 30, 2024, and we have issued letters of appointment to each of our independent
non-executive Directors on May 30, 2024. The terms of appointment under the service
contracts and letters of appointment are for an initial term of three years from the Listing
Date, subject to termination in accordance with their respective terms. The service contracts
may be renewed in accordance with our Articles of Association and the applicable Listing
Rules.
Save as disclosed above, none of our Directors have entered, or have proposed to enter, a
service contract with any member of our Group (other than contracts expiring or determinable
by the employer within one year without the payment of compensation (other than statutory
compensation)).
3. Directors’ Remuneration
The aggregate remuneration paid and benefits in kind granted to our Directors by our
Group in respect of the year ended December 31, 2023 was RMB2.4 million. For details of our
Directors’ emoluments during the Track Record Period, please refer to note 8 to the
Accountants’ Report in Appendix I to this prospectus.
Under the arrangements in force at the date of this prospectus, we estimate the aggregate
remuneration payable to, and benefits in kind receivable by, our Directors by our Group in
respect of the year ending December 31, 2024 to be approximately RMB4.6 million.
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-14 –


--- page 493 ---
D. OTHER INFORMA TION
1. Estate duty
Our Directors have been advised that no material liability for estate duty would be likely
to fall upon any member of our Group.
2. Litigation
Save as disclosed in this prospectus and so far as our Directors are aware, no litigation or
claim of material importance is pending or threatened against any member of our Group.
3. Sole Sponsor
The Sole Sponsor has made an application on our behalf to the Listing Committee for the
listing of, and permission to deal in, the Shares in issue and to be issued pursuant to the Global
Offering (including any additional Shares which may be issued pursuant to the exercise of the
Over-allotment Option).
The Sole Sponsor satisfies the independence criteria applicable to sponsors set out in
Rule 3A.07 of the Listing Rules. The Sole Sponsor will receive a fee of US$1.35 million for
acting as a sponsor for the Listing.
4. No Material Adverse Change
Save as disclosed in this prospectus, our Directors confirm that there has been no
material adverse change in the financial or trading position of our Group since December 31,
2023 (being the date to which the latest audited consolidated financial statements of our
Group were prepared).
5. Qualification and Consents of Experts
This prospectus contains statements made by the following experts:
Name Qualification
BOCOM International
(Asia) Limited
A corporation licensed to carry on Type 1 (dealing in
securities) and Type 6 (advising on corporate
finance) of the regulated activities under the SFO,
acting as the Sole Sponsor of the Listing
Jingtian & Gongcheng Qualified PRC lawyers
Travers Thorp Alberga Legal advisors as to Cayman Islands law
Ernst & Young Certified public accountants and registered public
interest entity auditor
Frost & Sullivan (Beijing) Inc. Industry consultant
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-15 –


--- page 494 ---
As of the Latest Practicable Date, none of the experts named above had any shareholding
in any member of our Group or the right (whether legally enforceable or not) to subscribe for
or to nominate persons to subscribe for securities in any member of our Group.
The experts named above have each given and have not withdrawn their respective
written consents to the issue of this prospectus with copies of their reports, letters, opinions or
summaries of opinions (as the case maybe) and references to their names included in the form
and context in which they are respectively included.
6. Promoter
Our Company has no promoter for the purpose of the Listing Rules. Within the two years
immediately preceding the date of this prospectus, no cash, securities or other benefit has
been paid, allotted or given nor are any proposed to be paid, allotted or given to any promoters
in connection with the Global Offering and the related transactions described in this
prospectus.
7. Preliminary Expenses
We have not incurred any material preliminary expenses.
8. Binding Effect
This prospectus shall have the effect, where an application is made in pursuance hereof,
of rendering all persons concerned bound by all of the provisions (other than the penal
provisions) of sections 44A and 44B of the Companies (Winding Up and Miscellaneous
Provisions) Ordinance insofar as applicable.
9. Bilingual Prospectus
The English language and Chinese language versions of this prospectus are being
published separately in reliance upon the exemption provided by section 4 of the Companies
(Exemption of Companies and Prospectuses from Compliance with Provisions) Notice
(Chapter 32L of the Laws of Hong Kong).
10. Miscellaneous
(a) Save as disclosed in this prospectus, within the two years immediately preceding the
date of this prospectus:
(i) no commissions, discounts, brokerages or other special terms have been
granted in connection with the issue or sale of any capital of any member of our
Group, and no Directors, promoters or experts named in “– D. Other
Information – 5. Qualification and Consents of Experts” have received any
such payment or benefit;
(ii) no capital of any member of our Group has been issued or is proposed to be
issued for cash or issued as fully or partly paid up otherwise than in cash;
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-16 –


--- page 495 ---
(iii) none of our Directors or the experts named in “– D. Other Information – 5.
Qualification and Consents of Experts” have any interest, direct or indirect, in
the promotion of, or in any assets which have been, acquired or disposed of by
or leased to, any member of our Group, or are proposed to be acquired or
disposed of by or leased to any member of our Group; and
(iv) no commissions (but not including commissions to sub-underwriters) have
been paid or payable for subscribing or agreeing to subscribe, or procuring or
agreeing to procure subscriptions, for any Shares or debentures of our
Company.
(b) Save as disclosed in this prospectus:
(i) there is no arrangement under which future dividends are waived or agreed to
be waived;
(ii) our Company has no outstanding convertible debt securities or debentures;
(iii) there are no founder, management or deferred shares in our Company or any of
our subsidiaries;
(iv) no capital of any member of our Group is under option, or is agreed
conditionally or unconditionally to be put under option;
(v) there has not been any interruption in the business of our Group which may
have or have had a significant effect on our financial position in the 12 months
immediately preceding the date of this prospectus; and
(vi) none of our Directors are materially interested in any contract or arrangement
subsisting at the date of this prospectus which is significant in relation to the
business of our Group.
APPENDIX IV STA TUTORY AND GENERAL INFORMA TION
– IV-17 –


--- page 496 ---
DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES
The documents attached to a copy of this prospectus and delivered to the Registrar of
Companies in Hong Kong for registration were:
(a) the written consents referred to in “Appendix IV — Statutory and General
Information – D. Other Information – 5. Qualification and Consents of Experts” in
this prospectus; and
(b) a copy of the material contract referred to in “Appendix IV — Statutory and General
Information – B. Further Information about Our Business – 1. Summary of Material
Contract” in this prospectus.
DOCUMENTS A V AILABLE ON DISPLA Y
Copies of the following documents will be published on the websites of the Stock
Exchange at www.hkexnews.hk and our Company at www.chinaorganic.com for a period of
14 days from the date of this prospectus:
(a) the Memorandum and Articles of Association;
(b) the audited consolidated financial statements of our Group for the Track Record
Period;
(c) the Accountants’ Report for the Track Record Period issued by Ernst & Young, the
text of which is set out in Appendix I;
(d) the report on the unaudited pro forma financial information of our Group issued by
Ernst & Young, the text of which is set out in Appendix II;
(e) the letter of advice issued by Travers Thorp Alberga, our legal advisors as to
Cayman Islands law, summarizing certain aspects of the company law of the
Cayman Islands referred to in Appendix III;
(f) the legal opinions issued by Jingtian & Gongcheng, our legal advisors as to PRC
law, in respect of the general matters and property interests of the Group in the PRC;
(g) the industry report issued by Frost & Sullivan;
(h) the material contract referred to in “Statutory and General Information – B. Further
Information about Our Business – 1. Summary of Material Contract” in Appendix
IV;
(i) the written consents referred to in “Statutory and General Information – D. Other
Information – 5. Qualification and Consents of Experts” in Appendix IV;
APPENDIX V DOCUMENTS DELIVERED TO THE REGISTRAR
OF COMPANIES AND A V AILABLE ON DISPLA Y
–V - 1–


--- page 497 ---
(j) the service contracts and letters of appointment referred to in “Statutory and
General Information – C. Further Information about Our Directors and Substantial
Shareholders – 2. Directors’ Service Contracts and Letters of Appointment” in
Appendix IV; and
(k) the Cayman Companies Act.
APPENDIX V DOCUMENTS DELIVERED TO THE REGISTRAR
OF COMPANIES AND A V AILABLE ON DISPLA Y
–V - 2–


--- page 498 ---
